高盛 (GS) 2004 Q4 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 Goldman Sachs fourth quarter 2004 earnings conference call.

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 then the number 1 on you telephone keypad.

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

If you are asking a question during the Q&A time and you are on a hands-free unit or speakerphone, we would like to ask that you use the handset when asking your question.

Also, this call is being recorded today December 16th, 2004.

Thank you.

Mr. Andrews, you may begin your conference, sir.

Thank you, Paul, and good morning.

This is John Andrews, Director of Investor Relations at Goldman Sachs.

I'd like to welcome you to our fourth quarter earnings call and also wish everybody happy holidays.

I'd like to start with a few comments before we turn it over to David.

Today's call, as you may know, could 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 the fiscal year ended 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 transaction backlog.

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

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

Without further ado, I'd like to turn the call over to our Chief Financial Officer, David Viniar.

Thanks, John.

And I'd like to thank all of you for listening today, and I'd also like to take the opportunity to wish everyone happy holidays.

We're pleased with our fourth quarter results, which completed a record year for the Firm.

Quarterly net revenues were $4.6 billion and net earnings were $1.2 billion, or $2.36 per diluted share.

Annualized return on tangible equity in the fourth quarter was 25%.

For the full year net revenues of $20.6 billion were 28% higher than fiscal 2003.

Diluted earnings per share of $8.92 were up 52%.

Return on tangible equity for the year was 25%.

2004 was by any measure a very strong year for Goldman Sachs.

We produced record net revenues, record net earnings and record earnings per share.

Nearly all of our major businesses saw revenue growth and many enjoyed record full-year net revenues.

We believe these results reflect the strength and breadth of our customer franchises, our willingness to deploy capital to capture opportunities and our focus on risk management.

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

Net revenues in Investment Banking were $768 million in the fourth quarter, a 14% decrease from the third quarter.

Full-year net revenues were $3.4 billion, up 24% from fiscal 2003.

Advisory net revenues for the fourth quarter were 414 million, down 8% from the third quarter.

This reflects a decline in completed M&A volume for the industry as well as for Goldman Sachs.

Goldman Sachs once again ranked number 1 in announced and completed M&A on a global basis for calendar 2004 through November.

We also advised on 7 of the 10 largest completed transactions.

During the fourth quarter a number of important transactions closed.

Including Banco Santander's $15.8 billion acquisition of Abby National, the Roush Company's $11.9 billion sale to General Growth Properties and SunTrust's $7 billion acquisition of National Commerce Financial.

Fourth quarter underwriting net revenues of $354 million were down 19% from the third quarter.

Equity underwriting net revenues declined 22% to 169 million, while debt underwriting was down 16% to 185 million.

Global equities markets for the most part rose during the fourth quarter, but pre-election uncertainty, as well as a long and directionless summer slowdown activity kept corporate issuers on the sidelines, particularly in the first part of the quarter.

We remain the leader in underwriting 2004.

Goldman Sachs ranked second in worldwide common stock offerings, equity and equity-related offerings and IPOs for the calendar year through November.

During the fourth quarter, we underwrote a number of significant transactions, including the $934 million IPO of DreamWorks, the $1.3 billion IPO of China Netcom and the Republic of Italy's 7.6 billion euro secondary offering of NL.

The Firm's Investment Banking backlog increased during the fourth quarter and year-over-year.

As I have said in the past, a sustained recovery in Investment Banking activity depends on continued economic growth, market activity and CEO competence.

Equity markets indicate that these have improved in recent weeks and we're especially encouraged by our participation in this improvement.

Let me now turn to Trading and Principal Investments, which consists of fixed income currency and commodities, or FICC, equities and principal investments.

Trading and Principal Investments produced net revenues of $2.9 billion in the fourth quarter, up 7% from prior quarter.

Full-year net revenues were up 28% to 13.3 billion.

Within Trading and Principal Investments, FICC net revenues of $1.5 billion were down 22% from third quarter, as strength in currencies and commodities was offset by weaker performances in interest rate products and credit.

For the full year, FICC generated record net revenues of $7.3 billion, 31% above 2003's then record results.

This is a remarkable performance driven by strength across all of our major businesses.

Credit and commodities saw the greatest year-over-year increases in net revenues followed by currencies and mortgages.

Interest rate products again had a strong performance, was down from a record 2003.

In the equities business, fourth quarter net revenues of $1 billion were up 13% from last quarter as equities trading improved 23% to $370 million and equities commissions were up 8% to 655 million.

The equities trading performance was driven primarily by increased net revenues from principal strategies, partially offset by lower net revenues from our equities products group.

For full year, equities produced net revenues of $4.7 billion, up 9% from fiscal 2003.

The most important driver of this year-over-year net revenue increase was our equities products group.

Turning to risk, average daily value at risk in the fourth quarter was 57 million, down 19% from the third quarter.

This was driven by a reduction in average daily VAR for interest rates, equities and currencies, partially offset by an increase in commodities.

As we have told you in the past, we calibrate our risk based on the opportunities available.

There were fewer opportunities in the fourth quarter leading to lower VAR, but if we see more opportunities in the future you should expect VAR to increase.

Principal Investments produced net revenues of $395 million in the fourth quarter, driven by an unrealized gain of $254 million or 21 cents per share during the quarter on our convertible preferred investment in Sumitomo Mitsui Financial Group.

Principal Investments also benefited from gains of $126 million for other corporate and real estate investments.

For the full year, Principal Investments produced net revenues of $1.3 billion.

The unrealized gain on SMFG was 771 million or 55 cents per share, and we remain very pleased with the performance of this investment.

I also want to highlight our traditional principal investing businesses.

These enjoyed a very strong year generating $561 million of gains and overrides, more than double last year's total.

At quarter end our investment in SMFG was carried at fair value of $2.6 billion, our corporate portfolio had carrying value of $1.3 billion and our real estate portfolio $800 million.

Now I'll turn to Asset Management and Security Services which reported net revenues in the quarter of 934 million, essentially flat compared to the third quarter.

Full-year net revenues were $3.8 billion, up 35% from 2003.

Within this segment, Asset Management net revenues were unchanged in the fourth quarter at $595 million.

Total assets under management increased 6% from the prior quarter to a record $452 billion with net inflows of 9 billion and market appreciation of 17 billion.

For the full year, net revenues were up 38% to a record $2.6 billion and assets under management increased 21%.

Inflows for the full year were $52 billion and were spread across every asset class.

We continue to be very pleased with the performance of our Asset Management business.

Securities Services net revenues were essentially unchanged at $339 million in the fourth quarter.

This was the second best quarter ever and capped off a record full year with $1.3 billion of net revenues.

Our performance reflected continued asset growth, new fund formation, and mandate wins in the hedge fund industry, all of which translated to significantly higher customer balances.

Now I'll turn to expenses.

Compensation expense in the fourth quarter was $1.6 billion giving a full-year ratio of compensation to net revenues of 46.7% up from 46.2% in 2003.

Non-compensation expense of $1.25 billion was 29% higher than third quarter.

This increase was primarily driven by a $62 million expense related to the establishment of the Firm's joint venture in China, a net provision of $40 million for a number of litigation regulatory proceedings, as well as increased charitable contributions and higher levels of business activity.

For the full year, non-compensation expense was up 4% at 4.2 billion.

Th is increase was also driven by the expense related to our investment in China, increased charitable contributions and higher levels of business activity.

Headcount at the end of the fourth quarter was approximately 20,700, up 2% from the third quarter and 6% compared to the end of 2003.

Our effective tax rate for 2004 was 31.8%, down 32.4% -- down from 32.4% in 2003.

This reflects decreased state and local taxes, as well as the effect of various audit settlements.

During the quarter, the Firm repurchased 5.6 million shares making a total of 18.7 million for fiscal 2004 and leaving approximately 6.4 million remaining under the Firm's existing authorization.

Looking back, the environment for many of our businesses change continually throughout the course of the year.

Momentum early in the year in equities markets gave way to many months of lower volumes and volatility with flat to declining prices although we have seen a recovery in recent weeks.

In FICC, rates were still low though rising.

The yield curve remains steep though flattening through the year, and credit spreads were tight.

Commodities experienced an exceptionally volatile environment with dramatic price increases and declines, driving the highest levels of customer activity we have seen in many years.

Currency markets went from being trendless for much of the year to seeing some significant moves in the fourth quarter.

I describe this backdrop in some detail because doing so highlights some important points.

First, as everyone listening knows, it is extremely difficult to make forecasts for the trading environment.

Second, our performance in 2004 reflected both the diversity of our business and our success in navigating through changing conditions.

And third, the strength of our customer franchise was extraordinarily important given the changing environment in 2004.

Of course, we will not always be so successful in taking advantage of opportunities, and we certainly will not always have as favorable an environment for some of our businesses as we did this year.

We also benefited in 2004 from a robust harvesting period in various private investing businesses, as well as the performance of SMFG.

We're proud of our performance, but we know we will not always be able to produce the same results.

Investment Banking activity levels were higher overall this year than in 2003, but the pace of transaction announcements certainly varied through the year.

We saw a recovery in business beginning of the year, but this was followed by slower levels of activity for many months before the pickup in recent weeks.

While we're certainly pleased with our participation in the recent increase in announced transactions, the sustained increase in banking activity in 2005 will require favorable or at least benign markets, continued economic growth, and an increase in CEO and investor confidence.

It goes without saying that our franchise in this business remains critically important to the Firm.

I also want to mention Asset Management and Securities Services with both enjoyed record years.

These are businesses which we have built over many years and we have benefited from strong performances in both.

Asset Management will depend on continued results in our investment strategies, but we're pleased with the breadth of the asset base we've accumulated.

Securities Services is an excellent business in which we're an industry leader.

While we feel that we may be at a near-term peak level of new hedge fund formation, we remain confident in long-term growth trends for this asset class, as well as the strength of our franchise.

In conclusion, our performance in 2004 affirmed our strategy of focusing hard on our clients and capitalizing on opportunities as they arise.

That said, where markets remain uncertain and we know that there is no guarantee of future performance.

We take some comfort from the fact we produced our 2004 results despite a less than optimal environment for many of our businesses.

This together with the quality of our people gives me confidence in the long term future for Goldman Sachs.

Thank you.

And now I'd like to take your questions.

Ladies and gentlemen, as a reminder, press star then the number 1 for any questions or comments.

Our first response comes from Glenn Schorr with UBS.

Thanks very much.

Hey, Dave.

Hey, Glen.

Where to begin.

Let's start on non-comp expenses.

Okay.

Up 19% X the specials of China and legal.

The professional service line seemed big, you mentioned charity and new business.

It seems like a lot.

In other words, if I say, okay, you're not going to have the China JV next quarter and hopefully not the legal, is that the run rate that we're really working with, or is --?

No, I think, Glen, here's what I would say.

There are a whole bunch of things in the fourth quarter.

First of all, as you mentioned, you have China, you have legal reserves, you also had some increased legal fees, some increased auditing fees, the charitable contributions that you mentioned, you know, levels of business activity caused some other increases, expenses somewhat, if you go back certainly to last year you'll see they tend to be a little bit higher in the fourth quarter.

When we look forward, we still think that the run rate of non-comp expenses is likely to be around $1 billion per quarter.

That's all I needed to hear.

Okay.

On the Securities Services side, a couple of things.

One, in this environment, the backdrop you gave was actually pretty good, right?

Equity trading had picked up, customer balances are up, fund formation has been good.

Why would it have not have gone up in a quarter like this?

Well, look, it's always hard to predict that each quarter revenues are going to grow in a business.

It was the second best quarter we've ever had in the business.

Balances are continuing to increase, and that's a business -- you know I'm very hesitant to predict, but that is a business that I just think you'll see continued growth going forward.

Okay.

And then maybe a more positive tone.

The pickup we've seen, even since the quarter ended in M&A and obviously you guys seem to be sold on every deal, how much can you attribute to the macro backdrop being great, meaning Goldman versus industry, and has there been any material change in the corporate confidence side?

You know, look, I'll tell you a couple of things about that.

First, no question over the last 2 to 4 weeks we've seen a pretty dramatic pickup in merger activity.

I'd like to say to you, boy, we really think it's going to happen for the whole year.

We certainly hope it does, but, you know, whether or not that continues is going to depend on whether you see continued economic growth, the markets continuing to be favorable and CEO confidence continuing to be strong, which causes people to look outward rather than inward.

As far as our performance, as you said, we've been involved in virtually every major transaction that's been announced in the last 4 weeks, and there were 4 deals announced today, totaling about $40 billion that we're in the middle of, that is not inconsistent with our performance over the last couple of years.

We've been number 1 in the merger business for about as far back as you can look at.

I think, if anything, that gap is widening not narrowing based on recent performance, and if the markets stay pretty strong I think hopefully we'll take advantage of them.

Great.

Thanks very much.

Our next question comes from Guy Moszkowski with Merrill Lynch.

Good morning.

Good morning, Guy.

Question on the comp ratio for the full year.

Given the current competitiveness in the labor environment, but also given that the business mix seems to be shifting a little bit in favor of M&A, and assuming that that continued through next year, would we expect that the comp ratio would move one way or the other from what it was for the full year this year?

It's very hard to predict.

First of all, I'm not sure if the business mix is or is not shifting.

I think that, you know, maybe we're seeing the M&A business increase.

It doesn't mean we're seeing the FICC business decrease.

I'm not sure we are.

But I don't think that that really has any bearing on necessarily the business mix on the comp ratio.

I think that, you know, it's going to depend on the overall performance of Goldman Sachs, the competitiveness of the industry and all the same factors that we always take into account.

Our goal, if we continue to perform at the top of the market, is to pair people at the top of the market.

That's fair.

The question rally was whether the business mix would influence it much and you seem to be saying probably not that much.

I don't think so.

Can you give us some color on the full-year inflows to the Asset Management business that you were talking about in terms of geography, in other words, the domicile of the clients, offshore versus onshore, and also just the channels.

Can you give us some sense for how that broke down?

Yeah, I think basically, Guy, it's pretty consistent across -- really, around the world and across all the channels.

When you look at U.S., Europe, Asia, and you look at what comes from our private wealth management network, what comes institutionally, to our biggest channels, some from third party, it's pretty consistent.

There's no one that stands out.

And obviously in the press release we broke down which asset classes it came from which, again, you know, other than money markets was very strong across all of them.

I think that's just been a very good starter for us.

Thanks.

That's helpful.

The third one is a little bit more open-ended, but basically, Fannie Mae obviously has run into issues regarding accounting for derivatives and particularly with respect to FAS 133.

The SEC is saying that their method for assessing whether hedge accounting was appropriate were not appropriate because they didn't really conform to -- appropriately to 133.

Can you just remind us how you have interpreted 133 with respect to your derivatives accounting?

Guy, I think -- I think you're asking a question that is a little more detailed than I probably want to get into.

We have a really long conversation about FAS 123.

First of all, most of our businesses are ones where FAS 133 does not really apply, but it's an incredibly complicated standard.

The only thing I would tell you is we are comfortable that where does it apply we have -- which is very small in our business, we have -- we follow it appropriately.

Okay.

That's very helpful.

Thank you.

No problem.

Our next question comes from William Tanona with J.P. Morgan.

Good morning, David.

Good morning, Bill.

In terms of, you know, in the release you guys mentioned that the principal strategies group was actually pretty strong this quarter, and I'm just trying to understand when I look at the equities trading line and compare it both to the second and third quarter where principal strategies, I think, had limited contribution in the first quarter, which had a pretty strong contribution, and try to connect the 2 dots between what might have happened in your core business if principal strategies were strong.

I think the -- well, first of all, we consider principal strategies part of our core business.

As you know it's been an important business at Goldman Sachs for many, many years and so it's part of our core business.

It's not a client facing business, as most of our other businesses are.

And I would tell you that the -- you know, the client facing business in the fourth quarter was, you know, kind of flattish to where it's been the last couple of quarters.

It started to feel better as we got towards the end of the quarter.

But kind of flattish through most of the quarter.

Okay.

That's helpful.

Then lastly, SMFG, obviously that's been a good investment for you guys.

Just want to know again when you can start hedging that and your thoughts about that going forward?

Sure.

The restrictions on the first third of the investment expire in February.

We are basically exploring our options to reduce our risk in that position.

With that being said, as you said, it's been a terrific investment up to now, and we continue to be quite bullish on both the company and the country.

Excellent.

Thank you.

You're welcome.

Next question comes from Chris Mayer with Morgan Stanley.

Good morning, David.

Good morning, Chris.

Just a quick follow-up on the question you just had on the equity trading business.

Can you maybe just help us try and understand what environment needs to take place for us to start seeing, you know, revenue levels in your equity trading business similar to that which we saw -- maybe not quite at the first quarter of this year's levels but something close to that?

Well, I think in some ways, Chris, you just helped me answer the question.

I'm not going to predict we'll be back -- the first quarter levels were quite good, but really what you saw in the first quarter of this year really started, if you think back to the end of last year, and continued through the first quarter of this year, was you had rising markets which really also contributed to lots of activity within the markets.

There were deals being done, people were hedging positions, people were just transacting.

Companies were just transacting a lot, and as in all of our business we've told you the most important thing are activity levels, and activity levels through the end of last year, first quarter of this year, were quite high.

They fell off pretty dramatically in the second and third quarter, started to pick up again in the fourth quarter, and obviously feel a lot better now, but we'll have to wait and see if that continues.

If it does, it should be better.

So what sort of activity level should we be monitoring, if we look at NYC [ph] volumes they were pretty flat on the first quarter versus the fourth quarter, and the VIX [ph] is kind of flat as well.

It's really, I thing if you see more transactions being done, and that's both underwritings as well as merger deals, those tend to lead to lots of activity level.

The other thing you have to look at, and you can't see it by looking at statistics, but just the general tone of the market tends to make institutions want to transact more.

It makes them change portfolios around, hedge portfolios, all things that happen when markets are both active and trending.

Okay.

Then secondly, on the -- just on the VAR, you mentioned that you saw lower opportunities in the quarter and hence pulled back VAR, but can you just maybe help us understand within, you know, the currency VAR and the equity VAR, you know, where we saw a rise in the equity markets and clearly some volatility in the currency business, why you saw lower opportunities in those 2 businesses?

The thing you always have to remember, the VAR we're talking about is the average through the quarter.

Yeah.

And if you think about all of those markets, equity markets were coming out of the summer, still not terribly strong, picked up towards the end, and the same thing with currencies.

Currencies were kind of trendless up until about the last month, and then picked up, and so these are average numbers.

They're not --.

The quarter end may be a bit higher, yeah, excellent.

You'll see that not too long but that is a reasonable assumption.

Good.

And then finally, David, just on the international business, I think one of the themes that came up on the Lehman call yesterday was just the strength of the international business across the board.

Can you just give us some color on what you guys have seen there?

Look, you know, our business kind of was strong throughout the year really across the board, but one of the places where we are concentrating, as you know, is outside the United States, not that we're not concentrating in the United States, but if you look at, you know, just the joint venture in China that we've announced and some of the other initiatives around the world, clearly we think there are tremendous opportunities outside the United States.

Okay.

Can you quantify how much of the revenues came from international this quarter?

Yeah, as we tell you, you know, all the time, it's always a hard thing to measure because, you know, when you do a U.S. offering for a non-U.S. company, where do you count it?

And trading revenues could depend on a specific desk, but generally around 60% of our revenues are in the United States and around 40% outside, and that's been pretty consistent and remains there and it will vary around that number quarter-over-quarter, but that's a pretty good midpoint.

Thanks, David.

You're welcome.

Our next question comes from Mark Constant with Lehman Brothers.

Good morning, David.

Good morning, Mark.

First, was there -- I know last year you essentially eliminated or pretty close to it, the use of stock options in the compensation plan.

Was that the case again this year, and was there any other material change in the mix of cash versus equity?

It was the case this year, and there was no other material change.

Okay.

With respect to the VAR, you know, we've talked on many occasions about responding to market conditions and allocating capital when you're paid for it.

Presuming that there were fewer opportunities in the marketplace, would you normally, having sort of felt, you know, almost in some cases an abundance of opportunities in the past, you know, might we expect that if this kind of environment were to continue you'd do more share repurchase, or was the sort of time period of those fewer opportunities just too short?

Did it have something to do with election anxiety?

Can you just give a little bit of sense of the overall capital management and opportunity outlook?

Sure.

As you said, we would not make capital decisions based on, you know, 2 months of fewer opportunities in the trading business.

That changes quite quickly.

You have to also remember just, for example, we have a principal investing business.

We have some other businesses which really don't appear in VAR, where we might see more opportunities, and so we might shift some resources there, but I actually don't have a view that there's going to be fewer trading opportunities going forward.

I actually think we will see those pick up, you know, we've seen them pick up already and I think we'll continue to see them pick up again.

I think this really was a short-term phenomenon.

We do not mean to imply that we expect our VAR to stay lower than it was through most of the year going forward.

Okay.

And 2 little numbers things, 1, the China expense in market development, was that -- was that all included, I guess, in this quarter?

Or is there a carry-over into the next quarter?

All this quarter.

Okay.

And on the Asset Management side, you had average assets rise again but really flat revenues, particularly in the Asset Management part of Asset Management and Securities Services, implying kind of a lower daily average fee, really the lowest we've seen in 7 or 8 quarters.

Particularly low performance fees?

Is there another explanation for that?

Yeah, you hit it.

Part of it is timing.

You only have -- it's when the fees start kicking in as the assets grow, and part of it was the timing of incentive fees.

It was lower in the quarter than we had in the prior quarters, and that, you know, is based on when funds basically close and when the performance fees vest.

Okay.

But it's not a function of performance itself, but rather the timing of the fee recognition?

No, not in the fourth quarter.

Thanks.

Our next question comes from Richard Strauss with Deutsche Bank.

Yeah, good morning, David.

Good morning, Richard.

You mentioned private equity a couple of times, and in highlighting I'm just wondering, it's always been, excluding Sumitomo, the amount that you've allocated of capital has been usually like high single -- or actually mid to high single digits, and I'm wondering, are you going to be -- do you anticipate targeting a higher percentage going forward?

I'm not sure what you meant, Richard, when you said the amount we've allocated has been --.

Well, if you look at the carrying value of 2.1 billion corporate and real estate as a percentage of your equity --.

Right.

Okay, now I understand.

Look, you know, there have been some pretty good opportunities, you know, we have been very successful in that business, as you know, other than coming out of the bubble where we had made some bad investments in technology companies and we had a bad year and a half there, that business has been a very, very good business for us for a long time, both the revenues it produces, as well as the other opportunities it produces around the Firm have been very important to Goldman Sachs and continue to be.

And so I wouldn't tell you I think we're going to necessarily allocate a bigger percentage of our capital, but that's going to continue to be a large and growing business at Goldman Sachs.

And not to beat a dead horse here, but on the equity, when I look at Lehman's half a billion dollars that they made in equity trading and they kind of trounced your result, and what I'm trying to -- if your client business was flat and you said your principal strategies was good this quarter, I mean, I guess I'm trying to figure out where your definition of "Good" is, because I remember the first quarter where I think your equity trading result was multiples of -- you know, 2 to 3 times of what this quarter was and I believe principal strategies probably had a big role in that.

Since Dinnaker [ph] has left or announced his resignation, we haven't seen that kind of quarter.

Is that group in a rebuilding mode?

Is it kind of on pause for awhile?

Richard, you of all people should know the depth that we have in that business, and that 1 person leaving Goldman Sachs would not really make a material difference.

As you know, we have a long history of, you know, people have left Goldman Sachs.

We have 20,000 people here, and people do leave.

The strength of Goldman Sachs lies in the depth and the breadth of our business as well as the bench that we have in all of our businesses.

And so I would not attribute anything to Dinnaker leaving other than it was his time to go.

That business continues to have quite a number of good people.

As I said, you of all should know that.

We're quite pleased with the performance.

Was it as strong as the record quarter we had in the first quarter?

No.

But was it stronger than we've seen in the second and third quarter?

Yes.

Okay.

Finally, on headcount, what are you projecting at this point for '05?

I think we would -- as we sit here today, I think expectation of increases kind of like what we saw this year would be a reasonable expectation.

Again, you know, that could change depending on how the environment changes during the year, but, you know, as we sit here today that would be a reasonable expectation.

Thanks.

No problem.

Our next question comes from Daniel Goldberg with Bear Stearns.

Good morning, David.

Good morning.

Just following up on that last question in terms of head count for the quarter was up 2%, any particular areas where you were adding?

No, it really was -- it was very well distributed amongst businesses.

On a percentage basis, if you look at the year, we added more outside the United States than in the United States, but you're starting with a smaller base.

So, you know, I think it's really pretty much across the board with a slight emphasis on outside the U.S. versus inside.

Okay.

You talked about the 40 million provision for litigation and regulatory proceedings.

Any specific details or color you can provide there?

No.

We can't.

But, look, the environment remains quite difficult.

Has not gotten better, but, no, I can't give any specifics.

Okay.

And on the cost of power generation line was down significantly quarter-over-quarter.

Any color there, and what can we expect going forward?

Yeah.

I think that was -- that had to do with the reallocation of the purchase price of some of the assets that we bought, which moved some of the expense really from one line to another.

I think you should expect a number of about $100 million per quarter going forward.

Okay.

That's helpful.

Then just lastly, the tax rate for '04 was down.

You mentioned a couple reasons why.

What should we expect for 2005?

Again, it's hard to predict, but I think a, you know, a rate somewhat -- where we were for the year plus or minus, you know, a partial percent is probably a fair assumption.

So where we were plus or minus less than 1% is probably a fair assumption.

Great.

Thank you.

You're welcome.

Ladies and gentlemen, again, for any questions at this time, press star then the number 1 on your telephone keypad.

Our next question comes from James Mitchell with Buckingham Research.

Good morning.

Good morning, Jim.

Quick question on fixed income.

Maybe if we could just get a little more color on FICC on a sequential basis, not absolute numbers, but maybe directionally what was sort of the weakest couple of parts of the business driving it down sequentially?

Thanks.

As I mentioned when I was talking, it was interest rates and credit products were weaker than they had been in the quarter before, so that drove it down a little bit, but, again, you always have to -- when you look at sequential quarter-over-quarter changes, one of the dangers is you have to look at both quarters.

Right.

You can after sequential change because the quarter was weak, or you can have a sequential change because a prior quarter was really strong.

Right.

Third quarter for you guys was very strong.

Right, exactly.

So it was weaker than it had been, but our business in FICC continues to be quite robust.

I guess, you know, did you see energy holding up relatively well with a very strong third quarter?

The commodities business continues to be quite strong, and, you know, you just look at the markets.

There's so much volatility in commodities prices and commodities is more than people just focus on oil prices but it's oil, it's gas, it's power, it's metals.

We again have a very, very broad commodities business and, you know, activity levels there continue to be quite high.

So is it fair to say that most of the other areas were relatively similar with the strong 3Q?

It was just mostly credit and interest rates?

Where you saw sequential declines?

Yeah, those were down, and other areas were flat to up.

Okay.

That's helpful.

Thanks.

You're welcome.

Bye.

Our next question comes from Michael Lipper with Lipper Advisory Services.

Good morning.

Good morning.

You probably have covered this indirectly, but the big change in overrides, was that -- can we have some color on that?

And any thoughts on a structural change that might go forward?

Overrides will be very lumpy.

Overrides are really dependent on when individual positions get sold depending on which funds, and so that is one line that is going to be lumpy.

We'll have a quarter where we'll sell a couple of investments in a fund that's in the override and we'll recognize a reasonably large override, then in a couple of quarters that may not happen.

So I don't see any structural change there, but you should expect that that's just going to be lumpy.

Thank you.

You're welcome.

Our next question comes from Mark Constant with Lehman Brothers.

Hi.

I just wanted to follow up on your response to the cost of power generated.

Is there one particular other line item that sort of took that $50 million this quarter?

Yeah, on --.

Is it in "other," or is it on the depreciation and amortization for the purchase adjustment?

I want to give you the right answer, Mark.

It's within -- it's within the Trading and Principal Investments line item up above.

It's, you know, basically changes from, you know -- it's within the revenues in the Trading and Principal Investments line item.

So it's a really small amount in a big number.

Got it.

That's why you can't see it.

Okay.

It was a 1-time adjustment as we settled up on the plant, and so you should just expect something like $100 million per quarter going forward as a reasonable number there.

Thank you.

Enjoy the holiday.

Thank you.

You, too.

There are no further questions at this time.

I'd now like to turn the call back over to management for any further comments.

Great this is John Andrews.

We'd like to thank you all for calling in today.

This call will be available on replay around 1:00 or 2:00 this afternoon.

The details on the replay access can be found on the press release, which you can get at our website, gs.com.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Again, thank you for participating.

You may now disconnect.