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Business Context and Reporting Period

Company: The Goldman Sachs Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended February 22, 2002 (Fiscal Q1 2002)
Business Overview: A leading global investment banking, securities, and investment management firm operating through two primary segments: Global Capital Markets and Asset Management and Securities Services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 24% to $3.6 billion, driven by a 33% drop in Global Capital Markets revenues and a 4% decline in Asset Management and Securities Services.
• Profitability: Net earnings fell 32% to $524 million. Pre-tax earnings declined 33% to $839 million.
• Segment Performance:
  • Global Capital Markets: Net revenues dropped to $2.2 billion. Investment Banking revenues fell 22% due to reduced M&A activity. Trading and Principal Investments revenues fell 38%, primarily due to a sharp decline in Equities trading revenues ($105 million vs. $1.18 billion prior year) and lower market volatility.
  • Asset Management: Net revenues increased 15% to $423 million, offsetting declines in Securities Services and Commissions.
• Expense Management: Total operating expenses decreased 21% to $2.8 billion. Compensation and benefits fell 24% to $1.8 billion, maintaining a 50% ratio to net revenues. Employee headcount decreased 4% to 22,136.
• Balance Sheet: Total assets remained relatively stable. Short-term borrowings increased by $2.4 billion, while long-term borrowings increased by $3.6 billion.

Outlook, Risks, and Management Commentary

• Business Environment: Management noted signs of a mild global economic recovery but highlighted persistent uncertainty, subdued equity prices, and low corporate activity. The Nasdaq declined 10% during the quarter.
• Liquidity: The firm maintains a liquidity cushion of unencumbered U.S. government and agency securities, averaging $27.25 billion during the quarter. Credit ratings remain strong (e.g., S&P A+, Moody's A1), though S&P revised its outlook to "negative" in July 2001.
• Market Risk (VaR): Firmwide daily Value-at-Risk (VaR) at a 95% confidence level was $49 million as of February 22, 2002. Trading losses exceeded the 95% one-day VaR on one occasion during the quarter.
• Accounting Changes: The firm adopted SFAS No. 142, ceasing the amortization of goodwill effective December 1, 2001. Goodwill is now tested annually for impairment.
• Legal Proceedings: The firm is involved in various judicial and regulatory proceedings. Management believes the aggregate results will not materially affect financial condition, though they could impact operating results for specific periods. A class certification was granted in the AMF Securities Litigation.
• Share Repurchases: As of February 2002, approximately 4 million shares remained under the repurchase program. On March 18, 2002, the Board authorized an additional 15 million shares for repurchase.

Investor Verification Checklist

• Equities Trading Volatility: Verify the sustainability of the sharp decline in Equities trading revenues and the impact of the new fee-based pricing structure on Nasdaq trading.
• Principal Investments: Review the composition and valuation of the $2.4 billion principal investment portfolio, noting the mix of corporate and real estate assets which may be illiquid.
• Goodwill Impairment: Monitor the upcoming goodwill impairment tests required under SFAS No. 142, as the firm holds $2.85 billion in goodwill.
• Liquidity Coverage: Confirm the continued availability of unencumbered securities to meet the $27+ billion liquidity cushion policy.
• Share Sales: Note the significant volume of shares (43.4 million) becoming eligible for sale in June 2002, which could impact stock price dynamics.