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

Thursday September 20, 8:00 am ET
Net Revenues Were $12.3 Billion, Second Highest Quarter

NEW YORK--(BUSINESS WIRE)--The Goldman Sachs Group, Inc. (NYSE: GS - News) 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.
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"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
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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
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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
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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
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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
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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
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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.

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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
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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
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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.

Contact:
The Goldman Sachs Group, Inc.
Media Relations:
Lucas van Praag, 212-902-5400

Investor Relations:
Heather Kennedy Miner, 212-855-0758

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Source: The Goldman Sachs Group, Inc.