高盛 (GS) 2008 Q1 法說會逐字稿

Hello, good morning, everyone.

This is Dane Holmes from Investor Relations, and welcome to our first quarter earnings conference call.

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 would affect the firm's future results, please see the description of risk factors on our current annual report on Form 10-K for the fiscal year ended November 2007.

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 at www.GS.com.

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

Let me now ask David Viniar, our Chief Financial Officer, to review the firm's first quarter results.

David?

Thanks, Dane.

Good morning.

I would like to thank all of you for listening.

I will give a brief review of our results and then I would be happy to take your questions.

Our first quarter results reflected a more challenging operating environment than we've experienced in recent quarters.

While a broad-based asset repricing across credit and equity markets negatively affected our performance in certain businesses, our core franchise remains strong.

For the first quarter of 2008, net revenues were $8.3 billion, net earnings were $1.5 billion, and earnings per diluted share were $3.23.

Annualized return on common equity was 15%.

Now, I'm going to review each of our major businesses.

Investment banking produced net revenues of $1.2 billion in the quarter.

First quarter advisory revenues were $663 million, down 47% sequentially, as the pace of closed M&A transactions slowed meaningfully.

Investment backing activity has clearly been influenced by broader market disruptions and an unclear economic outlook.

That being said, the strength of our client franchise in investment banking remains undiminished as we rank first in global announced M&A for the fiscal year to date.

Our investment banking backlog declined from the fourth quarter but it's still comparable to 2006 levels.

We advised on a number of important transactions that closed during the quarter, including Siemen's Automotive's EU11.4 billion sale to Continental, Abu Dhabi National Energy's $4.6 billion acquisition of Prime West Energy Trust, and CheckFree's $4.4 billion sale to Fiserve.

We are also advisor on a number of significant announced transactions, including Ingersoll Rand's $11.5 billion acquisition of Train, Vivendi Universal Games' $6.5 billion merger with Activision, and Rent Debt Holdings' EU3.4 billion acquisition of [Vettiar].

Underwriting revenues were $509 million, 31% below the fourth quarter.

Equity underwriting revenues were $172 million, down 57% sequentially, while debt underwriting revenues were up 2% from the fourth quarter to $337 million.

Equity financing activity declined during the quarter, due to sharp price reductions, higher volatility, and increased uncertainty in global equity markets.

Debt underwriting activity was relatively flat sequentially, as broader credit market disruption continued to weigh on new issue markets.

During the quarter, we participated in a number of significant underwriting transactions, including the $6.6 billion three-part convertible notes offering by Transocean, the $4.2 billion convertible bond offering by Sinopec, and the GBP318 million IPO by Hansen Transmissions.

Let me turn to trading and principal investments which includes FICC, equities, and principal investments.

Net revenues in this segment were $5.1 billion in the first quarter, down 26% from the fourth quarter.

FICC net revenues were $3.1 billion, down 5% from the fourth quarter.

We posted excellent results across our macro businesses with record quarters in currencies and rates and, while not a record, very strong revenues in commodities.

Currencies, rates, and commodities all benefited from higher volatility and increased customer activity during the quarter.

Credit revenues were down from the fourth quarter, as considerable client trading flow was more than offset by a broad decline in asset values.

Credit results included a $1 billion loss, $1.4 billion before hedges, related to leverage lending activities.

Mortgages revenues declined significantly during the quarter.

Market dislocation that began in the sub-prime asset class migrated to various assets including prime, Alt A, and commercial real estate.

Much of the pricing pressure we have seen is related to technical contagion and many assets are being priced by the market at levels which are significantly below the levels that would stem from a fundamental valuation approach.

However, we firmly believe in the mark-to-market philosophy and continue to mark our positions to market-clearing levels.

As a result, we had losses of approximately $1 billion on our residential mortgage positions during the quarter, largely in Alt A and prime.

As it relates to commercial real estate, our net losses were not material.

Turning now to equities, net revenues for the first quarter were $2.5 billion, down 3% from the fourth quarter.

Equities trading net revenues declined 5% to $1.3 billion.

Our derivatives business was up sequentially, driven by higher customer activity and increased equity market volatility.

Revenues from our cash equities business were solid but down from the fourth quarter, while principal strategies results were down significantly.

Equities commissions were $1.2 billion in the quarter, relatively flat on a sequential basis.

The continued strength in this business reflects both robust customer flows and our increasing market share on the electronic trading business.

Turning to risk.

Average daily value at risk in the first quarter was $157 million compared to $151 million for the fourth quarter.

Interest rate category VAR remained high, due to elevated volatility in the mortgage market.

VAR declined in the equity category as we reduced position sizes during the quarter.

The decrease was more than offset by an increase in our commodity category VAR, driven by higher volatility and an increase in positions, as well as a reduction in diversification benefits.

Let me now review principal investments where we recorded a first quarter net loss of $532 million.

This reflected a $135 million loss on our ICBC investment, as well as losses from other corporate principal investments.

We produced very strong results in asset management and security services, with record first quarter net revenues of $2 billion, up 11% from the fourth quarter.

Asset management produced net revenues of $1.3 billion, up 13% on $1.1 billion of management fees and $194 million in incentive fees.

Assets under management increased to a record $873 billion at the end of the first quarter.

During the quarter, assets under management increased $5 billion, reflecting $29 billion to inflows, partially offset by $24 billion of market depreciation.

Net inflows primarily reflected inflows in money market assets, partially offset by outflows in equity assets, and market depreciation within equity assets.

Security services produced strong net revenues of $722 million, up 7% from the fourth quarter.

This business benefited from higher customer balances.

Now, let me turn to expenses.

Compensation and benefits expense in the first quarter was $4 billion, accrued at 48% of net revenues.

First quarter noncompensation expenses were $2.2 billion, a 9% decrease from the fourth quarter.

The sequential decrease was largely driven by lower market development, depreciation and amortization, and occupancy expenses.

Occupancy expenses declined as the fourth quarter included $128 million of exit costs, related to the firm's office space.

Headcount at the end of the first quarter was approximately 31,900, up 4% from the fourth quarter.

The sequential increase was principally driven by our acquisition of Litton Loan Servicing.

Our effective tax rate was 29.5% for the first quarter.

The decrease in the effective tax rate was largely due to the geographic mix of earnings.

During the quarter, the firm repurchased 7.9 million shares for approximately $1.6 billion.

We currently have approximately 64 million shares remaining under the firm's existing stock repurchase authorization.

To conclude, the current environment is clearly challenging.

However, given the significant weakness in the broader market environment during the first quarter, we believe our results clearly demonstrate value of the Goldman Sachs client franchise and business model, as well as our culture of teamwork and risk management.

We will continue to execute on our strategic initiatives, conscious of the evolving market dynamics and focus on remaining nimble in this environment.

We believe this approach.

coupled with global economic growth, will allow us to continue to create significant value for our clients and shareholders over the longer term.

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

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

Hi, Dave.

Hello, Glenn.

Hello.

Maybe you could talk towards -- it is a two-parter.

One is, get it out of the way and talk toward how comfortable you are with your liquidity position.

And then maybe follow it up with how you're thinking about the distressed opportunities in the marketplace, and how willing are you to take on, I will just call it for lack of a better term, level three assets and beef up those positions, even though you're getting that what you think is a great price.

Okay.

I will answer both of them, Glenn.

Liquidity, you've heard me talk over the years about liquidity being the single most important thing at Goldman Sachs.

That is the case for us all the time.

It is even more the case in times of market turmoil.

I would tell you that our liquidity position now is stronger than it has ever been before.

And in my -- I guess it is nine years of being the CFO now, we have never had a stronger liquidity position than we have right now.

Our global core excess, which is really our pool of cash and cash equivalents, which averaged in the $60 billion range in the fourth quarter, is significantly -- has been significantly higher than that for the entire first quarter and it's significantly higher than that now.

Our -- most of our short-term financing is actually termed out.

We have little roll-over risk.

It is not zero, but it is little.

And so we do finance most of our repos for term.

We pay for that, but we think it is worth it.

Our commercial paper is less than $5 billion.

So it is very, very minimal.

And so we do everything we can to put our liquidity in very good shape, and it is, as I said, in as good of shape as we've ever seen.

I will add to that, even though you didn't ask it, I will just make it part of this question, I think that the liquidity facility that the Fed has provided, the ability to access the discount window directly for broker/dealers I think is a very good thing and will help both our liquidity as well as liquidity in the market.

One of the important parts of financing is to have diversification of financing sources.

That is another source of diversification.

It is another way of financing assets.

And while we have not used it yet, since it is effectively a day old, I would expect that I see no reason we would use it in the future.

We wouldn't use it in the future.

I think we will because it is another source of financing and it is a good source of financing.

So as I said, with all of those things, I think our liquidity position is probably stronger than it has ever been before.

So let me move on now to your other question.

Look, times of distress are times of caution, but it's also times of opportunity.

And purchasing distressed assets has actually been a business that has been a good business for Goldman Sachs over the years, in various places.

Our expectation is that we will see opportunities, and we look at everything on a risk/reward basis.

And if we see an asset, we do our best to value it, we do our best to decide what we think the risk is of holding it, and what the returns are going to be, and if we see good opportunities we would absolutely take advantage of them.

Good.

So ignore me when I ask you about the level three assets next quarter.

Remember that.

Can you talk about -- you had $1 billion in the write-downs on the resi mortgage side.

I think it's more than some expected.

I'm assuming it is Alt A-related.

Can you talk about what you got and how you have it marked and hedged in Alt A [lend]?

Sure It is mostly Alt A.

Sub prime.

And basically all mortgage assets declined in value, right up to the very top of the quality.

So anything you were long went down in value.

And so as I said, mostly Alt A, sub prime.

To give you a sense of what we have, I will just run through it.

At the end of the quarter, we had $12 billion of prime, $5 billion of Alt A, and $2 billion of sub prime.

That's long assets only so it doesn't take into consideration what hedges we have in place, what indices we're short, what single names we're short against them.

As I said, most of it was in Alt A.

Alt A is probably of all of those the hardest to hedge.

There is no direct index.

You can hedge sub prime with ABX.

You can hedge prime with agencies.

So there is better hedges for all of them, very little for Alt A.

But you have to hedge Alt A with a combination of the other indices.

And as with all hedges, there is basis risk that is introduced, and there is probably more basis risk with Alt A than anything.

And clearly with those losses over the course of the quarter, we were not hedged enough.

Great.

I am going to end it on an annoying one, sorry.

Any interest in the Bear franchise?

That has never been on our radar screen.

Okay.

Thanks so much, Dave.

Thanks.

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

Good morning, David.

Good morning, Guy.

Forgive me if you went over some of this.

The Lehman call went over a little bit.

On the leverage finance side, I saw that you, I guess, spoke to some reporters about a reduction over the course of the quarter.

And it would seem that you had some fairly significant sales.

We know what the price movement was like in the quarter.

Essentially, I guess, the question is, can you help us reconcile what you sold, what you might have actually put on at very low prices, and how the marks reconcile to sort of actual realized losses?

Yes, let me give you some numbers, and tell me if this helps.

Beginning of the quarter, we had $26 billion of unfunded, $17 billion of funded, $43 billion total.

Over the course of the quarter, we sold or reduced through cancellations about $20 billion.

We put on $4 billion of new commitments, obviously put on it, at the current -- current terms and conditions, leaving us at the end of the quarter $9 billion unfunded, $18 billion funded, $27 billion total.

And so the $1 billion of losses, there is $1.4 billion gross, $1 billion net, is really a combination of where things were sold and any time something was sold, anything we had, if it was sold below the marks, was marked down to there.

And so, you know, we have our positions marked now where we think we can sell them.

Got you.

That helps.

Thanks.

Can you give us a sense for total asset and leverage ratios at the end of the quarter?

Yes, round numbers, if you want just gross leverage, assets to equity, round numbers, our assets are about $1.2 trillion, and our equity is about $40 billion.

Just to give you the round numbers.

And can you help us with the net on that?

When you say net, what do you mean?

Well, net of matched book assets as you would -- as a calculated net leverage ratio?

I actually don't have those numbers in front of me so let me come back to you.

That would be great.

I didn't see any mention in the release of marks on commercial real estate finance assets.

And obviously, there was a pretty significant negative variability in the quarter there.

Can you give us a sense on your $19 billion or so portfolio at the beginning of the quarter, what kind of -- how you thought about the marking process, given it doesn't seem like it was very material in the end?

Yes.

Those marks are done with the same level of diligence and vigilance as everything else is marked and as things moved, it was marked down.

What I mentioned in my script was that the net losses on commercial were not material, and that is because we had offsetting gain on hedges.

As I said before to Glenn, and it is surely the case with commercial as much, when you hedge commercial real estate loans, which are largely single name loans with indices, which is really the best way to hedge it, you're introducing basis risk, which we did.

We had basis risk.

But over the course of the quarter, really the indices and the single names kind of moved in tandem and so they largely offset.

We had some losses but they were small.

But, it is something that we watch very carefully, and I can't tell that you we will always get it right.

But on that basis, we did in the course of the first quarter.

Lehman mentioned in terms of Alt A hedging sort of a natural hedge from servicing.

You've obviously added servicing capabilities during the quarter.

Do you see that as a way of hedging your exposure?

Look, first of all, we really have just gotten that servicing platform, so we're looking at it.

I think it is -- I think it is a tough way to hedge it.

Fair enough.

I think the Alt A is the hardest section to hedge.

Right.

Can you just comment in the prime brokerage and clearance business, first of all, are you seeing growth there that you can really tie directly to what happened to Bear?

To what extent are you able to accommodate incremental financing needs that are going to come to you at this point from clients who are sort of displaced?

And then, separately, but also on prime brokerage, can you give us a sense for whether you are seeing any significant securities inventory growth, due to seizure of prime brokerage collateral or how quickly are you finding that you're able to liquidate collateral when you seize it?

Look, our prime brokerage business has grown and continues to grow, and I think that is not necessarily related to what is happening with our competitors.

I think that is more because our business is pretty good, and I think our clients like the service we give them, and we get balances, both from new hedge funds and from current hedge funds all the time.

So those balances have grown and continue to grow.

And as they grow, we think that is good for us.

And yes, we can handle what our clients need.

We are careful on the financing terms.

We have the appropriate margin in place.

And over the course of the years, our losses there have been extremely small.

And as far as large growth in inventory assets, I would say it has been pretty minimal.

I would say, it is not that often that we have to seize assets, and when we do, we're generally able to liquidate them pretty quickly.

Okay.

That's all very helpful.

Appreciate it, David.

No problem, Guy.

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

Hi, good morning, David.

Roger.

I guess with respect to the TDCF facility, which you talk about briefly, how significant of a benefit is this?

And specifically, I mean do you look at this more as a funding facility to help you in terms of your repo financing or in terms of helping clients liquefy?

How do you, from a practical standpoint, how do you see it (multiple speakers) ?

I would answer those two things as yes and yes.

I think it is a very good thing.

I think that the purpose of doing it was really to help the market get more liquid.

We think it should have that benefit.

As I mentioned before, one of the benefits to us is diversification of financing.

It gives us another source of financing for assets.

We were okay without it.

We were fine without it.

But with it, it is just that much better and it is another source, both for our own assets and if a client wants us to help fund them, it gives us another source of financing to turn around to.

One of the things that had been going on in the market was that part of the lack of liquidity, we think and I think the Fed and the Treasury thought, was because of a lack of funding that was available.

And this makes funding available to broker/dealers like us to, A, buy assets, and B, fund others who want to buy assets.

And so I think, overall, it is a very good thing and I think it will be very helpful to the markets.

So this facility helps a great deal in terms of short-term funding.

What is your sense in terms of longer term balance sheet risk?

Do you think that the Fed ultimately is going to have to essentially buy out the liquid assets off the broker and balance sheets?

I know that they are very, very hesitant to do that.

And we will see what they end up doing.

I think it is going to depend on how the [world] unfolds.

I guess to that point, what else do you think gets, sort of facilitates, or what is a catalyst for the transfer of some of these risky assets?

You have clearly -- you sold loans off to your part during the quarter.

Have you been buying some loans as well?

Are there any sort of -- in any of these asset classes, have you been committing capital?

Do we potentially see any kind of a two-way flow?

I think some of the other brokers have been buying where they see opportunities as well.

I told you we made $4 billion of new commitments in the loan market so that is a commitment of capital.

We make markets in everything.

Across the mortgage industry, we have been buying and selling if we see opportunities.

I would tell you we haven't seen that many opportunities yet.

And we're going to wait for the ones that we think are the most appropriate and then we will try and take advantage of it.

And how do you manage that relative to, I guess, the total size of your balance sheet, any focus you have on delevering?

I think the numbers you gave us there on a gross basis are still at 30 times which I think is pretty consistent with where you've been.

Is there a target leverage ratio that you're shooting for and does that limit your ability to buy where you see opportunity?

We are always looking at risks and rewards.

You've heard me say in the past that we think that looking at a gross leverage level doesn't tell you very much.

Because, it depends on liquidity of the assets.

It doesn't tell you anything about the risk.

It doesn't tell you about what is hedged on the other side.

It doesn't tell you about derivative exposure.

And so we think that is a very minimal benefit.

One of the things that we look very carefully at is our capital ratios.

Those are tied very much to risk and liquidity.

And we make sure that those are always strong, and in deciding what we're going to purchase, we look at what our capital ratios are, we look at our liquidity, and we make our decisions based on that.

Are you looking to shrink the balance sheet going forward here?

We're going to -- it depends on what the world unfolds to be.

I think given where we are right now, our capital is very adequate.

Our liquidity is very adequate.

If there were things that we thought were not earning appropriate return, we would sell them.

If there were things that we thought we could make a lot of money from, we would buy them.

We have no need as we sit here right now to shrink our business.

Okay.

Thank you.

You're welcome.

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

Hi, David.

Good morning, Prashant.

Just on the fixed income revenue, if we look at this pulling out the write-downs, it is very strong.

Can you just talk about some of the drivers there?

And I don't know if you can quantify it, but how much was driven by just higher activity versus maybe the bid/ask spreads being wider?

Prashant, the activity levels across our macro businesses and some of the core franchise businesses of the firm were very, very strong.

And we mentioned that we had records in our interest rate products business, in our currency business, we had near record results in our commodities business.

So those businesses performed extremely well, and I think that was part of what drove the success in FICC.

In terms of the Fed's facility, is that something that you would like to see or could envision end up being something more permanent, considering maybe some positive and negative consequences of that?

Well, I would -- sure, from our point of view, we would very much like to see it be permanent.

I have no idea if the Fed or the Treasury have that in mind or not.

But as I said before, it gives us another source of financing.

It gives us diversification of financing.

And that's always a good thing for us.

And so certainly, as I sit here now, I don't see the negative.

I only see the positive.

Okay.

Fantastic.

And then just on the asset management side of the business, anything specific on the equity AUM that drove the flows in that business?

You mean the outflows?

The outflow, the $17 billion, yes.

I would say there were two things.

One, our quantitative long equity business had what I would call challenged results over the course of the last year so some of the outflow is that.

I think even more of it was a rotation of people's assets from equities into money markets, given the environment.

Okay.

And just, maybe longer term, thinking of the competitive dynamic, just any comments on with Bear, under a different entity, maybe the cost of leverage going forward, just a view on does the competitive environment change a little bit to your favor or not?

I don't see it changing very much.

JPMorgan is a very strong, has been a strong competitor.

I think, all of our competitors out there, I could go through them, are quite strong.

We think they are all in very good shape.

And we think that they are all going to be very, very good competitors going forward.

And you don't see any permanent implications on the cost of leverage or the amount of leverage being used industry-wide?

No, I don't.

Great.

Thanks, David.

You're welcome.

Your next question will come from the line of Ken Worthington with JPMorgan.

My questions were asked and answered.

Thank you.

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

Hey, David.

How are you doing?

Good morning.

I'm sorry if I missed this, I got on late, but did you guys actually say, did you have any positive benefit on fair value marks on your own debt this quarter?

I did not and no one asked it yet, so that's fine.

The net benefit to us was about $300 million.

And would that be mostly in FICC or is that spread across equities and FICC?

It is mostly in FICC.

There is some amount in equities but it is mostly in FICC.

Okay.

And then on the level three assets, it sounds like there was a broad discussion, but did you give the actual number versus the $69 billion you had last quarter?

I think the number is going to round to roughly 8% of our assets which is up a little bit.

It was, if you remember, 7% at the end of the third quarter, 6% at the end of the fourth quarter, and now it is 8%.

It has been running kind of in that range.

So it is going to be up a little bit.

And most of it is stuff that went from level two to level three assets.

Some of the commercial real estate loans became level three.

That's really it.

Okay.

And then did you talk at all about exposure to the mono line?

No.

Could you?

Look, all I would tell you is we manage our credit risk, just like every other risk where we're focused on companies that have had issues, and you have all read about them as much as I have and we have mitigants in place where we think we need them.

And so our exposures to any of our counterparts including the mono lines is something that is well within our comfort zone.

Okay.

And then on head count, which I think you mentioned, rose 4% mostly on the acquisition this quarter, any expectations for where we should expect that to trend the rest of the year?

And can we get some sense of areas where you might be looking to trend versus areas where you're still looking to grow?

Sure.

Without going through specifics and specific areas, because I don't really want to do that, our expectation, as we sit here right now, and it could certainly change if things get better or worse, is that leaving aside [LKQX], and leaving aside the acquisition, our head count will grow slightly this year.

I would say low to mid single digits is where we expect it to grow, and again, as we told you before, it will be greater growth outside the U.S.

than in the U.S.

but very modest everywhere.

Fair enough.

And then just the last question, given your comments on liquidity and how good it is right now, appetite for share repurchases, given kind of what you guys did this quarter?

We will look as we start next quarter.

We think there are opportunities for us to repurchase shares.

We have kind of seen where we've been running and I would expect to see things that are not terribly different from what you've seen in the past.

Fair enough.

Thanks a lot.

You're welcome.

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

Hi.

Good morning, Mike.

How much is non-U.S.

revenues and what did that do during the quarter?

It is running at roughly 50/50.

And is growth faster outside the U.S.

or faster in Asia or is it about the same?

It is growing faster outside the U.S.

You did not see a meaningful change in the quarter.

It is always hard to see quarter over quarter because it depends on where a loss might be, where a trading book that has profits might be, so it is not terribly meaningful to go one quarter to the next and say, 49, 51, 52.

But the trend is definitely growing faster outside the United States, with Asia being even faster.

And I'm going to ask an extremely simple question, you've kind of touched on the answer.

But why what happened to Bear Stearns is unlikely to happen to you?

And I guess that refers to -- well, how would you respond to that question?

I don't want to talk at all about what happened to Bear Stearns.

What happened to Bear Stearns happened to Bear Stearns.

And as I said, and I can go over it in as much detail as you want again, Mike, we think our liquidity position is as strong as it has ever been.

And what would be three key metrics, if you're summing up your liquidity position, what measures do you look at that show that?

I look at -- the one that is the most visible to you, we disclosed at the end of the quarter, is the global core access which is really an amount of cash that is sitting there.

And as I mentioned, it was in the mid 60s on average in the fourth quarter and it has been -- I'm sorry, in the first quarter, and it has been significantly higher than that over the last couple of weeks, and remains significantly higher than that right now.

Another metric that we look at internally is we look at the amount of our short-term financing that is termed out, so that we don't have significant rollover risk over the next day or couple of days, or a week, and that is a very, very high number.

And the third thing we look at is within that global core access, how much is commercial paper, because we think that is probably the least good part of a global core access.

And it's extremely small, it is less than $5 billion of the 80.

So those are just three metrics that we look at.

And what kind of risk do repos pose?

Well, look, the repo market has been a market that has been there for a very, very long time.

Despite that, we still try to term out a lot of our repos and we pay for that.

So rather than having overnight repo, we will do one week, two weeks, a month, six month repos.

And they cost more than doing overnight repos but they're less risky and one of the things I mentioned is looking at how we term out our repos.

And we have a very, very high percentage per term.

Thank you.

You're welcome.

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

Hi, just a few follow-ups here.

No problem.

In terms of your commercial exposures, can you give us a sense for the geographic distribution and the fixed floating mix?

I could, but I don't have those exact numbers.

I would tell you much -- much of it is in the U.S.

and much of it is floating.

So the majority will be in the U.S.

and the majority will be floating.

And if you want, we can get back to you with the exact numbers.

Okay.

I guess I was just -- yes, I was just asking from the perspective of the -- for the marks to be fairly insignificant, for you not to disclose them, I'm just trying to get a sense for why that is, relative to the declines that we've seen in observable pricing metrics.

And I appreciate the CMBX is only relevant for parts of it, particularly fixed rate U.S.

but--?

Well, no, it can be relevant for anything, there is just more basis risk.

So you can hedge something at fixed rate with floating rate, you can hedge something that's floating rate with fixed rate.

You are just taking a basis risk in doing it and that's why I said, we're very careful about that, we're very cognizant, we have to be extremely nimble.

But it worked pretty well last quarter.

Okay.

So it is really, you chalk it up to the effectiveness of the hedging?

Yes.

What about -- same sort of question in terms of your principal investments, private equity, sort of distribution, maybe geographically and by industry, it looks like it is only a little over 3% mark in the quarter despite the stock market is down 10%.

I would have thought there would have been a higher correlation of market decline.

It depends what you have.

Our portfolio performed pretty well because we think we have some pretty good investments.

It is geographically distributed.

It is industry distributed.

And we think that it showed the strength of some of the investments that we made.

Got it.

Okay.

And just in terms of client trading activity, any comment on the contour of flows during the quarter?

Did the quarter end as strong as it was during the quarter?

I think -- I wouldn't -- clearly, as you know, markets deteriorated over the course of the quarter.

But I don't see the client flow really changing much over the course of the quarter into some of our franchise trading businesses.

Okay.

And then lastly, just coming back to the repo market, can you talk to the mix of the assets that you finance in the repo market?

How much of this is mortgage back, and what are some of the other key asset classes in there?

We've financed a lot of our assets in the repo market.

There is a repo market, there are repos available for assets that range from certain mortgages to equities, to obviously U.S.

governments.

And what I would call the less liquid the asset, the more -- the more we care about funding it for term.

And that's why it is very, very important that we term out a lot of our repos.

Do you finance any customer balances in the prime brokerage area in repo?

No.

Okay.

So no prime brokerage assets are used to finance in any way the broker/dealer?

No.

Can't be.

Okay.

All right.

Thank you.

You're welcome.

Your next question will come from the line of Meredith Whitney with Oppenheimer.

Good morning, David.

I want to congratulate you for beating your own record on the brevity of opening remarks.

I do want to take this to a different track, if you would.

I'm interested in what happened with the asset management and then thematically what is going on with asset management in terms of, if you could geographically break down where the flows came from?

And if you could comment, if there is any way possible you guys could, you at Goldman Sachs, could compete with attracting flows from what has typically been offshore accounts?

So comment specifically on emerging market flows and then any type of sort of classically offshore flows?

And then I have a follow-up after that, please.

When you -- tell me, when you say what is going on with asset management, what did you actually mean?

Well, I mean that you guys have very strong flows.

It seems as if you're gaining market share from somewhere and I'm trying to figure out where.

Right.

I would tell you that, in the quarter, and again, it varies, most of our flows are still from the U.S., although we still have some that are coming from Asia.

Okay there is no larger story going on here?

No.

Not yet.

Although, as you know we have talked about that is a big area of concentration for us, is growing that business outside the United States.

Okay.

So this is not my follow-up question but this is an add-on to the last one.

But if you look at the disruption that has been caused in the last eight-plus months, I look at the ability to attract assets in emerging markets as really a jump ball issue more than it has ever been.

Would you agree with that?

Well, I'm not sure it ever hasn't been a jump ball because I don't think there is anyone who is entrenched enough in the emerging markets to have that big of an advantage.

Okay.

Then could you extend it then to what is classically offshore?

Well, no, look, I think in -- I will just -- in Europe, someone like a UBS, who has been there for several hundred years has an advantage.

Okay.

That will be different in some of the emerging markets where I think nobody is as firmly entrenched.

The franchise is old.

It is four years old, right?

Correct.

And then my follow-up is on operating leverage, in terms of how to look at the rest, the remainder of the year, in a difficult revenue environment, how you plan to deal with what could be protracted negative operating leverage?

Look, we're very cognizant of what is going on in the world.

We need to be extremely nimble.

But at the same time, we are in this for the long term.

And we think it is very important for us to make our strategic investments in places where we have to do that.

Unfortunately, I hate saying this, but the biggest lever we have in any given year is competition.

And as you know, compensation is two-thirds of our expenses, and year-end -- compensation, year-end bonuses are two-thirds of our compensation, and that is always tied to the firm's performance and it is the bigger lever we have for operating leverage.

Okay, all right, thanks, David.

You're welcome.

And at this time, there are no further questions.

Mr.

Holmes, please continue with any closing comments.

Thank you very much for joining us on our first quarter.

If you have any additional calls, please feel free to contact me at Investor Relations.

And we look forward to taking those questions.

Bye.

Ladies and gentlemen, this does conclude the Goldman Sachs first quarter 2008 earnings conference call.

You may now disconnect.