高盛 (GS) 2007 Q1 法說會逐字稿

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  • John Andrews - IR

  • -- (audio in progress) -- this is the Director of Investor Relations at Goldman Sachs. I would like to welcome you all to our first-quarter earnings conference call. Let me remind everybody 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 2006.

  • I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our Investment Banking transaction backlog 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, www.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. I will now ask David, our Chief Financial Officer, to review the Firm's results. David?

  • David Viniar - CFO

  • Thanks, John. I would like to thank all of you for listening today. I'll review our results and then I will take your questions. I am pleased to report record results for the first quarter. Net revenues were $12.7 billion, a 35% increase from the fourth quarter. Net earnings were $3.2 billion and earnings per diluted share were $6.67. Return on tangible equity was 44.7% and return on common equity was 38.0%.

  • Strength across virtually all of our businesses and all geographies drove these results. Most importantly, our performance reflects the depth of our client franchise and the diversity of our business mix. Of course, one quarter's results should never be annualized and recent market volatility reminds us that the environment can change quickly. Nevertheless, we remain confident about the global opportunities we see and Goldman Sachs' strong position to identify and benefit from those opportunities.

  • I will now review each of our businesses. Investment Banking produced record net revenues of $1.7 billion, up 28% from the fourth quarter. Advisory net revenues for the first quarter were up 37% to a record $861 million reflecting continued high levels of activity by both strategic clients and financial sponsors.

  • Goldman Sachs ranked first in announced M&A globally for the fiscal first quarter. We advised on a number of important transactions that closed during the quarter, including Johnson & Johnson's $16.6 million acquisition of Pfizer Consumer Healthcare, KKR and GS Capital Partners EUR4 billion acquisition of KION Group and Alcatel's $14.7 billion merger with Lucent Technologies.

  • We were also advisor on a number of important announced transactions, including Bank of New York's $16.5 billion merger with Mellon Financial, Allianz's EUR9.8 billion acquisition of the remaining interest in AGF and Sabre Holdings $5 billion sale to Silver Lake Partners and Texas Pacific Group.

  • First-quarter underwriting net revenues were $855 million, up 19% from the fourth quarter as debt underwriting revenues grew 52% sequentially to a record $589 million and equity underwriting revenues declined 19% to $266 million. Strong financing activity helped by low interest rates and tight credit spreads contributed to the record debt underwriting results. Leverage loan activity was particularly robust during the quarter. Equity underwriting was down from a strong fourth quarter as industrywide issuance levels slowed.

  • During the first quarter, we participated in a number of significant transactions, including Fortress Investment Group's $729 million IPO, Royal Caribbean Cruise's EUR$1 billion senior notes offering and Ping An Insurance Group's $5 billion IPO in China's domestic A-share market, the first domestic equity offering lead managed by Goldman Sachs through our joint venture in China.

  • Our Investment Banking backlog increased during the first quarter and is now the highest since 2000. Let me turn to trading and principal investments. This comprises fixed income currency and commodities or FICC, equities and principal investments. Net revenues were $9.4 billion in the first quarter, up 42% sequentially. FICC net revenues were a record $4.6 billion, up 48% from the fourth quarter with each of our five major businesses posting sequential revenue growth. Trending prices and favorable market conditions lead to increased customer activity in currencies, commodities, credit and rates.

  • Mortgage revenues were up on a sequential basis despite a more challenging sub-prime market. While strategically important to Goldman Sachs, I want to remind everyone that our mortgage business is modestly sized relative to the overall Firm and includes areas like the commercial and prime spaces.

  • Equities net revenues for the first quarter were $3.1 billion, up 45% from the fourth quarter. Equities trading net revenues were $2.2 billion, up 75% sequentially driven by higher revenues across our principal strategies, derivatives and cash equities businesses. Equities commissions were up 3% to $924 million. Higher equity prices across most global markets during our first quarter drove broad increases in client activity and also created market opportunities for our principal strategies area.

  • Turning to risk, average daily value at risk in the first quarter was $127 million compared to $106 million for the fourth quarter reflecting greater customer activity and market opportunities across our trading businesses, most notably in equity markets.

  • Let me now review Principal Investments, which produced record net revenues of $1.7 billion in the first quarter. Favorable equity markets provided a healthy backdrop for principal investments across the globe. Of the $1.7 billion in first-quarter revenues, approximately $500 million reflected gains associated with the adoption of FAS 157, the new fair value accounting standard. Excluding the FAS 157 gains, our corporate and real estate investment business still had a record quarter. Our strategic investments in ICBC and SMFG produced gains of $227 million and $161 million respectively.

  • Asset Management and Securities Services reported fiscal -- first-quarter net revenues of $1.6 billion, up 12% from the fourth quarter. Asset Management produced net revenues of $1.1 billion, up 15% sequentially. This included record management fees of $982 million, up 8% from the fourth quarter and $90 million in incentive fees.

  • During the first quarter, assets under management grew 6% to a record $719 billion reflecting quarterly net inflows of $35 billion and market appreciation of $8 billion. Our continued success in gathering assets reflects our strong investment performance over extended periods and broad product offering that spans all major asset classes and geographies.

  • Securities Services produced net revenues of $525 million in the first quarter, up 6% sequentially on higher activity levels by our hedge fund clients.

  • Now let me turn to expenses. Compensation and benefits expense in the first quarter was $6.1 billion accrued at 48% of net revenues. Non-compensation expenses, excluding consolidated investments, were $1.7 billion in the first quarter, down 6% sequentially. This decrease was primarily due to lower brokerage, clearing, exchange and distribution fees and lower occupancy, professional and market development costs.

  • Headcount at the end of the first quarter was approximately 27,000, up 2% from year-end 2006. Our effective tax rate was 34.2% for the first quarter, down slightly from the 2006 full-year rate of 34.5%. During the quarter, the Firm repurchased 13 million shares for approximately $2.7 billion. We currently have approximately 40 million shares remaining under the Firm's existing authorization.

  • Our first-quarter performance again demonstrated the earnings power of Goldman Sachs. We strive to be a global leader in all of our major businesses and most importantly to have the strongest and deepest client relationships because it is our client franchise that ultimately drives our success. We remain a leader in Investment Banking and the depth of our franchise has allowed us to benefit from the increasing levels in M&A and financing activity of our corporate and financial sponsor clients.

  • Our FICC franchise is extraordinarily diverse and not over-reliant on any single business. This diversity is a particular strength when one market is under stress as we have seen in parts of the mortgage market. We have among the largest equities and principal investment businesses in the world and these areas continue to produce strong results.

  • Our Securities Services business remains a leader in prime brokerage and continues to grow as we win new hedge fund mandates and our existing clients grow. Assets under management hit a new record of $719 billion.

  • I also want to underscore the importance of Goldman Sachs' global scale. Globalization of financial markets is accelerating and that is creating significant new opportunities for Goldman Sachs. We know that much of our future growth will be overseas and our significant global presence in global markets positions us well.

  • As you know, last year, 46% of our revenues were international and this quarter, our international revenues were approximately 50%. There has been much worry these past few weeks following a late February sudden correction in the equity markets. We all know that if recent market uncertainty were to persist for a sustained period of time, investor confidence would weaken and that could meaningfully slow the pace of many capital markets businesses.

  • While you all know me well enough to not expect any prediction about the future, I would simply note that the conditions that have fueled the growth of our business in these past few years remain very much intact. Global economies continue to grow. Interest rates are generally low. Inflation remains in check and credit spreads are tight.

  • As one of the most global firms with leading client franchises in every one of our businesses, Goldman Sachs is well-positioned to benefit over the long term from these favorable trends.

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

  • Operator

  • (OPERATOR INSTRUCTIONS). Glenn Schorr, UBS,

  • Glenn Schorr - Analyst

  • So just keeping on that big picture topic and you didn't mention CEO confidence, but I am assuming that that fits in there as well.

  • David Viniar - CFO

  • Yes, that's true.

  • Glenn Schorr - Analyst

  • But maybe within FICC and your comments about the diversity, mortgage is not a humongous business within FICC for you, but credit is and maybe if you could help give some sort of color in terms of the composition of the business and any thoughts on potential slowdown across structured credit and CDOs and things like that because we all are trying to figure out if we are whistling past the graveyard or watching a slow moving train wreck, so maybe specifically within credit.

  • David Viniar - CFO

  • Let me answer the two parts of the question. One, the various businesses and two, credit specifically. You have heard me say before, we have five big businesses in FICC; credit, rates, currencies, commodities and mortgages. No one business dominates. The biggest businesses in any quarter can change. Mortgage is generally not the biggest, so sized appropriately.

  • The credit business, as I said in my remarks, I can't predict the future, but as we sit here today, we really have not seen any contagion to the credit markets. The day that the equity markets declined a lot, we saw a widening of credit spreads. It was very orderly. There was no lack of liquidity and credit spreads have basically tightened back to where they were as we sit here now. And so as we sit here now, we really have not seen any effect on the credit markets.

  • Glenn Schorr - Analyst

  • Including the potential for CDO issuance going forward? The demand for paper is still there?

  • David Viniar - CFO

  • We haven't seen any change so far. I don't know what will happen in the future, but certainly over time CDOs are an important financing vehicle. Being able to structure credit to put the credit risk that people want in their hands has been an important change in the financial markets and I don't really see that changing.

  • Glenn Schorr - Analyst

  • Excellent. And then just looking at $6.67 in earnings, [$4.50]-ish in book growth. Is there anything besides the buyback that is a differential there, any negative adjustments on the equity side?

  • David Viniar - CFO

  • No, that's it.

  • Glenn Schorr - Analyst

  • Okay. Cool. And then last comment is -- question is on Securities Services. If you look at it on a year-over-year basis, the growth has slowed from the huge pace that you have seen in the past. Is that a maturation of the industry? Is there some pricing issues in the market that we should be aware of?

  • David Viniar - CFO

  • Pricing in every business has always been under pressure all the time, but pricing has actually held relatively firm there. We haven't seen any big change, so I think maybe you have some maturing of the business. It is still a growing business. It continues to grow nicely and we see that going forward too.

  • Glenn Schorr - Analyst

  • Excellent. Thank you.

  • Operator

  • Guy Moszkowski, Merrill Lynch.

  • Guy Moszkowski - Analyst

  • It looks, as you said, like you had, apart from the $500 million in FAS 157, about $600 million of gains in the corporate and real estate portfolio. Can you give us some sense of how much of that was corporate versus real estate?

  • David Viniar - CFO

  • Both of them were meaningful contributors. I can come back and tell you which one was a little bit bigger, but they were both pretty meaningful contributors to that and it was pretty widespread. I think corporate was a little bit bigger than real estate, but both of them were meaningful.

  • Guy Moszkowski - Analyst

  • It sounds like what your last comment would indicate that there wasn't really any -- there weren't two or three positions that really made a big difference. It was kind of across the board.

  • David Viniar - CFO

  • It was pretty good performance across the board.

  • Guy Moszkowski - Analyst

  • And did FAS 157 affect only the corporate or also the real estate book?

  • David Viniar - CFO

  • Both.

  • Guy Moszkowski - Analyst

  • It affects both?

  • David Viniar - CFO

  • Yes.

  • Guy Moszkowski - Analyst

  • Thanks. On commodities, it was flat, you pointed out in the press release on a year-over-year basis, although obviously up versus the fourth quarter. Can you give us any sense for shifting composition when we compare to last year in terms of areas within commodities?

  • David Viniar - CFO

  • I don't think there was a whole lot of difference. In most quarters, you would see that the energy part of commodities is by far the biggest part for us and metals is meaningful, but not as meaningful as energy.

  • Guy Moszkowski - Analyst

  • Okay. Would the same apply on the fourth-quarter to first-quarter comparison that there wasn't a lot of change in terms of the mix?

  • David Viniar - CFO

  • I think that's right.

  • Guy Moszkowski - Analyst

  • Okay. Just turning to the expense side if we could, obviously your expense management was very good on the non-personnel side in particular, but brokerage and clearing expenses were almost surprisingly light, down versus the fourth quarter even though you clearly were doing a lot of trading. Was there a mix thing there going on? Have you found ways of controlling your expenses better than in the past?

  • David Viniar - CFO

  • I look at those numbers as being roughly flat. Yes, they are down a little bit, but they are roughly fat and I think it is really just a mix question. I think it is what is traded on the various exchanges versus what is traded off the various exchanges. Obviously activity levels were high. You can see that in our results and our commissions were still up. But I think it is really just a question of mix and what is in the various businesses and largely what is on versus off exchanges more than anything else.

  • Guy Moszkowski - Analyst

  • Thanks. And then finally just a question on the VaR. As you pointed out, the significance -- the most significant increase was on the equity side. Was that mostly in principle strategies?

  • David Viniar - CFO

  • It was really a across the equities businesses. Like in FICC in equities in our customer businesses, we take risk. We trade with our customers. We end up with risk in doing that and so I would say that the increase was probably pretty equal between customer business, as well as principle strategies.

  • Guy Moszkowski - Analyst

  • Okay, great. Thanks very much, David.

  • Operator

  • Meredith Whitney, CIBC.

  • Meredith Whitney - Analyst

  • I have a couple of questions on recent market events, not having anything to do with sub-prime, but Macquarie just acquired Giuliani Partners and the way they characterized it was an employment exercise given the fact that it has been difficult to make hires of the scale of even 100 employees and you said during your press conference, you are going to continue the pace of hiring. I just wanted to get your perspective and thoughts on the hiring environment.

  • Then my second question is the Fortress deal that was issued this past quarter, you guys had incredible net new flows and I was just wondering can you discuss internally the dialogue between doing -- even considering an option like that for a portion of your funds?

  • David Viniar - CFO

  • Okay. Let me start with hiring. First of all, as you know, the bulk of our hiring is on campuses. So we continue to hire from colleges, from business schools quite a number of people and we are very successful in doing that. It takes a lot of effort, people put in an enormous amount of time into recruiting, but that is one big source of hiring for us.

  • Second, as far as hiring experienced people, which we do a fair amount of as well, it is difficult, but the market is tight. There is a lot of competition out there, but we have a reasonably good reputation. We are generally able to get a reasonable number of good people. But it is not without a lot of effort. Our senior people and all the people at Goldman Sachs spend a lot of time on recruiting and on talking to people. So I am not sure if you want more than that, but that is our take on hiring.

  • As far as what Fortress did, look, our businesses are very integrated. We think there are tremendous synergies amongst our businesses. We think that our client franchise drives a lot of our trading businesses, a lot of our asset management business. Being able to offer the asset management business is helpful to our corporate clients. You can just go through the synergies business to business and so I think that our businesses together are a lot more valuable than separate.

  • Operator

  • Douglas Sipkin, Wachovia.

  • Douglas Sipkin - Analyst

  • Just two questions. One, just getting back to the mortgage business. I know in the formal press release comments, you guys cited mortgages being up I guess on a year-over-year basis, as well as sequentially. What are the other areas within mortgage that performed well in the quarter and are they continuing to? I know it is just -- maybe how should we be thinking about how they are performing maybe in the February/March time period?

  • David Viniar - CFO

  • Without talking about our results in the quarter so far because it is not public, so I can't say anything, all I would tell you, as you look now, so far you really have not seen any contagion from the sub-prime markets to the other parts of the mortgage market. You have seen a little bit of spread widening, a little bit of nervousness, but nothing substantial. Really the difficulty in the market has been so far largely contained to the sub-prime market.

  • Douglas Sipkin - Analyst

  • Great. And then just shifting gears on the asset management side of the fence, alternative money flows down a decent amount. Is that a function of a broader sector reallocation that you guys might be seeing or some of the performance issues you had in '06?

  • David Viniar - CFO

  • Alternative investment flows were still up during the quarter and that is going to vary -- that is going to be a part of the business that is going to be lumpy. It is probably not going to be as smooth as some of the others. Some of it has to do with when funds are raised and various other items. So it is going to be lumpy. I think the fact that it was up and was positive, it is going to be lumpy over time.

  • Douglas Sipkin - Analyst

  • Okay. And then just one final on the fixed income flows. Obviously that has been a very good growth story for GSAM. Anything in particular this quarter with the strength in the fixed income flows -- domestic, international, more liability strategies, any color around that?

  • David Viniar - CFO

  • No, I don't think there is anything special. I think it is really across the various funds. I think it is all of those things. I think home equities are part of the benefit of having a big multi-product global platform.

  • Operator

  • Mike Mayo, Prudential.

  • Mike Mayo - Analyst

  • Can you elaborate more on the non-U.S. growth? What pushed the total -- the 50% of total revenues from non-U.S. this quarter?

  • David Viniar - CFO

  • Well, it is really, Mike, just a continuation of what we have been saying with the businesses outside of the United States, really across the board in every one of our divisions, growing faster than the businesses in the United States. Obviously that can shift quarter-over-quarter. One business could be up a little more in a different region.

  • But overall, the trends in virtually all of our businesses are to be growing faster outside the United States than within the United States. And so again 50% was really a question of time. It was going to happen and it has happened now. I can't tell you it won't slip below that at some point, but it is likely to end up getting bigger rather than smaller.

  • Mike Mayo - Analyst

  • Well, this quarter, what was the revenue growth outside the U.S. versus in the U.S.?

  • David Viniar - CFO

  • Mike, I don't know the exact percentage. It was faster outside the U.S. than in the United States, which of course is why it shifted. It is always tough to really pinpoint it quarter-over-quarter. There is a lot of assumptions that go into that given how global a firm we are and how integrated a firm we are, but directionally you are seeing things grow across the board faster outside the United States than in the United States.

  • Mike Mayo - Analyst

  • And sponsor activity, what percentage of your Investment Banking fees were from that?

  • David Viniar - CFO

  • We don't disclose what percentage any client or any group of clients was. But it is a meaningful percentage. Again, you just need to look at the deals that are being done. Sponsors are very important clients of Goldman Sachs. All of the sponsors, they are very active. We have good relationships and they are, along with our corporate clients, very meaningful clients of Goldman Sachs.

  • Mike Mayo - Analyst

  • And one general question, trading. Why did trading do so well this quarter? Are you benefiting from volatility or what reason would you give?

  • David Viniar - CFO

  • I think we are benefiting from activity, which comes from trending markets, including a trending upward equity market and from the strength of our franchise. I think the strength of our client franchise is what gives us so many opportunities to do transactions and it continues to be strong and it continues to grow.

  • Mike Mayo - Analyst

  • How much has it mattered that [FICCs] has gone up?

  • David Viniar - CFO

  • Well, first of all, during the quarter, FICCs had not gone up at all. It really didn't happen until after the quarter and I think that is a much less relevant indicator of our trading.

  • Mike Mayo - Analyst

  • And then lastly, FAS 157. What should we expect going forward? Just more lumpy results?

  • David Viniar - CFO

  • I think -- look, there is -- mathematically, there will be more volatility with FAS 157 than there was without FAS 157. It would just be a question of math. But I don't think -- after once you get through the initial transition period, I don't think the pattern will be necessarily any different than it otherwise would have been.

  • Operator

  • Ken Worthington, JPMorgan.

  • Ken Worthington - Analyst

  • Maybe first, can you talk about sentiment in China, either CEO or otherwise and to what extent has there been a change in risk tolerance with the correction in the equity markets there and what, if any, impact do you think the correction could have on near-term trading and banking activity?

  • David Viniar - CFO

  • Ken, I don't think there has really been much of a change. You saw a little bit of a decline in the markets, but the markets were awfully hot. Market -- I think sentiment is still pretty good. Obviously the economy in China is still growing quite nicely. People's expectations are that it is going to continue to grow quite nicely and I don't think sentiment has changed because of a couple of weak corrections. I think sentiment is still quite bullish in China.

  • Ken Worthington - Analyst

  • Thank you. And then I am doing a little fishing here, so can you share how Goldman's risk management models performed as the global equity markets sold off in late February and early March? Just any qualitative feedback we can get would be helpful.

  • David Viniar - CFO

  • We look at that all the time. It is a very legitimate question. It is something that we back-test all the time. Obviously, we do it in times of very calm markets, as well as in markets that are much more volatile and the same thing I would tell you in both cases. We look very closely at how our models performed and I think our models performed very well and really what we expected to happen was similar to what happened. Our models are probably a little bit more on the conservative side.

  • The models tend to assume that you don't do anything that fulfills your static and of course, we don't leave portfolios static, so we tend to perform a little better than models would predict and the other thing you always have to remember is models only tell you what will happen in a certain market event. They never tell you what the market event will be. So they are useful, but they are not definitive, but the models were pretty accurate.

  • Ken Worthington - Analyst

  • Excellent. Thank you very much.

  • Operator

  • James Mitchell, Buckingham Research.

  • James Mitchell - Analyst

  • Maybe just a quick follow-up on the comp ratio. It was down to 48% last year. I guess ex the FAS 123 charge, it was 49%. So is that not allocating comp to the FAS 157 adjustment or just sort of an acknowledgment that with a comp ratio of 46% to 47% over the last couple of years, you kind of have to take a tighter look at it?

  • David Viniar - CFO

  • First, we do not look at some revenues to allocate comp to and others not to. To us, revenues are revenues. They come from a lot of different places and a lot of different ways. Revenues are revenues and I think 48% is really just, given where the revenues are at this point in the year, the best estimate of what we think we will have tight at the end of the year.

  • James Mitchell - Analyst

  • Okay. Helpful. Thank you very much. And on time brokerage, just to follow up on that, you had 7% year-over-year growth, yet margin debt on the NYC and obviously that's not the sole driver of that business, but that was up 25% year-over-year on average, which seemed like a pretty good sort of environment. Just wondering why -- was there something in there that we are not thinking about or seeing in terms of why the growth was less than 10%?

  • David Viniar - CFO

  • No, I don't think so. As you said, it is not the sole determinant; it is just one piece of the business. I think as we said before, has hedge fund growth slowed somewhat? Yes, it has, but it is still growing. It is growing nicely. We expect to continue to grow it in the future.

  • James Mitchell - Analyst

  • Fair enough. And lastly, the impact of 157 on equity. Obviously it has some impact on liquid derivative assets, which I think flow through equity. Any impact there?

  • David Viniar - CFO

  • It's very, very immaterial.

  • Operator

  • Ron Mandle, GIC.

  • Ron Mandle - Analyst

  • I have a couple of questions. One is regarding -- I was wondering if you had significant sub-prime residual write-downs during the quarter?

  • David Viniar - CFO

  • Nothing meaningful.

  • Ron Mandle - Analyst

  • Since a lot of the unraveling of the sub-prime market occurred after your quarter-end, would you make the same statement now?

  • David Viniar - CFO

  • First of all, I actually don't agree with that. I think that a lot of it happened before our quarter-end. It has continued since the quarter-end, but I don't see anything different -- for us, there is nothing different in that business before or after quarter-end.

  • Ron Mandle - Analyst

  • Can you say how much you have in sub-prime residuals?

  • David Viniar - CFO

  • No.

  • Ron Mandle - Analyst

  • Okay. And also in regard to credit exposure to sub-prime lenders, using say New Century generically, but the sub-prime lenders as to their access to credit has diminished and their ability to buy back EPD loans from you has diminished. What would you tell us about your credit exposure in that regard?

  • David Viniar - CFO

  • I would tell you that we are careful --.

  • Ron Mandle - Analyst

  • Good.

  • David Viniar - CFO

  • That we do the best we can in providing and obtaining terms when we make loans to anyone which has the appropriate security and the appropriate haircuts and we do what we feel we need to do at the right time to mitigate our credit risk when we think there are issues and I won't tell you that we will never or have never had credit losses, but they are very modest when we have them.

  • Ron Mandle - Analyst

  • And in the current environment, do you think that that will continue to be the case given how quickly the access to liquidy of some of the sub-prime lenders has dried up?

  • David Viniar - CFO

  • I think for us, it will not be terribly meaningful for Goldman Sachs.

  • Ron Mandle - Analyst

  • Good. And I just have one question on 157 and that is is there an analogy with 123 in the following sense that there is a big impact in the first quarter and then there is a trailing impact going forward or have we really seen all the initial impact and then it is just that there is new accounting?

  • David Viniar - CFO

  • I think it is the latter. I think there was just an initial transition impact and then with new accounting, it will be slightly different each quarter than it otherwise would have been and over time, the numbers are always the same.

  • Operator

  • Michael Hecht, Banc of America.

  • Michael Hecht - Analyst

  • I just wanted to follow up on FICC. You guys noted the record results in credit and mortgages. I was just wondering if you could talk a little bit more about the traction there in terms of it being more environmental versus share gains and particularly in mortgages, are you seeing the best traction in sub-prime versus prime versus commercial or non-U.S.?

  • David Viniar - CFO

  • I think we have handled the turmoil in the market pretty well. Again, in mortgages, you have to remember to size it and I've talked about this. So sub-prime first. Sub-prime is part of mortgages, which is part of FICC, which is part of trading, which is part of Goldman Sachs. So the size of mortgages in all of Goldman Sachs is modest, while the business is important like all of our businesses. Credit businesses are a little bit better. I'm sorry. A little bit bigger -- it is bigger than the mortgage business, but we really haven't seen any contagion to the credit markets. The credit markets continue to be quite robust. Credit spreads continue to be tight. There continues to be a lot of liquidity in those markets.

  • Michael Hecht - Analyst

  • On the FX side where you guys noted you had year-over-year declines, can you just talk about trends there? Is it just lower volatility or any impact from unwinding or less activity from carrytrades, that kind of stuff?

  • David Viniar - CFO

  • I don't think I would attribute it to anything. I would say that it is -- the business was still quite strong in the quarter, just not as strong as what was a really strong quarter last year. The business performed very well.

  • Michael Hecht - Analyst

  • That's fair enough. On the equity side, I just was wondering if we can get any more attribution on the drivers, especially equity trading. I understand a lot of stuff goes through that number, but I think there is kind of a misperception out there that prop trading drives a lot of that. I'm just wondering if there is any other color you can give us on contribution from GSPS versus equity derivatives versus other drivers of the business like principally priced equity trades in the cash equity business?

  • David Viniar - CFO

  • I think you said it correctly. There is a misperception out there. Our GSPS business is a very good business. It has been for a long time at Goldman Sachs and was in the first quarter of this year, but it is not at all the driver. A great deal more of equity trading is the customer business than is GSPS and while GSPS was up, the customer business was up even more. It is really a lot of activity across the board in all types of trading of both cash and derivatives with our clients.

  • Michael Hecht - Analyst

  • Fair enough. That's cool. On the asset management side, obviously flows phenomenal across the business. On the alternative side, we saw a little bit of a slowdown in flows and with the drop-off in performance fees. Can you just touch on performance kind of broadly across alternatives and any color on that?

  • David Viniar - CFO

  • Again, it has been pretty publicized across the hedge fund complex, especially [Global] Alpha performance in 2006 was not terrific and so that is something that obviously we hope will not continue, but performance across most of our other products was very good.

  • Michael Hecht - Analyst

  • And then just last question. You guys note in the release that the hedge on the Sumitomo investment I guess was 71% or so. Can you talk about whether you have plans to increase that and then anything you can say on ICBC and any plans to hedge or whether you can hedge that over time?

  • David Viniar - CFO

  • Let me do it in reverse order. ICBC, we can't sell or hedge directly until about half of it in early 2009 and the other half later in 2009. Sumitomo, the last third of the position was eligible to be hedged starting February 7. We have hedged some of that. We will likely hedge more of that in a measured way over time when the market allows us to do that in a profitable way.

  • Michael Hecht - Analyst

  • Great. Thanks. Great quarter.

  • Operator

  • At this time, there are no further questions. Please proceed with any additional or closing remarks.

  • John Andrews - IR

  • Great. This is John Andrews again. We would like to thank you for listening today. This call will be available on replay on our website in a couple of hours. In the meantime, again, thank you for your time.

  • Operator

  • Ladies and gentlemen, this does conclude the Goldman Sachs first-quarter 2007 earnings conference call. You may now disconnect.