高盛 (GS) 2010 Q2 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the Goldman Sachs second-quarter 2010 earnings conference call.

(technical difficulty) Also, this call is being recorded today, Tuesday, July 20, 2010.

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 second-quarter earnings conference call.

Today's call may include forward-looking statements.

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

The firm's actual results and financial condition may differ possibly materially from what is indicated in those 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 our 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 capital ratios.

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.

As most of you are aware, last Thursday we announced the settlement for $550 million of the civil enforcement action brought by the SEC in April 2010 during the Abacus CDO offering.

We entered into the settlement without admitting or denying the SEC's allegations, but acknowledged that we made a mistake in including incomplete information in the marketing materials.

We firmly believe this settlement is the right outcome for the firm, our shareholders, and our clients.

In addition, at our annual shareholders meeting on May 7, the firm announced the creation of the business standards committee.

The committee is tasked with reviewing our business standards and making recommendations to the Board of Directors and senior management to reinforce the firm's client focus and improve upon the transparency of our activities.

The committee of the Board was established to oversee its work which is well underway.

We expect the finding of the recommendations will be meaningful to our constituents.

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

Second-quarter net revenues were $8.8 billion.

Net earnings were $613 million and earnings per diluted share were $0.78.

Excluding the $600 million UK bank payroll tax and the $550 million SEC settlement, earnings per diluted share were $2.75 and our annualized return on common equity was 9.5%.

Our performance in the second quarter resulted in a year-to-date annualized return on common equity of nearly 15% excluding the impact of the UK bank payroll tax and SEC settlement.

The operating environment in the second quarter of 2010 was characterized by broad market concern regarding several issues, principally European sovereign risk, a slowdown in China's growth trajectory, and uncertainty regarding financial regulatory reform especially in the US.

These concerns resulted in a significant focus on the prospects for the macroeconomic environment and the risk of a double dip recession.

Not surprisingly, these concerns negatively impacted asset prices, market volumes, and accessibility of certain markets.

Global equity markets posted significant declines during the second quarter.

The S&P 500 declined by 12%, the MSCI down by 13%, and the Shanghai Composite falling by 23%.

In addition, volatility reached its highest levels in a year with the VIX ranging from the midteens to as high as the mid-40s.

Corporate credit spreads also deteriorated significantly during the quarter with the CDEX Index wider by almost 40%.

The accumulation of these concerns led to greater risk aversion, significantly lower client activity, particularly during the last two months of the quarter.

This reduction of client activity occurred across a broad set of businesses within investment banking, FICC, and equities.

For example, industry volumes for global announced M&A and investment grade debt issuance were down 5% and 42% respectively.

The uncertainty surrounding the macro environment led to significantly less conviction and lower risk appetite among many of our institutional investment clients.

As we have said to you in the past, economic growth is the key driver of our operating performance.

A strong and growing global economic environment usually translates into greater activities among our client base, which in turn ultimately drives our opportunity set.

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

At the end of the second quarter, we had a Basel I Tier 1 ratio of 15.2% and a Tier 1 common ratio of 12.5%.

We also maintained a significant liquidity pool with our global core excess averaging $163 billion for the second quarter.

Our current levels of capital and liquidity reflect our continued cautious approach to the operating environment.

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

I will now review each of our businesses.

Investment banking produced net revenues of $917 million, down 23% from the first quarter.

Second quarter advisory revenues were $472 million, up 2% from the first quarter.

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

These include NBN's $7.8 billion acquisition of certain Telstra businesses; UAL's $6.2 billion merger with Continental Airlines; and Abraxis BioScience's $3.6 billion sale to Celgene.

We were also adviser on a number of significant closed transactions including Baker Hughes' $7.1 billion acquisition of BJ Services; NEC Electronics $4.1 billion merger with Renesas Technology; and 3Com's $3.2 billion sale to Hewlett-Packard.

Second-quarter underwriting net revenues were $445 million.

Equity underwriting revenues were $222 million, down 40% from the first quarter as declining equity markets and heightened volatility led to weaker new issue activity.

Debt underwriting was down 36% to $223 million as primary issuance was light during the quarter.

During the second quarter, we participated in many noteworthy underwriting transactions including Samsung Life's $4.4 billion initial public offerings; NBC Universal's $4 billion notes offering; and Amadeus IT Group's $1.9 billion initial public offering.

Our investment banking backlog increased from first-quarter levels.

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

Net revenues were $6.6 billion in the second quarter.

FICC net revenues were $4.4 billion in the quarter, down 40% from the record first quarter.

During the second quarter, macroeconomic uncertainty led to lower customer activity levels and weaker revenues across each major business, particularly credit, interest rates, and currencies.

Turning to equities, net revenues for the second quarter were $1.2 billion, down 49% sequentially.

Equities trading net revenues of $235 million reflected declining equity prices and higher volatility during the quarter.

A significant driver of our lower equity trading revenue stemmed from our franchise clients who have been actively looking to hedge their portfolios by being long equity volatility positions.

As a result of meeting franchise client and broader market needs, we had a short equity volatility position going into the quarter.

Given the spikes in volatility that occurred during the quarter, equity derivatives posted poor quarterly results along with weak quarterly results within our principal strategies and equity shares businesses.

We have significantly reduced our equity market exposure for now, as demonstrated by our reduction in equity-related VAR, which declined from $93 million at the end of the first quarter to $50 million at the end of the second quarter despite a significant increase in volatility.

Equities commissions were up 11% to $977 million.

Turning to risk, average daily value at risk in the second quarter of $136 million represented its lowest level in three years and is down 16% from the first quarter as position reductions in interest rates, equities, and commodities more than offset increased volatility.

Let me now review principal investments, which produced net revenues of $943 million in the second quarter.

Our investment in ICBC generated $905 million, largely driven by the recognition of our liquidity valuation adjustment as the transfer restrictions on our investment expired during the quarter.

Our corporate and real estate investment portfolios were not meaningful contributors during the quarter.

In asset management security services, we reported second-quarter net revenues of $1.4 billion, up 2% from the first quarter.

Asset management produced net revenues of $976 million, up 3% from the first quarter.

Assets under management declined 5% sequentially to $802 billion driven largely by money market outflows consistent with industry trends as well as equity outflows and market depreciation.

Securities Services produced net revenues of $397 million, up 1% from the first quarter.

Now let me turn to expenses.

Compensation and benefits expense, which includes salaries, bonuses, amortization of prior-year equity awards, and other items was accrued at a compensation to revenue ratio of 43%, consistent with first-quarter levels and our lowest first-half accrual as a public company.

As I mentioned, second-quarter results also included a $600 million charge for the UK's bank payroll tax.

Second-quarter non-compensation expenses increased 41% from the first quarter to $3 billion, primarily driven by the $550 million SEC settlement as well as higher depreciation and amortization and brokerage clearing execution distribution fees.

Total staff at the end of the second quarter was approximately 34,100, up 3% from the first quarter.

Over the past three years, we have relied on our culture of teamwork to enhance our client service, enable us to respond quickly to changing client demands.

It is this nimbleness and flexibility that allows us to help solve the complex problems facing our clients and seize opportunities in the market.

The financial regulatory legislation is the most sweeping regulatory change the industry has faced in decades.

We believe that improving the safety and soundness of the financial system is critical to creating a stable foundation for sustainable economic growth.

While the legislation touches a broad array of the activities undertaken by financial institutions, we believe there are two principle areas of impact for Goldman Sachs -- derivatives legislation and the restriction of proprietary activities.

We are analyzing the legislation and determining the best course of implementation for our clients and the firm.

We believe it is too early at this stage to quantify with any degree of certainty the financial impact of the bill.

It is understandable that the marketplace has produced multiple projections of the potential revenue impact.

However, any analysis of the current situation relies heavily on a series of broad-based assumptions and in many cases tends to omit the potential offsets like capital release and redeployment, changes to our cost structure, and our ability to react to the new regulations.

As a firm, we will rely on our culture, our track record of execution, and our commitment to our clients, shareholders, and the public at large to guide us through this period of change.

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

Guy Moszkowski, BofA Merrill Lynch.

Good morning, David.

I was hoping that maybe you could follow up a little bit on the comments that you just made about Dodd Frank.

Obviously, as you said, we have all sort of made some assumptions and attempted to quantify.

But can you give us a little bit more of a sense of what business model changes you might be contemplating or planning in order to comply in the allotted time frames?

And maybe you can elaborate a little bit on things like changes to cost structure, capital release and the like.

Guy, you know, it's very hard to do that.

I don't like to make -- give you numbers where I don't really have the facts.

As you know, while the legislation was passed and I expect will be signed by the President shortly, the actual rules are going to be written by the regulators.

They are not going to be written for probably 15 months.

Then the transition periods as you know for many of the businesses are quite long, in some cases up to five years beyond that.

So it is just extremely hard for us to quantify right now.

We have quite a number of people looking at this.

We are looking at all the potential changes that might happen and as more information unfolds, we will make the appropriate changes and hopefully move forward as fast if not faster than anybody.

But to quantify that now, I would just be making up numbers.

Well, I'm not even necessarily looking for quantification, like maybe if you could help us understand where in the early going here you are thinking that maybe cost structures could be -- not by how much but where you think cost structures might be able to be managed down.

Also, are there areas like balance sheet investing where maybe investors are assuming that there's not really anything you are going to be able to do going forward beyond the 3% of Tier 1 where maybe there are ways that you are interpreting the regulations to allow you to continue in some of those types of businesses?

I think we are going to have to wait and see what the actual rules say.

I think it's just too early for us to tell.

Okay, fair enough.

In terms of headcount, as you mentioned, you are up 3% in the quarter.

And I was wondering if you could give us a sense for where you actually are adding people at this point.

Is it more support or production?

And just sort of by line of business.

Sure, and this is not exclusive but probably the places the business concentration are our investment management division and some of the support areas given some of the regulatory requirements as well as just the importance we place on risk management.

But it's not exclusive to that.

It's other places as well.

But those are probably the biggest areas.

And I would say it's more outside the US than in the US as well.

And then just as a final question, you mentioned adding headcount in asset management, but as you also pointed out, there were some outflows.

If you actually -- I know this is always a dangerous exercise, but if we annualize the equity outflows in particular, it was a pretty significant percentage, more than 20% of beginning of period balance.

And I'm just wondering if there are some performance issues there, if there were any issues perhaps related to the SEC action, which of course has been resolved, or whether there is any color you can give us on what was going on there?

Hopefully you should not annualize those.

That would not be good and it's certainly not what we expect at all.

The one thing I would say, and you can see this by looking at revenues versus AUM.

Some of the equity outflows were very, very low fee paying outflows.

And so while the headline AUM decline was not attractive, the actual effect on revenues was quite small.

Then just let me throw in one more on capital management, if I might.

Conspicuous by its absence this quarter was any kind of share buyback and that's hardly surprising given what was going on with the SEC and everything.

But now that that has been resolved, should we consider it probable that you would return to a more normal kind of capital management exercise?

I think we'll have to -- we will evaluate the environment as it unfolds and we will make our decision over the course of the quarter.

Thanks, David.

I appreciate it.

Howard Chen, Credit Suisse.

Good morning, David.

On the regulatory reform, sometimes businesses have a way of evolving before the final rules are in place.

I guess on that note, are you seeing any material human capital shifts or outsized departures from some of the most -- more sensitive areas like derivatives or principal investments?

No, but it's very early.

But no, there's been really nothing substantial that's happened.

Okay, thanks.

And then on principal investments, given the equity market depreciation during the quarter, I would've thought we would have seen more in the way of markdowns within the equity like portion of the portfolio.

Could you walk through some of the trends you are seeing within that portfolio and why maybe that didn't occur?

Yes, I actually think there were some declines in the public securities that we had in the principal investment portfolio, but we also had some gains.

I think what people weren't thinking about was we had some gains that were unique to our portfolio because I think we invested pretty well.

We had some situations where we sold some assets.

We had some situations where assets were taken public and so those resulted in some pretty meaningful gains which offsets some of the losses on the mark-to-market on the public securities.

Great.

And then within investment banking and sales and trading businesses, David, clearly it seems like a pretty challenging environment for everyone within the industry.

But just curious if you could touch on competitive landscape, kind of the state of play of competitive landscape and how that's evolved over the past few months.

I think you said it well.

I think it is a very challenging environment.

That of course could change in either direction, and as you know, the environment and sentiment tends to change rather quickly in either direction.

Not that I think it's going to.

I don't know if it will or not, but it can in either direction.

And look, I think we have a lot of tough competitors out there and I think everyone is in the same boat right now.

Sorry, maybe just one clarification on that, David.

I guess if we rewind a year ago, clearly we are speaking about the scarcity of risk capital in the world.

Where does that stand today when you think about being a dealer of size and importance within some of these very meaningful markets?

I think some of the firms that were more hesitant to produce risk capital have -- their financial results have improved, their financial status improved.

So I think they might be more willing to.

I don't know for sure because we just finished a quarter where there was really very little call for the provision of risk capital because our clients really weren't doing very much.

I think when things pick up again, which they will eventually, it's just a question of when, I think we will have to see [them].

Okay, thanks.

That's very helpful.

Chris Kotowski, Oppenheimer & Co.

Yes, hi, if I can go back to the reg reform bill a bit, there are any number of now successful publicly traded private equity firms out there and it seemed like the one thing that was fairly clear in the Dodd-Frank bill was a 3% limit.

Granted there's a long phase in time.

But is there anything in the way that you manage the private equity businesses that would prevent you from putting it into an independent entity that could be spun out to your public shareholders?

I don't think there's anything in the bill that would prevent that, but that's not currently part of our plans.

We will assess it going forward.

I think it is pretty clear that we would have to limit our investment to 3%.

That would be a change in the way we run the business and we are going to assess what we decide to do going forward with -- understanding that we have that limitation.

Okay, thanks.

Michael Carrier, Deutsche Bank.

Thanks, David.

Just more -- I guess not on the regulation, but more how the management team and the Board thinks about it.

So given that you don't have all the answers and it's going to be studies and it's going to be years before we really figure this out, how does the Board and the management team think about the current mix of businesses, future mix?

And probably most importantly, just when you are allocating capital, what are the expected returns to continue to invest in businesses versus when you think it makes sense to return that capital to shareholders?

Well, as I have said before, our mix of business is not necessarily driven by management or the Board sitting back and saying, okay, we would like to have X% in this and Y% in this.

A great portion of the way our mix of business unfolds is driven by what our clients want.

In quarters where there's more of a demand for risk capital, you might see more revenues coming from the trading businesses.

In quarters where there's more demand for M&A and there's a higher value, you might see more of the mix coming from there.

So I think it really is driven by what our clients are demanding from us as opposed to us saying let's concentrate more here or there.

We do allocate people and resources to various businesses, but again, even that is primarily driven by what our clients are demanding from us.

So I think you should always, always keep that in mind.

It's very, very important and as far as what returns we are looking for from businesses, at least for now, that has not changed.

Okay, and then given the regulatory environment and then just the growth outlook in the different markets, it appears that Asia, and maybe some of the emerging markets will continue to be beneficiaries.

You guys have been investing in those areas.

I guess just when you look forward, more incremental investment into those markets and any granularity in terms of the businesses where you see the most opportunities?

No question that we are investing in the developing markets.

We have said many times that -- when we chased GGP around the world, that in periods and places of better economic growth, that will be better for our business because there is just more activity.

When economies are growing, our clients want to do more, whether they want to buy companies, sell companies, issue equity, issue debt, hedge risks, there's just more activity in that environment.

And I think while it's not going to be a straight line, it's pretty clear that the developing markets are going to have over the next medium-term higher growth than the developed markets.

So not at the expense of the developed markets but directionally I would expect we will invest more in those markets going forward.

We have been doing it, as you know, and we'll continue to do it going forward and I think that would be across all of our businesses the same way we do in every other market.

Okay, just a final one.

On the trading results, across FICC and equities pretty weak.

We are seeing that across the board.

When you look at May, whether it was the volatility in the equity markets, you guys taking the other side of clients or just the stuff that was going on in Europe, obviously a challenging environment.

Any granularity there whether it's in a different products or the different regions?

More from a sense of how much of it was reduced client activity versus just a very challenging environment where you either spreads [gapped] out or just on the principal side, markets went against you.

It was very, very largely reduced client activity.

One of the interesting things about the second quarter given how much markets declined and spreads widened when you compare it to -- not to say they were the same, but like the fourth quarter of '08 or something like that and with us and best I can tell looking at others too, although I can't really see inside them, you just didn't see a lot of losses.

It was really driven by lack of client activity and lack of revenues.

Okay.

Thanks, David.

Roger Freeman, Barclays Capital.

Good morning, David.

I guess just first on the equities trading line, so you are faced probably reasonably often with sort of directional trades that clients are taking and you are taking the other side of it and risk management is usually quite good in sort of managing around that.

So I guess my question here is on the [VAR] point, were you taking a position that VAR was not going to widen, was not going to blow out, and that's why you didn't hedge that out?

I would say we didn't hedge it fast enough, let's put it that way.

You see and one of the things I mentioned was again, while it's not all-encompassing, our equity VAR from the beginning of the second quarter to the end of the second quarter declined almost in half.

So clearly we were reducing position size and hedging things but things spiked really dramatically really fast.

Right.

Okay and that was more -- that would have been more of a first sort of middle of the quarter issue, right?

First and middle of the quarter issue as VAR was blowing out?

In other words, you've resolved that as of now?

Suffice to say we reduced our position (multiple speakers) a lot.

Okay.

I guess, the second question, you had a lot on your plate this quarter between the SEC investigation and the legislation unfolding.

I guess I wonder is -- given the time that that's taken for you and other senior members of management, do you feel like there's been any loss of focus in terms of the positioning around the trading businesses, anything that -- it's got to be a huge weight to have lifted off at this point to have sort of both of these issues behind you.

I certainly hope not because that would not mean that senior management wasn't doing their job that well.

But I wouldn't say so.

Look, there's always a lot on our plate.

There's always a lot of things going on.

We always know that the primary job we have working for our shareholders is to manage the business appropriately to make sure that we are managing our risks correctly but also looking at growth and looking at what is going on.

It certainly didn't feel to me like there was any lack of focus.

Okay.

Do you think in the asset management business, was there any impact on GSAM in terms of being able to raise money maybe from pension funds that were -- had any concerns from a fiduciary standpoint given the SEC investigation?

I can't say there was none.

That would be overstating it and there might have been pension funds where we don't get to talk to the Boards or even where we do, where behind the scenes they were uncomfortable.

I would say by and large across the board, our clients were pretty supportive of us.

That doesn't mean that 100% of them were, but by and large they were across the board.

Okay, great.

And then just last question, do you know what percentage of the investments you have in your hedge funds and private equity funds that on an individual fund basis exceeded the 3% level AUM that you would have to potentially resolve?

(multiple speakers)

I don't know that number offhand but we can certainly get back to you with it.

Do you think by just conceptually that having a 3% limit on a private equity fund disadvantages you competitively in terms of raising money?

It seems like some of the private equity firms put more than that in their funds.

I actually think the private equity funds -- I think, and I could be wrong here, put mostly less than that in.

So I think we have always been really pretty much at the high end.

I think the biggest advantage we're still going to have is not the amount of money we put in but it is the strength of our franchise and our ability to source really attractive transactions for our clients.

That's not going to go away.

Okay.

All right, thanks a lot.

Mike Mayo, CLSA.

I have three questions on the SEC settlement.

First, what impact does the SEC settlement have with regard to lawsuits against Goldman?

We don't think it's going to have any material impact.

And why is that?

Because we think there is nothing new in the settlement.

And what impact does the SEC settlement have on other CDO investigations?

Well, I think we said publicly in our statement and I will just read it to you, we understand that the SEC staff has completed a review of a number of other Goldman Sachs mortgage-related CDO transactions and does not anticipate recommending any claims against Goldman Sachs or any of its employees with respect to those transactions based on the materials it has reviewed.

We recognize that as is always the case, the SEC has reserved the right to reopen those matters based on new information.

I think we would stick with that, Mike.

Then most important, what impact does the SEC settlement have on potential criminal action against Goldman?

I read in the paper recently that the Department of Justice may still pursue criminal actions.

Is that correct?

What's your read?

I think we have said and I would say nothing different, we have not heard anything.

We're not aware of any criminal investigation.

I guess the issue is when I talk to investors, there's a subset out there that are prohibited from owning stock of Goldman Sachs due to the threat of criminal action.

And this is not just one or two investors, it's several and across the country.

So what would you say to those investors who say I can't own Goldman Sachs stock because I think there might be a criminal investigation.

What would be a milestone when we know there's no threat of a criminal investigation?

I couldn't tell you, Mike, that there is a company in the world that does not have a threat of a criminal investigation at some point in time.

I mean, every company in the entire world has that.

All I can tell you is that we are not aware of any criminal investigation of Goldman Sachs.

All right, thanks.

Matt Burnell, Wells Fargo Securities.

Good morning, David.

A couple of I guess administrative questions.

In the first half, the compensation ratio has been 43%, as you noted in your comments, versus a 49% to 50% historical ratio.

Should we start thinking about a more permanent move down to the mid to low 40% range?

What I would say and I said this at the beginning of the -- at the end of the first quarter, is obviously it's an accrual, not the actual compensation paid.

It's our best estimate of what we would pay, but it's based on our performance, on the competitive environment, and on the external environment.

And any and all of those could change in either direction.

Okay, on the ICBC marks, does what occurred in the second quarter imply somewhat greater volatility in those -- in the ICBC-specific marks going forward?

Well, we as you know based on the accounting rules, once our restrictions are lifted and we no longer have any restrictions, we can't have any valuation adjustment.

And so it is now as we say in [accounting terms] P times 2.

And so it's going to be directly tied to the price movement and that's it.

Okay, then one final question.

Was there a [DBA] benefit to the trading results this quarter versus the $100 million that you estimated last quarter?

Yes, it was about $400 million and it was largely in FICC.

Great, thanks very much.

Douglas Sipkin, Ticonderoga.

Jeff Harte, Sandler O'Neill.

Good morning.

You mentioned the backlog being up sequentially, and I know the backlog can be dubious.

But what drives the increase?

Is it actual kind of more activity levels waiting to happen or is it a lack of deals being canceled or executed?

What's driving the increase versus the first quarter?

Well, backlog increase is from more -- remember, our backlog is fee-based, not size of deal based, so clearly there are more fees in the backlog.

I'm not sure I would say dubious, but it's not necessarily all encompassing because remember there are a number of things that could get into backlog -- that could executed that never get into backlog, probably not merger deals.

Merger deals virtually always get into backlog but things like equity and debt underwriting if they are done on an accelerated book builds or overnight deals would never get into the backlog.

It's also certainly possible deals in backlog don't happen based on market movements, and I would say certainly that is the -- the equity underwriting backlog is most sensitive to that, where markets decline dramatically, then a lot of those deals would not happen.

The increase was probably roughly equal between mergers and equity underwritings and we will have to see what happens going forward.

Okay, because we continue to hear of kind of conversations and dialogs, but actual kind of deals working their way to the backlog enough to have an increase is good to hear but I suppose a little surprising.

It is, and I think I view that as a positive.

But as we've talked about, if confidence -- if markets don't stabilize and confidence isn't okay, then they're not going to end up happening.

But it's good that at least they are being talked about and people want to do them if the markets allow.

Okay, and as we think kind of in general about trading, I suppose it applies more to equities just because of the results this quarter.

Looking back at a tough second quarter, how much of the tough second quarter was call it price declines with things like volatility going against you versus just a lack of activity?

As we kind of look forward if activity levels aren't getting a lot better, could there be some relief from non-price declines?

I think the great majority was lack of activity, the very great majority, lack of activity.

Finally, just kind of sequential outlook wise, May was very tough.

Did activity levels get better in June and specifically better in the more important products?

Have you seen anything go on in what's usually a very quiet month of July?

You know, it's hard to assess and to go month by month is a dangerous thing.

I would tell you maybe they got a little better in June but that's not because June was active.

It's because May was so inactive.

June was still a very inactive month and this can turn on a dime, as you know.

Sentiment can change very, very quickly, but it has not turned yet.

Okay, thank you.

Carole Berger, Soleil.

Hi, David, good morning.

My question is sort of related to the Dodd-Frank bill and the issue of capital.

Is there anything in the Dodd-Frank bill that would affect how you manage capital over the near term?

I have been assuming that any actions that you might take given the bill would either free up capital or be capital neutral.

I think that's right, Carol.

Look, let's take the easy that someone asked about before.

There is a limitation on the amount of private equity having funds of 3%.

So it's likely that we will have less of our capital invested in those funds going forward.

That certainly frees up capital and that's the easiest one.

But we will have to look at some of the other ones as well.

And I think you are right.

I think most of the provisions are either capital enhancing in a way or capital neutral.

Guy Moszkowski, BofA Merrill Lynch.

Hi, David.

I just wanted to follow up on the question about the ICBC position and the potential for more volatility there.

Can you also review for us what restrictions or lack thereof you now face with respect to being able to hedge that position?

We have no restrictions on that position right now.

It is unrestricted completely.

So presumably you could put in place hedges at this point which would limit that volatility?

We could or we could sell certain pieces of it.

We could sell all of it.

We're not restricted, but I would tell you we expect to be a meaningful investor in ICBC going forward.

It doesn't mean we are going to hold all of it or not hedge all of it but I would expect it will be meaningful going forward.

Great, thanks very much.

Steve Stelmach, FBR Capital Markets.

Good morning.

In regard to your 20% ROE target and given the fact that Dodd Frank is pretty tough to quantify, is it safe to say that a 20% is under review or is it more a matter of just how you get to that 20% may change over time rather than the 20% (inaudible)?

All I would tell you is first of all, we've always said it is over the cycle.

Not for any particular quarter or year.

We are always looking at it and we are always trying to figure out how we're going to get there.

So there's nothing different because of the new bill.

Okay, then following up on capital, Dodd Frank sounds like it is at least palatable.

What about Basel III?

What is the latest there?

Look, I think there is still a lot of questions about what's going to come out.

As you know, there are two different Basel proposals, one that's called Basel [II.5] and one that's called Basel III.

I think that there are -- Basel II.5 had some tough, tough requirements that seem to be being worked out that are manageable.

I think Basel III has some requirements that I would characterize as probably not workable for the system.

But we will see how they work over time.

Great.

Thanks, David.

Ron Mandle, GIC.

Thanks, my questions have been answered.

Thank you.

Douglas Sipkin, Ticonderoga.

Yes, hi.

Good morning, David.

It's good to be back.

Two questions.

The first really more big picture.

Is there anything that you guys can do at any point in the future, maybe not now but down the road to get away from having a bank charter?

If so, would you consider it?

We have no plans to do anything different with our bank than where we are now.

We will always -- I would never tell you we wouldn't consider anything.

We'll see how the regulations unfold, but I would tell you our expectation is that there will be regulations not just for banks but for systemically important financial institutions that we think are going to be largely similar to bank regulations and we're fairly certain we are going to be one regardless.

Okay, that's helpful.

Thank you.

And then the second question related to FICC, obviously a challenging environment across the board.

Any notable change in bid ask spreads this quarter versus last or are we now sort of at the normalized level with all the competition factored in?

Again, you know I'm hesitant to use the word normal in anything, but I don't think there was that much of a change this quarter.

I think it was really just less of it.

Great.

Thank you.

(Operator Instructions).

I would now like to turn the conference back to management for any closing remarks.

I would like to thank everyone for joining us on the conference call.

If you have any follow-up questions, please feel free to contact us in the investor relations department.

Otherwise enjoy the rest of your day.

Ladies and gentlemen, this concludes today's Goldman Sachs second-quarter 2010 earnings conference call.

You may now all disconnect.