高盛 (GS) 2007 Q4 法說會逐字稿

(OPERATOR INSTRUCTIONS)

Welcome to our fourth quarter earnings conference call.

Today's call may include forward-looking statements.

These statements represent the firm's belief regarding future events but 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 these forward-looking statements.

For a discussion of some of the risks and factors that could effect 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 to you read the forward-looking disclaimer 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 telecast 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, Dan.

I would like to thank all of you for listening today and would also like to wish everyone Happy Holidays.

I'll 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 $46 billion.

Net earnings were $11.6 billion, and earnings per diluted share were $24.73.

These results generated a return on common equity of 32.7%.

Book value per share was $90.43, an increase of 25% over year end 2006, despite the repurchase of 41 million shares for nearly $9 billion.

For the fourth quarter, net revenues were $10.7 billion.

Net earnings were $3.2 billion, and earnings per diluted share were $7.01.

I would like to begin by noting that our record results in 2007 were not driven by the outperformance of any individual business, but rather by the cumulative impact of record performances across each of our businesses.

In favorable environments, Goldman Sachs, like the rest of our peers, is expected to produce strong results.

However, we believe that the true test of our franchise is relative performance throughout the cycle.

In light of the recently more challenging market conditions, our record results demonstrate the diversity of our business mix, the breadth of our global footprint and most importantly the strength of the Goldman Sachs client franchise.

Our performance is a direct byproduct of the talent of our people and their tireless commitment to our culture of risk management, teamwork and excellence.

I'll now review each of our businesses.

Investment Banking posted its second best quarter, with net revenues of $2 billion, down 8% from the record third quarter.

For the full year, Investment Banking net revenues were a record 7.6 billion, up 34% from 2006, the previous record.

Within Investment Banking, fourth quarter advisory revenues were $1.2 billion, down 12% from the record third quarter.

Goldman Sachs once again ranked first in announced M&A globally for calendar 2007 through November.

We advised on a number of important transactions that closed in the fourth quarter including the EUR 72.1 billion sale ABN AMRO to Consortium led by Royal Bank of Scotland.

BAYERISCHE HYPO $32 billion sale to Stat Oil and TransOcean's $17.4 billion acquisition of Global Santa Fe.

We are also advised on a number of significant announced transactions, including Commerce Bank Corp.'s $8.6 billion sale to Toronto Dominion Bank.

ICBC $5.6 billion acquisition of a 20% stake in South Africa's Standard Bank, and ABU DHABI National Energy's $4.6 billion acquisition of Prime West Energy Trust.

Fourth quarter underwriting net revenues were $733 million, unchanged from the third quarter, as equity underwriting revenues grew 14% to $403 million and debt underwriting declined 13% to $330 million.

While Global Equity markets evolved for much of the quarter, the strength in equity underwriting was driven by a robust and diversified portfolio of transactions.

Debt underwriting revenues declined, given continued dislocation in leverage finance markets.

During the fourth quarter, we participated in many noteworthy underwriting transactions, including Paribas $3.7 billion IPO, Near Star's $2.5 billion IPO, and Freddie Mac $6 billion preferred share offering.

While we can't predict the environment for Investment Banking 2008, the current level of strategic dialogue with our clients remains high.

However, continued Capital Markets dislocation concerns about the broader economic environment could impact the pace of Investment Banking business in 2008.

Underwriting activity has remained robust, as Global Equity issuances offset recent weakness in leveraged financed markets.

Our backlog declined during the fourth quarter, but remains higher than year end 2006 levels and is well diversified by both geography and sector.

Let me now turn to Trading and Principal Investments, which is comprised of FICC, Equity and Principal Investments.

Net revenue's were $6.9 billion in the fourth quarter down 16% from the third quarter.

Full year net revenues were up 22% over fiscal 2006 to a record $31.2 billion.

FICC quarterly net revenues of $3.3 billion were down 32% from the record third quarter.

For the full year, FICC Net revenues were a record $16.2 billion 13% higher than fiscal 2006.

FICC continues to benefit from significant diversity across both product mix and geography and a robust client franchise.

The operating environment for FICC was less favorable for much of the fourth quarter due to lower levels of client activity, particularly in the month of November.

Wider credit spreads, heightened volatility and reduced market liquidity kept many market participants on the sidelines.

Credit revenues decreased sequentially, as gains on certain equity investments, including $900 million for Horizon Wind were included in third quarter revenues.

The sequential decline was reduced by gains of approximately $500 million related to our leverage finance business in the fourth quarter.

Commodities net revenues were up sequentially, largely driven by approximately 800 million in gains associated with the partial sale of the Cogentrix Power Plant portfolio.

Currencies, rates and mortgages continues to be solid, though down from the record third quarter.

Turning to equities, net revenues for the fourth quarter were $2.6 billion, down 17%, reflecting declines in both our principal activities and our customer franchise, compared to a record third quarter.

Equities commissions were down 7% from the record third quarter to $1.2 billion.

For the full year, equities produced record net revenues of $11.3 billion, up 33% over fiscal 2006.

These results reflect the strength of the operating environment for equities, as most major indices rose during the year.

We also continued to benefit from meaningful growth in our equity derivatives franchise and market share gains in our electronic trading business.

Turning to risk, average daily value at risk in the fourth quarter was $151 million compared to 139 million for the third quarter.

The increase in VaR was driven by higher volatility across mortgage and equity markets.

Let me now review principle investments, which produced net revenues of $1 billion in the fourth quarter.

Our investment in ICBC produced a $163 million gain and we generated $838 million in gains and overrides from a diverse portfolio of corporate and real estate principle investments.

For the full year, principle investments produced net revenues of $3.8 billion, excluding SMFG and ICBC, we generated a record $3.4 billion in gains and overrides from corporate and real estate principle investments in 2007, more than doubling the $1.4 billion we earned in fiscal 2006.

This performance reflects the continued execution of our strategy to be an advisor, financier and coinvestor with our clients.

Asset management and security services reported fourth quarter net revenues of $1.8 billion, down 6% from the third quarter.

Full year revenues were up 11% to $7.2 billion.

Asset management produced net revenues of $1.2 billion, down 3% from the third quarter.

Management fees were down 2% sequentially to $1.1 billion.

For the full year, asset management net revenues were a record $4.5 billion.

Management fees were 4.3 billion, up 29% sequentially.

During the fourth quarter, assets under management grew 9% to a record $868 billion.

Total inflows during the quarter were 58 billion, including 42 billion into money markets, as investors continued to seek higher quality assets, and 16 billion of additional inflows, largely in fixed income.

We also benefited from $14 billion in market appreciation during the quarter, mainly in fixed income.

For the full year, assets under management increased 28%, or a record $192 billion.

Total inflows during the year were 161 billion, including 88 billion into money markets and 73 billion into -- across fixed income, equity and alternative investment assets.

We also benefited from $31 billion of net market appreciation, mostly in fixed income and equities.

We continue to be focused on the buildout of our private capabilities, particularly in actively managed alternative assets, and remain very optimistic about the growth prospects for asset management.

Securities services produced net revenues of 672 million in the fourth quarter, down 12% sequentially, largely due to seasonality.

For the full year, securities services net revenues were a record $2.7 billion, up 25% annually.

These strong results reflect our market-leading franchise and prime brokage and our success in winning new client mandates.

Now let me turn to expenses.

Compensation and benefits expense in the quarter was $3.3 billion.

This results in a full year compensation to net revenue ratio of 43.9%.

Non-compensation expenses were 2.4 billion in the fourth quarter, up 12% sequentially.

This increase was primarily due to market development and occupancy costs, as we continue to expand our global footprint.

Occupancy costs included $128 million of exit costs related to the firm's office space.

For the full year, non-compensation expenses were $8.2 billion, up 23% over 2006.

Half of the annual increase was due to activity-related brokerage clearing, exchange and distribution fees.

Head count at the end of the fourth quarter was approximately 30,500, up 15% over 2006 and 2% from the third quarter.

Our effective tax rate was 34.1% for the full year.

During the quarter, the firm repurchased 11.6 million shares for approximately $2.7 billion.

For the full year, we repurchased 41.2 million shares representing $9 billion of capital.

We currently have approximately 71 million shares remaining under the firm's existing authorization.

This includes 60 million shares of an increased authorization recently approved by our board.

We faced significant challenges in 2007.

The fact that we produced record net revenues and earnings serves as a confirmation of several strategic initiatives, which we implemented over the last several years.

Principally, our commitment to serving as advisor, financier and coinvestor to our clients, our consistent focus on product innovation to meet their needs and the continued expansion of our global footprint.

Within investment banking, we believe a key driver of our growth will come from the continued expansion of our business model into developing markets.

We find in many of these markets that are clients are as focused on expanding their global presence as building domestic market share.

Investment banking continues to drive varies revenue streams across the firm, particularly within the context of our principal Investment business, were almost two-thirds of our investing opportunities are sourced through our client facing franchise.

FICC produced another record year in arguable the most challenging mortgage and credit markets when have seen in almost a decade.

At the core of fixed success is the strength of its clients franchise.

Clients come to us for Best-in-Class execution, especially in dislocated markets.

We remained committed to making markets for our clients, even at the height of market difficulty and illiquidity.

While we can't predict that FICC will experience another year of double-digit revenue growth in 2008, we see tremendous opportunities across each of our five businesses to continue product innovation and expand our footprint.

Our equities business continues to benefit from bifurcated high touch and low touch business model.

Our expertise in pricing and risk managing large high touch transactions, coupled with our robust electronic trading capabilities have allowed us to continue to gain market share and leverage the expense structure.

Our Principal Investing business had a record year, as our investments have continued to perform well and provide significant opportunities for harvesting.

We have a diverse portfolio of Corporate and Real Estate Principle Investments around the world and continue to see compelling investing opportunities.

Within Asset Management, we've continued to grow and diversify our product offerings and expand our international reach.

In the last two years, we've increased Assets Under Management by over $330 billion.

Building out our Private Wealth Management business remains a key strategic priority and we expect that strength of our brand and the diversity of our product offerings will position us to be successful in this pursuit.

Our Prime Brokerage business demonstrated significant revenue growth of 2007 by maintaining a leading market share and securing many new client mandates.

We believe that growth in hedge fund assets will continue to drive compelling opportunities for this business.

Given the current dislocation in certain of the world's Capital Markets, we are of course cautious about the near-term outlook for our business.

However, we remain very optimistic about the medium and long-term outlook for Goldman Sachs, as we continue to chase GDP around the world.

Long-term, global economic growth will continue to be the fundamental driver of our business, although many are concerned about the potential for a slowdown in domestic and/or global economies, we feel confident about the strategic steps we have taken thus far and we look to leverage our global client franchise, firm culture and the talent of our people to maximize shareholder returns over the long-term.

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

(OPERATOR INSTRUCTIONS) And your first question will come from the line of Guy Moszkowski with Merrill Lynch.

Good morning.

Good morning, Guy.

I wanted to ask you first if you could elaborate a little bit on the tenor of strategic dialogues that you're having with investment banking clients and the degree to which your banker sensed that CEO's boards of directors are getting more cautious in the U.S., and possibly in Europe and how that might effect strategic activity over the next year or so.

The dialogue is quite broad and quite widespread.

It's really -- it's not concentrated in an industry group.

It's not concentrated in a region.

Its' quite broad, quite widespread and I think, we have not seen the cautiousness in the dialogue yet, but I think how things unfold will be directly correlated to what happens in the world.

I think many of these, many of these conversations will turn into transactions, if, markets recover, if economies grow, and I think if markets don't and economies are slower, then I think many of them will not turn into transactions.

And David, could you give us a little bit more elaboration, sort of numerically on your comment about the backlog?

Well, we don't disclose numbers, Guy, and we don't disclose percentages, but if you look at it from, from the third quarter to the fourth quarter, the decline was largely in mergers and it was largely because a lot of deals were closed and not as many came in, and if you look at it from year-over-year, it's kind of flattish in mergers and FICC and fixed income and it's up in equity underwritings.

Okay.

Thanks, that's helpful.

You had mentioned in the Q3 10-Q, you alluded to about a $1.8 billion CDO exposure and I think on the tapes this morning, I've seen that you said something about 400 million.

Are those comparable numbers, and if so, was the reduction all due to write-downs, or were you actually able to sell some?

No, they are not completely comparable.

The 1.8 was CDOs and residuals and CLOs and a couple other things.

I think the comparable number was about a little under a 1 billion to a little under 400 million.

And more of it was write-downs than sales.

Okay, and the 500 million that you referred to in credit, was that basically a recovery on some of the 2 billion-plus gross leverage finance write-down in the third quarter?

Correct.

Realized recoveries, right?

Most of that was sales above the marks.

Okay, and a small question, the 104 million in overrides that you referred to, is that all realized, or is there some difference in the way that you report that now under FAS 157 and 159, where you would have a sort of accruals that could bounce around?

All of our overrides are realized.

Okay.

And then I guess a final question I would like to ask is just on comp, when we look at the comp ratio year-over-year, it's up a tad and of course if we were to back out the nonrecurring portion of last year's 123R charge, it would be up a little bit more than that.

And I'm just wondering why, given the strength of revenue that you had on the one hand, and the, the much weaker sort of employment environment that we're seeing in the industry here at the end of the year, why we couldn't have seen maybe a little bit more comp leverage?

Well, I, I think, you know I think people pay too much attention to the ratio as a ratio.

As we've told you before, we, we compensate our people individually.

We don't start with the ratio and give it out.

We look at each person.

We reward people for their performance, for the firm's performance, for their business unit's performance.

We also look at the market environments.

We look at all those things.

We also did have 15% head count growth over the course of the year, and when we took all those things in consideration, we felt that that was fair compensation for our employees and fair income for our shareholders.

Fair enough.

Hard to argue with the latter.

Thank you.

You're welcome.

Your next question will come from the line of Glenn Schorr with UBS.

Thanks.

Hi, Dave.

Good morning, Glenn.

Good morning.

In principle investments, you had a couple of comments there that were interesting.

If you take out and put aside aside SMFG and ICBC for a sec, you have about 12 billion in principle investments that you note in the press release.

Based on your comments as advisor and financier and coinvestor, looking at the 12 billion, even if you put a 20, 25% ROI over time on that, which would be great, you've been producing higher than that.

Where else, where else do the gains on other corporate and real estate flow through, and where are the assets that are not being included in that principle investment table?

It's obviously coming from several places.

Well, first of all, the principle investment gains on the principle investment line are all related to the assets on that table.

So there's no other assets that flow into that line in our financial statements.

First of all, the returns on our principle investments have been quite good, and we have a very diverse portfolio.

It is very diverse by industry.

It is very diverse by geography and it is both real estate and corporate and it's just -- it's a good business.

We have the ability through our client franchise to source a lot of investments, so it's just been a very -- it's a good business for us.

Now, I'm not going to tell you, as you know, that it's going to be $800 million every quarter, but I think it's going to be a good and growing business for us.

And the funds that you all managed today, they have the ability to coinvest along with your coinvestments?

What do you mean, coinvest?

The funds are for large principle investments, the fund would be the principle vehicle for us coinvesting with our clients.

Okay, okay.

That's what I was just checking.

Yes.

And then maybe can you help us with the book growth, and this is always screwy, especially in the fourth quarter, but just maybe conceptually.

I know you're not going to give the numbers.

You have $7 in earnings, you paid dividends, you have some buybacks.

But somehow book grows by about $7.

Thinking throughout inputs, I know you give out equity and comp and you have some tax benefits, but help me make sense of that.

Guy, we can get back to you off line and go through exactly the numbers, but I think it's pretty much what you said.

It's, you start with earnings.

You also have to add -- I'm sorry, the one thing that I think you missed from your calculation in the fourth quarter is all the equity-based compensation.

So you have earnings, you have equity-based compensation, and you take away from that dividends and share repurchases and you end up with the book value.

And no major changes to the equity base?

No.

No comp this year?

Okay.

No.

Roughly -- no material changes.

Okay, and I didn't hear if you said in your prepared remarks, any major movements between level 2/3?

No.

Well, yes, movements between level 2/3.

There are always lots of movements.

The net number--

The net basis.

The net number will be fairly similar.

We, had at the end of the second quarter, it was roughly 6% of our assets.

At the end of the third quarter, it was roughly 7%.

At the end of the fourth quarter, I think it's going to be back to about 6%, but you have things, we think there's much more focus on it than there should be.

There are things like Level 3 assets at the end of the third quarter included a lot of leveraged loans.

Some of those were sold.

Some of those moved into Level 2 because there's a much, much more active market in leverage loans.

On the flip side, principle investments, by definition, are Level 3 assets and we made more principle investments in the fourth quarter.

So it goes up for that.

So roughly flat, a little bit down on a marge basis.

And maybe last one is just in general, I've seen larger balance sheets in general for everybody.

Part of that is growing with your equity, but I would think that some people in these uncertain times might want to take down the size of the balance sheet a little bit.

You guys don't disclose it, but if you could just make a comment on that thought.

Our balance sheet will be up a little bit and our leverage is -- I think it's roughly flat versus the third quarter, if you look at assets to equity.

On it's growing pretty much in line with equity from the third quarter to the fourth quarter.

Okay.

Thanks, David.

You're welcome.

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

Good morning.

Good morning, Meredith.

And Happy Holidays.

I have two unrelated, or unrelated questions.

I'm just going to ask them both at once so I can have my associate here on speaker phone.

But as the history of available information on Goldman is limited, I have only back to '99, I want to try to do some tea leaf reading with respect to your comments on FICC.

So in not one of those year-on-year progressions did you have a negative FICC turn, and in most, almost all but one did you have single-digit growth year.

And then you had negative growth on the equity lines and the obvious negative growth years '01, '02.

Under what circumstances could you fathom a, not just not double-digit growth, but a negative growth scenario in FICC?

And then the second question is, if you would please, because I get a lot of questions on this, walk through how you manage counter party risk in your various businesses.

Okay.

First one, I'll give you an easy answer to the first one.

An environment like the month of November that lasts for the entire year 2008.

Clearly, we would not see growth in FICC revenues if that happened, because basically what happened, because of the lack of liquidity, because of the volatility, clients sat on the sideline.

There just was not a lot of activity.

For us, and we've said this before, that's what really drives our revenues, really in all our businesses, but in FICC as well.

It's not the direction of interest rates or the direction of commodity prices or the directions of currencies.

It's activity levels.

And in the month of November, there was a big lack of liquidity in the markets and very little activity.

So that would certainly not be a good environment for FICC.

We would not have double-digit growth.

I doubt we would have any growth if that happened.

Okay.

You second question, counter party risk management .

That is all part of our risk management.

Counter party risk, credit risk, market risk.

We don;t separate them, we have a large group of people who look at our credit risk around the world therefore counter party risk ad we have just like market risk, in credit risk we have risk limits.

We have risk limits by counter party, by industry, by geography.

It's cut in many different ways and what we tend to put in place for to enable us to continue to do business with counter parties, if we get near or at their limits is we put mitigates in place, like collateral.

We will have collateral based triggers of credit exposures to firms or we will hedge certain things with CDS depending on what's happening, but we look at our party counter exposure as closely as we look at any other risk.

Set a whole series of limits and that's how we

Okay .

If I could just follow up on that, do you see in '08 of that being a major factor for a major risk for the industry or there others larger than

Counter party risk?

Yes.

I don't view it as being any-- I'm sure there are some counter parties for whom-- where it will be a bigger risk to them in 2008 than the past and some where it won't.

I dont see it being any-- we always look at this as a really big risk and so I don't think it's going to be a big risk in 2008 than it was prior.

Thanks so much.

Your next question will come from the line of Roger Freeman with Lehman Brothers.

Good morning, David.

Good morning, Roger.

With respect to any net impact of your positioning in mortgage credit this quarter, looks like it was pretty much a push, where it was a positive last quarter.

Is that a fair assessment?

No, I think what we said was it was still strong or solid, but lower than the record third quarter.

Okay.

Would -- where would you characterize your positioning there right now?

Are you net long or short, mortgage credit?

I think you can assume that the fact that we told you we were short at the end of the third quarter was a moment in time thing.

That is not likely to happen very often.

It's not good for us to disclose long or short in a trading position, and it's something that can change every day.

So I think you should not expect to see that very often.

Let me just ask this.

Last quarter, you thought we were sort of closer to the bottom in valuations.

What do you think about the market right now, and specifically, when do you think there's going to be a bid for some of the maybe higher quality, say, CDO, the higher quality tranches in CDOs, and do you expect to actually be a liquidity provider in that area?

I think we are still closer to the bottom, and I don't think there's a problem with the bid.

I think there's a bid.

I don't think there were many offers.

So I, I think it's a question of people actually being willing to sell what they have, not the fact that there aren't buyers.

I think there are buyers there.

For the right assets at the right price, yes, we would be a buyer.

Well, I mean the transactions that have occurred have largely been institutions that are in a distress situation.

I guess the question is when does that bid asset narrow to a point where you actually get a sort of liquid secondary ?

That's the question, and I'm not smart enough to know the answer, but I think it's really going to be a question of sellers being willing to sell things at the then-prevailing market price.

Okay.

What about the commercial mortgage market?

That's I think a bigger business for you than residential, right, and can you talk about your hedging?

Do you have sufficient credit hedges in that business?

It's not really a bigger business for us in the residential business.

We are, we're a big player in it.

We provide financing for people and we trade CMBS, and it's a risk that we manage just like all of our other risks.

It's not different than anything else.

We look on a day to day basis at our exposure.

We look at if we have commitments, how do we hedge them.

We look at times to go long, times to go short.

So it's not necessarily bigger business than the residential business.

It's part of our mortgage business, which is an important business, but certainly not outsized in the context of our FICC business.

So you wouldn't consider the widening and spreads in CMBS, (inaudible) -- of any significant contributor to the sequential results?

No.

Okay.

Lastly, can you just maybe expand a little bit more on the level of client engagement, specifically talk about December now versus November so far and maybe by product, where did you see the weakest client engagement and where was the relatively strong last month?

December is two weeks old.

It's very hard to say how things are going to unfold.

Our expectation is for the rest of December there's just not going to be that much going because of Holidays and a lot of people will go away and hopefully it will pick up in January.

The weakest thing environmentally, in the fourth quarter was the credit markets in November.

Lack of liquidity.

Very difficult markets, and it's too early to tell in December.

Okay.

Thanks for the comment.

You're welcome.

Your next question will come from the line of Mike Mayo with Deutsche Bank.

Good morning.

Good morning, Mike.

Hi.

I might have missed it, but how much in total write-downs did you take?

You said maybe 800 million on CDOs and COOs if you could confirm that.

Also, if you have write-downs on mortgages or CDOs elsewhere?

We didn't say, so you didn't miss it.

It's not a number we disclose.

Our mortgage business was profitable over the year.

We took some write downs on our loan mortgage inventory, and in cases where we had hedges or other short positions they were up, they were up more than the loans were down, but on both sides of it, and we're not going to disclose the number in the context of some numbers you've seen, both sides were relatively modest.

Would the write-downs have been more than the $500 million of recoveries from the leveraged loans?

We're not going to disclose the number.

Okay, and your leverage loan, you had 42 billion at the end of the third quarter.

Where is that now, and how did it get there?

We had $42 billion of unfunded commitments at the end of the, at the end of the third quarter.

In the fourth quarter, we sold or canceled 16 billion, 9 billion was funded.

We made $10 billion of new commitments and that leaves us with $27 billion of unfunded commitments at the end of the fourth quarter.

I think those numbers add up.

And I mean you had gains, even though some of the leverage loan indices kind of round tripped and then more.

Can you talk about what you're seeing in that market?

Yes, virtually all of those gains were realized gains, Mike.

So virtually all of them were, as I said, realized.

So things that were sold above the marks.

And I think what you have seen is, it was a -- we went through a whole cycle in the fourth quarter in the leverage loan market.

It started off basically closed.

Then through late September and most of October, it was quite robust, and then in November, it was quite slow again.

I think the market is difficult, but the difference between now and August is -- and we were getting deals done last week and the week before and the week before that.

And so for well instructed, correctly levered, correctly priced transactions, you can get them done.

There are buyers.

And then lastly, non-U.S., you talked about.

Can you talk about your non-U.S.

growth in the fourth quarter versus your U.S.

growth, and kind of what you're seeing by geography?

How much is the rest of the world getting dragged down by the credit situation in the U.S.?

Towards the end of the fourth quarter, you saw some of the non-U.S.

markets were effected as much as the U.S.

markets.

The markets in Asia were down quite a bit over the course of the month of November.

So I think you did certainly see that effecting the markets overseas as much as they effected the U.S.

When we look out, though, the trajectory remains the same, in that we expect our business to grow faster outside the U.S., especially in Asia, especially in some of the brick countries, and add Korea, Middle East to that, than we do in the U.S.

, so we expect U.S.

to grow as well.

So no change in the trajectory at

All right, thanks.

You're welcome.

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

Good morning.

Good morning, Jeff.

As we think to 2008, can you talk a little bit about your budgeting process?

I guess I'm trying to get on such a volatile environment where things went from such feast or famine, October to November, how do you try to plan for a 2008?

Look, it is a volatile environment, but I will tell you it's not harder now than it is any other year, because one of the things we know for sure is if things seem -- if things seem stable, we're probably wrong, because the world is a volatile place, and whatever we think is going to happen, what we know for sure is it will be something different, it will be better or it will be worse.

It will not be exactly what we think.

Budgeting is a very difficult process and it's why it's not a one-time a year thing for us.

We're going through it right now.

We will look at people's best estimates of where their business will be.

We'll give, we'll allocate resources based on that and that will be head count and that will be capital and that will be balance sheet and then we'll go a couple of months into the year and we will reassess.

And we are constantly reassessing that and we'll do a mini budgeting process several times a year to update that, because the -- because we know the markets change.

And maybe getting even a little more touchy-feeley off of that, I think back to a slide you have shown before showing M&A activities, a percentage of global market cap, indicating that things are real good in '06 and early '07, but not nearly to the level they had been in prior peaks.

As far as some of the froth or peak cyclical activities levels we saw on M&A based on a metric like that, how do you look at things going forward?

Are things really different this time, or is there really the potential for a big kind of '08/'09 near-term increase in something like M&A activity with big LBOs being sidelined?

Jeff, I actually don't have those statistics in front of me, so we will get back to you on those, but just environmentally, we're likely to see fewer of the mega public to private LBOs than we saw.

I think that's pretty clear.

The business is not over or dead or anything.

There are going to be lots of leverage buyouts done on reasonable sized deals, even on whole companies or on divisions of companies.

Just don't think we'll see the mega public to privates we saw.

So that will be a decline.

And the real question is, is that going to be replaced by the strategic activity?

We've seen a bunch of fairly large strategic deals announced.

There is a lot of dialogue going on, and I think whether that dialogue becomes transactions is going to be very much related to the markets recovery and to the economies continue to grow.

I think if they do, we'll see a lot of them become transactions.

Okay, thank you.

You're welcome.

Your next question will come from the line of Douglas Sipkin with Wachovia.

Good morning, David.

Good morning, Doug.

Just a couple of questions here.

First off, how would you categorize the market for gaining prime brokerage business this year versus last, and I would say more near-term over the last half of 2007 versus maybe '06 and '05?

The business is growing.

It continues to grow, I think the hedge fund asset class, is an asset class that's going to keep growing.

People are putting money into hedge funds and we are one of the leaders in that business and we have a very high share in the business and I think we continue to gain a high share of clients in that business.

Okay.

Secondly, obviously as it relates to the mortgage asset class, you guys did a phenomenal job this year.

I mean any, any thought process within the firm to maybe get bigger in some of these distress businesses that obviously now valuations are much more compelling, while some of your competitors are back tracking, so seems like it's a pretty good opportunity to get large inner that asset class?

Looking for opportunities to buy distressed assets has been a good business for Goldman Sachs for many years.

It was in Asia.

It was in Europe.

It was going back to the RTC in the U.S., in the early '90s.

I mean it has been a business that we have been in for a long time and I would expect that hopefully we'll see some opportunities in the mortgage world for us to buy distressed assets and in different asset classes, in different locations in different times it, is a core competency at Goldman Sachs.

We look for different opportunities.

Okay, great.

Shifting to the asset management business, obviously very flows on liquidity, not surprising.

I was surprised to see the very large and substantial fixed income flows.

Is there anything specific to the fourth quarter for you guys?

Is it a function of allocations or good performance, anything outside of just, you know, people putting money to fixed income that you can point to?

It seemed like it was such a big number for you guys.

I think it is what you said.

I think as people looking for high quality assets and I think it's been our performance, which has been pretty good in that space.

Great.

Thanks for taking my questions.

You're welcome.

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

Hey, good morning.

Good morning, Jim.

Most of my questions are answered, but maybe a couple minor ones.

First off on the buyback, you bought about 41 million shares last year out of the 60.

Now you're up to 71.

Do you think you would accelerate that into '08 given that you were a little bit, you weren't as aggressive in '07 and probably rightfully so in the second half of this year?

I don't -- we were -- we bought back a few fewer shares in '07 than in '06.

I think the best thing to use is what we did for '07 looking at '08.

But it can vary from that a little bit.

We increased the authorization, because we were down to 11 million shares.

We could use that up and we wanted to make sure that we had the dry powder if we wanted to buy back more.

We'll see how those things unfold.

I think it will be somewhere in that same range.

Okay, fair enough.

Then the other question on the advisory fees, the last two quarters seems to have been, from a realization rate, if you will, at least publicly announced completed volumes.

Have you seen a step up in sort of non-M&A advisory revenues, given the amount of turmoil in the markets?

Has that been a part of that, or is it simply every quarter it's a little different in terms of the profitability of each deal?

It's the latter, really is the latter.

On, great.

Thanks.

You're welcome.

Your next question will come from the line of Prashant Bhatia with Citigroup.

Hi.

Good morning.

Just on the fixed income trading revenue, in looking at it, backing out Horizon and Cogentrix and so on, it looks like the revenue fell from 5 billion last quarter to about 2 billion this quarter.

I know you talked about activity levels being a lot lighter, clients on the sidelines.

But can you elaborate a little bit more?

Was the whole decline just clients really pulling back?

That was -- the whole decline can never be, never be explained by just one thing, but there was a lot less activity in the quarter.

There were certain things, like as we mentioned, within FICC, we end up with certain equity positions as well, like Horizon that was, that was sold in the third quarter that we didn't have in the fourth quarter.

So you'll see things like that sometimes.

Markets were more difficult, activity was lower and so it was really a variety of things.

And November was still a positive month?

We don't disclose our P&L by month.

Okay.

Also, on, taking advantage of distressed assets, can you talk a little bit about the mortgage servicer you just purchased, or is that more strategic to help you take advantage of some of the distress in the CDO marketplace, or is that more just a general investment?

It, it's both.

It's not, it's not just to help us take advantage of the distressed environment that we think we're in.

We -- there's going to be a mortgage market in the United States going forward.

It's going to -- and it's going to be a big market and it's going to be a big business.

And being able to service assets is a key to being successful in that business.

We think [LIT] is one of the best services around.

We think they have the right standards, good quality people and we think being able to purchase them is going to help us as the whole mortgage market kind of unfolds going forward.

Okay, so a little of both, strategic and business you want to be in now?

Yes, absolutely, more strategic than anything.

Then on the asset management side, I think 80, $90 billion in money funds flows that have come in, can you just give us a feel if you have one on, how much of that can potentially stick and how much of that is just taking advantage of the natural arbitrage when the Fed cuts rate?

Well, that's, that's a very fair question.

It's hard to say.

I don't think it's the Fed cutting rates so much as I think it is people looking for quality and looking for the highest quality investments they can.

I think we will keep some of that, but I think those assets are probably less sticky than other assets.

Okay, great.

Thank you.

You're welcome.

Your next question will come from the line of Steven Wharton with JPMorgan.

Hi, David.

Good morning, Steve.

Did you disclose your structure note gains or losses?

No.

Versus liabilities?

We didn't because they were basically negligible.

We had losses that were less than $50 million.

It was really tiny.

Okay, thank you.

Because our spread's basically tightened a tiny bit over the course of the quarter.

And can you just refresh my memory what that number was last quarter?

It was a gain of about $300 million, round numbers.

All right, thanks.

Your next question will come from the line of Michael Hecht with Banc of America.

Hey, David, good morning.

Good morning, Mike.

Just to follow up on the Level 3 assets, you said pretty much unchanged from last quarter, sounded like there were some moving parts.

Are there any big unrealized gains or losses we will see in terms of marks from Level 3 assets once the K comes out or whatever?

I don't think you will see anything that is unusual compared to what you have seen before.

Okay, and then on the, on the prime brokerage business, obviously the trend's pretty good year-over-year.

The sequential decline, any sign of kind of deleveraging across the customer base, or is the sequential decline really the type of seasonality that you guys usually see?

Totally seasonality.

If you look, you will see every year second, third quarters are the highest, fourth and first lower.

You see the year-over-year increase.

That's one -- we generally tell people don't look year-over-year because our business moves sequentially.

That is the one business where I would not say that, the one business where I would tell to you look year-over-year and you see pretty strong growth.

It's purely seasonality.

Sure.

Would balances still be kind of up quarter over quarter?

Yes.

Okay, and then just shifting over to asset management, any update on performance of kind of Global Alpha?

I think I saw some things hit the tape, particularly GO and kind of base of investor redemptions and then any update on the investment you guys made last quarter, and any contribution that had, to I guess that flows through equity trading in the quarter?

Yes.

I'll do them in reverse order.

The investment in GO was down over the fourth quarter, but still up for the year.

Alpha continued to add difficult performance in the third quarter.

The performance was difficult.

We had redemptions, as expected.

Redemptions across our quant funds in the fourth quarter were around $3 billion, close to half of that was in Alpha.

And we think redemptions in the first quarter from what we can see will be even greater than that and , again, about half of half of that is going to be in Global

Okay.

It is -- we are okay with those funds being smaller, especially by alpha.

We think the fund has gotten too big and we think it will allow us to be more nimble and be able to react to the market faster.

Okay.

And then sticking in the asset management segment just for a second, quarter-over-quarter, the decline in kind of the core fees, I mean nothing major, but you did see about a 7 or 8% increase in average assets quarter-to-quarter, so just trying to understand the drop-off I guess in the fee rate.

So, Mike, we got to the last question before someone asked me about that, and it's interesting.

It's an anomaly of the calendar, nothing else.

As you know, we are a fiscal year, fiscal quarter firm, last Friday of every quarter and every month.

Therefore in most years, we have 52 weeks.

Every five to seven years, we have a 53rd week.

In most quarters, we have 13 weeks.

Every five to seven years, we have a 14-week quarter.

And the third quarter was a 14-week quarter.

Okay.

Sole explanation for the decrease was that we had one fewer week, actually one more week last quarter.

Okay.

That makes sense.

I was just hoping we could back up and talk a little bit more about equity trading, which for the year, obviously up like 35%.

I know there's a lot of things that go through there, crop activities, equity derivatives, principle oriented, kind of cash equity trades, I guess I'm trying to get a sense as to any outsized drivers of the business, last year, not just last quarter, but last year and what's kind of driving the results you guys are seeing there.

Very widespread.

The business in general has grown.

It is, as we said, a little bit we have both a high touch and a low touch strategy.

The high touch strategy includes both clients and prop.

It is where we have a pure prop business.

That was very profitable during the year.

Our client franchise business in shares and in equity derivatives grew quite well, and we also have a low touch strategy, where we are one of the leaders in electronic trading and we continue to gain market share, too.

And so it was really across all of the various products within equities trade, nothing, no outlier, no one thing drove it.

It was across all the products.

Okay.

That's fair.

Then just last housekeeping question, the tax rate last year, full year, about 34.1%.

If we assume maybe non-U.S.

continues to pick up as a percentage of whole, is there room for the tax rate to drift a bit lower or how should we think about that?

It is driven a lot by geographic earnings.

It's also driven by just the size of the earnings.

So we have tax credits that become smaller percentages as earnings grow.

I think it's always hard for me to predict.

I think it's best to assume what we had this year for next year.

But it could vary by a little bit one way or the other.

Okay.

That's fair enough.

Thanks a lot.

Happy holidays.

Same to you.

Thank you.

I will now turn the call over to Mr.

Holmes for any further remarks.

Okay.

Just wanted to thank everyone for joining us on our fourth quarter earnings conference call.

If there are any additional questions that you have, please direct them to Investor Relations and we'll deal with them there.

Thanks.

Have a good day, and Happy Holidays.

Ladies and gentlemen this, does conclude the Goldman Sachs fourth quarter 2007 earnings conference call.

You may now disconnect.