高盛 (GS) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

My name is Paul and I will be your conference facilitator today.

At this time I would like to welcome everyone to the second quarter 2003 Goldman Sachs earnings conference call.

All lines are on mute to prevent any background noise.

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

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

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

Thank you.

Mr. Andrews, you may begin your conference.

Good morning and welcome to the second quarter earnings call for Goldman Sachs.

I'm John Andrews, Director of Investor Relations.

Before we begin, I would like to remind everyone 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 could 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 2002, and Item 5 in our quarter report on Form 10-Q for the first quarter of fiscal 2003.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our investment banking backlog, and you should also read the information on the calculation of non-GAAP financial measures that's posted on the Investor Relations portion of our website, gs.com.

The audio cast is copyrighted material of The Goldman Sachs Group, Inc. and may not be duplicated, reproduced, or rebroadcast without our consent.

I would now like to turn it over to David Viniar, our Chief Financial Officer who would like to review our results.

Thank you.

Thanks, John.

I would like to thank all of you for listening today.

I will give a brief review of our results, and then take your questions.

We are pleased with the second quarter which reflects outstanding results in fixed income currency and commodities, or FICC, and good performances in several other businesses.

Quarterly net revenues were $4 billion, and net earnings were $695 million, or $1.36 per diluted share, up 5% from the first quarter.

Annualized return on average tangible equity for the second quarter was 18.7%.

I will review each of our segments starting with investment banking.

Net revenues in investment banking were $659 million, down 8% from last quarter.

Some areas of the capital markets such as equity- ranked, high yield debt, and mortgage underwriting were more active in the second quarter.

However, overall levels of corporate activity remain very low, particularly global IPOs and M&A.

Advisory net revenues for the second quarter were $258 million, down 23% from the first quarter.

The environment for this business continues to be challenging as evidenced by the continuing low level of announced M&A in the quarter.

However, we are pleased to retain our number one position of both completed and announced global M&A for calendar 2003 to date.

During the second quarter, several important transactions closed on which we were an advisor, including the $60.7 billion acquisition of Pharmacia by Pfizer, and HSBC's $15.3 billion purchase of Household International.

Key announced transactions included Wal-Mart's $1.5 billion sale of McLane Company to Berkshire Hathaway, and Newscorp's $6.6 billion acquisition of a 34% stake in US Electronics, and Concorde EFS's $7 billion acquisition by First Data.

Second quarter underwriting net revenues of $401 million were up 5% from the first quarter.

Goldman Sachs ranked number one in common stock, as well as all equity and equity-related offerings for calendar year 2003 to date.

We were an underwriter for France Telecom's $16.9 billion right's offering, dual trans offering.

During the second quarter our investment banking backlog increased.

The ending of the war in Iraq, together with recent improvements in the equity markets, have led to a slight increase in the level of dialogue with corporate executives.

However, I would caution that we are a long way from being able to declare sustained improvement in business conditions.

Of course, when activity levels do pick up, it will take some time for increased business to reflect in industry revenues, particularly in M&A.

Now let me turn to trading and principle investments which consist of FICC, equities, and principle investments.

Trading and principle investments produced net revenues of $2 billion in the second quarter, down 7% from the first quarter.

Within trading and principle investments, FICC generated net revenues of $1.6 billion, its second highest quarter ever.

Excluding the period of uncertainty during initial stations of the war in Iraq, conditions from most of our FICC businesses remained very favorable.

Interest rates stayed near record lows, credit spreads remained narrow, mortgage refinancing activity was high, and the world currency market saw dramatic moves.

While still having strong performances in our virtually all of our FICC businesses, most areas, except for currencies, saw revenue declines from the record first quarter.

Overall, it is clear that our results benefited once again from the strength and diversity of our FICC franchise.

Equities trading net revenues were $446 million, up 28% from the first quarter, as all major world equity indices reported gains, and activity levels rose somewhat from levels in the first quarter.

Our performance share was driven, primarily, by increased net revenues and equity derivatives.

Turning to risk, average daily value at risk in the second quarter was $59 million, up 11% from the first quarter.

Looking at the components of VAR, average interest rate VAR increased during the quarter, but equity, currency, and commodity VAR all declined.

Principal investments had negative net revenues of $28 million the second quarter.

This number includes an unrealized loss of $113 million, or 7 cents per share on our convertible preferred investment in Sumitomo Mitsui Financial Group.

I want to emphasize that the unrealized loss in our SMFG investment continues to vary widely from day to day.

At a number of points during the second quarter, the unrealized loss would have been significantly greater than it was at quarter end, while if measured today it would be meaningfully less.

At quarter end, our investment in SMFG was carried at fair value of $1.1 billion, which is derived from market data such as SMFG's common stock price and credit spreads, and which incorporates the impact of transfer restrictions, as well as downsize protection on the conversion stock price.

Our corporate portfolio had a carrying value of approximately $1.2 billion and our real estate portfolio approximately $800 million.

Now I will turn to asset management and securities services which reported net revenues in the quarter of $1.3 billion, unchanged from the first quarter.

Within this segment, asset management had net revenues of $404 million, down 11% from the first quarter, primarily reflecting lower incentive income.

Total assets under management was flat at $346 billion.

This reflects market appreciation, as well as positive flows in fixed income and alternative investments, which were largely offset by outflows in our money market business.

In the equity asset class, as was announced a few days ago, net flows were negative as the British coal pension scheme implemented a planned program of diversification among its asset managers resulting in a $6.9 billion outflow.

However, other equity inflows and market appreciation more than offset these outflows, leading to an increase in equity assets during the quarter.

Securities services net revenues were $279 million in the second quarter, up 11% from the first quarter reflecting increased activity levels.

Commissions increased 4% from the first quarter to $635 million.

This was driven by slightly increased activity levels in our global shares business.

Now I will turn to expenses.

Compensation expense in the second quarter was $2 billion, accrued of 50% net revenues.

Noncompensation expense of $921 million was down from last quarter.

When, as you will recall, we had $197 million of expenses related to legal reserves and exiting office space.

In the second quarter there were slight increases in activity-related categories such as brokerage and clearing, and market development.

These were more than offset by declines in professional services and other, occupancy, and depreciation amortization due to the expenses relating to legal reserves and exit costs in the first quarter.

The active two line in the second quarter included a further $36 million of expense related to reductions in our global office space.

Head count at the end of the second quarter was approximately 18,400, down 3% from last quarter and 7% fiscal year to date.

Our tax rate for fiscal 2003 to date was 34%, compared with 35% in the first quarter.

This reflects an increase in tax credits and changes in the firm's geographic earnings mix.

During the quarter, the firm repurchased 3.7 million shares, leaving 12 million under the current board authorization.

The board of directors of Goldman Sachs declared a dividend of 25 cents per share to be paid on August 28, 2003 to common shareholders of record on July 29, 2003.

Following the recent change in the tax treatment of dividends, we determined it was appropriate to increase the dividend from the 12-cent level which we have had since going public.

On June 26th, approximately 51 million shares of common stock related to the company’s IPO and subsequent acquisitions become eligible for sale.

In addition, approximately 11 million employee stock options become exercisable on that date.

Separately, in connection with the firm's ongoing policy of facilitating the orderly entry of shares into the market, up to an additional 5 million shares of common stock may become eligible for sale during the third quarter.

As in prior period, substantially all sale shares are subject to compliance with blackout procedures and volume restrictions.

Overall, we were pleased with our performance in the second quarter.

You will recall, at the end of the last quarter we were awaiting the outcome of geopolitical events beyond the control of any of us.

Since then we have entered the next phase in Iraq, oil prices have declined from their premium highs, a further economic stimulus package has been passed here in the U.S., and global markets have performed more strongly than many expected.

We have been able to benefit from the continued strength of fixed income and currency markets, and we welcome the slightly improved level of activity in equities.

However, I want to remind you that the operating environment for several of our businesses remains tough.

Economic data continue to send mixed signals, and CEO and investor confidence still have a long way to recover fully.

It will be sometime before we can determine whether the improvement is sustained.

I would also reiterate that any revenue impact typically lags improving conditions.

As always, we remain focused on strengthening our franchise, whatever the market conditions.

We retained our leadership in investment banking and continue to deliver strong performance in FICC.

In equities and asset managements we benefited, once again, from the breadth of our platform.

We were more optimistic on the emerging outlook than we were this time last quarter, but have yet to be convinced that a recovery is definitely underway.

That said, we remain very confident in the long term for Goldman Sachs.

Thank you, and now I would like to answer your questions.

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

One moment, please, for your first question.

Your first question is from Guy Muszkowski with Merrill Lynch.

Good morning, Dave.

Good morning, Guy.

First question: Equity trading revenues, as you pointed out, were up quite a bit versus the first quarter.

Sort of a similar trend to what we saw with Lehman, but very much the opposite from what we saw at Morgan Stanley and Bear, Stearns.

Yovare (phonetic) was down, sequentially in equities.

Can you talk about the quarterly progression there in cash versus derivatives?

And how you fared in terms of profitability of block trading and bought deals in the second quarter versus the first?

You asked a lot of questions together, Guy.

I'll try and answer them.

First, I can't comment on our competitors and why some were up and some were down.

For us, what I would tell you is, we just saw somewhat higher activity levels.

As the markets improved, as volumes went up, we saw more of our customers and counterparties wanting to do things they hadn't wanted to do for awhile.

Hedge transactions, new program trades.

Things like that.

We just saw greater activity levels.

As far as mix goes, the increase was lead primarily by an increase in derivatives.

Any comment you can make on the profitability in the second quarter versus the first of the blocks and the bought deals?

No.

We don't really talk about anything that specific.

Okay.

Can I ask a question about your intention to continue to repurchase shares to offset restricted stock and options dilution?

How do you determine the number of shares to buy in any given period, or should we expect that you're, basically, going to be in the market at all times to accomplish this?

Your question is a very good question.

First of all, there is no change in the philosophy.

We continue to plan to buy back the number of shares to offset shares that we use for equity-based compensation.

We are largely in the market most of the time that we are not in blackout periods.

And in varying amounts.

We try to make an estimate of what the share count is going to be.

It's a little hard to do exactly.

That's why you have seen the share count doesn't stay exactly constant.

The number of shares is actually influenced by the price of the shares.

So we can't make an exact estimate, but we make a basic estimate of where we think things are going to be and we buy back the number of shares over the course of the quarter to try and keep that roughly flat.

Do you have guidelines in terms of what kind of coverage of the overall overhang of restricted stock and options that exists?

Or as to how much of your cash flow you want to devote to this, or anything like that?

Again, it's not that big a number of cash.

We have a lot of cash, and so really, it is made to try to keep the share count constant.

We look at it over a period of time where we expect share count is going based on what we have given out already as restricted stock and options and buy back the number of shares to offset that.

And finally, just a clarification question on asset management.

I think you said this, but it was quickly.

Revenues were down 11% and asset management relative to the first quarter, but the assets under management were flat.

Did you refer to performance fees or something, or was there a timing of fee billing issue?

The biggest item -- there were a couple.

The biggest was incentive income and that is a timing question.

It's somewhat seasonal.

We have some incentive income that came in in the first quarter just because that's the way the contract is.

But we don't get the income until we've exceeded a benchmark for a period of time.

That period ended in the first quarter, so some income came in the first quarter there.

Thanks, very much, David.

You're welcome, Guy.

Your next question is from Henry McVey with Morgan Stanley.

Good morning, can you hear me?

Yes, I can, Henry.

Good morning.

First, on the tax rate, you mentioned geographic shift and then you said there were some tax credits.

I guess, can you drill into that?

And then also give us, going forward, are we back closer to 35, or what should we think about there?

I'll answer your second question first.

The expectation right now is that the full year rate will be 34%, that's why we are at 34%.

Geographic mix, really, it's slightly advantageous to have more of your earnings outside of the U.S. than in the U.S., and there was a slight shift there.

And as far as tax credits, it's just certain transactions we've done which led to certain tax credits for the fund.

All of those things combined to lower to about 34%.

But was it Europe or Asia in terms of outside the U.S.?

A little bit of both.

And then just, you said in your dialogue about if you are not optimistic, but more optimistic.

Can you just -- is it tangible -- are you seeing something in terms of the M&A backlog or can you just be a little bit more specific?

If that is the case, are you doing anything in terms of how you are changing your capital allocation between divisions?

Well again, I'll answer your second question first.

The answer is, we're not doing anything to change capital allocation right now.

We continue to see, at least right now, very good opportunities in the trading areas that use the most capital.

That could be different tomorrow.

But right now that is what we see.

I mentioned that investment banking backlog is up, quarter over quarter, from the end of the first quarter to the end of the second quarter.

And there is a slightly more positive tone in the markets.

And you know I am cautious by nature.

There are still not that many signs in the economy that things are -- there is a sustained economic rebound.

So I'm not yet willing to say that things have gotten better or are getting better.

But, it's pretty clear that there is a somewhat more positive tone.

And then, just on the head count, are you comfortable with where you are, or will we see just more of in terms of the trimming you have been doing in past quarters, given you are indicating it could be bottoming on the business?

Best I can tell you now, Henry, is, we are pretty comfortable with where we are.

You actually could conceivably see a slight increase because campus hires will come on in the third quarter.

Not -- we won't go out and do a lot of hiring, but all the campus hires will come on in the third quarter.

And we don't expect anything, substantial change other than that.

Okay.

And then, just a final question.

Just on the overrides, it looks like it's been trending -- I mean, commissions, if you look at versus the past couple of quarters, is there anything that's changed there?

Is it just bumpiness and could bounce back up in the next couple of quarters?

Yeah.

Commissions are up a little bit quarter over quarter, and that's really just because you saw a little bit more volume.

Right.

But on the overrides, you had been as high, I think second quarter a year ago, you were at 948 and then it was 840 and then you really trimmed down into kind of the mid sixes.

That values -- the overrides are within that number.

And overrides were down within it from last year.

Yes, that bounces.

That number is -- could be lumpy in any quarter.

And the commission -- volume levels are still down from where they were last year, which is why commissions are down, as well, but they're up a little bit from where they were in the first quarter.

It's a combination of those things.

Okay.

Thank you.

You're welcome.

Your next question is from Glen Schorr with UBS.

Hi, Dave.

How are you?

Good, Glen.

One clarification point on the equity commentary.

In the text it said Europe was softer.

I thought Europe picked up fairly significantly, actually a little bit better in the cash business relative to the U.S.?

Now, remember, are you talking about the text in the press release?

Correct.

Remember the text in the press release, by requirement, compared last year to this year.

Not quarter over quarter.

Okay.

So sequentially, is it fair to say that your European business participated with the pickup?

In equity trading, yes.

A separate item.

Was there any U.S. dollar weakness benefit, just on a net income basis?

Or does all of that get hedged away?

Yeah, basically, all of that gets hedged away.

Virtually no effect from us on currencies.

Got you.

And I saw in one of the footnotes, Williams Street may be halfway through the quarter, raised about $3 billion.

Any of that put to work?

Is there any more of an update you can give us on activity there?

Yeah.

We did the first funding of Williams Street and we started doing transactions in Williams Street about a month ago.

And we have done -- it's, as I said, this is not a, we are going to be really big in this, in lending, but we have done some transactions.

And that all -- the $3 billion shows up on your balance sheet as debt?

Yes, it does.

And then what happens if Williams Street extends a loan or makes a commitment?

It would largely be in unfunded commitments.

It will be within our contingencies and our footnote.

Okay, super.

Thanks a lot, Dave.

No problem.

Your next question is from Michael Freudenstein with J.P. Morgan.

Good morning, Dave.

Good morning, Michael.

Just on FICC, you've had two record quotas here.

I guess, first quarter highest ever, second quarter, second best quarter ever.

As we start to think about the rest of the year here, can you give us any sense of what your near-term expectations are for that business?

Here is what I will tell you.

At the end of 2001, if you would have asked me, I would have told you it was highly unlikely 2002 would be better.

If you would've asked me at the end of 2002, I would have told you it would be highly unlikely 2003 would be better.

I would have been wrong in each case.

And so, in some ways, I have given up predicting.

We just finished a half a year with about as good an environment if FICC as you can have.

That's not to say it's not going to stay there or get a little bit better.

As you know, the FICC markets probably change more quickly than any of the markets.

The offset to that is, it is a pretty broad business now.

We think of FICC as a business, but it's really not.

You look at the currency business, commodity business, interest rate products, credit products, mortgage products.

It's a very, very broad complex.

There is diversity across the business, but it's extremely hard to predict what's going to happen the rest of the year.

Okay.

You mentioned the backlog, and I know you, generally, are reticent to give any granularity there.

One particular product that has been missing across the industry has been IPOs.

I was wondering if you could give us your own take on the outlook for that market here in the next six months or so?

We don't give granularity, but you can just look at IPO volumes.

They continue to be quite low.

You saw a little bit of a pickup.

I think there were something like 7 IPOs over $100 million done in May, where there had been like 3 the whole year to date.

And I may be a little bit wrong on those numbers, reading them back to you But, saying there is a pickup, given the level where we are, isn't saying much.

IPO volumes are extremely low.

I guess I'm asking more about what you see coming down the pipeline, as opposed to what we have seen already out there.

I guess my comment there would be similar to some of the things that I've said before.

I'm a little more optimistic than I was.

We are seeing a little bit more activity but it's -- I would emphasis the words "a little".

You mentioned, I guess, in terms of the mix of business, is it still pretty much 60/40 domestic versus international?

Yes.

That's a good rough number.

And in terms of your modest increase in optimism, is there any particular geography where you are more optimistic or is it across the board?

Across the board.

And my last question is just, with respect to asset management, as people potentially [INAUDIBLE] stock to reallocate, [INAUDIBLE] reallocate it to equities, the Nasdaq continues.

As you think about your asset management franchise, do you have the same sort of scale in equities that you do in fixed income?

And were there to be a heavy reallocation into equities, and if you were lucky enough to capture that, do you think you would see margin pressure in that business or are you at scale in equities,as well?

In some ways I think just the opposite.

I think it would be a very big benefit to us, because we are kind of at scale now in most of the businesses.

And so, we, basically, built the infrastructure that needs to be built.

We would not need to build more infrastructure.

I think what you would see is that if a lot of assets were reallocated into equities, it would actually help our margins a fair amount.

Thank you.

You're welcome.

Your next question is from Mark Constant with Lehman Brothers.

Good morning, David.

Good morning.

Acknowledging that the text does require you to talk year over year, I think in your oral comments you'd referred to a sequential improvements in equities being, in part, due to a higher derivatives business.

With volatility having declined, should we just, A: Is that correct?

Should we assume that that was then in activity levels, as opposed to benefiting from volatility?

Yes.

We just saw higher levels of activity, more customers wanting to do transactions.

Even in the absence of a lot of corporate activity?

Yes.

As markets started to improve, volumes started to improve, you just saw people starting to come back and want to do things.

You would see more hedging transactions than we had seen for awhile.

More program trades.

In general, activity levels picked up a little.

On the advisory side, I know there is often huge discrepancies between reported volumes and your actual revenues, and fees can vary a lot from transactions, but the sequential dip there was a little more than I would have thought.

Did you book all of Pharmacia this quarter?

I was expecting this question.

The truth is ,what you said at the beginning is it's true.

It's very hard to calculate.

Remember, the Pharmacia deal, the volume of that deal was so big compared to the quarter that it skews a lot of what happened.

I'll just leave it at that.

And to kind of bring together a couple of things that you said, and as they relate to the comment in the release on "considering other factors, as well, with respect to the dividend increase" in addition to the tax change, you had mentioned in your other comments that you still see great opportunities to allocate capital in certain trading businesses.

Was one of the considerations for the dividend increase, perhaps, a cyclical peaking of other demands for capital?

No.

The main factors were the tax increase made it a sensible thing to do.

We haven't increased our dividend since we went public.

Our dividend was significantly lower on a percentage basis than anyone else's in the industry.

We raised it to a point where we are kind of middle of the road.

Well below some of our other competitors.

A little bit above some others, well below the average, But, just hadn't done anything in four years and now that the tax change happened, it made it sensible to move us, somewhere still at the low end, but more towards the average.

Nothing to do with competitiveness or capital [INAUDIBLE] or anything like that?

Not at all.

Yeah, okay.

And if I understood your answer to Guy right, [INAUDIBLE] not influencing at all the share repurchase program?

Correct.

No change in the share repurchase program.

Okay.

Thanks a lot.

You're welcome.

Your next question is from Reilly Tierney with Fox-Pitt, Kelton.

Hi, David.

Hey, Reilly.

I'm just thinking about fixed income.

I know everybody would love to get you to go out on a limb and talk about the sustainability of it.

Maybe it would be more useful if you talked about what should we look for in the market that would be the kind of key drivers that we might be able to observe a continued favorable environment for you?

I think the drivers are what you are seeing now.

Low interest rates, steep yield curve, volatility in currency prices, and a lot of mortgage refinancings.

A lot of activity there.

And volatility and commodity prices.

And movement and credit spreads also would be the other one.

Were there any factors this quarter that -- it seemed like, for example, foreign exchange was pretty strong this quarter Were there any things that were really above normal that helped this quarter be really strong, such as the commodities were in the first quarter?

Normal is a funny word, Reilly, when it comes to FICC.

But I would actually say what you saw this quarter, other than the 3 or 4 weeks when the Warner rack was at its height and you saw, paralysis is too strong a word, but you saw lack of activity as people were trying to figure out what was going on, you saw an environment that was almost the same as last quarter.

Commodity prices declined than went up.

But other than that you saw very similar events.

Low interest rates, DPO curve, mortgage refinancing, currency volatility, credit spreads narrowing.

All of those things were -- I wouldn't say they were normal, but they were like they were the quarter before.

And also the equities trading piece.

Can you give us more color about that, given there were some discrepancies.

Did you see anything in particular among investors?

Certain types of investors, that saw an increase in their particular activity?

Do you think it will be sustainable?

I wouldn't say it was a particular type of investor.

In general, we saw our customers and clients wanting to do more things.

And I think that if the markets continue to be stronger and volumes continue to increase, it is likely that that business will do better.

Okay, thanks a lot.

You're welcome.

Again, ladies and gentlemen, if you do have any questions, press star then the number 1 on your telephone key pad.

Your next question is from Douglas Sipkin with Wachovia.

Yeah, Hi.

Good morning.

Two question.

One: If you could just provide an outlook for sort of a normalized expense run rate for the occupancy line.

I know you guys have, I believe about a 38 million real estate closing charge this quarter.

If you could just provide an outlook for that line.

In addition, I'm just curious, when we think about FICC in this quarter, if you could break down percentage-wise, roughly, how much of that -- the second best quarter ever was like the last three weeks of May.

If you could provide that, that will also be helpful.

We never go through anything other than saying what it was in the quarter.

So we don't do that.

And a normalized occupancy number is -- in our business, as you know, I'm very hesitant to say anything is normalized, because things do move around.

I think if you look at the occupancy line, you take out 100 million from the first quarter, the $36 million from the second quarter, you'll get something close to where we would expect to be running, barring any additional write-offs at this point.

That will get you in the ballpark.

Could you provide just some color on the outlook for potential write-offs, or are you guys comfortable now that the bulk of them have been taken?

Look, we try to be -- I said this before, we try to be very sensible with our space.

We have more space than people are in right now.

But, we are not anxious to get rid of space at the bottom of the market and then get it back at the top of the market.

Right now, we think that we have done what we should do with space, and that all the rest of what we have is either used or will be used in the future.

Terrific.

Thank you very much.

You're welcome.

Your next question is from James Mitchell with Putnam Lovell.

Yeah, hi.

I just want to follow up on the money market issue.

Jut a couple of questions related to that.

When did you see most of the outflows?

Was it in the middle of the quarter, the end of the quarter?

And number two, I guess, are we seeing some stabilization at the end or early this quarter?

And what kind of further pressure do you expect if we do get rate cuts today?

And lastly, and I hate to ask too many questions, where have you been seeing the assets going?

It doesn't look like we saw too much in fixed income, I guess.

Although norm-wise we did see some in equities.

Actually, in some ways it's an easy answer.

It is very seasonal.

You tend to see money market out flows in the second quarter, and it's basically so people can pay their taxes.

They take money out of money markets and pay taxes.

That's where it goes.

It goes to the government.

Okay.

So that's more of the high net worth side?

Yeah.

And it's basic tax payments across the board.

If you go back and look at the second quarter every year you will see money market outflows.

What do you expect in terms of if there are any rate cuts?

Do you have any worries about that, at all, or do you think people have parked their money there and don't care what rates do?

Depends on what happens other places, as well.

If you see a rate cut and continued strength in the equity markets, it's likely people will move some assets from money markets to equities, and that would be a positive.

Yeah, I hear ya.

Okay.

Thanks.

You're welcome.

Your next question is from Jeff Harte with Sandler O'Neill.

Hey, good morning, guys.

Looking at just the investment banking revenues and it's a lumpy market still so it's hard to get a feel on.

Can you give any color as to potential pricing pressures that you are experiencing?

More specifically on underwriting and looking at equity.

I think it would be fair to say, and if you look over the last 20 years in equity underwriting, there has been pressure on margins.

You see underwriting spreads going down slowly, kind of constantly over 20 years.

They there will continue to be pressure there.

I don't think that will change.

But you haven't seen -- outside of what's been going on for 20 years, you haven't seen a pick up, necessarily, in the amount of competitive pressure recently?

No, not really.

Okay, thanks.

You're welcome.

Your next question is from Ron Mandell with GIC.

Hi, David.

Hi, Ron.

Two questions.

One is, I was wondering if you could quantify how much you think the backlog is up?

And then the second is on the timing of asset management fees, are the fees actually ex incentives?

Are they priced previous quarter end, average during the quarter?

A little guidance there would be helpful.

On the first question we don't give any specifics on the backlogs.

We're sorry.

On the incentive fees --

No, the nonincentive.

I'm sorry?

The nonincentive fees on asset management.

Are they priced some quarter end, average?

Prior quarter end, current quarter end?

It's largely on average.

Your best way to figure it out would be on average basis.

The point is that the mix should be richer in the second -- in the third quarter than the second, on average.

So ex incentives, then fees should be up in the third versus the second.

It would depend on what happens to assets in the third quarter.

Of course.

Okay.

Thanks.

You're welcome.

At this time there are no further questions.

Mr. Andrews, are there any further comments?

Yes.

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Ladies and gentlemen, this concludes today's conference call.

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