高盛 (GS) 2006 Q4 法說會逐字稿

Good morning. My name is Dennis, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Goldman Sachs fourth quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

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 would like to welcome you to our fourth quarter earning conference call.

Let me remind you that today's call may include forward-looking statements. These statements represent the Firm's belief regarding future events that by their nature are uncertain and outside of the Firm's control. The Firm's actual results and financial condition may differ possibly materially from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect the Firm's future results, please see the description of risk factors in our current annual report on Form 10(K) for our fiscal year ended November 2005. I would also direct you to read the forward-looking disclaimers in our quarterly earning releases, particularly as it relates to our Investment Banking transaction backlog.

You should also read the information on the calculation of nonGAAP financial measures that is posted on the Investor Relations portion of our Web site, www.gs.com. This audiocast is copyrighted material of the Goldman Sachs, Inc. and may not be duplicated, reproduced, or rebroadcast without our consent.

Without further ado, I would like to turn it over to our Chief Financial Officer, David Viniar, who will review the quarter and full year results. David?

Thanks, John. I would like to thank all of you for listening today, and I would also like to wish everyone Happy Holidays. I will give a brief overview of our results and then take your questions.

I'm very pleased to report a record year for Goldman Sachs. Net revenues were $37.7 billion, net earnings were $9.5 billion, and earnings per diluted share were $19.69. Return on tangible equity was 39.8% and return on common equity was 32.8%.

Our fourth quarter net revenues were $9.4 billion, net earnings were $3.2 billion, and earnings per diluted share were $6.59. As you know, we adopted SFAS 123 R in 2006 that required the expensing of equity compensation, granted to retirement-eligible employees in the year of grant. At the same time we had to continue to amortize past year's equity reward to retirement-eligible employees under the old accounting rules.

This created somewhat of a doubling up of certain compensation expense in 2006. We incurred $637 million of compensation expense in 2006 from past awards, while expensing 100% of this year's awards to retirement-eligible employees. That $637 million expense lowered full-year diluted EPS by $0.88 cents, fourth quarter diluted EPS by $0.18, and increased our full-year compensation to net revenue ratio by approximately 1.5%.

Going forward we expect the amortization expense from past year's equity awards to retirement-eligible employees to be immaterial.

2006 was a remarkable year for Goldman Sachs. While the entire industry benefited from a strong operating environment for most of the year, our business clearly outperformed. Our full-year earnings per diluted share of $19.69 were essentially the same as 2004 and 2005, our prior two record years, combined.

While the environment was our friend in 2006, our performance reflects the unique competitive positioning of Goldman Sachs. Each of our major business produced record results. Our ability to generate industry leading growth speaks to the strength of our client relationships, the diversity of our business mix and the culture of excellence at our Firm.

I will now review each of our businesses. Investment Banking net revenues were $1.3 billion in the fourth quarter, up 4% from the third quarter. For the full year, Investment Banking net revenues were a record $5.6 billion, up 53% from fiscal 2005 and eclipsing fiscal 2000s results, the prior record.

Investment Banking continues to benefit from high activity levels driven by favorable equity in financing markets, strong CEO confidence and continued financial sponsor activity. Within Investment Banking fourth quarter advisory revenues were $627 million, up 3% from the third quarter. Goldman Sachs once again ranked first in announced and completed MNA globally for calendar 2006 through November.

We advised on a number of important transactions that closed in the fourth quarter including Fisher Scientific Internationals $12 billion acquisition by Thermo Electron, AmSouth Bank Corp's $10 billion acquisition by Regions Financial, and Resolution plc's $3.6 billion sterling acquisition of Scottish Mutual Assurance.

We were also advisor on a number of important announced transactions including the $22 billion management-lead buyout of Kinder Morgan, RWE's $8 billion sterling sale of Thames Water, and the Blackstone Group's $36 billion acquisition of Equity Office Properties.

Fourth quarter underwriting net revenues were $717 million, up 6% from the third quarter as equity underwriting revenues grew 22% sequentially to $330 million and debt underwriting declined 5% to $387 million. The growth in equity underwriting was driven by favorable equity markets and increased CEO and investor confidence. Debt underwriting revenues were strong in the fourth quarter despite a slight sequential decline as market ride financing activity levels remained high reflecting improved investor confidence about the outlook for interest rates in the U.S.

We remained a leader in underwriting in 2006 ranking first in WorldWide equity and equity-related offerings for calendar year through November. During the fourth quarter we participated in a number of significant transactions including Warner Chilcot's $1.1 billion IPO, Abu Dhabi National Energy's $3.4 billion note sale, and Chunghwa Telecom's $1.1 billion following -- follow-on offering.

The outlook for Investment Banking is positive. Our backlog increased during the fourth quarter and today is the highest since 2000. The growth in Investment Banking activity is being driven by strong global equity markets, favorable credit markets, benign macro economic trends and growing corporate consolidation around the globe. All trends point to continued strength into 2007.

But let me remind everyone of the obvious. That conditions in the capital markets can change quickly and no backlog is ever guaranteed. However, if global economic growth continues and markets remain stable, our Investment Banking clients will continue to be active.

Let me turn to Trading and Principal Investments. This comprises fixed income currency and commodities, or FICC, Equities, and Principal Investments. Net revenues were $6.6 billion in the fourth quarter, up 37% sequentially. Full-year net revenues were 52% over fiscal 2005 to a record $25.6 billion. FICC quarterly net revenues of $3.1 billion were up 9% from the third quarter.

The operating environment for our FICC business continued to be favorable in the fourth quarter as rates generally rallied and credit spreads tightened. Within FICC, our Global Credit business, which includes distressed investing, had very strong results driven in part by approximately $500 million in gains associated with the IPO of Accordia Golf. Currency revenues unimproved sequentially as the fourth quarter saw some movement in major exchange rates. Commodities revenues remained strong yet essentially unchanged from the third quarter.

Our interest rates area saw modest sequential decline in revenues while mortgage revenues dropped more meaningfully from the third quarter. For the full year, FICC net revenues were $14.3 billion, 60% higher than fiscal 2005. FICC continues to benefit from a deep client franchise, diverse product offerings and broad geographic presence.

Equities net revenues for the fourth quarter were $2.1 billion, up 37% from the third quarter. Equities trading net revenues were $1.2 billion up 75% sequentially, largely driven by higher sequential revenues in our Cash Equities business and to a lesser degree by principal strategies area. Equities commissions were up 6% to $896 million reflecting higher volumes in the quarter. For the full year, Equities produced record net revenues of $8.5 billion up 50% over fiscal 2005.

These results reflect that the strength of the operating environment for Equities as most major indices rose during the year. 2006 also underscored the strength of our global Equities franchises which is the largest in the world when measured by revenues. We were early restructuring this business in deploying electronic trading technologies that handles the major of shares traded today on most major exchanges.

Those early strategic moves have paid clear benefits as we have produced record annual revenues with about half the had account in Equities we had in 2000.

Turning to risk average daily value at risk in the fourth quarter was $106 million compared to 92 million for the third quarter, reflecting greater opportunities in customer activity across our trading businesses. Let me now review Principal Investments which produced net revenues of $1.4 billion in the fourth quarter. The largest driver of these results was a $949 million gain from our investment in ICBC which went public in the quarter. The economic interest in the majority of our initial $2.6 billion investment is held by various Goldman Sachs funds.

Let me also remind you that large restricted Principal Investments are typically subject to liquidity discounts as is the case with our ICBC investment. Our investment in SMFG produced a loss of $78 million reflecting the decline in SMFG's common stock price during the fourth quarter. We also generated $528 million in gains and overrides from other Principal Investments.

For the full year, Principal Investments produced net revenues of $2.8 billion. Even excluding the gains in SMFG and ICBC, we generated a record $1.4 billion in gains and overrides from Principal Investments in 2006, nearly doubling the $753 million we earned in fiscal 2005.

Asset Management and Securities Services reported fourth quarter net revenues of $1.4 billion, down 2% from the third quarter. Full-year revenues were up 36% to $6.5 billion.

Asset Management produced net revenues of $933 million, up 2% sequentially. Management fees were a record $910 million, up 11% over the third quarter, reflecting continued growth in assets under management. For the full year Asset Management net revenues were a record $4.3 billion. Management fees were $3.3 billion, up 27% annually, and incentive fees were $962 million.

During the fourth quarter assets under management grew 7% to a record $676 billion, reflecting quarterly net inflows of $24 billion and market appreciation of $23 billion. For the full year, Assets under management increased 27% or a record $144 billion from inflows of $94 billion market appreciation of $50 billion. This success reflects our strong performance record and broad product offering and we remain very optimistic about the growth prospects for Asset Management in the years to come.

Securities Services produced net revenues of $496 million in the fourth quarter, down 8% sequentially due largely to seasonality as certain client activities that occur in the second and third fiscal quarters are absent from the fourth quarter. For the full year, Securities Services net revenues were a record $2.2 billion, up 22% annually. These strong results reflect our market leading franchise in prime brokerage.

Now let me turn to expenses. Compensation and benefits expense in the quarter was $2.5 billion, this results in a full-year compensation to net revenue ratio of 43.7%. Our ability to produce this much leverage in our largest single expense is a direct result of the strength of our franchise which enabled us to produce industry leading performance in 2006 and attract and retain the very best people.

However, I would caution everyone against thinking this is a permanent shift to a lower compensation ratio. I would simply note that our financial performance was a big factor in this year's compensation ratio which could be higher or lower in the future. Non-compensation expenses excluding consolidated investments were 1.8 billion in the fourth quarter, up 16% sequentially. This increase was primarily due to higher brokerage clearing exchange and distribution fees, higher professional fees and higher market development costs.

For the full year, non-compensation expenses excluding consolidated investments were 6.1 billion, up 24% over 2005. Approximately two-thirds of the annual increase was either activity-related brokerage clearing exchange and distribution fees, or related to our newly acquired insurance business.

Headcount at the end of the fourth quarter was approximately 26,500, up 12% over 2005, and 3% from the third quarter. Our effective tax rate was 34.5% for the full year. The increase in the full-year tax rate reflected a reduction in the impact of certain tax benefits due to higher absolute earnings. Last year's tax rate had also benefited from favorable one-time audit settlements.

During the quarter the Firm repurchased 20.8 million shares for approximately $3.7 billion. As we told you at the end of the third quarter, we increased our share repurchase in the fourth quarter in anticipation of equity warrants issued as part of year-end employee compensation. For the full year we repurchased 50.2 million shares representing $7.8 billion of capital. We currently have approximately 53 million shares remaining under the Firm's existing authorization.

2006 was an outstanding year for Goldman Sachs. We produced record net revenues, earnings and returns for the Firm as well as record results in every major business. Our revenue performance in 2006 speaks for itself. In Investment Banking we maintain our leading position in the most important franchise businesses of MNA and equity underwriting. Dialogue with both strategic and financial market participants remains high.

For Investment Banking the development of new global markets and new clients from those markets and the acceleration of corporate restructuring around the world are important trends that will contribute to significant future growth. These trends also highlight the importance of having a major international presence in Investment Banking. Equally important we continue to focus on leveraging our Investment Banking franchise across all of our businesses.

The strength and depth of our global Investment Banking client relationships give us a competitive advantage in virtually all of our businesses, and we are already seeing those benefits today. Without any Investment Banking relationships we could not have in invested in SMFG and ICBC nor could be we have identified a significant number of successful investments made by our merchant banking area nor could we have established our unique position to operate domestically in China which is arguably the most important strategic opportunity we have today.

FICC produced another record year. 2006's results in particular underscore the breadth and diversity of FICC and the strength of our client franchise. We cannot continue to grow this business without clients who want to trade or hedge in a variety of macro economic environments around the world. However, FICC remains unpredictable, and I cannot project that we will have another year of double-digit revenue growth in 2007.

What I can confidently say is that FICC is broad and global and the strength of our client relationships means we are well positioned for long-term success in this business.

Equities also produced record results in 2006 despite more challenging market conditions for much of the summer. We believe that our market leading low touch and high touch capabilities combined with our global presence provides significant opportunity for future growth and market share gains.

Principal Investments produced record annual results as well. While gains in ICBC and SMFG were significant this year, we also recognized record gains from our portfolio investments. Our continued success in this business reflects our two decades of experience in merchant banking and real estate investing combined with Goldman Sachs' global presence and client relationships that gives us a significant competitive advantage in identifying investment opportunities.

Asset Management security services also had record full-year results. Assets under management have again reached a new record with nearly $100 billion of net new inflows during the year.

Securities Services reported its best year ever driven by increased customer balances, strong level of hedge fund activity and our market-leading franchise in prime brokerage.

As you have heard me say countless times before, it's impossible to project our earnings into the future. What I can tell you is that the opportunities we have are significant. The global opportunities are particularly significant. Our international businesses contribute approximately 45% of our net revenues and continue to grow rapidly.

While we will always be subject to the cycles of the global capital markets, our key driver over the long term remains global economic growth. So while quarter-to-quarter and year-to-year growth may not be consistent or predictable, our long-term outlook for Goldman Sachs has never been more positive.

With that I would like to thank you again for listening today, and I am now happy to answer your questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Glenn Schorr with UBS.

Hi, Dave.

Good morning, Glenn.

Good morning.

Based on your comments I think I know the answer, but I will ask it any way. The little bit of a crack that we've seen in sub-prime credit land and in mortgage world, it sounds like you think it's contained but I would rather ask you the question. In other words we don't see any spreading in terms of leverage loan market, high yield market or any credit deterioration. Is that correct?

Not to date. So far it's really been contained.

Gotcha. Was EITF-3 adopted yet or do we still have another year before that?

It was in a way unadopted.

Unadopted.

We had it before but, no, it is no longer here.

No longer here. And just checking on what we think of as the potential for audit, no other way to describe it, but unrealized gains to be brought through either the P&L or write into equity, has that happened for the industry or for you guys yet? Or not yet?

Basically O23 is now gone and anything that could have been recognized under the old standard has been recognized and not things that were not recognized will be accounted for under the new standard going forward.

I hope that answers your question.

It definitely does and a quickie third one will just wrap it up.

We've seen this before but I just want to understand it completely. When you have, let's call it, about -- maybe $4.2, $4.3 billion between the buy back and the dividends, versus 3.1 billion of earnings, yet book value still goes up $4.75.

The question is, how much of that is timing and related towards comp plans versus something like O2-3?

No, it's not O2-3. It is largely -- you have to add earnings plus the comp we gave out to equity and you subtract the buybacks and the dividends.

Understood, Awesome. I appreciate it, thanks.

Your next question comes from the line of Guy Moszkowski with Merrill Lynch.

Good morning, David.

Good morning, Guy.

You talked about the Investment Banking backlog but I was wondering if you could give us a little bit more color on how it compares to the end of last quarter by type of activity.

It is up -- it is up pretty substantially in merger activity. Probably up less in financing activity. But up.

Okay. That's helpful.

I gather from that comment and what you said on the call that you are not seeing any fallout at this point from what would appear to be some slow down in U.S. economic growth.

Here's the thing. There is still a lot of activity. And there is still growth. Growth has slowed, but the economy is still growing. There is still a lot of activity and there is still a pretty high degree of confidence in most sectors in the economy.

Great.

Just moving on to something else, I was wondering if you could help us a little bit with making sure we understand the P&L geography of the gains in the quarter from ICBC and Accordia in particular.

I mean you alluded to the fact that Accordia, about $500 million or so was I think in FICC because I think that was a distressed assets?

Right, and that's all of it.

That's all of it, there's nothing that showed up anywhere else?

That's it.

And ICBC is obviously just that one item?

Correct.

Thanks, that's helpful.

Mortgage revenues in the third quarter you noted were down, and I was wondering if you could --

In the fourth quarter.

I'm sorry, in the fourth quarter versus the third quarter were down.

Yes.

And I was wondering if you could give us a little bit more of a sense for what drove that, was it as Glen alluded to just in the sub-prime area, was there something else?

It was -- remember, mortgages within FICC it's part of the mortgage business, largely the sub-prime business but really the slow down in housing across the board would have caused a decline in mortgages more concentrated in sub-prime than in the rest, but a slow down across the board.

Thanks.

And then finally a question on non-comp expenses. With the divestment of Accordia, or the IPO of Accordia, will that reduce the non-comp expenses relative to consolidated entities?

Yes. You actually saw a little bit of it in the fourth quarter. If you noticed you see non-comp expenses of consolidated entities with a little bit lower in the fourth quarter than it was in the third quarter and you will see it reduced somewhat more going forward.

Okay. Great.

Actually, let me just ask one more question. What, if you have commented on this, is the headcount associated with your insurance business?

It's really small. It's really small. I don't have the exact number, but it's -- it's very small. It's literally a few people.

Okay. Great. Thanks very much, appreciate it.

Okay.

Your next question comes from the line of Ken Worthington with JP Morgan.

Hi. Good morning.

Good morning, Ken.

The New York Stock Exchange has altered its pricing for specialists firms. Given this change do you expect your specialist business to achieve appropriate returns on capital in its current form or do you believe that business needs to be restructured?

Let me say a couple of things. First of all as you know our specialist business in the context of Goldman Sachs is pretty small.

Yes.

So it's not, it doesn't really move the needle. We constantly review our businesses, and I think what we are seeing in the specialist business is its likely going forward maybe going to have maybe lower revenues but also lower expenses and at least as it sits right now, we think it's appropriate and will have the appropriate returns and, of course, subject to change over time but that's where we see it right now.

Okay. Great. Thank very much.

Your next question comes from the line of Mike Mayo with Prudential Equity Group.

Good morning.

Good morning, Mike.

Could you elaborate more on the non-U.S. growth? What was the linked quarter growth rate outside U.S. versus the U.S.?

And is it true ICBC counts as U.S. revenues, if can you clarify that?

No, ICBC did not count as U.S. revenues, it count as revenues outside the U.S. It's a very hard number to give you precisely, Mike, because we talked about this before, where do you count the U.S. IPO of a Chinese company or a merger between a U.S. and non-U.S. entity.

It's hard but as best we calculate it, we are at the point now where our revenues outside the U.S. were roughly 45% of our business and they continue to grow faster outside the U.S. than in the U.S. with Asia growing faster than Europe.

A separate question on private equity, if we are trying to forecast private equity gains -- I guess certain capital markets activity, stock market levels, what else should we put in our model?

You know what I always tell you about how hard it is to forecast revenues and I know that's your job and so you have to do it. You know what I always tell you about how hard it is to forecast revenues, and I know that's your job, and so you have to do it.

It's very hard, but you look at as you said where you think MNA activity is going to be, where you think the market is going to be and then you can look a little bit at the -- the increase in the amount we have invested because that's obviously one of the drivers, how much we have invested, so you can look at where Principal Investments and real estate principal investments on the balance sheet last year versus this year and try to take that into account as well.

If the stock markets stay at the current level today, how do you feel about private equity gains going forward?

I feel pretty good about them.

And a related question. If you have, say, one-fifth of global mergers driven by private equity, you might agree or disagree with that and to the extent that private equity investments have increased by 50% in the last few years, does that assume that merger activity should also increase by 50% for the 20% portion that's driven by private equity?

That's an interesting mathematical question.

My guess is that of the larger transactions it's probably a little more than 20% driven by private equity but I'm guessing. I actually don't have that number.

It's hard to equate it that way, Mike, because it's going to be -- if you start with the first caveat you started which is assuming everything else stays the same, then I think you're probably right. But a lot is going to depend on the environment. The environment in the locations where the investments are.

Remember they are not all in the U.S. The environment, is it good, are is the market going up, are people confident, still, everything else being equal, which is a really big caveat, your mathematics are probably right.

And then last question on private equity, your comp rate, shouldn't it go down a little bit to the extent that private equity gains are going up?

At Goldman Sachs we believe that a dollar is a dollar. And it doesn't matter where it comes from, and because people don't get compensated just on the -- on their business unit's results everyone at Goldman Sachs shares when the Firm does well and shares when the firm does poorly.

It really doesn't matter where revenues come from. Revenues are revenues at Goldman Sachs.

Thank you.

You're welcome.

Your next question comes from the line of James Mitchell with Buckingham Research.

Good morning.

Good morning.

Two quick questions.

One on incentive fees. Given the pretty favorable environment this quarter being down so dramatically year over year, just anything going on there that we should -- if it's temporary or something else in terms of how you are accounting for it I guess is the first question?

Two things I'd say, although you are right on a percentage basis, they are obviously down quite dramatically, it's not a very large dollar decrease.

No, I think you read in the papers this past week that some of the hedge funds in our alternative investment part of Asset Management have not been performing great, and that's really been driving the incentive fees down.

Right. So it's just simply that and obviously that can turn on a dime?

That's it.

Okay.

And just on the Securities Servicing side, prime brokerage side we've seen growth rates not just for you guys, but everywhere, first-half growth rates were 30% plus. In the second half year-over-year growth rates were 10 to 15. Obviously there's been a pull back on the hedge funds side.

What's your sense as, the environment has been pretty favorable for awhile now, are you starting to sense that hedge funds are getting more active and coming back into the market or what's your view there?

It would be hard for me to say. I think it's going to be 30% or 20% growth in the business. But the hedge fund asset class is a growing asset class.

It is one that is sensible. It is one that a lot of people with money to invest are quite interested in. And so we believe that the asset class will continue to grow and grow at a reasonably good pace going forward. I don't see anything changing there.

I can't tell you it's going to grow 30% a year but I think it's going to continue to grow.

No. Fair. But you did see hedge funds delever a decent amount?

Yes. Hedge funds, they delevered over the summer and through the early part of the fall and I think if the markets stay as favorable as they've been they will probably start to increase risk again.

Okay. Fair enough. Thanks.

Okay.

Your next question comes from the line of Daniel Goldberg with Bear Stearns.

Good morning, David.

Good morning, Dan.

On the tax rate, it was up as you discussed but how should we think about that for '07 and beyond.

It's probably a good estimate of where we start '07. Again, depending -- it depends on your assumptions of where our earnings are going to be.

If you assume our earnings are going to be about where they are, then it's probably a good estimate of '07. Because remember the thing that causes it to go down is we have some fixed dollar tax credits so a slower percentage benefit with higher earnings.

Okay.

On the expenses -- other expenses was up 23%, I know you talked about a couple of reclassifications, out of other expenses at the brokerage expense line, can you just maybe give us a little color on what drove the other expense line up?

Really, the biggest thing in the other expense line increase is the insurance business. The fact that we didn't have that business last year and the businesses in there this year, that's the biggest driver of it. So will you see it more comparable next year.

So that's a better run rate this coming quarter?

Yes.

Okay.

And then just on the Capital Management, give us a sense for potentially the pace of buy backs as the stock is above 200 maybe what the impact on ROE levels are going forward?

It's always hard to say. We will continue to analyze this as we go through the year. It's interesting, people will ask, will we slow it down now that stock was above 200. Of course everyone asked us that when it was at 130 at the same time, and we wish we bought back more earlier in the year and less later in the year now.

I would expect you will see a similar pattern of buybacks over the next year as we did this year. It could change, but we'll buy more kind of in the early part of the year, slower in the middle of the year and then more in the fourth quarter as we pick up in equity again. So a similar pattern to that.

Any thoughts on ROE?

We say that we expect we are going to have an ROE of greater than 20% across the cycle. We still think that. Obviously this year helps.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Meredith Whitney with CIBC World Markets.

Good morning and Happy Holidays to you two.

I have a pretty basic question which is, when you look at the old adage that capital markets grow at 3X, 4X times global GDP and the fact that you guys are growing market share in so many of the businesses that you are in.

I just want to get a further elaboration on the double-digit guidance on FICC, if you could provide that.

Well, you know I will never predict what FICC revenues are going to be next year. I couldn't predict what they were going to be tomorrow.

But we've had a lot of successive years of double-digit revenue growth, and all I was saying is I expect that that business is going to continue to grow and it's going to continue to grow quite well as it has in the past, but I can't tell you it's going to be double-digit next year.

It's similar guidance that you gave this same time last year?

Absolutely.

Got it. Okay. Thank you.

You're welcome.

Your next question comes from the line of Jeff Harte with Sandler O'Neill.

Good morning.

Good morning, Jeff.

A couple things.

The fix income origination, we look at industry volumes really increasing post the Fed going on hold. How should we be thinking about that as we look to 2007? Is that maybe some activity being pulled into this year for next year?

Again, this is all -- everything -- I caveat everything with as we sit here today because it can change. I think we are seeing some pretty good backlogs in fixed income issuance.

Obviously you pick up the paper you read about the buyouts and since the leverage finance business is quite strong, there's a lot of money to be lent out still. The market environment is quite good and as we sit here right now there is a pretty big backlog there.

Okay.

And brokerage clearing exchange expenses, if I look at the full year they out grew trading revenues. How should we think of that going forward? Is there some potential leverage there or is that going to be an ever-growing expense line item?

The exact percentage is going to vary somewhat year by year. But I think in years of business growth you will see that go up and in years of business decline, which hopefully we won't see very many of, but you will probably see that number come down.

So directionally, I think they will match. And they won't match exactly percent for percent but they will match directionally.

Okay. And finally in FICC, you mention that the Accordia gains were in there. Can I assume those showed up in the credit bucket?

Yes.

If you were to exclude the $500 million gain from the credit bucket, how would you classify the revenue strength relative to prior periods for credit?

I would say it was strong.

So even absent Accordia it was a good credit trading quarter?

Yes.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Ron Mandle with GIC.

Hi, folks.

I have a question about incentive comp elaborating on the previous point where you noted that incentive comp was relatively low this quarter and referred to the newspapers article.

Ron, you mean incentive fees, is that what you're talking about?

Yes, incentive fees, exactly right, sorry.

And I thought that incentive fees were more front loaded in the first quarter and so I guess my impression at least before this call was that to the extent the newspapers are right that we would see a significant decline in incentive fees in the first quarter and so is the timing off on that or --

No. You are absolutely right.

Most of the incentive fees are in the fourth quarter -- in the first quarter because most are tied to big funds which end on December 31. So you will see a significant decline in that in the first quarter.

But there are some incentive fees throughout the year and certain accounts which invest largely on the same basis as some of the big hedge funds, that's why you see the number last year was small, it was 100 million, this year it's even smaller, it's 20 million, but it's largely based on the same thing just on a much smaller scale.

So, as you say, if the trends in that particular fund continue through year end then the first quarter, your first fiscal quarter would see a significant drop? Anyway of quantifying what the drop might be?

No. But it will be significant.

Okay.

That was my question. Thank you.

You're welcome.

Your next question comes from the line Tony Della Piana with John Hancock.

Thank you very much, David.

Good morning.

Two quick questions, one in terms of obviously your risk management, you talk a lot about [Inaudible], whatever, but given your diversity, what type of event that gives you the most pause in terms of the entire business?

Certainly full express test, 87, long-term capital. Obviously, you wouldn't expect a permanent thing, but is -- and I would think more geo-political with Asia, but what type of event or sequence of events causes you the most pause in terms of the business?

The thing that actually causes us the most pause is not a, really a single event. It's a protracted slow down in worldwide economic growth. That is the thing that would affect our business negatively the most. Our business tends to be tied more to economic growth than to anything else.

Because as economies grow, companies as well as investors have more confidence, they transact more, you see more investment banking business, more hedging, more trading. Everything is -- there's more transaction volume in times of economic growth.

So it's not really -- obviously we do all kinds of analysis for individual events, whether it's geo-political, whether it's a movement in the dollar or interest rates or equity markets or anything like, but the thing that would about give us the most pause is slow down in economic growth.

And secondly, if one were to characterize -- I mean these results are certainly the last few years tremendous, and obviously the thought process is, there's always no such thing as a free lunch in terms of some of these increases.

Is a lot of these increases simply capital markets and everyone is benefiting from these, maybe not to the same degree? Or is there other stuff going on in that this is just a rare MNA type, a rare, as you say, economic cycle that basically is giving us a great boom for everyone and we just do it better?

I think it's -- I will put it in three categories.

First, the environment, the environment obviously has been attractive for our business. The capital markets have been good. The merger environment has been good. It has good economic growth around the world, CEO confidence, investor confidence, so all of those things have been beneficial to us.

The second thing I would say is our business model has been validated and has worked quite well. The willingness and ability to have the worldwide leading franchise, the leading client franchise and the ability to marry that with risk management on behalf of our client, willingness to take risks for them, willingness to invest our capital for our clients married with our franchise, and I'm giving the short answer, has been very, very beneficial.

The willingness to change businesses and foresee the environment, to change the model of our equity business when we had the number one franchise, so it's still the number one franchise but even better. Those things as I think our business model is the second thing and then the third thing clearly is the quality of our people.

We think we've hired and trained and retain the best people that there are and I think it shows with our results. Those are the three things I was talking about.

And last question, the total, you reported the earnings on the Principal Investments for the year and the quarter, what would be that total amount that shows up on the balance sheet that generated that?

If you have our press release and you look on page 11, we have a chart at the bottom which shows all of the Principal Investments broken down, corporate, real estate, and then ICBC separately. If you don't have it I will read you all the numbers.

No, I have it.

And the funds that you guys manage and invest, those are included in those numbers, the equity in those funds?

It is, other than ICBC, this is just our share of the funds.

Great. Fantastic. Thank you, David.

You're welcome.

At this time there are no further questions. Are there any closing remarks?

This is John Andrews.

We would like to thank you again for listening to the call.

It will be available for replay on our website in a few hours. Otherwise, we would like to wish, again, everybody very Happy Holidays.

Thank you.

Ladies and gentlemen, this does conclude the Goldman Sachs fourth quarter, 2006, earnings conference call. You may now disconnect.