高盛 (GS) 2002 Q4 法說會逐字稿

Good afternoon.

My name is David.

And I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Goldman Sachs fourth quarter 2002 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press Star 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

I will now turn the call over to Mr. John Andrews.

Mr. Andrews, you may begin your conference.

Good morning, and welcome.

I'd like to welcome you actually to the final chapter of today's marathon Investment Banking conference call sessions.

I'm John Andrews, Director of Investor Relations at Goldman Sachs and I'd like to welcome you to our fourth quarter earnings call.

Before turning the call over to David Viniar, I'd like to remind you that today's call may include forward-looking statements.

These statements represent the firm's belief regarding future events that, by their nature, are uncertain and outside of the firm's control.

The firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that do affect the firm's future results, please see the description of certain factors that may affect our business in our current annual report on Form 10-K for our fiscal year ended November 2001 and item 5 in our quarterly report on Form 10-Q for the third quarter of fiscal 2002.

I would also direct to you read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our Investment Banking transaction backlog.

This audio cast is copyrighted and may not be duplicated, reproduced or rebroadcast without our consent.

Our Chief Financial Officer David Viniar will now review the firm's results.

David?

Thanks, John.

I'd like to thank all of you for listening today.

I would also like to take this opportunity to wish everyone a happy holidays.

I'm going to start with a brief review of our results and then I'll take your questions.

Fourth quarter results reflected the continued challenging operating environment for many of our businesses.

Quarterly net revenues of $2.9 billion were down 21 percent from the prior quarter.

Net earnings were 505 million, or 98 cents per diluted share.

Annualized return on average tangible equity in the fourth quarter was 14.4 percent.

For the full year, net revenues of $14 billion or 12 -- were 12 percent below 2001 while diluted earnings per share of $4.03 were five percent lower.

Return on average tangible equity for the year was 15.3 percent.

I'll now review each our businesses starting with Investment Banking.

Net revenues in Investment Banking were $523 million, a 20 percent decrease from the third quarter.

The fourth quarter saw roughly flat global completed M&A for the industry but a decline in equity underwriting activity from already low levels.

Worldwide IPOs were down 44 percent from the third quarter and worldwide common stock issuance declined 28 percent.

Advisory net revenues for the fourth quarter were $299 million, 5 percent below the third quarter.

There continues to be no sign of recovery in the advisory business as worldwide announced M&A activity fell 26 percent from the third quarter.

For fiscal 2002, global completed M&A was down 49 percent and announced mergers declined 31 percent from 2001.

In the face of the extremely difficult conditions confronting the industry as a whole, we take some comfort from -- that Goldman Sachs once again ranked number one in announcing completed M&A on a global basis.

We advised on seven of the ten largest closed transactions and six of the top ten announced transactions of 2002.

During the quarter, several important transactions closed, including the $72 billion sale of AT&T Broadband to Comcast, the $2.6 billion sale of Chef America to Nestle.

In Europe we advised kingfisher on their $4.4 billion acquisition of Castarama [ph].

In addition a number of significant transactions were announced during the fourth quarter, including the $15.3 billion sale of Household International to HSBC and the $4.7 billion sale of TRW Automotive to the blackstone group.

Fourth quarter underwriting net revenues of $$224 million were down 34 percent from already weak third quarter levels.

This steep decline in Equities markets during September together with continued lack of investor and CEO confident made for a very challenging Equities environment.

While we saw markets recover towards the -- we saw markets recover towards the end of the quarter -- I'm sorry, to end the quarter flat or slightly up, the more favorable tone during November was not sufficient to offset a very difficult beginning of the quarter.

As with M&A, our equity franchise remains strong.

Goldman Sachs ranked first in worldwide public common stock offerings and second in worldwide IPOs for the calendar year through November.

During the quarter, we underwrote a number of significant transactions including the $700 million IPO for Platinum Ray, the $2.5 billion offering for Zurich Financial and the $1.2 billion offering for Fox Entertainment.

During the fourth quarter our Investment Banking backlog increased slightly but I want to emphasize that we are not taking this as a sign of imminent recovery.

The backlog ended the year down significantly from the end of 2001.

Let me now turn to trading and principle investments which consists of fixed income, currency and commodities or FICC, Equities and Principal Investments.

Trading in Principal Investments produced net revenues of $990 million in the fourth quarter down 34 percent from the prior quarter.

Full year net revenues of $5.2 billion were 17 percent less than 2001 as a significant decline in Equities trading net revenues offset gains in fixed income.

Within Trading and Principal Investments, FICC net revenues of $793 million were down 40 percent from a record third quarter.

A decline in global interest rate products together with declines in mortgages and currencies more than offset increases in global credit businesses and commodities, although not as strong as prior quarters, the fourth quarter capped off a record year for our FICC businesses.

Equities trading faced an extremely difficult operating environment for much of the quarter with lower levels of primary activity and reduced volumes and volatility in the secondary markets.

Net revenues were $204 million down 27 percent from the third quarter as improved net revenues in equity arbitrage and convertibles were more than offset by the decline in equity derivatives.

Principal Investments produced negative net revenues of $7 million, reflecting write-downs on our corporate investment portfolio which largely offset -- which were largely offset by disposition gains in real estate.

The carrying value of our corporate portfolio at the end of the fourth quarter was approximately $1 billion while our real estate portfolio was approximately $750 million.

There's been a lot of commentary lately about our risks, so I thought I would address the issue.

While value at risk or VAR is not the only measure of risk, it is certainly one indication.

Average daily VAR in the fourth quarter was $46 million, essentially unchanged from the third quarter.

And for fiscal 2002, it was $46 million versus $39 million during 2001.

Overall VAR was somewhat higher this year over last reflecting a higher level of opportunity in some of our trading businesses, but it's been relatively flat during the course of 2002.

Going to the next level of detail, while overall VAR has been relatively flat quarter to quarter, the components of our VAR have varied through the year.

As with people and capital, we allocate risk capacity to places where we see opportunity over time.

Now I'll turn to Asset Management and securities services which reported net revenues in the quarter of $1.4 billion down 9 percent from the third quarter.

Fiscal 2002 net revenues were $5.9 building, up 5 percent from 2001.

Within this segment, Asset Management net revenues were essentially flat compared to third quarter levels at $387 million.

Total assets under management increased 4 percent from the prior quarter to $348 billion, driven primarily by net inflows of $10 billion.

Year-over-year, assets under management were roughly flat, with $9 billion of net inflows, a remarkable performance given the 18 percent decline in the S&P 3500, 20 percent decline in the FTSY and 14 percent drop in the NK.

Asset Management achieved record full year net revenues of $1.7 billion.

Securities Services net revenues were $246 million in the fourth quarter, down 8 percent from the third quarter.

This reflected lower net revenues in securities lending and margin lending partially offset by increased revenues from the matchbook.

Commissions declined 11 percent from the third quarter to $742 million.

The decline was caused primarily by lower levels of customer activity particularly on global shares business.

There were also lower overrides from our merchant banking business.

Now I'll turn to expenses.

In a difficult revenue environment, we have continued to take a very disciplined approach to our costs.

Compensation expense in the fourth quarter was $1.2 billion, giving a full year ratio of compensation to net revenue of 48 percent down from 49 percent in 2001 despite the meaningfully weaker revenue environment.

As in previous years, a portion of our compensation was equity based.

In fiscal 2001, substantially all of our non-cash compensation was in the form of options.

This year, we have used roughly equal proportions of restricted stock units and options.

As previously announced, we will expense options beginning in fiscal 2003 but will continue to target compensation at 50 percent of net revenues plus or minus a percent or two.

Noncompensation expense $946 million was 3 percent below the third quarter, reflecting a decline in brokerage and clearing expense and continued discipline in other areas.

Full year noncompensation expense declined 6 percent.

Head count at the end of the fourth quarter was approximately 19,700 people, down 4 percent from the third quarter and 13 percent from the beginning of fiscal 2002.

You will recall that we began this year expecting our head count to decline by a mid single digits percentage.

But as the tough environment persisted, we took further action to size our business appropriately.

Our current expectation is that head count will remain roughly flat as we enter 2003, but this is an area we review continually.

Our tax rate for fiscal 2002 was 35 percent, down from 37.5 percent in 2001.

This reflects our geographic earnings mix combined with ongoing efforts to convert major operating subsidiaries around the world to corporate form as well as an increase in tax-exempt income and domestic tax credits.

During the quarter, the firm repurchased 6.4 billion shares -- 6.4 million shares, making a total of 19.4 million for fiscal 2002.

Including the new share repurchase authorization approved by the Board, we had approximately 19 million shares remaining under our repurchase authorization at the end of fiscal 2002.

In conclusion, 2002 turned out to be a tougher operating environment than any of us expected.

Although we cannot control the business environment we can control how we execute.

While I believe Goldman Sachs has performed well at a difficult point in the cycle, I am conscious that my comments on the outlook may sound very similar to last year's.

Let me say, first, that we are extremely focused on serving our clients through this challenging environment.

We are confident that a recovery in capital markets will see some of the current dialogue translated to higher activity levels.

However, CEOs still need better visibility on corporate earnings in the broad economic outlook before strategic activity can pick up.

In addition, as we are all aware, there are uncertainty related to the global political situation which continue to have a dampening effect on the corporate outlook.

Our current expectation is that we will see a gradual economic recovery during 2003 with some acceleration of activity during the second half of the year.

While we are quite cautious on the environment in the term, we will continue to execute our strategy through these challenging times confident that we are in a long-term growth business with a very strong franchise.

Thank you and now I'd be happy to take your questions.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q & A roster.

Your first question comes from Henry McVeigh of Morgan Stanley.

Good morning.

Good morning, Henry.

Couple of things.

One, thanks for putting the VAR into the release.

You're welcome.

Just second thing, can you on the capital markets, can you just I guess, you know, they obviously came off quite a bit but on the debt and the equity side and I guess what some people are struggling with is, what is -- do you feel like we're now in a more sustainable run rate if the environment stayed flat like this, and what, you know, just in -- you came down several hundred million.

What was the Delta this quarter?

Are you talking about the trading lines?

Yes.

Particularly on the fixed income side.

I don't think we would ever tell you that there is a number that we think is the sustainable revenue number in FICC trading.

You know, the way we would describe it is the third quarter of last year of -- of this year was a great quarter.

It was a record quarter.

You know, substantially out performing everyone.

This quarter was a pretty good quarter, you know, not a great quarter but a pretty good quarter at $800 million of revenues.

Where next quarter comes out is very hard for me to predict.

We have always told you that we don't think these are, you know, stable recurring revenues and I can't predict where they are going to be.

It's hard to say what a baseline is.

And just on the -- but on the VAR, are you comfortable -- if you look at the interest rate you were up 70 percent from 2001 to 2002.

And I know you reallocate resources.

Do you think you'll continue to have that type of focus?

It depends on what the environment's like in 2003.

Obviously, this was a pretty good environment for, you know, taking risk, having to do with interest rates.

Our customers wanted to do a lot of trading around interest rates so there were a lot of opportunities there.

Again, it's very hard for me to predict if that's what the situation is going to be in 2003.

If it is, then we would be comfortable taking similar levels of risk.

And just on the occupancy side, I know you had talked about this coming down, this quarter and last quarter I think you both had kind of one timers in there.

Can you give us some clarity?

We had as we mentioned the one-time charge in connection with our New Jersey facility last quarter.

A few small write-offs of space during this quarter which were roughly the equivalent of that one-time charge last quarter.

We, of course, included those within the occupancy charge.

And so that's why I think you see them roughly the same.

And so going forward, hopefully, most of that's been done in terms of the write-offs?

Uhm, you know, for now, the answer is yes.

You know, we are very conscious of our space.

We are very conscious of not being in a position where we, you know, get rid of space at the bottom of the market and then get more space at the top of the market.

So, you know, as we sit here now, we're comfortable with where we are.

Right.

And just, you commented on the options saying last year, you know, heavy use of options, this year much more balanced.

Yes.

Included in that number, you -- it was 41 points I assume, is some element of severance?

Yes, that's correct.

That is within our comp expense.

Okay.

Good enough.

And just outlook on tax rate for '03?

Again, you know, we told you when we went public that we expected those numbers to trend down as we were able to restructure the company to, you know, more corporate form.

It has happened again as I sit here today I have no reason to believe it's going to be anything other than where it is now, 35 percent.

Okay.

All right.

Good enough.

Thank you.

You're welcome.

Your next question comes from Guy Moskowsky of Salomon Smith Barney.

Good morning, David.

Good morning, Guy.

Can you give us a little bit more color on backlog you talked about it relative to a year ago.

Can you give us any sense relative to how it looks maybe 3 months ago maybe on a key product or asset class basis?

Yeah.

We don't disclose the breakdown, Guy.

But I think I mentioned it's actually up slightly from where it was at the end of the third quarter.

But I emphasized the word "slightly."

And know, you should not take that to mean that there is any imminent recovery.

You know, if anything, you know, the Investment Banking business feels kind of, you know, the same.

Very, very difficult business.

Corporate CEOs very hesitant to do strategic transactions by and large equity markets still pretty difficult.

Yeah.

Fair enough.

Uhm, I appreciate also your comments about the unpredictability of FICC and other trading revenues.

But that being said, can you give us a sense for the degree to which you think seasonality impacted those lines relative to last quarter?

Uhm... you know, I -- I -- I heard some of the comments my colleague made, and I think to some extent I agree with him that, you know, if you look back historically, you will find that some of the trading revenues tend to be lower in the fourth quarter.

I think that was part of it.

And I think part of it was our performance.

Our performance both in the exceptional third quarter and the not as good fourth quarter.

I'd also like to just revisit the occupancy cost issue, given that there's been this announcement in the last couple of days that you are going to be keeping more of the Equities division in New York, does that not occasion some further need to sublet says in.

No.

That just means we are going to move different people.

I see.

Then finally, I know that you answered a question with respect to this to some extent with Henry, and maybe I missed some of the answer.

But have you commented on the mix of stock versus cash comp this year versus last year?

We commented on the mixes of stock and options within the equity component and that's going to be roughly 50/50.

Right.

And how about the equity component versus the cash component?

Can you give us any sense there?

Yeah.

In -- in keeping, I think, with the current environment of the focus on -- of, you know, making sure senior people are aligned with shareholders, we slightly -- we slightly increased the percentage of equity at the most senior levels of the firm.

But it did not have a dramatic effect.

But it was really done more, as I said, to, you know, in the current environment of aligning shareholders and employees, especially senior management.

Terrific.

Thanks very much.

You're welcome.

Your next question comes from Mark Constant.

Good morning, guys. couple of things.

One, could you elaborate a little bit on the continued weakness in equity trading?

I know volumes haven't been great.

Volatility is down.

There may be a seasonality factor there and certainly hasn't been much issuance.

But, you know, exchange volumes certainly weren't that awful.

Market direction was at least neutral.

I'm wondering is there a lost ratio storage, is there more customer risk trading?

Is there a real reason you can point to for share losses versus reported exchange volumes, that type of think?

I think it is solely a question of lack of activity.

There was --

Primary or secondary?

Well, they go together.

Primary activity, the lack of primary activity as well as secondary volumes just causes there to be a lack of trading activity, a lack of trading opportunities.

There aren't many clients who want to do things.

There aren't things to hedge.

And so there's just very, very low activity levels across the board in virtually all of the Equities trading businesses.

And it would primarily be the most significant culprit for that sort of loss of share, if you will, also versus posted exchange volumes?

I'm sorry, would what be?

Would priamary, the lack of new issuance activity -- people are obviously trade but it seems like they are trading less than in the aggregate, you know what I mean?

That to a large extent helps drive corporate activity.

On the banking side, was there anything in terms of sort of the timing of revenue recognition either 3Q to 4Q or this quarter into next that was at all similar to, you know, what you had last year in '01 from the second to third quarter where it kind of pushed down the second quarter and up the third?

Was there any transactions right before or after?

No.

I think the fourth quarter really just reflects continuing weakness in the Investment Banking business, not ours, in the total investment banking business.

Lastly, just on the -- on your comments about the tax rate, should I conclude from those answers to Henry that in assets you have now sort of realized the vast majority of what you had previously talked about trying to drive that number down, or, you know, should we be looking at any of the tax credits or tax-exempt income as being --

No.

We are kind of where we are going to be.

Okay, thanks.

You're welcome

Your next question comes from Michael Freudenstein of J.P. Morgan.

Yes, hi, David.

Hi, Michael.

Just wanted to -- and I realize this is a difficult question, but I wanted to try to get some sense of how your size today -- obviously, we have had some -- across street, you have had some reduction in employment levels trying to sort of anticipate the right level for activity heading into '03.

And I guess I'm just trying to get a sense of, you know, where you're sized today.

Are you assuming current market conditions continue?

Are you assuming some improvement?

And then within that you know, what are you thinking about in terms of what kind of returns are achievable if conditions stay like this begin how you're sized?

You know, it's a very good question, and it's one of the most difficult questions to answer because what we try to do is balance current profitability and current returns versus the strength of the franchise for what we anticipate will be the business, you know, 12 to 18 months out, because we don't want to be in the mode of constantly hiring people, firing people, hiring people, firing people.

It's very painful to fire people.

And, you know, I think as I mentioned, our outlook for the environment is that it will, you know, get somewhat better through next year, picking up at the end of next year, and so when we look 12 to 18 months out, and we look at our size today, we say, this seems like we have the right size.

If the business environment stayed exactly as it is today for the next two years we're too big and we know that.

It's not what we anticipate, but we will continue to watch it during the course of the year as we did last year.

And if we're wrong and things are worse than we think they are going to be, then we would take whatever action we need to take.

I appreciate that.

And I guess my question is really sort of around very of improvement because -- and please correct me if I'm wrong here, but if I tried to normalize your comp and benefits ratio which obviously has this fourth quarter benefit, it seems like your ROE would be something more in the high single digits range, you know, and I'm just trying to get a sense then on a run rate into next year, you know, what kind of velocity pickup would you think would be reasonable?

It seems to me as far as of the first six months of next year, there's a lot of information out there already vis-a-vis the backlog.

I agree it's one of the things I said.

We are very cautious about the near term.

But if we started to see an improvement in the business and deal volume picking up even if we didn't see revenues picking up right away, you know, that would give us a whole lot more comfort about being right-sized.

But you're not seeing that right now?

Not right now.

Okay.

Thank you.

You're welcome.

Your next question comes from Robert of Banc of America Securities.

Hi, David.

I was wondering if you could amplify on your outlook comments a little bit.

You had mentioned gradual economic improvement expected second half weighted next year.

As you budget out the revenue, what areas are you looking for maybe a decline in revenue versus, you know, where you are expecting acceleration?

Well, we don't really predict revenue.

I know -- you'll never hear me tell you what we think our revenues are going to be next quarter or next year.

But, you know, I think that pretty much across -- what I said really goes pretty much across the board, that environmentally we think that the business environment, the economic environment, it's going to get slowly better throughout next year and hopefully pick up towards the end of next year.

Okay.

Also, saw a comment of yours in the press about having to do with the research settlement and I think it said that you had said we are adequately provisioned for what we know now.

I was wondering, do you have a reserve set up?

We have legal reserves set up for whatever potential liabilities we think we might have.

Any indication on magnitude or....

No.

Okay. -- magnitude or....

No.

Okay.

Just lastly, wondering if you could just maybe give some commentary on when you start to think about sort of repegging the comp-to-net revenue guidance you made.

You reiterated the 50 percent plus or minus one or two percent.

Yup.

But at what point do you get to the point where maybe the head count reductions stop and you decide to repeg that lower?

Uhm....

What has to happen?

I'm not sure how to answer that question.

I mean, right now, we foresee -- you know, when we look out into the future, we foresee us, you know, staying within that bent, 50 percent plus or minus a percent or two.

I don't actually see that changing anytime in the near future.

Okay.

Great.

And just lastly, could you comment on your appetite for expanding your clearing business?

If any profitable opportunity to expand any of our businesses arose, we would take advantage of it.

And if it didn't, we wouldn't.

Thank you.

You're welcome.

Your next question comes from Glen Shore of Deutsche Banc.

Hi, Dave.

Just a couple of cleanups left.

Curious, what were total -- if you're predict head count hopefully flat for next year, if things start improving, just curious what severance costs were in '02.

We don't break out and disclose our severance costs separate lit.

But, you know, we did have 13 percent reduction in our head count and so there were, you know, reasonable severance costs within our compensation line.

That goes away.

Okay.

How about average price on the 6.4 million shares bought back?

I can have someone call you, I actually don't know that offhand.

No problem.

And one more.

Composition of Asset Management flows, the $10 billion... by maybe asset class or product just curious where you're getting the flows in.

Well, you -- you can sketch some of that actually in the press release this quarter at the very end, we put in both the flows as well as what the change in mix of our assets is.

So we didn't put in the flows by category.

You can get some of that by looking at t and you see going quarter to quarter that equity assets were up and money market assets were up.

So that kind of gives you I think some guidance on where it came from.

Okay.

Half out of three.

Not a problem.

Thanks, Dave.

Your next question comes from Riley Tierney of Fox-Pitt Kelton.

Hi, David.

Hi, Riley.

I just want to visit this topic once more about the equity trading revenue in the FICC trading revenue for the quarter.

Sure.

Is there any, you know, say, opportunistic mark-to-market going through these numbers that, you know, I mean, the equity trading number looks so low even versus the fourth quarter of last year in -- in the first quarter of last year when you had very un-- you know, kind of unusual events depressing -- is this the worst quarter for Equities trading revenue ever?

Well, two things, Riley, that you have to remember, and we've talked about that a little bit in the press release.

Some of the change when you look year-over-year is a reclass of revenues.

The Nasdaq business specifically which used to be in trading as we began to do that on a commission basis moved from trading to commissions.

Right.

So that's not apples-to-apples comparing year-over-year.

Comparing last quarter to this -- that is apples to apples and it is really just a very, very continued weaken environment for Equities trading.

Right.

But last year, this year, is not apples to apples.

Okay.

So if -- there is nothing in terms of like any equity derivatives losses or block trading losses going through this or any --

No.

-- kind of uhm --

No.

And the FICC line, is there any kind of credit mark-to-markets or anything like that that --

We -- we -- we mark-to-market all of our positions every day.

So whatever marks there were at the end of last quarter were in there, whatever, you know, things happen this quarter are in this quarter.

So there is nothing that's been built up and we took this quarter.

Everything is mark-to-market every day.

Okay.

Dave, can I ask you one more question?

Sure.

This is a little perspective.

But with regard to you know, uhm, the commentary about, you know, the direction of the business, you know, it's obviously going to be, you know, you're not that optimistic about, you know, an explosion of revenues next year.

Uhm yet you are not talking about you know, significant head count reductions.

Right.

How do we start to think about Goldman Sachs getting back to a, you know, 20 percent ROE?

I mean, what kind of -- I mean, the revenue lift, it seems like, to get to that level just seems so inconceivable at this point, given the business conditions.

Don't -- it seems like the business model needs to change to get back to that level, other than a miraculous recovery in revenues.

Riley, I don't believe -- I don't believe anyone in our industry is this -- in this environment is going to have 20 percent ROE.

I don't think you can cost-cut your way to a 20 percent ROE.

I think we are going to have to see some improvement on the revenue side to get to that level.

And I think what you're seeing Goldman Sachs do and frankly what you're seeing most of our colleagues do is control costs to the extent to keep ourselves in the teens even in a very, very difficult environment.

Okay.

Thanks a lot.

You're welcome.

Your next question comes from Judah of Merrill Lynch.

Hi, David.

How are you?

Hey, Judah.

Couple things.

First, on the FICC trading delta sorry to try one more time but it seems like you have had a quarter in general where credit spreads narrowed sharply and the fact that you would be down would seem to either suggest, you know, much lower proprietary end/or exposure to some of the outsiders of the industries that are experiencing some kind of problem.

Is there any way to give any kind of response to those kind of, you know, questions or points?

Not really.

You know, look, we said that, you know, the areas that declined were, you know, global industry products and mortgages currencies.

It was just, you know, performance that was not as good as it was in the third quarter.

Okay.

And then on the VAR numbers you give, I'm just curious, the diversification effect both on the full year and link quarter basis you're getting an increased diversification benefit.

I'm curious what you think is driving that?

It has to do with the differences in correlations between the different markets.

You know, that's obviously one of the things that we look at closely because we manage the risk for the firm as a whole.

And so you always have to be careful at liking -- at looking at individual risks.

There are times when you can look at an individual risk and think that maybe it's high and you should take some of it off and in fact what you're doing because of offsetting risks somewhere else would be actually increasing the risk to the firm.

And so we are very, very focused on looking at our risk as a whole as we go through things and making sure that we keep that within an acceptable level

And if you are doing any kind of credit swaps -- credit default swaps, does that -- would that show up somewhere in trading or would that be somewhere else?

That would be in trading.

And would that have a bearing on the diversification impact or not?

Sure.

It would?

Sure.

All of our risks would.

Does the volume of credit defaults swaps has it increased markedly enough to explain much of that change?

No.

Okay.

The other question -- I had back on -- I know these are rehashing earlier questions, but on the comp ratio guidance it seems like we're coming off of a year we have a severance level, we have industry compensation expectations being brought down dramatically.

It seems like you're hopeful that revenues are laying a base.

Why wouldn't you be more optimistic in terms of having a lower comp ratio next year?

Couple of things I'd say.

First of all, there are some parts of the industry that are still performing quite well where people are being compensated.

Second of all, it's still a very competitive environment out there you know, we have to compete the, we have to keep our team together and we have to pay people, you know, at or near the top of the industry because we think we have the best people.

And so, uhm, you know, I'm -- I -- I'd like to tell you that I think you could be -- it could be lower but I haven't seen it and I don't really think it's going to happen.

Does the comp ratio for the fixed income business versus the Equities business materially different?

We doesn't disclose that on a business-by-business basis.

Again I would think though that a recovery in Equities and potential erosion in fixed income would actually -- there would be more leverage in comp ratio perhaps on the Equities side.

If we think it's going to be outside of that bounds, I assure you, we'll will -- we will let you know.

But I would just be surprised at this point.

If you face the scenario where your competitors were not, you know, business was starting to recover, competitors were doing a pretty effective job of, you know, lagging comp increases, you would say you would be a follower in terms of potentially lowering that guidance?

Unfortunately --

I mean, in other words, you feel like you are going to be in a position where you are go to have to lead the market up or really be just more -- try to be at the high end --

We pay people what we think they deserve to be paid.

Best I can tell looking at our ratio, we are as if not more disciplined than anybody in the industry and while still keeping together what I think are the best people in the industry.

Okay.

Thank you, David.

You're welcome.

Happy holidays to you.

Thank you

Your next question comes from Michael Lipper of Lipper advisory services.

Good afternoon.

A question on your Asset Management revenues.

Could you indicate what portion of those revenues are subject to (indiscernible) not the current incentive fees are but what proportion do have some incentive contracts?

Michael, I have to be honest, I don't know the answer to that question.

But we can get back to you.

Thank you.

You're welcome.

Happy holiday.

Thanks, you, too.

At this time there are no further questions.

We will now go back to Mr. John Andrews for any closing remarks.

I'd like to thank everybody for calling in.

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Have a happy holiday.

Thank you for participating.

This concludes today's Goldman Sachs quarter earnings conference call.

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