高盛 (GS) 2004 Q2 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the Goldman Sachs second quarter 2004 earnings conference call.

After the speakers's remarks, there will be a question and answer period. [Operator instructions.] Also, this call is being recorded today, June 22, 2004.

Thank you.

Mr. Andrews, you may begin your conference.

Good morning.

This is John Andrews, Director of Investor Relations, and I would like to welcome you to our second quarter conference call.

We would like to remind everybody that today's call may include forward-looking statements.

These statements represent the firm's belief that 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 those indicated in those forward-looking statements.

For discussion of some of the risks and factors that could affect the firm's future results, please read 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 2003, and Item IV in our quarterly report on Form 10-Q for the first quarter of fiscal 2004.

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

And you should also read the calculation on non-GAAP financial measures that is posted on the Investor Relations portion of our website, gs.com.

This audiocast is copyrighted material of the Goldman Sachs Group, Inc, and may not be duplicated, reproduced, or rebroadcast without consent.

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

David?

Thanks, John, and I'd like to thank all of you for listening today.

I'll give a brief overview of our results and then take your questions.

We are pleased this morning to report our second best quarterly earnings.

Net revenues of $5.5 billion were down 7% from the record first quarter.

Net earnings were $1.2 billion, or $2.31 per diluted share.

Annualized return on tangible equity was 27% for the second quarter and 29% year-to-date.

This quarter, again, demonstrates the broad range of our franchises.

Security services had a record quarter, asset management had its second-best quarter ever, while fixed income currency and commodity, or FICC, posted its third best quarter.

Investment banking continues to recover, reporting its strongest revenue since the third quarter of 2001.

Together, these more than offset a challenging quarter in equities trading.

I will now review each of our businesses, beginning with investment banking.

Net revenues in investment banking were $953 million, up 25% from the first quarter of 2004.

Advisory net revenues of $513 million grew 43% from the first quarter, reflecting, in part, a 37% increase in completed global M&A for the industry.

Goldman Sachs, once again, ranked number one in global announced and completed M&A for the first five months of calendar 2004.

During the second quarter, we advised on a number of significant transactions which closed, including Banc of America's $49 billion acquisition of FleetBoston and the $14 billion sale of Vivendi Universal to GE.

Announced transactions included the 55 billion euro sale of [Viventis] to [Santa Fe], Royal Bank of Scotland's $11 billion purchase of [Charter One], and [Kroll's] 1.8 billion sale to [Marsh McClennan. ]

Second quarter underwriting net revenues of $440 million were up 9% from the prior quarter, with a 23% increase in debt underwriting, somewhat offset by a small decline in equity under writing.

The interest rate and geopolitical uncertainty that has affected equity markets for the last few months contributed to a 10% decline in global equity and equity-related offerings for the industry during the second fiscal quarter; however, debt underwriting volumes were up slightly.

Our underwriting franchise remains very strong.

Calendar year-to-date, we rank second in global common stock and worldwide equity and equity related offerings.

During the quarter, we underwrote a number of significant transactions, including [Jennwork] Financial's $3.5 billion IPO and convertible notes offerings, [Belgicomm's] 3.6 billion euro IPO, and the European Investment Bank's $1 billion global notes offering.

The firm's investment banking backlog was down slightly in the quarter.

The uncertainty in equity markets over the last few months has slowed the pace of M&A announcements and public equity filings.

Although we believe that investment banking's gradual recovery is likely to continue, the current uncertainty may affect near-term transaction volumes unless investor confidence improves.

Let me now turn to trading and principal investments, which consists of FICC, Equities, and Principal Investments.

Trading in principal investments produced net revenues of $3.6 billion in the second quarter, down 12% from the record first quarter of 2004.

Within trading and principal investments, fixed net revenues of $1.9 billion, once again represented an extremely strong performance, albeit down 10% from the record first quarter.

Virtually all of our businesses in FICC, rates, credit, mortgages, currencies, and commodities continued to perform very well.

Despite the lower than expected increase in U.S. interest rates, we continue to benefit from the strength and diversity of our franchise.

Within the equity's business, second quarter net revenues of $1.1 billion were down 35% from last quarter, while equities commissions of $727 million were up slightly from the first quarter, equities trading revenues fell 63% to $351 million.

The largest single driver of the decline in equities trading revenue was principal strategies, or GSPS, our proprietary trading business within equities.

GSPS had a record first quarter but was only slightly positive in the second quarter.

As you know, this is a business where we have been in for a very long time, going back to the days of [Gus Leevee] half a century ago.

Over time, GSPS has generated outstanding results but it will inevitably have an occasional difficult quarter.

Decline in equities trading also included lower net revenues in our client businesses, known as the Equities Products Group, as a result of lower activity levels relative to the first quarter.

Turning to risk, average daily value at risk in the second quarter was $69 million, down slightly from the first quarter.

Principal investments produced net revenues of $657 million in the second quarter.

This result was primarily driven by an unrealized gain of $561 million, or 37 cents per share, on a convertible preferred investment in Sumitomo Mitsui financial group.

Principal investments also benefited from gains from other corporate investments, and the recognition of merchant banking overrides.

At quarter end, our investment in SMFG was carried at fair value of $2.4 billion; our corporate portfolio had a carrying value of $1.1 billion, and our real estate portfolio of $700 million.

Now, I will turn to asset management and security services, which reported net revenues in the quarter of $931 million, down 11% from the first quarter.

Within this segment, asset management had its second best quarter ever, with net revenues of $601 million, down 21% from the first quarter.

While management fees were up from the prior quarter, incentive fees, which, as I mentioned last quarter, are seasonally higher in our first fiscal quarter, were down significantly.

In the second quarter, our total assets under management increases $3 billion to 415 billion.

Inflows in the second quarter were $9 billion, partially offset by market depreciation of $6 billion.

Year-over-year, assets under management were up 20%.

Security services net revenues were a record $330 million in the second quarter, up 17% from the prior quarter.

This reflected increased customer balances.

Now, I will turn to expenses.

Compensation expense in the second quarter was $2.8 billion, accrued at 50% of net revenues.

Noncompensation expenses of $1 billion were flat compared to the first quarter.

However, if you exclude last quarter's real estate and litigation charges of $95 million, noncompensation expenses were up, driven primarily by activity-related expenses such as brokerage and clearing, as well as legal fees.

To anticipate a question, we took no additional legal reserves during the quarter and believe we are adequately reserved for all probable and estimable legal expenses based on what we know today.

Head count at the end of the first quarter was approximately 19 thousand -- I'm sorry, head count at the end of the second quarter was approximately 19,500, up very slightly from the 19,300 at the end of the first quarter, and flat from the end of 2003.

Our tax rate for the first half of fiscal year 2004 was 32.4%, compared to an accrual of 33% at the end of the first quarter.

This is primarily due to a change in our geographic earnings mix.

During the quarter, the firm repurchased 3.7 million shares, leaving our remaining share repurchase authorization at 15.7 million.

As we have previously disclosed, approximately 42 million shares pursuant to IPO awards will be delivered to employees on the 23rd of June.

In addition, approximately 10 million options issued at the time of the IPO to employees will become exercisable.

Substantially, all of the shares available for sale in June will be subject to compliance with blackout procedures and volume restrictions.

This means that as of June 23rd, all of the shares owned from the IPO and all of the shares and options to be delivered pursuant to IPO awards will have become available for sale.

Overall, we were pleased with our second quarter performance, which came at a more challenging trading environment than we saw during the first quarter.

Interest rates rose at the long end of the curve, but even with the somewhat tougher environment, we continue to benefit from the strength and breadth of our FICC franchise.

Of course, markets are now focused on the short end of the curve and the potential for Fed action.

I am not going to try to predict either the market or our revenues, but I will reiterate our view that over time, trend is more important than market direction in driving our FICC businesses.

On the equity side, investor uncertainty led to choppy and ultimately weaker markets in the quarter, which were harder for us and our customers to navigate.

We've always been candid about the fact that our equities business includes a separate proprietary effort, which, over time, has been and I expect will be an excellent business for the firm.

However, we do not expect to generate smooth quarterly results, and as I mentioned, this business was only slightly positive in the second quarter.

Most importantly, of course, we are dependent on the level of customer activity for the significant majority of our equity revenues and this also varies with the environment.

However, we are very confident in the strength of our franchise, and would note that total equities net revenues year-to-date are up 36% versus the same period in 2003.

Of course, if markets continue to gyrate and investor confidence is challenged, it will affect our business, too.

Investment banking continued its gradual recovery, but I want to caution you that growth here can only follow corporate activity levels, and experience tells us that these, in turn, depend on equity markets and continued GDP growth.

That said, we take comfort from our continued leadership position in the key, high margin products.

Asset management continues its growth, and security services turned in a record performance.

In conclusion, we continue to be pleased with the earnings power of our franchise and confident in our long-term prospects.

Economic growth is continuing around the world and our corporate and investor clients have shown us in 2004 that they are, once again, willing to execute transactions when markets are favorable.

We look forward to assisting them in the months ahead.

Now, I'd like to take the questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star, then the number 1 on your telephone key pad.

Our first response comes from Guy Moszkowski with Merrill Lynch.

Good morning.

Hi, Guy.

Hi.

Can you give us just a little bit more color on what drove the significant decline in the equity principal trading, in the principal strategies group?

Is it, in particular, versus the first quarter, were there large, unrealized gains in the first quarter which just reversed?

Well, let me try as best I can, Guy.

First of all, you have to look at the fact that it is -- that you are looking at a delta.

So the second quarter, as I mentioned, was only slightly positive, which is not great performance for the business.

The first quarter, on the other hand, was a record performance.

So not only was the second quarter a weak quarter, but the delta was bigger than normal.

And what drove it was really a combination of things.

The business includes a lot of different positions across lots of regions and lots of industries, which are sometimes relative-value positions between companies in an industry, different industries, different regions.

And those things can sometimes be right in the long term and wrong in the short-term, which is partially what happened, and sometimes just be wrong in your analytics and take losses and get out of position.

So it was really a broad combination of different positions that went went against us.

Okay.

But how about as to the question of whether a large portion of the first quarter gain was actually, sort of an unrealized mark, a significant portion of which reversed.

Is that a fair characterization or not?

You have to remember our business is really -- I don't really differentiate between unrealized and realized gains.

We are buying and selling securities all the time.

And I would say that, again, it was a combination of some positions that we had had at the end of the first quarter which then didn't do as well, and other positions that is we got during the second quarter that didn't do as well.

No, that's fair.

I mean, the only reason I asked the question is it gives us a sense for the velocity with which they turn over their positions in that group.

I would say, compared to some of our trading businesses, the velocity is slower.

It is a partially an investing business, but compared to something like the principal investment business, it's much faster.

True.

It's somewhere in between.

Okay.

That's helpful, thanks.

You are welcome.

On the FICC side, can you give us some sense for how FICC revenues sort of trended during the month of the quarter?

I'm not asking you for a breakdown by month, but were the the earning rates much different by the end of the quarter than they were early in the quarter in FICC?

Look, you know, Guy, we don't disclose earnings by month or trends during the quarter.

It was a -- what I would tell you about the quarter itself was that it was somewhat more difficult than the first quarter, but the environment is still pretty good.

There is still plenty of activity in the FICC markets.

Okay.

Final question, which is a little bit different.

Given the fact that all of the IPO shares are unlocked, and that you also face ongoing vesting of RSUs and options granted since the IPO, do you foresee increasing the buyback authorization, which is now down to about 15.7 million shares, any time in the next couple of quarters?

I would expect that we will continue to buy back at around the pace we have, and when we get through this authorization, we will probably go back to the board and ask for more.

I don't think anything will change dramatically.

Okay.

That's also very helpful.

Thank you, David.

No problem.

Our next question comes from Glenn Schorr with UBS.

Thanks.

Hey Dave.

Good morning, Glenn.

There's some kind of -- some firms have done this already, and there's some comments recently in the press that you think about reforming the M&A unit.

I don't know if you can comment on that, but just theoretically, was that -- when you consolidated it in, was that a function of activity, and would be -- reforming the unit be a sign of confidence, despite your cautionary comment that there is activity and should grow in line with GDP or more?

I would say that it was probably a comment on activity when we folded the M&A department into the rest of investment banking.

You know, we are always looking at the structure of our various businesses.

We are always reacting to market changes.

In the 24 years that I've been at Goldman Sachs, there have been half a dozen restructurings of investment banking and other businesses, and then Goldman Sachs.

I wouldn't read too much into any of them, other than we are always trying to align ourselves in the best way we can to serve our clients, based on what our clients want at the time.

Got it.

Switching gears, Sumitomo; been a genius call to run naked on that.

At any level do you put a hedge on?

I thank you for your comments.

We never think of anything we do as genius.

But we review all the time, the position, as well as other positions, for whether or not they should be hedged.

All I will tell you is we continue to be bullish on Japan and bullish on Sumitomo itself, and we will continue to reevaluate it at all times.

But there's no restriction on if you felt like it, you couldn't hedge it?

We have certain contractual restrictions on being able to hedge Sumitomo directly, but no restrictions on anything we wanted to do on the sector, or on the country, or on anything like that.

Got it.

And then, final on noncomp expense side.

Your comments are fair on the 95 from last quarter.

Would you consider this general comment on noncomp expenses and growing with activity levels?

In other words, I didn't hear you mention any specific projects or things that you are building out.

In other words, these are good expenses?

Look, yeah.

I mean, actually, some of the expenses that went up, I hope keep going up.

Things like brokerage and clearance are things that go up with volume levels and we would like to see them continue to go up, where our head count, we think it was flat in the quarter.

We have the new hires coming in from universities and business schools over the summer, so it will probably go up a few percent, but we are still very mindful of our expenses and we are watching them closely.

Got it.

And occupancy there's a good number?

A new run rate?

Yeah, I think it's a pretty good number.

Okay, good.

Thanks very much.

You're welcome.

Our next question comes from Richard Strauss with Deutsche Bank.

Okay.

Thank you.

David, just, on the equities here, the [VAR] actually stayed flat, even though the prop effort, I guess, you didn't find the opportunities this quarter that you found last quarter.

And I'm just trying to get a sense of what should we make of that?

Does that mean that you are still out there looking for these opportunities?

I mean, you clearly have exposures there.

I guess I would have thought that VAR would have gone down, given that you didn't do as well this quarter.

Remember, I didn't say we didn't think we had the opportunities in equities.

I said the business didn't do as well.

And we clearly took some of the positions down; others we thought we found some other opportunities that we could take advantage of.

Overall, when you look at the environment -- that business aside, which didn't do so well -- we think that probably there were somewhat, it was a somewhat more difficult environment for trading; we saw somewhat fewer opportunities, but not a lot.

And that, I think, is reflected, kind of, in the results of the VAR.

Mm-hmm.

Okay.

And then when I look at the principal investment portfolio -- not excluding the Sumitomo -- it looks like it went down a few hundred million.

No doubt, you recognized some gains.

Interestingly, the public portfolio didn't go down at all, it was just the private portfolio.

Was that all just, kind of, harvesting gains or was there anything else to that?

It was largely harvesting gains.

Okay.

And then, just finally, with regard to commodities.

I'm sorry, I think you said something earlier about it -- it's the trends that are important versus, and then I missed what you said.

All right.

If you think about most of our FICC businesses, people always -- there's a general view in the markets that with rates going up, FICC businesses will fall off the table.

I mean, that's what we've read a lot about, that interest rates are going to go up and everyone's going to stop making money in FICC.

And my only comment was meant to say that's not necessarily true.

You know, if you go back 15 years ago, you are probably in an environment where people made a lot more money when rates were going down than going up because they had inventories.

And you'd make money on your returns when the rates went down; you wouldn't make money when they went up.

But the businesses are so much more diverse now, and there are so many more different things people do that what's most important is levels of activity and clients being willing to transact.

So would that be true, for instance, in like the oil markets, if volatility remains high, even though the price of oil is not going up any more, it's going down, you could you still recognize similar opportunities?

I mean, by --

Absolutely.

That would be the same in all of the FICC businesses.

If there are trending markets with volatility around a trend, clients tend to transact, and that's good for us.

Right.

Okay.

Well, thank you.

You're welcome.

Our next question comes from Bill Tanona with JP Morgan.

Hey, David.

Good morning, Bill.

Just a quick question on the equities underwriting.

It seems like it was a little bit softer than I would have anticipated and what we have been led to believe, given some of the public data that was out there.

I just want to get your thoughts on that on a sequential basis.

Well, if you looked at -- our equity underwriting revenues were down just a touch, in a quarter, where, I believe, industry-wide equity writing volumes were down.

So I think it's pretty consistent.

Our decline was somewhat less than industry underwriting volumes, which would make sense, given our market share.

Okay.

Maybe I just have some bad data.

I would have thought, given the surgeon IPOs this quarter relative to last quarter, you guys probably would have seen an uptick there on the equity underwriting side.

I think it was pretty much in line.

We we can talk to you offline about the data, but I think it's pretty much in line.

Okay.

And small one in terms of the amortization of IPO awards, is that going away going forward or is there still a small component left of that?

I think you will see there is a tiny component left, but I have a feeling you might see the line disappear because it's so small it's not material to have a separate line.

Okay, and then lastly, in terms of security services, obviously, the big increase there was due to higher average customer client balances?

Right.

I just wanted to get your thoughts in terms of how things might have trended towards the end and was there any type of seasonality here in the second quarter?

No, not really.

There's a little piece of a financing business in there that's relying on dividend season, and that is sometimes a little higher in the second third quarter, but it's a small piece of the business.

You know, sometimes there's a little seasonality to that in the second and third quarter, but that's not a material part of the business.

Great.

Thank you.

You're welcome.

Our next question comes from Jeff Heart with Ambler O'Neill.

Good morning.

Nice quarter.

Thank you.

Looking at the security services segments, kind of the prime brokerage business and any kind of intraquarter trends there.

I mean, a record quarter, was that a decelerating record quarter throughout the quarter, or the kind of leverage levels and activity levels hold up fairly well?

Again, as I mentioned to Guy, we don't really give month by month results or trends during the quarter.

But the one thing I would say, despite the fact that markets have been choppier and certain hedge funds have not performed as well in the second quarter as they did in the first quarter, a lot of this did quite well.

The number of new hedge funds that continued to be formed, the dollars flowing into hedge funds continue to increase.

And if you look around now, it has not slowed at all over the course of the year.

And as that market grows, that business continues to be great business for us.

On the investment banking side, you mentioned the pipeline being down a little bit sequentially.

This is going to become probably awfully touchy, feelly, but from a prepipeline perspective, kind of in conversations with potential issuers and kind of, corporate America on the demand for the financing, I mean, you would expect the recovery in investment banking not to be a neat, linear line up.

Do you, kind of, think that the underlying need, or perceived need, to reach outside of corporations for external financing remains strong, and just kind of the environment we're in?

Yes is the short answer.

I think there is definitely still a need for financing.

I think there is definitely still a need for consolidation.

I think that most of our clients believe that too.

But, you know, whereas -- what you had seen was that, kind of, underlying need was there and then the markets really picked up and all of investor center picked up and you saw a big pick up in investment banking activity.

The need is still there, and all of a sudden, with the concern over interest rates and inflation, people have become more cautious again.

So I think you've seen things trend off a little bit over the last few months, and it will trend back up again, it's just a question of when.

And one more on the principal investing gains.

You mentioned, kind of harvesting opportunities, kind of reducing the size of the portfolio some.

As we've seen some indecision in turn of the overall equity market, are you seeing less exit opportunities?

Again, clearly, if the equity market stayed softer, that would affect it.

But there's still some pretty good opportunities, and what you are seeing now are all those investments that were made and continued to be made after the bubble burst in 2000, so the late 2000, 2001, 2002 investments are now three, four-years old, and about the time to start harvesting some of them.

So I think the harvesting opportunities, because some of the businesses have done quite well, are pretty good.

Okay.

Thanks.

You're welcome.

Our next question comes from Mark Constant with Lehman Brothers.

Hi, David.

Hey, Mark.

You know, and John knows, how sensitive I am to the tenses you use, and I believe I heard you describe the FICC environment as still reasonably active.

It sounded like that was a third quarter referencing comment.

That would be a little bit inconsistent with broader slowdown, seasonal, and/or just sentiment-driven in the equities business.

Is that an accurate observation still in activity levels, and most FICC business are still reasonably robust in the third quarter?

You know I would never comment on a quarter in the middle of a quarter.

Not your results, just activity levels in the marketplace.

I think that the FICC levels of activity, in general, are still pretty good.

Okay.

And a couple of specifics on dates.

The IPO-related option grants, when do those expire actually, as opposed to vesting?

Becoming exercisable, rather.

I believe those expire -- almost all of the options we granted were 10-year options.

So the IPO options should be 2009 options.

Okay.

So five more years.

Okay.

And then also, do I recall -- I thought there was like a two-year on the SMFG convert, there was two-years you couldn't -- you couldn't convert for one or two-years.

The contractual restrictions are that we can -- we are allowed to sell up to 1/3 after two-years, up to 1/3 after three-years, and up to 1/3 after four years.

So that would be a part of what you would consider along with your hedges, etc?

Correct.

And then finally, the subjective question.

We've talked a lot in the past about marginal return opportunities and hurdle rates.

Your comment about expecting to keep peer repurchases at comparable levels to what they've been, does that suggest then, that you see comparable incremental return opportunities in client driven and the proprietary businesses?

Yes.

We continue to see very good opportunities, to continue to earn returns in the 20% range.

Thank you.

You're welcome.

Next question comes from James Mitchell with Buckingham.

Yeah, hi.

Good morning.

Just a couple of nit-picky questions, I guess a lot of mine have been asked and answered.

But on the performance fees, is there any level this quarter at all?

Yeah..

We don't actually break out the number.

Right.

There were some in the second quarter, but it is seasonally weighted to the first quarter.

If our funds perform well, the biggest amount will always be in the first quarter by far --

Right.

-- because a lot of them are calendar-year funds.

Right.

No, fair enough.

But there was some level in the quarter?

Yes.

Okay.

I guess point number two, on depreciation and amortization line, it fell about 14 million sequentially.

Is that a good run rate going forward?

Was there something in the quarter that you wrote off and won't be expecting to depreciate going forward?

No, I think it's a pretty good number.

Okay.

Thanks.

You're welcome.

Again, ladies and gentlemen, as a reminder, press star, then the number 1, if you have any questions.

Our next response comes from Douglas Sipkin with Wachovia.

Yes, good afternoon.

Hi.

Just a quick question -- most of them have been answered already, but I think Guy made a reference to this -- could you just give us some insight as to if there has been dramatic change?

I know you have notably significant amount of FICC businesses, but dramatic change in the performance of some of those businesses over like a 12-month period, i.e., some are down considerably, but obviously, there is a big offset, or has, sort of, the revenue levels been normalized been, give or take 10%, fairly constant over like a 12 to-16 month period?

Well, the first thing I would say is going back, really, over the last probably three-years, every one of the businesses has performed well.

So it's not like one business has been down, another has been up.

Now, you know, there are quarters when one might be better than others, but they've all performed well.

And if you really go back over a 12-month period, what you'd find is that every quarter I would tell you that I couldn't imagine the environment being as good the next quarter, and every quarter it's been as good.

This quarter the environment was still really good; the revenues were down a little bit from the first quarter, but the first quarter was unbelievable.

And it was still, as I said, the third best quarter ever.

So the businesses continue to perform pretty well, the environment continues to be good, and it continues to be good across all the businesses.

Just if I could pick your brain for one more quick second.

I mean, I'm just curious to hear Goldman Sachs's view, obviously, you guys are a significant player in basically all the markets.

I mean, is it a function of the short end of the bond market that's going to drive this change?

Because, like you mentioned, it seems to be that the consensus, there's going to be a notable decline at some point.

Obviously it has not happened yet.

I mean, this quarter, there is a huge move in the bond market.

Is is a function of short rates coming up or are people just thinking about the market the wrong way?

Here's what our economist would say -- and he knows more about this than I do -- he looks out and he says he thinks that the Fed will raise rates 25 basis points next week, and then probably four more times this year, 25 basis points each, at 100 basis points.

That brings the Fed funds rate to 2%.

That's still a pretty low rate.

There's a long way to go before people will be concerned about rates being too high for activity levels to stop.

And so his view is that the Fed's going to raise rates to basically normalize interest rates and bring them into line with where they should be, as opposed to what is an artificially low level that we have now.

And so, it's not, we're not -- that does not make us pessimistic about the FICC businesses.

That tells us they'll do that, growth will continue and activity levels will stay pretty good.

Thanks, that's helpful.

You're welcome.

Our next question comes from Michael Lipper of Lipper Advisory.

Good afternoon.

Hi, Michael.

Hi.

Can we think a little longer term than the quarter, and has there been any change in the firm's outlook as to change in the structure of the marketplace, not only in the U.S. but overseas?

And do you have any active group looking at these changes?

Michael, first of all, we are always happy to think longer term.

That's the way we tend to operate, is thinking for the long term.

When you talk about market structure, there is still a lot of uncertainty about market structure.

It's pretty clear that there's going to continue to be more automation in the markets, but we continue to set ourselves up to be successful, however market structure ends up.

You know, we are able -- one of the things behind the [inaudible] acquisition and the increase in technology at Goldman Sachs, is to make sure that we can service our clients however they want to be serviced, whether it is low volume, high touch, or high volume, low touch, and everything in between, that we can be there for them in the long term however the markets tend to develop and however our clients want to transact.

But at this point, you are not taking a leadership or thought leadership position?

I think we're going to, as I said, we would rather be in a position to be successful however it comes out, because it's still not totally clear to us where things are going to end up.

Okay.

Thank you.

You're welcome.

There are no further questions at this time.

I would now like to turn the conference back over to Mr. Andrews for any further comments.

We would like to thank you all for calling in today.

This call will be available for replay on our website, and the details to get a hold of that replay will be found at the end of our quarterly press release.

Otherwise, thanks for calling in.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect