Investment Banking
We provide a broad range of investment banking services to a diverse group
of corporations, financial institutions, governments and individuals and seek
to develop and maintain long-term relationships with these clients as their
lead investment bank.
Our current structure, which is organized by regional, industry and product
groups, seeks to combine client-focused investment bankers with execution and
industry expertise. Because our businesses are global, we have adapted our organization
to meet the demands of our clients in each geographic region. Through our commitment
to teamwork, we believe that we provide services in an integrated fashion for
the benefit of our clients.
Our Investment Banking segment is divided into two components:
• Financial Advisory. Financial Advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures, corporate defense activities,
restructurings and spin-offs; and
• Underwriting. Underwriting includes public offerings and private placements
of equity and debt instruments.
Financial Advisory
Goldman Sachs is a leading investment bank in worldwide mergers and acquisitions.
Our mergers and acquisitions capabilities are evidenced by our significant share
of assignments in large, complex transactions for which we provide multiple
services, including “one-stop” acquisition financing and cross-border structuring
expertise, as well as services in other areas of the firm, such as currency
hedging.
Underwriting
We underwrite a wide range of securities and other financial instruments, including
common and preferred stock, convertible and exchangeable securities, investment-grade
debt, high-yield debt, sovereign and emerging market debt, municipal debt, bank
loans, asset-backed securities and real estate-related securities, such as mortgage-backed
securities and the securities of real estate investment trusts.
Equity Underwriting. Equity underwriting has been a long-term core strength
of Goldman Sachs. As with mergers and acquisitions, we have been particularly
successful in winning mandates for large, complex equity underwritings. We believe
our leadership in worldwide initial public offerings and worldwide public common
stock offerings reflects our expertise in complex transactions, prior experience
and distribution capabilities.
Debt Underwriting. We engage in the underwriting and origination of various
types of debt instruments, including investment-grade debt securities, high-yield
debt securities, bank and bridge loans and emerging market debt securities,
which instruments may be issued by, among others, corporate, sovereign and agency
issuers. In addition, we underwrite and originate structured securities, which
include asset-backed and mortgage-backed securities and collateralized debt
obligations. We have employed a focused approach in debt underwriting, emphasizing
high value-added areas in servicing our clients.
Trading and Principal Investments
Trading and Principal Investments facilitates customer transactions with a
diverse group of corporations, financial institutions, governments and individuals
and takes proprietary positions through market making in, and trading of, fixed
income and equity products, currencies, commodities and derivatives on such
products. In addition, we engage in floor-based and electronic market making
as a specialist on U.S. equities and options exchanges and we clear customer
transactions on major stock, options and futures exchanges worldwide. In connection
with our merchant banking and other investment activities, we make principal
investments directly and through funds that we raise and manage.
In order to meet the needs of our clients, Trading and Principal Investments
is diversified across a wide range of products. We believe our willingness and
ability to take risk distinguishes us from many of our competitors and substantially
enhances our client relationships.
Our Trading and Principal Investments segment is divided into three components:
• Fixed Income, Currency and Commodities. We make markets in and trade interest
rate and credit products, mortgage-backed securities and loans, currencies and
commodities, structure and enter into a wide variety of derivative transactions,
and engage in proprietary trading;
• Equities. We make markets in, act as a specialist for, and trade equities
and equity-related products, structure and enter into equity derivative transactions,
and engage in proprietary trading. We also execute and clear customer transactions
on major stock, options and futures exchanges worldwide; and
• Principal Investments. Principal Investments primarily represents net revenues
from our merchant banking investments, including the increased share of the
income and gains derived from our merchant banking funds when the return on
a fund’s investments exceeds certain threshold returns (merchant banking overrides),
as well as unrealized gains or losses on our investment in the convertible preferred
stock of Sumitomo Mitsui Financial Group, Inc. (SMFG).
Fixed Income, Currency and Commodities and Equities
FICC and Equities are large and diversified operations through which we engage
in a variety of customer-driven and proprietary trading activities.
In their customer-driven businesses, FICC and Equities strive to deliver high-quality
service by offering broad market-making and market knowledge to our clients
on a global basis. In addition, we use our expertise to take positions in markets,
often by committing capital and taking risk, to facilitate customer transactions
and provide liquidity. Our willingness to make markets in a broad range of fixed
income, currency, commodity and equity products and their derivatives is crucial
both to our client relationships and to support our underwriting business by
providing secondary market liquidity.
We generate trading net revenues from our customer-driven businesses in three
ways.
• First, in large, highly liquid markets, we undertake a high volume of transactions
for modest spreads and fees.
• Second, by capitalizing on our strong market relationships and capital position,
we undertake transactions in less liquid markets where spreads and fees are
generally larger.
• Finally, we generate net revenues from structuring and executing transactions
that address complex client needs.
In our proprietary activities in both FICC and Equities, we assume a variety
of risks and devote resources to identify, analyze and benefit from these exposures.
We leverage our strong proprietary research capabilities and capitalize on our
analytical models to analyze information and make informed trading judgments.
For example, as part of our FICC credit and mortgage products businesses, we
have expanded and expect to continue to expand the extent to which we make principal
investments in portfolios and single issues of distressed debt as well as other
special situation investments. In our proprietary activities, we seek to benefit
from perceived disparities in the value of assets in the trading markets and
from macroeconomic and company-specific trends.
Although FICC and Equities involve distinct product areas, we have recently
increased coordination among their businesses. Among the steps we have taken
are to integrate, to an increasing extent, management of FICC and Equities and
to integrate the facilities and personnel of some of our FICC and Equities businesses,
especially in Europe and Asia. We have also merged substantially all of our
risk management functions for FICC and Equities. We expect to continue to increase
the integration and coordination of these businesses in the future, as we respond
to what we believe is client demand for more centralized services and as we
attempt to take advantage of perceived synergies.
We believe that our trading and market-making capabilities are key ingredients
to our success. While these businesses have generally earned attractive returns,
we have in the past incurred significant trading losses in periods of market
turbulence, such as in 1994 and the second half of 1998, and from time to time
in connection with large block trades.
In both our customer-driven and proprietary activities in FICC and Equities,
we manage our exposure to credit and other financial risks on a global basis
across all our products. Our trading risk management process seeks to balance
our ability to profit from trading positions with our exposure to potential
losses. As part of this process, we analyze not only market risk but also credit
and other financial risks. Risk management includes input from all levels of
Goldman Sachs, from the trading desks to the Firmwide Risk Committee.
FICC. FICC’s principal businesses are:
• Commodities and commodity derivatives, including our power generation business;
• Credit products, including investment-grade corporate securities, high-yield
securities, bank loans, municipal securities, credit derivatives and emerging
market debt;
• Currencies and currency derivatives;
• Interest rate products, including interest rate derivatives and global government
securities;
• Money market instruments, including the matched book; and
• Mortgage-backed securities and loans.
A core activity in FICC is market making in a broad array of securities and
products. For example, we are a primary dealer in many of the largest government
bond markets around the world, including the United States, Japan and the United
Kingdom. We are a member of the major futures exchanges, and also have interbank
dealer status in the currency markets in New York, London, Tokyo and Hong Kong.
Our FICC research capabilities enhance our ability to provide high-quality
products and service to our clients and include quantitative and qualitative
analyses of global economic, currency and financial market trends, as well as
credit analyses of corporate and sovereign fixed income securities.
As part of our commodities business, we recently acquired equity interests
in East Coast Power L.L.C. and Cogentrix Energy, Inc., companies engaged in
the power generation business.
Equities. Our Equities principal businesses are:
• Equities Products Group;
• Exchange-Based Trading; and
• Principal Strategies.
Equities Products Group. Our equities products group (EPG) includes primarily
customer-driven activities in the shares, convertible securities and derivatives
businesses of the firm. These activities also include clearing client transactions
on major stock, options and futures exchanges worldwide.
We trade equity securities and equity-related products (such as convertible
securities, options, futures and over-the counter (OTC) derivative instruments)
on a global basis as an agent, as a market maker or otherwise as a principal.
As a principal, we facilitate customer transactions, often by committing capital
and taking risk, to provide liquidity to clients with large blocks of stocks
or options. For example, we are active in the execution of large block trades
(trades of 50,000 or more shares).
We are a member of most of the world’s major stock, options and futures exchanges,
including those located in New York, Chicago, London, Paris, Frankfurt, Tokyo
and Hong Kong. We are a designated market maker in over 3,000 stocks traded
on the Nasdaq Stock Market.
In the options and futures markets, we structure, distribute and execute derivatives
on market indices, industry groups and individual company stocks to facilitate
customer transactions and our proprietary activities. We develop quantitative
strategies and render advice with respect to portfolio hedging and restructuring
and asset allocation transactions. We also create specially tailored instruments
to enable sophisticated investors to undertake hedging strategies and establish
or liquidate investment positions. We are one of the leading participants in
the trading and development of equity derivative instruments. We are an active
participant in the trading of futures and options on most of the major exchanges
in the United States, Europe and Asia.
Exchange-Based Trading. Our exchange-based trading business includes our stock,
option and exchange traded funds (ETF) specialist businesses. We engage in floor-based
and electronic market making as a specialist on U.S. equities and options exchanges.
In the United States, for stocks, we are one of the leading specialists on the
NYSE. For options, we are a specialist on the American Stock Exchange, the Chicago
Board Options Exchange, the International Securities Exchange and the Philadelphia
Stock Exchange. For ETFs, we are a specialist on the American Stock Exchange
and the NYSE.
Principal Strategies. Our equities principal strategies business includes equity
arbitrage, as well as other proprietary trading in equity and related securities,
including convertible securities and derivatives. Equity arbitrage includes,
among other strategies, relative value trading (which involves trading strategies
to take advantage of perceived discrepancies in the relative value of financial
instruments, including debt and equity instruments), statistical arbitrage (which
involves trading strategies based on analyses of historical price relationships
among sectors of the equities markets) and risk arbitrage (which focuses on
event-oriented special situations such as corporate restructurings, recapitalizations,
mergers and acquisitions and legal and regulatory events).
Principal Investments
In connection with our merchant banking activities, we invest by making principal
investments directly and through funds that we raise and manage. Principal investments
also includes our investment in the convertible preferred stock of SMFG, which
we acquired on February 7, 2003.
Asset Management and Securities Services
The components of the Asset Management and Securities Services segment, are
set forth below:
• Asset Management. Asset Management provides investment advisory and financial
planning services to a diverse client base of institutions and individuals and
generates revenues in the form of management and incentive fees; and
• Securities Services. Securities Services includes prime brokerage, financing
services and securities lending, all of which generate revenues primarily in
the form of interest rate spreads or fees.