高盛 (GS) 2009 Q3 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 third-quarter 2009 earnings conference call.

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 third-quarter earnings conference call.

Today's call may include forward-looking statements.

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

The firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect our 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 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, and I would like to thank all of you for listening today.

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

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

Net revenues were $12.4 billion.

Net earnings were $3.2 billion.

And earnings per diluted share were $5.25.

Our annualized return on common equity was 21.4%.

Our results in the third quarter reflect the continued demand for expert advice and execution from our global client base.

Throughout this financial crisis, we've maintained an unwavering focus on serving our clients.

We believe that staying close to our clients during periods of market turmoil reinforces the strength of our franchise.

Our client relationships have been critical to our recent performance and will remain a key driver of our future performance.

Our FICC business continues to be a strong performer, and many of the favorable conditions that benefited the businesses during the first half of 2009 continued in the third quarter.

The competitive environment remained fragmented, and available risk capital was limited.

Consequently, we continued to experience elevated market share and attractive margin dynamics within several of our market-making businesses.

The depth and diversity of our FICC business continued to be a key contributor to our performance this year.

Third-quarter results, for example, include a record performance in mortgages, and our second-best quarterly performance in credit.

Rates, currency and commodities each posted one of their two best quarterly performances in either the first or second quarter.

During the third quarter, the S&P, Dow Jones and FTSE posted their strongest quarterly gains in over a decade, which helped drive solid results in equities and principal investments.

Many of the headwinds that we faced during the first six months of 2009 also continued in the third quarter.

The investment banking and security services operating environment remained difficult.

Investment Banking revenues continued to be hampered by an uncertain macro economic outlook and low [CEO] confidence.

That being said, we saw higher levels of strategic dialogue and a significant increase in our backlog during the quarter.

However, these revenues will only be recognized if and when these transactions close over coming quarters.

Results within our Security Service business continued to decline, principally reflecting lower seasonal dividend-related activity.

Similar to Investment Banking business, we began to see some positive trends developing, including the beginning of inflows into select hedge funds and a modest increase in leverage.

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

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

Given our cautious outlook and the prospect for higher capital requirements in the near future, maintaining robust levels of risk-adjusted capital for the time being remains appropriate.

At the end of the third quarter, we had a Tier 1 ratio under Basel I of 14.5%.

We also maintained a robust liquidity pool, with our global core excess averaging $167 billion during the quarter.

As I've mentioned previously, we have an established track record of dynamically managing our capital liquidity based on our assessment of the operating environment and potential opportunities.

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

I will now review each of our businesses.

Investment Banking produced net revenues of $899 million, down 38% from the second quarter.

Third-quarter Advisory revenues were $325 million, down 12% from the second quarter.

Goldman Sachs is ranked first in announced M&A globally year-to-date, and advised on a number of important transactions that were announced during the quarter.

These include Baker Hughes' $5 billion acquisition of BJ Services; Perot Systems' $3.9 billion sale to Dell; and Procter & Gamble's $3.1 billion sale of its pharmaceutical business to Warner Chilcott.

We were also adviser on a number of significant closed transactions, including Nuon's EUR8.5 billion sale to Vattenfall; Canada Pension Plan Investment Board's AUD7.3 billion acquisition of Macquarie Communications Group; and Cardinal Health's $5.2 billion spinoff of CareFusion.

Third-quarter underwriting net revenues were $574 million.

Equity underwriting revenues were $363 million, down significantly on a sequential basis, as a number of second-quarter capital raises in the financial institutions sector were not repeated in the third quarter.

Debt underwriting declined 37% to $211 million due to seasonally weaker new issuer markets over the summer months.

During the third quarter, we participated in many noteworthy underwriting transactions, including Mizuho's $5.9 billion follow-on offering; NewPage Corporation's $1.6 billion high-yield notes offering; and [RDO's] $720 million IPO.

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

Net revenues were $10 billion in the third quarter, reflecting strength across each of the businesses.

FICC net revenues were $6 billion in the third quarter, representing a 12% decrease from the second quarter.

Our FICC performance continued to reflect strong market share, although client activity levels were generally lower relative to a particularly strong first half in 2009.

While bid/ask spreads have begun to compress, particularly in more liquid vanilla products like rates and currencies, they remain wide by historical standards.

Credit Products' net revenues declined from the record second quarter, but remained robust, as we continued to benefit from strong market share and higher asset prices drove solid customer activity levels.

Net revenues in interest rates and currencies were strong, but lower sequentially, due to lighter trading volumes and tighter spreads.

Mortgages produced record results, driven by strength in the customer trading business, partially offset by approximately $120 million in write-downs within our commercial real estate loan portfolio.

Commodity net revenues were down from the second quarter, reflecting lower volatility and decreased customer activity.

Turning to Equities, net revenues for the third quarter were $2.8 billion, down 13% sequentially.

Equities Trading net revenues were $1.8 billion, strong, but down 14% versus the second quarter due to lower client activity levels across both cash trading and derivatives.

Similar to the second quarter, net revenues from our Principal Strategies business were positive, but not a significant revenue driver.

Equities commissions were down 9% sequentially to $930 million due to seasonally lower customer activity.

Turning to risk, average daily value at risk in the third quarter was $208 million, down 15% from the second quarter.

I will now review Principal Investments, which produced net revenues of $1.3 billion in the third quarter.

Our corporate principal investment portfolio generated net gains of $977 million, largely in corporate debt and public equity investments.

Our investment in ICBC generated net revenues of $344 million, and our real estate principal investments generated losses of $66 million.

In Asset Management and Security Services, we reported third-quarter net revenues of $1.4 billion, down 6% from the second quarter.

Asset Management produced net revenues of $974 million, which was up 6% from the second quarter.

Assets under Management grew 4% sequentially to $848 billion due to market appreciation.

Security Services produced net revenues of $472 million, down 23% from a seasonally strong second quarter.

The third quarter also reflected fewer hard-to-borrow opportunities in the market.

Now let me turn to expenses.

Compensation and benefits expense in the third quarter was $5.4 billion, or 43.3% of net revenues, reflecting a decline in our year-to-date accrual to 47% of net revenues.

The lower compensation accrual reflects our record year-to-date revenues in 2009, as well as better visibility on expected compensation levels as we approach the end of the year.

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 this competition will ultimately reflect the Firm's performance for the entire year.

Third-quarter noncompensation expenses were $2.2 billion, 7% higher than the second quarter, largely driven by a $200 million charitable contribution to the Goldman Sachs Foundation.

Total staff at the end of the third quarter was approximately 31,700, up 2% from the second quarter.

Our effective tax rate was 32.2% year-to-date and 33.5% for the third quarter.

The last 18 months have been an extremely challenging period for the global financial services industry.

There are many lessons to be taken from all that has transpired.

During the most turbulent of times, we stay focused on several critical objectives -- support the efficient functioning of capital markets, which is critical to global economies; financially prepare the Firm for a more difficult operating environment; provide unwavering service to our clients; and protect our franchise and, thus, shareholder value.

To accomplish these objectives, we made prices when markets were volatile and illiquid, and extended credit when credit was scarce.

We incurred the economic cost associated with proactively reducing our exposure to leveraged loans and real estate by nearly 60%, and raising $11 billion in capital.

These were steps we took before we received TARP funds from the US government.

In just over a year, we nearly doubled our liquidity balances to over $170 billion.

We didn't have any unique insights about how difficult things would become.

We took these actions out of prudence and awareness that we didn't have all the answers.

We took these actions because we knew that we had an important role to play in supporting global capital markets and economies, our clients, our more than 30,000 employees, and most importantly, our shareholders.

By staying focused on these objectives, we've gained several secondary benefits.

First and foremost, the most attractive aspects of our culture, collaboration, nimbleness and commitment to excellence, have been strengthened.

These cultural attributes remain critical to our ability to navigate the current environment.

Second, our global team of talented professionals remains intact and committed to our business model.

This holds true whether you speak to a management committee member who has been with the firm for 25 years or a recent undergraduate hire.

Since people are our greatest asset, we recognize that ultimately our success will be driven by their collective effort.

Third, our franchise maintains its breadth, depth and diversity, and our relative competitive position has been materially improved during this period.

And finally, the combination of robust risk-adjusted capitalization and profitable results allows the Firm to take advantage of opportunities as they arise, to continue to invest in growth businesses and technology and to adapt to volatile markets.

In summary, while the market outlook remains uncertain, we believe that the Firm is well positioned to continue to execute on its key strategies.

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

Glenn Schorr, UBS.

So I kind of remember back a period of time when you one February said this is the best environment in my 25 years in the business.

And that is not this environment, yet the numbers you are putting up are pretty damn close to record levels on a leverage ratio that is pretty low and capital ratios that are much bigger.

I guess the question is as you keep doing all the things that you said you are doing in terms of collaborating, being nimble and servicing the heck out of your clients, what are you thinking as the rules change?

The spread environment won't change what it is, but it seems like you have leeway on the capital and the leverage front to deploy things.

How does that trade-off work over the next year or two?

So, first of all, I am much more confident saying that this is not the best environment that I've ever seen than I was saying that that was the best environment I've ever seen.

As you know, the best environment for Goldman Sachs is very, very strong global economic growth, and that is not what we are in right now.

But our market shares have improved, and I think we are getting a bigger share of a smaller pie right now.

We are certainly hopeful that over time the pie will increase; our share will probably decrease.

But we think the pie increasing will hopefully make up for the share decreasing.

As far as capital and leverage, we are still in an uncertain economic environment and an uncertain regulatory environment.

I would suspect that the regulatory environment will clear itself up over the next year or so, and hopefully the economic environment will get better.

We will either see more of opportunities which will use our capital or we will do other things to reduce what is now overcapitalization.

But that won't happen anytime materially in the very near future.

It will happen over the next, I don't know, 12 to 18 months.

So I saw the liquidity pool drop a drop, but it is still really big.

And like I commented on capital and leverage ratios, do your comments mean that, look, we happen to be fortunate enough to making a lot of money right now.

We'll wait for the regulations to change before we do anything significant on the capital liquidity and leverage front?

I think that is the most likely scenario.

Got it.

And then is there a function of today's trading environment, especially on the fixed side -- you know, you look at a quarter like this, where revenues are still pretty awesome, and VAR is down 15% sequentially.

Is the -- are you seeing just an extraordinary velocity of balance sheet, if you will, and just able to turn the inventory as quick as you've seen in a long time?

Is that what is helping contribute?

Yes, basically all of the trading is kind of plain vanilla, very liquid products, that come on and off the balance sheet very quickly.

You see it from the balance sheet side.

The balance sheet size stayed the same; VAR was down.

And yet results were quite good.

And then final question on Security Services.

Actually, sequentially, the percentage drop is not all that different from third to second quarters that we've seen in the past.

However, I -- down 50% year on year still has us scratching our heads a little bit.

I know rates are really low.

I hear your comment on no one is doing the hard-to-borrow because the market goes up every day.

But do you think that down 50% year to date is about right, or is there -- were there some share gains there throughout the years that maybe as competitors heal, you give a little bit back there, as well.

No, I actually think 50% year-over-year is about right, given what has gone on in the world, between hedge fund assets being down last year.

Last year, I think hedge fund assets in total were down probably close to 50% -- total hedge fund assets over the last year.

We've started to see them -- and then, as I mentioned, the hard-to-borrows, with people being very worried about shorting anything.

So you put those two things together, I'm not surprised at the year-over-year decline.

But we have started -- and again, I don't want to overstate this -- we have started to see the reversal of that trend as we got -- went through the third quarter.

Okay, cool.

Thanks very much.

Guy Moszkowski, Bank of America Merrill Lynch.

Good morning, David.

I wanted to ask you, first of all, if you could -- if it would be possible for you to give us a little bit more color on the movement of bid-offer spreads in key categories that you've identified, like credit, rates, FX, etc., over the course of the year.

If you can't quantify, which I understand why you wouldn't, can you give us sort of an indexed view of where they might have begun the year and where some of those key categories are right now?

Boy, it is hard to be very definitive in quantifying it, Guy.

But I would tell you that probably as we went through the first quarter and probably half of the second quarter, our spreads in virtually every product were as wide as we have ever seen them.

And I would tell you that now, certainly in the more liquid products like rates and currencies, we've seen those spreads decline a fair bit; still higher than what I would consider normal, a lot higher than what we saw in 2006 and 2007.

But it is hard to index, but a fair amount lower than we saw in the first half of this year.

You know, credit products and things like that, still tighter than we saw in the first half, but well wide of the normal environments.

So they haven't tightened as much as some of the more liquid products, but tightened a bit, but well over normal levels.

And do you have an outlook -- a thought on the outlook for that?

Should we -- given the comments you made about industry conditions still being quite fragmented and capital still being -- risk capital still being kind of scarce, would you expect that the tightening trend will continue or do you think it is stalled out here for a while?

No, I think the tightening trend will continue.

I think that if the world continues to be a better place, then the tightening trend will continue.

People will get healthier.

Volumes will go up.

More risk capital will come into the market.

And again, this is a question of pie versus share of the pie.

I would expect that the pie will continue to grow, and I think what is now a very elevated share of the pie will come down.

I think we will keep some of the market share gains we got, but not all of them.

If I can just turn to compensation for a minute, can you give us a sense for what the impact on reported compensation for the year might be of decisions that you might make to, for example, defer some comp over a period of time or increase the percentage that would be in shares?

We don't know yet, Guy.

These are things we are still working through, and we won't make final decisions on these until the end of the year.

So I would be premature in giving you anything there.

So for now, as we try to model the full year comp, is the best approach really to look at prior years with revenue similar to what we are seeing this year, and just look at the full-year comp ratio for those periods?

I can't give you any better way to do it.

Roger Freeman, Barclays Capital.

Good morning.

I actually just wanted, I guess, to follow up on a couple of these issues.

I guess first on FICC.

Can we just maybe just touch on these dynamics a little bit more?

So bid/ask spreads have come in a fair amount, as you say.

You are saying they are wider than normal.

I guess you probably heard Jamie Dimon's comments yesterday.

He kind of used an index of one before the crisis, six and now two.

I don't know if you broadly agree with that, but let's assume that it is something that has come in a fair amount.

And it sounds like over -- really since the second quarter, but your FICC revenues are only down 15%.

One of the things we've heard is that because [vol] has come down, positioning has been a lot easier within FICC.

So I'm wondering as we now come into the fourth quarter, if this credit spread rally has run out of steam -- maybe there is some more to go in high yield -- are we going to see that impact?

How much has been sort of positioning principal, however you want to call it, in all of that?

Very little.

First, you know me well enough to know that I can't -- and I'm not going to try and tell you what's going to happen in the fourth quarter.

Because we will see.

But most of our revenues across trading, across FICC, really have been client-related, where our clients want to do things; there just hasn't been that much conditioning, there hasn't been that much writeups of prior distressed assets.

It has been what I will call blocking and tackling every day, day after day, dealing with our clients who want to do things, making markets, making prices, helping them hedge things, whether it is rates or energy prices or currencies or things like that.

That has really been the great, great majority of our revenues.

Okay.

But I guess it stands to reason, though, somehow that the dramatic spread compression we've seen over the course of this year has to benefit a business that is an inventory business.

Is that not a fair assumption?

It benefits it a little on some assets, but the velocity of our assets is so fast that we don't really -- we are not really holding assets.

And while it is in inventory, we have inventory -- we have hedges against most of that inventory.

And so you have some things on balance sheet, you have some hedges off-balance-sheet.

But our -- net-net, the contraction in spreads, the biggest advantage -- the biggest help in the contraction of spreads and therefore the increase in kind of risk asset prices has been two things.

One, it leads to higher activity levels; and two, in our principal investment area.

So most of the gains on holding risk assets have been in the principal investment area.

Okay, and then I guess there has been some shift into the higher margin, higher -- wider bid/ask products, like mortgages.

That is helpful.

But I guess just sort of more macro on this subject, you kind of look at $6.3 billion in really adjusted revenues, I think, taking out some of the charges, etc.

A strong quarter before the credit crisis for you was really like $4 billion, maybe low 4s.

So you still have this delta, and like you said, there is market share.

As the market share maybe comes down, some of these other higher margin products grow in total.

It feels like this still moves probably down on a run rate basis.

I know seasonally it is going to be down in the fourth quarter.

But -- hard probably for you to respond, but it is still a very elevated number.

We are very pleased with the performance.

You know I don't talk about run rate revenues or sustainability.

But people asked the same question after the second quarter going into the summer, and the third quarter performed pretty well.

I can't tell you the fourth quarter is going to be as robust.

I don't know.

But I am pretty confident that our performance will be as good as it can be in whatever the environment is that unfolds.

Okay.

Fair enough.

And then just last question, just back on the comps.

And I guess you said best advice is look at prior years.

I guess just one question around that.

If you look at --

What I said was I couldn't give you better advice.

Okay, you can't give better advice.

But let's say '06 and '07, it seems to me that a lot of the strength there was generated from harvesting principal investment gains, private equity, that you would argue maybe were generated by fewer people and you had more comp leverage off of that.

I'm just wondering is that really sort of fair?

This time, you've got more -- a wider range of the organization involved in generating these revenues.

And I guess I'm just wondering if that is a fair way to go.

I think that is a fair way to think about the Firm.

The revenues that we have now are being driven very much by our franchise, which takes the entire Firm behind it to be successful.

And I think we have to be fair to those people.

But we are also cognizant of what is going on in the world and the pressures we are under.

And so we are going to try and balance those things as we work through the end of the year, and we will make our decisions as we get to year-end based on the overall performance of the Firm and our people.

Got it.

Okay, thanks.

Howard Chen, Credit Suisse.

You've been in the belief that this distressed investing cycle is going to take a little bit longer to play out than the past ones.

Just curious, can you touch on the Firm's current appetite for putting capital to work on the distressed front, and how has bid/ask evolved through the opportunities that are out there?

Sure.

That's a good question.

And -- look, we would have thought that there would have been many more opportunities by now.

We definitely have an appetite and have had an appetite, and are willing to -- and it has been a business that we have been in for a long time -- we are willing to be a purchaser of assets if we think the returns are worth it.

Now in the environment where the returns on very, very liquid products have been so high, we are only going to invest in illiquid products if the returns are even higher.

But there has been very little willingness of the holders of distressed assets to sell them at what we thought were reasonable prices; just a difference in their views of price and our views.

I think those views have gotten a lot closer, and I think that we are starting to see what I would call a -- maybe it's a little more than a trickle, but not much more, of potential opportunities.

And so I am hopeful that we will find some.

I don't think it is going to be a gigantic number, but I am hopeful that we will find some opportunities over the next several quarters to use our capital to invest.

Thanks.

And so just stepping back from that, David, I guess by geography and by business, where are you seeing the best opportunities to deploy resources today?

I actually think it is going to be -- if I give you geographies and businesses, when I am done, I will have gone through all of them.

We are really seeing these opportunities in different ways globally, and we are seeing them really across our trading businesses; we are starting to see a pickup in the Investment Banking backlog.

We are starting to see more inflows and people what I would call rerisking in the Asset Management business.

So we are really starting to see opportunities across all of the businesses pick up.

Now, we've all seen it.

Tomorrow, I could tell you something different.

But that is how it feels right now, and we are seeing across the US, across Europe, across Asia, across developing markets and developed markets.

It is really across the board.

Okay, thanks, David.

And then real estate assets have been written down pretty hard.

Your write-downs on the trading portfolio and within REPIA are at their lowest levels.

Curious -- are you seeing people here more willing to move assets or are folks are still holding on to what they've got?

I think the real estate assets are probably still the least liquid and most distressed of the asset classes.

As you know, we've -- as you said, we've written ours down pretty heavily and we don't have that much left.

But I think we are still a bit away from breaking that log jam.

Okay, and then just final numbers question for me.

Apologize if I missed this in the prepared remarks.

But what impact did tightening of spreads have on the trading revenues this quarter?

And just where the marks on the commercial real estate stuff stand.

You mean our spreads?

You mean -- tightening of our --?

Yes, your own spreads, the DVA, David.

It was about -- I think it was about $275 million in the quarter, and something like 80% of that was in FICC and the rest was in Equities.

And the marks on commercial real estate I think were at about 50 average across our commercial real estate portfolio.

Thanks so much, David.

Mike Mayo, CLSA.

Good morning.

Just a follow-up to the other question.

Is there any way to quantify the increase in the velocity of the assets in FICC trading?

Well, the only way I would quantify it, Mike -- the real answer is no, it's very hard to quantify it.

But you see our balance sheet hasn't moved.

Our balance sheet was 890 last quarter, 882 this quarter, kind of the same.

And it has been like that for a couple of quarters.

And it's not like we are not doing anything.

There is -- you see the fact that we are making as much money as we are trading is because there is a lot of activity, and yet the balance sheet is kind of staying the same.

And it is just assets going on and off the balance sheet constantly.

Whatever the decline in the margin is made up for in the velocity.

Yes.

And can you give us any sense for how much the margin might have gone down?

It is really hard for me to quantify.

I don't like to kind of make up numbers, and I think I would be -- it is just very hard for me to quantify.

But it is down -- in some of the more liquid product, it is down a fair amount, but it is still significantly higher than we've seen in previous environments.

And in terms of the backlog, can you give any color, mergers, equity underwriting, debt underwriting and by region?

It is up in all of them, I would say really dominated by mergers and equity underwriting, more than debt underwriting.

But all of them are up.

And I think it is really across all of the regions.

Now, it will take longer for merger revenue to show up than equity underwriting revenue, and equity underwriting revenue will show up if the markets stay okay.

And if they don't, then some of that will go away.

But I would say more mergers and equity underwriting than fixed income, but pretty much across the board.

And then revenues outside the US, what was the relative growth this quarter and what are you doing in Asia, where the market --?

We were at a little over 50% the US.

I think it is around -- a little over 50% in the US, and the rest outside the US.

And look, you know we have been very focused on growing our Asian business, especially our China business for a while.

We continue to be.

We were one of the first ones in there, one of the few that has a license to operate there.

And it is probably the biggest near-term focus for the Firm.

All right.

Thank you.

Chris Kotowski, Oppenheimer.

Wonder if you could talk a little bit about the asset management business.

I noticed there were modest outflows of the money market funds, but it didn't go into any of the other alternatives.

Any color there?

What I would say there -- look, this is a big focus of ours, and it continues to grow well.

And I think if you look at our statistics, they are very consistent with the industry statistics over the course of the quarter.

But really what you saw is over the last year, I would say within the asset management world, for us and for others, you saw tremendous derisking.

So people basically took their assets out of equities, alternative investments, other things and put them into money markets.

And what you saw in the third quarter was the beginnings of rerisking.

Now, not all of it came into our funds, but people taking their money out of money market funds and starting to put it into more risky investments, starting with fixed income.

Because I think the general view of the world was that the credit space was the best place to invest, and I think maybe you will start seeing some flows in some other areas over the next couple of quarters, if the world stays okay.

Okay.

And then on the Principal Investments.

I noticed they are up about $1.3 billion in aggregate from the prior quarter.

And is that marks or putting new money to work?

It is largely marks on old stuff.

We made some new investments, more on the debt side than the equity side.

But it was -- the ICBC one, you can see that was just the ICBC stock price going up.

And in the Corporate Principal Investments, it was really dominated by private investments in debt securities -- that is our mezz fund, our senior loan fund and some other debt investments -- and public -- investments in equities that -- where it has gone public.

So it is just the equity markets going up.

That was most of the earnings.

Okay.

And then finally, any thought on the contributions to the Foundation?

Is that something that we should look for on a semi-ongoing basis?

And any -- is there a target level at which you would like to get the foundation to?

How should we think about that?

No target at this time, and we will make a fourth-quarter decision in the fourth quarter.

All right, thank you.

Michael Carrier, Deutsche Bank.

Actually, one question on FICC.

You know, there has been a lot talked about the spreads, and then you guys mentioned your velocity.

If you look relative to '06, '07 levels, we can kind of see what has happened on the spread side.

But from the client activity side, based on the data that the Fed puts out or talking to different fixed income desks, it seems like client activity is still relatively low.

Like up a lot since the first quarter.

But should we expect as spreads come in, just client activity in the markets to become more efficient and trading volumes in general will start to increase, and so that will cause of some of the offsets?

That is what should happen.

And I think you said it exactly right.

In the scheme of what we saw in 2005, '06, '07, client activity is still low.

I mean, we have a pretty big share.

And what will drive more client activity will be better economic growth, and when there is better economic growth, clients do more things.

Any time there is a merger transaction, there is hedging transactions, whether it's currencies or rates or commodities or something that comes with it.

Anytime there is an underwriting, there is more stuff that comes with it.

And as companies do more things, they are more active.

And that happens when there is more economic growth.

So that is what I said before, that what we are hopeful of is that we know we are not going to keep all of the market share gains that we have.

We think we will keep some of them, but not all of them.

But that hopefully the market, of which we are getting a share, will get bigger as the world gets better.

Okay.

And then just on the capital levels, there has been some adjustments put out by Basel II in terms of new requirements.

And based on the US getting there in 2010 and then implementation by 2012, it seems like for Goldman, you guys are always managing the risk like with your internal standards, and it tends to be more conservative than where the regulation is.

And Basel II, I think the internal models, sometimes there is more weighting there.

And if you -- if the models are deemed very robust, then you can actually have some benefits in terms of the amount of risk you need to put against these assets.

Based on anything that Basel II has put out, and I guess the most recent was back in July, when you guys look at it and look at where Basel II is headed, are there areas that you feel like you are already at relative to the industry based on Basel I?

And then do you just feel like relative to where your current capital levels is, you're fine?

And I guess most importantly, the regulators in Basel, are they talking to you guys?

Because it seems like through all of this, especially when it comes to capital levels, you've done fairly well.

Look, it is still too early to tell exactly where the capital regulations are going to come out.

I think it is pretty clear that capital requirements will go up.

You will -- for the same assets -- certainly for some of the same assets that people need to hold higher capital levels.

We have dialogue with our regulators all the time about our internal models and what they mean.

Our management of risk, I think as you said, we think we manage our risk very, very conservatively and always have.

But I think we are still in a wait-and-see mode.

I think it is too early for us to really know exactly where this is all going to fall out.

Okay.

And then just finally, on the -- I guess on the innovation side or where you see new opportunities, you guys had mentioned distressed assets and opportunities.

It seems like through each downturn, whether it was [tacked] with principal investments or long-term capital and fixed income, Enron, commodities, it seems like there is always an opportunity besides just distressed assets.

So when you look at the current environment, there is a lot talked about like the shadow banking system and that going away.

I don't think Goldman is going to become a big mortgage originator, but are there any opportunities out there that you see either as a void or a vacuum right now either that potentially -- either there is some significant upside for Goldman or for the industry?

We actually think that the biggest opportunity for us is just to continue to grow what we have, that our businesses are good businesses.

We think there is opportunities to grow them around the world.

And that is really what we are focused on rather than trying to get into something new where we don't have expertise.

Thanks, guys.

Meredith Whitney, Meredith Whitney Advisory.

I have a few questions.

The government purchase program was supposed to end this quarter.

They've extended it to next quarter.

How much of that us a driver of velocity of flows?

And how are you positioned when they exit, if they exit, for any type of principal risk?

And what do you think that impact is going to be in the larger market?

That is my first question.

Start off with an easy one.

Not a problem.

Look, I think, as you know and I think the Fed knows this, exiting their support of various markets is a very tricky thing.

I think that they are going to do it carefully.

They are going to do it slowly and over time.

I think they are signaling the market.

I think they are doing a very good job of letting people know they are going to continue for a while, but they aren't not going to continue forever.

As far as our positioning, I don't think it really matters at all.

As you know, as I said, most of what has happened has been the velocity, not the positioning.

And I think that they are going to slowly extricate themselves for that as the markets get healthier and can pick up slack.

Okay, but in terms of the flow volume, right -- so you have been the greatest beneficiary of increased flow volumes.

How are the flow volumes going to be influenced as they exit?

(Multiple speakers) I think that they will try to time their exits for the market being healthy enough to pick up that flow.

And so I think the flow will continue.

And then who would you imagine would be the substitute buyers?

The various market participants.

I think it will be the various financial institutions, funds.

I think the whole variety of buyers.

And there is a lot of cash out there to buy.

Okay.

And then just a last one.

I was teasing when I said it's the easiest one.

But it was easy for you.

The last one, of the principal revenues, almost $1 billion, how much of that was cash sales, and how much were markups?

Oh, I would say that it was much more markups than sales.

Okay.

All right.

Thanks so much.

I don't have the exact number, but it would be much more markups than sales.

Okay.

Thanks, David.

Robert Lee, KBW.

Thanks.

Good morning.

My question is on FAS 166-167.

Can you just kind of update us a little bit on the anticipated impact next year?

And specifically, I am just curious -- a lot of asset managers are kind of concerned about the impact to them, as it would require consolidation of a lot more investment products with performance fees.

Do you see that having the same impact on you?

If you could maybe just give us a sense on where you see that headed.

Two things.

First, from our balance sheet point of view, we think it will have some but a relatively immaterial impact.

The other thing to remember that is probably the most important thing for us, from a P&L point of view, whether something is on our balance sheet or not, if we have the financial commitment, if we have the financial risk, we mark it to market and run it through our income statement.

So it will have absolutely no effect on our income statement at all.

And we think some, but a pretty much immaterial, effect on our balance sheet.

That was it.

Thank you.

Ed Najarian, ISI Group.

My questions have been answered.

Thank you.

Steve Stelmach, FPR Capital Markets.

Good morning.

I apologize, but I'm just going to put maybe a little finer point on the velocity question.

Is it fair to infer from your answers that in a better economy, you suspect that velocity will increase, and that maybe the second and third quarters are not sort of the peak in your balance sheet sort of velocity?

Is that a fair (multiple speakers)?

I guess what I would say -- and we are using terms here interchangeably, so I want to be a little careful.

I would expect in a better economy the amount of activity will increase.

Whether assets come on or off our balance sheet as fast, hard to say.

In a better world, we might do more investing than we are doing right now.

So I can't say if velocity would necessarily increase.

But I think the amount of activity from which we would get transactions with our clients would be higher.

Perfect.

Great.

Thank you very much.

Douglas Sipkin, Pali.

Good morning, David.

Two questions.

One, I think you've hit on already.

Just the balance sheet, fairly constant the last couple of quarters.

Is that for the most part a conscious decision by you guys or is it really just a function of the way things shake out?

And what would it take for you guys to sort of increase it a little bit?

I know the leverage is still very low by some of the historical standards.

I think it is more the latter, that it is the way things shaked out, that the opportunities we saw were largely in very, very liquid products that did not require any increase on our balance sheet.

If there were opportunities to increase it a little bit right now, we would do that.

I don't think we would want to increase it very dramatically right now, because we are still conscious of the fact that no one -- we are not out of the woods in the economic environment yet.

But I think we would increase it a little bit, but there just haven't been those opportunities.

Okay.

And then just hitting a little bit more on the bid/ask spread stuff, it just seems like a lot of your competitors are making bigger commitments now.

And I'm just wondering, has all that not shown up yet, and maybe will it sort of like January 1, 2010, with a lot of the hiring that is taking place and sort of the rejuvenated commitments to fixed income trading?

With respect to corporates and MBS, it sounds like we are still seeing very good profitability.

What is the level of concern, post end of year, with a lot of fresh money maybe coming back to those products from competitors?

I'm not sure that there is a date on which it is going to change dramatically.

I think that it is going to be a gradual shift over time, with more competitors entering the market.

And look, remember, in order to do this and do it well, you need not just firms to get healthier, but to be confident in their risk management.

And we've seen in the past that is something that takes a long time to build up, and you have to get it right and you have to do it well.

And otherwise, you get in trouble by making commitments.

Great.

And then just one quickie.

I know you don't always provide, but any guidance around your hiring outlook, given maybe we are seeing some stabilization in markets.

I know you sort of jumped this quarter, which I know is some seasonal elements to that.

But maybe through 2010.

Don't know yet.

I think we are still kind of looking through what we want to do for 2010.

Okay, thank you.

Kian Abouhossein, JPMorgan.

In respect to capital at risk and capital allocation, I see your VAR coming down mainly in interest rates.

Is this a trend that we should expect to see that VAR is maybe scaled down, or this just a methodological impact?

And how do you see capital moving between different businesses and regions?

It really is going to depend on the opportunities we see.

I think if you look back in our history, you will see -- take VAR as an example -- you will see both the VAR in the absolute number go up and down, but you will see even more movement within the categories virtually every quarter; you will see differences.

You will see some up; you will see some down.

And we don't walk into a period of time and say, okay, let's take risk here or let's allocate capital here.

What we do is we -- because we know we are not smart enough to know.

We know the world is going to fall differently than we think it is going to.

What is important for us is that we are nimble enough to move our resources where we see the opportunity, whether that is capital, whether that is people, balance sheet.

Whatever we see, we move it to where we see the opportunities.

And I think you will see that continue.

So you will see it moving around in.

And do you see -- considering that the consensus is to move more capital into a lot of the fixed income businesses, do you feel uncomfortable about that at this point, or there is no uneasiness about any of the movements that you've seen by peers?

No, we are not uncomfortable.

Again, we think that the key to being able to operate in the fixed income trading businesses, and especially to do things on behalf of our clients, is our risk management.

And as long as we continue to be as focused on that as we are and have the quality of people involved in our risk management and have the most senior people of this firm involved in it, we are comfortable with where we are.

Just shifting to risk-weighted assets, your Basel II SEC risk-weighted assets increased by about $20 billion, $19 billion.

Can you explain why?

I'm not sure what number you are looking at, because I think our risk-weighted assets stayed -- in the third quarter, stayed almost flat.

I think I'm looking at Basel II risk-weighted assets, SEC.

I'm not sure what period you are looking at.

You are looking at first quarter, second quarter?

I am looking at -- so I am looking year-on-year.

There was $380 billion and they're about $400 billion.

Okay, yes.

You know, I (multiple speakers).

I am just trying to understand if it's pro-cyclicality or what is the driver of the change.

I'm sorry -- so you are looking at the Basel II risk-weighted assets?

Yes.

Okay.

So part of that was just a mix issue.

Part of that is in Basel II, as we transition from the SEC Basel II to the Fed Basel II.

There are some changes in methodology that are pretty small.

Because you see, well, it was $20 billion, it was 380 to 400, so on a percentage basis it wasn't that high.

But you are seeing some methodology changes that have caused an increase in risk-weighted assets.

Okay.

And lastly, your market risk about 170 -- your market risk-weighted assets, if I compare them to peers, you are clearly significantly bigger.

And today, the Basel committee came with a statement -- a quantitative statement that you've probably seen -- on trading book of risk-weighted assets to double, to triple, on an average.

And I am just wondering what does it mean for you as a group and how much of your market risk-weighted assets are trading book related?

I think it is too early to tell how all of this is going to unfold, and I would tell you that I think our calculation is extremely conservative.

I think when everything is put on an equal footing, I think that the effect on us is going to be the same as the effect on most of our major counterparties.

Can you say, though, in terms of trading book versus market risk, is it maybe one third or half?

Is that kind of ballpark?

I think those are not numbers that we want to discuss.

Okay.

Thank you.

Matt Burnell, Wells Fargo Securities.

Most of my questions have been asked and answered, but let me ask a bit of a nitty-gritty question.

In terms of underwriting fees, across the platform, debt and equity platform, from some of the information we've gotten from third-party sources, it appears those fees, particularly in the US for debt and equity products, are actually relatively higher than they were a year ago, and have actually been trending upward over the last couple of quarters.

Is that characterization correct?

And how does that -- what can you tell us about what the trends might occur in some of those products, particularly outside the US?

It feels -- and you might have more statistics than me -- I would actually say that the fees are pretty stable.

The fees on equity products, while they have been trending down, they've probably more stabilized.

Same thing in fixed income products.

But I don't think they are really trending up very much.

I think they are pretty stable.

I think you might just be seeing a different mix -- more highly levered deals than not; therefore the fees would be a little bit higher.

Not as many really, really big deals.

You tend to charge smaller fees on a percentage basis the bigger the deal, even though the dollars are bigger.

And you haven't seen as many really large transactions as you had seen in 2006, 2007.

So that might be why you are seeing it.

It is probably a mix question more than anything.

Great.

And then one administrative question.

The charitable donation expense, that runs through other expenses, correct?

That is correct.

Great.

Thank you very much.

Michael Hecht, JMP.

Just wanted to follow up on the strength in equities trading.

I know you pointed to the strength in derivatives, and it sounded like GSPS wasn't a real big driver this quarter.

Any other color you can give us on what drove the strength there?

No, it was really just (technical difficulty) both shares and derivatives much more than our principal strategies business.

And it was just kind of, as I said, every day, blocking, tackling, dealing with our clients, doing things for them, helping them reposition things such as that.

Nothing -- no big item.

Okay.

Fair enough.

And then can you talk a little bit more about the seasonality you saw in the trading business maybe through the quarter?

Just trying to give a sense of whether the revenues were kind of evenly distributed over the three months of the quarter or whether you saw any pickup in September?

No, it was much more even.

I would not say we saw a big pickup in September.

So it wasn't a normal summer then?

Well, it was a more normal summer than the prior two summers.

I would say that.

But it was pretty stable throughout the quarter.

Okay.

And then can you talk a little bit more about your outlook on, I guess, just the regulatory environment and the impact of -- are you seeing more derivatives shift from the over-the-counter markets to exchanges through centralized clearinghouses?

I mean, I guess on top of the cyclical forces and the competitive forces you talked about that may drive trading spreads and now over time, do you see that as more of a secular driver of tighter spreads over time?

I think the real answer -- my first answer is we don't know.

It is too early to tell.

There are some themes that are almost certainly going to happen.

You mentioned some of them; we've talked about some of them.

Probably going to be higher capital requirements.

We think there will be more centralized clearing of derivatives than we've seen before.

There will be more things on exchanges.

And we actually think that is a good thing.

We think it is a good thing for the world.

We think it will be -- if it is done correctly, it will be risk reducing, and we think that is good.

And so most of the things that at least the high level have been talked about, we're pretty much in favor of.

Okay, fair enough.

And then just last housekeeping question for me.

Diluted share count was up about 5%; basic shares a little bit more modestly.

What is the driver there?

It was -- a lot of it was just the -- A, the passage of time, and B, the increase in our share price.

Those two things helped drive share count because of accounting for RSUs and options on treasury stock methods.

Makes sense.

Okay, thanks a lot.

Roger Freeman, Barclays Capital.

Just had a couple of follow-ups.

What is the illiquidity discount on ICBC at this point?

We think it is like $1 billion to $2 billion?

Is that right?

We don't disclose exactly what that discount is, but you could probably get pretty close to calculating it.

Yes, I mean, because the gain on it was definitely less than the share price was (inaudible) this quarter, which suggests that discount came up.

But I guess the bigger question is that the lock-up there expires -- right -- April of next year?

So at some point, is that going to be a point in time P&L event?

First of all, the discount -- no, the discount would be amortized in over time as we get closer to that point in time.

But we don't -- if you remember what happened last April, we extended the discount on some -- the lockup on a very large portion of the share.

So we don't know what will happen in April.

Okay, fair enough.

And then just in some of the illiquid investment opportunities, what are you seeing on the whole loan front in resi?

It sounded like there is sort of a trickle of activity.

It sounds like -- at least from hedge funds -- I'm wondering if you are doing this as well -- kind of going to banks and offering to buy portfolios that they can now absorb to sell at a loss with better-than-expected operating earnings.

Is that something you are doing, too?

Well, I think a trickle is a good way to describe what is going on there.

As I mentioned to you, the buyers and sellers, there was a very wide divergence in price expectations.

I think that divergence has narrowed pretty dramatically.

But I still think for the most part, buyers and sellers are still not in the same place, although getting closer, and in some cases, I think you will see some sales.

But not -- I think it is going to be awhile before it is a very large amount.

All right, okay.

And then I guess just within sort of prime brokerage leverage for hedge funds, sounds like that is sort of creeping up a bit.

It sounds like there is a fairly robust repo market again for a number of assets.

I'm wondering where haircuts are on sort of a lot of key -- whether it is mortgage-backed or other -- are today, say, versus where they were going into the crisis.

How far (inaudible) would trade?

First of all, on leverage, as I said, we saw the beginnings of it starting to trickle up, but I don't want to overstate that.

It is a little bit.

And I don't think haircuts on repos have changed very much at all, especially -- on most securities.

I think they are pretty much the same as where they've been.

Okay.

And then just lastly, real quick.

On -- I guess in the mortgage securities trading area and the escrow (inaudible), I guess going back to what Meredith was asking, do you think that with the Fed having been so aggressive in buying MBS securities here that that has actually kept some of the traditional players on the sideline, and that is where that incremental demand comes from?

This is a chicken and egg question.

Did their buying keep the traditional players on the sideline, or did they buy because they were --

They were on the sidelines, right.

(Multiple speakers) sidelines.

And I think it is a little bit of both.

And I think that hopefully what you will see is that they will stop buying so much as these traditional buyers become healthier and more willing to take risk come back in, and that is why you will see the flows stay.

I think they're trying to time their withdrawal that way.

All right, perfect.

Thanks.

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

Holmes.

Great.

Thanks once again, everyone, for joining in the call.

Obviously, if you have any other follow-up questions, please feel free to reach out to me in the Investor Relations Department.

Have a nice day.

Ladies and gentlemen, this does conclude today's Goldman Sachs third-quarter earnings call.

You may now all disconnect.