Goldman Sachs Reports Earnings Per Common Share of $4.47 for 2008

The Goldman Sachs Group, Inc. (NYSE: GS) today reported net revenues of $22.22 billion and net earnings of $2.32 billion for the year ended November 28, 2008. Diluted earnings per common share were $4.47 compared with $24.73 for the year ended November 30, 2007. Return on average tangible common shareholders’ equity ⁽¹⁾ (ROTE) was 5.5% and return on average common shareholders’ equity (ROE) was 4.9% for 2008.

Goldman Sachs reported fourth quarter negative net revenues of $1.58 billion and a net loss of $2.12 billion. The diluted loss per common share was $4.97 compared with diluted earnings per common share of $7.01 for the fourth quarter of 2007 and $1.81 for the third quarter of 2008.

Annual Business Highlights

• Goldman Sachs ranked first in worldwide announced mergers and acquisitions for the calendar year-to-date. ⁽²⁾
• Equities generated net revenues of $9.21 billion, reflecting strong results in the client franchise businesses, including record commissions.
• Asset Management generated record net revenues of $4.55 billion, including record management and other fees of $4.32 billion.
• Securities Services achieved record net revenues of $3.42 billion, 26% above the previous record set in 2007.
• On September 21, 2008, The Goldman Sachs Group, Inc. became a bank holding company regulated by the Federal Reserve Board.
• The firm’s Tier 1 Ratio ⁽³⁾ was 15.6% at the end of the year. During the fourth quarter, the Tier 1 Ratio increased from 11.6%, reflecting $20.75 billion of equity issuances.

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"Our results for the fourth quarter reflect extraordinarily difficult operating conditions, including a sharp decline in values across virtually every asset class,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer. "While our quarterly performance obviously didn't meet our expectations, Goldman Sachs remained profitable during one of the most challenging years in our industry's history. Our deep and global client franchise, experienced and talented people and strong balance sheet position our firm well for the year ahead.”

Net Revenues

Investment Banking

Full Year

Net revenues in Investment Banking were $5.19 billion for the year, 31% lower than 2007. Net revenues in Financial Advisory were $2.66 billion, 37% lower than particularly strong net revenues in 2007, primarily reflecting a decline in industry-wide completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $2.53 billion, 24% lower than 2007, principally due to significantly lower net revenues in debt underwriting. The decrease in debt underwriting was primarily due to a decline in leveraged finance and mortgage-related activity, reflecting difficult market conditions. Net revenues in equity underwriting were slightly lower compared with 2007, reflecting a decrease in industry-wide equity and equity-related offerings.

Fourth Quarter

Net revenues in Investment Banking were $1.03 billion, 48% lower than the fourth quarter of 2007 and 20% lower than the third quarter of 2008. Net revenues in Financial Advisory were $574 million, 54% lower than a particularly strong fourth quarter of 2007, primarily reflecting a decline in industry-wide completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $460 million, 37% lower than the fourth quarter of 2007. Net revenues in both debt and equity underwriting were significantly lower, reflecting lower levels of activity.

The firm’s investment banking transaction backlog decreased during the quarter and ended the year significantly lower than at the end of 2007. ⁽⁴⁾

Trading and Principal Investments

Full Year

Net revenues in Trading and Principal Investments were $9.06 billion for the year, 71% lower than 2007.

Net revenues in Fixed Income, Currency and Commodities (FICC) were $3.71 billion for the year, 77% lower than 2007, primarily reflecting losses in credit products, which included a loss of approximately $3.1 billion (net of hedges) related to non-investment-grade credit origination activities and losses from investments, including corporate debt and private and public equities. Results in mortgages included net losses of approximately $1.7 billion on residential mortgage loans and securities and approximately $1.4 billion on commercial mortgage loans and securities. Interest rate products, currencies and commodities each produced particularly strong results and net revenues were higher compared with 2007. During 2008, although client-driven activity was generally solid, FICC operated in a challenging environment characterized by broad-based declines in asset values, wider mortgage and corporate credit spreads, reduced levels of liquidity and broad-based investor deleveraging.

Net revenues in Equities were $9.21 billion for the year, 19% lower than a particularly strong 2007, reflecting losses in principal strategies, partially offset by higher net revenues in the client franchise businesses. Commissions were particularly strong and were higher than 2007. During 2008, Equities operated in an environment characterized by a significant decline in global equity prices, broad-based investor deleveraging and very high levels of volatility, particularly in the second half of the year.

Principal Investments recorded a net loss of $3.86 billion for 2008. These results included net losses of $2.53 billion from corporate principal investments and $949 million from real estate principal investments, as well as a $446 million loss related to the firm’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC).

Fourth Quarter

Trading and Principal Investments recorded negative net revenues of $4.36 billion, compared with net revenues of $6.93 billion for the fourth quarter of 2007 and $2.70 billion for the third quarter of 2008.

FICC recorded negative net revenues of $3.40 billion compared with net revenues of $3.30 billion for the fourth quarter of 2007. The negative net revenues for FICC in the quarter were due to losses from investments, including corporate debt and private and public equities, and trading in credit products. These results were adversely impacted by unprecedented weakness across the broader credit markets, reflecting broad-based declines in asset values, substantially reduced levels of liquidity and dislocation between prices for cash instruments and the related derivative contracts and between credit indices and the underlying single names. Credit products also included a loss of approximately $1.3 billion ($1 billion, net of hedges) related to non-investment-grade credit origination activities and mortgages included a net loss of approximately $700 million on commercial mortgage loans and securities. Net revenues in commodities and currencies were solid, but lower compared with the fourth quarter of 2007. Interest rate products had strong results, which were significantly higher compared with the fourth quarter of 2007.

Net revenues in Equities were $2.64 billion, 2% higher than the fourth quarter of 2007, primarily reflecting significantly higher net revenues in derivatives, partially offset by losses in principal strategies. Commissions were particularly strong and were higher compared with the fourth quarter of 2007. During the quarter, Equities operated in an environment characterized by a significant decline in global equity prices, a significant increase in volatility levels and generally strong client-driven activity.

Principal Investments recorded a net loss of $3.60 billion for the fourth quarter of 2008. These results included net losses of $2.00 billion from corporate principal investments and $961 million from real estate principal investments, as well as a $631 million loss related to the firm’s investment in the ordinary shares of ICBC.

Asset Management and Securities Services

Full Year

Net revenues in Asset Management and Securities Services were $7.97 billion for the year, 11% higher than 2007.

Asset Management net revenues were $4.55 billion for the year, 1% higher than 2007. During the year, assets under management decreased $89 billion to $779 billion, due to $123 billion of market depreciation, primarily in equity assets, partially offset by $34 billion of net inflows. Net inflows reflected inflows in money market, fixed income and alternative investment assets, partially offset by outflows in equity assets.

Securities Services net revenues were $3.42 billion for the year, 26% higher than 2007, reflecting the impact of changes in the composition of securities lending customer balances, as well as higher total average customer balances.

Fourth Quarter

Net revenues in Asset Management and Securities Services were $1.74 billion, 5% lower than the fourth quarter of 2007 and 15% lower than the third quarter of 2008.

Asset Management net revenues were $945 million, 19% lower than the fourth quarter of 2007, primarily due to lower management and other fees, principally due to market depreciation and net outflows in equity assets. During the quarter, assets under management decreased $84 billion to $779 billion, due to $90 billion of market depreciation, primarily in equity assets, partially offset by $6 billion of net inflows. Net inflows reflected inflows in money market and alternative investment assets, partially offset by outflows in equity and fixed income assets.

Securities Services net revenues were $799 million, 19% higher than the fourth quarter of 2007. The increase in net revenues reflected the impact of changes in the composition of securities lending customer balances, partially offset by the impact of lower total average customer balances.

Expenses

Operating expenses were $19.89 billion for 2008, 30% lower than 2007.

Compensation and Benefits

Compensation and benefits expenses (including salaries, bonuses, amortization of prior year equity awards and other items such as payroll taxes and benefits) were $10.93 billion for 2008, 46% lower than 2007, reflecting lower levels of discretionary compensation due to lower net revenues. The ratio of compensation and benefits (excluding severance costs of approximately $275 million in the fourth quarter of 2008) to net revenues was 48.0% for 2008. The ratio of compensation and benefits to net revenues was 43.9% for 2007. Employment levels decreased 1% compared with the end of 2007, reflecting an 8% decrease during the fourth quarter.

Non-Compensation Expenses

Full Year

Non-compensation expenses were $8.95 billion for 2008, 9% higher than 2007. Excluding consolidated entities held for investment purposes ⁽⁵⁾, non-compensation expenses were 5% higher than 2007. The majority of this increase was attributable to higher brokerage, clearing, exchange and distribution fees, principally reflecting higher activity levels in Equities and FICC.

Fourth Quarter

Non-compensation expenses were $2.51 billion, 4% higher than the fourth quarter of 2007 and 15% higher than the third quarter of 2008. Excluding consolidated entities held for investment purposes ⁽⁵⁾, non-compensation expenses were 4% lower than the fourth quarter of 2007 and 9% higher than the third quarter of 2008. The decrease compared with the fourth quarter of 2007 was due to lower occupancy and market development expenses. The decrease in occupancy expenses was attributable to exit costs incurred during the fourth quarter of 2007 related to the firm’s office space. The decrease in market development expenses primarily reflected lower levels of business activity during the fourth quarter of 2008.

Provision for Taxes

The effective income tax rate was approximately 1% for 2008, down from 25.1% for the first nine months of 2008 and down from 34.1% for fiscal year 2007. The decreases in the effective income tax rate were primarily due to an increase in permanent benefits as a percentage of lower earnings and changes in geographic earnings mix.

Capital

As of November 28, 2008, total capital was $232.59 billion, consisting of $64.37 billion in total shareholders’ equity (common shareholders’ equity of $47.90 billion and preferred stock of $16.47 billion) and $168.22 billion in unsecured long-term borrowings. Book value per common share was $98.68, an increase of 9% compared with the end of 2007 and essentially unchanged from the end of the third quarter of 2008. Tangible book value per common share ⁽¹⁾ was $88.00, an increase of 12% compared with the end of 2007 and essentially unchanged from the end of the third quarter of 2008. 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 485.4 million at period end.

On September 29, 2008, The Goldman Sachs Group, Inc. (Group Inc.) completed a public offering of 46.7 million common shares at $123.00 per share for proceeds of $5.75 billion.

On October 1, 2008, Group Inc. issued to Berkshire Hathaway Inc. and certain affiliates 50,000 shares of 10% Cumulative Perpetual Preferred Stock, Series G (Series G Preferred Stock), and a five-year warrant to purchase 43.5 million common shares at an exercise price of $115.00 per share, for aggregate proceeds of $5.00 billion.

On October 28, 2008, under the U.S. Treasury’s TARP Capital Purchase Program, Group Inc. issued to the U.S. Treasury 10.0 million shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series H (Series H Preferred Stock), and a ten-year warrant to purchase 12.2 million common shares at an exercise price of $122.90 per share, for aggregate proceeds of $10.00 billion. Cumulative dividends on the Series H Preferred Stock are payable at a rate of 5% annually through November 15, 2013 and at a rate of 9% annually thereafter.

The firm repurchased 10.5 million shares of its common stock during 2008 at an average cost per share of $193.18, for a total cost of $2.04 billion. The remaining share authorization under the firm’s existing share repurchase program is 60.9 million shares.

The firm’s Tier 1 Ratio ⁽³⁾ was 15.6% as of November 28, 2008.

Other Balance Sheet and Liquidity Metrics

• Total assets ⁽⁶⁾ were $885 billion as of November 28, 2008, down 18% from August 29, 2008.
• Level 3 assets ⁽⁷⁾ were approximately $66 billion as of November 28, 2008 (down from $68 billion as of August 29, 2008) and represented 7.5% of total assets.
• Average global core excess ⁽⁸⁾ liquidity was $111.43 billion for the fourth quarter of 2008 and $96.73 billion for the year ended November 28, 2008.

Dividends and Other Matters

The Board of Directors of Group Inc. (the Board) approved a change in the firm’s fiscal year end from the last Friday of November to the last Friday of December. The change is effective for the firm's 2009 fiscal year.

The Board declared a dividend of $0.4666666 per common share to be paid on March 26, 2009 to common shareholders of record on February 24, 2009. The dividend of $0.4666666 per common share is reflective of a four month period (December 2008 through March 2009), due to the change in the firm’s fiscal year end. The Board also declared dividends of $239.58, $387.50, $255.56 and $255.56 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 February 10, 2009 to preferred shareholders of record on January 26, 2009. In addition, the Board declared dividends of $2,500 per share of Series G Preferred Stock to be paid on February 10, 2009 to preferred shareholders of record on January 26, 2009 and dividends of $14.8611111 per share of Series H Preferred Stock to be paid on February 17, 2009 to preferred shareholders of record on January 31, 2009.

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Goldman Sachs is a bank holding company and 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, 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 30, 2007 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 30, 2007.

Certain of the information regarding the firm’s Tier 1 Ratio, total assets, level 3 assets and global core excess liquidity consist of preliminary estimates; these estimates are forward-looking statements and are subject to change, possibly materially, as the firm completes its annual financial statements.

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 or continued weakness 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 inability to obtain adequate financing, 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 30, 2007 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 30, 2007.

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/shareholders. 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 74336254, 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
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Footnotes