Goldman Sachs Group Inc. — Fiscal 2009 Form 10-K Summary
Business context and reporting period
Goldman Sachs is a global investment banking, securities and investment management firm operating through Investment Banking; Trading and Principal Investments; and Asset Management and Securities Services. The filing covers the fiscal year ended December 31, 2009. Fiscal 2009 began December 27, 2008, following the company’s transition from a November fiscal year-end; the prior comparable fiscal year ended November 28, 2008, and a separate one-month transition period ended December 26, 2008.
Goldman Sachs became a bank holding company in September 2008 and elected financial holding company status in August 2009. It operates through regulated subsidiaries including Goldman Sachs Bank USA.
Financial performance and key metrics
| Metric | 2009 | 2008 | Change/comment |
|---|---|---|---|
| Net revenues | $45.17 billion | $22.22 billion | More than doubled |
| Pre-tax earnings | $19.83 billion | $2.34 billion | Material recovery from 2008 |
| Net earnings | $13.39 billion | $2.32 billion | Significant increase |
| Net earnings applicable to common shareholders | $12.19 billion | $2.04 billion | Significant increase |
| Diluted EPS | $22.13 | $4.47 | Significant increase |
| Return on average common equity | 22.5% | 4.9% | Improved materially |
| Compensation and benefits | $16.19 billion | $10.93 billion | Up with higher revenues |
| Compensation-to-revenue ratio | 35.8% | 48.0% excluding 2008 severance | Lowest annual ratio reported |
| Net cash from operating activities | $48.88 billion | $1.89 billion | Strong improvement |
| Cash and cash equivalents at year-end | $38.29 billion | $15.74 billion | Increased $24.49 billion |
Trading and Principal Investments generated $34.37 billion of net revenues and $17.32 billion of pre-tax earnings, compared with $9.06 billion of net revenues and a $2.75 billion pre-tax loss in 2008. FICC revenue was $23.32 billion, supported by strong client activity, improved asset values and tighter credit spreads. Equities revenue was $9.89 billion, up 7% from 2008.
Investment Banking generated $4.80 billion of net revenues and $1.27 billion of pre-tax earnings. Financial Advisory revenue declined 29% to $1.89 billion, while underwriting revenue increased 15% to $2.90 billion.
Asset Management and Securities Services generated $6.00 billion of net revenues and $1.34 billion of pre-tax earnings, down from $7.97 billion and $3.04 billion, respectively, in 2008. Assets under management increased to $871 billion from $779 billion, driven by $76 billion of market appreciation, partly offset by $3 billion of net outflows.
Balance sheet, capital, debt and liquidity
- Total assets were $848.94 billion at December 31, 2009, down from $884.55 billion at November 28, 2008.
- Total shareholders’ equity was $70.71 billion, including $63.76 billion of common equity and $6.96 billion of preferred stock.
- Common book value per share increased to $117.48 from $98.68; tangible book value per common share increased to $108.42 from $88.27.
- Unsecured long-term borrowings were $185.09 billion, compared with $168.22 billion, while unsecured short-term borrowings declined to $37.52 billion from $52.66 billion.
- Customer deposits increased to $39.42 billion from $27.64 billion.
- The firm reported Basel I Tier 1 capital of $64.64 billion, risk-weighted assets of $431.89 billion, a Tier 1 capital ratio of 15.0%, a total capital ratio of 18.2% and a Tier 1 leverage ratio of 7.6%.
- GS Bank USA reported a Tier 1 capital ratio of 14.9%, a total capital ratio of 19.3% and a Tier 1 leverage ratio of 15.4%.
- Average Global Core Excess liquidity was $166.37 billion, compared with $96.73 billion in 2008. The firm stated that it maintained substantial unencumbered, highly liquid securities to cover stressed cash and collateral outflows.
- Outstanding FDIC-guaranteed debt under the Temporary Liquidity Guarantee Program was $20.76 billion at year-end, consisting of $1.73 billion of short-term and $19.03 billion of long-term debt, all maturing by June 15, 2012.
Material changes versus the prior comparable period
- Results rebounded sharply from the 2008 credit-market crisis as markets stabilized, liquidity improved, asset prices recovered and credit spreads tightened.
- Trading and Principal Investments shifted from a $2.75 billion pre-tax loss to $17.32 billion of pre-tax earnings.
- Principal Investments produced $1.17 billion of net revenue, including a $1.58 billion gain on ICBC shares, a $1.31 billion gain on corporate investments and a $1.76 billion real estate investment loss.
- Mortgage activities still included an approximately $1.5 billion loss on commercial mortgage loans, excluding hedges.
- Level 3 assets declined to $46.48 billion from $66.19 billion, while level 3 assets for which the firm bore economic exposure declined to $43.35 billion from $59.57 billion.
- Average daily VaR increased to $218 million from $180 million, although year-end daily VaR declined to $153 million from $244 million.
- The firm completed a $5.75 billion common stock offering, repurchased the $10 billion TARP preferred investment and repurchased the related warrant for $1.1 billion. Cumulative TARP-related payments totaled $11.42 billion.
- Operating expenses rose 27% to $25.34 billion. Non-compensation expenses included approximately $850 million of charitable contributions and approximately $600 million of real estate impairment charges related to consolidated entities held for investment purposes.
Guidance, outlook, risks and unusual items
The filing does not provide formal numerical earnings guidance. Management reported that the investment banking transaction backlog increased significantly during 2009, but cautioned that transactions may be modified or not completed. The firm stated that the business environment became more favorable after the first quarter of 2009, while emphasizing that earnings remain highly dependent on global market and economic conditions.
- Principal risks include market volatility, declining asset values, credit and counterparty defaults, liquidity and funding disruption, rating downgrades, operational or technology failures, legal and regulatory proceedings, reputational damage and intense competition.
- A one-notch and two-notch downgrade in long-term credit ratings could have triggered approximately $1.12 billion and $2.36 billion, respectively, of additional collateral or termination payments under bilateral agreements.
- Commitments totaled $107.42 billion, including $44.80 billion of commitments to extend credit, $34.84 billion of forward-starting resale and securities-borrowing agreements, $13.24 billion of investment commitments and $10.55 billion of forward-starting repurchase and securities-lending agreements.
- Unfunded corporate and real estate principal investment commitments totaled up to approximately $12.27 billion.
- Litigation and regulatory matters were numerous. Management believed aggregate outcomes would not materially affect financial condition, but individual periods could experience material operating impacts. Litigation and regulatory provisions included $104 million in 2009.
- The firm agreed to repurchase certain auction-rate securities from eligible private wealth management clients at par and pay a $22.5 million fine under a New York settlement, subject to applicable approvals and documentation.
- The firm’s internal control over financial reporting was assessed as effective, and PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Reconcile the unusually strong 2009 earnings with the concentration of performance in FICC, market-sensitive trading and principal investments.
- Review the sustainability of the $34.37 billion Trading and Principal Investments revenue base and the sensitivity of results to spreads, volatility, liquidity and asset valuations.
- Assess the quality, valuation methodology and economic exposure of level 3 assets, private investments, commercial real estate positions and ICBC shares.
- Evaluate liquidity after considering $185.09 billion of unsecured long-term debt, $37.52 billion of unsecured short-term borrowings, rating-triggered collateral requirements and restricted subsidiary capital.
- Review the terms and remaining maturities of FDIC-guaranteed debt and other government-supported funding.
- Assess potential losses from litigation, mortgage-related matters, auction-rate securities, guarantees, derivatives, VIEs and unfunded commitments.
- Confirm the impact of proposed compensation rules, financial-sector taxes, Basel II implementation and other evolving regulatory requirements.
- Consider the comparability limitations caused by the fiscal-year change and the non-comparable one-month December 2008 transition period.