Goldman Sachs Reports Third Quarter Earnings Per Common Share of $1.81

The Goldman Sachs Group, Inc. (NYSE: GS) today reported net revenues of $6.04 billion and net earnings of $845 million for its third quarter ended August 29, 2008. Diluted earnings per common share were $1.81 compared with $6.13 for the third quarter of 2007 and $4.58 for the second quarter of 2008. Annualized return on average tangible common shareholders’ equity ⁽¹⁾ was 8.8% for the third quarter of 2008 and 16.3% for the first nine months of 2008. Annualized return on average common shareholders’ equity was 7.7% for the third quarter of 2008 and 14.2% for the first nine months of 2008.

• Goldman Sachs ranked first in worldwide announced and completed mergers and acquisitions for the calendar year-to-date. ⁽²⁾
• Securities Services produced its second best quarterly net revenues of $916 million, 20% higher than the third quarter of 2007.
• Book value per common share increased 2% during the quarter to $99.30.
• The firm’s Tier 1 Ratio ⁽³⁾ was 11.6% at the end of the quarter.

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"This was a challenging quarter as we saw a marked decrease in client activity and declining asset valuations,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer. "Despite the deteriorating market conditions, the focus of our people and strength and breadth of our client franchise produced a solid performance in a tough environment. We remain well-positioned to meet the needs of our clients and identify and act on the right market opportunities.”

Net Revenues

Net revenues in Investment Banking were $1.29 billion, 40% lower than the third quarter of 2007 and 23% lower than the second quarter of 2008.

Net revenues in Financial Advisory were $619 million, 56% lower than a particularly strong third quarter of 2007, primarily reflecting a decrease in industry-wide completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $675 million, 8% lower than the third quarter of 2007, due to lower net revenues in equity underwriting, primarily reflecting a decrease in industry-wide initial public offerings. Net revenues in debt underwriting were essentially unchanged from the third quarter of 2007. The firm’s investment banking transaction backlog increased during the quarter. ⁽⁴⁾

Net revenues in Trading and Principal Investments were $2.70 billion, 67% lower than the third quarter of 2007 and 52% lower than the second quarter of 2008.

Net revenues in Fixed Income, Currency and Commodities (FICC) were $1.60 billion, 67% lower than a very strong third quarter of 2007, primarily reflecting particularly weak results in credit products and mortgages, which were adversely affected by broad-based declines in asset values. Credit products included very weak results from investments and a loss of approximately $275 million (including hedges) related to non-investment-grade credit origination activities. Mortgages included net losses of approximately $500 million on residential mortgage loans and securities and approximately $325 million on commercial mortgage loans and securities. Commodities produced strong results, which were higher compared with the third quarter of 2007. Net revenues in currencies and interest rate products were also strong, although essentially unchanged from the third quarter of 2007. During the quarter, FICC operated in an environment generally characterized by wider mortgage and corporate credit spreads, volatile markets and lower levels of client activity.

Net revenues in Equities were $1.56 billion, 50% lower than a particularly strong third quarter of 2007. During the quarter, Equities operated in a challenging environment characterized by a significant decline in global equity prices, deleveraging by clients and generally lower client activity levels towards the end of the quarter. The decline in net revenues reflected very weak results in principal strategies. In addition, net revenues in derivatives were significantly lower than a particularly strong third quarter of 2007. Commissions were strong, but lower, compared with the third quarter of 2007.

Principal Investments recorded a net loss of $453 million for the third quarter of 2008. These results included losses from corporate and real estate principal investments, partially offset by a $106 million gain related to the firm’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC).

Net revenues in Asset Management and Securities Services were $2.05 billion, 4% higher than the third quarter of 2007 and 5% lower than the second quarter of 2008.

Asset Management net revenues were $1.13 billion, 6% lower than the third quarter of 2007, reflecting lower management and other fees, as well as lower incentive fees. The decrease in management and other fees primarily reflected the impact of one fewer week in the firm’s fiscal third quarter of 2008 compared with the third quarter of 2007. During the quarter, assets under management decreased $32 billion to $863 billion, due to $25 billion of market depreciation, primarily in equity assets, and $7 billion of net outflows. Net outflows reflected outflows in equity and money market assets, partially offset by inflows in alternative investment and fixed income assets.

Securities Services net revenues were $916 million, 20% higher than the third quarter of 2007. The firm’s prime brokerage business continued to generate strong results and customer balances were higher compared with the third quarter of 2007.

Expenses

Operating expenses were $5.08 billion, 37% lower than the third quarter of 2007 and 23% lower than the second quarter of 2008.

Compensation and benefits expenses were $2.90 billion, 51% lower than the third quarter of 2007, commensurate with lower net revenues. The ratio of compensation and benefits to net revenues was 48.0% for the first nine months of 2008, consistent with the first nine months of 2007. Employment levels increased 3% during the quarter, primarily reflecting the seasonal timing of school hires.

Non-compensation expenses were $2.18 billion, 1% higher than the third quarter of 2007 and 6% higher than the second quarter of 2008. Excluding consolidated entities held for investment purposes ⁽⁵⁾, non-compensation expenses were 3% lower than the third quarter of 2007, primarily reflecting lower brokerage, clearing, exchange and distribution fees.

The effective income tax rate for the first nine months of 2008 was 25.1%, down from 27.7% for the first half of 2008 and down from 34.1% for fiscal year 2007. The decreases in the effective income tax rate were primarily due to changes in geographic earnings mix and an increase in permanent benefits as a percentage of lower earnings.

Capital

As of August 29, 2008, total capital was $221.97 billion, consisting of $45.60 billion in total shareholders’ equity (common shareholders’ equity of $42.50 billion and preferred stock of $3.10 billion) and $176.37 billion in unsecured long-term borrowings. Book value per common share was $99.30 and tangible book value per common share ⁽¹⁾ was $87.11, each increasing 2% during the quarter. 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 428.0 million at period end.

The firm repurchased 1.5 million shares of its common stock at an average cost per share of $180.07, for a total cost of $271 million during the quarter. 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 11.6% as of August 29, 2008.

Other Balance Sheet and Liquidity Metrics

• Total assets ⁽⁶⁾ were $1.08 trillion as of August 29, 2008.
• Level 3 assets ⁽⁷⁾, including those for which the firm bears no economic exposure, were approximately $68 billion as of August 29, 2008 and represented 6% of total assets. Level 3 assets excluding those for which the firm bears no economic exposure ⁽⁷⁾ were approximately $58 billion as of August 29, 2008 and represented 5% of total assets.
• Average global core excess ⁽⁸⁾ liquidity was $102.33 billion for the quarter ended August 29, 2008.

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 24, 2008 to common shareholders of record on October 27, 2008. The Board also declared dividends of $236.98, $387.50, $252.78 and $252.78 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 10, 2008 to preferred shareholders of record on October 26, 2008.

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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.

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 capital 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 quarterly 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 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.

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 61230228, 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.

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