高盛 (GS) 2009 Q1 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 first quarter 2009 earnings conference call.

(Operator Instructions).

This call is being recorded today, Tuesday, April 14, 2009.

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 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 these forward-looking statements.

For a discussion of some of the risks and factors that could affect the firm's future results, please see the description of risk factors in our current Annual Report on Form 10-K for the fiscal year ended November 2008.

I'd also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our investment banking transaction backlog, and you should also read the information on the calculation of non-GAAP financial measures that is posted on the Investor Relations portion of our website, www.GS.com.

This 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 firm's results.

David?

Thanks Dane .

I'd like to thank all of you for listening this morning.

I'll give an overview of our first quarter 2009 results and then take your questions.

In light of the continued challenging macroeconomic backdrop I'm pleased to report solid first quarter results for Goldman Sachs.

First quarter net revenues were $9.4 billion, net earnings were $1.8 billion, and earnings per diluted share were $3.39.

These results generated an annualized return on common equity of 14.3%.

Before reviewing our first quarter results, let's briefly discuss the month of December.

The difficult market environment that we faced during the fourth quarter of 2008 continued into December, with downward pressure on asset values, weak Investment Banking activity, and lower equity volumes, which more than offset continued strength in our FICC franchise businesses .

December net revenues were $183 million.

Net earnings were negative $780 million and earnings per diluted share were negative $2.15.

December results were negatively impacted by $2.7 billion in fair value losses, including approximately $1 billion in non-investment grade loans, which included approximately $850 million for Lyondell Basell, approximately $625 million in our commercial Real Estate loans, approximately $525 million related to our Real Estate principal investment business, and $500 million from private investments in our corporate portfolio.

December results also included a CVA loss of more than $100 million, as a result of a tightening of the firm's credit spreads.

Compensation expense for December was comprised of salaries, severance, and amortization of prior years awards as no accrual for discretionary compensation was included.

Although the market environment also had its challenges during the first quarter, our results demonstrate the breadth, resiliency and strength of our business model and franchise.

The results for several of our businesses, including mergers and acquisitions, equity underwritings, security services and principal investing reflect extremely difficult operating conditions; however, having established a diverse set of global businesses, strong performance and other franchise businesses like rates, commodities, currencies, credit trading and asset management offset those negative pressures.

Despite more than $2.5 billion of fair value losses in the first quarter, $2.2 billion of revenue, and $300 million additional expenses, we generated an annualized return on common equity of 14.3%.

Our performance in the first quarter was also a by-product of a significantly altered competitive landscape.

Many of our traditional competitors have retreated from the marketplace, either due to financial distress, mergers, or shift in strategic priorities.

Throughout this cyclical downturn, we have remained committed to serving our clients as an advisor, financier, market maker, asset manager, and coinvestor.

Our first quarter results demonstrate the benefit of this uninterrupted focus on client service.

This was particularly evident in our multi faceted FICC business, which posted record quarterly revenues.

The reduced level of available risk capital created more market share opportunities and attractive margins across most of our franchise businesses, particularly in plain vanilla liquid products.

In 2009, we've remained committed to actively managing risk and strengthening our conservative financial profile.

As a result, our exposure to legacy risk positions, including leverage loans and residential commercial Real Estate continues to be at low levels relative to our capital base.

Our financial profile is further enhanced by the fact that we have virtually no direct exposure to the consumer.

At the end of the first quarter, our capital ratios remained at robust levels with a Tier 1 ratio on the Basell 2 of 16% and a Tier 1 ratio on the Basell 1 of 13.7%.

Our strong level of capital provided a prudent capital cushion to weather current conditions, while maintaining our ability to be opportunistic.

We've taken a similar approach to managing our liquidity profile.

Our global core excess pool of liquidity reached record levels during the first quarter of 2009, averaging $164 billion during the quarter.

As you know, we're in the process of raising common equity.

After the completion of the stress assessment, if permitted by our supervisors and supported by the results of the stress assessment, we would like to use the private capital we are raising in addition to other resources to redeem all of the TARP capital.

We never believe the investment of taxpayer funds was intended to be permanent.

Thus we view it as our duty to return the funds, as long as we can do it without negatively impacting our financial profile, or ability to act as a central liquidity provider to the global capital markets.

I'll now review each of our businesses.

Investment Banking produced net revenues of $823 million, down 20% from the fourth quarter.

With a broad based slowdown in global activity, our backlog declined during the first quarter.

Within Investment Banking, first quarter advisory revenues were $527 million, down 8% from the fourth quarter.

Goldman Sachs ranked first in completed M & A globally, as we advised on a number of important transactions that closed in the first quarter.

These include Genentech's $47 billion sale to Roche Holdings AG, Time-Warner's $47 billion spinoff of Time Warner Cable, and Altria's $12 billion acquisition of UST.

We were also advisor on a number of significant announced transactions, including Pfizer $64 billion acquisition of Wyeth, Schering-Plough's $46 billion sale to Merck, and Nuon's $11 billion sale to Vattenfall.

First quarter underwriting net revenues were $296 million, down 36% sequentially.

Equity underwriting revenues of $48 million were down 82% from the fourth quarter, reflecting very limited industry-wide activity following continued instability in the global equity Markets.

Debt underwriting improved 33% to $248 million, given the resurgence in investment grade issuance during the quarter.

Let me now turn to trading and principal investments, which is comprised of FICC, equities, and principal investments.

Net revenues were $7.2 billion in the first quarter, reflecting strength in client facilitation despite significant asset price declines across our principal investing businesses.

FICC net revenues were a record $6.6 billion in the first quarter, representing a 34% increase from the previous quarterly record of $4.9 billion in the third quarter of 2007.

Our record FICC performance was principally driven by favorable competitive dynamics, wider margins, a shift to more plain vanilla liquid transactions, and higher volatility, which more than offset lower volumes.

Net revenues in our rates and commodities businesses were up substantially in the first quarter, reaching record levels due to strong customer flow in response to a macro environment characterized by coordinated monetary and fiscal actions by central banks.

Credit also posted strong revenues due to increased trading of cash and other liquid credit products.

Mortgage results improved sequentially, but continued to be negatively impacted by losses within our commercial Real Estate portfolio, which totaled approximately $800 million.

Turning to equities, net revenues for the first quarter were $2 billion, down 24% sequentially.

Equities trading declined from a robust fourth quarter due to lower customer volumes and less volatility across our cash trading and derivatives businesses.

Equities commissions were down 26% sequentially to $974 million, reflecting a slowdown in client trading activity, particularly outside the United States.

Turning to risk, average daily value at risk in the first quarter was $240 million compared to $197 million for the fourth quarter.

The increase was driven by higher credit spread risk.

Let me now review principal investments, which produced negative net revenues of $1.4 billion in the first quarter.

Our corporate principal investment portfolio generated net losses of $621 million during the quarter, due to further depreciation in global equity markets.

Our real estate principal investment portfolio generated $640 million in losses, due to incremental valuation adjustments that incorporate deteriorating commercial real estate fundamentals and higher cap rates.

During the quarter, we extended our transfer restrictions for 80% of ICBC, demonstrating our belief in the long term prospects of the company and the broader Chinese market.

Although ICBC stock price increased modestly during the quarter, the extension of the transfer restrictions increased our liquidity discount and resulted in a $151 million loss.

In asset management, and security services, we reported first quarter net revenues of $1.5 billion, down 17% from the fourth quarter.

Asset management produced net revenues of $949 million which was comparable with the fourth quarter as assets under management remain fairly constant at $771 billion.

We remained well positioned in asset management, as we continue to possess one of the most diversified product platforms in the business.

Security services produced net revenues of $503 million in the first quarter, down 30% sequentially, due principally to lower customer balances.

As we mentioned in the fourth quarter, we expected AUM across the hedge fund universe to decline in 2009 due to weaker hedge fund performance and redemptions.

The reduction AUM within our business was in line with the broader industry experience.

Now let me turn to expenses.

In the first quarter, compensation and benefits expense, which includes salaries, discretionary compensation, amortization of prior year equity awards and other items such as payroll taxes, severance costs and benefits, was $4.7 billion, accrued at 50% of net revenues, which is consistent with historical accrual levels and lower return environments.

First quarter non-compensation expenses, excluding those related to consolidated investments, were down 25% sequentially.

The largest drivers of the decline were lower brokerage clearing and exchange fees and professional fees.

The increase in non-compensation expenses related to consolidated investments primarily reflected impairment charges of approximately $300 million related to real estate assets.

Headcount at the end of the first quarter was approximately 28,000, down 7% from fiscal year end 2008.

Our effective tax rate was approximately 31% for the first quarter.

While the global financial services industry continues to navigate through extremely difficult macroeconomic conditions, our competitive position has improved significantly over recent years.

We have a leading global franchise serving the world's most important corporations, financial institutions, governments, and high net worth individuals.

We provide our clients with a broad set of products on an integrated basis.

We have strong capital ratios, record levels of liquidity, and a fair value balance sheet, and most importantly, we have a culture of teamwork, risk management and client service that has positioned Goldman Sachs to perform well in a variety of operating environments.

Across many of our businesses, trading margins are robust, and those willing and able to commit capital are earning even higher risk premiums, particularly in plain vanilla businesses.

Furthermore, the product and geographic diversity of our business provides Goldman Sachs with significant flexibility and a broad opportunity set.

Given the challenging fundamental back drop in the global economy, we continue to be cautious about the near term outlook for our businesses.

Nevertheless, we remain focused on our core strategy as an advisor, financier, asset manager, co-investor and market maker, and believe this integrated model provides the ability to deliver strong returns for our shareholders over the long term.

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

(Operator Instructions).

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

Good morning, David.

Good morning Guy.

First question is should we interpret your comment in the release that illiquid assets generally continue to decline in value in the first quarter to mean that very little of the FICC revenue in the quarter was the result of just reversal of negative marks in the prior four months?

Yes, that's correct.

You saw that we had another $800 million of writedowns on commercial real estate loans, there were very little in reversal and virtually nothing in reversal of marks on illiquid assets.

In fact they continued to go the other way.

And sort of a related question.

You did a very thorough press call on the AIG relationship a few weeks ago, and the payments you received from them after the government bail out of AIG.

These results have some people asking if I think that some of these revenues reflect recoveries on marks in the prior periods related to some of those positions.

How would you respond when you're asked that question?

First of all, virtually all of those cash flows which as you know were just cash flows, they had nothing to do with P & L and in fact most of them were value for value cash flows.

Most of those took place before the end of the year, the main transactions were all unwound before the end of the year.

I would say our P & L related to AIG in the first quarter rounded to zero.

Okay, that's helpful, thanks.

You mentioned the $800 million of CRE finance losses, I guess on some combination of whole loans and CMBS, you specifically say that that excludes hedges and we know that the CMBS performance was generally pretty negative, so it would seem a good deal of the loss might have been covered by hedges depending on how hedged you were.

Can you give us a sense for your hedge coverage in CRE, and what sort of offset ling gains for those hedges might have produced?

Sure.

The stuff that was really directly tied to hedging those positions probably about $100 million plus or minus a little bit of positive.

That does not include what we did in our normal CMBS trading business, so just the direct hedges rounded to about $100 million of profit.

Okay, on the legacy position?

Yes.

Right, okay.

Maybe we can switch to the global core excess.

You took that up to $163 billion.

That's over a $50 billion increase.

Can you talk a little bit about both how and why you decided to take it to that level?

Yes.

They're kind of related.

It's still a dangerous environment, and as you know, and you've heard us say many times, there is nothing more important than liquidity in this dangerous environment.

It made sense to have a lot of liquidity from both a defensive and an offensive point of view, so to protect ourselves, and also to take advantage of opportunities to buy illiquid assets if they came about.

The environment in the first quarter was such that there were so many opportunities in truly liquid assets that there was no need to use liquidity to buy illiquid assets and there weren't a lot of good illiquid assets for sale, so really both from a prudence point of view it made sense to take it up, from an opportunity point of view it made sense to take it up, and then the opportunities out there did not cause us to use any of it.

Got it.

How come book value increased so little over the year-end figure?

You had in the last four months, you had net earnings of about $1.24, but the book value was only up I think $.14.

Okay, this is a little bit complicated so I apologize in advance for going through something that is so technical, but let me do this so I can explain it to everybody.

When we award equity based compensation, we take the expense at the award price, and the tax benefit at the award price.

As equity-based compensation is delivered, the actual tax deduction for the firm is at the price it is actually delivered.

In prior years, when the price where equity was delivered was higher than where the equity had been awarded, there was an additional tax benefit to Goldman Sachs which went right to book value.

It doesn't go to P & L, as long as you have prior period credits, it goes right to book value, not to P & L.

In this quarter, given what happened to our stock price over the course of the year, the equity that was delivered was delivered at a lower price than where it had been awarded, and to use the numbers, the very round numbers, we delivered roughly 30 million shares at a price that on average was roughly $100 per share lower than where it had been awarded, so that would be $3 billion, at roughly a 1/3 tax rate, would be roughly $1 billion or $2 per share in book value, and so had it not been for that tax effect on our books, we would have had a $2 increase in book value, and sorry for going through the technical accounting but that's the explanation.

That was actually a very crisp explanation of something that sometimes takes a lot longer than that to talk about so I appreciate it.

Thanks very much David.

Appreciate it.

You're welcome Guy.

Your next question comes from Howard Chen with Credit Suisse.

Good morning David.

Thanks for taking my questions.

Sure.

First, a lot of interest on the sustainability of FICC revenues.

I know it's a difficult question to answer, but could you provide any thoughts on how you and the management team think about that over the near to intermediate term?

Okay, so you know me well enough and everyone knows me well enough to know that I would never use the words "sustainability and revenues" in the same sentence.

Our revenues kind of start every day, but what I will tell you is that the revenues in FICC were very very broad based, it was not like there was any individual position or any individual business, they were across the variety of rates business and currencies and commodities and credit and mortgages excluding the commercial real estate loans, and so it was very very widespread and while we clearly had the benefit of higher spreads, less competition, we also had the detriment of lower volumes, and so the expectation would be that at some point, there would be more capital in the market and so those spreads would narrow but that would likely come at a time when there would be higher volumes, so you have some offsets.

Now, as I said, I can't tell you that we're going to have $6.6 billion every quarter, but I can tell you that if you go back in history and excluding really big writedowns in the fourth quarter of last year, we've had really good FICC performance in almost any type of environment that you have seen, whether it was high rates, low rates, strong dollar, weak dollar, high commodity prices, low commodity prices, wide credit spreads, narrow credit spreads, we tended to have pretty good FICC performance across-the-board so while I can't give you sustainability on the number, I can tell you we've tended to perform in many environments and that's because of the breadth of that business.

That's helpful thanks, and maybe following it from a different angle, how do you think about resource and allocating resources to a fixed income trading business that just blew away its previous quarterly record by over 40%, by the way we look at it?

We've talked a little bit about this in the past.

Our resource allocation process is a pretty dynamic process.

We look at allocating a whole variety of resources, including capital, risk limits, balance sheet and people, and it's not just based on how you've done.

It's based on where you think the opportunities are going to be on future, so we'll continue to look at it.

We will feed those places where we think we're going to have opportunities with all of those resources, and grow those businesses where we think it's appropriate.

Great thanks and David can you touch at all on the pacing of the March quarter and the profitability as we progress through January, February, and March?

There's a lot of market commentary that March was more challenging for some, and curious to get your point of view.

Without being too specific and I would not put a lot of weight on a one month versus another month.

I would tell you that our revenues across the FICC businesses were pretty consistent across the quarter.

Okay thanks and clean up on the exposures, David, could you provide us a sense of where marks stood and gross exposures level stood at the end of March versus November for all of the hotspots, commercial real estate, levered loans, residential real estate, Alt A, subprime, prime.

Let me give you a couple of those.

Okay, thanks.

Anything I don't answer ask me if I haven't given you what you need.

The commercial real estate, we had at the end of the quarter a market value of about, round numbers I'll give you about $8.5 billion, and about $1.5 billion of that was CMBS securities so the real loan portion was about $7 billion, and our average mark cross there was something in the high 50s.

The residential real estate for us, we just have a trading position at this point.

We have non-agency residential real estate.

We have roughly $4 billion split equal, roughly equally between prime, Alt A and subprime, and that is really a trading position.

It's going to go up or down over the course of any quarter at this point.

I wouldn't call them legacy positions anymore, and our leverage loans from the $52 billion of legacy loans that we had at the beginning, at the end of the third quarter of '07 which is when the credit crisis really hit, were down to a market value of about $2.3 billion, so the exposure there is pretty minimal at this point and the average mark on that $2.3 billion is in the range of $0.50.

Okay, great.

I think you got them all and net leverage during the quarter, any sense there and color in how that potentially fluctuated during the quarter?

Well the balance sheet ended at 925, the average balance sheet was somewhat higher, the gross leverage number was I think 14.7.

I think I got that right.

Yeah, it was 14.6, and the adjusted leverage was 8.4, so still pretty conservative leverage numbers.

Great thanks.

And then on security servicing, you spoke to the gross revenues being materially lower due to client AUM levels, but could you touch on your thoughts on the profitability of that business, that's difficult for us to see that through the income statement?

It's still, a pretty high margin business, so a lot of the security services revenue does just kind of get through to the bottom line, but clearly with the decline in hedge fund assets, that business was slower in the quarter, and I wouldn't expect it to grow at the rapid pace it had been growing, I think hedge funds performed better in the first quarter than they certainly had so it's still a very viable asset class.

We still expect over time, hedge funds to be an important asset class for people to invest in, so we still from here expect that business to grow.

Okay great, thanks.

Final one for me, apologies if I missed this in the prepared remarks, but could you qualify how much Alltel and Sanyo benefited principal investments during the quarter?

As you know, we don't disclose individual profitability or losses on individual positions, but I will tell you we're a fair value firm.

Alltel was pretty well marked at the end of the year, last year, so there was very little Alltel in the P & L and there was some but not a really huge amount of Sanyo.

Great.

Thanks David.

Congrats on the quarter.

Thank you.

Your next question comes from Meredith Whitney with Meredith Whitney Advisory Group.

Good morning.

Too early this morning.

Sorry, Meredith.

I'm back on caffeine.

I had a few questions.

One is a regurgitation of a prior question, but when you look at the composition of the revenues this quarter, it's different from the composition of revenues in at least the past three years.

How do you size the business, not just allocations to one business, but how do you size the larger business, that's the first question.

Look, and if I don't answer your question tell me.

I'll try, because I think I got it, but look, one of the things about our business and one of the advantages, and we've talked about this, is the breadth and diversity of our revenues, and we don't expect that all of our businesses are going to be good at the same time.

When that happens, it's great.

It happened some of the times in the 2006, 2007 time frame, but it's unrealistic to think that's going to happen at all periods of time, and what we want is a broad enough set of businesses so that if some are weaker and some are stronger, and I think that's what you saw in the first quarter.

Obviously things that we'll call recession sensitive businesses, so things like the merger business, the equity underwriting business, security services, things like that, anything equity volumes were operating at a more difficult environment, and things that are not necessarily sensitive to volumes, things like many of the FICC businesses, which as you've seen and I've talked about before, we've been able to have good results in almost any environment, because they aren't directional businesses, performed extremely well.

That's what we expect of our broad set of businesses, and so when we look at that, we try and see what are the right resources, and we sometimes move the resources around, we size our business for our expectations going forward, as we sit here today, we think we have our businesses sized correctly, if the world were to get a lot worse, then our business would be too big, and if the world improved more rapidly than people think, then we have to be out increasing our resources, but for what we think going forward given the mix of business we think it's sized pretty well.

Okay, so add-on to that, moving away from lender to facilitator, is it, and I'm asking the same question again, is it a different composition in terms of sizing of the business?

Not necessarily.

I mean, the making of markets has been the key to our business for a very long time and was the key to the business in the first quarter.

So I don't think, although clearly there was a shift to much more liquid products in the first quarter and more FICC as a percentage of our revenues than we've seen in some of the quarters, overall it doesn't really change the size of the business.

Okay, and across-the-board would you say your lending commitments came down in the quarter?

There were not a lot of new lending commitments made during the quarter, I would say that.

Okay.

And then--

There were some, Meredith.

There were a few large transactions, and when our clients wanted it, we were there for them, but it's not as you know, we're a corporate lender.

We're not really a consumer lender.

The corporate volumes were lower so there weren't as many requests but there were some.

Okay.

And then lastly, in terms of from your release, you talked about some of the volatility had waned throughout the quarter and I'm trying to piece that with your cautious outlook and trying to remember how cautious you were in prior quarters.

Can you elaborate on the outlook?

You know me well.

I'm always cautious.

And at the height of the markets I'm cautious.

It's kind of what I'm supposed to do.

But look, there are headwinds still with asset values.

I think those headwinds are less for us because we don't have that many anymore, and they continued to decline but there are still headwinds, and that's what makes us cautious.

Our economists are, I would say, more optimistic or less pessimistic than they've been about the outlook for the economies going into the second half of the year, so that gives us some cause for optimism, but we're still in a difficult economic environment and that's what makes us cautious.

Thanks so much.

Your next question comes from Chris Kotowski with Oppenheimer.

Good morning.

I wonder if you could talk a little bit about your expectations for the timing of the repayment of the TARP fund and what guidance you've been given on that, and would you proceed with the equity offering in advance of having clarity on that issue, or would you hold that back?

Okay, so the guidance we've been given is that the stress test is supposed to be completed around the end of this month.

Other than that, all I can say is what I already said in my prepared remarks, which is, after the completion of the stress assessment, if permitted by our supervisors and if supported by the results of the stress assessment, we would like to use the capital we raised plus additional resources to redeem all of the TARP capital.

Okay.

And then second question, you had announced earlier in the week a fund to purchase private equity commitments from other parties, and roughly what's your size of that committment, and overall what should we be expecting in terms of your investing activity in private equity, both real estate and corporate?

Sure.

That was a little bit old news.

That was a fund that most of which had been raised earlier.

This was the final closing.

That's one of our asset management funds which is really a client fund.

It has very little of the firm's money.

Where we manage money on behalf of our clients.

I think you probably saw it, it's called Vintage Fund Five.

So it's the fifth one we've done, we've done many of these in the past, and it's really to buy secondary interest in private equity funds.

It's not to make primary private equity investments.

It's to buy secondary interest in the private equity funds, and as I said most of that funds had been raised before.

This was the last closing and reporting on the fund, and in fact part of that fund has already been invested.

Any guidance you'd give us on other expectations in terms of private investment activity going forward here?

I think that clearly there's not a lot of leverage available, so I would expect the private equity investing activity to be pretty slow.

There might be some opportunities but it will certainly be slower than we've seen in the last couple years.

Okay, thank you.

You're welcome.

Your next question comes from the line of Kian Abouhossein with JPMorgan.

Good morning.

Good morning.

I have a question regarding Tier 1 capital change, looking at SEC Basell 2 and Fed Basell 1, can you touch on why the capital movement has happened in Tier 1 capital?

Well, this is the first quarter we've reported Basell 1.

On Basell 2, it was up a little bit, not very much, it went from 15.6 to 16 so it wasn't a very big movement.

Basell 1, it's the first quarter we've actually calculated because remember we weren't a bank holding company so we didn't have to calculate Basell 1 before so I can't tell you if there's been a lot of movement there, because it's really the first quarter we've done it.

And on the absolute Tier 1 capital number it's lower on the Fed relative to SEC.

Is there any change that you need to make adjustments?

Well, first of all remember, it is the First quarter we've ever done it.

It's based on different things, so as we do that calculation more, I would expect those numbers might get a little bit closer together, but regardless, that, even that 13.7% number is a very very high absolute Basell 1 capital ratio, Tier 1 capital ratio, so we're extremely comfortable with where that is.

Moving from Fed Basell 1 to Fed Basell 2, I know it's a bit early, but can you touch on what you expect any material changes between Basell 1 and Basell 2 in that respect?

I would expect our Basell 2 Fed number would be pretty close to our Basell 2 that we reported.

Lastly on opportunities you mentioned the flexibility of moving resources.

Where do you see the opportunities if you take a slightly longer term view and where are you shifting resources to?

Well, let me talk about the opportunities.

Look, we continue to see opportunities right now in the very very liquid products, so I don't think those opportunities are going away so fast.

The other place we continue to look for opportunities is we have had a long history as being a good investor in distressed assets.

We think there are a lot of distressed asset opportunities.

So far, there haven't been many of those opportunities, because sellers and buyers prices have not yet come in line.

We think that is likely to happen over the next several months, so we think those opportunities are there, and we continue to look and think that certainly over the medium to long term, there will be very good opportunities outside the United States and especially in some of the BRIC countries and the emerging markets where maybe there's a pacing question in the near term, but if you look out three to five years, we certainly expect those economies to grow quite rapidly, and there to be very good opportunities for Goldman Sachs.

And do you see areas where you're taking resources out?

Can you talk about that as well, or would you say that net-net, resources will be significantly higher over the next two or three years?

Very hard to say.

All I can say right now is I think we're sized appropriately for where the business is, and if the business begins to grow again, then I think we'll need more resources, and if it doesn't, then we won't.

Great.

Thank you very much.

You're welcome.

(Operator Instructions).

And your next question comes from Jeff Harte with Sandler O'Neill.

Good morning.

Nice numbers.

Thank you.

This has been touched on a couple times but I keep looking at an excess liquidity pool of $164 billion, which is 18% of assets.

That seems like an awful lot of kind of capital to be parking, and I'm assuming the reverse repo book.

I mean, how long do you hold on to that much cash in the hopes that opportunities come up, or I mean, how long are you comfortable holding that much of what should be a low earning asset?

It is definitely a low earning asset.

It is definitely a drag on our earnings and our return on equity, and I think in this environment, prudence is the better path, and so if the environment starts to get better, then we would need to hold somewhat less liquidity, but we also might see opportunities to use it, so either we would use it, or we would not hold as much if the environment started to get better, but in this environment, I think we would make the trade off of slightly lower earnings and ROE for the prudence of having the higher liquidity.

Okay.

And looking at the FICC number which was big, can you give us any kind of idea of how big some of the gains or revenues might be from the positions that are not included in VAR, some things like principal strategies, I guess would be equities but the special situations group, things like that versus kind of your pure trading businesses?

Well as you know we don't disclose individual business unit profitability.

I would tell you as we said, virtually all of the revenue was from very liquid, from trading very liquid products, very little in anything that was illiquid.

Okay.

And finally, with a very strong fixed income trading quarter, I was a little surprised to see brokerage and clearing of some of the activity expenses be down as much as they are.

Is that because of the equities business, or why do we have such a low BC& E number, given how strong trading revenues were?

What drives that more than anything are equity volumes, and equity volumes were really off really across-the-board, but especially outside the United States.

Really, that's the main driver of BC& E would be equity volumes.

Okay, and I suppose finally, Investment Banking pipelines are down, not a big surprise given the environment.

Are you getting any kind of a sense from conversations with clients, I mean how bad is CEO confidence?

What do you think it takes to actually start seeing people want to start transacting again, and kind of M & A and equity markets?

Well let's separate them.

So I think over the last several weeks, you've already started to see a pretty big pick up in capital markets activities.

Now I can't tell you it's going to be sustained, but last week, I think I may have this a little wrong, but I think the number was 24 equity offerings last week, which was the largest number we've seen in a very very long time, and this week, while they are very small, there are two IPOs being done this week, I think it's the first time since the Summer we've seen two IPOs in the same week, so the capital market and even in the first quarter we started to see a big pick up in investment grade offering so I think the capital markets activity is really starting to pick up and if the equity markets hold given the need many companies have for equity, I think you'll see a pretty big pick up in capital markets activity.

I think the merger business is going to take a little bit more time.

I think you're going to need to see a little bit more sustained pick up in economic activity, which will drive CEO confidence which will drive the merger business.

You've seen the occasional very large deal, but it's really the occasional very large deal as opposed to the constant flow of $1 billion merger deals.

I think there is a lot of dialogue, but it's going to be a little while longer until the triggers get pulled on some of those deals but I think capital market activity could come back a lot faster.

Okay, thank you.

You're welcome.

Your next question comes from Lauren Smith with KBW.

Hi, good morning.

Just a quick question or clarification actually.

In your commentary about FICC, you said there was very little write up or reversal of prior marks on assets.

I just also want to clarify that there's nothing in the FICC number either that relates to your own CDS?

We had a loss of about $200 million on our own debt, on CVA, because our credit spreads tightened across the quarter.

Okay, $200 million.

That was a loss.

Okay, thanks.

You're welcome.

Your next question comes from Steve Stelmach with FBR.

Hi, good morning David.

Good morning Steve.

Just real quick on interest expense, it's down by about half, quarter-over-quarter.

Was there any hedging gains involved in that number, or was that pretty much a result of Fed funds at effectively zero right now?

I think it was more that the absolute rates were down, and it's not a number that we focus on that much, because it kind of is, when we break it out for our P & L purposes, but it's really, within our businesses, because our assets turn over so quickly when rates tend to be low and our interest costs, what we earn on the assets tend to be equally low so they tend to go together, but it was really just a function of the very very low absolute rates.

So it's a relatively sustainable number until rates go back higher?

Yes.

Okay.

And then just real quickly on the VAR, it sounds as if the principal trading business, less emphasis agency business is probably a little bit higher this quarter, maybe that characterization is wrong, correct me if I'm wrong, but if that is the case, why would VAR be higher, if you could just help us sort of conceptualize that a little bit?

It's really just volatility and movements in credit spreads that drove it.

It's not positioned to us.

Okay, got it.

Thank you.

You're welcome.

And your final question is a follow-up from the line of Guy Moszkowski with Merrill Lynch.

David, I just wanted to ask you going back to the concept of the TARP repayment, obviously it's understandable why you would want to do that, but what's the interaction of no longer being a TARP preferred recipient versus eligibility to participate in the FDIC's TLGP program?

Are they related, or really does it matter to you at this point?

As far as we know, they are not tied together.

There are participants in the FDIC guarantee program who did not have TARP capital today, and we think that Congress has made it pretty clear that they are interested really in the equity investments in the firms that have received TARP capital and those things are not tied together so that's everything we know.

As far as whether it's important, we've begun to issue unguaranteed debt.

We would like to continue to do that when opportunities are available for us.

We think that our spreads will come in and allow us to do that.

In the meantime, we still have some capacity under the FDIC guarantee at pretty attractive spreads, so we'll continue to use that when it's available, but we expect to continue to raise unguaranteed debt when it's available as well.

Great.

Thanks very much for taking the follow-up question.

You're welcome Guy.

I'd like to turn the conference back over to Mr.

Holmes for any closing remarks.

Great.

Thanks everyone for joining the call.

Obviously if people have any questions they should feel free to reach out to me and I'll be happy to answer it, otherwise have a nice day.

Ladies and Gentlemen, this does conclude today's Goldman Sachs first quarter 2009 financial results.

You may now all disconnect.