2. [4 marks] Analyse the business model of Goldman Sachs in 2006.

a. What were the main business areas in 2006?

b. Provide in your words a brief description (max 10 lines) of what each area does. If appropriate you can make explicit reference to what you have written before (for the areas that have not changed).

c. How much each of them contributes to the total revenues and profits of the bank?

d. How profitable was each area (in terms of profit margin)?

Assignment Questions 1. [4 marks] Analyse the current business model of Goldman Sachs. a. What are the main business areas? b. Provide in your words a brief description (max 10 lines) of what each area does. c. How much each of them contributes to the total revenues and profits of the bank? d. How profitable is each area (in terms of profit margin)? 2. [4 marks] Analyse the business model of Goldman Sachs in 2006. a. What were the main business areas in 2006? b. Provide in your words a brief description (max 10 lines) of what each area does. If appropriate you can make explicit reference to what you have written before (for the areas that have not changed). c. How much each of them contributes to the total revenues and profits of the bank? d. How profitable was each area (in terms of profit margin)? 3. [2 marks] Comment on the differences compared to the current business model. Can you trace the specific changes to any particular event or regulation? 4. [2 marks] Comparing the two financial statements comment on the main changes in the cost structure of the bank. Only focus on the most relevant changes. 5. [2 mark] In the Abacus Scandal (analysed in Topic 5), Goldman Sachs earned a fee of 15m$. To which division/business area would this fee belong? 6. [2 marks] The FT article commenting the 2017 M&A League Tables (analysed in Topic 2) mentions a deal managed by Goldman Sachs in 2011 (involving a company called \"El Paso\"). Indicate which divisions/business areas of Goldman Sachs were involved in this situation. Describe in your words the conflict of interest between the two. 7. [2 marks] The FT article analysed in Topic 1 describes a change in the business model of Goldman Sachs. Can you indicate where we can find the effect of this change in the 2016 annual report (compared to 2006)? In your own words can you briefly describe the advantages the bank expects from this new line of business? 8. [2 marks] In Topic 8 we analysed a FT article describing a concession made by regulators to Goldman Sachs regarding the application of the so-called Volcker Rule. Briefly explain the content of this rule and the specificity of the extension received by Goldman Sachs. You can find explicit mention of (the possibility of) this extension in the 2016 annual report. Explain which division/business area is affected by this extension and how. Clients. Markets. Culture. Goldman Sachs 2006 Annual Report The Goldman Sachs Business Principles Financial Highlights as of or for the year ended november ($ and share amounts in millions, except per share amounts) 2006 2005 2004 Operating Results Net revenues Investment banking Trading and principal investments Asset management and securities services $ 5,629\u0003 $ 3,671 $ 3,374 25,562 \u0003 16,818 13,728 6,474 \u0003 4,749 3,849 Total net revenues 37,665 \u0003 25,238 20,951 Pre-tax earnings 14,560 \u0003 8,273 6,676 Net earnings 9,537 \u0003 5,626 4,553 Net earnings applicable to common shareholders 9,398 \u0003 5,609 4,553 $ 19.69 \u0003 $ 11.21 $ 8.92 Common Share Data Diluted earnings per common share Average diluted common shares outstanding 477.4 \u0003 500.2 510.5 $ 1.30 \u0003 $ 1.00 $ 1.00 Book value per common share(1) 72.62 \u0003 57.02 50.77 Tangible book value per common share(2)(3) 61.47 \u0003 46.76 40.91 201.60 \u0003 134.12 104.84 $838,201 \u0003 $706,804 $531,379 26,134 \u0003 15,669 12,087 122,842 \u0003 84,338 68,609 Dividends declared and paid per common share Ending stock price Financial Condition and Other Operating Data Total assets Other secured financings (long-term) Unsecured long-term borrowings Total shareholders' equity 35,786 \u0003 28,002 25,079 Leverage ratio(4) 23.4x \u0003 25.2x 21.2x Adjusted leverage ratio(5) 16.1x \u0003 17.9x 15.1x 3.4x \u0003 3.0x 2.7x 32.8% \u0003 21.8% 19.8% 39.8% \u0003 26.7% 25.2% 26,467 \u0003 23,623 21,736 $676 \u0003 $532 $452 Debt to equity ratio(6) Return on average common shareholders' equity(7) Return on average tangible common shareholders' equity (8) Selected Data Total employees Assets under management ($ in billions) (1)Book value per common share is based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 450.1 million, 460.4 million and 494.0 million as of November 2006, November 2005 and November 2004, respectively. (2)Tangible book value per common share is computed by dividing tangible common shareholders' equity by the number of common shares outstanding, including restricted stock units granted to employees with no future service requirements. (3)Tangible common shareholders' equity equals total shareholders' equity less preferred stock, goodwill and identifiable intangible assets, excluding power contracts. See \"Financial InformationManagement's Discussion and AnalysisEquity CapitalCapital Ratios and Metrics\" for further information regarding our calculation of tangible common shareholders' equity. (4)Leverage ratio equals total assets divided by total shareholders' equity. (5)Adjusted leverage ratio equals adjusted assets divided by tangible equity capital. See \"Financial InformationManagement's Discussion and AnalysisEquity CapitalCapital Ratios and Metrics\" for further information regarding adjusted assets, tangible equity capital and our calculation of the adjusted leverage ratio. (6)Debt to equity ratio equals unsecured long-term borrowings divided by total shareholders' equity. (7)Return on average common shareholders' equity is computed by dividing net earnings applicable to common shareholders by average monthly common shareholders' equity. (8)Return on average tangible common shareholders' equity is computed by dividing net earnings applicable to common shareholders by average monthly tangible common shareholders' equity. See \"Financial InformationManagement's Discussion and AnalysisResults of OperationsFinancial Overview\" for further information regarding our calculation of return on average tangible common shareholders' equity. I. Our clients' interests always come first. Our experience shows that if we serve our clients well, our own success will follow. II. Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard. III. Our goal is to provide superior returns to our shareholders. Profitability is critical to achieving superior returns, building our capital, and attracting and keeping our best people. Significant employee stock ownership aligns the interests of our employees and our shareholders. IV. We take great pride in the professional quality of our work. We have an uncompromising determination to achieve excellence in everything we undertake. Though we may be involved in a wide variety and heavy volume of activity, we would, if it came to a choice, rather be best than biggest. V. We stress creativity and imagination in everything we do. While recognizing that the old way may still be the best way, we constantly strive to find a better solution to a client's problems. We pride ourselves on having pioneered many of the practices and techniques that have become standard in the industry. VI. We make an unusual effort to identify and recruit the very best person for every job. Although our activities are measured in billions of dollars, we select our people one by one. In a service business, we know that without the best people, we cannot be the best firm. VII. We offer our people the opportunity to move ahead more rapidly than is possible at most other places. Advancement depends on merit and we have yet to find the limits to the responsibility our best people are able to assume. For us to be successful, our men and women must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Being diverse is not optional; it is what we must be. VIII. We stress teamwork in everything we do. While individual creativity is always encouraged, we have found that team effort often produces the best results. We have no room for those who put their personal interests ahead of the interests of the firm and its clients. IX. The dedication of our people to the firm and the intense effort they give their jobs are greater than one finds in most other organizations. We think that this is an important part of our success. X. We consider our size an asset that we try hard to preserve. We want to be big enough to undertake the largest project that any of our clients could contemplate, yet small enough to maintain the loyalty, the intimacy and the esprit de corps that we all treasure and that contribute greatly to our success. XI. We constantly strive to anticipate the rapidly changing needs of our clients and to develop new services to meet those needs. We know that the world of finance will not stand still and that complacency can lead to extinction. XII. We regularly receive confidential information as part of our normal client relationships. To breach a confidence or to use confidential information improperly or carelessly would be unthinkable. XIII. Our business is highly competitive, and we aggressively seek to expand our client relationships. However, we must always be fair competitors and must never denigrate other firms. XIV. Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives. As open markets and global nance transform economies, capital markets will play an increasingly vital role in connecting capital to ideas necessary for growth. Goldman Sachs helps allocate capital and manage risk, and through this process fosters entrepreneurship and innovation, drives eciency and encourages economic reform. clearly, it is our clients, with their aspirations and risk taking, that ultimately effect change. They build new businesses and strengthen existing ones. Others seek to enhance the performance of their portfolios and provide economic security for the future. however, in today's global markets, the needs and objectives of our clients are often multifaceted and difcult to execute. Solutions to complex problems hold tremendous potential for investors, issuers and the societies they serve. we must remain responsive to the evolving needs of our clients and nimble in adapting to that change. Our culture forged through teamwork, excellence and a passion to deliver for our clients has instilled in our people an infectious desire to ask, \"Is there a better way?\" These intangibles dene Goldman Sachs and the value we work to provide for our clients and shareholders. Goldman Sachs 2006 Annual Report page 1 Gary D. Cohn, President and Co-Chief Operating Ofcer Lloyd C. Blankfein, Chairman and Chief Executive Ofcer page 2 Goldman Sachs 2006 Annual Report Jon Winkelried, President and Co-Chief Operating Ofcer Fellow Shareholders: We are extraordinarily fortunate to have the opportunity to lead Goldman Sachs. Like each of our predecessors, our mandate is to preserve the legacy of the rm while remaining open to the change and innovation that best meets the needs of our clients. Our outlook has been shaped by our having been at Goldman Sachs for an average of more than 20 years. Each of us has been responsible for a number of different regions and businesses across the rm, and, with the strong leadership in each of the rm's divisions, Goldman Sachs continues to benet from an enduring sense of continuity. All of us at the rm are stewards of a legacy forged over 138 years that puts our clients at the center of everything we do. These cultural attributes were at the very heart of our performance this past year. For 2006, net revenues increased 49% to $37.7 billion and net earnings rose 70% to $9.5 billion. Diluted earnings per common share were $19.69, an increase of 76% from $11.21 for the previous year. Our return on average common shareholders' equity was 32.8%. And as you can see in the chart to the right, book value per common share increased 27% in the last year, and has grown from $20.94 at the end of our rst year as a public company in 1999 to $72.62, a compound annual rate of 19% over this period. At the same time, the rm returned over $7.8 billion of capital to shareholders by repurchasing 50.2 million shares of our common stock in 2006. While revenues grew 49% last year, our operating expenses increased 36%. As a result, our 39% pre-tax margin in 2006 was a record allowing us to produce more earnings per dollar of net revenues than at any time since we went public. We also retained a greater overall percentage of earnings than in previous years, with 43.7% of revenues being paid for compensation and related expenses. While our business does not lend itself to predictable earnings on a quarterly basis, over the long term, we are committed to providing our shareholders with returns on equity at or near the top of our industry while continuing to grow book value and earnings per share. In our rst letter to you, we will discuss some of the underlying strengths that helped drive our results, and how they make Goldman Sachs competitive in the face of contrasting business models, structural changes and evolving client needs. We also will highlight some of the growth opportunities we see in various markets and regions and conclude with a few brief points about managing the rm in different market environments. The Evolving Needs of Our Clients In recent years, the changing needs of our clients, technological advancements and the global integration of markets and economies have spurred structural changes in securities markets and, in turn, across all of our businesses. Goldman Sachs 2006 Annual Report page 3 Increasingly, clients expect rms like Goldman Sachs to commit capital on their behalf when executing transactions. This has shifted the landscape in virtually every aspect of our business. In investment banking, offering strategic advice remains at the center of what we do. Clients frequently expect our advice to be accompanied by the provision of the capital necessary to make that advice actionable. For example, Goldman Sachs was the lead advisor to Mittal Steel in its acquisition of Arcelor. We not only provided strategic advice but also a signicant nancing commitment which was critical to the feasibility of the bid. In securities sales and trading, market making has always been essential to the liquidity, efciency and stability of nancial markets. Increasingly, however, our clients look to us to execute large, complex or capital-intensive transactions on their behalf. Our investment management clients seek advice focused on achieving the best long-term performance for their portfolios. While we must produce consistently strong results for our clients, our approach must be balanced with the right asset and risk allocation specic to each client's needs. This requires identifying and developing innovative products and strategies that seek to optimize returns, while minimizing risk. Credit and Equity Integration. We combined the key elements in our capital markets sales and trading operation cash equities, credit, derivatives and convertibles and housed them in consolidated groups so our clients' needs are served seamlessly across the entire capital structure. High-Touch and Low-Touch Trading. We recognized early on that the impact of technology and our clients' desire to execute trades through multiple channels were going to fundamentally alter the cash equities market. We restructured our equities business to respond to the priorities of our clients. We developed and built out electronic execution platforms that now trade approximately 500 million shares a day. At the same time, we rened our high-touch trading, facilitating complex client transactions through a combination of our execution capability and our willingness to assume market risk and commit capital. Investing Platforms. We built out our investing platforms and more closely coordinated their activities with investment banking. We broadened our merchant banking focus to different asset classes, closing a $6.5 billion Infrastructure Fund and a $5.25 billion Mezzanine Fund in the last year. Alternative Assets. As an early entrant in both the alternative asset management and prime brokerage spaces, we recognized the important role private pools of capital would play across markets. With $145 billion of alternative assets under management, Goldman Sachs is one of the largest managers of direct hedge fund and hedge fund of fund assets as well as private equity portfolios of funds. Our securities services business, which provides nancing, securities lending, fund administration and other services for many of the world's largest hedge funds, has seen its client base double and balances triple in size in the last ve years. The development of these businesses has helped make us more effective advisors and investment managers. 4GFGPKPI\u00021WT\u0002/CPFCVG Our focus on the needs of our clients has never wavered. The question for us remains, however, how Goldman Sachs can best meet those needs. Today, it has become almost axiomatic that rms like Goldman Sachs can be an advisor, nancier and co-investor. However, we have long believed that not only can Goldman Sachs fulll these roles, but we must do so in order to be effective for our clients. Guided by this client focus, we must constantly re-examine the boundaries of our businesses and identify new opportunities. This continuous review of our strategy has led us to restructure a number of businesses to better address the needs of our clients. Financing Group. We created the nancing group centralizing all nancing-related advice, origination and execution within the rm. Our investment banking clients today benet from greater connectivity within our capital markets franchise through innovative nancing and risk management solutions across the equity, credit and derivatives spectrum. page 4 %NKGPVU\u0002CPF\u0002%WNVWTG When we began to implement these changes, we did so at a time when we already had a strong franchise across many of our businesses. Change, understandably, seemed unduly risky to many. Goldman Sachs 2006 Annual Report Two hallmarks of the rm gave us the condence to initiate these changes. First, staying close to clients has allowed Goldman Sachs to identify and anticipate opportunities at an early stage. Our proximity to clients allows us to understand early on what is required to meet their changing needs. And we have learned the value in being willing to embrace the risk of altering our model to supply that response. Today, we hold leading positions in M&A advisory and underwriting, maintain signicant market share in the equity, xed income, currency and commodity markets, and have one of the largest, best-performing investment management platforms in the world. Clients have never been more important to Goldman Sachs and Goldman Sachs has never been better positioned or capable of meeting the varying needs of our clients. The second factor that has dened our response to change is our culture. We strongly believe that the shared values embodied in our people are our most powerful competitive advantage. Our emphasis on teamwork is not an abstract goal, but a living, breathing reality. It allows us to complement an individual's skills and expertise with his or her colleagues to provide exceptional client service across different parts of the rm and components of a client's transaction. This teamwork is ingrained in Goldman Sachs. Our people approach their responsibilities through the lens of a partnership. They feel ownership of the entire rm, not just of their division or region. On a daily basis, this translates into a real sense of collaboration. Our focus on people begins with recruiting the right individuals one-by-one to Goldman Sachs. We then help develop their careers with regular and specic feedback and opportunities to work in different parts of Goldman Sachs. We believe this effort has paid off with high levels of retention and deep experience across the rm, despite the intense competition for talent in our industry. Our industry and the rm's work environment are fertile ground for innovation. We reward people who develop new ideas and new ways of serving our clients. Whether it is anticipating change in equity market structure, identifying opportunities in distressed investing, exploring alternative energy solutions or recognizing the important roles private pools of capital would play, our people have searched out and been receptive to new ideas and market opportunities. Growth Opportunities While we have been fortunate in identifying and acting on many opportunities in recent years, we see certain areas today where the rm has been uneven in its response. One area that we believe needs increased focus is our strategy in new and developing markets, particularly India, Russia, Brazil and the Middle East. Certainly, the strength of our franchise in China continues to benet from our continuous involvement in the country since the early 1990s. Two years ago, we established Goldman Sachs Gao Hua Securities Company Limited, our joint venture in China, in conjunction with the creation of a domestic securities company, Beijing Gao Hua Securities Company Limited. This unique structure gives us the ability to operate in the domestic Chinese markets. This past year, we made an important strategic investment in Industrial and Commercial Bank of China Limited (ICBC), China's largest commercial bank. We did so through a strategic cooperation agreement in which we committed to advise ICBC on important risk management, infrastructure and business development issues. Equally critical, ICBC will help us identify new clients and opportunities in one of the most signicant markets we are operating in today. While we believe we have a strong presence in China, we need to establish a more meaningful presence in India, Russia, Brazil and the Middle East. In India, we are establishing, through Goldman Sachs India, a deeper investment banking and securities business. We have strong relationships with many of the largest corporations in India, but the country's rapid growth and strong talent pool merit a much more dedicated on-the-ground presence. Russia, with an increasing number of companies focused on international growth, represents strong investment banking, sales and trading and private banking opportunities. We recently opened an ofce in Moscow and have professionals focused on serving clients in each of these divisions. In Brazil, we were recently granted a local foreign exchange license and are moving aggressively to build a signicant sales and trading operation. At the same time, we have new leadership in place in our Investment Banking division in So Paulo and are intent on further strengthening our relationships in Brazil and across Latin America. In the Middle East, Goldman Sachs is opening ofces in the Arabian Gulf to work more closely with our investment banking and private wealth management clients. Goldman Sachs 2006 Annual Report page 5 We see other areas across the rm where we believe there is strong growth potential. These include widening our investment banking footprint to work with a broader circle of corporate clients. Many smaller companies in the so-called middle market may benet from our strategic advice, nancing know-how and capital even more than larger companies. We also see opportunities in advising governments and investors on the sale and purchase of public infrastructure assets like airports, shipping ports, toll roads and bridges. In the insurance sector, the management of certain assets, such as variable annuities, allows us to extend our core competency in risk management and our trading expertise. We also are building a private banking capability within our private wealth management business as part of our strategy to provide a full range of services to our clients. #\u00026TCFKVKQP\u0002QH\u00025GTXKEG This past year, Goldman Sachs lost an individual who deeply embodied our culture and spirit. In August, John L. Weinberg, Senior Chairman and former Senior Partner, passed away. During his more than 56 years with Goldman Sachs, John built many of the rm's most enduring client relationships and, through his leadership, helped elevate the rm's global stature. John's commitment to service and ideals bigger than one person infused his sense of obligation to the rm and its culture. He was a visionary, and while this description can often be overstated, it does not do justice to the condence he inspired, the clarity in thinking he expressed and the integrity he exhibited throughout his career. John was a crucial link in a virtuous cycle of people helping those they work with, caring not only about their division, but also about the rm by serving on various rmwide committees or task forces and extending that ethic to their communities and countries. The culture of service that John personied has continually evolved and, today, is represented in his successors. Hank Paulson, who had served as Goldman Sachs' Chairman and CEO for the last seven years, was nominated and conrmed as the United States' 74th Secretary of the Treasury. Each of us is indebted to Hank in our own way but all of us miss his tireless passion, sage counsel and innate leadership. He led Goldman Sachs through both exhilarating and difcult times. In the wake of the bursting of the technology bubble, Hank forced the rm and many in the industry to ask uncomfortable questions. And he held himself to that same scrutiny. page 6 Like his four immediate predecessors, Hank wanted to help make a difference through government service. We are proud of him and wish him every success. In many ways, however, Hank's decision is not unique. Our people, from those junior to those senior, are passionate about effecting change either through the rm or in their personal lives. This past year, we celebrated Community TeamWorks' 10th anniversary. In that time, the people of Goldman Sachs have volunteered with over 830 community partners in 9,400 projects to help over 600,000 people in need. Every day between April and August of each year, people across the rm come together to spend time with a child or senior, help to build affordable housing, teach young people in schools, clean up parks or work for their communities in countless other ways. While the combined effect of this volunteerism is possible to quantify in numbers, it is impossible to quantify in terms of the impact it has on Goldman Sachs. It reinforces the sense of obligation we all share not only to one another but also to the well-being of our communities. We don't require that any of our people participate in Community TeamWorks, but approximately 18,000 people in the rm volunteered to do so in 2006. We are also proud that Goldman Sachs received a public service distinction for an action that came directly out of our business. In November, the rm accepted the Secretary of State's Award for Corporate Excellence for the donation of 680,000 acres of ecologically precious land in Tierra del Fuego, Chile. In 2002, we purchased a portfolio of distressed debt, which included notes secured by this environmentally signicant forestland. We determined that this unique tract of land could and should be preserved. With the Wildlife Conservation Society (WCS), we announced a partnership to protect much of the wilderness at the southernmost edge of South America. Through this unprecedented private/public alliance, Goldman Sachs and the WCS are working with Chilean conservationists and other partners to establish a world-class nature reserve that preserves and protects this extraordinary land. Over the last two years, the rm assisted six European governments in developing the International Finance Facility for Immunisation (IFFIm), which came to fruition this past year. This innovative structure will provide a steady stream of immunization funds for programs in 70 developing countries by issuing debt in capital markets backed by multiyear grants from sovereign donor governments. These funds are projected Goldman Sachs 2006 Annual Report to help save the lives of ve million children in the next ten years. IFFIm is an important example of the power of capital markets to address some of society's most important issues. This is particularly true in the area of the environment. In the last year, we have expanded our trading activities in the carbon emissions market to include trading and investing in project-based emission reduction credits and pricing emission risk, in addition to the trading of carbon credits. Innovative trading in these new markets can be a source of meaningful action to address global climate change. Lastly, given the integration of markets and economies, improvements in transportation and communication networks and the development of capital markets around the world, Goldman Sachs is well positioned to be a catalyst for nancial progress, innovation and economic growth. We are proud to be able to work with many countries, both with developed and emerging markets, as they restructure and reform their economies and nancial systems. We believe strongly that Goldman Sachs, through the skill and know-how of its people, is contributing to the development of vibrant and dynamic markets that can efciently allocate capital to their most productive use. Such markets are a vital precursor to sustainable economic growth and security, as millions of people are experiencing the benets of market development around the world. No matter the conditions, our job is to perform well relative to our competitors and the opportunities at hand. But in absolute terms, we plan for markets and conditions that won't always be as favorable as those in recent years. We know that managing the rm in unfavorable environments is very different from managing it in good times. But two indelible mandates will remain: commitment to our clients and to our culture. All of us at Goldman Sachs are fortunate to work in a dynamic industry with clients who expect and demand a great deal. There is no substitute for being held in high regard by our clients, having a clear understanding of our role in their larger success and keeping our perspective no matter the business environment. We are excited and proud to lead the remarkable people of Goldman Sachs, and through their talent, expertise and client focus will work to build on the rm's strong legacy. lloyd c. blankfein Chairman and Chief Executive Ofcer gary d. cohn President and Co-Chief Operating Ofcer /CPCIKPI\u00026JTQWIJ\u0002&KGTGPV\u0002/CTMGVU The broader business environment has been very favorable for the past several years, and thus far in 2007, the nancial and economic outlook across the global economy has remained generally positive. However, we are always cognizant that conditions can change quickly and in unforeseen ways. We continually remind ourselves that the recent pace of revenue growth simply is not sustainable. As a rm that operates in the center of the global economy, we have been able to grow at a multiple of GDP growth and are directly and signicantly affected by the macroeconomic environment. It is difcult to regard 2006 as anything but an exceptional year for Goldman Sachs. One of the worst things we could do, as a rm and as individuals, is to begin to believe that the laws of economics don't apply to usthat somehow markets aren't cyclical. We also need to be mindful that our nancial performance is very much a product of the opportunities the market environment and our clients make available to us. jon winkelried President and Co-Chief Operating Ofcer Goldman Sachs 2006 Annual Report page 7 Tokyo Cross-Divisional Client Teams Cross-divisional client teams in Tokyo draw upon professionals from Investment Banking; Investment Management; Equities; Fixed Income, Currency and Commodities; Human Capital Management and Operations to service nancial institutions. Pictured at Roppongi Hills, Tokyo. , : Yoshihiko Tanio, Fixed Income, Currency and Commodities; Ichiro Amano, Equities; Chiho Adachi, Equities; Koichiro Abe, Fixed Income, Currency and Commodities. , : Norihiko Ishihara, Investment Banking; Yotaro Agari, Investment Banking; Tetsuji Fuwa, Investment Banking. 1. Clients clients are at the core of our daily activities, our business strategy and our culture. How our people engage with clients has changed as the markets evolve and clients see their needs changing. Clients continue to select Goldman Sachs for advice, execution and capital for significant strategic opportunities. Increasingly, we work with clients on a wider basis. They may ask us to create a specialized product, finance a transaction or take part in one as a principal. Our flexibility in working with clients according to their individual needs is an important factor in our efforts to grow our franchise through strong client relationships, innovative services and new markets. , : Hiroko Shinoda, Investment Management; Aki Asami, Investment Banking; Hiroyuki Tomokiyo, Fixed Income, Currency and Commodities; Toshiyuki Ohashi, Investment Banking. , : Takeshi Fukuhara, Operations; Kumiko Ishige, Human Capital Management. Mittal Steel Mittal Steel's $34 billion acquisition of Arcelor was a signature cross-border M&A transaction in 2006. Our client's goal was to combine two leading steel companies to achieve unprecedented scale and global presence. Our team acted as Mittal Steel's lead M&A advisor on this complex and public cash and share offer. The largest ever in the steel industry, the offer was launched simultaneously in ve jurisdictions including the U.S. Goldman Sachs jointly led the loan nancing for the acquisition, provided credit rating advisory services and assisted Mittal Steel's communications with investors and proxy advisory rms. page 10 Goldman Sachs 2006 Annual Report Bank of China The Bank of China H-Share initial public offering on the Hong Kong Stock Exchange raised $11.2 billion under volatile market conditions. Goldman Sachs acted as joint global coordinator and joint global book runner and orchestrated an intensive marketing process. Both the international and Hong Kong offerings were signicantly oversubscribed, with participation from a broad based pool of institutional, high-net-worth and retail investors. This transaction was a testament to Goldman Sachs' ongoing global leadership in equity offerings. Goldman Sachs 2006 Annual Report page 11 KarstadtQuelle Europe's largest department store and mail order group, KarstadtQuelle, joined with an afliate of Goldman Sachs' Whitehall Fund in a real estate joint venture transaction that allowed KarstadtQuelle to regain its nancial exibility and to focus again on its core business. One of the largest real estate transactions in Europe, the new joint venture holds a portfolio of over 150 real estate properties that KarstadtQuelle sold and is leasing back on long-term contracts. KarstadtQuelle is receiving a total cash payment of up to `3.7 billion and is expecting additional payments through value appreciation of its 49% stake in the joint venture. Goldman Sachs underwrote non-recourse senior and mezzanine nancing and advised on the acquisition. Through a combination of our real estate, nancing and structuring expertise, Goldman Sachs was able to provide KarstadtQuelle with an attractive way to redeem nearly all its outstanding debt and provided a signicant contribution to its restructuring. page 12 Goldman Sachs 2006 Annual Report Goldman Sachs Mutual Funds In 2006, Goldman Sachs Asset Management's (GSAM) U.S. mutual fund business signicantly grew its assets under management. The primary driver of this growth was third-party distribution, which serves over 50,000 advisors at more than 400 institutions. On a daily basis, GSAM professionals help advisors build better portfolios for their clients through excellence in asset management, expertise in portfolio construction and wealth management resources. With strong distribution through leading banks, broker-dealers and registered investment advisors, our U.S. mutual fund business ranked among the industry's top ten fund complexes in 2006 based on long-term fund ows. Source for fund ows data: Strategic Insight Simfund. Excludes variable annuities. Pictured in Chicago, Illinois. From left to right: Vicky Hayes, Scott Coleman, Troy Thornton, Jim McNamara. Goldman Sachs 2006 Annual Report page 13 Urban Investment Group Our Urban Investment Group invests as a long-term capital partner in a wide range of minority-led ventures and urban real estate projects. Pictured at The Kalahari, a mixed-use development project in New York City. , : Michael D. Trovini, Lindsay Greene, Martin E. Chavez, Stuart M. Rothenberg, Margaret Warden. , : Amber McCants, Todd D. Stern, Alicia K. Glen. 11. Markets the capital markets are one of the world's great sources of creative energy and potential. Broadening participation in the capital markets stimulates growth, enhances financial stability and generates efficiencies for all participants. Goldman Sachs has specific views on how the needs of our clients are helping to shape the evolution of the markets. We have structured our business to reflect those views, and have taken direct action to help governments, corporations and investors tap the markets to address some of their most significant challenges. , : Richard A. Friedman, Kevin M. Jordan, Margaret Chinwe Anadu, Thomas A. Kalvik, Precious Williams. , : Osei A. Van Horne, Carrie L. Van Syckel, William G. Gonzalez. Environmental Markets While we aggressively manage our own environmental footprint, we are also establishing a leading position in understanding the many ways environmental concerns are affecting global markets. Our equity research teams have established a rigorous approach to evaluating the environmental, social and governance (ESG) risks for industry sectors and individual companies. We have delivered on our 2005 pledge to invest over $1 billion in alternative energy projects across a range of technologies including wind, photovoltaics, solar and geothermal. We have been trading carbon credits in the European carbon emissions market since its inception and, in the last year, have expanded our activities to include trading and investing in project-based emission reduction credits and pricing emission risk. Finally, our newly created Center for Environmental Markets has made leadership grants to support a series of market-based research initiatives. page 16 Goldman Sachs 2006 Annual Report Mr. Zhou Yueqiu, ICBC General Manager of the Custody Service Department speaking with Jerry Corrigan, Goldman Sachs Managing Director, at a best-practices exchange in New York City. Industrial and Commercial Bank of China Limited Goldman Sachs has been deeply involved in helping China develop successful capital markets and reform its nancial sector. In January 2006, Goldman Sachs and Industrial and Commercial Bank of China Limited (ICBC), China's largest banking institution, signed a strategic cooperation agreement under which Goldman Sachs is assisting ICBC management across a range of strategic and operational initiatives. The rm is providing expertise and exchanging ideas on best-practices for issues such as governance, corporate and investment banking, nonperforming loans disposal and risk, treasury and asset management. In connection with this agreement, Goldman Sachs made a signicant investment in ICBC, reinforcing our long-term commitment to China. Goldman Sachs 2006 Annual Report page 17 Electronic Trading Goldman Sachs is a leader in helping clients navigate the structural changes in the equity markets. Many early and signicant investments in electronic trading capabilities are paying off, such as our awardwinning REDIPlus platform that offers clients the ability to electronically execute transactions involving equities, options, futures, foreign exchange and entire portfolios frequently using GSAT algorithms in the U.S., Europe and Asia. Our SIGMA X crossing network represents a signicant liquidity pool, allowing clients to transact with over one billion shares per day. While the majority of our customer share volume is now handled electronically, the traditional \"high-touch\" capabilities of capital commitment and risk management skills demanded by more complex trades still drive a signicant portion of our Equities business. Offering clients both these \"high-touch\" and \"low-touch\" capabilities is critical to our strategy. page 18 Goldman Sachs 2006 Annual Report CHINA INDIA BRAZIL RUSSIA BRICs Since Goldman Sachs introduced the concept of BRICs in a 2001 research report titled \"Building Better Global Economic BRICs,\" this innovative approach to analyzing emerging markets has become part of the common language of the global capital markets. As economies, the BRICs nations (Brazil, Russia, India and China) are proving their importance to the global economy. By the end of 2006, the collective size of the BRICs economies had risen above 11% of world GDP. As an investment tool, the BRICs analysis is helping clients manage their portfolios and serving as the foundation for new investment funds including our own BRIC fund from Goldman Sachs Asset Management. Our commitment to the BRICs economies is further reected in our signicant investments in new ofces in Moscow and Mumbai as well as ongoing investment in our businesses in China and Brazil. Countries scaled to 2006 GDP in descending order. Goldman Sachs 2006 Annual Report page 19 Capital and Commitments Committees We reinforce our cultural standards for integrity with rigorous processes through which our Capital Committee reviews principal commitments of the rm's capital and our Commitments Committee reviews the rm's underwriting and distribution activities. Representatives pictured in Jersey City, New Jersey. , : Tim Freshwater, Hong Kong; David Viniar, New York; Edward C. Forst, New York; Christopher A. Cole, New York; Frances R. Bermanzohn, New York. , : Mark G. A. Machin, Hong Kong; Glenn P. Earle, London. 111. Culture our culture is integral to our business strategy. We take active steps to reinforce it and keep it relevant to clients, new recruits and the current generation of Goldman Sachs people. Our culture is at work as Goldman Sachs teams tackle multifaceted client objectives. It is continually renewed as the firm's senior-most executives invest significant amounts of time recruiting new talent into our organization. Our culture is strengthened in communities around the world where Goldman Sachs individuals come together to volunteer their time and expertise. Finally, and sadly, it is reaffirmed when we come together as a community to mourn the passing of one of our own. , : Kevin W. Kennedy, New York; Eric S. Dobkin, New York; Howard A. Silverstein, New York; Michael S. Sherwood, London; E. Gerald Corrigan, New York. , : David J. Mastrocola, New York; Robert J. Markwick, London. IFFIm Every year, 27 million infants around the world are not vaccinated against the most common childhood diseases. Childhood immunization provides tremendous benet at very low cost. Six European governments determined to use the power of the capital markets to accelerate the funding they pledge for immunization programs. A small team at Goldman Sachs dedicated two years to this initiative and worked with the initial sovereign sponsors, the World Bank and other development organizations to turn the idea into a reality. The result is the International Finance Facility for Immunisation (IFFIm), which is nancing immunization programs in 70 of the world's poorest countries. IFFIm launched its rst $1 billion bond in November 2006, with Goldman Sachs acting as lead manager. Through immunization programs operated by the GAVI Alliance, it is projected that, in total, the money IFFIm raises will help protect more than 500 million children over the next decade saving an estimated ten million lives over time. page 22 Goldman Sachs 2006 Annual Report CTW 10th Anniversary The Charitable Services Group helps our people fulll the rm's commitment to assist our communities through nancial support, volunteer activities and collaborations with nonprot organizations. Consistent with all of our programs, we take a strong client service approach with our nonprot partners, helping them build capacity and develop programs that address community needs while best using our people's skills. Our Community TeamWorks program is in its tenth year of helping over 600 nonprot organizations around the world tap the talents and energy of approximately 18,000 Goldman Sachs volunteers. We also coordinate participation in local activities like the Corporate Challenge, New York Cares Day, Change for Charity and Gulf Coast Volunteering. Goldman Sachs volunteers, as part of their Community TeamWorks project, worked to clear a haven for wildlife that was not accessible to the public for over 50 years. Goldman Sachs 2006 Annual Report page 23 Talent Our ability to attract and retain talented people is the foundation of what we do for clients and shareholders. We make an unusual effort to identify people with the talent and drive to succeed in life and in business. Our senior executive team is deeply engaged in on-campus recruiting. Our investments in career development are signicant and ongoing, designed to help our professionals grow personally and professionally over the course of their careers. We truly believe that Goldman Sachs provides an unsurpassed platform for people who want to take their talents to the next level. Edith Cooper, Managing Director, addresses a group of students at Georgetown University, Washington, D.C. page 24 Goldman Sachs 2006 Annual Report A Tradition of Service This year we lost a friend and leader who devoted his life to service rst in the United States Marine Corps during two wars, and then to Goldman Sachs and its clients. At his memorial service, friends remembered John L. Weinberg: \"John would pump up the weak and deate the mighty. He would remind us that trees don't grow to the sky.\" Lloyd C. Blankfein, Chairman and CEO, 2006 - Present \"John was a keeper of our culture. He embodied it. He was totally and completely authentic. He could not abide arrogance.\" Henry M. Paulson, Jr., Chairman and CEO, 1999 - 2006 \"When we were reminiscing about our dealings with John, it seemed that everyone had the same thing to say: authentic, wise, real that's what John was.\" Jack F. Welch, Jr., Chairman and CEO, GE, 1981- 2001 \"Having two chairmen was so unusual that Marvin Bower at McKinsey, who always liked new ideas, told us it couldn't work, but he would be happy to help us x it. A year later, we gave him a free lunch and told him it didn't need xing.\" John C. Whitehead, Co-Senior Partner, 1976 -1984 \"President Clinton told me about a backwoods character from Arkansas who had more nancial sense than all the sophisticates I knew. I told him about a backwoods character from Greenwich, Connecticut whom I would face off against his man anytime.\" Robert E. Rubin, Co-Senior Partner, 1990 -1991 John L. Weinberg, Co-Senior Partner, 1976-1984; Senior Partner, 1984-1990. Goldman Sachs 2006 Annual Report page 25 Goldman Sachs is a leading global investment banking, securities and investment management rm that provides a wide range of services worldwide to a substantial and diversied client base that includes corporations, nancial institutions, governments and high-net-worth individuals. Our activities are divided into three segments: $5,629 $3,374 $25,562 $3,671 $6,474 $4,749 $16,818 $3,849 $13,728 Trading and Principal Investments Net Revenues Investment Banking Net Revenues 2004 2005 2006 (in millions ) +PXGUVOGPV\u0002$CPMKPI We provide a broad range of investment banking services to a diverse group of corporations, nancial institutions, investment funds, governments and individuals. 2004 2005 2006 (in millions ) Asset Management and Securities Services Net Revenues 2004 2005 2006 (in millions ) 6TCFKPI\u0002CPF\u0002 2TKPEKRCN\u0002+PXGUVOGPVU #UUGV\u0002/CPCIGOGPV\u0002 CPF\u00025GEWTKVKGU\u00025GTXKEGU We facilitate client transactions with a diverse group of corporations, nancial institutions, investment funds, governments and individuals and take proprietary positions through market making in, trading of and investing in xed income and equity products, currencies, commodities and derivatives on these products. In addition, we engage in specialist and market-making activities on equities and options exchanges and we clear client transactions on major stock, options and futures exchanges worldwide. In connection with our merchant banking and other investing activities, we make principal investments directly and through funds that we raise and manage. We provide investment advisory and nancial planning services and offer investment products (primarily through separate accounts and funds) across all major asset classes to a diverse group of institutions and individuals worldwide and provide prime brokerage services, nancing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-networth individuals worldwide. page 26 Goldman Sachs 2006 Annual Report Financial Information Table of Contents Management's Discussion and Analysis Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Overview . . . . . . . . . . . . . . . . . . . . . . . . . Business Environment. . . . . . . . . . . . . . . . . . . . . . . . Certain Risk Factors That May Affect Our Business Critical Accounting Policies . . . . . . . . . . . . . . . . . . . Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and Identiable Intangible Assets . . . . . Use of Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . Financial Overview . . . . . . . . . . . . . . . . . . . . . . . . Segment Operating Results . . . . . . . . . . . . . . . . . . Geographic Data . . . . . . . . . . . . . . . . . . . . . . . . . . Off-Balance-Sheet Arrangements . . . . . . . . . . . . . . . Equity Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractual Obligations and Commitments. . . . . . . Risk Management. . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Management Structure . . . . . . . . . . . . . . . . . Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit Risk on Derivatives . . . . . . . . . . . . . . . . . Liquidity and Funding Risk . . . . . . . . . . . . . . . . . . Operational Risk . . . . . . . . . . . . . . . . . . . . . . . . . . Recent Accounting Developments . . . . . . . . . . . . . . Management's Report on Internal Control over Financial Reporting . . . . . . . . . . . . Report of Independent Registered Public Accounting Firm . . . . . . 28 . 29 . 30 . 31 . 33 . 33 . 38 . 39 . 40 . 40 . 44 . 50 . 51 . 52 . 55 . 57 . 57 . 58 . 62 . 62 . 64 . 69 . 70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 73 Consolidated Financial Statements Consolidated Statements of Earnings . . . . . . . . . . . . Consolidated Statements of Financial Condition . . . Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . Consolidated Statements of Comprehensive Income . . . . . . . . . . . . Goldman Sachs 2006 Annual Report page 27 76 77 . 78 . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements Note 1 Description of Business . . . . . . . . . . . . . . . . . . Note 2 Signicant Accounting Policies . . . . . . . . . . . . Note 3 Financial Instruments . . . . . . . . . . . . . . . . . . . Note 4 Unsecured Short-Term Borrowings . . . . . . . . . Note 5 Unsecured Long-Term Borrowings . . . . . . . . . Note 6 Commitments, Contingencies and Guarantees Note 7 Shareholders' Equity . . . . . . . . . . . . . . . . . . . . Note 8 Earnings Per Common Share . . . . . . . . . . . . . . Note 9 Goodwill and Identiable Intangible Assets . . Note 10 Other Assets and Other Liabilities . . . . . . . . . Note 11 Employee Benet Plans . . . . . . . . . . . . . . . . . Note 12 Employee Incentive Plans. . . . . . . . . . . . . . . . Note 13 Transactions with Afliated Funds . . . . . . . . Note 14 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . Note 15 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 16 Business Segments . . . . . . . . . . . . . . . . . . . . . Supplemental Financial Information Quarterly Results . . . . . . . . . . . . . . Common Stock Price Range . . . . . . Selected Financial Data . . . . . . . . . . 74 75 79 79 . . 88 . . 95 . . 95 . . 97 . 101 . 102 . 103 . 105 . 106 . 110 . 113 . 114 . 115 . 116 . . . . . . . . . . . . . . . . . . . . 119 120 . 121 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management's Discussion and Analysis introduction Goldman Sachs is a leading global investment banking, securities and investment management rm that provides a wide range of services worldwide to a substantial and diversied client base that includes corporations, nancial institutions, governments and high-net-worth individuals. Our activities are divided into three segments: Investment Banking We provide a broad range of investment banking services to a diverse group of corporations, nancial institutions, investment funds, governments and individuals. and Principal Investments We facilitate client transactions with a diverse group of corporations, nancial institutions, investment funds, governments and individuals and take proprietary positions through market making in, trading of and investing in xed income and equity products, currencies, commodities and derivatives on these products. In addition, we engage in specialist and market-making activities on equities and options exchanges and we clear client transactions on major stock, options and futures exchanges worldwide. In connection with our merchant banking and other investing activities, we make principal investments directly and through funds that we raise and manage. Trading Management and Securities Services We provide investment advisory and nancial planning services and offer investment products (primarily through separate accounts and funds) across all major asset classes to a diverse group of institutions and individuals worldwide and provide prime brokerage services, nancing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide. Asset page 28 Unless specically stated otherwise, all references to 2006, 2005 and 2004 refer to our scal years ended, or the dates, as the context requires, November 24, 2006, November 25, 2005 and November 26, 2004, respectively. When we use the terms \"Goldman Sachs,\" \"we,\" \"us\" and \"our,\" we mean The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, and its consolidated subsidiaries. References herein to the Annual Report on Form 10-K are to our Annual Report on Form 10-K for the scal year ended November 24, 2006. In this discussion, we have included statements that may constitute \"forward-looking statements\" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements may relate to our future plans and objectives, among other things. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed below under \" Certain Risk Factors That May Affect Our Business\" as well as \"Risk Factors\" in Part I, Item 1A of the Annual Report on Form 10-K and \"Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995\" in Part I, Item 1 of the Annual Report on Form 10-K. Goldman Sachs 2006 Annual Report Management's Discussion and Analysis executive overview Our diluted earnings per common share were $19.69 for 2006, compared with $11.21 for 2005. Return on average tangible common shareholders' equity (1) was 39.8% and return on average common shareholders' equity was 32.8%. Excluding non-cash expenses of $637 million related to the accounting for certain share-based awards under SFAS No. 123-R(2), diluted earnings per common share for the year were $20.57 (2), return on average tangible common shareholders' equity (1) was 41.8%(2) and return on average common shareholders' equity was 34.4%(2). In 2006, we generated record diluted earnings per common share, which exceeded the prior year record results by 76%. Each of our three segments achieved record results. The increase in Trading and Principal Investments reected signicantly higher net revenues in Fixed Income, Currency and Commodities (FICC), Equities and Principal Investments. The increase in FICC reected particularly strong performances across all major businesses. During 2006, FICC operated in an environment characterized by strong customer-driven activity and favorable market opportunities. The increase in Equities primarily reected signicantly higher net revenues in our customer franchise business. During 2006, Equities operated in a favorable environment characterized by strong customer-driven activity, generally higher equity prices and favorable market opportunities, although volatility levels were generally low. In FICC and Equities, as a result of the favorable trading and investing opportunities for our clients and ourselves, we increased our market risk, particularly in equity products, to capitalize on these opportunities. We grew our balance sheet as needed to support these opportunities as well as to support increased activity in Securities Services. The increase in Principal Investments reected a signicant gain related to our investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC) and higher gains and overrides from other principal investments, partially offset by a smaller, but still signicant, gain related to our investment in the convertible preferred stock of Sumitomo Mitsui Financial Group, Inc. (SMFG). The increase in Investment Banking was due to signicantly higher net revenues in Underwriting and Financial Advisory, as we beneted from strong client activity levels, reecting favorable equity and nancing markets, strong CEO condence and growth in nancial sponsor activity. The increase in Asset Management and Securities Services was primarily due to higher assets under management and signicantly higher incentive fees, as well as signicantly higher global customer balances in Securities Services. Assets under management increased $144 billion or 27% to a record $676 billion, including net asset inows of $94 billion during 2006. (1) Return on average tangible common shareholders' equity is computed by dividing net earnings applicable to common shareholders by average monthly tangible common shareholders' equity. See \" Results of Operations Financial Overview\" below for further information regarding our calculation of return on average tangible common shareholders' equity. (2) Statement of Financial Accounting Standards (SFAS) No. 123-R, \"Share-Based Payment,\" focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based payments. In the rst quarter of 2006, we adopted SFAS No. 123-R, which requires that share-based awards held by employees that were retirement-eligible, including those subject to non-compete agreements, be expensed in the year of grant. In addition to expensing current year awards, prior year awards must continue to be amortized over the relevant service period. Therefore, our compensation and benets expenses in 2006 included (and, to a lesser extent, 2007 and 2008 will include) both amortization of prior year share-based awards held by employees that were retirement-eligible on the date of adoption of SFAS No. 123-R and new awards granted to those employees. We believe that presenting our results excluding the impact of the continued amortization of these prior year share-based awards increases the comparability of period-to-period operating results and allows for a more meaningful representation of the relationship of current period compensation to net revenues. The following tables set forth a reconciliation of diluted earnings per common share, common shareholders' equity and net earnings applicable to common shareholders, as reported, to these items excluding the impact of the continued amortization of these prior year share-based awards held by employees that were retirement-eligible on the date of adoption of SFAS No. 123-R: YEAR ENDED NOVEMBER 2006 Diluted earnings per common share Impact of the continued amortization of prior year share-based awards, net of tax Diluted earnings per common share, excluding the impact of the continued amortization of prior year share-based awards $19.69 0.88 $20.57 AVERAGE FOR THE YEAR ENDED NOVEMBER 2006 ( in millions ) Total shareholders' equity Preferred stock Common shareholders' equity Impact of the continued amortization of prior year share-based awards, net of tax Common shareholders' equity, excluding the impact of the continued amortization of prior year share-based awards Goodwill and identiable intangible assets, excluding power contracts (see footnote 1 above) Tangible common shareholders' equity (see footnote 1 above), excluding the impact of the continued amortization of prior year share-based awards $31,048 (2,400) 28,648 (122) 28,526 (5,013) $23,513 YEAR ENDED NOVEMBER 2006 ( in millions ) Net earnings applicable to common shareholders Impact of the continued amortization of prior year share-based awards, net of tax Net earnings applicable to common shareholders, excluding the impact of the continued amortization of prior year share-based awards Goldman Sachs 2006 Annual Report page 29 $9,398 421 $9,819 Management's Discussion and Analysis Looking forward to 2007, our investment banking backlog at the end of 2006 was at its highest level since 2000 (1). In addition to potential growth in the businesses and geographic areas in which we currently operate, the expansion of the economies of China, India, Russia and Brazil, as well as those of the Middle East offer new opportunities for us to increase our presence in those markets. In Investment Banking, there is growth potential to broaden our client base by providing strategic and nancing advice and capital to middle-market companies. We also see opportunities to advise governments and investors on the sale and purchase of public infrastructure assets. In addition, we are building a private banking capability as part of our strategy to provide a full range of services to our private wealth management clients. Though we generated record operating results in 2006, our business, by its nature, does not produce predictable earnings. Our results in any given period can be materially affected by conditions in global nancial markets and economic conditions generally. For a further discussion of the factors that may affect our future operating results, see \" Certain Risk Factors That