The Goldman Sachs Group, Inc. ANNUAL REPORT

Transcription

1 The Goldman Sachs Group, Inc. ANNUAL REPORT 2016

2 The Goldman Sachs Business Principles Our clients interests always come first. Our experience shows that if we serve our clients well, our own success will follow. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

3 Fellow Shareholders: We started 2016 with concerns about global economic growth, leading some to comment that the world was headed into a recession. While those concerns moderated in the second quarter and the global economic outlook improved in the second half, other concerns drew to the forefront. Few predicted with conviction the outcome of the United Kingdom s referendum on remaining a part of the European Union, the results of the presidential election in the United States or the markets reactions to either event. In last year s letter, we characterized 2015 as a tale of two halves. That was certainly true again in 2016, but in reverse order. As our clients and by extension, the firm navigated the challenging operating environment in the first half, our net revenues declined by 28 percent year over year for the period, with the majority of that decline occurring in the first quarter. As conditions improved in the second half, so did client sentiment. As a result, net revenues increased by nearly 16 percent year over year in the second half, including two consecutive quarters of more than 11 percent annualized return on average common shareholders equity. The events of the past year are a stark reminder of how quickly expectations and conditions can change, and of the importance for us to be nimble and to concentrate on the things we can control. Despite the difficult start to the year, we remained focused on our clients and operating efficiently, without surrendering the ability to pursue potential opportunities. For the full year, the firm generated net revenues of $30.6 billion, net earnings of $7.4 billion and diluted earnings per common share of $ Our return on average common shareholders equity was 9.4 percent. Despite our focus on cost discipline, we did not stop investing in our franchise including investments in technology, attracting and retaining top talent, and seeking new business opportunities, including our efforts to expand our lending footprint, most notably through Goldman Sachs Bank USA. We believe that our consistent investment in our franchise positioned us to serve our clients when activity increased in the back half of Managing the firm with discipline while preserving optionality for upside can be a difficult balancing act. We do not hold preconceived expectations for certain outcomes, but rather approach our own operations with the same mindset we do when helping our clients. We spend a great deal of time thinking about and preparing for downside scenarios, but we are always cognizant that the economy, markets and sentiment could break to the high side, and we position ourselves for that possibility. We believe our client franchise benefits from our consistent commitment to being a diversified and dependable provider of services. Goldman Sachs 2016 Annual Report 1

4 Letter to Shareholders Lloyd C. Blankfein Chairman and Chief Executive Officer (center) David M. Solomon President and Co-Chief Operating Officer (left) Harvey M. Schwartz President and Co-Chief Operating Officer (right) 2 Goldman Sachs 2016 Annual Report

5 In this year s letter to our shareholders, I will discuss these and other topics, including our financial profile and the state of our businesses. Financial Profile Given the challenging operating environment in the first half of 2016, we undertook steps and actions consistent with the difficult conditions. For the first quarter of 2016, with net revenues down by 40 percent year over year, we accrued compensation and benefits expenses 40 percent lower year over year. We ended the year with net revenues and compensation and benefits expenses nine and eight percent lower than 2015, respectively. We also completed an initiative that identified a reduction of approximately $900 million in annual run rate compensation during the year, in which we realized approximately $500 million, net of severance and other related costs, during Including these efforts, we have announced and completed $2.8 billion in savings initiatives since This demonstrates how our flexible cost base helps us navigate challenging operating environments. The impact of our efforts can be seen by comparing our results in 2016 to was an instructive year as it was a tough net revenues year, similar to In 2011, we had net revenues of approximately $29 billion with operating expenses of approximately $23 billion. Our compensation and benefits to net revenues ratio was more than 42 percent and our pre-tax margin was over 21 percent. In 2016, despite higher net revenues, our operating expenses were down by 10 percent vs. 2011, our compensation and benefits to net revenues ratio was down by 400 basis points and our pre-tax margin was more than 12 percentage points higher. This reflects a lot of the firm s work in cost discipline and provides significant operating leverage for the future. Our cost savings efforts in 2016 were part of a broader focus on efficiencies. For example, over the past five years we have grown our head count in our Salt Lake City office by nearly 80 percent, making it our fourth-largest location globally. In terms of our capital and liquidity, our balance sheet has never been more conservatively positioned as a result of adjustments we have made to adapt to new regulations since the financial crisis. By almost all measures, Goldman Sachs, and the broader financial system, is safer. For example, our Global Core Liquid Assets have increased by almost four times, our common shareholders equity has nearly doubled and our gross leverage has been cut by more than one-half since the end of Moreover, we have reduced our balance sheet size by seven percent over the past five years, while increasing our common shareholders equity by 13 percent and our book value per common share by 40 percent. Over the same period, we have returned nearly $32 billion of capital to shareholders through buybacks and dividends, reducing our basic share count by more than 100 million shares, or approximately 20 percent, to the lowest ever. Importantly, while these efforts helped us to strengthen our balance sheet, they did not detract us from remaining focused on sustaining and improving the quality of our client franchise. Investment Banking Our investment banking franchise reflects deep relationships with more than 8,000 clients across a variety of industries in approximately 100 countries. We ended the year ranked first in global announced and completed mergers and acquisitions, advising on many of the year s most significant transactions. As has long been the case, our advisory franchise creates other opportunities across the firm, such as in debt underwriting, which is able to serve our clients with Goldman Sachs 2016 Annual Report 3

6 Letter to Shareholders best-in-class debt financing capabilities. Our financial advisory net revenues declined compared to a strong 2015, partially offset by record debt underwriting net revenues of $2.5 billion. In fact, we ended the year ranked in the top five in global debt and in the top three in global high-yield areas where we traditionally have not had the same footprint as some of our larger competitors. We also continued to maintain a leading equity underwriting franchise, though net revenues declined significantly in 2016 as a result of the operating environment. Nevertheless, we ended the year strong, as our investment banking transaction backlog grew in the fourth quarter. Institutional Client Services With a leading, diversified global platform in Institutional Client Services (ICS), comprising our Fixed Income, Currency and Commodities Client Execution (FICC) and Equities franchises, we are one of the few firms that have remained committed to serving our clients needs broadly across financial products, services and regions. We did not extrapolate from the exceptional conditions of the past several years to draw hard and fast conclusions about the FICC franchise. These conditions included interest rates near or below zero, a flat yield curve and muted economic growth. That is why we put a premium on maintaining our commitment to businesses that we knew were important to our clients. We have a diverse client franchise, and one area of particular strength has long been our standing with the hedge fund community. Our product diversity, global footprint, world-class prime brokerage capabilities, and engagement strategy based on content are of particular value to hedge fund clients. Over the past few years, we also have made it a key priority to deepen relationships with more traditional asset managers. As an example of our progress, we have seen market share improvements in our U.S. cash credit businesses, where asset managers have historically been active. Both hedge funds and active managers could face a much different and more attractive market environment in To the extent decreasing market correlations translate into a better backdrop for generating outsized performance, that should also support increasing levels of client activity. Despite the headwinds that marked the start of 2016, ICS net revenues were down modestly compared to FICC net revenues increased slightly year over year, which is notable given market conditions in the first quarter. Equities client execution net revenues declined significantly year over year, driven by lower client activity levels. Investment Management Our broad portfolio of solutions and consistent performance have enabled us to be one of the fastestgrowing active investment managers in the world. Our product offerings range from asset and liability management for our private wealth clients, to tailored advisory solutions for our institutional clients, to fund products across all asset classes. Net revenues declined year over year in 2016, due largely to lower incentive fees. However, even in a more challenging environment, we have continued to build our franchise. Over the past three years, we have grown our assets under supervision by $337 billion to a record of nearly $1.4 trillion. That growth would be akin to creating a top 30 U.S. asset manager in just three years, and includes $150 billion of organic active long-term net inflows. During this period, many active investment managers have seen net client outflows. Despite such growth, we continue to see significant potential as investors consolidate assets with leading providers. There are bigger players within each of the product categories in which we compete, offering room to garner more market share. We will pursue that growth by providing clients with comprehensive advice, thought leadership and innovative products that will help them to better meet their investing needs. 4 Goldman Sachs 2016 Annual Report

7 Investing & Lending Investing & Lending is a collection of activities that is synergistic with other elements of our overall franchise, helping us to expand our client relationships. We continue to provide long-term capital by way of direct lending and equity investments, and remain focused on opportunities that provide strong risk-adjusted returns on capital over the long term. Growing Our Lending Footprint In particular, we continue to see lending as a growth opportunity for the firm. Approximately one-third of our 2016 net revenues in Investing & Lending was generated by debt securities and loans, which included more than $1 billion in net interest income. Over the past four years, we increased our funded loans 2.8 times to roughly $64 billion. Corporate loans, diversified across sectors and industries, make up 46 percent of the portfolio, followed by private wealth management loans at 32 percent and real estate loans at 17 percent. We continue to see increased demand from our investment banking and private wealth management clients, and we are intent on prudently increasing our lending portfolio. This past fall, we launched Marcus: By Goldman Sachs an online lending platform designed to provide consumer clients with an alternative to higher-interestrate credit card debt. The growth in digital finance, combined with our historical strength in technology and risk management, led us to see an opportunity to add value to this attractive new market for Goldman Sachs. By most measures, the opportunity is broad and deep. The unsecured consumer loan market in the U.S. is roughly $850 billion. We are focused on creditworthy consumers with $5,000 to $30,000 of credit card debt, the majority of whom are not aware of better debt management options. We have received encouraging feedback from our new clients as we have slowly built out the business, and continue to see potential for attractive risk-adjusted growth opportunities. Focus on Technology Technology is central to every part of our business. Simply put, it is a core competitive advantage that drives long-term value in several ways namely, through enhancing our clients experience, driving efficiency and creating new opportunities, like Marcus. Our investment in our Marquee platform, a collection of applications for our institutional clients, represents one such cutting-edge opportunity. Marquee allows clients to access some of the same analysis and risk management tools our market makers use. More broadly, we are investing in infrastructure to improve our electronic execution capabilities, including for systematic investing clients who require speed and differentiated execution, and for straightthrough processing. We have also made successful investments in electronic execution platforms. Our global infrastructure, as a result of this and other investments, is now capable of executing equity and select FICC transactions in a much more efficient manner. Importantly, all of our clients not just our clients with quantitative strategies enjoy the benefits of better execution. We have likewise integrated technology into our recruiting processes, in particular to facilitate first-round video interviews with the goal of widening and diversifying the pool of talent we evaluate. For 2017 s intern class, so far we have conducted interviews with candidates from more than 900 schools, reaching 100 more schools than last year. Our People Of course, our most important long-term competitive advantage is our people. Our commitment to attracting and retaining the most talented people in our industry and beyond is of vital importance to the firm and the perennial foundation of our success. We must be diverse and representative of the countries and cultures in which we operate. Our people represent more than 160 different nationalities and speak over 100 different languages. Goldman Sachs 2016 Annual Report 5

8 Letter to Shareholders I am pleased to report that Goldman Sachs remains a highly attractive place to work. In 2016, our summer internship and full-time campus applicants rose by 11 percent. We had approximately 130,000 applicants for just 5,000 internship and full-time campus roles approximately a four percent hiring rate. In addition, of those who received offers, approximately eight out of 10 accepted. And, in 2016, we were proud to be named as one of Fortune magazine s 100 Best Companies to Work For. Goldman Sachs is one of only five companies to be recognized every year that the Great Place to Work Institute has issued its list since Given the growing significance of technology in how we operate our businesses, we have increasingly been focused on hiring individuals with backgrounds in science, technology, engineering and math (STEM). In 2016, 37 percent of new campus analysts who joined the firm came from these STEM majors. Today, approximately 9,000 people, or roughly one-quarter of the firm, work in various engineering-related roles. More broadly, our people continue to see the value of a long-term career at Goldman Sachs. The median tenure of our partners and managing directors at the firm is 15 years, and nearly 60 percent of them joined the firm as an analyst or associate (our entry level positions). To ensure that the talent we hire is the talent we keep over the long term, we invest hundreds of thousands of training hours in our new analysts, and provide thousands of classroom programs and digital resources for senior professionals. Executive Succession and Our Deep Leadership Bench In 2016 and the early part of this year, we saw a number of movements in our leadership ranks, as well as a key addition to our Board of Directors. As chairman and chief executive officer, in consultation with our Board of Directors, one of my most important priorities is smooth and effective leadership transitions. This past December, then U.S. President-elect Donald Trump appointed Gary Cohn, then our president and chief operating officer, director of the National Economic Council. Gary was responsible for developing and leading many of the firm s most important initiatives, and demonstrated a deep commitment to our clients, our people and the culture of Goldman Sachs. We thank him for having served as a trusted advisor, dedicated colleague and friend to so many at the firm, and wish him well. David Solomon, our former co-head of the Investment Banking Division, and Harvey Schwartz, our chief financial officer, assumed new responsibilities as presidents and co-chief operating officers of the firm. In addition, Marty Chavez, chief information officer, was named deputy chief financial officer of Goldman Sachs and will become chief financial officer. This past year was also marked by some senior retirements from the firm. Michael Woody Sherwood, vice chairman of the firm and co-chief executive officer of Goldman Sachs International, and Mark Schwartz, chairman of Goldman Sachs Asia Pacific and vice chairman of the firm, announced their retirements following decades of service. We wish both Woody and Mark all the best in the years ahead and thank them for their extraordinary contributions to Goldman Sachs. Richard Gnodde, co-head of the Investment Banking Division and chief executive officer of Goldman Sachs International, and Pablo Salame, co-head of the Securities Division, were appointed vice chairmen of the firm. David, Harvey, Marty, Richard and Pablo have a long track record of distinction in their respective areas of expertise, spanning multiple businesses and geographies. In December, we welcomed a new member to our Board of Directors. Ellen Kullman is an accomplished business leader who has held a variety of senior roles at E. I. du Pont de Nemours and Company, including as chairman and chief executive officer. We are confident that her deep experience in business and as a board member in both the public and nonprofit sectors will add great value to our Board of Directors. 6 Goldman Sachs 2016 Annual Report

9 Our Tradition of Leadership and Public Service Gary was not the first person from Goldman Sachs to join the government, and we hope and expect that he will not be the last. Five of my most recent predecessors went into government service, and that has not been by happenstance. One ethic that has long pervaded Goldman Sachs is a commitment to public service if one is given the opportunity to serve. And that has been true over time and in many of the geographies in which we operate. We recruit people who are oriented to the larger world, and their jobs require them to be both outwardly and inwardly facing. In the process, they develop the skills to make a contribution in large, complex organizations and the expertise to help drive economic progress and job creation. We have been criticized for the fact that some of our colleagues, after long careers at the firm, have moved to work in the public sector. The charge is that Goldman Sachs is able to extract certain advantages that others cannot. In fact, the opposite is true. Those in government bend over backward to avoid any perception of favoritism. We are proud of our tradition of leadership and public service and believe it is a core part of our culture. That is why we will continue to encourage our people to contribute to government service if they are fortunate enough to be asked. We also have contributed our expertise and knowledge to broader public policy issues, such as fiscal policy. And, when certain issues impact our people, we have not hesitated to speak up on their behalf. In the past, we have commented on marriage equality, and more recently, immigration policy, because they both affect our ability to hire and retain people from the broadest pool of talent. We will continue to express our views on policies that affect our people, our business and the long-term interests of economic growth. Our Commitment to Our Communities Goldman Sachs has long embraced our responsibility to help address social and economic challenges around the world. Our approach goes far beyond the significant financial support we provide to a broad array of philanthropic endeavors; we also make meaningful contributions that harness our business expertise, relationships and knowledge to address critical needs in the communities in which we work and live and sometimes far beyond. 10,000 Women Since 2008, the Goldman Sachs 10,000 Women initiative has helped foster economic growth by providing women entrepreneurs in 56 countries with business education and access to capital. The initiative is now expanding to reach more than 10,000 women through a first-of-itskind global finance facility launched in partnership with the International Finance Corporation to increase access to capital for women entrepreneurs to grow their businesses. By the end of 2016, the facility had committed more than $600 million to banks in 17 emerging markets, which will enable more than 30,000 women entrepreneurs to access capital. 10,000 Small Businesses 10,000 Small Businesses has served more than 7,300 small businesses at 31 sites across the United States and the United Kingdom by the end of This initiative has worked with more than 100 local and national lenders and other organizations to provide access to management training, capital and business support services. Independent evaluations of the program have shown that participants consistently increase revenues and create net new jobs at a pace that outperforms the broader economy. Goldman Sachs Gives Through this donor-advised fund, partners at the firm recommend grants to nonprofit organizations around the Goldman Sachs 2016 Annual Report 7

10 Letter to Shareholders world. Since its launch in 2010, the fund has made more than 28,000 grants totaling nearly $1.2 billion through the end of 2016 to 5,600 organizations that further Goldman Sachs Gives mission of fostering innovative ideas, and solving economic and social issues. Grants from Goldman Sachs Gives have recently supported the Middle East refugee crisis, STEM education for underserved youths globally, medical research across a variety of fields, and need-based financial aid at colleges and universities globally, to name a few key initiatives. Looking Ahead We often say that no one has a crystal ball. Markets change course at a moment s notice, and in response to factors no one can predict with any certainty. Cycles come and cycles go. But, if we manage our business with discipline and preserve our flexibility for upside, we can put ourselves in the best position to meet the needs of our clients and to grow our franchise. We have long maintained that it is important to remain active and invested in our core businesses, despite cyclical pressures, both as we respond in the short term and orient ourselves for the horizon. In the past decade or so, some in our industry pulled back from sales and trading businesses that, to some, seemed to be permanently and negatively affected by market conditions, regulatory change and other factors. We remained committed to the value we provide clients in those businesses across cycles. It is difficult to know how effective we have been at achieving the balance between cutting costs and investing in businesses until the cycle fully turns. Regardless of which way the future breaks, we do, however, see many reasons for optimism. Economic growth was showing signs of improvement, even before the election. U.S. interest rates are poised to rise, as policymakers digest improving economic indicators, while other global markets hold steady or even engage in stimulus, creating opportunities for investors in monetary policy divergence. More durable market trends may yet emerge and spur healthier levels of client activity. Looking ahead to 2017, Goldman Sachs remains committed to working with our clients and leveraging the resources of the firm to help them achieve their objectives, while creating long-term value for shareholders. I believe that our client franchise is as strong as it has ever been. We have transformed our balance sheet in ways that help us better weather challenging environments, while allowing us to pivot in times of higher client activity. We have prudently managed our operating expenses and capital, building significant operating leverage. By staying true to our strategic focus, I am confident we can continue to generate industry-leading returns for shareholders and outperform over the long term. Lloyd C. Blankfein Chairman and Chief Executive Officer Putting aside one s individual politics, the outcome of the U.S. election raises the possibility of more stimulative tax and regulatory policies, as well as plans for more infrastructure spending. This represents a substantial change in direction for the U.S., and offers many investors and companies a reason for optimism. 8 Goldman Sachs 2016 Annual Report

11 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 Commission File Number: The Goldman Sachs Group, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 West Street New York, N.Y. (Zip Code) (Address of principal executive offices) (212) (Registrant s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: Common stock, par value $.01 per share New York Stock Exchange Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate Non-Cumulative Preferred Stock, Series A New York Stock Exchange Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.20% Non-Cumulative Preferred Stock, Series B New York Stock Exchange Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate Non-Cumulative Preferred Stock, Series C New York Stock Exchange Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate Non-Cumulative Preferred Stock, Series D New York Stock Exchange Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate Non-Cumulative Preferred Stock, Series I New York Stock Exchange Depositary Shares, Each Representing 1/1,000th Interest in a Share of 5.50% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series J New York Stock Exchange Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.375% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series K New York Stock Exchange Depository Shares, Each Representing 1/1,000th Interest in a Share of 6.30% Non-Cumulative Preferred Stock, Series N New York Stock Exchange See Exhibit 99.2 for debt and trust securities registered under Section 12(b) of the Act Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. È Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes È No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. È Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). È Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Annual Report on Form 10-K or any amendment to the Annual Report on Form 10-K. È Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer È Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes È No As of June 30, 2016, the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant was approximately $59.3 billion. As of February 10, 2017, there were 398,377,814 shares of the registrant s common stock outstanding. Documents incorporated by reference: Portions of The Goldman Sachs Group, Inc. s Proxy Statement for its 2017 Annual Meeting of Shareholders are incorporated by reference in the Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.

12

13 THE GOLDMAN SACHS GROUP, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016 INDEX Form 10-K Item Number Page No. PART I 1 Item 1 Business 1 Introduction 1 Our Business Segments and Segment Operating Results 1 Investment Banking 2 Institutional Client Services 2 Investing & Lending 4 Investment Management 4 Business Continuity and Information Security 5 Employees 6 Competition 6 Regulation 7 Available Information 23 Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of Item 1A Risk Factors 25 Item 1B Unresolved Staff Comments 44 Item 2 Properties 44 Item 3 Legal Proceedings 45 Item 4 Mine Safety Disclosures 45 Executive Officers of The Goldman Sachs Group, Inc. 45 PART II 46 Item 5 Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 46 Item 6 Selected Financial Data 46 Page No. Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations 47 Introduction 47 Executive Overview 48 Business Environment 49 Critical Accounting Policies 50 Recent Accounting Developments 53 Use of Estimates 53 Results of Operations 53 Balance Sheet and Funding Sources 66 Equity Capital Management and Regulatory Capital 71 Regulatory Developments 77 Off-Balance-Sheet Arrangements and Contractual Obligations 79 Risk Management 81 Overview and Structure of Risk Management 82 Liquidity Risk Management 87 Market Risk Management 94 Credit Risk Management 99 Operational Risk Management 105 Model Risk Management 107 Item 7A Quantitative and Qualitative Disclosures About Market Risk 107 Goldman Sachs 2016 Form 10-K

14 INDEX Page No. Item 8 Financial Statements and Supplementary Data 108 Management s Report on Internal Control over Financial Reporting 108 Report of Independent Registered Public Accounting Firm 109 Consolidated Financial Statements 110 Consolidated Statements of Earnings 110 Consolidated Statements of Comprehensive Income 111 Consolidated Statements of Financial Condition 112 Consolidated Statements of Changes in Shareholders Equity 113 Consolidated Statements of Cash Flows 114 Notes to Consolidated Financial Statements 115 Note 1. Description of Business 115 Note 2. Basis of Presentation 115 Note 3. Significant Accounting Policies 116 Note 4. Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value 122 Note 5. Fair Value Measurements 123 Note 6. Cash Instruments 124 Note 7. Derivatives and Hedging Activities 130 Note 8. Fair Value Option 141 Note 9. Loans Receivable 147 Note 10. Collateralized Agreements and Financings 151 Note 11. Securitization Activities 155 Note 12. Variable Interest Entities 157 Note 13. Other Assets 161 Note 14. Deposits 164 Note 15. Short-Term Borrowings 164 Note 16. Long-Term Borrowings 165 Note 17. Other Liabilities and Accrued Expenses 168 Note 18. Commitments, Contingencies and Guarantees 168 Note 19. Shareholders Equity 172 Note 20. Regulation and Capital Adequacy 175 Note 21. Earnings Per Common Share 183 Note 22. Transactions with Affiliated Funds 184 Note 23. Interest Income and Interest Expense 184 Page No. Note 24. Income Taxes 185 Note 25. Business Segments 187 Note 26. Credit Concentrations 189 Note 27. Legal Proceedings 190 Note 28. Employee Benefit Plans 196 Note 29. Employee Incentive Plans 197 Note 30. Parent Company 199 Supplemental Financial Information 201 Quarterly Results 201 Common Stock Price Range 201 Common Stock Performance 201 Selected Financial Data 202 Statistical Disclosures 202 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 208 Item 9A Controls and Procedures 208 Item 9B Other Information 208 PART III 208 Item 10 Directors, Executive Officers and Corporate Governance 208 Item 11 Executive Compensation 208 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 208 Item 13 Certain Relationships and Related Transactions, and Director Independence 209 Item 14 Principal Accounting Fees and Services 209 PART IV 209 Item 15 Exhibits, Financial Statement Schedules 209 SIGNATURES 214 Goldman Sachs 2016 Form 10-K

15 PART I Item 1. Business Introduction Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and individuals. When we use the terms Goldman Sachs, the firm, we, us and our, we mean The Goldman Sachs Group, Inc. (Group Inc. or parent company), a Delaware corporation, and its consolidated subsidiaries. References to this Form 10-K are to our Annual Report on Form 10-K for the year ended December 31, References to the 2015 Form 10-K are to our Annual Report on Form 10-K for the year ended December 31, All references to 2016, 2015 and 2014 refer to our years ended, or the dates, as the context requires, December 31, 2016, December 31, 2015 and December 31, 2014, respectively. Group Inc. is a bank holding company and a financial holding company regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Our U.S. depository institution subsidiary, Goldman Sachs Bank USA (GS Bank USA), is a New York State-chartered bank. As of December 2016, we had offices in over 30 countries and 47% of our total staff was based outside the Americas. Our clients are located worldwide and we are an active participant in financial markets around the world. In 2016, we generated 40% of our net revenues outside the Americas. For more information about our geographic results, see Note 25 to the consolidated financial statements in Part II, Item 8 of this Form 10-K. Our Business Segments and Segment Operating Results We report our activities in four business segments: Investment Banking, Institutional Client Services, Investing & Lending and Investment Management. The chart below presents our four business segments. Investment Banking Financial Advisory Underwriting Equity Underwriting Debt Underwriting Institutional Client Services Fixed Income, Currency and Commodities Client Execution Equities Equities Client Execution Commissions and Fees Securities Services Firmwide Investing & Lending Equity Securities Debt Securities and Loans Investment Management Management and Other Fees Incentive Fees Transaction Revenues The table below presents our segment operating results. Year Ended December $ in millions % of 2016 Net Revenues Investment Banking Net revenues $ 6,273 $ 7,027 $ 6,464 21% Operating expenses 3,437 3,713 3,688 Pre-tax earnings $ 2,836 $ 3,314 $ 2,776 Institutional Client Services Net revenues $14,467 $15,151 $15,197 47% Operating expenses 9,713 13,938 10,880 Pre-tax earnings $ 4,754 $ 1,213 $ 4,317 Investing & Lending Net revenues $ 4,080 $ 5,436 $ 6,825 13% Operating expenses 2,386 2,402 2,819 Pre-tax earnings $ 1,694 $ 3,034 $ 4,006 Investment Management Net revenues $ 5,788 $ 6,206 $ 6,042 19% Operating expenses 4,654 4,841 4,647 Pre-tax earnings $ 1,134 $ 1,365 $ 1,395 Total net revenues $30,608 $33,820 $34,528 Total operating expenses 20,304 25,042 22,171 Total pre-tax earnings $10,304 $ 8,778 $12,357 Goldman Sachs 2016 Form 10-K 1

16 In the table above: Financial information related to our business segments for 2016, 2015 and 2014 is included in Management s Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Supplementary Data, which are in Part II, Items 7 and 8, respectively, of this Form 10-K. See Note 25 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for a summary of our total net revenues, pretax earnings and net earnings by geographic region. Operating expenses includes provisions of $3.37 billion recorded in Institutional Client Services during 2015 for the settlement agreement with the Residential Mortgage- Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force. See Note 27 to the consolidated financial statements in Part II, Item 8 of the 2015 Form 10-K for further information. All operating expenses have been allocated to our segments except for charitable contributions of $114 million for 2016, $148 million for 2015 and $137 million for Investment Banking Investment Banking serves public and private sector clients around the world. We provide financial advisory services and help companies raise capital to strengthen and grow their businesses. We seek to develop and maintain longterm relationships with a diverse global group of institutional clients, including governments, states and municipalities. Our goal is to deliver to our institutional clients the entire resources of the firm in a seamless fashion, with investment banking serving as the main initial point of contact with Goldman Sachs. Financial Advisory. Financial Advisory includes strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, spin-offs and risk management. In particular, we help clients execute large, complex transactions for which we provide multiple services, including cross-border structuring expertise. Financial Advisory also includes revenues from derivative transactions directly related to these client advisory assignments. We also assist our clients in managing their asset and liability exposures and their capital. Underwriting. The other core activity of Investment Banking is helping companies raise capital to fund their businesses. As a financial intermediary, our job is to match the capital of our investing clients, who aim to grow the savings of millions of people, with the needs of our public and private sector clients, who need financing to generate growth, create jobs and deliver products and services. Our underwriting activities include public offerings and private placements, including local and cross-border transactions and acquisition financing, of a wide range of securities and other financial instruments, including loans. Underwriting also includes revenues from derivative transactions entered into with public and private sector clients in connection with our underwriting activities. Equity Underwriting. We underwrite common and preferred stock and convertible and exchangeable securities. We regularly receive mandates for large, complex transactions and have held a leading position in worldwide public common stock offerings and worldwide initial public offerings for many years. Debt Underwriting. We underwrite and originate various types of debt instruments, including investment-grade and high-yield debt, bank loans and bridge loans, including in connection with acquisition financing, and emerging- and growth-market debt, which may be issued by, among others, corporate, sovereign, municipal and agency issuers. In addition, we underwrite and originate structured securities, which include mortgage-related securities and other asset-backed securities. Institutional Client Services Institutional Client Services serves our clients who come to us to buy and sell financial products, raise funding and manage risk. We do this by acting as a market maker and offering market expertise on a global basis. Institutional Client Services makes markets and facilitates client transactions in fixed income, equity, currency and commodity products. In addition, we make markets in and clear client transactions on major stock, options and futures exchanges worldwide. As a market maker, we provide prices to clients globally across thousands of products in all major asset classes and markets. At times we take the other side of transactions ourselves if a buyer or seller is not readily available and at other times we connect our clients to other parties who want to transact. Our willingness to make markets, commit capital and take risk in a broad range of products is crucial to our client relationships. Market makers provide liquidity and play a critical role in price discovery, which contributes to the overall efficiency of the capital markets. 2 Goldman Sachs 2016 Form 10-K

17 Our clients are primarily institutions that are professional market participants, including investment entities whose ultimate customers include individual investors investing for their retirement, buying insurance or putting aside surplus cash in a deposit account. Through our global sales force, we maintain relationships with our clients, receiving orders and distributing investment research, trading ideas, market information and analysis. Much of this connectivity between us and our clients is maintained on technology platforms and operates globally wherever and whenever markets are open for trading. Institutional Client Services and our other businesses are supported by our Global Investment Research division, which, as of December 2016, provided fundamental research on more than 3,000 companies worldwide and more than 40 national economies, as well as on industries, currencies and commodities. Institutional Client Services generates revenues in the following ways: In large, highly liquid markets (such as markets for U.S. Treasury bills, large capitalization S&P 500 stocks or certain mortgage pass-through securities), we execute a high volume of transactions for our clients; In less liquid markets (such as mid-cap corporate bonds, growth market currencies or certain non-agency mortgage-backed securities), we execute transactions for our clients for spreads and fees that are generally somewhat larger than those charged in more liquid markets; We also structure and execute transactions involving customized or tailor-made products that address our clients risk exposures, investment objectives or other complex needs (such as a jet fuel hedge for an airline); and We provide financing to our clients for their securities trading activities, as well as securities lending and other prime brokerage services. In connection with our market-making activities, we maintain inventory, typically for a short period of time, in response to, or in anticipation of, client demand. We also hold inventory to actively manage our risk exposures that arise from these market-making activities. Institutional Client Services activities are organized by asset class and include both cash and derivative instruments. Cash refers to trading the underlying instrument (such as a stock, bond or barrel of oil). Derivative refers to instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors (such as an option, which is the right or obligation to buy or sell a certain bond or stock index on a specified date in the future at a certain price, or an interest rate swap, which is the agreement to convert a fixed rate of interest into a floating rate or vice versa). Fixed Income, Currency and Commodities Client Execution. Includes client execution activities related to making markets in both cash and derivative instruments for interest rate products, credit products, mortgages, currencies and commodities. Interest Rate Products. Government bonds (including inflation-linked securities) across maturities, other government-backed securities, repurchase agreements, and interest rate swaps, options and other derivatives. Credit Products. Investment-grade corporate securities, high-yield securities, credit derivatives, exchange-traded funds, bank and bridge loans, municipal securities, emerging market and distressed debt, and trade claims. Mortgages. Commercial mortgage-related securities, loans and derivatives, residential mortgage-related securities, loans and derivatives (including U.S. government agency-issued collateralized mortgage obligations and other securities and loans), and other asset-backed securities, loans and derivatives. Currencies. Currency options, spot/forwards and other derivatives on G-10 currencies and emerging-market products. Commodities. Commodity derivatives and, to a lesser extent, physical commodities, involving crude oil and petroleum products, natural gas, base, precious and other metals, electricity, coal, agricultural and other commodity products. Goldman Sachs 2016 Form 10-K 3