高盛 (GS) 2011 Q3 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the Goldman Sachs third-quarter 2011 earnings conference call.

Also, this call is being recorded today, Tuesday, October 18, 2011.

Thank you.

Mr.

Holmes, you may begin your conference.

Good morning.

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

Welcome to our third-quarter earnings conference call.

Today's call may include forward-looking statements.

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

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

For a discussion of some of the risks and factors that could affect 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 2010.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our Investment Banking transactions, backlog, capital ratios, risk weighted assets and global core access, and you should also read the information on the calculation of non-GAAP financial measures that is posted on the Investor Relations portion of our website at www.gs.com.

This audio cast is copyrighted material to Goldman Sachs Group Inc.

and may not be duplicated, reproduced or re-broadcast 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 third quarter-results and then take your questions.

Net revenues in the third quarter were $3.6 billion.

Net earnings were a negative $393 million, and earnings per diluted share were negative $0.84.

The third quarter continued to be dominated by concerns surrounding the weakened state of the global economies.

The market was particularly focused on sovereign risks within the Eurozone, specifically the risk of contagion from smaller GDP countries like Greece to larger GDP countries.

Market participants are also focused on how heightened sovereign risk will impact the banking system within the Eurozone and beyond.

The uncertainty surrounding the potential policy responses to these complex issues has amplified the level of concern among market participants.

The price performance within European markets was a strong indicator of market fears with the euro stock 50 down 23% during the third quarter.

As would be expected, the Eurozone concerns heightened worries regarding the implications of these challenges on economic prospects in the US.

Similar to Europe, equity and debt markets reflected increased fears about the US economic outlook.

The S&P 500 declined 14%, and the VIX increased to its highest level in more than two years.

Ultimately economic concerns within Europe and the US permeated investor sentiment within growth markets as demonstrated by Hang Seng, Bovespa and Shanghai Composite posting quarterly declines of 21%, 16% and 15% respectively.

Faced with a challenging global economic outlook, CEO confidence and investor sentiment remains under pressure.

Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute or our Asset Management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives.

As we have said in the past, the firm's opportunity set begins with a client's decision to transact, a decision which has historically been correlated to a growing economic environment.

A growing economy is also correlated to increasing asset values and positive revenues from our Investing and Lending activities.

Not surprisingly, the macro challenges in the quarter drove lower levels of client activity in Investment Banking and certain FICC businesses and a significant decline in asset values within our Investing and Lending portfolio, resulting in a third-quarter loss.

Despite the negative revenues in our Investing and Lending business this quarter, we have a strong track record as an investor and our positions in the product of long-term investment decisions.

We entered into these positions with a focus on meeting our clients' needs for financing, supporting key strategic relationships and generating long-term returns for our clients and shareholders.

The firm also has a full understanding of the fair value implications of these investment decisions, and our third-quarter results reflect falling asset prices and are unrealized.

Given the significance and complexity of the economic issues facing governments and regulators, we are, of course, cautious about the near-term outlook for our business.

And while we are clearly disappointed about our third-quarter results, we remain optimistic about the medium and long-term outlook for Goldman Sachs.

Our global clients continue to place significant value on our services whether acting as a merger advisor or a financial intermediary.

We will continue to focus on serving our clients' needs and managing shareholder's capital prudently, a commitment which we believe is essential to our long-term value proposition.

I will now review each of our businesses.

Investment Banking produced third-quarter net revenues of $781 million, down 46% from second-quarter results.

Third-quarter advisory revenues were $523 million, down 18% from the second quarter, reflecting an industrywide slowdown in completed M&A transactions.

We advised on a number of significant transactions that closed during the third quarter, including Petrohawk Energy Corp's $15.1 billion sale to BHP Billiton, Phadia AB's $3.5 billion sale to Thermo Fisher Scientific and GE Energy's $3.2 billion acquisition of Converteam Group.

We also advised on a number of important transactions that were announced during the third quarter, including Nalco Holdings' $8.1 billion merger with Ecolab, ING's EUR2.7 billion sale of its Latin American insurance and pension operations to GrupoSura, and [Dra Brazil's] $1.2 billion merger with [Hyia].

Third-quarter underwriting net revenues were $258 million, down 68% sequentially as the more challenging market backdrops significantly reduced new issuance activity.

Equity underwriting revenues of $90 million were down 76% from the second quarter, reflecting lower volumes in a volatile and declining equity market.

Debt underwriting revenues decreased 61% to the $168 million, reflecting sharply lower leverage finance activity and more muted investment-grade issuance.

During the third quarter, we participated in noteworthy underwriting transactions, including ANZ Banking Group's $1.4 billion convertible preferred offering, Carlyle Group's $1 billion sale of a portion of its equity stake in China Pacific Insurance Company, and Intels' $5 billion debt offering.

Our franchise remains strong as demonstrated by year-to-date global lead table standings where we rank first in announced M&A, equity and equity-related common stock offerings and IPOs.

Our Investment Banking backlog increased compared with the end of the second quarter of 2011.

Turning to Institutional Client Services, which is comprised of FICC and equity client execution, commissions and fees and security services, net revenues of $4.1 billion were up 16% from the second quarter as activity levels improved in certain businesses despite the continued difficult operating environment.

FICC client execution net revenues were $1.7 billion in the third quarter, up 8% from the second quarter.

Our rates business increased sequentially as client flows improved in the midst of higher central bank activity and a more volatile interest rate environment.

Commodities improved relative to a difficult second quarter as elevated volatility and macro uncertainty drove higher levels of business across all of our client segments.

Foreign exchange revenues were down sequentially as volatility in certain markets proved difficult to navigate.

Credit continued to be challenging as a lack of new issuance, wider spreads and customer risk aversion created a difficult backdrop for hedging and inventory management.

Our mortgages' results reflected significantly lower levels of client activity and the negative impact of asset price declines, particularly in CMBS.

In equities, which includes equities client execution, commissions and fees and security services, net revenues for the third quarter were $2.3 billion, up 22% sequentially.

Equities client execution revenues were up 45% to $903 million due to increased client activity in certain equity businesses and effective risk management of customer-driven positions in the more volatile environment.

Commissions and fees were $1 billion, up 18% from the second quarter on higher market volumes.

Security services net revenues of $409 million were down 5% from the seasonally stronger second quarter.

Turning to risk, average daily value at risk in the third quarter was $102 million, largely flat relative to the second quarter.

Our quarter-end VAR was higher than the average, largely due to significantly greater volatility and interest rate products.

Now I will review Investing and Lending, which produced negative revenues of $2.5 billion in the third quarter.

The firm's Investing and Lending activities across various asset classes, primarily including debt securities and loans and equity securities, are included in this segment.

These activities include both direct investing and investing through funds, as well as lending activities.

With equity market indices such as the MSCI down 17%, ICBC down 35% and the high yield CDX Index wider by more than 350 basis points, our longer-term investments posted significant mark-to-market losses for the third quarter.

Our investment in ICBC produced a greater than $1 billion loss.

Other equity investments generated a $1 billion loss across our portfolio of fund and direct investments.

Losses from debt securities and loans were $907 million, primarily driven by wider spreads across our portfolio.

Other revenues of $477 million consist primarily of operating revenues from our consolidated investment activities.

In investment management, we reported third-quarter net revenues of $1.2 billion, down modestly from second-quarter results.

Management and other fees were 3% lower sequentially at $1 billion.

During the third quarter, assets under management decreased $23 billion to $821 billion, largely due to market depreciation and equities.

Turning 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 revenue ratio of 44% for the third quarter of 2011, a ratio consistent with the compensation accrual in the first half of 2011.

Third-quarter non-compensation expenses were $2.7 billion, 11% higher than the second quarter, primarily due to higher brokerage, clearing and exchange fees as a result of greater equity client volumes and approximately $100 million for the UK bank levy.

Total staff at the end of the third quarter was approximately 34,200, down 4% from the end of the second quarter.

Our effective tax rate was 30.3% year-to-date.

Given the significant uncertainty regarding the prospects for the macroeconomic environment, there is an understandable focus on the strength and stability of financial institutions.

We, like many other US financial institutions, took the lessons from 2008 to meaningfully improve our risk profile.

We significantly reduced risk exposures, while materially increasing our capital base, resulting in lower leverage and improved risk adjusted capitalization.

Our strong capital levels have also positioned the firm to prudently manage our capitalization in the current environment with the firm repurchasing 18.1 million shares for approximately $2.2 billion during the third quarter.

Liquidity is the lifeblood of any financial institution, and given the challenge of economic activity, our liquidity levels remain near historic highs.

We have also continued to take a prudent approach to our European region exposures.

At the end of the third quarter, our gross funded credit exposure to all sovereigns, financial institutions and corporates in Portugal, Ireland, Italy, Greece and Spain was $4.2 billion, which only includes the benefit of cash and US Treasury collateral.

Our exposure net of hedges was $2.5 billion.

Over the past two quarters, the operating environment has been dominated by macroeconomic concerns, which have translated into generally muted client activity and significant asset value declines in the third quarter.

In the near term, several concerns need to be addressed to improve market sentiment and drive higher client activity levels across our franchise.

While we have confidence that the environment will eventually improve, timing is uncertain.

We are prepared to stand by our clients and will continue to address their challenges while providing best-in-class service.

Ultimately our ability to adjust and effectively respond to our clients' needs will drive long-term returns for our shareholders.

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

Guy Moszkowski, Bank of America.

At some of your competitors, we have seen some fairly chunky debt value adjustments for structured products.

I know in the past you have always had a policy of hedging these out, but sometimes there has been something of an impact, and I was hoping maybe you could tell us what it was.

If you have continued your hedging policy, maybe you can just remind us about what you do.

Sure.

As you know, we do try and hedge that exposure as best we can.

It was a more significant number than usual this quarter, though still pretty modest.

The total amount was $450 million roughly, and roughly $300 million of that was in FICC and roughly $150 million in equities.

And maybe you could just remind us of what you do to try to keep those numbers from being the kind of outside numbers that we have seen elsewhere?

Well, we try as best we can to have close to offsetting positions against our own credit spreads.

Not in our own names because we cannot do that, but in whatever names we can.

So you use a basket of some sort of a peer group?

Yes.

I wanted to follow up with a Volcker question if I might.

Obviously there is a draft out.

It has more questions than answers, and so it is early days.

But I was wondering if you could give us some thoughts on any changes in your operating model and compliance regime that you are thinking about at this point given what you have seen?

Guy, you kind of started off by saying most of what I was going to say, which is it is early days.

The proposed rule, as you said, leaves more questions than answers.

In fact, as we add it up when you add all the questions, there are over 1000 questions that need to be answered.

We continue to work through it and work constructively with regulators.

We have not changed anything at this point because, as you said, more questions than answers.

We don't know where it is going to come out.

And in terms of your interpretation of what you did see in the context of your Investing and Lending business, do you anticipate material restrictions there?

As far as we can see, as you know, we have already shut down our walled off proprietary business, so that is gone.

We think that any investment in funds will be limited to 3%, and other than that, more questions than answers.

Fair enough.

I have a final question on Basel III and your Basel III basis Tier 1 common target that you alluded to in the past of getting to around 11%.

Obviously you have deployed a fair amount of capital through share buybacks, which you talked about.

It seems like GDP growth, as you also alluded to, is weak in the medium term.

That seems to dampen earnings prospects.

Are you still targeting an 11% Tier 1 common target Basel III basis given all of that?

Let me just clarify.

I don't think we ever said we were targeting 11% Basel III capital ratio.

I think what we said was the best calculation we could do right now looking out using consensus earnings estimates, passive -- you know, no active mitigation, just letting things roll off; at the end of 2012, our best calculation that we would be at close to 11%.

That was not our target.

In fact, I think that is higher than what our target would probably be.

I think, if we did that same calculation today, which, of course, is not necessarily a meaningful calculation because most of these requirements are not in effect in 2012, the number would be closer to 10%, given largely, as you said, GDP down, earnings estimates down.

But we still have round numbers best we can tell with all the caveats, and it would be roughly 10% at the end of 2012.

Got it.

Thanks very much for the update.

Appreciate it.

Glenn Schorr, Nomura.

I guess the question is on equity and risk weighted assets.

In the past you have shown us that about $32 billion across Investing and Lending, over-the-counter derivatives and mortgage trading and securities and trading, and the question was, I guess, with some of the regs changing and then just also just the real weak environment, how quickly does some of that equity and risk weighted assets get freed up?

Is there a cyclical component to it, or is most of that given to us for illustrative purposes of, if something changes in the regulation, then that is how much can get freed up?

It was the latter.

We were just doing the calculation of, if that whole segment went away, how much capital would be freed up?

It was not a calculation of, what was going to be freed up when.

There was just so much talk that the whole segment would go away.

(multiple speakers) let people know if you really think the whole segment is going to go away, here is how much capital is going to be freed up.

Understood.

On Investing and Lending specifically, you had mentioned obviously that the losses in the quarter are all unrealized.

I'm assuming that the private pieces might have had bigger marks because they passed some threshold.

So I wondered if you could provide a little color on that?

And then the flip side is, knock wood it is early, but so far MSCI is up 6%, ICBC is up 12%.

Do the same 10% rules apply after the recent markings, or do we have to wait for the new Q?

Well, a couple of things.

First of all, I would say that there were -- as you said, it was all unrealized as far as the losses.

In fact, there were very modest realized gains on some things that we sold, which actually offset it.

As far as the 10% numbers go, there will be slightly lower because the base will be lower because we lost money last quarter in this, and so the overall amount is lower.

And so it is 10% off a lower base, but the calculation is going to be the same.

Okay.

That is cool.

And then last one, I guess, just to try to dig a little further on Volcker -- and I know we don't want to go too far -- but I will give you my interpretation, and you tell me if I'm crazy.

In the current form the way it is written, the specific part in market-making that talks about having a very limited amount of revenue to be made from price movements of the underlying security and they want it all to be fees, commissions and bid ask, in my view that is just not workable in the current market structure, and that would actually be very disruptive.

Is that top of your list of questions to ask and things to go through during this comment period?

It is very hard to pick one out that would be top of the list.

So I mean some of the issues we see are -- and you have kind of a little bit alluded to this as the guy before you -- at least as it is now written -- I will give all the caveats, lots of questions -- there is tremendous operational burden and cost of compliance for the entire industry.

Some or all of that would need to get passed through.

It could result in diminished liquidity.

That would hurt our clients and the markets.

And, you know, we are also focused on the competitiveness of the US financial institutions.

So I mean those are some of the questions at the top of our mind, but, as we have said, there is 1000 questions in there.

Right.

Looking forward to the White Paper.

Thanks.

Roger Freeman, Barclays Capital.

One question is, in the VAR components, I noticed that the diversification benefit was lower this quarter.

Is that a function of higher correlation across asset classes or that your business mix has shifted a lot more into rates, which -- and actually went up, and if you were more concentrated there, you would get less diversification?

I think you hit it more on your first part.

There is a much higher correlation between asset classes.

And, look, I want to emphasize on thing since you raised it, as I mentioned in the call, VAR was higher at the end of the quarter.

As you know, volatility -- VAR is a combination of position size and volatility.

Volatility was up dramatically as we went through the quarter.

I would expect, assuming we made no changes to positions at all, that our VAR would be fairly significantly higher in the fourth quarter than the third quarter.

Okay.

And then, I guess, maybe just tacking on that, what have you seen here in the last couple of weeks?

It seems like there has been some decline in volatility, some decline in correlation, especially across individual stocks.

Do you see that bringing any increased risk appetite -- (multiple speakers)?

I think it is too soon.

You know, we had a -- you think of what we have gone through in a little over two weeks, the first two days of the quarter -- or actually the first day and three quarters were horrendous from a market point of view, not (multiple speakers).

Then things got a little better and were mixed.

Last week big market rally.

Yesterday a big market decline.

So I think there is still a lot of uncertainty, and a lot of it is based on who says what on what day.

Okay.

And then Investing and Lending, can you just remind us a bit on the debt securities, however you can talk about it?

Sort of composition of investments, is this mostly distressed debt structure?

What is in this mostly?

The main thing is it is really a combination of mezz loans.

You know we have a fairly large mezz fund and senior debt.

So it is really -- those are the two biggest components would be senior debt and mezzanine debt.

There is also some distressed loans in there, but the biggest components would be mezz and senior loans.

And the last question is on Basel -- is about Basel III.

The mitigation component of that, have you -- as you have gone through this, have you found additional ways to mitigate?

Also, how much of the roll forward is predicated on monetizing investments in investment and lending?

The answer to the -- let me do the last question because it is the easiest.

It is none.

Look, we continue to work through the Basel III numbers.

We are really at the early stages of doing it.

Because, as you know, these rules don't take effect for several years.

So we are focused much more on running the business today, but we do have groups of people that are beginning the look through of how we can mitigate some of the Basel III impacts.

Michael Carrier, Deutsche Bank.

One more question on the Investing and Lending.

So, if we look at the balance in that business and granted it is a quarter late, it is going to be lower.

But I think it was around $50 billion.

So if we think of the mix of the products that are in there, so mezzanine lending, you mentioned the senior debt, private equity, are you still expecting something like a 10% return in that business given the capital requirements?

And so, if we just translate it out of the $50 billion, still like a $5 billion number over the long run, obviously private equity returns have been stronger than that over time.

But I'm just trying to get a sense of where you think the returns in that business still can be in this environment?

It is a very hard question.

I think over the long run we would be disappointed with a 10% return in that business.

Obviously, as you said, in any quarter, it can be extremely volatile and up or down a lot more than that.

But over the long run, we would be disappointed with a 10% return, and our history has been a lot better than a 10% return.

Okay.

And then just based on the current capital levels, you know what you are seeing here in this environment and maintaining certain ratios.

The buy-backs ramped up.

Just in terms of outlook, what you have approval for, is there any way to gauge that going forward in this environment?

Look, it is the toughest question.

We have approval to do kind of what we feel we might want to do in this environment.

As we sit here today, it is a very stressed environment, which causes us to want to conserve capital, but we look at our stock price, and we are pretty convinced that looking back we are going to wish we bought back a whole lot of shares at this price.

And so we are just going through it as the quarter goes, and we will decide what we think is prudent as we go forward.

There is no magic answer to it.

It is going to be judgment calls as we go through the quarter.

Okay.

And then just on Europe, you gave the updated exposures.

When you think about your counterparty risk, when you think about the ways that you manage that risk, requiring collateral, marking it daily, hourly, going to those clients to get collateral if you need it, I'm just trying to understand how when you are in that stressed environment, and this is more the industry, but how do you manage those risks when you can see what your exposure is to one counterparty, but it is very difficult to see what their exposures are to other counterparties?

That risk management does not start when you enter a stressed environment.

It starts as you enter into transactions.

We have credit limits and we look forward, and the collateral that we are getting tends to be under agreements that were put in place when transactions were first entered into.

Very difficult.

When the environment gets stressed, you go to a client and say, hey, we have changed our minds.

Now we want collateral from you.

So this is really part of our ongoing risk management.

We make judgments about how much exposure we should take to individual counterparties, but also to industries, to regions, to countries, etc.

We set limits on those bases, and we require collateral on those bases.

Okay.

And then just last one on the expensive initiative, any update there maybe on timing and just given the outlook whether it is from a macroeconomic outlook or regulatory pressures, and more so I would say on timing just in terms of where you guys are at in terms of achieving those synergies?

We are working through them.

We expect to be done by the end of the year.

Howard Chen, Credit Suisse.

Just back on Europe, I was hoping to dig deeper on the opportunity set as you all see it.

If we re-wound to the 2008/2009 crisis, the firm benefited from outsized share gains and sales and trading, but then the distressed opportunity really never came to the forefront.

So, I guess, when you compare and contrast Europe now to what we all went through in the US, I mean how are the environments and the opportunities similar or different as you see it?

I think it depends on what ultimately comes out of the powers that be in Europe.

There is a chance that we might have an opportunity to help some of our clients raise capital.

But we don't know what is really going to come out.

There is a chance that we might be able to help them sell assets or possibly buy some of the assets.

You said it did not really materialize in the US.

There were some.

It has not really materialized in Europe, but we may see some.

So I think those are some of the opportunities that might happen.

But I think that probably the biggest opportunity for us is, if they reach some resolution which gives the markets comfort on how things are going to go in Europe, that you would just see a higher confidence level around the markets and then more activity in general, which would be best for us.

Right.

And I know to that point client activity is weak, but have you seen any benefit from excess spreads or a pullback in risk capital from competitors in the region?

Not really because there is just not enough activity for it.

Great.

And then we saw a lot of volatility during the quarter in CDS spreads for financial services firms.

Just outside of DVA, CVA, just can you remind us on what CDS spreads actually mean to you operationally or are there any meaningful changes in client behavior either positive or negative worth noting?

The answer is, other than we hate watching them widen, they don't really mean very much to us.

It did not really affect our funding.

There was not a meaningful change in client behavior.

We are in some ways confused and disappointed when we see them where they are given all the numbers they talked about.

Given how strong our capital is, our liquidity is, the maturity of our funding and the balance sheet, we kind of scratch our heads a little bit.

But it really has not affected anything other than our emotions.

We don't like seeing it, but it has not had a big effect.

Okay.

It makes sense.

And then finally, you noted equities was helped by the volatility, and we can see that equity-specific VAR went down.

Just maybe helpful, could you differentiate between why volatility is a tail wind in a quarter like this versus maybe working adversely in a quarter like the second quarter of last year?

I mean has anything meaningfully changed in your equities business as you see it when you compare and contrast those two environments?

The second quarter of last year was really, as I think we talked about then, really just specific positions that we got.

Clients wanted to be in something.

We took the other side and could not get out of it.

It was really just a specific issue with specific positions as opposed to this quarter where there was just volumes and equities were pretty high, and it was one of the businesses where there was more activity and volatility led to more activity, and that was beneficial to us.

Betsy Graseck, Morgan Stanley.

A couple of questions, one on VAR.

Just as a follow-up, you indicated that end of period was higher.

Is that across the board or skewed towards any one asset class?

It is skewed towards the interest rate category.

Okay.

So the rest of them are pretty much in line with where the averages are?

Yes, I mean that would be my expectation, but remember, we're two weeks in.

So a lot could change as the quarter goes on.

Sure.

Okay.

And then can you just remind us why you are not able to hedge on the I&L segment?

It is a very difficult question.

A lot of that is our investment in our funds.

That is a business where our clients basically want to be long equities, and we are investing alongside of our clients.

So you could hedge if you wanted to?

There is no prescription keeping you from hedging?

There are some places we can and some places that we could not.

So, for example, we are free to do what we want with ICBC at this point.

It is completely free.

Some of the equities we could hedge, but a decision has been made not to in that segment.

Kian Abouhossein, JPMorgan.

A few questions.

The first one is -- and you discuss it briefly -- the issue of CDS in your CDS widening.

At the same time, you are buying back stock.

So how should I read this?

What is the fixed income market telling you that you obviously don't think is an issue?

I'm just trying to understand what is the difference from your perspective buying back stock and the CDS widening?

I'm sorry.

I'm not sure I understand the relationship.

So the funding market is incrementally getting more concerned or more negative in respect to the spreads.

That is what the spreads are telling us of Goldman.

At the same time, you are very confident about your capital position and buying back stock.

So what I'm trying to do is square the two movements.

Look, as I answered before, it is one of the reasons why -- in a way, I'm a little confused because the CDS spreads don't seem to make sense to us given how strong our capital position and liquidity position are.

We made a decision as the quarter went on that our capital position and liquidity position are strong enough that we could use roughly $2 billion of both our capital and liquidity to buy back stock given where our stock price was.

And, as I mentioned, as we think about this quarter, it is a decision that we are thinking about where it is a stressed environment.

So our natural tendency is to preserve cash and liquidity, even though we have a lot of both.

And yet we look at our stock price being where it is, we think it is extremely low and that it would be beneficial to our shareholders to be buying back stock at this price.

So, as I said, there is no formula for it, but it is a decision we make as the quarter goes on.

And if you look at the cash funding market against the CDS spreads that you are seeing, how do they differ?

Again, you are asking -- I mean it is a very good question.

CDS is a much more volatile market than cash.

So what we have seen is less day-to-day movement in cash than in CDS, but directionally cash spreads have widened like CDS has widened.

Maybe not the same, maybe not on any day the same amount, and not nearly with the volatility that CDS has moved both widening and tightening.

But certainly directionally our cash prints have widened as well, but on very, very little activity.

And then I compare your funding that I see on the screen relative to some of your money centered peers, which seems to be much lower, you are implying earlier in the question that it does not really seem to make a difference to your business.

Is that correct?

And is it also correct to assume that because you are not writing any long dated business, should there be long dated business that would make an impact?

It has had minimal impact on our business so far.

And would it be different if there would be long dated business?

We do some long dated business, and it might affect us versus some competitors who might have lowered spreads, but we also compete on execution as well, and our execution tends to be pretty good.

The last question is on counterparty risk.

Have you changed the way you look at counterparty risk?

Because clearly there is some concern about certain counterparties in the market, and hence one would assume that a counterparty has been constrained to certain parties or to certain segments geographically?

We have not really changed the way we look at counterparty risk.

We, of course, always evaluate our counterparties based on what is going on and decide where we do and don't want to take exposures.

I have mentioned many times in the past that vis-a-vis most financial institutions without regard to a view on credit, we do so much business back and forth with the other major financial institutions that we all tend to have margin agreements with each other to make sure that credit exposures to other financial institutions never get very large.

We had with our counterparties, our counterparties had with us.

So we are always making credit judgments as we go on, but the way we do that has not changed.

Okay.

And lastly, prime brokerage, how do you see balance movements at the moment or last quarter?

They have been relatively stable over the quarter.

We have had some ins and some outs, but relatively stable.

Matt Burnell, Wells Fargo.

Two quick questions.

One is, given the widening of your cash spreads, which I realize has not been quite as volatile as your CDS spreads, and your desire to maintain liquidity, have you thought about repurchasing some of the debt that trades currently in the market?

Again, a very good question.

It is something that we think about.

Given our focus on liquidity, it is not something that we do very often.

We make an active market in our debt.

If people want to sell us some, we buy it, and we tend to sell it out.

But it is something that we consider from time to time, but not in a very big way given our focus on liquidity.

Okay.

Just shifting the question a little bit -- and I'm sorry if you went through this; I jumped on the call a couple of minutes late -- I'm just curious about revenue trends across the geographies and if you can splitting out some of the trading issues, were there particular -- was there particular weakness in Europe and relative strength in Asia, or is that overthinking the concept?

I think from the trading business I think that is overthinking it.

I think we pretty much saw similar trends, not exactly the same, but similar trends really around the world.

Obviously our overall revenues in Asia were down a lot given the $1 billion loss in ICBC.

But, from a trading point of view, I would say the trends were relatively similar around the world.

Mike Mayo, CLSA.

So what is the constraint for share repurchases?

What is your authorization from the Fed?

I mean you are trading below tangible book value.

You say you want to buy stock.

How much can you buy?

We have not disclosed the authorization from the Fed.

When is the blackout period?

The blackout period ends tomorrow.

Ends tomorrow?

Yes.

And when did it start?

It started towards the middle of August.

Why so early did it start?

I'm sorry, middle of September.

I had a moment of going back to being in November at year-end for a second.

I apologize.

Middle of September.

Why not -- didn't it used to be the end of September?

Is that for you, or is that for everybody?

No, we blackout from about two weeks before the end of the quarter until our earnings release, so it is about a five-ish week blackout period.

Is there anything else you can do to I mean sell off something and buy back stock?

Based on solely your comment, you think it is a good investment.

It is probably a better investment than some other things.

Why not just downsize even more, free up capital and use that to buy back stock?

I mean how do you think about that trade-off?

The trade-off is what we think the business opportunities are going to be.

And while we are a little cautious right now, we are not so negative on our business that we want to sell off a lot of things and shut it down.

So we are still going to run our business.

We are still going to trade with our customers.

We are still going to have a balance sheet and have inventory.

But we are, as I said before, thinking about the trade-offs between being in a stressed environment and having a stock price that, as you said, is below tangible book and a fair amount below tangible book.

I know that someday we are going to look back and wish we had bought back more at this price.

The CDS has widened along with everybody else, and you say it is wrong based on your analysis of it --

I said it was confusing.

I did not say it was wrong.

Okay.

I don't believe markets are wrong.

I think it is confusing.

Well, Hat can you do to help narrow that CDS spread?

I don't think we can do anything to narrow the spread anymore than we can do anything to change our stock price.

The markets trade as the markets trade.

We try and make sure people understand what the extent of our liquidity and our capital and the conservatism of our risk management, etc.

And we know that over time our spreads will follow that.

In the short-term, there will be a lot of volatility.

There will be times of market stress, and we think it may not at times reflect the quality of the firm, but we are convinced that over time it does.

And then lastly, your pace of investing in Asia in emerging markets, emerging markets have pulled back a bit.

Have you had any change in your pace of investment?

Modestly but not very much.

We still think that the biggest medium to long-term opportunities are going to be in some of those growth markets.

While just like everything else, as the world slows, we might moderate the pace a little bit, but we are still going to be investing in those businesses.

Fiona Swaffield, Royal Bank of Canada.

Just two questions.

On the non-compensation costs, I know you gave some commentary stripping out brokerage and the $100 million.

But there still seems to be some growth to me, and there seems to be kind of a rather large other expenses number, even if I take out the levy.

If you would comment on that.

And my second question was on the fact your heads have gone down a bit more than your original plan, I think, that you gave in Q2, and you could talk more about staff numbers.

And the third issue is, I know you have talked a lot about the CDS and funding, but I am just wondering about the elevated senior debt costs, if I look at some of your issues out there and how you feel about any rollover you have got coming off any maturities and whether that means you just will not replace them at the current level, or how should we think about your senior funding?

I will try and remember.

I think I wrote them down, so I think I have got all three questions.

So if I don't, then remind me.

As far as other expenses, three things make up probably close to two thirds of the difference.

One is the UK back levy; a second is, as you know, and we announced, we bought the rest of Goldman Sachs Australia, which we have had in a partnership that used to be called JBWere now Goldman Sachs Australia.

So that now became consolidated.

And the third was the increase in our litigation reserves, which was not a big number, but when you look at the year-over-year change, you add those three things, it is about two thirds of the change and then assorted other things that make up the difference.

As far as headcount goes, so heads are down about 1300 from the second quarter to the third quarter.

We, as again you know, we sold our servicing platform, Litton, and we consolidated the rest of Goldman Sachs Australia as I mentioned.

The net of that was a decrease of about 800 heads.

So the decrease, excluding those two things, was about 500, and that was part of the expense initiatives that we talked about.

And the third thing on our debt -- again, that is something that we are just going to consider as the quarter goes on.

We will see what the opportunities are.

We will look at how much cash we have, how much funding, what our spreads are, and we will make decisions at the time about whether we want to replace maturing debt.

We don't have that much debt maturing over the course of the quarter, and we will decide as the quarter goes on whether we want to replace it or want to wait for a better time.

Could you remind us how much you have got maturing before the end of the year?

I think the plain vanilla debt maturing that is through the end of the quarter I think is around $5 billion.

If it is very different, we will come back to you.

Brennan Hawken, UBS.

Just one quick follow-up.

I don't mean to beat a dead horse here on the buy-backs, but if we -- should we assume after the end of the year that it is likely you will exhaust the share repurchase?

So, at least looking back, we can know what the authorization was from the Fed?

The authorization we have from the Fed is for the year, so it will expire at the end of this year.

Then we will work with the Fed for authorization for next year.

It is not a certainty we will use all of it.

So you will know that whatever we bought back was within our Fed authorization, but it will not necessarily tell you that was all of it.

Fair enough.

And, on that next discussion, there were some questions raised around the timing of the scheduled stress test and the fact that results will not come out until 1Q is nearly over.

Has there been any change or any movement as a result of maybe some back-and-forth with the regulators there?

We continue to discuss that with the Fed.

I think we will reach a resolution soon.

Okay.

And then last one, given how the year is shaping up to be pretty weak and expectations are lower around year-end compensation across the street, how should we think about a catchup accrual for comp in 4Q?

We will see as the year unfolds.

I think that right now we are accruing as best we can.

But, as you said, the year is not shaping up as strong as some of the others.

And, again, as you know, it tends to be in lower revenue years, the percentage comp tends to be higher.

But we will see -- we do our comp at the end of the year, and we will adjust it accordingly if need be.

At this time, there are no further questions.

You may proceed with any closing remarks.

We would like to thank everyone for participating in the third-quarter conference call.

If you have any questions, please feel free to reach out to Investor Relations.

Otherwise, have a nice afternoon.

Ladies and gentlemen, this does conclude the Goldman Sachs third-quarter 2011 earnings conference call.

You may now disconnect.