高盛 (GS) 2008 Q4 法說會逐字稿

Good morning.

My name is Gerald and I'll be your conference facilitator today.

I would like to welcome everyone to the Goldman Sachs fourth quarter 2008 earnings conference call.

After the speakers remarks there will be a question and answer period.

(Operator Instructions) This call is being recorded today, Tuesday, December 16, 2008.

Thank you.

Mr.

Holmes, you may begin your conference.

Good morning.

This is Dane Holmes, Director of Investor Relations at Goldman Sachs.

Welcome to our fourth quarter earnings conference call.

Today's call may include forward-looking statements.

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

The firms actual results and finance 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 firms future results please see the description of Risk Factors in our current Annual Report on form 10-K for our fiscal year end 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.

As you should also read the information on the calculation on 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.

Our Chief Financial Officer, David Viniar will now review the firms results.

David?

Thanks, Dane.

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

I'll give an overview of our fourth quarter and full year results and then take your questions.

Full year net revenues for 2008 were $22.2 billion.

Net earnings were $2.3 billion and earnings per diluted share were $4.47.

These results generated a return on common equity of 4.9%.

Book value per share was essentially flat at $98.68.

For the fourth quarter, net revenues were negative $1.6 billion, net earnings were negative $2.1 billion and earnings per diluted share were negative $4.97.

Clearly, 2008 represented one of the most difficult operating environments in modern financial history and certainly the most challenging year since we became a public Company.

Asset price declines, volatility and illiquidity were unprecedented across both equity and credit markets.

In the first nine months of the year these stresses had a varied impact on our results and were largely offset by other revenues within our diversified business mix.

However, the significant magnitude of the stresses and the fact that they occurred simultaneously, negatively impacted fourth quarter results.

During the year, the MSCI was down 45% with a 34% decline occurring during the fourth quarter alone.

Certain high quality leverage loans decreased in value by more than 25 points during the quarter.

Commercial Real Estate assets were under particular pressure with the CMBX double A index off by nearly 60%.

In the midst of this asset price pressure the VIX increase over 150% during the fourth quarter reaching an all-time high.

In addition, rapid deleveraging by many market participants and continued supply demand imbalances resulted in increasing illiquid markets across a broad spectrum of asset classes.

As would be expected the market environment had a negative impact on client activity and fee income for many of our businesses.

While our fourth quarter performance obviously did not meet our expectations it needs to be placed in context.

First, the vast majority of our balance sheet is subject to fair value accounting.

The stresses during 2008 and in the fourth quarter are reflected in our earnings.

So it's appropriate to consider what these market levels implied at the end of the fourth quarter.

Credit indices which represent an important input to our fair value process is illustrative of distress at the end of the quarter.

The US investment grade index was implying that roughly one in five investment grade issuers would default over the next five years.

Within the mortgage space, the CMBX index of triple A commercial mortgage back securities was implying that almost 60% of the underlying mortgage loans would default over their term.

Second, many of our marks during the quarter came from investment businesses.

We have a strong track record as an investor.

These positions are the product of long term investment decisions.

We entered into these positions with a full understanding of the fair value implications who were the focus of meeting our clients need for co-investment and generating long term returns for our investors and shareholders.

Finally it is important to recognize that we generated net profits of over $2.3 billion in 2008 despite this environment.

Furthermore, given that this included significant losses related to asset price declines, you can see the true earnings power of the Goldman Sachs franchise throughout the year.

Businesses such as M&A, rates, currencies, commodities, equities and asset management performed exceptionally well.

And clients continue to look to Goldman Sachs for advice, innovation, execution and our client franchise will continue to drive opportunities for the firm into 2009.

During the quarter, the firm took a number of steps to fortify our balance sheet and positioning.

Our total balance sheet declined by almost 20% to $885 billion and our tier one ratio remains robust at 15.6%.

Our global core excess pool of liquidity averaged over $110 billion during the quarter.

We continued to reduce concentrated risk positions including leverage in Real Estate related loans.

These asset classes represented 57% of tangible common equity at year-end down from 85% in the third quarter and 224% at year-end 2007.

Legacy leverage loan exposure now stands at $7 billion, down from $52 billion at its peak last year.

Our commercial Real Estate portfolio declined by approximately 25% to $10.9 billion in the fourth quarter alone.

In short, Goldman Sachs is well positioned to withstand difficult markets and take advantage of near term opportunities.

I'll now review each of our businesses.

Investment Banking produced net revenues of $1 billion, down 20% from the third quarter.

For the full year, Investment Banking net revenues were $5.2 billion, down 31% from a record 2007.

Our backlog declined during the fourth quarter.

Within Investment Banking fourth quarter advisory revenues were $574 million, down 7% from the third quarter.

Goldman Sachs once again ranked first in announced M&A globally for calendar 2008 through November.

We advised on a number of important transactions that closed in the fourth quarter including Anheuser-Busch's $60.4 billion sale to InBev, Wrigley's $23.2 billion sale to Mars and APP Pharmaceuticals $5.6 billion sale.

We're also advisor on a number of significant announced transactions including Wachovia's $15.1 billion sale to Wells Fargo, Altria's $11.6 billion acquisition of UST, and Dresdner Bank's EUR5.6 billion sale to Commerce Bank.

Fourth quarter underwriting net revenues were $460 million, down 32% sequentially.

Equity underwriting revenues of $273 million were down 7% from the third quarter reflecting the continued weakness in global equity markets.

Debt underwriting declined 51% to $187 million given significant credit market dislocation and weak new issuance markets during the quarter.

During the fourth quarter we participated in many noteworthy underwriting transactions including GE's $12.2 billion common share offering, Ecolab's $1.9 billion common share offering and SunGard's $1 billion combination term loan and senior note financing.

Let me now turn to Trading and Principal Investments, which comprised of FICC equities and principal investments.

Net revenues were negative $4.4 billion in the fourth quarter reflecting significant asset price declines across credit and principal investing businesses.

Full year net revenues were down 71% to $9.1 billion.

FICC net revenues were negative $3.4 billion in the fourth quarter principally driven by losses from investments including corporate debt and private and public equities and trading and credit products.

These results were adversely impacted by unprecedented weakness across the broader credit markets reflecting deteriorating asset values, substantially reduced market liquidity, and dislocation between cash and related derivative instruments as well as indices in the underlying single names.

Credit also included $1.3 billion in losses, $1 billion net of hedges, associated with our legacy leverage loan positions.

Mortgage revenues declined sequentially due to continued asset price weakness particularly in our commercial Real Estate portfolio where we generated net losses of $700 million.

Our franchise businesses generated solid performance despite the challenging market conditions.

Revenues from our rates business were up sequentially due to increased volatility and strong customer flow.

Currencies and commodities continue to be solid though down from the third quarter.

Fourth quarter results include approximately $700 million in gains from the impact of our wider credit spreads on certain long term debt largely in FICC.

For the full year, FICC net revenues were $3.7 billion, down 77% from fiscal 2007, primarily reflecting losses in credit products including $3.1 billion in losses related to legacy leverage loan positions and losses from investments.

Full year mortgage results, included approximately $1.7 billion of net losses on residential mortgage assets, and $1.4 billion on commercial mortgage loans and securities.

Importantly, our macro franchise businesses including currencies, rates and commodities each produced exceptional results during the year that were up from 2007 levels.

Turning to equities.

Net revenues for the fourth quarter were $2.6 billion up 69% sequentially.

Equities Trading rebounded from a weak third quarter due to higher customer volumes across our cash trading and derivatives businesses.

We recorded losses in principal strategies.

Equities Commissions were up 9% sequentially to $1.3 billion reflecting robust client trading activity and growing market share.

For the full year, equities produced net revenues of $9.2 billion down 19% from fiscal 2007.

These results reflect the overall challenging environment for equities as major indices declined more than 40% during the year.

We also recorded losses in principal strategies for the year.

Turning to risk, average daily value at risk in the fourth quarter was $197 million compared to $181 million for the third quarter.

The increase was driven greater volatility across mortgage and credit products.

If volatility had remained constant VaR would have declined during the quarter.

Let me now review Principal Investments which produced net revenues of negative $3.6 billion in the fourth quarter.

Our corporate principal investment portfolio generated losses of $2 billion during the quarter due to significant decline in global equity markets.

Our investment in ICBC produced a loss of $631 million.

Our Real Estate principal investment portfolio generated $961 million in losses due to valuation adjustments that reflect higher cap rates and weaker fundamentals in commercial Real Estate.

For the full year, Principal Investments produced net revenues of negative $3.9 billion.

Once again, it is important to distinguish between fair value losses on these long term portfolio assets and losses on residual troubled asset exposures.

Although we have no intention of selling these assets in the near term, fair value accounting rules require that we value them based on current market conditions.

That doesn't mean they can't go down in value from here.

They can, but many of these positions represent excellent long term investments.

Moreover, our merchant banking businesses are critical to our fundamental strategy of acting as advisor, financier and co-investor with our clients.

In Asset Management security services, we reported fourth quarter net revenues of $1.7 billion, down 15% from the third quarter.

Full year revenues were up 11% to $8 billion.

Asset Management produced net revenues of $945 million, down 16% from the third quarter due to lower assets under management and the corresponding impact on management fees.

For the full year, Asset Management net revenues were a record $4.6 billion up 1% from fiscal 2007.

During the fourth quarter, assets under management declined 10% to $779 billion.

The decrease was driven by $90 billion in market depreciation, largely in equity assets, partially offset by $6 billion in net in flows.

Security services produced net revenues of $799 million in the fourth quarter down 13% sequentially due to lower customer balances, partially offset by a more favorable mix of securities lending customer balances.

For the full year, security services net revenues were a record $3.4 billion, up 26% annually.

Given weaker hedge fund performance and redemptions this year, it is likely that assets under management across the hedge fund universe will decline into 2009.

Many of you have asked how this will impact our prime brokerage business.

While difficult to quantify, we expect that a decline in customer balances can be somewhat offset by optimizing our cost structure and business mix to improve margins, as we've witnessed during the fourth quarter.

Now let me turn to expenses.

Compensation and benefits expense, which includes salary, bonuses, amortization of prior year equity awards and other items such as payroll taxes and benefits, were negative $490 million in the quarter which means we reversed compensation previously accrued through the third quarter.

This results in a full year compensation net revenue ratio of 48%, excluding approximately $275 million in fourth quarter severance costs.

Fourth Quarter non-compensation expenses excluding those related to consolidated investments were up 9% sequentially largely in other expenses primarily related to our re-insurance businesses.

For the full year, non-compensation expenses, excluding those related to consolidated investments, were up 5% over 2007.

Headcount at the end of the fourth quarter was approximately 30,000, down 1% versus year-end 2007 and 8% from the third quarter.

Our effective tax rate was approximately 1% for the full year.

The decrease in the effective income tax rate was primarily due to the greater impact of permanent benefits as a percentage of lower earnings, as well as changes in the geographic mix of our earnings.

The global Financial Services industry has faced considerable challenges over the past 18 months.

What started as a subprime issue in the United States has evolved into a significant global crisis.

As a central player in the global Capital Markets, Goldman Sachs was not immune from these broader market challenges and during the fourth quarter widespread asset price declines drove meaningful losses across many of our balance sheet positions.

However, as I previously commented, it is important to keep our results in context.

Goldman Sachs was solidly profitable in 2008.

Able to remain profitable due to our continued committment to our fundamental risk management culture, the strength of our client franchise, the diversity of our businesses, and the resilience of our people.

Given our significant reduction of legacy assets and our lack of direct consumer exposure, we believe that our balance sheet is strong.

Importantly, we have significant capital to take advantage of market opportunities as they arrive in 2009.

As a result of the broader market dislocation, the competitive landscape has changed.

Across many of our businesses, trading margins are robust and the premium on risk capital is higher than we've seen in years.

In this type of environment return on assets is improving.

Given the current dislocation in certain of the world's capital markets we are of course cautious about the near term outlook for our businesses.

However, we remain optimistic about the medium and long term outlook for Goldman Sachs.

Our status has changed to a bank holding Company, but the traditional role we play as an advisor as well as a financial intermediary for clients across the globe has not changed.

Although we like many are concerned about the potential for a slowdown in global economies, we feel confident about the strategic steps we've taken and will look to leverage our global client relationships, risk management culture and the talent of our people to maximize shareholder returns over the long term.

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

(Operator Instructions) Your first question comes from Guy Moszkowski with Merrill Lynch.

Good morning.

Good morning, Guy.

David, could you start off by quantifying if you could the extent to which hedging helped you or hurt you during the quarter?

There's an illusion in the release to dislocation between cash and derivative prices and between indices and single names which seems meant to say that that was an issue.

And the only quantification I can get of it in commercial, not in commercial Real Estate in one of the other categories seems to indicate there was a little bit of benefit in that one category but it looks like more broadly there was an issue.

Well first of all that's a very broad question, to say, did hedging help us or hurt us because we have hedges in many, many, many places of many different types.

And look, it's very hard to quantify that.

One of the difficulties in trading in credit during the quarter and really across many asset classes was what I would call the significant divergence between the performance of more liquid and less liquid assets.

Basically the way you can think about it, Guy is the less liquid an asset was the worse it performed.

The more liquid an asset was you can either say the better it performed or the less bad it performed.

And that took many many forms in many asset classes and one way to think about it was indices tend to be more liquid than any single names, any single name you had that was hedged with an index, there was divergence in performance.

Cash assets tend to be less liquid than derivatives especially in a credit crisis and so there was divergence there and that was across many categories, but especially in credit you saw that divergence.

And any time you hedge something while you reduce certain risks you increase other risks.

And we know that going in and so it made it a very difficult operating environment, especially across credit products.

But there's no way to sort of quantify that to help us understand the extent to which that particular set of mismatches hurt?

No.

Because it was different in different places.

Okay, fair enough.

Let me change the topic a little bit.

In FICC, you had about a $5 billion negative swing from third quarter results to fourth quarter and about a $1.5 billion negative net revenue.

Can you give us a sense for how much of that decline came from something that you alluded to in your remarks which would be positions held essentially as longer term investments say by the special situations group rather than mark-to-market and realized losses on shorter term trading inventory?

Yes.

I would tell you, just give me one second Guy, that a -- certainly not all of it but a reasonably large part of that swing was caused by mark-to-market on investments within our credit business.

There were some offsets because some of our franchise businesses did quite well but yes, a fair portion of it but far from all.

Okay, fair enough.

You alluded in security services to changing the mix more favorably in terms of securities lending, customer balances.

I was wondering if you could give us a little bit more color and granularity on that given that it already does appear to have helped and that you seem to be counting on it to help you offset the decline in hedge fund industry?

Well, some of the things we do is we are able to source securities that are important for our clients that others might not be able to source because of our network and our distribution.

And we think we're able to perform some of the services that they require better than many others because we've been in the business for a very very long time.

And so that allows us to keep more profitable business.

On the deposit side, I think you alluded in a press interview that you did earlier today to wanting to increase your deposits to the $50 to $100 billion level which would be anywhere from I guess a doubling to almost a quadrupling.

What's your strategy at this point for raising those deposits and at this point, how would you quantify the total dollars worth of deposit eligible assets in terms of funding ?

Alright, so we have said this pretty consistently, Guy and if you remember, Lloyd talked about this at your conference, so what I said is completely consistent with what he said.

And our strategy is to build that through third party distribution like brokered CDs, to build it through our internal network of private Wealth Management where we have a lot of cash in the system, to find other maybe less traditional ways of building it internally considering Internet banking and other things, and to look at if anything made sense acquisitions as well.

And so those are basically the methodology that we're going to use and we have about $150 billion in the bank right now that could be largely funded with deposits.

Okay.

Fair enough.

I just want to keep asking the questions just as things evolve.

No problem.

Thanks, David.

Your next question comes from Roger Freeman with Barclays Capital.

Hi, good morning, David.

Roger.

I guess with respect to the balance sheet obviously a pretty impressive decline in terms of the total.

Can you just elaborate a little bit on where that's coming from?

I think in your press interview earlier I thought you said that gross leverage came down like 13.7 times.

Is that right and does that suggest the matchbook is really where it came from?

No, that was -- it came from a whole lot of categories across the balance sheet.

I wouldn't, there's no one individual category.

It came down from a fair number of places.

I guess well maybe let me ask it this way.

If you sort of think about what we've seen in capital markets, just across most asset classes there's been a very much of a liquidity freeze and $200 billion of a decline in balance sheet.

It just seems like a big number relative to what you could move into markets.

Can you maybe frame it in that perspective?

Sure.

Yes.

It is a big number.

Most of the assets were more liquid rather than less liquid because there wasn't much of a market for the less liquid although we did sell some of our leverage loans.

We did sell some of our commercial Real Estate, which seemed big in the context of how much of those we have but small in the context of $200 billion.

So more of it was more liquid interest rate or credit or other types of assets.

Our prime brokerage balances were down as well so that contributed to it.

So it was really across all those asset classes.

Yes, I recall when we were a couple months ago one of the comments was that you look at the asset classes that could be leveraged things like treasuries and agencies, that you could get the balance sheet down quickly, you could get leverage down quickly by reducing those businesses and I guess it's fair to say that's some of what you did.

Yes, because that is some of what we did because while they may be more liquid there was also risk in them.

Right.

And we felt that at this time, reducing those assets made sense, because of the riskiness of the environment.

Right.

So I guess --

Less liquid assets more riskier, more liquid assets had a lot of risk as well.

And that risk went up during the quarter also.

Sure, okay.

And I guess to segway from there into your total equity position and strictly with the TARP funds and Buffet and the equity raise you did, where are you on the spectrum at this point with respect deploying any of that capital?

I mean it sounds like it's still sort of a risk averse mode.

You'd rather have more of a cushion.

Are you getting closer to maybe next quarter starting to put some of that to work or what are you looking for to take a little bit more risk?

That's a very hard question to answer.

We know that we are not smart enough to call the bottom of the market.

So we're likely to invest in things either a little bit before or a little bit after the market turns.

We hope a little bit after but we don't know for sure.

And there's no good answer other than we evaluate every opportunity when it comes up looking in this environment only for what we think are very good investments.

But as I said, we are well positioned.

We do have a lot of capital.

We do have a lot of cash, and so if we see good investment opportunities, we're going to take advantage of them with full knowledge that if the world continues to get worse we'll have to because we marked them at fair value, mark them down and take losses.

But we have traditionally found very good opportunities in this environment and we're hoping to find more.

Okay.

And then I guess on the client side, where would you sort of characterize deleveraging at this point with respect to hedge funds?

What are you seeing in terms of year-end redemptions, are the 25% types of numbers we're seeing consistent with what you're seeing?

And are there any asset classes that you think still are going to see much higher collateral requirements?

CDS seems to be one that pops up.

Anything else?

Guy, I think your numbers for year-end are probably as good as mine.

Obviously there is more deleveraging and if the world gets worse again, there will be more deleveraging and if it doesn't it will kind of slowdown.

I'm a little confused by your last question on the assets requiring more collateral.

Well, what we've seen here over the course of many months is various asset classes suddenly requiring, getting either margin called, usually via a higher collateral requirement for example, the convertible bond market last quarter.

There's been a discussion that I think we've even discussed that when CDS moves into central clearing house, you might see higher collateral requirements against that.

Those are the types of things that have caused deleveraging to date.

I'm wondering if you see any other assets like that that maybe don't have high enough collateral requirements against them yet?

In your prime brokerage business.

Nothing specific that comes to mind, but again, if the world continues to worsen then people will ask for more collateral on everything.

Right.

Okay.

Just lastly, any exposure to Madoff?

No.

Okay.

Thanks.

You're welcome.

Your next question comes from Glenn Schorr with UBS.

Hi, Dave.

Good morning, Glenn.

One quick follow-up on the FICC line of questioning.

Just give an example of what kind of assets you might hold in the special situations group, just because it's such a big move this quarter.

Well, that's a group that you talk about more than we do, but within the whole credit complex.

Look we make all different kinds of assets and I'll give you an example and this is not to say that everything is like the example I'm going to give you.

I wish it was.

But we invest in different types of assets, we invest in distressed debt sometimes that will turn into equity.

We'll invest in other types of debt across the capital structure.

We'll also make small private equity investment into situations that we think are interesting.

And to give you an example of what happened during the quarter, I'll take two investments we made.

I won't name them, but we made two investments where the total investment size between the two was $68 million.

Those investments have a life to date profit after the fourth quarter of in excess of $300 million.

Now, the companies went public, so part of that was written up which we do.

We've been selling some of those, but it takes a while to get out of those.

But we have $300 million of life to date P&L but in the fourth quarter, we had over $200 million of losses on those investments.

So terrific investments.

We think that there's still upside in those investments, but in an environment where you have every equity index in the world down between 25 and 35% and you have credit \markets down a commensurate amount, investments that you hold on your balance sheet in debt and equity assets are going to be down.

And that's what we saw across FICC as well.

And as of last quarter end, this quarter end, would you be willing, I know the answer is no but I'll ask anyway, but would you be willing to size it?

Because I'm a believer in what that franchise means towards Goldman's earning power overtime and I'm just curious on sizing.

Well thank you because we're believers too obviously.

But while we don't disclose the size of any particular business within FICC or any other business line, we disclose a lot about this.

If you go back, I'll help.

If you go back to our last 10-Q and you look at page 108 just to give you the page to make it easier for you --

The 10% change?

Yes, exactly.

That kind of tells you how big the assets are that are investments because it tells you what happens if 10% of them go down.

And so that's a very good proxy.

Okay.

Another clarification one.

Inside reconciling PIA on page 13, if you look at just the private corporate piece, the 10.7, optically it looks like a small change from last quarter, however you obviously noted that you had $2 billion in net losses across both the private and public.

Right.

So that would lead you to believe there's marks in there but also investments.

So fair enough and so there's a reasonable hit in there but can you tell us any color about the portfolio itself?

Let me give you some help on those numbers.

If you look at where it was at the beginning of the quarter and you look at the net change, it's down about 15%, round numbers.

Obviously, markets around the world were down more than that.

We think that's a good thing.

And basically, and I hope this is because of our quality of investing part of it might be luck, where we have very minimal to no exposure in some of the sectors that were hit the hardest like financials, retail, auto, so places like that were not where our investments were.

And so the biggest drivers of the declines in the indices were places we were not invested.

We had some investments that actually were profitable for us that did well and so the net down 15% is actually when you think it through probably makes some sense.

We're not happy about it, but we're not going to get through a quarter like this without losses in principal investments.

And some banks are moving some assets that they like longer term into the health and maturity portfolios.

It's a little bit of against what's in Goldman's blood I know that, but any thoughts on like especially those assets that you identified, the $150 billion?

Well, that's a very interesting way to describe it, Glen, because in effect, those are our equivalent of hold to maturity assets.

We invest in our Principal Investments.

We invest in the Real Estate, we invest in some of the things within FICC.

There's no plan to sell those this quarter.

Most of those are assets that we're going to hold to the fruition being either a sale of the Company or a public offering or something like that which they generally intended to be three to five to seven year holds.

So they are our equivalent hold to maturity, but there is no concept of hold to maturity for investments like that as far as our financial statements go.

They have to be marked at fair value.

We believe in marking things at fair value because it tells you what's really going on in the world and it keeps our balance sheet and capital completely clean.

But if you think about them the way that hold to maturity account would work, then they would be at original costs right now.

We don't believe in that but that's exactly the way we think of those assets.

We know they are going to have some times where they go down but we think in the long term they are going to be very profitable.

Again that's not to say everyone.

We're going to make mistakes and we lose money on some of them, but for the most part we think they are good investments.

I'd expect nothing less.

Thanks David.

You're welcome.

Your next question comes from Meredith Whitney with Oppenheimer.

Hi David good morning.

Good morning, Meredith.

I have a couple questions.

The first is related to the down grade this morning insofar as if in fact the holding Company, not the bank holding Company, but the holding Company debt is -- I guess they are concerned with subordinated the FDIC debt, how do you resolve that if the FDIC doesn't expand their wrap guarantee beyond June?

Or do you expect them to extend that?

And then I have a follow-up question, please.

Let me try to answer and I'm not sure I'm really going to be answering your question.

The FDIC guaranteed debt is kind of in a separate category.

It is -[paripasude] to our other debt.

It of course has the government guarantee so it's rated triple A.

It's not that the other debt is subordinated.

It's just that it -- I mean although we are very confident in our credit, we're not as good a credit as the US government and we know that.

And so it is a better credit and so ii prices a lot better but the rest of our debt will be at our credit and our senior debt will be our senior debt.

And we are hopeful that we will start issuing our senior debt on an unguaranteed basis as soon as the market is open.

We don't believe that debt markets will be closed forever and so we hope to start issuing as soon as it's open.

Okay, is there any suggestion of a bias one way or the other, I mean this is sort of tea leaves, but if need be the FDIC would be receptive or you know as well as we know?

We've had no discussions with them about that.

Okay.

And then the follow-up is related I just want to clear something up because there are a lot of questions about this related to I know your stated exposure to AIG has been immaterial, but did last nights purchase of AIG Securities by the Fed have any impact on your exposure positively or negatively?

Our exposure has been immaterial.

It is still immaterial.

So there's been no change.

Okay.

All right, thanks for clearing that up.

Happy Holidays.

Same to you.

Your next question comes from Mike Mayo with Deutsche Bank.

Good morning.

Good morning, Mike.

Is [surety] deleveraging done and if not how much more do you have?

You know me well enough to know that I will not say anything is done forever or that we are finished.

As we sit here today, our expectation and our hope is that we'll grow, not shrink.

We think that we put ourselves in a position with the balance sheet reductions, with the capital increases, with the cash increases, to take advantage of opportunities as we see them.

And so if we see some good opportunities, we will take advantage of them and we would hope to grow.

Now, I'm a little hesitant, Mike, because a month and a half from now if the world takes a really really big leg down, we might change our mind and decide the prudent thing is to shrink.

But as we sit here right now that's not our anticipation.

Okay and is you're right sizing done do you have more to go?

And it looks like your headcount is kind of like 2007 levels and your non-comp expenses are above 2007 and I don't imagine you expect revenues like 2007.

So how do I reconcile those thoughts?

The answer to that is really the same answer as I gave you on the balance sheet, which is we've done what we think we need to do right now but we have to wait and see what happens over the course of the next few months or the next year.

And so I can't promise you that nothing else will happen either to the downside or the upside.

As far as non-comp expenses go there's a couple of things in there.

Some of those things are volume related like brokerage and clearance.

Some are really directly tied to business growth in certain areas like our reinsurance business, and other non-comp expenses will lag what happens with headcount.

And so there are a lot of expenses in things like technology and travel and things like that which are very much directly tied to headcount but they lag.

And so I think we might see some effect of that next year.

And in right sizing either for the balance sheet or for expenses, how do you think about non-US versus the US?

And the reason I ask the question is it seems like non-US is a little bit behind the US in going through this cycle.

It's a very fair question.

I think you're right in that.

I think the US probably lead the downturn and might lead the coming out of it at some point as well.

So you're right.

Our right sizing has pretty much been level across regions and our strategy of thinking that over the long term there's likely to be more growth outside the US than in the US although still growth in the US still hasn't changed.

Okay, and last question, the CEO in the recent conference said he didn't expect any real big change in the business model.

And I was a little surprised given everything that's taken place.

If you could just elaborate on that a little bit?

Well, one thing I can tell you is that the CFO will never say something different than the CEO says.

But I actually, look, obviously, Lloyd and I completely agree on that that we think that our business model if you think about it which is largely to be an advisor, a financier, a co-investor and a financial intermediary for our clients around the world we think is a very good business model.

We think that when as the world gets better and when the world gets better our clients are going to want advice.

They are going to want financing.

They are going to want people to co-invest with them and they are going to want people to help them make markets and do hedges in various markets around the world.

That's what our strategy is and we font see why that should change and we think it's going to be as if not more needed going forward.

All right, thank you.

You're welcome.

Your next question comes from Patrick Pinschmidt with Morgan Stanley.

Hi, David.

Good morning.

I was hoping you could give us a little more color on the FICC investment losses.

For example, is it possible to maybe bucket your five largest positions in that portfolio in terms of their contribution to the loss this quarter?

I mean, just any sort of ballpark for kind of the breadth of the write downs and the relative sizes?

No.

You should not think this was one or two or three large investments.

This was really across the investment portfolio of equity assets and credit assets.

It was very widespread.

It was not like you could pick out three or four and say if we didn't have those, it wouldn't have been a problem.

That was not the case.

It was much more widespread.

It was really caused by widespread asset price declines across the world.

Okay.

And sorry, one more strategy question.

I guess you've been fairly vocal about talking about distressed equity investment opportunities.

Are you comfortable taking incremental risk with your capital to pursue those opportunities or do you think going forward there might be more of a balance from sourcing some of the capital from third party funds?

The answer is both.

We are comfortable, but careful about taking those risks today because we think there will be great opportunities but we have to be very cautious because the world is still a very dangerous place.

So as I said we are comfortable but careful.

But we also think that it is prudent for us to use some of our capital as well as sourcing other capital.

We also think it's important because we think these opportunities are really good to offer them to our clients as well as ourselves.

That's what we do.

When we raise these funds we are both in some ways diversifying our risk but in some ways giving opportunities that we think are very good opportunities to our clients.

And so it's really for all of those reasons that we think we will take some with our own capital and some with funds that we will raise.

Okay, great.

And then did you disclose the risk weighted assets of the sequential a change there in the fourth quarter?

It's not in the release.

We're going to get back to you with the answer to that.

We have the numbers.

I just don't have those right in front of me.

Okay and then finally in terms of the compensation to net revenue outlook I guess generally your guidance has been 50% plus or minus a few percentage points.

Is that what we should use going forward?

I'm going to answer your last question first.

Our risk weighted assets were about $400 billion at the end of the quarter which was up a little bit from the prior quarter and that's because the credit risk within the risk weighted assets went up and more than offset the decline in the market risk.

Okay.

Thank you, that's helpful.

Risk weighted.

And as far as comp to net revenue, no change from our guidance.

50% plus or minus a couple percent.

Great.

Thanks, David.

You're welcome.

(Operator Instructions) Your next question comes from James Mitchell with Buckingham Research.

Good morning.

Good morning, Jim.

Can you just maybe talk about the RESI side on the mortgage book if there were any significant net write downs this quarter and what the remaining exposures are?

Sure.

The reason we didn't mention it is because it wasn't significant.

We had net losses that were pretty immaterial in that book, and part of that is because we've gotten those positions down to almost what I would call a trading portfolio, kind of our normal portfolio.

We have a little bit over $5 billion of long RESI assets.

Obviously we have some shorts too, but of long RESI assets and that's a $1.5 billion of prime, round numbers.

$1.5 billion of prime, $1.8 billion of Alt-A and $1.8 billion of subprime.

And if you look from last quarter, you see that prime is down some, Alt-A is down a fair amount and subprime is actually up a little bit because we bought a portfolio, we sold some and even within the prime and Alt-A, there were purchases on sales.

So there's probably some assets in there we would still like to sell and we will but it's really as I said a trading portfolio largely at this point.

So it's just a flow book right now and you're not turning over pretty rapidly reducing the risk there?

Yes.

Not rapidly because the markets aren't all that liquid.

Fair enough.

When -- and I said there's some assets in there we would like to sell and others that we're making markets on.

Yes.

Fair enough and then maybe just bigger picture.

Any thoughts on what the Fed's been doing in terms of adding liquidity to the market?

It seems like it's helped the short-term money-markets to some extent, but we're really not seeing much of a move on the longer term credit side.

Do you think that that will have an impact over time or is it just too early to tell?

No.

I think the only thing that's too early to tell is when it's going to have an impact.

It is absolutely going to have an impact.

I think between what the Fed is doing, what the Treasury is doing, what Congress is doing and what governments around the world are doing, they're throwing so many resources at the economies around the world and at the credit markets around the world that it is unquestionably is going to have a positive effect.

The thing that's unknown is when.

Right now, there's still so much fear and negative sentiment in the market that that is overwhelmed the liquidity that's been put in and the opportunities that are there and at some point that's going to turnaround.

Right.

Fair enough and maybe just one last question on the comp side you're down 46% year-over-year, but obviously there's a decent amount of fixed comp.

Can you disclose how much the bonus pool was down and what I guess the morale is like?

We don't disclose that number, But suffice it to say that we are, we pay our people for the performance of Goldman Sachs.

And when Goldman Sachs does very well, we think our people, our employees should share in it with our shareholders and when Goldman Sachs has a year where our results are down significantly our compensation will be down significantly.

And that's always been the philosophy at Goldman Sachs and I think people who have been here for a while understand that and understand that there will be upside but there will be years when results are down and comp will be down a lot.

Great.

No, fair enough.

I appreciate it.

Thanks.

You're welcome.

Your next question comes from Ron Mandle with GIC.

Hi, David.

Good morning, Ron.

I'm still not sure I understand the part about prime brokerage.

You have this phrase, changes in the compensation of securities lending customer balances.

I'm still not sure what that means and how that is positive.

It means that the services we're providing and the securities we're able to source for our customers.

They need different things in their balance, when they have balances they need different services and they need different types of securities, if they're short things we have to find them for them are the higher margin services.

And so that's really what we're trying to say.

So you're charging more for people who want a short in other words?

Or we're finding assets that are traditionally have higher margins in them because not all shorts are created equal.

Right.

Okay, and so that, it's not necessarily limited to equities, in other words?

Our prime brokerage business is largely an equity business.

Oh, okay.

Okay.

And then my other question was in regard to the comp ratio.

I know you made the comment about 50%, but the two years before this, you were closer to 44, year before that 47.

And I guess I was wondering whether and 48% this year, with excluding the severance, so I guess I was wondering whether this might have been an opportunity to readjust the business in light of the new realities that we're seeing across Wall Street and have lower comp going forward.?

Look, I think it's always hard to say what's going to happen going forward.

I think almost by definition you would find with us and almost everyone the higher the revenues the lower the compensation percent and the lower the revenue the higher the compensation percent.

Even though comp goes up and down with performance, I think that would just be a normal thing.

I also think you'd find that we have one of the lowest comp to net revenue ratios around certainly within the industry.

And I'm not sure that's a good thing or a bad thing.

It's just factual.

And as I said our people will share when we do well and I think if you asked our people this year they would say that they're being treated appropriately and fairly given that the performance of the firm was down significantly, so is the competition.

And in regard to headcount going forward, I think you're more or less implying that if market conditions are more or less like they are well into '09 then headcount would not change significantly in that environment?

That's right.

Okay.

Thanks very much.

You're welcome.

Your next question is a follow-up from Guy Moszkowski with Merrill Lynch.

Hi, David.

Just a follow-up on the comp.

Was there any change in the composition between stock and cash this year?

Yes.

More equity, less cash.

Despite the fact that you're issuing it at a level well below book that's still the appropriate thing to do?

We felt it was appropriate to tie people in even more to the firm this year.

Yes, fair enough.

Can you give us a sense of how much it shifted?

No.

And maybe this is asking the same question but if you had kept the ratio the same versus last year, would there have been a material impact on the comp to revenue ratio?

It is asking the same question.

But that was a good try.

Okay, well that is part of my job.

Okay just one more then on some of the losses in the quarter and where they may have come from.

If I go back to your 10-Q and I look at your exposures or your disclosed max loss exposure to VIE assets there's a few billion dollars of max exposure to synthetic CDOs and CLOs and several billion dollars more in written protection on mortgage CDO collateral.

Did those exposures, did marks on those exposures filter meaningfully into your FICC losses this quarter?

No.

Very immaterial.

And as you know, whether things are on our balance sheet or not, we treat them as fair value, so whether things are on or not is no different to our financial standings, but that has virtually no bearing.

Okay, great.

Thank you very much David.

You're welcome.

Your next question comes from Richard Staite with Atlantic Equities.

Hi.

Just going back to the prime brokerage, could you just give some indication on your market share there and how that's changed over the quarter?

And then maybe more broadly across the firms other businesses what you're seeing in terms of market share, where you're seeing a big pick up or indeed where you're losing share?

That's a very fair question, but it's actually really hard to answer, because there's no statistics on prime brokerage market share.

So, we did lose some balances.

We got a lot back that we wanted to get back.

I'm struggling because it's not that I actually don't want to answer that question.

I actually don't know the answer, because as I said there's really no statistics on market share in prime brokerage.

I would say that we might have lost a little share in that business, but not very much and we still have if not the highest market share one of the highest market shares in prime brokerage.

That's the best I could answer there.

In many of our other businesses, our market share has kind of stayed the same or increased.

Our mortgage business, we continue to have the highest market share.

We're the leader in M&A.

In many of the equities businesses, our share continues to go up.

It's one of the reasons why you see our commissions continue to go up even though clearly the cents per share people are paying is not going up.

And so if anything I'd say our market share in some of those businesses is going up.

Okay, great.

Anything -- anywhere where you're losing?

Not that comes to mind.

Okay, great.

Thanks a lot.

You're welcome.

I would now like to turn the conference back to Mr.

Holmes.

Thank you everyone for dialing into our fourth quarter conference call.

If you have any additional questions please feel free to reach out to me.

Otherwise have a Happy Holiday.

Bye-bye.

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

You may now all disconnect.