高盛 (GS) 2009 Q2 法說會逐字稿

Good morning.

My name is Gerald, and I will be your conference facilitator today.

I would like to welcome everyone to the Goldman Sachs second-quarter 2009 earnings conference call.

(Technical difficulty).

Also, this call is being recorded today, Tuesday, July 14, 2009.

Thank you.

Mr.

Holmes, you may begin your conference.

Good morning.

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

Welcome to our second-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 would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our Investment Banking transaction backlog.

And you should also read the information on the calculation of non-GAAP financial measures that is posted on the Investor Relations portion of our website at www.gs.com.

This audiocast is copyrighted material to 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 would like to thank all of you for listening today.

I will give an overview of our second-quarter results, and then take your questions.

I am pleased to report strong second-quarter results for Goldman Sachs.

Second-quarter net revenues were $13.8 billion; net earnings were $3.4 billion and earnings per diluted share were $4.93.

Excluding $426 million in preferred dividends associated with TARP repayment, earnings per diluted share were $5.71, and our annualized return on common equity was 23.8%.

Our second-quarter results are a product of the breadth, resilience and adaptability of our client franchise.

We continue to believe that a diverse set of global businesses staffed by dedicated professionals will be the critical driver of our long-term performance.

Several of the favorable conditions that we experienced in the first quarter of 2009 extended into the second quarter.

The competitive environment in the second quarter remain fragmented, and levels of available risk capital remained low.

Our ability to stay focused on serving our clients yielded strong results, particularly within our multi-faceted FICC business.

Importantly, while first-quarter 2009 FICC results reflected strength in our rates and commodities businesses, the second-quarter performance was driven by higher contribution from our credit and currencies businesses.

This further demonstrates the benefits of having a diversified business model.

The quarterly improvement in our results was also a function of a more favorable operating environment for several of our other businesses, largely driven by higher equity market prices and activity levels.

As a result, we posted strong revenues in our equity underwriting business within Investment Banking and in our equity sales and trading business within Trading and Principal Investments.

Our Principal Investments segment also benefited from higher equity prices, particularly as it relates to our ICBC investment.

Nevertheless, we faced headwinds in the second quarter of 2009.

The operating environment for several of our businesses, including M&A Advisory and Securities Services, remains challenging.

An uncertain macroeconomic outlook, coupled with low CEO confidence, has resulted in lower M&A activity.

Given the industrywide reduction in hedge fund assets and leverage, the results within our Securities Services business were lower than in prior years.

Despite the challenging environment, we maintained market-leading positions in both of these businesses.

In addition, our results include fair value losses due to downward price pressure in commercial real estate.

Second-quarter results were negatively impacted by approximately $700 million of fair value losses associated with commercial real estate loans within FICC, nearly $500 million of losses within REPIA, and $170 million in noncompensation expenses, reflecting impairment charges related to real estate assets.

The results in the second quarter also included a $426 million preferred dividend associated with the repayment of the TARP preferred stock and approximately $300 million in CVA losses associated with the tightening of our credit spreads.

In light of the difficult macro environment, we continue to conservatively manage our risk, capital and liquidity levels.

The risk reduction efforts that we undertook in prior quarters lessened the negative impact of further declines in asset values in the second quarter.

We also continue to benefit from having virtually no direct exposure to the retail consumer business.

Given our cautious outlook, maintaining robust levels of risk-adjusted capital for the time being is appropriate.

At the end of the quarter, we had a Tier 1 ratio under Basel I of 13.8% and a Tier 1 ratio under Basel II of 16.1%.

We also maintained a record liquidity pool, with our global core excess averaging $171 billion during the quarter.

We have an established track record of dynamically managing our capital and liquidity based on our assessment of the operating environment and potential opportunities.

Our current level of capital and liquidity reflect both the potential for further market disruptions, as well as the opportunity to capitalize on distressed opportunities.

I will now review each of our businesses.

Investment Banking produced net revenues of $1.4 billion, up 75% from the first quarter.

Second-quarter advisory revenues were $368 million, down 30% from the first quarter.

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

These include BHP Billiton's AUD73.1 billion joint venture with Rio Tinto; Liberty Entertainment's $14.5 billion sale to DIRECTV; and Sumitomo's $5.8 billion acquisition of Nikko Cordial.

We were also advisor on a number of significant closed transactions, including Rohm and Haas's $18.6 billion sale to Dow Chemical; Enel's EUR9.6 billion acquisition of Endesa; and Hutchison Telecom's AUD3.6 billion merger with Vodafone's Australian telecom operations.

Second-quarter underwriting net revenues were $1.1 billion.

Equity underwriting revenues were $736 million, up significantly from the first quarter.

The increase in activity reflected our clients' capital needs, particularly in the financial institutions sector, which coincided with greater investor appetite for equity assets.

The activity was further enhanced by stabilizing equity market values.

Debt underwriting improved 35% to $336 million, given the strength in investment-grade and municipal issuance during the quarter.

During the second quarter, we participated in many noteworthy underwriting transactions, including HSBC's $19.6 billion rights offering; the state of California's $6.9 billion municipal bond offerings; and Arcelor Mittal's $4 billion common stock and convertible notes offering.

Our Investment Banking backlog declined during the quarter.

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

Net revenues were $10.8 billion in the second quarter, reflecting particular strength across our FICC and equities client franchise.

FICC net revenues were $6.8 billion in the second quarter, representing a 4% increase from the first quarter.

Our FICC performance continued to be driven by historically wide margins, strong market share and a focus on more liquid, plain-vanilla transactions.

Credit Products' net revenues were up substantially due to higher levels of customer activity across both investment-grade and high-yield products, largely in cash and other liquid markets.

Net revenues and currencies were up sequentially on higher trading volumes in volatile, yet trendy, markets.

Interest rate net revenues were strong, but down from a record first quarter, as client activity levels declined and spreads narrowed modestly.

Commodities' revenues were also solid but down sequentially on lower customer activity levels.

Mortgage results improve sequentially, but continued to be negatively impacted by losses within our commercial real estate loan portfolio, which totaled approximately $700 million.

Turning to equities, net revenues for the second quarter were $3.2 billion, up 59% sequentially.

Equities Trading net revenues were up over 100% as equity values increased, leading to more active new-issue markets and higher customer volumes across both cash trading and derivatives.

Net revenues from our Principal Strategies business were positive, but not a significant revenue driver in the quarter.

Equities' commissions were up 5% sequentially to $1 billion.

Turning to risk, average daily value of risk in the second quarter was $245 million, up modestly due to an increase in equity VAR, offsetting a decrease in interest rate VAR.

Let me now review Principal Investments, which produced net revenues of $811 million in the second quarter.

Our investment in ICBC generated net revenues of $948 million, driven largely by a 30% increase in ICBC stock price during the quarter.

Our Corporate Principal Investing portfolio generated net gains of $343 million, and Real Estate Principal Investments generated approximately $500 million in losses.

In Asset Management and Securities Services, we reported second-quarter net revenues of $1.5 billion, up 6% from the first quarter.

Asset Management produced net revenues of $922 million, which was down 3% from the first quarter.

Assets under management grew 6% sequentially to $819 billion, largely as a result of market appreciation.

Security Services' net revenues of $615 million were up 22% sequentially due to the seasonally stronger second quarter.

Now let me turn to expenses.

Compensation and benefits expense in the second quarter were $6.6 billion, accrued at 49% of year-to-date net revenues.

As I've highlighted previously, this number includes salaries, discretionary compensation, amortization of prior-year equity awards and other items, such as payroll taxes, severance costs and benefits.

As in every other year, we must accrue compensation based on our expectation of the full-year expense, but incentive compensation decisions are not made until year-end, and thus, competition will ultimately reflect the Firm's performance for the entire year.

Second-quarter noncompensation expenses, excluding those related to consolidated investments, were $1.8 billion, 11% higher than the first quarter, driven by higher brokerage clearing and distribution expenses and other expenses, which included a $50 million special assessment by the FDIC.

Total staff at the end of the second quarter was approximately 29,400, down 1% from the first quarter.

Our effective tax rate was approximately 31.7% for the second quarter.

For the past two years, we've operated in an extremely challenging environment.

Our performance in this cycle has been guided by several principles, including putting our clients' needs first, executing our stated strategy and acting as a good steward of the Firm.

We adhere to these philosophies to enhance and preserve our franchise and protect the interest of our shareholders.

These are long-standing principles, and we remain committed to them.

Furthermore, their value is amplified in a difficult environment.

Thus, we will continue to focus on maintaining our leading global franchise, serving the world's most important corporations, financial institutions, government and high-net-worth individuals.

In the current environment, our clients' demand for effective advice and execution is elevated.

To meet these demands, we will continue to provide a broad set of solutions on an integrated basis, seeking to serve as a trusted advisor, financier, asset manager, co-investor and marketmaker.

This environment is not conducive to straightforward solutions.

Our culture of innovation and nimbleness allows us to react quickly in this dynamic environment.

Financial markets and businesses are increasingly global, and our geographic reach uniquely positions us to serve our clients anywhere in the world.

Being a good steward of our financial position means that we will continue to manage our capital liquidity levels based upon a conservative assessment of the potential risks and opportunities that may lie ahead.

This allows us to provide risk capital where it is scarce and stay focused externally.

We believe that our commitment to these principles represents the best strategy for delivering attractive returns through the cycle.

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

(Operator Instructions) Guy Moszkowski, Banc of America Securities.

Good morning, David.

Just first, one very factual question.

What was your risk-weighted assets at the end of the quarter?

Our risk-weighted assets were, on a Basel I basis, about $409 billion.

On a Basel II basis, about $382 billion.

So based on a sort of flat to smaller average balance sheet, I guess, relative to the prior quarter and improved FICC and equity trading revenues, it would seem that your bid-offer spreads on average every seem to have actually improved based on the -- compared to the first quarter.

Is that fair?

I would say they were kind of flattish.

And that what really drove it were activity levels, which kind of didn't result in a whole lot of assets on our balance sheet because the velocity of assets was quite high.

Right.

And you alluded in your comments to the fact that a lot of the focus really is on very liquid and kind of plain vanilla stuff.

And when I met with you and your team a few weeks ago, there was even some discussion of distressed and the fact that you really weren't seeing good risk-adjusted returns on a lot of the distressed deal flow that you were seeing, so you weren't doing so much there.

Is that still fair?

Hasn't changed at all.

So then, I guess the follow-up question to all of that is if your core excess is around $170 billion and I think your Tier 1 common to RWA is something approaching 11%, and I think the Government's hurdle for exiting TARP sounds like -- based on some other firms -- that it must have been around 6%, 6.5%.

How do you think about deploying what looks like pretty significant excess liquid capital over time?

And I guess the corollary to that would be do the results of the first half, which were obviously very encouraging, do they encourage you to raise your targeted ROE from the 20% kind of return on tangible goal that you've talked about?

Well, let me answer that question first.

No.

Our target, as you know, has not changed since we went public.

And I don't think it is going to change for now.

That is what we say over the cycle, and there are good parts of the cycle and bad parts of the cycle, and I think that is a fair target for over the cycle.

As far as deploying capital, there are a couple of things I would say, Guy.

First of all, the world is still not a great place.

There -- the economies are still in difficult situations in many parts of the world.

Second, we are hopeful that we will see opportunities, although we are a buyer, but there have not been a lot of sellers, certainly not at prices we deem attractive.

So I don't know when that is going to happen or if it is going to happen.

And the third thing is there are going to be new capital regulations coming out.

We don't know what they are going to be.

So we have to wait and see.

Okay.

That's all fair.

Thanks very much, and thanks for coming on this morning.

No problem.

Thank you, Guy.

Glenn Schorr, UBS.

Let's talk about funding needs just for a second.

I look at your debt maturities schedule and it's actually in a lot better shape than most, but you still have some coming due each year, 10 or so for the next -- who knows -- eight years or whatever.

How much have you pre-funded in terms of the near-term?

And obviously, I take that in the context of, as Guy just pointed out, really high capital ratios and big liquidity buffer.

But what I'm getting at is people are issuing in this market -- you've been able to issue in this market at tighter spreads, but still not tight enough spreads.

I think that in a way you just answered the question.

We have a lot more cash than we have debt maturities coming due.

We are not forced to issue debt for quite a while if we didn't want to.

I think we will still want to continue to issue small amounts over time at various maturities.

We'd like to keep walking our spreads in, which has actually been happening, as I think the world is getting better and people are getting again more comfortable with us.

So I wouldn't tell you we are going to be out of the market.

I would expect we will be in the market periodically, more to continue to have access than because we have to.

Fair enough.

On this phenomena of the wider spreads -- and I think you've spoken well enough to it is not at its widest, but it's also not going to necessarily go back to where we've come from.

How do -- help us walk through how much of it is the reduced competitive landscape and how much of that is temporary from the standpoint of because some of it is coming in the more liquid products, it is not necessarily all being earned in high-risk-weighted-asset businesses.

These are businesses that are actually flow businesses, that are more of a -- if anything, people are going to allocate more resources to going forward.

Look, it's very hard to quantify.

I think you've hit on what a big driver of the performance has been.

And I don't -- I think some part of it is sustainable and some part of it is not.

Over time, firms will recover, firms will be willing to provide more risk capital, and it is going to happen over time and it will drive spreads narrower.

That is -- it just will happen over time.

It always does.

Of course, as you know, in some of the other businesses we have, they are in some ways lower than we expect [them] to see.

I would expect that as you see more and more people willing to provide risk capital, you will see the merger business start to pick up.

So you have some things that hopefully will offset.

Got you.

One last one.

I know the answer, but I've got to ask it anyway.

A bunch of companies take a look at the new environment with new regulation coming down the pipe and think about what has happened in the funding markets and have gone through some rigorous business line rationalization process.

I think Goldman's DNA is more of capitals fungible and it kind of goes towards -- with client needs and where the investment opportunities are.

But has there been any "business line rationalization"?

Do you see any need for that?

And is it -- how dramatically is the answer based on where the new capital requirements shake out?

We, of course, have to see what the capital requirements are.

We don't really think that is going to change the way we do business.

You know, Glenn, we've been quite consistent in saying that we like our business model, that we think our business lines are good business lines.

We are always looking to expand them where we think there are opportunities; we largely expand them in different locations around the world.

And they ebb and flow at different times, rather than getting out of businesses, which, actually, we think has been problematic for some.

When you tend to get in and out of businesses, you tend to get out at the bottom and in at the top, and we try not to do that.

We try and be pretty consistent.

So no, we are pretty happy with the business mix we have right now.

Awesome.

Thanks very much.

Meredith Whitney, Meredith Whitney Advisors.

Howard Chen, Credit Suisse.

Thanks for taking my questions.

Somewhat of a follow up to Guy's question on capital.

With respect to liquidity, (inaudible) liquidity continues to grow, as you noted.

How do you think about the potential drag that is having on the returns, if at all?

It has a fairly big drag on our returns.

$172 billion of capital where we are -- of excess liquidity where we are funding kind of at unsecured rates rather than secured rates, and in this environment there is a pretty big spread.

So it has a pretty big drag.

But in the risk-reward of having that drag and having enough liquidity under any and all circumstances versus not having the drag and potentially not having enough liquidity, we'll take the drag.

We've always thought that liquidity risk management was the singlemost important thing for any financial firm, including ours.

We continue to think that.

And so I think we are at the very conservative end right now, but we will always be at the conservative end.

Right, okay.

Second, I know you mentioned the $700 million of commercial real estate write-downs in your commentary.

But could you just provide us with where gross exposure levels and marks stood at the end of the quarter, in the usual hotspots?

I think we are really down to just commercial real estate now.

I think that is really the only thing.

And if you look across all of our commercial real estate within FICC, we had, round numbers, $8 billion; about $1.6 billion of that was securities.

So you really have, market value, about $6.4 billion of loans.

And that is marked really in the low 50s.

Okay, great.

And then last one for me, David.

A lot of real-time industry discussion right now on OTC market regulation and more recently the energy trading markets.

Any evolved thoughts on your end on how all this plays out and how you are potentially weighing the positives and negatives for the Firm?

Look, it is too early to tell.

Again, all the things that have been proposed have been at very high levels right now.

On OTC derivatives, we are a believer in central clearing.

Wherever things can be standardized and be cleared centrally, we think that is good and it's good for the market, and actually it's good for us because it levels the playing field in some ways.

We are always kind of at the very conservative end in our credit terms.

So we think this will level the playing field.

So we like that.

There's always going to be a need for non-standardized OTC derivatives to help our clients manage their risk.

There are a lot of corporations that need the risk management services and that don't want to provide the initial margin of trading on an exchange.

So we are supportive of it where it makes sense.

And as far as in commodities, again, we believe very strongly that supply and demand is what drives the markets more than anything else, and whenever we are doing transactions tend to be on the other side of our corporate clients.

So consumers need hedging.

Producers need hedging.

And you need financial intermediaries to help do that.

But we will see what the regulations show.

Thanks for the thoughts, and congrats on the quarter.

Meredith Whitney, Meredith Whitney Advisors.

Good thing I'm not a tech analyst.

I had a little glitch there.

I didn't know what happened to you, Meredith.

I was on mute.

My question relates to once you have established or the Government has established, the regulators have established clear capital levels that they deem appropriate, when would you update your shelf?

Because that looks a little light in context of what you could repurchase.

And then as a follow-on, what is your appetite in terms of sequencing to repurchase?

First, shelf really is for -- is for issuing, not repurchasing.

So I think, from a purely technical matter, we don't need to update the shelf to repurchase.

So I think we are fine there.

And we are always reviewing our -- both our equity and our debt shelf so that we have sufficient powder whenever we need to issue.

And so we review it constantly.

We talk to our Board about it, and whenever we need to update it, we just go back to the Board and, subject to their agreement, we would update it.

But I wouldn't read much into it one way or the other.

Again, as far as timing and sequencing, it is too early to say anything.

As I said before, first of all, we are going to manage things conservatively because the environment is still a very tricky environment.

As you well know and I know you believe, we are way far away from being out of the woods in the environment.

So we are going to be at the conservative end on our capital.

Plus there is going to be new capital regulations coming out, and we have to look and see what they are before we make any decisions.

All right.

And then would you talk about the sequencing month-to-month in terms of activity and then how this month is shaping up so far?

We don't normally go through month-to-month.

We disclose quarterly, not monthly.

But I would tell you there wasn't that big a difference across the second quarter.

It was pretty standard across really the entire quarter.

And it is just much too early to tell this month.

We are two weeks into it, and one of the weeks was July 4.

So that was naturally a very, very quiet week.

So it's really hard to say.

Okay.

All right.

Thanks, David.

Roger Freeman, Barclays Capital.

I guess on the credit trading side, can you talk to -- I understand it has sort of been flow-driven revenues there, but we've gone through the best six-month period for high-yield and high-grade returns in history.

And I'm wondering how much of the revenues there are inventory benefit, because it's an inventory business trading corporate credit.

And did you take a view on spread tightening where you didn't hedge out that exposure?

And then if we're not going to have that in the back half of the year, how much of an impact would that be?

Virtually none was based purely on spreads tightening and inventory markups.

We don't -- we tend to move around whether we are long or short on a daily basis.

Most of the P&L coming from our credit trading business was in a variety of ways slow business.

That was really the biggest driver; it was not just markups of inventory.

Okay.

So you had hedged out the credit spread tightening?

Yes, pretty much so.

And you know, in our legacy leveraged long positions, we're down to a little over $2 billion of market value, and that is largely hedged, as well.

So there is very little of that.

Okay.

That doesn't mean in the future someday we wouldn't take a view, either bullish or bearish.

But that was very little.

Got it.

Okay.

And then on equity trading, I guess one thing that I am trying to reconcile is the relative strength of the trading line item versus the commissions.

Trading was right up at a record.

Commissions were strong, but not at the same level of strength.

And trading deal flow you would think would generate outside commissions.

So I guess the question is how much of that was derivatives trading?

And then also, kind of look at the VAR, right?

It was the one area where VAR really picked up a lot.

So it looks like a lot more risk was taken in equities trading.

Can you kind of reconcile some of those pieces?

Sure.

Well, first of all, it was really strong across both derivatives and cash.

And I would say -- and you see this sometimes.

You go back in history, you will see times where what I would say trading activity levels were not consistent with commission levels, which are just really what is on the Exchange.

And so the two are not necessarily related to each other.

And one of the things we've always done, and you know, is we will take risk where our clients want us to and where there are opportunities.

So it's not unusual for our risk to be up in one area and down in another area where we see opportunities and where our clients want us to.

So there was more activity in the equity -- equity risk was up because there was more activity.

And interest rate risk was down because there was less activity.

Is it fair to say within cash trading that the facilitation was up a fair amount in the quarter?

Yes.

Okay.

All right.

And then I guess on commodities, just to drill a little into what Howard was asking.

So you have historically talked about commodities, I think, being 20% of FICC.

Is that still sort of a range that we are in right now?

There is a very wide range around that.

That is a number we have given you at times of what it has been since we've gone public, in total.

But there is a really wide range quarter to quarter.

Are we in the upper or lower end of that right now?

One or the other.

Let me ask this.

Would -- when you think about the regulatory changes here, again, a lot of high-level stuff has been discussed.

But if position limits are put in place but the hedge exemptions remain, it sounds to me, based on what you said before, that that would not have any material impact on your business because you really are just hedging client risk, as opposed to doing a lot of prop trading in energy.

Right.

That is right.

That is why the devil is in the details.

So it is hard to say until you --

It's a question of how you define hedges, right?

That's exactly right.

Okay.

Last question.

On TLGP debt, there's been some discussion about you taking that out.

Is there a call -- are you able to call that debt?

No, I don't think any of the debt we've issued has call features.

So no, we have no ability to just go take it out.

Got it.

Okay.

All right.

Thanks.

Jeff Harte, Sandler O'Neill.

A couple of things.

Investment Banking, obviously, underwriting is very strong.

You mentioned the backlog was down some and how good FICC specifically was this quarter.

As we start looking forward, does the FICC capital raise environment still have legs to run through the back half of the year?

Are there kind of other areas you could see picking that up?

How are you looking at the underwriting businesses in the second half?

First, one interesting thing to always think about when you think of the backlog, a lot of equity deals actually never get in the backlog.

M&A deals always get into backlog, because they take time.

But it is not unusual in today's environment for at least -- with some number of equity deals -- for them to come up because a client decides on a Tuesday they want to do an equity raise; they call us on Tuesday afternoon and we do a book build over Wednesday and do the deal on Thursday.

So the backlog is a very good indication in mergers, and it's somewhat an indication in equities too.

But you have to be a little careful of looking at backlog as an indicator of what's going to happen later in the year in underwritings.

Look, a lot of financial institution equity was issued.

But I think there are still a lot of corporations around the world that need to rebuild their balance sheet.

And if markets stay okay and stay receptive, I think there will be a lot of equity offerings.

Okay.

Kian Abouhossein, JPMorgan.

Equity derivatives, can you talk a little bit about the business in terms of performance?

Because if you look on a quarter-on-quarter basis, clearly, the equity numbers were very strong.

Just trying to understand if this was a very important driver also on a quarter-on-quarter basis.

Yes, our equity derivatives business, as you know, is a very good business for Goldman Sachs.

Both our derivatives and our cash businesses were very strong in the quarter, although derivatives was up more quarter-over-quarter than cash was.

Okay.

And you mentioned FX being very strong, but volatility came down quite materially in the second quarter, which I assume impacts margins.

Can you explain the strength in FX?

There was a lot of activity and you had pretty good trending markets, which is always good for us.

Okay.

And on margins, we're hearing some of the European banks indicating some margin pressure starting to come in at fixed income.

Do you see any regional differences between US, emerging market Europe?

Not significantly.

And how do you see margins in fixed income?

If I compare them to 2, 2 1/2 years ago, at what level would you say they are within the fixed income world on a comparable basis?

I would say they are better than they were 2, 2 1/2 years ago.

But not 2, 3 times better?

It's hard to quantify it to that level of precision.

Okay.

And lastly, in respect to fixed income, do you believe there is a real structural change in the way fixed income will be priced?

Or do you think it is a lack of capital, which will flow back over time into the business and reduce margins to the levels that we've seen 2, 2 1/2 years ago?

I think that clearly margins are up now.

I think it is unrealistic to think that some amount of capital won't flow back.

I think some amount of capital will, which will reduce margin to some extent.

But I am not convinced it will go all the way back to where it was.

Okay.

Thank you.

Mike Mayo, CLSA.

Can you quantify the change in the backlogs from the first to the second quarter?

It was down.

Okay.

Non-US versus US revenues, can you talk about that linked-quarter?

Yes, you know, one of the things we always tell you is you have to be careful about that quarter-over-quarter, because we have global books and global trading.

Best estimate, it was roughly 50-50 US/non-US.

It was actually something like 51-49 US/non-US, but pretty close to 50-50.

And any non-US countries that stand out in particular as doing a little bit better?

No, it was a little bit more in Europe than in Asia, but not dramatically more.

Okay.

And then you have replaced lost revenues a lot.

And just when we look at the underwriting from the second quarter, it looks like most of the underwriting revenues came from banks.

I'm just looking at the same Dealogic data you'd have.

But as you point out, 19 of the 20 biggest equity deals you did were to banks and financial firms.

So my question is, if the banking industry is saying they have enough capital now -- and you might not believe that -- but does that mean you will be hard-pressed to replace those underwriting revenues from the second quarter?

You know, I never talk about consistency of revenue, so no is one answer.

But as I just said, there are a lot of companies around the world that still need to fix balance sheets.

And I think that if the markets stay receptive that there will be a lot of equity issuance going on over the rest of the year.

And by receptive, do you mean simply the level of the stock market?

Both of the level and the willingness of buyers to buy.

We had a lot of cash, a lot of investors who wanted to take equity positions over the course of the second quarter.

They need to continue to feel that way.

And last question, we talked about the multiplier effect -- how much does trading go up for every dollar of underwriting you do.

And can you say what the multiplier effect was, say in your underwriting business?

In other words, if I look year over year on your published data, equity trading went up six times relative to the increase in equity underwriting.

Now, I know there's a lot of -- a lot data is in that equity trading number.

Would you say the multiplier is six-to-one or two-to-one?

I actually, Mike, don't know.

And I think it is not necessarily consistent.

But clearly, around equity underwritings you are going to see a lot of trading activity.

It is not linear at all.

And so I would be hard-pressed to give you an exact number there.

I would really be making it up if I gave it to you.

All right.

Thanks a lot.

Chris Kotowski, Oppenheimer.

I noticed that corporate private equity investments were up about $500 million from last quarter to this quarter, and I was wondering is that indicative of new investing or is it marking to market up positions that were there?

And does it relate to a willingness to put dry powder to use?

It was largely marking to market things that were there.

There were some new investments, but more of it was things that we already had.

Okay.

And then I guess like some of my brethren on the phone, I am stunned to sort of see your TCE levels about 50% above where they were just 18 months ago.

And I guess we are all wondering what do you do with all this capital, and how long do you warehouse it.

And I'm curious, what capital ratio do you think is the most relevant that we should be looking at, and any idea kind of what you think the long-term target is?

So, I'll give you the same answer I gave everyone else (technical difficulty) capital.

We are not out of the woods.

The world is still a tough place.

We are going to be conservative.

There are new capital regulations coming.

We are hoping we will see opportunity.

So --.

Okay, got it.

(multiple speakers) on that.

And as far as a number, like with all things, with risk, with other things, we don't think there is a single number that people should look at.

We think you should look at a variety of numbers, TCE, Tier 1 capital ratios.

But we are a believer in Basel II being a very -- a reasonably good measure of risk and a good capital ratio.

Everyone is going to be moving on to Basel II over the next several years, so I think that will be a consistent measure over the next couple years, and I think it is a good one to look at.

All right.

Thank you.

James Mitchell, Buckingham Research.

A quick question on asset management business, assets under management up, revenues down.

Can you talk to the dynamic there?

Is it just some beginning of period pricing in the institutional business, or is there something else going on there?

No, it is actually -- the two things, where one is, you know, assets under management did not come in all at the beginning of the quarter, so it took a while for them to go up.

But really what it was, it is a small difference, and there were a couple of items in the first quarter that were some one-time fees that were not repeated in the second quarter.

If they hadn't been there -- it's small, but if it hadn't been there, then you would have seen what you would've expected, which is up from second quarter, first quarter, aligned with assets.

There was nothing else to it.

Okay, thanks.

And then maybe on just following up on the equity VAR question, the one situation is if you look in Equities, volatility was down quite a bit.

So I would've thought that would help dampen any increase in the VAR.

Is it the trading side or is it really just the underwriting business was so strong and you have some capital and risk allocation to the big uptick in the equity underwriting book?

Just trying to understand --

No, it was really the trading side much more than the underwriting side.

And yes, volatility was down, and that would help dampen it.

But there was just a lot more activity.

Okay, and was that more driven by cash or the derivatives business?

Both.

Both.

There was a lot of activity in both sides.

Okay.

And maybe lastly, on just M&A, obviously there is a cycle; it tends to take a while.

Balance sheets need to be repaired first.

But what is your sense of, I guess, the dialogue and the outlook as we go forward here?

Do you think there is going to be -- given that the markets have been stable for a little while and if that lasts, do you think we finally start to see some uptick there, or we still got to through a few more quarters of people repairing balance sheets?

I think that if the market stays stable, you will start to see a big uptick in activity, but you won't see an uptick in revenues for a number of quarters.

Sure, right, yes.

But I think if you really have stable markets for another few months and CEO confidence starts to get a little better, then I think you'll start to see some uptick there.

But you are seeing good levels of dialogue?

Yes.

But we have for a while, and it hasn't translated into deals.

So you really need that stability for it to happen.

Right.

Okay.

One last thing on these CRE investments, do you guys disclose what your commitments are?

Obviously, you wrote off about $500 million in the investment line, but I think total outstanding only fell around $100 million.

So are you guys -- is there drawdowns on commitments (multiple speakers)?

There were a couple hundred million dollars of drawdowns, and I think we disclosed it in the Q.

All right I'll take a look.

All right, thanks.

Bye.

Robert Lee, KBW.

Thanks.

Most of my questions were asked, but there are one or two quick ones.

First actually relates to the money fund business.

Obviously, within the scheme of Goldman it is not huge, but in that industry you are a pretty big player.

Could you give us your thoughts on where you see capital -- if you see capital climates starting to head in -- come into that business as one of the proposals out there?

Again, too early -- I'm sorry to be not answering these questions, but it's just too early to tell.

There is a bunch of proposals out there.

They are at the very high level.

That is one of the things that is on the table, and we just don't know exactly where that is going to end up.

Okay.

And maybe in the Securities Services business, clearly, as you point out, it has been impacted a lot by a variety of issues, lower customer balances, etc.

But as you look out, what are you kind of hearing from your clients?

Are you seeing that -- it seems like we are getting through the redemption cycle, that industry is starting to talk about maybe even flows at some point later in the year.

Is that -- are you hearing that reflected back from your clientele?

Yes, I think that is absolutely right.

I think we're largely -- assuming performance stays okay, which it has been -- through the first half of this year, performance has been pretty good -- it feels like we are pretty much through the redemption cycle and it actually looks like you are going to start to see some money flowing into hedge funds.

How that continues will be really dependent on performance, but that is certainly what it feels like right now.

All right, great.

That was it.

Thank you.

Douglas Sipkin, Pali Capital.

Just two questions.

One, obviously, tremendous pricing improvement in the fixed income trading business.

Is that carrying over into the underwriting side as well?

Are you guys are seeing maybe the ability to raise prices a little bit there?

I think underwriting spreads have been largely flat, and they have been for a while.

They haven't really changed.

Okay.

Even for like rights offerings and things of that nature?

Not materially different.

Okay.

Secondly, in terms of FICC, what percentage of the volume increase would you attribute to maybe investors getting in front of potential regulatory changes or thinking about CDS moving more to exchanges versus sort of just people getting more involved in risk assets?

I think it was largely driven by the latter.

I think it was really people having much more of a desire to get involved in risk assets over the course of the quarter.

Okay.

And then just third question, can you update us on when you guys officially are changing locations, and are there any things we need to be thinking about in terms of occupancy expenses after that?

We will begin to move into our new building in the fourth quarter of this year.

And then we will continue to move in over the course of next year.

And I think you will see an increase in occupancy expenses over the fourth quarter this year and across next year as we are kind of in two buildings, and then you will see it decline again.

Okay, great.

Thank you very much.

Steve Stelmach, FBR Capital Markets.

Just a real quick question on the competitive landscape post TARP repayment.

Are you seeing those who repaid TARP become a little bit more aggressive since the TARP repayment, or is the competitive landscape pretty much as it was for most of the quarter?

I don't think it has really changed at all based on TARP repayment.

Okay, so people are still generally risk-averse, at least your competitors?

Most are and some are not, but most are.

Okay.

And then just maybe I'll ask that kind of a question one last time, but when you think about your capital levels, is -- how should we think about what you think the regulatory environment is going to look like versus just your general risk aversion out there?

How should we think about that split?

Look, I think they both influence us right now.

We don't know where the regulatory environment is going to change, but we also are very cognizant that the environment is still risky.

It is not that long since we are in a really risky time.

And it is not like economies around the world are booming.

So there is a lot of risk out there.

Both of those things are influencing us.

The general mantra is just more the better at this point?

Yes.

Okay, thank you.

Richard Staite, Atlantic Equities.

Can you give any updates on how you plan to grow the asset management and private banking businesses going forward?

I think this is an area where you've mentioned the possibility of acquisitions in the past, and given the strength of your balance sheet, you are obviously in a good position to do that.

So do you see opportunities out there at the moment?

Sure.

Look, we've always felt the same way about that business, which is if there were an acquisition that made sense financially for us to do, we would certainly consider it.

When we look at the prices of most of the acquisitions, we think that they haven't made sense in that you've had to assume really a heroic growth rates that we don't think are realistic.

In a way, sometimes when you make acquisitions, you have to pay for them twice as well, because you generally have to buy them and then you have to give big guarantees to the people to keep them.

And we've been able to grow that business organically.

You know, it has taken a while, but we've grown it quite successfully, almost exclusively organically.

And the high likelihood is that is the way we are going to continue to grow it in the future.

Okay, thanks.

Michael Hecht, JMP Securities.

I just wanted to come back to the equity trading number, and the sustainability there.

I mean, it is -- $2.2 billion is obviously just a monster number.

I know you said it wasn't a big portion from like principal strategies or prop trading and that derivatives were strong.

But just trying to think about any of the other drivers there.

I think you guys report insurance activities there.

And then how do we think about just the 15% positive move in the equity markets here, and do we need to see a strong equity market environment like that to drive that type of quarter in equity trading?

The biggest drivers continue to be cash and derivatives trading.

So yes, insurance is in there, [GSP] is in there, but they are not drivers.

It is really cash and derivatives trading is the biggest driver.

And you know, the interesting thing about the equity markets is it probably has the most correlation of any market between the direction of prices and how we do, not because we are long or short, but because it is the one market where you tend to see more activity when the market is going up.

Because people are more confident, they feel better, they do more.

That is not an absolute, so you could see a situation where equity markets are flattish or up a little or down a little, and we do quite well.

But as you know, we are -- our results are really tied more to activity level than anything.

And in equity markets, people tend to do more when markets are improving.

And so it usually is helpful to us.

Okay, that's helpful.

Thanks.

And then just on FICC and maybe trading broadly, it sounds like you are saying that the trading spreads we are seeing are likely to continue for the near term.

I mean over the longer term, we will have to see.

But I'm just wondering about how we think about normal kind of third quarter and even like second-half seasonality in trading, particularly when we've seen such a strong first-half result.

There is no normal.

I wish I could tell you that there is something that was normal in our business, but I wouldn't know how to define it.

And we will just have to see over the second half of this year.

Okay.

And then I just wanted to follow up on your comments on the M&A cycle and what we need to see to spur more activity.

I think you used to kind of speak to you kind of tracking the level of conversations that bankers were having kind of with corporate CEOs.

In other words, some sense of like a pre-pipeline of deals.

How is that kind of tracking these days?

It is pretty high.

There is a lot of conversation.

But it has been pretty high for a while, and it hasn't translated into deals.

Now, it is a little bit higher now.

I think people are feeling a little bit better, but not enough better to really pull the trigger yet.

And so it is going to have to -- confidence is going to need to go up even higher.

Okay.

And so, if we are thinking about an M&A recovery, it means definitely not going to be a second half of '09 story -- I mean maybe 2010, maybe longer.

That is what I think.

I think you will start to see it -- you might see more activity pick up in the second half of this year, but you won't see revenues until next year.

Okay, got it.

Just last question for me, on expense trends.

$2.1 billion of noncomp, kind of flat quarter-over-quarter, I thought was pretty impressive, particularly with the tick-up in the trading businesses, equities in particular.

I was just surprised we didn't see more of the variable non-comp expenses pick up.

Any color for the outlook on non-comp expense?

In some ways, we hope it goes up, because we would like to see our [BC&E] go up because volumes explode.

We would like to see more travel and more things that -- because business is up a lot.

But we are keeping a tight lid on expenses, because we are not out of the woods by any means.

And I think you will see it go up with activity.

Okay.

Fair enough.

Thanks a lot.

Matt Burnell, Wells Fargo Securities.

Thanks for taking my question.

Most of my questions have been asked and answered.

But -- and I hate to beat a dead horse on the equity, but let me try to take this in another direction.

As you look at your adjusted leveraged targets over the next year, two, three years, away from looking at it quarter-to-quarter, how should we think about where you sit today and where those ratios conceptually might move, given where we've been over the past two to three years?

Look, we actually don't necessarily target balance sheet leverage, either gross leverage or adjusted leverage, because we think in some ways that is not a good measure.

Now we know a lot of people focus on it, so we are cognizant of it.

But we've had this conversation.

Depending on how liquid your assets are, you can be more highly levered and less risky or less highly levered and more risky.

But I will tell you that the adjusted leverage ratios are at the low end of where we've been historically.

And I would not expect them to continue to stay this low over time.

If the world stays really risky, then we might keep them low.

But if the world starts to improve a little bit, I would expect to see those leverages start to go up.

Okay.

And I guess one question in terms -- specifically to Goldman Sachs Bank, has there been any material change to the deposits in that bank over the quarter, or just the broad funding mix of the bank over the quarter?

No, I think they have been largely stable over the course of the quarter, both from deposits and the funding mix.

And then one last question, in terms of liquidity, you've given us the average core liquidity number.

Can you give us the trend for the quarter-end balance relative to the beginning of the quarter balance?

It was pretty stable over the course of the quarter.

It went down a little bit right at the end of the quarter because we [repaid] TARP by $10 billion.

But other than that, it has been pretty stable over the course of the quarter.

Great.

Thanks very much.

[Ron Mandle, GIC.]

I have two questions.

One, I was wondering if you could comment on your credit facility with CIT and what your exposure might be if things go particularly badly for them from here.

And then the second question was in regard to buying back the TARP warrants, where you stand, how we should think about how much that might cost and so on.

Sure.

CIT, we are -- between our collateral and our hedges, we think we are well secured and well protected.

So we think we are fine there.

What does that mean, well secured, well hedged?

You mean if they draw down, you have collateral that would fully cover the amount of the draw?

Yes.

Okay.

And --

And on warrants, we are in discussions with the Treasury.

And do you think you will be buying them, or will you go to arbitration, or will they be auctioned?

What do you think (multiple speakers)?

We don't know.

We are in discussions right now.

Too early to tell.

What kind of timeframe should we be thinking of in that regard?

Again, not sure.

We're in the middle of discussions.

Okay, thanks.

I would like to turn the conference back to Mr.

Holmes for any closing remarks.

Great.

Thank you, everyone, for joining us for our second-quarter earnings call.

If you have any additional questions, please feel free to give us a call in the Investor Relations Department.

Otherwise, please enjoy the rest of your day.

Bye.

Ladies and gentlemen, this does conclude today's teleconference.

You may now all disconnect.