高盛 (GS) 2005 Q4 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the Goldman Sachs fourth-quarter 2005 earnings conference call.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Also this call is being recorded today, December 15, 2005.

Thank you.

Mr. Andrews, you may begin your conference.

Thank you, Dennis, and good morning.

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

I'd like to welcome you to our fourth-quarter earnings conference call and wish you all a very happy holidays.

Let me start with some standard language.

Today's call may include forward-looking statements.

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

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

For a discussion of some of the risks and factors that could affect the firm's future results, please see the description of certain factors that may affect our business in our current annual report on Form 10-K for our fiscal year ended November 2004.

I would also direct you to read the forward-looking disclaimers in our quarterly press 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 public website, gs.com.

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

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

David?

Thanks, John.

And I would like to thank all of you for listening today and would also like to wish everyone happy holidays.

I'm very pleased to report a record year for Goldman Sachs.

Net revenues were $24.8 billion, net earnings were $5.6 billion and earnings per diluted share were $11.21, all record results.

To put this in context, our earnings per diluted share in the year we went public, 1999, were $5.27, less than half today's.

And even in 2000 they were just $6.35.

Our fourth-quarter net revenues were 6.3 billion; net earnings 1.6 billion; and earnings per diluted share were a record $3.35.

Annualized return on tangible equity was 32% for the fourth quarter and 28% for the full year.

While these are slightly below the returns we achieved in 1999 and 2000, we are pleased to report such strong returns on an equity base which has more than tripled since we went public in 1999.

We believe this performance reflects the breadth and depth of our client relationships and a business environment which was favorable for most of the year.

It also attests to our discipline when it comes to committing capital and managing risk.

As intermediaries, we are continually called on to use our capital on behalf of clients and our performance reflects our success in doing that wisely in 2005.

I'll now review each of our businesses.

Net revenues in Investment Banking were $948 million in the fourth quarter, down 7% from the third quarter.

This decline primarily reflected a 23% drop in debt underwriting.

For the full year, Investment Banking net revenues were $3.7 billion up 9% from fiscal 2004.

Advisory net revenues for the fourth quarter were $546 million essentially unchanged from the third quarter.

Goldman Sachs once again ranked first in announcing completed M&A globally for calendar 2005 through November.

We also advise on six of the ten largest completed transactions.

A number of important transactions closed during the fourth quarter including Procter and Gamble's $57 billion acquisition of Gillette;

Washington Mutual's $6.5 billion acquisition of Providian; and Temasek's acquisition of a stake in China Construction Bank.

We're adviser on a number of important announced transactions including Ford Motor Company's $5.6 billion sale of Hertz and Telephonica's $17.7 billion Sterling acquisition of '02 (ph).

Fourth-quarter underwriting net revenues were $402 million with equity underwriting net revenues up 3% to 205 million and debt underwritings down 23% to 197 million as activity levels particularly in leveraged loans declined from the strong third quarter.

We remain the leader in underwriting in 2005.

Goldman Sachs ranked number one in worldwide equity and equity rated offerings for the calendar year through November.

During the fourth quarter, we underwrote a number of significant transactions including the $2.7 billion IPO for Link Reit in Hong Kong;

Allianz's $2.7 billion sale of shares in Munich Re; and the $478 million IPO for the intercontinental exchange.

The outlook for Investment Banking is more favorable than at anytime in recent years.

The improving global equity markets, strong corporate performance and higher levels of CEO and investor confidence all point to increased levels of the strategic activity by our clients.

Of course all of these circumstances can change very quickly if the business environment changes as we saw in 2001.

However, if economic growth continues, markets remain benign, and confidence holds, we believe our clients will be active and our Investment Banking business will be a beneficiary.

Our Investment Banking backlog increased significantly during the fourth quarter.

I'll now turn to Trading and Principal Investments.

This comprises Fixed Income, Currency and Commodities or FICC;

Equities and Principal Investments.

Net revenues were $4.1 billion in the fourth quarter down 19% from the prior quarter, but full-year net revenues increased 23% to $16.4 billion, a record performance.

FICC net revenues were at $1.85 billion, down 30% from the record third quarter.

Increases in commodities and currencies were more than offset by declines in credit, interest rate products and mortgages.

As is often said, our FICC net revenues varies significantly quarter over quarter, but the annual trends have been much less volatile.

For the full year, FICC generated record net revenues of $8.5 billion, 16% above the prior year.

We've continued to benefit from the depth of our customer franchising FICC (ph), our disciplined approach to capital commitment on behalf of clients, and the geographic and product breadth of many of our businesses.

Equities net revenues for the fourth quarter were $1.4 billion, down 12% from the third quarter.

Equities commissions increased 11% to $800 million reflecting higher volumes and activity levels but Equities trading declined 31% from the third quarter.

The primary driver of the sequential decline in Equities trading was our principal strategies business which performed well but produced lower net revenues compared to the exceptional third quarter.

For the full year, Equities produced record net revenues of $5.7 billion, up 21% or close to $1 billion from fiscal 2004.

The principal driver of this growth continues to be our broad based client business which ranges from high touch capital commitment trades, to a full suite of algorithmic and other electronic trading capabilities to our derivatives business.

Principal strategies also performed very well in 2005.

Turning to RISC, average daily value at RISC in the fourth quarter was 80 million compared to 76 million for the third quarter.

For the full year, average VaR was 70 million, up 4% from 2004.

Let me now turn to principal investments.

Net revenues were $852 million in the fourth quarter capping off a record year.

In the fourth quarter there was an unrealized gain of $723 million or $0.56 per share related to our convertible preferred investment in Sumitomo Mitsui Financial Group.

Principal investments also benefited from gains and overrides of $129 million on other corporate and real estate investments.

For the full year, our principal investments produced record net revenues of $2.2 billion.

The unrealized gain on SMFG was $1.5 billion or $1.06 per share.

Our corporate and real estate investment businesses also enjoyed strong performance in fiscal 2005 with $753 million of net revenues as compared to 561 million in 2004.

At quarter end our investment in SMFG was carried at fair value or $4.1 billion.

As I've mentioned before, we are fully hedged with respect to one-third of our investment in SMFG.

Our corporate portfolio had a carrying value of $1.7 billion and our real estate $700 million.

Asset Management and Securities Services reported fourth-quarter net revenues of $1.2 billion essentially flat compared to the third quarter.

Full-year net revenues were a record $4.7 billion, up 23% from 2004.

Within this segment, Asset Management produced record net revenues of $787 million, up 8% from the third quarter with record assets under management of 532 billion.

For the full year, assets under management increased 18% or $80 billion.

Combined with our strong performance, this increase drove over 16% increase in net revenues to $3 billion for fiscal 2005.

Full year net inflows were $63 billion, up from 2004's 52 billion showing the strong momentum this business has developed.

We are particularly pleased with the breadth of our Asset Management franchise.

We now manage more than $100 billion in each of our main categories of money markets, fixed income and currency, equity and alternative investments.

Together, equity alternative investments are now just over half of total assets under management.

Let me now turn to Securities Services.

Net revenues were $447 million, a 6% decline from the third quarter record reflecting the normal seasonal pattern of the prime brokerage business.

We saw continued growth in customer balances during the quarter.

For the full year, net revenues were $1.8 billion, up 38% from 2004, and up 78% since 2003.

Over many years we have built a strong client franchise in Securities Services.

It's one of the earliest participants in the prime brokerage business.

We were ideally positioned to reap the benefits of hedge fund formation and asset growth by providing our clients with the very highest level of service.

Now let me turn to expenses.

Compensation expense in the fourth quarter was $2.4 billion giving a full-year ratio of compensation to net revenues of 47.2%.

Non-compensation expenses excluding consolidated investments were 1.27 billion, up 11% from the third quarter.

The key drivers were brokerage and clearing, professional fees and higher charitable contributions.

For the full year, non-compensation expenses excluding consolidated investments increased 8% to $4.6 billion.

The primary drivers of the increase were again brokerage and clearing, professional fees and higher charitable contributions.

Headcount at the end of the fourth quarter was approximately 22,400, up 2% from the third quarter and 8% compared to the end of 2004.

Our effective tax rate for the fourth quarter was 34% and for the full year it was 32%, roughly unchanged from 2004.

During the quarter the firm repurchased 20.5 million shares for approximately $2.5 billion.

For the full year, we repurchased 63.7 million shares leaving approximately 43 million remaining under the firm's existing authorization.

This represents a total of $7.1 billion of capital returned to shareholders via the buyback in 2005 reflecting our discipline and focus on managing our business to optimize returns as well as growth.

2005 was an exceptional year for Goldman Sachs.

We increased our net revenues by 21% and our diluted EPS by 26% and we produced a return on tangible equity of 28%.

As always, the key to our performance was the strength of our franchise with corporate, government and investor clients.

No client has to choose Goldman Sachs and we work very hard to develop and retain the best people and creative culture in which they can deliver outstanding service in a highly competitive business.

Their success in serving our clients in 2005 was the driver of the firm's results.

Of course our business also requires us to commit capital and we benefited in 2005 from our discipline, risk management and focus on returns.

The firm's results also reflected broadly favorable markets, continued economic growth and the absence of major shocks to the financial system.

However, 2005 was not without challenges.

We experienced some less favorable periods including the rapid widening of credit spreads that occurred during our second quarter and the associated weak trading addition for some businesses.

Nevertheless, I'd emphasize that factors which some felt would be very negative for Goldman Sachs, such as a flattening of yield curves and continued low volatility in equities market did not prevent us from generating record net revenues.

Our ability to navigate challenging market conditions and serve our clients was critical in 2005 as it will be in the future.

Let me turn to the outlook.

Our Investment Banking business has continued to grow as activity levels gradually recover.

As we speak today, the outlook for 2006 is favorable, based on increased dialog levels, benign equity markets and a rising backlog.

However, backlog can disappear overnight if conditions change and I cannot predict markets any better than you.

Our Securities businesses continue to benefit from the breadth of the platforms we have built to serve our clients.

In Equities, we've configured our business to provide the broadest range of client services at the same time as focusing our efforts in a disciplined way.

However, the Equities business remains sensitive to market direction as well as client volumes and activity levels and flows into mutual funds and hedge funds.

Our Fixed Income, Currency and Commodities businesses will now record yet another annual increase in net revenues demonstrating the depth of our customer franchise across multiple asset classes and the strong conditions in many markets.

Even with 13 consecutive rate increases in the last 18 months, an environment many would consider unfavorable for FICC, these businesses have together produced a remarkable growth record.

Today risks include the deficit and balances, high prices in volatility and commodities and the resilience of credit markets in a world with significant available liquidity.

However, since 2001, you've seen our business continue to become broader and more global and produce more revenues for the firm.

Provided our clients continue to be active and respond to clear market trends and Fixed Income, Currency and Commodities, we will likely benefit.

We also know that the breadth of our FICC complex which is not overly reliant on any single asset class is an important competitive advantage.

Principal investments had a record year in 2005.

SMFG's performance has been outstanding and we know it will not always be so consistent although we remain confident in SMFG and Japan for the long term.

Our corporate and real estate businesses are equally difficult to forecast but our confidence in the long term is shown by the fact that we raised new funds for each asset class during 2005.

Asset Management and Securities Services have both benefited from patient investment and attention to client needs over a long period of time.

Growth in assets under management will depend on continued strong investment performance, but we take some comfort from the scale of our business across a broad range of asset classes and distribution channels.

In Securities Services we enjoy a very strong market position with some of the most demanding clients in our industry.

While hedge fund performance will vary through time, we believe that the asset class is here to stay and we are very well positioned to continue as a leader in serving the industry.

With that I'd like to thank you again for listening today.

And I will now be happy to answer your questions.

(OPERATOR INSTRUCTIONS).

Glenn Schorr with UBS Global Asset.

Thanks very much.

Hey, Dave.

Can you give us a little bit more on the FICC color from just on the sequential basis?

I know when commodities stop trending and reverse trend that might be something -- but maybe just a little more color on the delta from last quarter?

Well, you know, Glenn, there is not really that much to say that I didn't say.

FICC still had a pretty good quarter.

Revenues were still pretty strong.

It was obviously down from a very significant terrific third quarter.

The businesses all really performed well.

It's not like I could pick one out and say this business had a tough quarter or this business had a tough quarter.

The businesses all performed pretty well.

But not as good as the spectacular third quarter.

And we've talked before about the fact that when you look at FICC on a quarterly basis and it's the same thing for the firm, there's going to be some volatility.

But when you look at it on an annual basis, I think we now have 17 out of the last 21 years with revenue growth.

So the growth story remains the same.

And across the businesses, some were up a little, some were down a little but it just wasn't as strong as the really fantastic third quarter.

Fair enough.

Another question just on the banking side.

Just looking at full year on full year to smooth out some of the bumps.

M&A revs up 10%; equity underwriting down 14%; that is in the face of I think completed volumes for the industry, up 30% on the M&A side and equity underwriting flat.

Is that a function of just the multi-manager deal and more block trades and -- or is -- meaning is this a pricing thing?

Is it a mix thing?

Yes and yes is the answer to that.

It's a function of there being more co-managers which puts a damper on the revenue any individual manager gets; more block trades which you know don't show up in our equity underwriting line.

And so the difference in mix I think that is really all it's a function of because we continue to be one of the leaders in the business depending on which statistics you look at -- number one, or two, or three in every category.

We are right there doing more than our fair share of business.

Okay, cool.

Thanks very much.

Good holiday.

Guy Moszkowski with Merrill Lynch.

Good morning.

I was wondering if you could give us a little bit more detail on the backlog?

You mentioned that is it up significantly in the fourth quarter.

But can you give us a sense for what significantly means and sort of how it breaks among the different product lines?

In some ways, you know the answer to the question.

We don't break out the number.

We don't give the number.

Across the product lines it is -- they are all up.

So it is up pretty significantly in every product line.

And I would tell you activity levels are very high.

I mean this in some ways is transparent.

You read the papers; you see a lot of the deals that are being announced; you don’t see some of the financings that are being awarded.

But there's a lot of those too.

But what we are seeing is increased confidence levels of CEOs and investors, whereas most of the business had been driven by financial sponsors over the last couple of years.

The financial sponsor business is still very strong and now strategics are in as well.

And so activity levels are quite high in the investment bank business.

You'd probably think less of me if I hadn't asked.

I would have been surprised, Guy.

Can we talk now about headcount growth outlook now that you are through the budgeting process and into the new year?

Can you give us a little bit of an update of what you are thinking about given current conditions?

Sure.

Our headcount was up about 8% this year.

And I think that is a reasonable, something like that with always plus or minus a couple of percent is probably a reasonable estimate for next year as we sit here now.

I wouldn't expect anything wildly different.

Just in terms of the mortgage side and origination business.

We've talked in the past about how you've always been a little bit leery of that because of the potential for expense buildup and also potential reputational exposure.

But it would seem certainly based on some comments that Bear Stearns made on their conference call just a little while ago, like opportunities might be increasing because of pressure on some standalone originators.

And I'm just wondering whether that is something that you would rethink?

I don't think our view has changed.

It is, you've heard me say, you've heard Hank say it, we will always consider things.

We will always look at them.

We are not saying we would never do it.

Obviously some have been, like Lehman, have been extremely successful in doing this.

It has been a very, very good business for them.

The two things we always worry about are one, the connection to retail which brings its own risks that we have to date been unwilling to take, not that we won't going forward.

But today we've not been willing to take.

And you know the time and the cycle which worries us a little bit too.

So those are really -- you know, it's the potential benefits versus those risks that we continue to analyze and for now there is no change but it's not that we don't continue to look at it.

Thanks.

And then finally on share repurchase, during the year I guess you bought in just under 64 million shares.

You've got about 42 million left in the authorization which you did increase sort of in the middle of the year.

Right.

How would you think going forward about whether you would increase that and continue to return some capital given what the outlook is for reinvestment?

As I said when we had the authorization which was about a quarter ago, we said it would probably be over the course of about a year.

That was the plan.

But that we would continue to reassess.

We did it not because we didn't see opportunities because we saw and we continue to see an enormous number of opportunities but that our capital had just grown so fast that we said we were not going to stop the growth.

We were going to slow down the growth and that's really what we did this year.

Our common equity capital grew by about $1.3 billion this year.

So we slowed down the growth with the tremendous earnings.

And it is something that we will continue to reassess.

I don't see anything that causes me to think we are going to change our view which is that as we continue to earn money and grow capital very rapidly we want to slow down that growth somewhat.

But we will continue to reassess that as well, Guy.

And from where you sit right now, given how you're planning for the different businesses this year are you thinking that the less capital intensive businesses will grow relatively faster than the more capital ones than what happened last year or the other way around?

No, I think that we see good growth across all of them.

If you think of investment banking as the less capital intensive business -- as I said, the outlook there looks quite good as we sit here now.

But the outlook in some of our trading businesses and FICC and equities where we do use capital, there is just a tremendous amount of client activity right now.

Of course it could change but right now I see them both growing pretty quickly.

Okay, that's pretty helpful.

Thank you, David.

Daniel Goldberg with Bear Stearns.

Good morning, David.

On the Equities business, you mentioned briefly in your prepared remarks trading was down, commissions were up.

And particularly on the commission side, it looks like it was the highest level ever.

Any more color there what really drove that increase?

No, there is two things that are having happening in commissions.

One, volumes were up somewhat in the fourth quarter.

And I think we are starting to gain some marketshare.

I think things are starting to consolidate a little bit.

We're starting to gain share.

Our scale and the breadth of the product offerings that we have for our clients are starting to help (ph).

So I think both of those are kicking in.

And would the further electronicification of the NYSE and your probably advanced positioning on the technology side, should you expect that to continue?

I mean should you benefit from that?

We certainly hope so.

And that is obviously the way we have positioned our business to be able to benefit from as you said, further electrification and our platform and our technology which is I think is as strong as anybody's.

Okay.

On that expense side, you also mentioned the drivers, particularly brokerage and clearing, professional fees, other expenses up pretty significantly quarter over quarter.

Any more color there on any of those line items?

What really drove that?

And should we think about them as decent run rates going forward?

Brokerage and clearance is activity based; that is actually a good thing.

We are actually happy when that goes up.

Professional fees, largely legal and consulting, and you know it's the environment that we live in is causing especially the legal fees to go up.

The one in the quarter we typically make a charitable contribution at the end of the year, and so that was really what drove the other expenses to be up -- is largely what drove it.

And that is probably not a good run rate number.

But everything else probably is reasonably good if activity levels stay high.

Okay.

And then on that non U.S. business, can you just give us an update there?

You didn't really talk too much about that, maybe the percentage of revenues from non U.S. and any trend you saw in Europe and Asia that may have been different from the U.S.?

Sure.

We continue -- obviously it bumps around run quarter to quarter but it is still a pretty good estimate to say in the range of 60% of our business in the U.S. and in the range of 40% of our business outside of the U.S.

I think it is fair to say that when we look out right now although we see very, very good growth in all of the businesses, things probably growing a little bit faster in Asia than everywhere else.

Both in China there is obviously very, very good growth.

And in Japan with the economy really starting to grow there; activity levels both on the trading side as well as on the investment banking side are much higher than we've seen in the past.

I'd say Asia is probably the fastest-growing business but that is not to say that Europe and the U.S. aren't growing fast as well.

And what productline do you see as the biggest opportunities outside the U.S.?

You know, it's funny.

I get asked that question and sometimes I try and say, okay, let me go through the product lines.

And when I finish, I've gone through all of them.

And we really do see opportunities across the board.

The investment banking business, as I mentioned, there is a lot of consolidation happening, a lot of equification happening really across Europe and Asia.

On the trading side in FICC, very good opportunities, good distressed asset opportunities as well as other trading.

Equity market volumes are up across the board in both places.

The Asset Management business and Securities Service business are all growing in Europe and in Asia as well.

So, as I said, when I get through it, I end up that I've gone through all of them because we really do see our overall business growing in both locations.

Okay, you did it again.

Thank you.

Jeff Harte with Sandler O'Neill.

Good morning.

As we look in the wake of kind of a record year and you've talked a lot about areas Goldman Sachs is strong in and it seems most of your competitors are talking about their kind of incremental growth prospects coming from -- getting into areas you are already strong in be it prime brokerage, be it commodities.

Can you talk a little bit about your growth outlooks or your kind of growth prospects in an environment where in a lot of the growth industries you're going to be defending marketshare as opposed to trying to gain marketshare?

I'm not quite sure how to go about answering the question the way you phrased it.

We continue to have a good position in all of those markets.

We've always been in a business where it is very competitive and there is no business that you ever get in that other people don't try and get in as well if they are profitable.

And like everything else we do, we know that, I said it before, our clients do not have to choose us.

And they are only going to choose us if our performance continues to be good.

We think there are really good opportunities in some places like the Securities Services business.

There are barriers to entry in the business even though others are trying to get in.

And there is a long way to go.

In other businesses, we have franchises that had been built up over many years; client relationships that have been built over many years; distribution systems built up over many years; that others we understand are getting into the business and they are very good competitors.

And what it really comes down to is given the opportunities we see in the markets, if we want to continue to grow we have to continue to perform.

And we have to continue to hire and retain the best people and perform at the top of the industry.

And if we keep doing that, then we are confident that given the opportunities we will continue to grow.

And that is the way we look at it.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Mike Mayo with Prudential.

Hi.

A couple of follow-ups.

What was the revenue growth outside of the U.S. for the quarter?

Revenues outside the U.S. probably grew a little bit faster than in the U.S.

But it really well, you know, again, that 60/40 ratio has been fairly consistent for awhile, around 60/40.

You know, that varies quarter over quarter.

Probably a little bit higher outside of the U.S. as far as growth went in the fourth quarter but not much.

Okay, so it wasn't disproportionate in FICC in anyway or --?

No.

And how much was the charitable contribution that you mentioned that is not indicative of a --?

It was a mid double-digit type number.

And the tax rate was above typical this quarter.

Can you talk about the outlook for next year?

Yes.

If you look at the full-year number, it was pretty consistent with last year's full year number.

And we had some audit settlements early in this year that we didn't have last year.

We had some tax credits last year we didn't have this year.

I think the fourth quarter number was probably a little higher than we expect for next year.

I think the full year number is probably a little lower than we expect for next year.

So it is probably, you know, if you're trying to figure out for your model, it would probably somewhere in between.

Okay.

And then lastly, I mean equity trading, you did have a good third quarter but it did come down quite a bit.

You said down one-third due to the principles strategies business.

Can you just elaborate on that business a little bit more?

Sure.

As you know, that is a business we have been in for a very long time.

It used to be the equity arbitrage business.

It goes back to the days of Gus Levy and then Bob Ruben.

It is a proprietary business where we take positions.

And it still performed well.

It was an outstanding third quarter and so it didn't perform as well as in the third quarter.

The customer business was down a little bit as well.

It was weaker in the fourth quarter although again down from an outstanding third quarter.

But it was more on the principles strategies side as far as explaining the decline.

And is there any way for you to give an outlook for the trading businesses?

I know you said the investment banking side looks really good.

How do you think about trading?

I think really the same way.

It's very hard to predict going forward.

It is largely reliant on customer activity levels.

And as we sit here right now, customer activity levels are very high.

They are pretty high.

We see our customers wanting to do a lot of things on the FICC side as well as on the equity side.

On the equity side, activity levels tend to go higher when the markets are constructive and they certainly feel pretty constructive now.

On the FICC side, they tend to be higher when there are trends and there are trends and so activity levels as we sit here right now are pretty high.

Are right, thank you.

Douglas Sipkin with Wachovia.

Good morning, David, how are you?

Good, Doug.

Good morning.

Just a couple of follow-ups here, one just sort of broad strokes question.

Sort of the classic.

Obviously we are in an incredible environment for investment banking.

You had mentioned things look great.

But the yield curve apparently didn't disrupt the fixed income trading businesses.

So I think that is a big positive and well received by the investment community.

In just terms of what are you guys really concerned about?

What are some of the risks?

Obviously a slowdown in market activity.

But is there anything specific in the fixed income world given that sort of the big fear was the yield curve and that doesn't -- that's not the straw that broke the camel's back?

So just broader on fixed income side -- anything that keeps you up at night that we haven't seen yet that could unravel sort of the better fixed income long-term story?

Well, there are a lot of things that keep me up at night.

As you know, you have heard me say, that rising interest rates and a flattening yield curve were not terribly concerning to me.

I mean people talked about it a lot but we recognized that in different environments given the breadth of our business, we can make money.

Clearly a decline in economic growth around the world would be the worst thing for our business.

Overall, not just FICC.

Overall our business is it does better in periods of economic growth, that leads to more CEO and investor confidence; leads to better markets; leads to more activity.

So that is certainly something to worry about.

In general, and I think this might be a cause rather than effect, but higher inflation is not good for our business.

High inflation levels would probably lead to a slow down in activity levels.

And so we worry about that.

If I can think of two things, those would be the ones that I would mention.

Is it possible that -- I mean the yield curve flattening has had an impact on FICC but just the secular trends are more powerful and that is why it is harder to see?

And in fact, if we were to get some rate stoppage and then a steepening maybe would be even better or am I thinking too far ahead?

I can't possibly answer the question.

Things grew well over the last couple of years, would they have grown even more if the yield curve hadn't flattened?

I just don't know.

But I would tell you that it is not the shape of the yield curve or the direction of interest rates that really drives our business.

That may have driven business ten years ago or even five years ago but not anymore.

It is really the level of customer activities which is driven more by trends and volatility than it is by the direction of any particular market.

Great.

That's helpful.

Can you just give us an update on Sumitomo, your plans with that moving into 2006?

Sure.

As you know, we hedged the first third of that position last year.

We are able to hedge the second third beginning in February of next year.

It is a very big position.

We will reduce our risk when we are able to over time and in a very measured pace, as we did last year.

We did not rush in and sell a lot or hedge a lot very quickly and we won't this time either.

But we will over time probably reduce our risk somewhat more.

It doesn't mean we've changed our view.

We remain very confident in Sumitomo and in Japan.

But given the size of the position when we can, we will probably in a measured way reduce our risk.

Great, thanks a lot.

James Mitchell with Buckingham Research.

Good morning.

Just quick question on the Asset Management business.

Maybe this is being overly picky.

But you guys had long-term inflows, net inflows of 5 billion still pretty solid but sort of the lowest we've probably seen over the last year.

Anything going on there that maybe there is just a one big account that moved out or just one quarter doesn't make a trend -- just kind of not as strong a quarter as prior quarters?

How should we think about that?

No, there is nothing problematic.

The pace at which we were gathering assets is not -- I mean we are not going to gather $80 billion every year.

I know that.

And we are not going to do it at the quarterly pace we have done and I think it was still 8 billion in total; 5 billion in longer-term assets as you define them, still a pretty good quarter, a $12 billion increase overall.

So really nothing other than not as strong as the incredible strong quarters we've had before.

But the business continues to do quite well; assets continue to flow in; our performance is still pretty good.

So everything about it is still pretty good.

Any kind of changes there in terms of what you're seeing in trends or flows or anything like that?

Not really.

Okay.

All right, thanks.

David Trone with Fox-Pitt Kelton.

Actually my question was asked and answered.

But a quick question on the dividend, did you make any comments on your philosophy there?

I know it has been 2.5 years -- the yield is a little low.

No, I didn't make a comment and we have no plans to change anything as we sit here now.

In returning capital to shareholders we actually think it is better to do it by buyback than through increased dividends.

Okay, great.

Thanks.

Mark Constant with Lehman Brothers.

Good morning, David.

Just a couple of little things I wanted to follow up on.

The Wood (ph) guy was talking about the more human capital intensive versus more principle capital intensive business outlook into '06 and it sounded like you were suggesting that you saw roughly proportionate opportunities in both.

Should we then expect or should I say not expect a material shift in comp ratios as a result of that by there (ph) at least from where we sit today?

That is very hard for us to estimate as we sit here now.

But you know we've said that we're going to accrue comp or pay comp, we expect at roughly 50% plus or minus a couple of percent.

As you know if you look back over the years if you had added in the options expenses in the first few years, it was a little over 50%, last few years it has been a little under 50%.

There is nothing that tells us it's going to be different than what we've seen in the last few years.

And just to check on it, any change in the mix of comp this year now that you are done with the year anything between cash and equity or other type of equity? (Indiscernible)

Nothing significant.

Similarly, I appreciate the breakout of the consolidated expenses from the consolidated investments, that is a mouthful.

You can also -- you find in the footnotes the related comp stuff too.

But was there any change in the revenue side from consolidated investments this quarter or was that pretty comparable?

Pretty comparable too.

Okay.

Great.

Thank you very much.

Enjoy the holidays.

Winnie Chang (ph) with Columbus Management.

Hi, it is Winnie Chang from Columbia Management.

But my question is I noticed that there seems to be a lot more debt being issued lately under the Goldman name directly.

I was wondering if there was a cause for that?

You mean us issuing our own debt?

Yes.

It really hasn't increased lately.

If you look across the course of this year, we have issued a fair amount of long-term debt in excess of $20 billion long-term debt.

And that is really to fund the growth of the firm.

We are very, very mindful of our liquidity.

Our assets tend to be fairly short-term assets.

But we fund a lot of them with long-term debt to make sure we have adequate liquidity.

Because it is probably the single risk that anyone in this industry should be most cognizant of and we are.

And so with good markets as we've seen -- good debt markets, we've been able to issue a lot of long-term debt and therefore we have to just really improve our liquidity and management even more.

Do you expect to issue significantly more debt next year?

We expect to --.

Given the opportunity?

We expect we will be a big issuer of long-term debt as long as the markets are still pretty good.

We will continue to do that as the firm continues to grow.

We are going to fund in that way.

Are there particular businesses that you would rather fund with debt than cash flow?

We fund all of our businesses with a mixture of those.

But in order to fund the assets of the firm we need -- as the firm grows, we need to issue debt in order to be able to do that.

Okay, thank you.

At this time there are no further questions.

Thank you, Dennis.

We'd like to thank everybody for calling in.

This call will be available on replay in a few hours.

You can get the call-in details off the press release or on our website, gs.com.

We again like to wish everybody happy holidays and a happy new year.

Thank you.

This concludes today's Goldman Sachs fourth-quarter 2005 earnings conference call.

You may now disconnect.