高盛 (GS) 2010 Q1 法說會逐字稿

Good morning. My names is Gerald and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs first-quarter 2010 earnings conference call. (technical difficulty)

Thank you. Mr. Holmes, you may begin your conference.

Good morning. This is Dane Holmes, Director of Investor Relations at Goldman Sachs. Welcome to our first-quarter earnings conference call.

Today's call may include forward-looking statements. These statements represent the Firm's belief regarding future events that by their nature are uncertain and outside of the Firm's control. The Firm's actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements.

For a discussion of some of the risks and factors that could affect the Firm's future results, please see the description of risk factors in our current annual report on Form 10-K for the fiscal year ended December 2009. 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, www.GS.com.

This audiocast is copyrighted material of the Goldman Sachs Group, Inc., and may not be duplicated, reproduced, or rebroadcast without our consent. Our Chief Financial Officer, David Viniar, will now review the Firm's results. David?

Thanks, Dane. I would like to thank all of you for listening today. I will give an overview of our first-quarter results and then ask Greg Palm, our General Counsel, to discuss the SEC complaint against Goldman Sachs. We will take your questions at the end.

I'm pleased to report strong first-quarter results for Goldman Sachs. Net revenues were $12.8 billion; net earnings were $3.5 billion; and earnings per diluted share were $5.59. Our annualized return on common equity was 20%. During the quarter, book value per share was up over 4% to $122.52.

Faced with a still difficult, although improving, macroeconomic operating environment, our performance in the first quarter of 2010 continued to demonstrate the benefits of a diversified business model and deep client relationships.

While certain businesses, including FICC and Equities, produced sequentially higher revenues, they were partially offset by the impact of lower levels of completed Investment Banking transactions and lower revenues from Asset Management and Securities Services businesses.

While individual businesses will have different performance based on the operating environment in any given quarter, economic growth around the world remains the single most significant long-term driver of our Firm's opportunity set. Our constant focus on clients, despite the challenging environment of the past two years, continued to bolster our performance via elevated market share and strong demand for our services.

We enter 2010 with robust liquidity and risk-adjusted capital levels. In keeping with the Firm's long-standing policy of repurchasing shares to offset increases in share count over time, resulting from employee share-based compensation, the Firm repurchased 13.2 million shares for approximately $2.3 billion. Despite these share repurchases our common shareholders equity still increased by $2.2 billion to $66 billion.

We remain committed to maintaining a conservative financial profile and appropriately managing our capitalization. Our Basel I Tier 1 ratio of 15% and a global core excess flow of liquidity, which averaged $162 billion during the quarter, reflect that commitment.

I will now review each of our businesses. Investment Banking produced net revenues of $1.2 billion, down 28% from the fourth quarter. First-quarter advisory revenues were $464 million, down 31% from the fourth quarter. Goldman Sachs ranked first in announced and completed M&A globally year to date, and advised on a number of important transactions that were announced during the first quarter.

These include Novartis's $39.3 billion acquisition of the remaining stake in Alcon; American Life Insurance Company's $15.5 billion sale to MetLife; and Schlumberger's $12.2 billion acquisition of Smith International. We were also advisor on a number of significant closed transactions including Burlington Northern Santa Fe's $35.9 billion sale to Berkshire Hathaway; Cadbury's $22.4 billion sale to Kraft Foods; and Liberty Global's $5.2 billion acquisition of Unitymedia.

First-quarter underwriting net revenues were $720 million. Equity underwriting revenues were $371 million, down 41% from the fourth quarter as the market for new issue activity was less robust. Debt underwriting was up 3% to $349 million, with strength across leveraged finance and investment-grade markets.

During the first quarter, we participated in many noteworthy underwriting transactions, including Sumitomo Mitsui's $11.1 billion follow-on offering; IMS Health's $2 billion term loan and $1 billion high-yield note issuance; and Hartford Financial's $1.7 billion follow-on offering and $575 million convertible preferred stock offering.

Our Investment Banking backlog was essentially flat from year-end levels.

Let me now turn to Trading and Principal Investments, which is comprised of FICC, Equities, and Principal Investments. Net revenues were $10.3 billion in the first quarter.

FICC net revenues were $7.4 billion in the quarter, representing a significant increase from the fourth quarter as every major business -- including credit, interest rates, currencies, commodities, and mortgages -- generated higher revenues. This quarter's FICC results are also more balanced, with broad contribution across products and regions. Our FICC performance reflects solid market share and generally strong levels of client activity despite lower levels of volatility.

Turning to Equities, net revenues for the first quarter were $2.4 billion, up 22% sequentially. Equities trading net revenues were $1.5 billion, up 45% versus the fourth quarter, largely driven by a sequential improvement in derivative activity.

Net revenues from our Principal Strategies business were positive but not a significant revenue driver in the quarter. Equities commissions were down 4% sequentially to $881 million due to generally lower market volumes during the quarter.

Turning to risk, average daily value at risk in the first quarter was $161 million, down 11% from the fourth quarter.

Let me now review Principal Investments, which produced net revenues of $510 million in the first quarter. Our corporate Principal Investments portfolio generated net gains of $760 million, largely in corporate debt and public equity investments. This was partially offset by our investment in ICBC, which generated net losses of $222 million during the quarter.

Our real estate Principal Investment portfolio was not a meaningful contributor during the quarter.

In Asset Management and Securities Services, we reported first-quarter net revenues of $1.3 billion, down 14% from the fourth quarter. Asset Management produced revenues of $946 million, which was down from the fourth quarter, largely due to seasonally lower incentive fees. Assets under management declined 4% sequentially to $840 billion, driven by money market outflows consistent with industry trends, partially offset by net inflows in fixed-income assets and market appreciation, primarily in equity assets.

Securities Services produced net revenues of $395 million, down 11% from the fourth quarter, due to a less favorable mix of customer balances.

Now let me turn to expenses. Compensation and benefits expense, which includes salaries, bonuses, amortization of prior-year equity awards, and other items such as payroll taxes and benefits, was accrued at a compensation to net to revenues ratio of 43%. The first-quarter 2010 compensation ratio is our lowest ever first-quarter ratio, 650 basis points lower than our historical reported first-quarter average compensation to net revenue ratio of 49.5%.

The significant reduction in first-quarter compensation accrual reflects the current strength of our revenues and relative competitive position, and recognition of the broader environment in which we operate. Going forward, the compensation ratio will continue to be impacted by these and other factors.

First-quarter non-compensation expenses were $2.1 billion, 23% lower than the fourth quarter, which included approximately $620 million in charitable contributions. Total staff at the end of the first quarter was approximately 33,100, up 2% from the fourth quarter.

Our effective tax rate was 33% for the first quarter.

As I mentioned earlier, based on our long-standing policy of offsetting the dilutive impact of employee-based compensation, we repurchase 13.2 million shares for approximately $2.3 billion during the quarter.

The broader economic environment remains fragile, and the future set of operating and regulatory guidelines remains in flux. However, we believe our long-term success hinges on a core set of principles.

First and foremost, we will focus on serving our clients' need on a global basis with a diversified product portfolio. Second, given the importance of human capital to our success in meeting clients' needs, we must recruit and retain the most talented people in our Firm.

Third, we will continue to foster a culture of communications, long-term thinking, collaboration, flexibility, and risk management excellence. Finally, we will strive to provide industry-leading returns by combining these principles with a compensation structure that pays for performance and aligns employees' interests with those of our other long-term stakeholders.

As we stated last quarter, we believe that financial institutions have a significant and critical role to play in promoting economic growth, jobs, and wealth creation for society. Our business model and culture is consistent with these significant responsibilities.

As a major participant in the financial markets, we remain committed to supporting initiatives that improve the long-term stability of the global financial system. Thus we will continue to work with governments, regulators, and peers across the world to strengthen standards and processes. With that, I would like to pass the call to Greg Palm, our General Counsel.

Thank you, David. As you are aware, last Friday the SEC filed a civil complaint against the Firm and one of our employees. We are very disappointed that the SEC would bring this action, which relates to a single synthetic CDO transaction involving two professional institutional investors, in the face of an extensive record which we believe establishes that the allegations are unfounded. I should note that since this is active litigation I will have to be somewhat constrained in my commentary.

To begin with I want to make very clear one important point. We do not in any way dispute the necessity and the importance of the SEC's role in protecting investors and supporting fair, orderly, and efficient markets. Our dispute is with regard to their respective view of the facts in this case and the applicable law.

The process which resulted in this action began in August 2008, when the SEC first asked for information on this transaction. Over the past 18 months, we have provided the staff with an extensive amount of documents and testimony relating to our activities in the mortgage space generally and this transaction in particular.

The core of the SEC's case appears to be based on the theory that one of our employees -- and thereby the Firm -- misled two professional institutional investors, ACA and IKB, in connection with a synthetic CDO transaction. Specifically, the SEC claims that we failed to ensure that the offering material disclosed the role of another market participant in the transaction, namely Paulson & Co.

Before delving further into the facts of this case, I want to make another point clear. We would never intentionally mislead anyone, certainly not our clients or a counterparty. We have never condoned and would never condone inappropriate behavior by any of our people. On the contrary, we would be the first to condemn and to take all appropriate action.

Our responsibilities as a financial intermediary require it, and our commitment to integrity and the Firm's business principles demand it.

As to the case -- and by way of background, there were only two professional institutional investors other than ABN AMRO acting as counterparty credit intermediaries involved in this transaction. Both of these investors were institutions with significant resources and extensive experience in the CDO market.

At year-end 2006 ACA, a specialty financial services company, managed 22 similar CDOs with $15.7 billion in assets. IKB, a large German bank, had a separate mortgage group and was an active participant in the CDO market. Indeed, as of January 2007, according to IKB, they had launched and managed more than $16.8 billion of CLOs and CDOs and viewed securitization and CDO investments as an integral part of their business model.

From the outset, the transaction enabled ACA, IKB, and Paulson needs to achieve certain desired exposures to Baa2-rated subprime securities of the 2006 vintage. Our role as a financial intermediary and marketmaker was to bring together such market participants.

ACA and IKB were positioned to benefit from an increase in the value of the reference portfolio of securities; and Paulson was positioned to benefit from a decline in the value of this portfolio. As professional investors, they fully understood that a synthetic CDO transaction must have both a buyer and a seller; that is, both a long and a short side. And each had the resources necessary to analyze the reference portfolio of securities, which was completely itemized for them.

In the process of selecting the reference portfolio ACA, which was both the portfolio selection agent and overwhelmingly the largest investor, evaluated every proposed security. Although ACA received input from both Paulson and IKB, ACA had sole responsibility for determining, and did determine, the final portfolio and was paid a fee for performing that role.

ACA used proprietary models and methods of analysis to develop its own independent view of the relative riskiness of each security. To that point, ACA rejected more than half of the securities suggested by Paulson.

All of that being said, the particular securities in the reference portfolio were not ultimately a key factor in the performance of this transaction. The entire pool of Baa2-rated securities from the 2006 vintage performed similarly, amidst an unprecedented market collapse.

The SEC complaint also alleges that ACA was led to believe that Paulson would be buying an equity position, rather than taking a contrary position against the portfolio, which skewed ACA's approach to dealing with Paulson. We simply do not believe that the evidence cited by the SEC demonstrates that ACA was misled into believing that Paulson was going to be buying an equity position; and the term sheets and offering certainly did not reflect an equity tranche.

Finally, a significant point missing from the SEC's complaint is the fact that Goldman Sachs retained a significant residual long position in the transaction. Our overall losses in connection with the transaction exceeded $100 million, including $83 million with respect to the retained long position. We certainly had no intent that the structured transaction was designed to lose money.

In summary, there are four key points to consider. First, this was a transaction between institutional counterparties who well understood the risks they were taking. Moreover, ACA and IKB knew that the transaction must have a short position opposite their long position.

Second, ACA as portfolio selection agent was solely responsible for, and in fact did, select the securities in this portfolio.

Third, there was never any representation that Paulson was to be a long equity investor in the transaction.

Fourth, GS had no economic motivation for this transaction to fail. In fact, our incentives were aligned with ACA and IKB.

Finally, we want to emphasize again that we do not in any way dispute the importance of the SEC's role in protecting investors and supporting a fair and efficient market. Our dispute is with regard to our respective views as to the facts in this case and the applicable law.

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

Glenn Schorr, UBS.

Thanks. First one, I'll just follow up on the case. I'm curious on one thing. If Paulson -- if there was no misrepresentation about Paulson being a long, how were they introduced into the process?

In other words, they were obviously making suggestions into what securities ACA should include. But under what capacity were they introduced, if it wasn't a long or a short? What were they doing there?

Yes, my first comment would be -- and I think you probably know this very well -- which is in this market there has to be a long and a short. That is perfectly clear.

And the other point I would really emphasize is that in order to have a transaction in this market you have to have some reference portfolio of securities which is satisfactory to both the longs who are looking at the portfolio -- they are not looking really at anything else; and the shorts, who are looking at the same portfolio and deciding that. As you know, whether the shorts are us or anyone else.

Paulson entered the process here with ACA, and at least based on the record we know, we actually have no idea where AC got -- assuming they did, because that is what is alleged here -- the impression that Paulson was a, quote, equity investor.

But how did they know there was a transaction going on? Meaning, I know Paulson approached you and wanted a certain exposure. How did ACA get introduced to Paulson?

I'm sure we would have put them in contact with each other. But to get into the -- do I recall precisely what date that occurred on? No, I don't. There is no evidence been adduced to us as exactly what that involved. But you know --

Okay. I think I read the --

And you also -- if the question is, what was ACA thinking? I don't know for sure what they were thinking, simply because as I have described we have been part of this case; and the only evidence we have been given as to what they were, quote, thinking is the SEC's statements as to what they were thinking. And as to how we influenced that thinking, as to what they were thinking, you'd see it in the complaint. So I don't have any -- I have no knowledge beyond that.

How about a more straightforward one? The risk factors in the prospectus or what I have been shown seem pretty clear of what you are not representing at the time. And they seem, from a non-lawyer person like me, to cover any misrepresentations. Because you're not making any representations at the time.

I am curious to know how that factors in, if any. Because like I said the risk factors seem to say you are not representing anyone's role in this, and there might be nonpublic information, blah blah blah. But how much does a -- what kind of role does a prospectus play in a case like this?

Yes, I think the case itself is about the offering circular in terms of the risks. Just to back up and not be too legalistic, these investors in these investments, what is relevant to the investor is the reference securities. And although this isn't a registered US offering, there is a particular SEC regulation called AD which specifies the types of information about the securities you have to put into a prospectus of this type.

Because unlike an investment in Ford Motor Company, where you put in a description of Ford Motor Company and certain required disclosures, you are mostly just describing the company in a variety of ways. Here, unlike that, you are describing and providing to the potential, quote, investor a list of all the particular life assets that he or she is investing in. In this case, since it is a CDO, the financial institution is investing in.

The reason for the risk factors -- of which, as you can see, there are many -- we are making no representation other than the fact that yes, these are the securities that are referenced in the portfolio. Because after all, the performance of those securities had nothing to do with anything but the future. I.e., how was the mortgage or housing market going to perform in the future? So that is the role we play.

Last legal one. Are there other Wells outstanding on this or other issues?

Well, what I'd say about that is our policy has always been to disclose to our investors everything that we consider to be material. And that would include investigations, actually lawsuits, regulatory matters, anything. Whether there is a Wells or not a Wells, if we consider it to be material we go ahead and we disclose it; and that is our policy.

To get to your question, we do not disclose every Wells we get simply because that just -- that wouldn't make sense. Therefore we just disclose it if we consider it to be material.

Obviously at the K you didn't think this one was material. Okay. David, believe it or not I have a question on the quarter.

Great, Glenn.

Risk-weighted assets up 6%, but your leverage is still way low and your cap ratios are great. Just curious where those risk-weighted assets are showing up.

Sure. One of the things we have told you over the course of last year is that we were transitioning from Basel I being regulated by the SEC to Basel I being regulated by the Fed. In doing so we had to get some models approved and other items that would change the way risk-weighted assets were calculated.

I think that increase in risk-weighted assets was largely due to transitioning to the Fed models. And we are now fully on all of the Fed models.

Got it. Okay. The last quickie. Did anybody have to approve the buyback? Even though you have the best capital ratios in bank-land.

I would say it like this, Glenn. We don't do anything with our capital without the knowledge and approval of our regulators.

Okay. I'm done. Thank you very much.

Guy Moszkowski, BoA Merrill Lynch.

Good morning. Let me start with a question on the quarter, and then we will transition back to the case.

On the quarter, as Glenn noted, the assets grew, the risk-weighted assets grew a bit. But the VaR fell. I was just curious whether the decline in VaR was some sort of a conscious derisking choice, or is it the result of declining volatility and swapping out a high vol quarter for a lower vol quarter?

It was a combination of two things, I would say. It was lower vol, which definitely reflected it, and then just a continuation of the opportunities there, being high velocity on the balance sheet or off the balance sheet. Very liquid stuff.

So it was a combination of those two things which drove the VaR lower. It was not a conscious decision; just the opportunities that we saw and how it impacted the VaR.

Then the decision to repurchase some shares, obviously we haven't really seen that much elsewhere in the industry to date, with most people saying -- as you have until now -- that the uncertainty about the capital regime is such that one prefers to retain capital.

What was the thought process there as you chose to go ahead and repurchase some capital even though, as you made clear, your capital nonetheless grew?

I think, Glenn, it is a question of balance. I think all of those statements you made are still applicable for Goldman Sachs as well. There is still a lot of uncertainty out there.

We still want to maintain high capital ratios. But even with the buyback we did grow our equity by over $2 billion. Our capital ratios are quite high and remain quite high.

I think we are committed to continuing to maintain very conservative high capital ratios. And we will make decisions about buybacks within the context of that commitment.

Then if I can just follow up on the comp ratio at 43%. Obviously given the operating leverage inherent in your business, the very strong topline results, it makes a certain amount of sense.

And yet from a policy perspective, you really never have wavered from the idea of a very high 40s to 50% early in the year ratio; and then you true up as we go on. So I would like to explore the thought process there just a little bit more, if I might.

What I would say is that our compensation ratio was based on our performance, our competitive positioning, and the external environment. And any of those could change in the future, but that was the balance we struck right now.

Okay. Then if I could ask a question or two about the SEC's case.

Greg, you said that you had an $83 million, I guess, principal loss on the retained long position and some other losses that aggregated up to over $100 million, which is a little bit more than what you'd said in the earlier press release, which I think was about $90 million.

What is the difference between the $83 million and the total loss?

Either David or I can do it, but the first point I would just make is I think in our first, as you called it, release we talked about it being over $90 million. So from that perspective --

Over 100 is still over 90.

That's true.

That was (multiple speakers). We were just -- we thought $100 million was a round number and that would make it read better. If David wants to go through the number, he can or I would.

Glenn, there were several other aspects of the transaction.

This is Guy, but that's okay.

I'm sorry, Guy. Guy, I apologize. Guy, there were several other aspects of the transaction that included positives like fees and bid-offer spreads. But then there were also collateral securities that we managed on which we lost money and other aspects of the transaction. When you added them all up, the net losses to Goldman Sachs were over $100 million.

Just as a follow-up to that, is it -- was the loss, was the fact that you had the position essentially that it was an underwriting position that you were unable to distribute? And if that was the case, how routine would it have been in this type of a synthetic mortgage CDO for you to have a holding of that type?

I will take a hand at that question. Just two things.

One, on the generality, how often or whatever, I must admit I have never done a frequency analysis so I can't tell you for sure. Because it is not that relevant to the investor on the other side. The investor on the other side actually is told in the prospectus that in fact we're selling it. And from their perspective we are the short. So from their perspective it is irrelevant.

In this particular -- and the only other point I think I would make here is, when the transaction was effectuated as it were, the final transaction, the dust settled, we obviously didn't have to do a transaction if we weren't willing to sit there and hold this long position -- which is what we did.

Now whether or not we were going to sell it in the future or try to sell it or whatever else, all that could be true. But when we did the transaction, we obviously held the position and we kept holding the position.

Fair enough. Thank you very much for taking my questions.

Howard Chen, Credit Suisse.

Good morning. Thanks for the call and appreciate Greg joining today as well. I will start with one on the complaint. Are there any client businesses that cannot be conducted in normal course or are impaired due to the filing of the SEC complaint or formal enforcement investigation by the FSA?

By the FSA? The short answer is I am not aware of any at all. You know, we will stop -- all firms in our industry are investigated all the time about everything. It doesn't cause anything.

Okay. Second, it is clear that you strongly disagree with the complaint. But how do you think about the timeline and impact of resolution from here?

Well, obviously since we were somewhat surprised, you might say, on Friday morning that this was a filed complaint -- and no one had told us about it in advance -- we have certainly at the early stages of this case. So in terms of resolution, there are always the mechanical things involved in cases, which I am sure you would like me to speak a long time about, but everyone in this room would probably get bored.

But we have not yet been served. There is a process in the court where you have to, quote, answer within 20 days once you are served, except there are extensions to do that. So the litigation would play out over time. Whether it is resolved quickly over time, takes a long time or not, I really couldn't say.

Okay. Then switching over to the business, David, very strong sales and trading results continue. I guess can you speak qualitatively to where you think we are in that handoff of improving client volumes and normalizing bid-ask spreads?

Boy, it's a very tough question and there is no data to support things. I would say bid-offer spreads have tightened somewhat. They are certainly not as robust as they were early in 2009, but they are still healthy and there is still very good client activity.

Yet as we have said repeatedly, as GDP growth around the world picks up we would expect client activity to pick up as well. So good client activity; but hopefully it will get better. And bid-offer spreads tighter than they were, but still healthy.

I know we are just a few weeks into it, but just post the end of the Fed's impact on the mortgage purchase program, what are you hearing in terms of business heads and seeing in terms of client activity as we see the extraction of some of these quantitative easing measures on the core business?

I think the Fed has done a terrific job in fact. They -- one of the things the Fed made very clear is they signaled way in advance what they were going to do. They signaled and they told the market. And they told the market again, and they told them again.

And when the day came that they were going to stop purchasing the mortgage securities, it was hard to find any-market participant who didn't know on that day they were going to stop shouldn't be a market participant.

So I think the market was completely ready. I think there hasn't been much effect because of that. So I think they are doing a terrific job.

But, you know, it is too early to say two weeks into the quarter what is going to happen this quarter.

Right, okay. Then just a cleanup question, David. Any -- what was the impact of [DVA] and some other smaller puts and takes within this quarter's trading results?

It was very small. DVA was about $100 million positive.

Okay. Thanks so much for taking the questions.

Michael Carrier, Deutsche Bank.

Thanks, guys. One question for Greg. I guess when we look at the SEC process, this is very unusual relative to how they usually operate. So just trying to understand.

Howard was asking about the timeline; but maybe what are the options or what happens? Meaning is it trial is one stance, or settlement? I'm just trying to understand more what we should be looking out for over the next three to six months.

Look, you have already obviously hit the options. You go to trial, which is what we are doing. And you always have the option of, if there is an agreeable settlement, to both sides settling at any point in time too.

So the timeline as stated before is actually totally unknown at this time. It will just either take a lot of time, a little time, but we just don't know.

Okay. Then just on the client side, just dealing with these headlines, whether it's employees, the management team, you had some of the Greece headlines, these headlines -- what are you telling the clients? And is there a heightened level of concern, or is it more one-offs?

I think what I would say is we are out talking to our clients. I think you can see from our results last quarter that our clients still support us.

Our view is our clients will support us as long as we provide very good service to our clients. And that is the key to our success, been the key to our success for a very, very long time.

Our people through the entire financial crisis were out talking to their clients, were out providing service to their clients, were out providing prices and liquidity to their clients. And we are still doing that.

I think that as long as we continue to perform for our clients they will be happy with us. And if we stop performing for them, then they won't.

Okay. Then just last one. Just on some of the regulation or where regulators are focused, it seems like it is a lot like down the food chain. So whether it's derivatives, certain trading areas, on your conversations with all the regulators is anyone focused on the underwriting standards or the beginning of these transactions, versus what goes on over time?

Then just on the Trading side in terms of recent derivative regulations, some firms have pointed out what the potential impact would be from clearing over-the-counter transactions. I guess, any way to size up how significant derivatives are for you and any potential impact? Clearly we are still early in the process, but any clarity there?

It's very hard to quantify what effect any of the legislation could have because it's very uncertain, and how it affects all the different markets (inaudible) uncertain.

As far as some of the derivative legislation, we have said this before -- we support greater standardization in the derivatives market. We support the increased use of central clearing houses. We think it will make the markets safer.

And, frankly, given that we are very conservative in our credit terms, we think it will make us more competitive. So we are supportive of much of the derivative legislation that is out there.

As far as underwriting standards, look. I think that all of the regulators always are and always have been focused on underwriting standards. That is one of the most important things in driving a safe and efficient market is having good underwriting standards. So I am not sure there is any new legislation on it, but I think it is a big focus of every regulator. And it's a big focus of ours and always has been.

Okay. Thanks, guys.

Roger Freeman, Barclays Capital.

Hi, good morning. I guess just one on the case. How many of your CDO transactions -- I think on the data I have it says you did 39 in '06 and 34 in '07. How many of those has the SEC reviewed and concluded reviews of so far?

The concept of -- I think as I indicated in my remarks, the SEC for the past 18 months has been looking generally at the mortgage market, our mortgage deals, with particular focus on what we're talking about here. That is really basically all I can say on it right now.

Okay. Well, are there others where there is repeated back-and-forth dialogue where they're asking a lot of questions that you think could result in charges?

Look, there is one case that has been brought. That is what I can say.

Okay, okay.

That is all we know.

Got it. Okay. All right. Moving on to the business, David, can you help us maybe a little bit with any particular areas of strength on the client flow side? Because most of the indicators that we have looked at have suggested the flows have been mediocre, definitely not 75% up from the fourth quarter.

And bid-asks from what we can tell are pretty much out there tights. It sounds like you don't agree with that. So any color you can give there on particular product areas of strength and the flows.

I think what it shows its how broad and deep our client franchise is. It was strength across every one of the business units, across every one of the regions. It wasn't dominated by one particular product or one particular trade or one particular region.

It was really just broad strength across our entire franchise. I think that is really -- as I said, it was very balanced. And that is really what drove the performance this quarter.

You would say --

I said very good as opposed to great; but very good performance in all of the products.

Though you ended up with a great outcome, right, on the revenue? Was positioning material or not?

It is really because it was -- when you -- we don't expect necessarily every one of the businesses to have very good performance at the same time.

Got it, got it.

Last year we talked about kind of hands-offs, we're seeing micro and macro, and this was really very good across all of them.

Anything in commodities worth pointing out in terms of trends?

Just good performance.

What percentage of that business would you say is slots-related as opposed to securities trading or futures?

I'm not sure. I'm not even sure how to quantify that.

I guess one -- my question I guess following on that is with the Lincoln legislation, what are your thoughts on -- what is your read on the swaps? The swaps language basically is calling for these businesses to be completely spun out of the dealers or lose access to Fed borrowing.

All I would say is I think that derivatives serve an important role in the world's financial markets. My guess is they will continue to, in some form. We will just see how the legislation turns out.

Right. Maybe in some other countries. Okay. Then lastly on -- so in Equities you said the sequential increase is mostly derivatives. So I guess fair to say then that derivatives as a percentage of your Equities trading revenue is probably at least 50%, if not maybe two-thirds of that business now?

That is why I want to be very careful. It drove the delta. It didn't necessarily drive the performance.

But your delta was $400 million, right? So that would at least get you to a third; and then some portion of the $1 billion in the fourth quarter was derivatives, right?

I think it is fair to say that our Equities performed -- our Equities business is relatively balanced between cash and derivatives.

Okay, okay. All right, great. Thanks.

Mike Mayo, CLSA.

Good morning. Well, I am not the lawyer either, but it seems like a lot of the SEC's case relates to page 12 of the SEC's complaint where they say investors were assured that the party selecting the portfolio had an alignment of economic interest with investors.

I guess that relates to two points. One, that Paulson helped to select the portfolio; and, two, Paulson was going short. So in very simple terms, why would the SEC be wrong?

Okay. Well, in very simple terms, the portfolio here was not selected by John Paulson. The portfolio here was selected by ACA. ACA had the responsibility to do that. They were paid to do it. They did do it; and they were the largest investor in this transaction overwhelmingly. So they certainly had every incentive to do it.

As I indicated in the prepared remarks, way more than half the portfolio are things that they suggested -- and we use the word suggested. These transactions get suggestions from all sorts of people typically, so that is why I'd say there is nothing to what is in there.

At what point does materiality kick in? If John Paulson had suggested all of the securities in the portfolio, and ACA selected them all, would that then be material? If he selected one and they accepted one, that wouldn't be material. If he selected all, maybe that would be material.

At what point do you cross that threshold?

Can I make two comments here? Number one, as you know I believe, it didn't matter what was selected here. If you bought in the 2006 vintage, you got crushed when the market collapsed, which no one could predict. This was just basically taking a view on what was happening in the housing market. So it really didn't matter at all.

Secondly, think about the fact that ACA was the economic purchaser of more than 85% of this deal. So they selected the portfolio. They were paid to select the portfolio. And they invested totally in the portfolio.

So once again I have to end up with the same conclusion. We just disagree with the legal theory here as well as the way the facts are characterized.

Then last follow-up on this point, even if morally you are absolutely correct -- I mean, there's just three parties. Everyone knew what was going on. But under the law perhaps there is a required disclosure. Even if ACA knows what is going on, there is required disclosure and the offering circular simply say who was involved in the process. Why is that argument wrong?

You start out with if the law requires it, then why is the argument wrong? We don't believe the law requires it and we certainly don't believe it is material in this context at all.

Then how typical would it be for hedge funds to meet with third parties for selection of securities in a CDO? How did that market work?

You know, commenting on your description is somewhat challenging. One point I would make is that the Abacus transaction, as you can see from reading the SEC complaint, seems to stand on its own unique facts, including the -- I'll used the word allegation that somehow one of our employees misled or -- and it could be negligently misled -- ACA into thinking that Paulson was something other than he turned out to be.

So the facts here are incredibly I would say narrow in that sense.

Okay. Just the last follow-up. Let's assume everything you did here was legal for the moment, which I know you believe. Let's assume this doesn't go away soon.

Why not just work with the SEC? When you fight City Hall, some bad things can happen. So at what point do you say, let's just put this behind us. The SEC has a point of view; we disagree; let's just find some middle ground and settle and disclose more and pay some kind of fee?

Mike, I would leave this to, as Greg said, we don't know how this case is going to unfold at this point. It is very early on and we will see how it unfolds.

All right. Thank you.

Edward Najarian, ISI.

Good morning. I think most of my questions have been answered. But I would just be interested in, as you read the SEC's complaint, what in your opinion are they trying to extract from Goldman Sachs? Are they after a punitive damage of some sort?

If, assuming the SEC is successful, where will they attempt to go with this in terms of how they deal with Goldman Sachs? Will it be punitive damages? Will it be restricting Goldman from some sort of business practices? Will it be both?

How do you think about your downside risk, even though you believe you are right, regarding where the SEC is trying to take this?

Yes, look. First of all, I have no idea how the SEC is approaching this obviously, because the case as somewhat of a surprise.

Secondly, when the SEC makes new cases like this they typically want some type of a fine and other types of things. I must say, given the nature of the allegations in here, which is whether or not an individual affirmatively misled someone about something, that is a pretty narrow set of facts. We certainly agree that there should be prohibitions from people misleading people; and we would never permit it if we knew about it.

So I don't -- I have no idea what the SEC would think about or so on or so forth. So I can't really comment beyond that.

They have made no indication to you of the -- now they have filed this complaint; and they made no indication to you where they would like to take this or what sort of their next step in the process is?

No. No indication whatsoever.

Okay, thank you.

Meredith Whitney, Meredith Whitney Advisory Group.

Hey, David.

Hey, Meredith. How you doing?

I'm good. You can call me the wrong name all call if you want.

And I apologize again to Guy.

I have a question on your Asset Management business. You had pretty significant outflows this quarter, and the results have been choppy for the last six quarters.

I know you've had some personnel changes. Can you comment on that? And can you comment on what you are doing to address what looks to be like some disruption of that business?

Meredith, I would say look, the results this quarter -- the outflows this quarter were basically all in money markets. And that is pretty consistent with I think what we have seen going on around the world.

Basically what's happening is the world is rerisking, so they are taking money out of money markets and putting it elsewhere. We don't control all of the dollars, so we didn't keep all of them. But we did have inflows into fixed income, which is pretty consistent again with what's been happening in the world.

So we don't view that as having been choppy. Those changes that we have made have really had nothing to do with performance. They had to do with people deciding it was time to retire and moving some other people around.

So we are still pretty pleased with how that business is going and the growth we have had over time and the mix of the assets. So I think that's all I would say there.

Okay, all right. Thanks.

Jeff Harte, Sandler O'Neill.

Morning, guys. A couple questions on the quarter. This has been touched on, but when it comes to the fixed income trading environment, we kept hearing how competitors were gone and there was very little competition. Only a few people actively committing capital.

With spreads not really coming back in all the way yet, what are you seeing as far as competitors coming back into some of the fixed income businesses? Are they back?

Well, I mean I think you just saw it from the results from our competitors that a bunch of them are certainly more involved in the market than they had been over the last 18 months or so. So there is differently more competition than there was last year.

And as I told you a bunch of times, we expected that was going to happen. In fact, we expected it would happen sooner than it did.

But our client franchise and our market shares remain extremely strong. I think what we have done in being there for our clients throughout has helped us and hopefully will continue to help us. The breadth and depth, the product portfolio that we offer, and our willing our willingness to provide liquidity and make markets for our clients when they need it I think has helped us a lot. So our market share has stayed very strong; but there is definitely more competition there.

Covering as many products and geographies as you do, are there specific products where the competition really has not come back as much?

I think it is pretty much starting to come back in most places.

Okay. You also then on Sec lending mentioned the year-over-year change in the composition of securities, lending customer balances, and stuff. Any changes sequentially?

Same thing. I would say same thing. I think people are more nervous to short with harder to borrow securities, given how robust the markets have been. I think that is really what has been driving it.

Okay. I guess one thing on the case. At this point, we're talking about an SEC civil complaint. Has there been any conversations with the Department of Justice or anything beyond civil?

There have been no conversations whatsoever.

Okay. Thank you.

Kian Abouhossein, JPMorgan.

Yes, hi. The first question is regarding litigation reserves. Have you taken any reserves regarding this SEC complaint? What are your outstanding litigation reserves currently?

We take litigation reserves for anything that is estimable and probable, as we are supposed to do. And we don't disclose anything for individual cases because that wouldn't be prudent for us to do.

Okay. In respect to the Dodd financial regulatory bill, is it possible to get into a little bit more quantification, considering the bill is now relatively detailed, both in respect to the Volcker rule, the end-user clearing, and the trading on the [NASEF] platform?

We actually find it very difficult to quantify exactly what the effects would be, because it's very hard to know how the markets would unfold, very hard to know how competitive positioning would unfold. We continue -- as we have said many times, we stated our support for the efforts of the Administration and Congress for reform that improves the safety and soundness of the financial system. We think it would be very important for any reform to move forward on a global basis, not to be fragmented different places in the world.

But very hard to quantify. We think that as long as regulation is consistent around the world and for all competitors we will do just fine.

All right. Regarding the Basel consultation paper for Basel III, I assume you have replied to the consultation paper at this point. I was wondering, what are the key issues that you would like to see changed in Basel III?

We have responded to the qualitative comments because that is what was due last week. The quantitative impact is not due till the end of the month. So that is not done yet.

Without getting into specifics, we just want to make sure that the regulators in Basel who are looking to make the system safer, which we support, don't go too far and do things that will stifle growth and stifle lending. We want to make sure that those unintended consequences don't happen.

Are there any specific issues -- leverage where you can, net derivatives and minority, all these kind of things -- are there any issues that you see should really be changed that are high on your list?

We're not going to get into specifics of our commentary.

Okay. Lastly on FICC revenues, I remember a while ago you said you have a very high market share in FICC revenues. And although you expect the pie to be relatively big, continue to be very big, your continued size of the pie could shrink.

But if I look at these revenues I don't see that. So can you explain in what areas you had significant performance, in what business segments of FICC?

I actually think I said the opposite. I said that if you think about what ought to happen when our market shares were so high last year, is that -- if you think of what should happen, as the world got better and competitors got healthier, that they would come into the market; and so our market shares would probably decrease.

But that that ought to be timed with as the world is getting better with greater activity levels, and therefore the pie increasing. So my expectation was that our market share would decrease and the pie would increase.

Yes, that is what I meant, yes.

Okay. But it was pretty certain that those things would not happen at exactly the same time. So that was kind of the backdrop.

As far as specific areas where you asked about, I think one of the things I mentioned was it was not a specific area that drove FICC. It was very good performance across a lot of products. Across all of the products, really, that is what drove it. Good balance both by product mix and globally.

And within regions?

Just had a good product mix both within products and both across products and across regions. Very good balance.

All right. Thank you very much.

Matt Burnell, Wells Fargo.

Good morning. Thanks, David. Most of my questions on the lawsuit have been answered but a couple of questions on the quarter. You mentioned that the backlog this quarter was flat from the prior quarter. That sounds a little bit less strong than we've heard from some of your competitors.

Can you put some color around where there might be strength or weakness within that?

Yes. You know, I think that you always have to be a little careful of backlog because --

Fair enough.

As you know, a lot of deals -- certainly financing deals will quite often get done that don't get into the backlog at all. I would say the mix shifted a little bit, and so you probably had a small increase in advisory backlog, a small decrease in the debt underwriting backlog.

But I wouldn't read that much into it. Directionally it's usually pretty good, but absolutely it is not.

We're still seeing reasonably good dialogue. I think if the world continues to improve, the economic world continues to improve, I think we'll see more activity. And if it doesn't, then we won't.

Question on -- you mentioned in terms of FICC that the geographic breakdown was pretty solid. Would you make the same -- would you characterize the equity performance as basically being the same internationally versus the US? Or are their pockets of strength within the Equities business geographically?

What I would say is really across the Firm pretty consistent with what we have seen -- but again it's always hard to measure because we are a global business. But you know a little bit over 50% of our revenue in the US; a little bit under outside the US. And I think that mix will probably shift in the other direction.

You know, outside the US probably two-thirds or so Europe and one-third Asia. That is pretty much (inaudible).

Then one regulatory question. You mentioned in the fourth-quarter conference call that Goldman had no intention of changing its charters in terms of having a bank charter. Can you confirm that that is still the case?

I guess more to the point, with all the pending regulation, in your view would it even matter if you were a bank or not a bank? Wouldn't the regulation basically apply to you regardless of your status?

That is one of the -- I think I mentioned that. We have no intention to change anything as we sit here now.

I think at least from what we see it is pretty clear that in the regulation where they are going to have (technical difficulty) seem to be systemically important firms that we will be one, and that we are going to be covered by those same regulations. So I don't expect anything different than that.

Great. Thanks very much, David.

David Trone, Macquarie.

Good morning. I am still not 100% clear on something. The synthetic needed a short, presumably ACA knew that construct. Did they know that Paulson was that side of the trade?

I have no idea what ACA knew. I read what I read in the complaint; and I read what they say was caused by us, negligently or otherwise.

So -- because it strikes me that if there is a synthetic and if ACA was as experienced as you say, they must have known that there was a short. So then it comes to the question of, when Paulson was making recommendations, did they, A, solely think that they were long? B, did they think they were the short side of the trade? Or C, did they think they were going to be the short and maybe hedge it with the equity tranche? I guess that is really the crux of the matter.

You've done I think probably a pretty good job of coming up with the variations. I have no idea. So I really can't help you out there.

I can -- as I said somewhere in the prepared remarks, this all seems to be, as I said, at root about whether or not someone intentionally misled someone. And as I also said, that is something we certainly wouldn't approve of or sanction.

But again, beyond that, I have no idea and I can't really speculate.

Well, you mean you as a person or Goldman Sachs itself has no idea? Because you were the broker, right? You brought the parties together?

Me as a person? No, I am speaking on behalf of Goldman Sachs right now. So what I saying is (multiple speakers).

Right, right. So how could you not know what -- you were the broker; you brought the parties together. So --?

Based on the facts as we know them, the view is that we have no basis for knowing why ACA concluded what it concluded. The SEC obviously alleges that there was a negligent or whatever, intentional -- there are all sorts of alternatives and this is a very technical document -- by an employee of ours. It cites these e-mails which are sitting in here, in the complaint, for that proposition.

I think if you read the complaint it certainly provides no basis for a representation by us or anything else. But again we're at the beginning of this litigation. And as I said at the beginning, our view of the facts is different from the SEC's view of the facts, and the case will proceed.

Let me ask you, customarily -- forgetting about this transaction, but just generally -- in a synthetic where there has to be a long and a short, wouldn't it be totally legitimate for the short side of the trade to negotiate with the long side of the trade what they were going to include?

Kind of no different than if I am going to bet on a basketball game with a friend, he and I have to negotiate the spread.

Yes, I would agree with you entirely. Because if you think about it, you can't do a synthetic trade unless both sides are amenable to whatever you are talking about. Whether or not a financial institution such as ourselves who sits in the middle of the market and tries to bring people together, talks to both sides all the time, then comes up with the construct, iteratively going back and forth or otherwise, of course that's the case.

Okay. Then last question. If it was synthetic and did not need the equity tranche and the full capital structure, I am not 100% clear on why Goldman had a position.

Our position wasn't in the equity tranche. Our position was a slice of the super-senior. We had a slice there, which is similar to the same slice that ACA would have had on the swap that they did using ABN AMRO as the credit provider in the middle. Okay? (multiple speakers) in the middle. So it was part of the super-senior.

But why did you take that? You didn't have to, right?

No, we didn't have to take that position. Obviously, I've been asked the question, well, wouldn't you have wanted to redistribute it or whatever else? Which is somewhat irrelevant to the proposition that when we closed the transaction we took on the position.

If you look at proposed regulatory changes which David alluded to, this concept of having skin in the game, the 5% rule or whatever is talked about, assuming that gets adopted in some way, you could say that part -- that underwriting we had skin in the game. We held the position. Whether or not we decided to distribute it or wanted to distribute it a month later is somewhat quite irrelevant, because we didn't have to do the transaction.

If weren't willing to take on the risk, we wouldn't have taken on the risk. If we believed there was something wrong with this transaction, then we obviously wouldn't have put our skin in the game in that way, as it were.

Let me take that a step further. Could the transaction have been consummated without you taking a position?

I have no idea. You would have to have a different transaction. Because right now you have to have a long and a short, correct? And therefore --

Right, but you already had them without you.

No, no.

David, we didn't have matching positions. So we don't know if it could have been consummated without us or not, because it wasn't consummated without us. So we don't know if it could have been.

Okay, so in essence -- so it sounds like you needed to take the position to make it happen.

We took a position and the deal got done. Hard to say what would've happened if we didn't.

Okay. Okay, and then lastly, did you hedge that position?

The reason you see the loss that has been described is because we held the long position and it deteriorated in value substantially, as did all the securities in this market or interest in this. And that is why we have the loss.

Right. So when you are giving us that number, you're not just giving us a gross; you are giving us the --?

No, no, that is the net loss to the Firm. That is our so-called P&L on that. I call it mostly L (multiple speakers).

Okay, just checking. Okay. Thank you very much. I appreciate your answers.

Ron Mandle, GIC.

Hi. There is one aspect of the legal issue I am not sure I completely understand. That is, as you say, ACA involved ABN AMRO in the deal; and so it is not clear to me that ACA ever had -- or when the deal closed that ACA had that significant an economic interest in the deal. So I was wondering if you could elaborate on that point.

Yes, they had the full economic interest in how the deal performed. ABN AMRO's only role was in essence to stand between ACA and us, simply because it was a credit question. Meaning ABN -- and a collateral posting question.

ABN AMRO was willing to take on the possibility that ACA would have financial difficulties. Had nothing to do with this particular transaction, whether it went up or down. They were there basically I'll call it as a credit protector.

So we faced ABN AMRO with a mirror to the same type of swap arrangements going over to ACA. As the deal fluctuated in economic value, ABN AMRO really had no care or interest in that. Ultimately the only real question was, at the end of the day, would there be any kind of overall credit problem with ACA because of its total business and whatever else it happened to be doing.

But ABN AMRO was there for that reason. As you know, all the major financial -- I should never say all, excuse me. But a financial institution like ABN AMRO or like Goldman Sachs, we are willing to post collateral one way or the other depending on how the positions are moving between each other.

So in the end, ABN AMRO did suffer a loss from this deal because ACA had losses overall, not specific -- not just on this deal?

Entirely correct.

Okay. Then I actually do have a business question and that is in regard to the Asset Management business. You mentioned the outflows in the money market funds. But the equity flows have been weak, were slightly negative this quarter, and haven't been that strong in the past. In the recent past, whereas they had been more robust earlier.

Is there a bigger story there that you can elaborate on, David?

No, Ron. Again, I would say that is pretty consistent with industry trends as well. If you look at what happened really through the course of 2009 in the Asset Management world, as you saw -- forget about Goldman Sachs. As I said, in the industry you saw outflows in industry money markets and inflows into fixed income funds.

And very, very little -- in fact I think there were, I think gross in the industry -- I may be off a little -- there were still outflows in equities although it was pretty close to flat. And it's really only recently that you started to see small inflows into equity funds.

So you're happy with your performance in the funds; and there is no issue in that regard?

We are never happy with our performance. We always think it can be better. So we are always striving to make it better in Asset Management as well, but we think relatively we are doing okay.

Okay, good. Thank you.

Richard Staite, Atlantic Equities.

Good morning. Just going back to the compensation ratio, you said it was 43%, reflecting the strength of your business and the current (technical difficulty). If over the remainder of the year revenues remain strong and the environment doesn't change, should we be looking at 43% for the next three quarters, then a dip into the fourth quarter?

I guess what I would say is I mentioned three factors -- our performance, the competitive environment, and the external environment. I think the only thing I can be sure of is that all three won't stay exactly the same as they are today.

So we're just going to have to see how that unfolds, and that will be the basis of us deciding what compensation should be as we go through the course of the year.

Okay, and should we think about (technical difficulty) think about the UK bonus tax in that?

The UK bonus tax is not considered in those numbers. The UK bonus tax we view as a separate one-time item.

Right. Okay. Just a very separate question. In terms of your overall revenues, could you give some guidance around how much is generated from governments as a client? The obvious question being if certain governments decide they didn't want to deal with you anymore, would that have much of an impact?

As you know, I have been asked this question many times before. It's a very, very hard question to answer because we have a very integrated sales and trading model. But the very, very vast majority, in fact almost all of what we do, starts with our clients and starts with trades that our clients want to do and that we are providing some type of service or liquidity for our clients.

There is small, walled-off, proprietary business like GSPS which we've talked about, but the great majority of what we do is based on our client franchise.

Okay.

I will now turn the call back to management for any closing remarks.

Once again I would like to thank everyone for joining our first-quarter 2010 conference call. If you have any additional questions, please feel free to contact me in the investor relations department to have those answered. Otherwise, please enjoy the rest of your day.

Ladies and gentlemen, this does conclude today's Golden Sachs first-quarter 2010 earnings conference call. You may now all disconnect.