高盛 (GS) 2005 Q1 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 first quarter 2005 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 one on your 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 speaker phone, we would like to ask that you use the handset when asking your question.

Also, this conference is being recorded today March 17, 2005.

Thank you.

Mr. Andrews, you may begin your conference.

Good morning.

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

I'd like to welcome you to our first quarter earnings call.

Let me briefly read the conference call warning label before we turn it over to David.

Obviously 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 the fiscal year ended November, 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 transactions backlog, and 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 at 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.

With that out of the way let me hand the call over to our CFO, David Viniar.

David?

Thanks, John.

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

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

We're extremely pleased with our first quarter results which included record net revenues, record net earnings, and record earnings per share.

This performance reflects, above all, the strength and breadth of our client franchise.

Net revenues of $6.4 billion were up 40 percent from the fourth quarter and were up 8 percent compared to last year's first quarter.

Net earnings were up 27 percent from the fourth quarter and 17 percent from last year's record first quarter, to $1.5 billion or $2.94 per diluted share.

Annualized return on average tangible equity was 30 percent.

I'll now review each of our businesses beginning with investment banking.

Net revenues in investment banking were $893 million, up 16 percent from the fourth quarter of 2004.

Advisory net revenues were unchanged at $414 million, although completed M&A volume declined 23 percent for the industry.

Our client franchise in investment banking continues to be very strong and we once again ranked number one in announced and completed M&A for our first fiscal quarter.

As you will all have noted, announced M&A was up significantly in the quarter.

We're very pleased with our participation on behalf of our clients in this trend, advising on announced transactions including the $57 billion sale of Gillette to Proctor and Gamble, Nextel's $47 billion merger with Sprint, Johnson and Johnson's $25 billion acquisition of Guidant, Novartis' $8 billion acquisition of Hexal and Eon Labs, News Corp's $7 billion acquisition of the reminder of Fox Entertainment, and Lenovo's $2 billion acquisition of IBM's PC business.

Of the top 10 announced transactions, fiscal year to date, we are advising on seven.

Our franchise continues to be strong across industries and geographies.

First quarter underwriting net revenues of $479 million were up 35 percent from the prior quarter with equity underwriting up 10 percent to $186 million and debt underwriting increasing 58 percent to $293 million.

Equity and equity related underwriting activity declined around 9 percent for the industry and 4 percent for Goldman Sachs during the quarter, where our total -- while our total debt activity actually increased 33 percent versus an industry decline of 3 percent.

This was a record performance for debt underwriting, which reflects, in particular, our strength in high yield and leverage loans.

Overall our underwriting franchise remains very strong.

During the quarter we underwrote a number of significant transactions including Berkshire Hathaway's $3.7 billion senior notes, Las Vegas Sands $800 million IPO and $250 million high yield offering, Texas Genco's $3.6 billion debt financing, and the European Investment Banks's $3 billion global notes offer.

The Firm's investment banking backlog increased during the first quarter.

Let me now turn to trading and principal investments, which consist of fixed income currency and commodities, or FICC , equities and principal investments.

Trading in principal investments produced net revenues of $4.4 billion in the first quarter, up 52 percent from last year's fourth quarter and up 6 percent from last year's very strong first quarter.

Within trading and principal investments, fixed record net revenues of $2.5 billion were up 71 percent from the fourth quarter with all businesses performing well.

Our FICC clients continue to be very active.

Quarter-over-quarter we saw sharply higher net revenues in interest rate products, credit, including distressed investing, and mortgages.

Commodities net revenues were down only slightly from the record fourth quarter.

Currencies net revenues, although also strong, declined.

Although we will of course see variations from quarter-to-quarter, the environment for our FICC businesses, in general, remains robust with high levels of customer activity.

This is critical because many of our best trading opportunities arise because our customers come to us with problems where we have the unique ability to help them find and implement the solution.

Within the equity businesses first quarter net revenues of $1.6 billion were up 51 percent from last quarter, as equities trading more than doubled to $829 million, and equities commissions rose 10 percent to 721 million.

As you know our equities business is very sensitive to global equity markets and customer activity levels.

The vast majority of the increase in equities net revenues reflected a stronger performance from our client focused equities products group, which includes shares, derivatives, and convertibles activity.

We also recorded higher net revenues within principal strategies.

Average daily value at risk in the first quarter was $65 million, up 14 percent from the fourth quarter and down slightly from the full year 2004 average of $67 million.

Principal investments produced net revenues of $344 million in the first quarter.

This number included an unrealized gain of $181 million or $0.12 per share on our convertible preferred investment in Sumitomo Mitsui Financial Group.

As of early February this year, we were able to hedge or convert and sell one third of the common stock underlying our SMFG convertible preferred.

As of today, we have hedged the majority of the free shares and plan to reduce our risks further over time.

Principal investments also benefited from gains and overrides of $163 million from other corporate and real estate investments.

At quarter end our investment in SMFG was carried at fair value of $2.7 billion, our corporate portfolio had a carrying value of $1.3 billion and our real estate portfolio $800 million.

Now I will turn to asset management and securities services, which reported record net revenues in the quarter of $1.1 billion, up 21 percent from the prior quarter.

Within this segment asset management net revenues were up 26 percent to $749 million.

This result reflected increased assets under management as well as incentive fees for strong investment performance.

As we saw last year, incentive fees are seasonally weighted to our first fiscal quarter.

In the quarter our total assets under management increased 7 percent to $482 billion with $27 billion of net inflows from clients across all assets classes, as well as $3 billion of market appreciation.

Year-over-year assets under management were up 17 percent, demonstrating the continued strong growth of our franchise.

Since we began building a multi-product, global asset management business some 10 years ago, we have grown assets from $52 billion of mostly money market and fixed income assets, to $482 billion, across all asset classes and geographies today with almost all of this growth being organic.

Securities services net revenues were a record $380 million in the first quarter, up 12 percent from the prior quarter, as customer balances and securities and margin lending increased.

Now I'll turn to expenses.

Compensation expense in the first quarter was $3.2 billion, accrued at 50 percent of net revenues.

Noncompensation expenses of $1.06 billion included a provision for certain litigation and other regulatory proceedings of $31 million.

Head count at the end of the first quarter was approximately 20,700, essentially flat compared to the end of 2004.

Our tax rate for the first quarter was 29.5 percent, down from 31.8 percent for fiscal 2004, due to an $80 million or $0.16 per share net benefit from various audit settlements.

Excluding the effect of the settlements, our tax rate would have been approximately 33 percent.

During the quarter the Firm purchased 11.5 million shares -- I'm sorry.

The firm repurchased 11.5 million shares, at a total cost of $1.2 billion.

Approximately 35 million shares remain under the Firm's authorization.

I'm sure that our performance this quarter will invite comparisons with our performance one year ago.

We're certainly happy to have improved significantly on what were then record results.

I said then that you should not annualize one quarter's earnings, which is true every quarter in a business that is driven by the market environment as much as ours.

I also said do not underestimate the earnings power of Goldman Sachs.

The strength of our franchise shows in investment banking, one of our most important businesses, which creates revenue opportunities across the Firm.

It also shows in FICC and equities, where customer relationships give rise to opportunities to trade and manage risk on their behalf.

Finally our franchise is evident in two customer businesses which continue to grow steadily, asset management and security services.

Looking forward, we're pleased to note the pickup in corporate activity in recent months, particularly in M&A.

We have long said that if equity market environment is favorable and economic growth continues, there's plenty of desire on the part of companies to use M&A in capital raising as part of their strategy.

If markets remain receptive, we continue to expect investment banking activity to grow gradually over time.

The FICC business has continued to defy predictions of a slowdown in activity.

Let me once again emphasis our breadth, which we believe is unique across five distinct complexes -- interest rates, credit, mortgages, currencies and commodities, all global businesses.

Although the yield curve is flat, interest rates and mortgages have continued to perform well.

Clients have to react to rising as well as falling rates and we have been beneficiaries of the activity that results.

Credit also remains extremely active.

We continue to be cautious about the sustainability of tight credit spreads, but we're pleased with our strength across this enormous asset class.

Commodity markets remain volatile and active and we continue to see clients of all types wanting to engage in hedging and investing, in energy products in particular.

Lastly in currencies, the macro environment continues to generate customer activity, although it tends to be strongest when key currency relationships are moving in clear directions.

As I mentioned earlier, our equities business is very sensitive to market conditions.

We believe that the scale and breadth of our platform, across shares, derivatives, program and algorithmic trading and convertibles positions us very well with the clients in an environment where marginal players are being squeezed hard by changes in the business.

We've also seen some benefit in our secondary business from the increase in corporate activity.

Our securities services franchise is another critical equities market business that positions us very well given the importance of the hedge funds today.

Growth in asset management, as all of you know, will continue to depend on a strong performance record.

In conclusion, as you've heard me say many times before, our businesses do not lend themselves to easy predictions but we're very confident in the strength of our franchise and we'll continue to work very hard in coming quarters to serve our clients and our shareholders.

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

I'd like to remind everyone to ask a question press star then the number one on your telephone keypad at this time.

Again, that's star then number one.

Our first question comes from Glen Schorr with UBS.

Hi, David.

Good morning, Glen.

Quick question.

There has been all kinds of different numbers flying about, maybe you can clarify.

Tomorrow's float weighted S&P re-balancing, can you just approximate size of what that means for Goldman?

Sure.

We actually think, Glen, it's going to have a very minimal effect.

By our calculations we think that the index funds will need to sell about 2.4 million shares, and that's, you know, less than a day's volume, like, you know, somewhere between half and three-quarters of a day's volume.

You already traded 2.7 today.

Yeah, we think it's going to have a very minimal effect.

Great.

And then, share count went up a little bit more than we thought in the first quarter, obviously that has to do with grants, but can you just talk about that in the context of the first quarter’s seasonality, if you will, and then your comments in the K about, maybe managing the equity base a little bit?

Sure.

First of all, I think seasonally you will see it always goes up a little bit in the first quarter, and there's really three components of it.

It's share grants, it's options exercised, and this quarter it's the increase in stock price, which, you know, affects the way you account for options.

So, those are the three things that affect it, but it is, you know, seasonally it tends to happen.

You know, what we said about our equity, and we said it when we announced the buy back, we announced the authorization for 40 million shares a couple months ago, is we're going to continue to use share buy backs to keep our share count relatively constant, to offset the effect of equity that we used in compensation.

We're also going to use it to manage our equity in an appropriate way, which really means that we're going to, you know, if not reduce equity a little bit going forward, certainly slow down the growth as we continue to earn money.

And you know, this is not - you know, because I know the next question will come, this does not mean we don't see very good opportunities to use our capital.

We do see very good opportunities to use our capital, as evidenced by our performance this quarter.

But we've just made so much money over the last few years that it has caused our equity to grow faster than we had anticipated and we can probably do with a little bit less right now.

Gotcha.

Last quick one is can you just, I won't lead the witness, but, revenues went up 1.8 billion from last year, which was an okay quarter.

Full comp ratio, what does that mean for you flexibility-wise for the rest of the year?

Look, we, you know, accrue our comp at 50 percent comped in at revenue until the end of the year, because we have no better estimate than that.

We think we have the best people at Goldman Sachs.

We think they need to be paid appropriately.

It's a very competitive environment, and you know, we luckily continue to produce good revenues so that we can pay our people well.

All the power to you.

Thank you.

Thanks a lot.

Our next question comes from Guy Mizlowski (ph) from Merrill Lynch.

Good morning.

Good morning, Guy.

You mentioned both in the release and a first minutes ago, that the investment banking backlog increased in the quarter.

But I was wondering if you could give us a little bit more color in terms of quantifying that a little bit and maybe talking a little bit about M&A versus equity underwriting versus whatever you might see in fixed income there.

Guy, as you know, we don't quantify it, we don't break it down.

But look, you know, what I will tell you is look at the environment.

Obviously, there has been large increases in announced M&A.

There has been large increases also in announced equity underwritings, and so the environment for those businesses is strong.

And, you know, if credit spreads remain pretty tight, I think that the debt markets will stay pretty robust.

Okay.

Fair enough.

I had to try.

Okay.

I was wondering if you could give us some sense of any regional shift that you might have seen in the composition of FICC revenues, especially on the fixed income component of that during the quarter?

Not really.

You know, remember, it's hard to really attribute revenues, although we do, because most mini-books within FICC are global books.

I mean, take the currency book, for example.

That gets handed off from one region to the next when regions open up.

So books tend to be pretty global.

There are some businesses that are more specific.

It could also depend on where a customer happens to be in one quarter or another, but I would say overall there has really been no shift in where the revenues come from.

And, you know, overall when we look at Goldman Sachs, we still would tell you that roughly, and you know, there's plus or minus several percent, you know, 40 percent comes from outside the United States.

Okay.

But the question was coming from the fact that it appeared that given the strength that Lehman had in fixed income that they had seen some kicking in of the non-U.S. portion of the business in fixed income and that that had helped cushion, at least some slowing of the growth on the U.S. side, and that with Bear Stearns, their fixed income revenues were flattish and at least part of the difference was the international.

So I was wondering if that was something that had made a difference in the quarter.

I would actually tell you our business was pretty strong around the global.

Okay.

Switching to the equity side, quickly, equity commissions were up quite strongly, 10 percent, I guess, year-over-year.

Certainly much better than what we've seen with the peer group.

In the context of some pricing pressure there obviously, can you comment on why you seem to be doing a little bit better there?

You know, we've talked to you a little bit about what we've done in equities and how we have tried to expand that business to make sure that we are able to offer the services that all of our clients want.

We are able to offer the low-touch, high-volume service that many of our clients want, where our hopefully increased volume will make up for decreased spreads.

But we are also able to offer the high-touch, low-volume, you know, higher-margin business.

And I think we're a little bit ahead of the curve and somewhat unique in being able to offer the breadth of products we that can offer and I think that's leading to us, you know, hopefully, some share consolidating.

That's helpful.

One more question, if I might.

You mentioned that in securities servicing, the driver of the growth was largely just an increase, I guess, in financing balances.

But was there some meaningful component as well of an improvement in the spread that you earn on that financing, given the rate environment?

No.

The spreads have stayed roughly the same.

Really.

Okay, that's very helpful.

Thank you, David.

You're welcome

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

Morgan Securities.

Hey, David.

Good morning, Bill.

You guys obviously had a very strong quarter on the equities trading side, and I was wondering if you could give us a sense as to, you know, how much of that delta might have come from principal strategies and how much might have come from just overall increase in client activity.

Sure.

Actually, very little of the delta came from principal strategies.

Principal strategies had a good quarter, but they had a good quarter in the fourth quarter of last year as well.

And so, very little of the delta was from the principal strategies.

Most of it was from the increase in customer activity.

Interesting.

Okay, thanks.

You're welcome.

And then in terms of SMFG, I mean, how should we be thinking about that hedge?

Is that something that you guys are doing on like a delta-neutral basis, or are you just protecting your downside and we still could see possible upside from that third?

Well, I mean, I, I think we -- we are largely hedging out all of the risk there, so both upside and downside on the third.

We still will have a very large position, you know, two thirds of that position is still quite large.

And as I've mentioned, you know, while we wanted to reduce the risk somewhat just given the overall size of the position, we continue to be, you know, very bullish on Japan, we continue to think extremely highly of Sumitomo.

And so, you know, nothing on our view has changed, it just was a very big position.

So being able to hedge out, you know, a third of it, we think, well it's just prudent.

Great.

And then just lastly, in terms of non-comp expenses, you know, we obviously saw some shuffling around of expenses quarter-to-quarter there.

Just wanted to get your thoughts, overall, how we should be thinking about the non-comp side.

Right.

Sure.

I think we told you then, the last quarter, there were a lot of unusual items in there.

We said that, you know, you should expect a number of about $1 billion plus or minus some, probably plus a little bit going forward.

And if you look at this quarter and if you take out the legal reserve, it was 1 billion 30 million, 1 billion 25 million, even in a quarter where there was lots of activity level.

And so, you know, if activity level continues to go at this pace, my guess is that will drift up a little just because of things like brokerage and clearance and things like that, which are good things.

I mean, I hope those expenses go up.

But other than that, we intend to keep that at around a billion, you know, plus or minus a little bit.

Great.

Thanks, David.

You're welcome.

Next question comes from Chris Myers (ph) with Morgan Stanley.

Good morning, David.

Good morning, Chris.

David, just, you know, one of the levers you guys have this year just from a P&L standpoint is the depressed margins you had in investment banking in '04.

I wondered if you could just talk a little bit about whether you saw some improvement in the margin in Q1.

And I know it's tough to do it on a one quarter base.

Right.

Well, a couple of things I'd say there.

First of all, activity levels in investment banking are higher.

You know, you saw improvement there.

You've seen, you know, you just read the papers, you can see M&A activity pick up, you can see investment equity underwriting pick up.

So clearly activity levels are higher.

If activity levels remain higher, ultimately you will see improvement in margins in investment banking.

You have to be very careful looking at quarterly margins, looking at the, you know, and you'll see it in the 10-Q, because of allocations of compensation during the year which, you know, are based on very, very rough estimates that, as you know, are trued up at the end of the year.

So I don't know if you'll see changes in the margins when we report in the first quarter.

But again, if activity levels continue to increase, margins are going to go up in that business.

Yeah, thanks.

And then secondly, we've had a bit of a wobble here with General Motors yesterday and today on the credit side.

Just help us understand why a widening in credit spreads wouldn't necessarily be bad for the credit trading business, given how big that business is for FICC?

Chris, in some ways, it's similar to the question I keep getting about interest rates.

Why isn't an increase in interest rates going to be bad?

You know, clients need to do things when markets are moving in various directions.

If interest rates are trending up, clients are going to be quite active.

That's going to be good for us.

If credit spreads narrow, that should be good for us.

If credit spreads trend wider over a period of time, there should be a lot of activity in the markets, and that should be good for us.

If there is a big interest rate widening shock, that will probably not be good in the short term.

I think, after the short term, then if things will get re-rated and activity will pick up.

But a short-term shock is never good really for anybody, but trends in any direction are generally helpful for us.

Have you actually seen an increase in the activity in the last, let's say this week, in the credit market?

Those markets have been so active.

And remember, GM's announcements were yesterday, so it's very hard for me to say in the last day I've seen an increase in activity over what we've seen, because they've been so active up to now.

Okay, good, thanks.

You're welcome.

Next question comes from Mark Constant with Lehman Brothers.

Good morning, David.

Good morning, Mark.

You anticipated the opportunities question, of course, on equity capital allocation.

But, when you say less, I mean, do you mean literally less as in net reduction in total common shareholders' equity?

Again, that's hard to say because I don't know, you know, it depends on how much money we make and how much it grows.

And the same thing with share counts.

It's very hard to say it's going to be less because, you know, stock price factors in, a whole bunch of things factor in.

You know, we will certainly use this to slow down the growth, I think, is the more appropriate way to think about it, as opposed to there being less.

And it being potentially less as opposed to definitively?

Is that --?

There will be less at any point in time than there would have been after this, but whether it's going to be less than it is today, I don't know.

Okay.

And, just to follow up on your answer to Chris's question, the -- in particular with your European references to trending, I think you made an exception in one of your newswire interviews today, on the equities side for yesterday in particular, and I think Chris raised the GM issue.

At what point do oil prices or GM or markets like we had yesterday in equities at what point does that kind of good volatility and sort of catalyst for client activity really become kind of the disruptive shock kind of that you alluded to?

I mean, do trends have to be -- can trends truly continue to change directions and you're still feeling, you know, good about the environment, or are we still a ways off from those types of shocks really being disruptive, I guess is what I'm trying to get a sense of?

Let me sever it, because the equity markets are somewhat different.

I think if the equity markets trended down over the next six months, that would not be good for business because, first of all, it would likely mean that growth has slowed, and, you know, our business is, you know, our overall activity levels tend to be tied to levels of economic activity and economic growth, plus a downward trending equity market would likely end up produce less in equity underwriting, less in merger activities.

So I don't think a downward trending equity market would be good.

I think that would separate that from the various FICC markets.

And just from an accounting standpoint on the SMFG hedge, would we see -- should we look for, you know, let's say, SMFG's value goes up on that third that you've now hedged at least partially into the second quarter.

Should we see an offset in equity trading?

Is that -- you'd still see the principal investment gain?

No, it will all be in principal investments.

It will all still be [inaudible]?

So, yeah, it will just be on that line item we will have both the revenue and whatever offset from the hedge.

Okay, and finally I know you don't like to predict actual timing and magnitude of your backlog formally anymore than Final Four picks.

But given the, you know, sort of magnitude of the ramp up on the advisory side in particular, should we have more sort of a timing – a tempering of enthusiasm in terms of transactions that are now in the backlog but still unlikely to close in the particular coming quarter?

First of all, I'll tell you, I'm better at predicting almost anything than Final Four.

So, that's it.

But, I will -- look, it does take a while for M&A deals to close.

You have to be very careful about backlog and revenues.

First of all, as I said, it takes a long time for M&A deals to close.

Second of all, a lot of deals we do, especially on the equity side, never make it into backlog or go in and out of the backlog within a quarter.

Uh-huh.

So, you know, on the M&A side deals that are announced today, you won't see the revenue for, you know, six or so months plus or minus, that is true.

Thank you.

You're welcome.

Our next question comes from Carol Berger (ph) with Krief (ph) Investment.

Hi.

Good morning, Carol.

Good morning.

Two questions.

One on the SMFG.

I thought you said it was a $181 million unrealized gain, and then you said that a third of your position has been hedged, converted and sold.

No, no.

What I said is the 181 million is unrealized.

What I said is that the third of the position was eligible to either be hedged or converted and sold, and we have hedged.

Okay.

Sorry.

Good clarification.

No problem.

Second question.

There seemed to be a fairly large increase in good will and intangibles this quarter.

I guess I just don't understand why it would be so large.

You're correct.

What it was is we announced the closing of the purchase of NEGT, which was basically, I think it was 29 more power plants.

And with that and the true-up of the tangibles from the purchase of Cogentrics, all the power plant businesses, basically there are a lot of intangible assets there and that's what it was.

Thank you.

You're welcome.

Our next question comes from Daniel Goldberg with Bear Stearns.

Good morning, David.

Good morning.

Can you just talk a little bit about the asset management business.

I guess during the quarter you saw an annualized organic growth rate of about 24 percent.

What are you guys doing there that might be different from some of your peers in terms of growing those assets?

Look, you know, we took in -- net sales were $27 billion in the quarter, and that's one of the reasons why, with all our businesses, I tell you be careful of annualizing.

That would imply over $100 billion of asset sales.

And you’ll never hear me say that’s what we’re going to do.

It would be great, but, you know, I wouldn't say that.

I think the growth, which has been quite good, comes really from two things.

One is the strength of our franchise and our ability to get in to people, to see them, to have all the doors open.

And the second, that you need once you have the first, is performance.

And the performance of our funds, you know, the risk management that we have in there which is, you know, like what we have everywhere else at Goldman Sachs, has worked pretty well, and so the performance has been pretty good.

And I think those two things combined is what has allowed us to grow assets a lot.

Okay, great.

The value at risk.

Any specific changes at period end versus the average?

No, no.

Really you'll see when the Q comes out.

I think you'll see pretty similar.

And then, we heard from some of your competitors have talked about record results within their prime brokers business and others talking about just significant growth.

Can you talk a little bit about what you're seeing within prime brokerage and if there is any pressure in terms of competition or pricing?

Sure.

I mean, we had record results.

The business continues to be a great business for Goldman Sachs.

We're, you know, one of the two firms that are pretty dominant in this business.

There are firms trying to get into that business.

There have been firms trying to get into that business for a very long time.

It's one of the businesses we're in that does have reasonable barriers to entry.

It costs a lot to build the technology to get into that business.

We have done it.

We have both the technology and the intellectual capital, and the relationships to be good at that business, and it's hard for people to break into it.

I can't tell you nobody will.

I know that people will try that will always put pressure on spreads, it always does, but we continue to be a leader in the business with something that our clients want.

So it enables us to keep spreads relatively constant, although with some pressure on them.

Okay.

Great.

Thank you.

You're welcome.

Again, ladies and gentlemen, press star then the number one for any questions at this time.

Our next response comes from James Mitchell with Buckingham Research.

Yeah, hi guys.

Most of the my questions were answered.

Just a quick follow-up on the equity trading.

I think you had said that sequentially what drove the doubling of equity trading was not principal or principal strategies but more just customer flow.

Is that right?

That's correct.

Was that mostly customer flow in derivatives or is there another product set I'm not thinking about?

A, you are correct with your first statement, that is what I said.

And the biggest share was in derivatives.

That, that was really what drove it.

Although, somewhat in shares and other places, structured products, but derivatives was the biggest piece.

Was the major piece, and was that pretty much spread globally or did you see any particular strength in a region?

No globally.

Okay, thanks.

You're welcome.

Next question from Brad Hintz with Sanford C. Bernstein.

Hello, David.

Good morning, Brad.

Good.

Can you talk about the components of your VAR?

Sure.

You know, we do disclose them.

That's one thing we do disclose.

If you look on page 7 of our press release, it gives you the components of VAR, you know, for each -- for this quarter, for last quarter, for the comped quarter last year.

Are you seeing a demand for it going forward in terms of growth of equities?

You know, it's going to vary quarter-over-quarter.

I think over time I would expect our VAR will go up.

When get bigger, the markets get bigger, I would expect our VAR will go up over time.

But, you know, on that trend line you're going to see various segments be higher or lower in various periods depending what the opportunities are.

Let's turn to asset management.

What was the impact of performance fees on your asset management revenues this quarter?

Performance, you know, as we've told you, performance fees are a seasonally weighted very heavily to the first quarter.

And so, you know, if you look at last year's first quarter, you will see it was a record quarter and this year's first quarter is the second best quarter we've ever had.

Performance fees were important.

Not the dominant part.

Performance fees were actually down somewhat from last year's first quarter, although management fees were actually up as the assets have grown.

Okay.

Capital demand.

Where do you see it rising?

Where do you think you can chip away at it as you increase your buy back?

Well, hey look, right now and you can see it in this quarter, we continue to see pretty good opportunities in almost all of our capital using business.

The FICC complex continues to be strong really across the board.

Equities trading, if anything, is picking up and if the market stays strong I think we'll see activity there.

The principal investing businesses have good opportunities around the world both in corporate and real estate.

So I actually don't see demand for capital diminishing at all.

The only thing I see, and what I was trying to say with the share buy back, is that our growth in capital has been so fast it has been even faster than the growth in the demand for capital, but I don't see it diminishing in any one of our businesses right now.

And, thank you, and what's your outlook for equity capital markets?

Are we going to see a pickup in secondaries, a pickup in IPOs?

I should ask you the question.

You know, I think if the equity market stays strong, we will see a pickup in both IPOs and secondary offerings.

If they don't, then we're not going to see a pickup.

Companies want to issue, but they're only going to do it if the markets stay strong.

Right.

Any comments from your equity capital markets people of the impact of getting sort of past the Sarbanes-Oxley period here?

No.

I don't really think so.

I think maybe on the margin people are able to be a little more outward focused rather than inward focused, but I think it's only on the margin.

It really didn't prevent people from doing business.

Thank you, David.

You're welcome.

Next question comes from Michael Lipper with Lipper Advisory Services.

Good morning, and thank you for taking the call.

Looking at the Firm on an overall basis, net interest income declined.

Is that really a mix issue, or has the spread narrowed significantly in any of the businesses?

It's really – and you hit it in the first part of the question.

I think it's really just a mix issue.

And again, you know, we -- the net interest is really part of our business.

We do break it out in the income statement, but I think it's really just a mix issue with, you know, some decline in mortgage inventories probably is the biggest component of that.

Thank you.

You're welcome.

There are no further questions at this time.

Are there any further comments?

This is John Andrews.

I'd like to thank everybody for joining us today.

Obviously you can follow up directly with investor relations with further calls.

And this call will be available on replay around 1 or 2 this afternoon.

You can get the details on our website or in the press release.

Thank you.

Ladies and gentlemen, this concludes today's conference, again thank you for participating.

You may now disconnect.