Goldman Sachs Reports Third Quarter Earnings Per Common Share of $6.13

The Goldman Sachs Group, Inc. (NYSE: GS) today reported net revenues of $12.33 billion and net earnings of $2.85 billion for its third quarter ended August 31, 2007. Diluted earnings per common share were $6.13 compared with $3.26 for the third quarter of 2006 and $4.93 for the second quarter of 2007. Annualized return on average tangible common shareholders’ equity (1) was 36.6% for the third quarter of 2007 and 37.5% for the first nine months of 2007. Annualized return on average common shareholders’ equity was 31.6% for the third quarter of 2007 and 32.0% for the first nine months of 2007. Business Highlights Investment Banking produced record quarterly net revenues of $2.15 billion, driven by results in Financial Advisory which were 64% higher than the previous record. Goldman Sachs ranked first in worldwide announced mergers and acquisitions for the calendar year-to-date. (2) Fixed Income, Currency and Commodities (FICC) generated record quarterly net revenues of $4.89 billion, reflecting strength across most businesses. Equities generated record quarterly net revenues of $3.13 billion, including record commissions. Asset Management generated record management and other fees of $1.15 billion. Assets under management increased 27% from a year ago to a record $796 billion, with net inflows of $50 billion during the quarter. Securities Services achieved record quarterly net revenues of $762 million, reflecting continued strength in the prime brokerage business. -------------- "Given the difficult environment of the third quarter, many of our businesses were challenged,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer. "But overall, the quality of our franchise produced strong results as clients continue to look to us for advice and execution. The strength of our client relationships, the diversity of our businesses, and the talent and teamwork of our people continue to drive our performance.” Net Revenues Investment Banking ------------------ Net revenues in Investment Banking were $2.15 billion, 67% higher than the third quarter of 2006 and 25% higher than the second quarter of 2007, as mergers and acquisitions activity remained strong. Net revenues in Financial Advisory were $1.41 billion, more than double the amount of net revenues in the third quarter of 2006, reflecting significantly higher client activity. Net revenues in the firm’s Underwriting business were $733 million, 8% higher than the third quarter of 2006, due to higher net revenues in equity underwriting, primarily reflecting an increase in industry-wide equity and equity-related offerings, partially offset by lower net revenues in debt underwriting, as the financing environment became less favorable. The decrease in debt underwriting reflected lower net revenues in leveraged finance. The firm’s investment banking transaction backlog decreased during the quarter, but was higher than at the end of 2006. (3) Trading and Principal Investments --------------------------------- Net revenues in Trading and Principal Investments were $8.23 billion, 70% higher than the third quarter of 2006 and 24% higher than the second quarter of 2007. Net revenues in FICC were $4.89 billion, 71% higher than the third quarter of 2006, reflecting significantly higher net revenues in currencies and interest rate products. Net revenues in mortgages were also significantly higher, despite continued deterioration in the market environment. Significant losses on non-prime loans and securities were more than offset by gains on short mortgage positions. In addition, net revenues in both commodities and credit products were higher compared with the third quarter of 2006. Credit products included substantial gains from equity investments, including a gain of approximately $900 million related to the disposition of Horizon Wind Energy L.L.C. In addition, credit products included a loss of $1.71 billion ($1.48 billion, net of hedges) related to non-investment grade credit origination activities. Although the mortgage and corporate credit markets were characterized by significantly wider spreads and reduced levels of liquidity, FICC benefited from strong customer-driven activity and favorable market opportunities in certain businesses during the quarter. Net revenues in Equities were $3.13 billion, more than double the amount of net revenues in the third quarter of 2006. Net revenues were significantly higher in derivatives, reflecting strength across all regions, as well as in shares due to higher commission volumes. In addition, net revenues in principal strategies increased compared with the third quarter of 2006. During the quarter, Equities operated in an environment characterized by strong customer-driven activity and higher volatility. Principal Investments recorded net revenues of $211 million, reflecting gains and overrides from real estate principal investments. Results in Principal Investments included a $230 million gain related to the firm's investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC) and a $261 million loss related to the firm's investment in the convertible preferred stock of Sumitomo Mitsui Financial Group, Inc. (SMFG). Asset Management and Securities Services ---------------------------------------- Net revenues in Asset Management and Securities Services were $1.96 billion, 35% higher than the third quarter of 2006 and 8% higher than the second quarter of 2007. Asset Management net revenues were $1.20 billion, 31% higher than the third quarter of 2006, reflecting a 40% increase in management and other fees, partially offset by lower incentive fees. During the quarter, assets under management increased $38 billion to $796 billion, reflecting money market net inflows of $31 billion, non-money market net inflows of $19 billion spread across all asset classes, and net market depreciation of $12 billion, reflecting depreciation in equity and alternative investment assets, partially offset by appreciation in fixed income assets. Securities Services net revenues were $762 million, 42% higher than the third quarter of 2006, as the firm’s prime brokerage business continued to generate strong results, reflecting significantly higher customer balances in securities lending and margin lending. Expenses Operating expenses were $8.08 billion, 55% higher than the third quarter of 2006 and 20% higher than the second quarter of 2007. Compensation and Benefits ------------------------- Compensation and benefits expenses were $5.92 billion, 68% higher than the third quarter of 2006, primarily reflecting the impact of higher net revenues. The ratio of compensation and benefits to net revenues was 48.0% for the first nine months of 2007 compared with 49.4% for the first nine months of 2006. Employment levels increased 7% during the quarter. Non-Compensation Expenses ------------------------- Non-compensation expenses were $2.16 billion, 27% higher than the third quarter of 2006 and 16% higher than the second quarter of 2007. The increase compared with the third quarter of 2006 was primarily attributable to continued geographic expansion and the impact of higher levels of business activity. The majority of this increase was in brokerage, clearing, exchange and distribution fees, which principally reflected higher transaction volumes in Equities. Other expenses also increased and included provisions for litigation and regulatory proceedings of $35 million. Provision For Taxes ------------------- The effective income tax rate was 33.2% for the first nine months of 2007, essentially unchanged from the first half of 2007 and down from 34.5% for fiscal year 2006. The decrease in the effective tax rate from fiscal year 2006 was primarily due to changes in the geographic earnings mix and an increase in tax credits. Capital As of August 31, 2007, total capital was $190.19 billion, consisting of $39.12 billion in total shareholders’ equity (common shareholders’ equity of $36.02 billion and preferred stock of $3.10 billion) and $151.07 billion in unsecured long-term borrowings. Book value per common share was $84.65 and tangible book value per common share was $73.10 (1), each increasing 4% compared with the end of the second quarter of 2007. Book value and tangible book value per common share are based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 425.5 million at period end. The firm repurchased 11.2 million shares of its common stock at an average cost per share of $219.35, for a total cost of $2.45 billion during the quarter. The remaining authorization under the firm’s existing share repurchase program is 23.0 million shares. Dividends The Board of Directors of The Goldman Sachs Group, Inc. (the Board) declared a dividend of $0.35 per common share to be paid on November 26, 2007 to common shareholders of record on October 29, 2007. The Board also declared dividends of $404.41, $387.50, $404.41 and $399.13 per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively (represented by depositary shares, each representing a 1/1,000th interest in a share of preferred stock), to be paid on November 13, 2007 to preferred shareholders of record on October 29, 2007. -------------- Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, it is one of the oldest and largest investment banking firms. The firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world. Cautionary Note Regarding Forward-Looking Statements ---------------------------------------------------- This press release contains "forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only the firm’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the firm’s control. It is possible that the firm’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. For a discussion of some of the risks and important factors that could affect the firm’s future results and financial condition, see "Risk Factors" in Part I, Item 1A of the firm’s Annual Report on Form 10-K for the fiscal year ended November 24, 2006 and "Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the firm’s Annual Report on Form 10-K for the fiscal year ended November 24, 2006. Statements about the firm’s investment banking transaction backlog also may constitute forward-looking statements. Such statements are subject to the risk that the terms of these transactions may be modified or that they may not be completed at all; therefore, the net revenues, if any, that the firm actually earns from these transactions may differ, possibly materially, from those currently expected. Important factors that could result in a modification of the terms of a transaction or a transaction not being completed include, in the case of underwriting transactions, a decline in general economic conditions, outbreak of hostilities, volatility in the securities markets generally or an adverse development with respect to the issuer of the securities and, in the case of financial advisory transactions, a decline in the securities markets, an adverse development with respect to a party to the transaction or a failure to obtain a required regulatory approval. For a discussion of other important factors that could adversely affect the firm’s investment banking transactions, see "Risk Factors" in Part I, Item 1A of the firm’s Annual Report on Form 10-K for the fiscal year ended November 24, 2006. Conference Call --------------- A conference call to discuss the firm’s results, outlook and related matters will be held at 11:00 am (ET). The call will be open to the public. Members of the public who would like to listen to the conference call should dial 1-888-281-7154 (U.S. domestic) or 1-706-679-5627 (international). The number should be dialed at least 10 minutes prior to the start of the conference call. The conference call will also be accessible as an audio webcast through the Investor Relations section of the firm’s web site, www.gs.com/our_firm/investor_relations/. There is no charge to access the call. For those unable to listen to the live broadcast, a replay will be available on the firm’s web site or by dialing 1-800-642-1687 (U.S. domestic) or 1-706-645-9291 (international) passcode number 14824766, beginning approximately two hours after the event. Please direct any questions regarding obtaining access to the conference call to Goldman Sachs Investor Relations, via e-mail, at gs-investor-relations@gs.com. THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES SEGMENT NET REVENUES (UNAUDITED) $ in millions       Three Months Ended % Change From Aug. 31, May 25, Aug. 25, May 25, Aug. 25, 2007 2007 2006 2007 2006 Investment Banking   Financial Advisory $ 1,412 $ 709 $ 609 99  % 132  %   Equity underwriting 355 358 270 (1 ) 31 Debt underwriting   378     654     409   (42 ) (8 ) Total Underwriting 733 1,012 679 (28 ) 8                 Total Investment Banking   2,145     1,721     1,288   25   67     Trading and Principal Investments FICC 4,889 3,368 2,860 45 71   Equities trading 1,799 1,415 707 27 154 Equities commissions   1,330     1,082     844   23   58   Total Equities 3,129 2,497 1,551 25 102   SMFG (261 ) (64 ) 261 N.M. N.M. ICBC 230 (125 ) (8 ) N.M. N.M. Other corporate and real estate gains and losses 148 909 142 (84 ) 4 Overrides   94     64     35   47   169   Total Principal Investments 211 784 430 (73 ) (51 )                 Total Trading and Principal Investments   8,229     6,649     4,841   24   70     Asset Management and Securities Services Management and other fees 1,152 1,035 822 11 40 Incentive fees   46     20     96   130   (52 ) Total Asset Management 1,198 1,055 918 14 31   Securities Services 762 757 537 1 42                 Total Asset Management and Securities Services   1,960     1,812     1,455   8   35                   Total net revenues $ 12,334   $ 10,182   $ 7,584   21   63       Nine Months Ended % ChangeFrom Aug. 31, Aug. 25, Aug. 25, 2007 2006 2006 Investment Banking Financial Advisory $ 2,982 $ 1,953 53  %   Equity underwriting 979 1,035 (5 ) Debt underwriting   1,621     1,297     25   Total Underwriting 2,600 2,332 11         Total Investment Banking   5,582     4,285     30     Trading and Principal Investments FICC 12,861 11,158 15   Equities trading 5,377 3,730 44 Equities commissions   3,336     2,622     27   Total Equities 8,713 6,352 37   SMFG (164 ) 605 N.M. ICBC 332 (12 ) N.M. Other corporate and real estate gains and losses 2,180 626 N.M. Overrides   373     199     87   Total Principal Investments 2,721 1,418 92         Total Trading and Principal Investments   24,295     18,928     28     Asset Management and Securities Services Management and other fees 3,169 2,422 31 Incentive fees   156     939     (83 ) Total Asset Management 3,325 3,361 (1 )   Securities Services 2,044 1,684 21         Total Asset Management and Securities Services   5,369     5,045     6           Total net revenues $ 35,246   $ 28,258     25     THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) In millions, except per share amounts and employees         Three Months Ended % Change From Aug. 31, May 25, Aug. 25, May 25, Aug. 25, 2007 2007 2006 2007 2006 Revenues Investment banking $ 2,145 $ 1,720 $ 1,285 25  % 67  % Trading and principal investments 7,576 6,242 4,368 21 73 Asset management and securities services 1,272 1,107 975 15 30 Interest income   12,810   11,282   9,351 14   37   Total revenues 23,803 20,351 15,979 17 49   Interest expense   11,469   10,169   8,395 13   37     Revenues, net of interest expense   12,334   10,182   7,584 21   63     Operating expenses Compensation and benefits 5,920 4,887 3,530 21 68   Brokerage, clearing, exchange and distribution fees 795 638 523 25 52 Market development 148 144 117 3 26 Communications and technology 169 161 141 5 20 Depreciation and amortization 145 140 126 4 15 Amortization of identifiable intangible assets 53 50 50 6 6 Occupancy 218 210 221 4 (1 ) Professional fees 188 161 135 17 39 Cost of power generation 88 81 101 9 (13 ) Other expenses   351   279   278 26   26   Total non-compensation expenses 2,155 1,864 1,692 16 27               Total operating expenses   8,075   6,751   5,222 20   55     Pre-tax earnings 4,259 3,431 2,362 24 80 Provision for taxes   1,405   1,098   768 28   83   Net earnings 2,854 2,333 1,594 22 79   Preferred stock dividends   48   46   39 N.M.   N.M.   Net earnings applicable to common shareholders $ 2,806 $ 2,287 $ 1,555 23   80       Earnings per common share Basic $ 6.54 $ 5.25 $ 3.46 25  % 89  % Diluted 6.13 4.93 3.26 24 88   Average common shares outstanding Basic 429.0 435.8 449.4 (2 ) (5 ) Diluted 457.4 464.1 477.4 (1 ) (4 )   Selected Data Employees at period end (4) 29,905 28,012 25,647 7 17 Ratio of compensation and benefits to net revenues 48.0  % 48.0  % 46.5  %   THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) In millions, except per share amounts         Nine Months Ended % Change From Aug. 31, Aug. 25, Aug. 25, 2007 2006 2006 Revenues Investment banking $ 5,581 $ 4,276 31  % Trading and principal investments 22,891 17,976 27 Asset management and securities services 3,512 3,545 (1 ) Interest income   34,450   25,430 35   Total revenues 66,434 51,227 30   Interest expense   31,188   22,969 36     Revenues, net of interest expense   35,246   28,258 25     Operating expenses Compensation and benefits 16,918 13,952 21   Brokerage, clearing, exchange and distribution fees 1,984 1,414 40 Market development 424 338 25 Communications and technology 481 396 21 Depreciation and amortization 417 378 10 Amortization of identifiable intangible assets 154 128 20 Occupancy 632 613 3 Professional fees 510 367 39 Cost of power generation 253 308 (18 ) Other expenses   924   789 17   Total non-compensation expenses 5,779 4,731 22         Total operating expenses   22,697   18,683 21     Pre-tax earnings 12,549 9,575 31 Provision for taxes   4,165   3,190 31   Net earnings 8,384 6,385 31   Preferred stock dividends   143   91 N.M.   Net earnings applicable to common shareholders $ 8,241 $ 6,294 31       Earnings per common share Basic $ 18.89 $ 13.92 36  % Diluted 17.75 13.12 35   Average common shares outstanding Basic 436.2 452.1 (4 ) Diluted 464.3 479.7 (3 )   Selected Data Ratio of compensation and benefits to net revenues 48.0  % 49.4  %   NON-COMPENSATION EXPENSES (UNAUDITED) $ in millions         Three Months Ended % Change From Aug. 31, May 25, Aug. 25, May 25, Aug. 25, 2007 2007 2006 2007 2006   Non-compensation expenses of consolidated investments (5) $ 101 $ 101 $ 153 -  % (34 )  %   Non-compensation expenses excluding consolidated investments Brokerage, clearing, exchange and distribution fees 795 638 523 25 52 Market development 146 142 108 3 35 Communications and technology 168 161 139 4 21 Depreciation and amortization 128 121 103 6 24 Amortization of identifiable intangible assets 52 48 48 8 8 Occupancy 200 192 188 4 6 Professional fees 188 160 132 18 42 Cost of power generation 88 81 101 9 (13 ) Other expenses   289   220   197   31 47   Subtotal 2,054 1,763 1,539 17 33           Total non-compensation expenses, as reported $ 2,155 $ 1,864 $ 1,692   16 27       Nine Months Ended % ChangeFrom Aug. 31, Aug. 25, Aug. 25, 2007 2006 2006   Non-compensation expenses of consolidated investments (5) $ 289 $ 371 (22 )  %   Non-compensation expenses excluding consolidated investments Brokerage, clearing, exchange and distribution fees 1,984 1,414 40 Market development 418 313 34 Communications and technology 479 391 23 Depreciation and amortization 367 325 13 Amortization of identifiable intangible assets 150 126 19 Occupancy 581 528 10 Professional fees 508 358 42 Cost of power generation 253 308 (18 ) Other expenses   750   597   26   Subtotal 5,490 4,360 26       Total non-compensation expenses, as reported $ 5,779 $ 4,731   22     THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (UNAUDITED)       Average Daily VaR (6) $ in millions   Three Months Ended Aug. 31, May 25, Aug. 25, 2007 2007 2006 Risk Categories Interest rates $ 96 $ 81 $ 55 Equity prices 97 101 61 Currency rates 23 20 21 Commodity prices 24 24 31 Diversification effect (7)   (101 )   (93 )   (76 ) Total $ 139   $ 133   $ 92   Assets Under Management (8) $ in billions         As of % Change From Aug. 31, May 31, Aug. 31, May 31, Aug. 31, 2007 2007 2006 2007 2006 Asset Class Alternative investments $ 151 $ 151 $ 139 -  % 9  % Equity 251 253 193 (1 ) 30 Fixed income   230   221   186 4   24 Total non-money market assets 632 625 518 1 22   Money markets   164   133   111 23   48 Total assets under management $ 796 $ 758 $ 629 5   27   Three Months Ended Aug. 31,   May 31,   Aug. 31, 2007 2007 2006   Balance, beginning of period $ 758 $ 719 $ 593   Net inflows / (outflows) Alternative investments 7 - 13 Equity 7 7 4 Fixed income   5     7   10 Total non-money market net inflows / (outflows) 19 14 27   Money markets   31     4   3  (9) Total net inflows / (outflows) 50 18 30   Net market appreciation / (depreciation) (12 ) 21 6       Balance, end of period $ 796   $ 758 $ 629 Principal Investments (10) $ in millions       As of August 31, 2007 Corporate Real Estate Total   Private $ 5,627 $ 1,695 $ 7,322 Public   1,863   47   1,910 Subtotal 7,490 1,742 9,232 SMFG convertible preferred stock (11) 3,690 - 3,690 ICBC ordinary shares (12)   6,281   -   6,281 Total $ 17,461 $ 1,742 $ 19,203 Footnotes (1) Tangible common shareholders' equity equals total shareholders' equity less preferred stock, goodwill and identifiable intangible assets, excluding power contracts. Identifiable intangible assets associated with power contracts are not deducted from total shareholders' equity because, unlike other intangible assets, less than 50% of these assets are supported by common shareholders' equity. Management believes that return on average tangible common shareholders' equity (ROTE) is meaningful because it measures the performance of businesses consistently, whether they were acquired or developed internally. ROTE is computed by dividing net earnings (or annualized net earnings for annualized ROTE) applicable to common shareholders by average monthly tangible common shareholders' equity. Tangible book value per common share is computed by dividing tangible common shareholders' equity by the number of common shares outstanding, including restricted stock units granted to employees with no future service requirements. The following table sets forth a reconciliation of total shareholders' equity to tangible common shareholders' equity:   Average for the   As of Three Months Ended August 31, 2007   Nine Months Ended August 31, 2007 August 31, 2007 (unaudited, $ in millions)   Total shareholders' equity $ 38,667 $ 37,384 $ 39,118 Preferred stock   (3,100 )   (3,100 )   (3,100 ) Common shareholders' equity 35,567 34,284 36,018 Goodwill and identifiable intangible assets, excluding power contracts   (4,926 )   (4,956 )   (4,915 ) Tangible common shareholders' equity $ 30,641   $ 29,328   $ 31,103   (2) Thomson Financial - January 1, 2007 through August 31, 2007. (3) The firm's investment banking transaction backlog represents an estimate of the firm's future net revenues from investment banking transactions where management believes that future revenue realization is more likely than not. (4) Excludes 4,904, 4,841 and 9,901 employees as of August 2007, May 2007 and August 2006, respectively, of consolidated entities held for investment purposes. Compensation and benefits includes $40 million, $50 million and $83 million for the three months ended August 31, 2007, May 25, 2007 and August 25, 2006, respectively, attributable to these consolidated entities. (5) Consolidated entities held for investment purposes are entities that are held strictly for capital appreciation, have a defined exit strategy and are engaged in activities that are not closely related to the firm's principal businesses. For example, these investments include consolidated entities that hold real estate assets, such as hotels, but exclude investments in entities that primarily hold financial assets. Management believes that it is meaningful to review non-compensation expenses excluding expenses related to these consolidated entities in order to evaluate trends in non-compensation expenses related to the firm's principal business activities. (6) VaR is the potential loss in value of Goldman Sachs' trading positions due to adverse market movements over a one-day time horizon with a 95% confidence level. The modeling of the risk characteristics of the firm's trading positions involves a number of assumptions and approximations. While management believes that these assumptions and approximations are reasonable, there is no standard methodology for estimating VaR, and different assumptions and/or approximations could produce materially different VaR estimates. For a further discussion of the calculation of VaR, see Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in the firm's Annual Report on Form 10-K for the year ended November 24, 2006. (7) Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated. (8) Substantially all assets under management are valued as of calendar month end. Assets under management do not include the firm's investments in funds that it manages. (9) Includes the transfer of $8 billion of money market assets under management to interest-bearing deposits at Goldman Sachs Bank USA, a wholly owned subsidiary of The Goldman Sachs Group, Inc. These deposits are not included in assets under management. (10) Represents investments included within the Principal Investments component of our Trading and Principal Investments segment. Excludes assets related to consolidated investment funds of $17.11 billion as of August 2007, for which Goldman Sachs is not at risk. (11) Excludes an economic hedge on the shares of common stock underlying the investment. As of August 2007, the fair value of this hedge was $2.69 billion. Includes the effect of foreign exchange revaluation on the investment, for which Goldman Sachs also maintains an economic hedge. (12) Includes interests of $3.97 billion as of August 2007 held by investment funds managed by Goldman Sachs. The fair value of the investment in the ordinary shares of ICBC, which trade on The Stock Exchange of Hong Kong, includes the effect of foreign exchange revaluation, for which Goldman Sachs maintains an economic currency hedge.