高盛 (GS) 2012 Q1 法說會逐字稿

Good morning, and my name is Dennis and I will be your conference facilitator today.

I would like to welcome everyone to the Goldman Sachs first-quarter 2012 earnings conference call.

Also, this call is being recorded today, Tuesday, April 17, 2012.

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 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 2011.

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, capital ratios, risk-weighted assets and global core excess.

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

This audiocast is copyrighted material of The Goldman Sachs Group, Inc.

and may not be duplicated, reproduced or rebroadcast without our consent.

Our Chief Financial Officer David Viniar will now review the Firm's results.

David.

Thanks, Dane.

I would like to thank all of you for listening today.

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

I'm pleased to report solid first-quarter results for the Firm.

Net revenues were nearly $10 billion and net earnings were $2.1 billion.

Earnings per diluted share were $3.92 and our annualized return on common equity was 12.2%.

For Goldman Sachs our opportunity set begins with our clients.

In the wake of the financial crisis our clients faced a series of challenges that accelerated in 2011.

For both corporate and investing clients, shifting and often conflicting economic data created uncertainty about the outlook for the global economy.

Evolving clarity was complicated by the degree of interdependence among different regional economies.

As would be expected, these macroeconomic concerns were reflected in the global capital markets as market participants became increasingly concerned about the economic environment, particularly related to the potential systemic risk presented in Europe.

The situation was exacerbated by growing skepticism regarding the willingness of the global political infrastructure to address the economic risk confronting the system.

These factors resulted in periods of unprecedented volatility of asset values and bouts of prolonged illiquidity, often sparked by perception or conjecture rather than by fundamental analysis or actual facts.

Ultimately, economic uncertainty, market volatility and systemic risk factors had a materially negative impact on market psychology in 2011.

While macroeconomic challenges persist, there have been some positive developments over the last few months.

At the end of December the European Central Bank announced that it would enhance its long-term refinancing operations to provide term liquidity.

By assessing potential funding risks the ECB materially reduced the market's concern that a systemic event could emanate from an European financial institution.

In addition, the market has seen steady progress in 2012 on resolving Greece's debt situation, providing greater comfort that there will be a difficult but organized approach to addressing sovereign issues within the euro area.

In response to these critical events, capital markets rallied significantly in the first quarter of 2012.

Credit markets improved materially, experiencing tighter spreads, higher activity levels, increased new issuance, and most importantly, improved market liquidity.

Global equity markets also rallied during the first quarter, with the S&P 500 up 12%, the FTSE up 14.2% and the Hang Seng up 11.5%.

Volatility was materially lower, as demonstrated by the VIX declining by one-third.

While there were positive developments, announced M&A volumes remained light and equity volumes remained muted, reflecting the longer time required to improve CEO confidence and investor conviction.

Ultimately the more favorable operating environment combined with the strength of our diverse global client franchise did create an improved opportunity set for Goldman Sachs in the first quarter of 2012.

I will now review each of our businesses.

Investment Banking produced first-quarter net revenues of $1.2 billion, up 35% from fourth-quarter results.

First-quarter Advisory revenues were $489 million, up 4% from the fourth quarter.

Goldman Sachs ranked first in worldwide announced M&A globally for the year-to-date.

We advised on a number of important transactions that closed in the first quarter, including Hitachi Global Storage Technologies' $4.8 billion sale to Western Digital Corporation; Temple-Inland's $4.3 billion sale to International Paper; and Transatlantic Holdings' $3.4 billion sale to Allegany.

We are also advisor on a number of significant announced transactions, including TNT Express' EUR5.2 billion to the United Parcel Service; Tyco International's $4.9 billion merger of its flow control business with Pentair; and Apache's $2.9 billion acquisition of Cordillera Energy Partners.

First-quarter underwriting net revenues were $665 million, up 72% sequentially.

Equity underwriting revenues of $255 million were up 34% from a weak fourth-quarter, reflecting an increase in secondary offerings as IPO activity remained light.

Debt underwriting more than doubled to $410 million, reflecting higher industrywide debt issuance.

During the first quarter we participated in many noteworthy underwriting transactions, including Priceline's $1 billion convertible offering, Seadrill's $1 billion secondary offering; and Clear Channel's $2.2 billion high-yield offering.

Our Investment Banking backlog remained unchanged from year-end levels.

Let me now turn to Institutional Client Services, which is comprised of FICC and equities client execution, commissions and fees and security services.

Net revenues were $5.7 billion in the first quarter.

Our FICC and equities client execution businesses produced significantly stronger results than during the fourth quarter, driven by an overall improvement in market sentiment.

FICC client execution net revenues were $3.5 billion in the first quarter, improving significantly from the weak fourth-quarter.

This quarter's results reflected a broad contribution across our businesses and products.

Our rates, credit and mortgage businesses benefited from higher client activity levels following the LTRO, the improved outlook for the US economy, and the orderly restructuring of Greece's debt.

Our currency's business benefited from stronger performance in our emerging markets businesses.

Commodity results reflected lower volatility levels, which drove fewer opportunities during the quarter.

Turning to equities, which includes equities client execution, commissions and fees and security services, net revenues for the first quarter were $2.3 billion, up 33% sequentially.

Equities client execution revenues doubled to $1.1 billion, largely reflecting higher net revenues within our derivatives businesses.

Commissions and fees were $834 million, up 7% from the fourth quarter on higher market values in Europe and Asia and higher volumes in options and futures.

Securities services net revenues of $367 million were down 5% sequentially.

Turning to risk.

Average daily value at risk in the first quarter was $95 million, down 30% relative to the fourth quarter.

Lower interest rate risk was driven by lower levels of volatility.

Let me now review Investing & Lending, which produced net revenues of $1.9 billion in the first quarter.

The Firm's Investing & 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.

Our investment in ICBC produced $169 million in the quarter.

Other equity investments generated net revenues of $891 million, reflecting gains that were relatively balanced between public and private equity investments.

Net revenues from debt securities and loans were $585 million, largely driven by interest income and a more favorable credit market.

Other revenues of $266 million were primarily driven by the Firm's investment in consolidated investment entities.

In Investment Management we reported first-quarter net revenues of $1.2 billion, down 7% from the fourth quarter due to seasonally lower incentive fees.

Management and other fees were consistent with the fourth quarter at $1 billion.

During the first quarter assets under management decreased $4 billion to $824 billion.

Outflows in money markets, and to a lesser extent equity and alternative assets, were partially offset by $22 billion of market appreciation.

Now let me turn to expenses.

In the second quarter of 2011 we announced an initiative to reduce approximately $1.2 billion in run rate compensation and non-compensation expenses.

We increased the program to $1.4 billion over the course of the year.

We have largely implemented our announced expense reductions and continue to review means to further improve our operating efficiency.

Compensation and benefits expense, which include salaries, bonuses, amortization of prior-year equity awards, and other items such as payroll taxes and benefits, was accrued at a compensation and net revenue ratio of 44%, which is consistent with the Firm's accrual in the first quarter of 2011.

First-quarter non-compensation expenses were $2.4 billion, 8% lower than the fourth quarter, reflecting reduced costs across a number of expense categories.

Total staff at the end of the first quarter was approximately 32,400, down 3% from the end of 2011 and down 9% from the end of 2010.

Our effective tax rate was 33.7% for the first quarter.

During the quarter we repurchased 3.3 million shares of common stock for a total cost of $362 million.

These repurchases reflected the completion of our 2011 capital plan.

Today we also announced an increase in our quarterly common stock dividends from $0.35 to $0.46 per share.

While we expect share repurchases to continue to be the predominance of our capital management activity, we have received shareholder feedback related to our dividend and therefore elected a modest increase.

The first-quarter brought several favorable developments in the operating environment for our businesses.

We believe the probability of a tail event in the euro area has materially declined in light of the LTRO.

In addition, the economy in the United States is showing signs of recovery.

China, while potentially slowing, still remains a strong economic growth engine.

Despite these improvements, client sentiment remains fragile.

In addition, market developments in recent weeks, including weaker US economic data and wider spreads in certain peripheral European countries, remind us of the fragility of this recovery.

While debt financing markets are open and equity financing markets are improving, M&A activity has not yet gained momentum.

Volumes improved in certain fixed income markets, but equity volumes remain under pressure and investor conviction is mixed.

We believe an improving macroeconomic picture is the most significant driver of improved market psychology and a healthy stable capital markets over the medium term.

In the near term the current operating environment warrants a prudent approach to managing capital and liquidity levels and a continued focus on expense initiatives.

The last three years have brought a series of challenges to Goldman Sachs and the financial services industry, as well as market participants more broadly.

We are encouraged by the early signs of improvement in markets and the economy, but remained cautious given the complexity of risks and challenges.

Everyone at Goldman Sachs remains steadfast in their commitment to serving our client franchise.

We are keenly aware that the quality of our advice and execution in today's challenging markets serves as the foundation for maintaining these long-term client relationships and ultimately meeting the needs of all of our stakeholders.

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

Guy Moszkowski, Bank of America Merrill Lynch.

Let me just start with the expense initiatives that you alluded to.

Obviously in the quarter, as you also pointed out, what you reported on the nonpersonnel side was -- indicated very strong cost management.

You can look at some of those items and say -- well, some of this is just discretionary spending being stepped on temporarily in what is still a weak revenue environment.

On the other hand here, you are telling us that you fully implemented your sizable cost-cutting plan.

So I guess that is a roundabout way of asking for a little bit of guidance as to whether we should be straightlining these levels of nonpersonnel costs?

You know, I'm always hesitant to give guidance on anything, because things change.

But I think that you can assume that most of those cost reductions, many of which are related to people -- but non-comp expenses are attached to people -- are in, and so I think that the numbers that you see are not a bad proxy.

All other things being equal, and no -- assuming no big changes in the environment for where things are going to run.

Okay, that is helpful.

Thanks.

I wanted to talk about CCAR a little bit.

Obviously, your CCAR results highlighted something we have known for a while, which is that your capital position is very strong.

The shares have obviously rallied meaningfully in the first quarter, but they are still below tangible book.

Maybe you can articulate your philosophy with respect to share buybacks relative to the share price and the degree of price sensitivity that you may show.

Well, I would always like to buy more when the stock price is lower and less when the stock price is higher, but I have never found myself to be a great predictor of our stock price.

And so I am not necessarily sure when the stock price is lower or when it is higher.

We will -- we will have a plan.

We will moderate that plan both -- based both on our results and how things are going during the quarter as well as on the stock price.

And we will try to buy more at the lower stock price and less at the higher stock price, but I don't know for sure we will be successful with that.

And can you give us some sense of how to think about what authorization you may have received from the Fed as to how much you may buy back?

You know we didn't disclose it last year nor this year.

Got to ask though.

(multiple speakers).

Can you tell us what you are pro forma Basel III Tier 1 common and risk-weighted assets were?

I can give you the ratio.

I actually don't have in front of me both the equity and the risk-weighted assets.

But with all the caveats of the rules not being done, being very rough estimates, all of those caveats take as a given, at the end of the quarter our Basel III ratio would have been roughly 8%.

And if you roll forward to 2013 it -- again, assuming just consensus estimates of earnings and passive rolloffs of positions, so no active mitigation, it would be around 11%.

Okay.

And then final question from you just about Investing & Lending.

The outstanding levels of your I&L portfolios have been pretty constant, but going forward, of course, there is going to be limitations on the level of fund commitments and maybe some other limitations under Volcker.

How should we think about the portfolio trajectory there given some of these limitations and the expected runoff of your current portfolio holdings?

Again, it is hard to answer the question because the rules are far from final.

But, certainly, some of our investments in hedge funds are going to come out.

We have announced that publicly.

And our investment in equity funds are going to be limited to 3%.

And so some of those -- some of the investments where we have a higher percentage will rolloff, and so in that way you could certainly see some of that portfolio come down.

But until the rules are finalized, we don't know exactly where it is going to go.

And just in terms of the potential capital relief as we see some runoff, I think you have spoken to about $9 billion of capital held against that portfolio currently, is that still more or less right?

Right.

But again not to mislead you, that is the total capital held against that portfolio.

We don't expect that whole portfolio to go away, so we don't expect all that capital to be released.

And it is going to be dependent on the final rule set, how much happens and what the ultimate flows are.

Yes, of course.

Okay, thanks very much, David.

I appreciate that.

Howard Chen, Credit Suisse.

I was just hoping to get your latest thoughts on the competitive landscape in the sales and trading businesses.

On one hand you have spoken about the exit of some competitors in big pockets of the business.

I am curious if you are seeing any improved share trends.

And, second, on the flip side are you seeing the competitive landscape heat up and any particular sub-clusters of FICC or equities?

Thanks.

I would say the competitive landscape remains tough.

We have a lot of very, very good competitors out there.

I can go back to 2009, whereas you know we gained a tremendous amount of share, but we all talked about -- you heard me say very clearly that was not sustainable and we knew our competitors would be back; they are.

I think there are some competitors, some of the European institutions who have exited certain businesses, so that is helpful.

But it is hard to really see that because there is not yet that -- enough improved flow to really see how much share we can pick up from that.

I would say our franchise remains very strong.

We continue to get a very, very good market share across the trading businesses, but that is not without very strong competition from our major competitors.

Great, thanks.

And then a healthy start to the year, but with the environment still glass half full, glass half empty, how are you thinking of staffing levels and the hiring outlook today?

Look, I think we are relatively well positioned, assuming that the environment stays pretty much what it is.

But you heard me say we are going to look for other means of efficiency, because we are still cautious on the outlook, but I wouldn't expect anything major to change from where we are.

Perfect, thanks.

And then final one for me, given that the Moody's review for you all in the industry, just can you share your latest views on what a downgrade for the Firm and the industry means to you and the competitive landscape, you know, if it falls out that your rating comes -- you know, lays out at a premium to that of some of your major competitors?

Look, first I would say, and I am sure this will not surprise you, we very strongly disagree with some of the things that Moody's has mentioned in some of their reports.

We think that if you look at every single credit metric there is for Goldman Sachs, and frankly for many of our competitors, none of the actions they have talked about are warranted.

We are -- as you know, we are quite analytical, and when we do all of the analysis we cannot figure out why they are where they are.

So I just wanted to tell you that.

Look, what the effect is going to be, I think much of it is in the market, because they have clearly foreshadowed what they are thinking of doing.

I think if they move the whole industry to the left, I think it is just -- it will not in the end have that big an effect.

There are some who might be more affected than others.

At least from what they say, we will be at the higher end, but not the highest, and so I don't think it will have a big effect.

And it is hard to say that there will be a real competitive change from what they do.

Okay, thanks so much for taking my questions, David.

Glenn Schorr, Nomura.

One of the impossible questions.

So, look, you guys are the only ones that break out Investing & Lending separate.

There is a component, at least a decent component of it, that would be included in some of the competitors' FICC numbers.

But with all that said, can we drill down on FICC specifically?

It was an interesting quarter, because spreads compressed a lot, but you came into the quarter and then -- with lower risk rates and you took VaR down dramatically in rates and currencies.

Can we just talk about separating the environment and your derisking versus looking forward to how the business is being shaped, and then very specifically how you think about your share within FICC?

In some ways, your question included my answer.

So, look, you're correct about the segment, and so it is hard to compare, it is not necessarily apples-and-apples.

You're correct about our caution.

And the way I would describe the quarter is I would say flow in FICC was good, but not great.

And our quarter in FICC was good, but not great, reflecting that.

There was big asset price improvement, but we were -- we have been cautious on risk and we remain cautious on risk given the environment.

And I think that is also reflective of the fact that our clients have been cautious on risk and remain cautious on risk.

And that is why flow, I would say, was good but not great.

And I think all of those things are related.

Our franchise still feels extremely strong.

Our market share is very high.

And the reason that it was a lot better than what you saw in the -- towards the end of last year is because flow and outlook was better but still cautious.

I appreciate that, and I will note that you didn't say anything about future part of the business and the regulatory environment.

In other words, this is all a product of your client flow and the business environment.

I think that is the great bulk of it.

I think some of the flow -- or not great flow is caused by concern about what regulation might do.

I think that is a very small part of it; I think most of it is macroeconomic driven.

Okay, I appreciate that.

After the quarter there was some new stories on ICBC sale.

I am just curious if you -- it wasn't all of it, I am just wondering how much is it in the funds, how much is the Goldman piece, and was left after the latest sale?

Sure, the simple answer is there was nothing different about this than the prior sales.

It was purely a derisking sale because our position was quite big.

We remain -- we still have a position that at current market prices is a little bit less than $2 billion.

We remain very optimistic about ICBC and about China.

We remain very committed to both strategically, and we would expect to have a reasonable sized position going forward, but it was just big and we derisked.

Okay, last one.

And I have been through this cycle with you before, but it seems like there has been a decent number of senior producers leaving Goldman over the past couple of months.

And wondering if you could just put some context around that and how much time you spend worrying about it, because I know it comes up in a lot of conversations we have?

Sure, and this is -- we talked about before, and I have told you that you should expect what you saw.

We have statistically 15% to 20% of our partners leave every two years.

You go back in history and you have seen that.

And over the last four years coming into this year very, very few left.

And I think that was a testament to people's feelings about Goldman Sachs.

It was a tough economic environment.

It was a tough reputational environment.

And our partners are completely loyal and felt that they should stay with Goldman Sachs.

I think as things have improved somewhat what you're seeing is a little bit of a catch-up.

It is natural, and it is actually important, and it is warranted, because if it doesn't happen then the next level of people don't have -- who are fantastic -- don't have the opportunity to move up and then they will leave.

And then when the senior people leave you will be missing that middle level.

And so there is nothing unusual about it.

It is exactly in line with what we would have expected.

I would expect that between now and the end of the year you will see more partners leaving.

I couldn't tell you who they are going to be.

It is just a natural progression, and our bench is so deep that it is really not an issue at all.

Okay, super, thanks, David.

Roger Freeman, Barclays.

Just -- maybe just to follow on that question.

I think you said that headcount was down 3% since the end of 2011.

Is that just the holdover of some of the initiatives from last year or is that the sum of the departures post --?

No, I think it is largely kind of the ends of our expense initiatives that we talked about.

Okay.

Could you also comment on maybe how -- what headcount level delta is in the US versus non-US, either like over the last year or year-to-date?

I am just curious what the relative growth or contraction rates are.

The contractions I would say were more in the US and Europe than in Asia, but pretty similar across the US and Asia with -- US and Europe -- with a little bit less in Asia, given our concentration on growing that business.

Would you still anticipate to be growing, say, not outside of Europe this year, particularly in emerging markets?

I would anticipate us to be growing in emerging markets, but I would anticipate that growth to be very moderate in this environment.

Okay.

On the regulatory front is there -- are there any significant items?

There are a lot of rules that have to be read and -- but obviously a lot of discussions going on around them.

Are there any major issues that you feel at this point have not been acknowledged by relevant, either members of Congress or regulators, to work out?

Look, I think the regulators, and especially the regulator who are writing the rule, understand the issues.

I think they're very, very difficult issues.

I think they are doing what we completely support, which is trying to write rules that make the financial system safer and sounder, while not hurting the free flow of capital and therefore economic growth and not hurting the competitiveness of US financial institutions.

That is their goal; it is not easy.

The rules are very, very complicated.

We are very supportive of what they're trying to do, and I think they're really trying hard to do this, but it is a difficult task.

And they recognize all of the issues involved.

Okay.

And then just in the equities business, I was curious on the equity derivative comments that you were up year-over-year.

From everything I've heard that has been a much tougher business year-over-year, particularly with volatility down.

Is there anything unusual or particularly chunky in there?

No, we actually saw more activity from our clients in the derivative space, and so that was very helpful to us.

Okay.

Last one, just on liquidity, $170 million, I think, this quarter.

Given all of your comments, things feeling somewhat better, but obviously still some points of caution, do you anticipate to run at these kinds of levels probably for the rest of the year?

We have been running at the high -- an average of the high 160s probably for the last two-ish years.

I would not expect -- assuming the environment does not change dramatically, I would not expect it to change dramatically.

It might go up or down a little bit from here; I wouldn't expect it to change dramatically.

Okay, all right, thanks a lot, David.

Michael Carrier, Deutsche Bank.

Your first question, when you started out you mentioned solid unit results, yet still just a 12% ROE.

Now granted tough environment and tough environment for all the peers, so on a relative basis still pretty good.

But I think when we think about the macro environment improving and what that can do to returns, and we can all try to gauge that and factor that into the pickup in activity, but when you think about the uncertainty on some of the regulations that are still weighing on the industry, like how much does that limit your ability and the industry's ability to reposition in order to improve returns?

Like meaning if that -- if the regulatory uncertainty keeps getting kicked down the road, like does that significantly limit what you can do to try to improve those returns versus just the macro environment?

Okay, I think -- as you heard me say before, I think the biggest driver is going to be activity, and the biggest driver of activity is going to be the macroeconomic environment.

You saw some pickup this quarter and so you saw pretty good pickup in ROE, although not something that we consider acceptable.

I think there is -- look, let's just be realistic, there is going to be regulatory uncertainty for a while.

And I actually think, as I said before, I think the rules are hard, and I think I would trade regulatory uncertainty for better rules.

And so I think the regulators are taking the appropriate amount of time to make sure they get it right, and in the long term that is going to be better for us and better for everybody.

Okay.

And then during the quarter, I guess, one is on the asset management side, so you did one deal.

That business just on the long-term flows continues to see outflows.

So just strategically how are you guys trying to reposition that?

And then you've also been building the reinsurance business.

So where do you see the opportunity there, and is some firms pulling out and you see some market share, or longer term where are the returns there?

So, look, on asset management it is still a very, very big focus of the Firm.

You saw the acquisitions we made were small, as we have told you, you might occasionally see them.

They are really to put us in parts of the business that we weren't in before, and it was hard to start ourselves.

All very small dollars, but hopefully will give us a platform that we can grow off.

One of the things we have seen in asset management is our performance in the last several months has definitely improved.

And if that continues, I think that would be a good precursor to good inflows of assets.

We will have to see if that continues.

Reinsurance, I would say, is really just totally opportunistic.

We have seen some opportunities where for various reasons of risk management and capital some people were pulling out of the market.

We thought it made sense for us to opportunistically pick up some pieces, but it is a very, very small business within the context of Goldman Sachs.

Okay, thanks.

And last one, just a number, and we might have missed it, but just on the DVA, did you split that out either just in terms of FICC and equities?

No, it is roughly 50-50 between FICC and equities.

A tiny bit more in FICC than equities, but roughly 50-50.

Okay, thanks a lot.

Chris Kotowski, Oppenheimer.

I am looking at the famous page 25 from the Fed's March 13 CCAR publication, which shows all the banks' capital ratios before the proposed capital actions and then after.

And for Goldman Sachs it is a very small difference.

It was 5.8% before the capital actions that you requested and 5.7% after.

So -- which implies that it is 0.1% of your risk-weighted assets, like you only asked for an incremental $400 million of additional return to your shareholders.

And I guess I am wondering, A., is that a correct reading?

B., that makes it sound like the only thing you asked for was for this dividend and not for any incremental share repurchase authorization.

Am I reading that correctly?

So I will tell you two things.

One, we did not only ask for dividends, although I'm not going to disclose how much of a share increase.

And the second thing I will give you is a bad answer, which is we do not know how the Fed did the calculations.

Okay.

All right, that is it for me.

Thank you.

Meredith Whitney, Meredith Whitney Advisors.

I have a question that is sort of related to FICC, but broader, and I'm just going to go for it, which is you talk about risk and your risk appetite differentiated you last quarter, the year quarter before, this quarter.

And maybe if you could explain your approach to risk or better articulate your -- better explain with maybe some tangible examples your approach to risk and particularly political risk?

And if you would comment on the YPF issue with Argentina yesterday?

Just, I mean, giving more would be helpful, at least for me.

Meredith, that was a very broad question.

I will try and answer it as best I can.

Look, the biggest thing that drives our risk appetite is our client flow, and what our clients are doing and how much they want to do.

And, obviously, when they do more we are likely to end up with more risk.

They are not necessarily doing that much more because they are cautious as well.

The second thing that drives our risk really is the traders on the lines view of their ability to analyze the situation.

We talked a lot about this last year, about the fact that really what was driving markets last year was very largely political as opposed to economic.

And so because we are good analysts and think we can try to evaluate the more likely economic outcomes -- and we are not always going to be right, we know that, but at least we can analyze it, the situation where it is really politics and speeches and what people are saying more than economic outcomes that are driving the market it is very hard for us to analyze risk and makes us extremely cautious about being left with any risk.

Frankly, it made our clients more cautious too and there was less activity.

So we saw that last year.

That is really the philosophy more than anything else.

I think the YPF situation, I don't have much to say.

I think it is an isolated incident in a certain location.

I certainly don't think or hope it is indicative of the rest of the world.

Okay, thanks so much.

Kian Abouhossein, JPMorgan.

A few questions.

First of all, the Basel numbers are to indicate and the Basel III, are they ex-NPR2?

Yes, they are.

And when do you expect some kind of finalization around NPR2?

I don't know.

I don't know.

We don't know when the rules are going to be finalized.

And assuming the business NPR2 proposals are what will be finalized, how would that impact in particular your mortgage business, and then also I guess your securitization business, but particular mortgage business?

I think it would be very difficult for that business.

And, look, I can't give you an exact answer, but it is hard to see that business for us, or really anyone under those rules, that business making sense.

And I think you would have to see a big pullback, and I don't think that would be very good for capital markets or for the economy, and so we hope that doesn't happen.

Okay.

Shifting to FICC, if I look at your numbers over now I would say six quarters, one could make the argument that you have taken a quite risk aversion view and the revenues as a result maybe again some of your peers look weakish.

How would you -- or how do you answer that argument?

And I'm clearly just looking at clean revenues ex-DVA, some of them ex-CVA, on a like for like basis.

How would you argue against that?

Look, I think that basically we have been cautious.

I think our clients have been cautious as well.

And I think that our franchise remains very strong.

We still believe we are getting a very, very high market share.

We are not getting the market share we were in 2009.

And, remember, I told you in 2009 we weren't going to keep that market share.

So I think you always have to be careful where you start.

And when you go back to the remnants of 2009, if we lost share since then the answer is yes.

But we picked up enormous share going into that, and we knew we weren't there to keep it.

But leaving that aside, we think our franchise has not lost share at all, and in fact stayed -- it remains very, very strong.

And can we talk a little bit about this quarter, a little bit by FICC business?

What were the bright spots, what the more difficult areas?

We know that you are a big mortgage player, was that an area which performed very good or was it more difficult on commodities?

Can you talk a little bit by subsegment just what has been performing very strongly and was maybe a bit more difficult?

Well, without disclosing numbers, because you know we don't do that, what I would tell you is I would say the rates business had a very strong quarter, and all the other businesses had good but not great quarters.

Okay.

And lastly in terms of investing, you have indicated a little bit on the emerging market side, but can you talk a little bit about the key area that you see for yourself both in terms of capital as well in terms of what are the potential growth engine that you see?

You have always been very good at looking forward and seeing where you see potential investment opportunities and profit opportunities.

Can you talk a little bit about what are actually growth areas within investment, either geographically or business segments?

I appreciate that compliment.

I wouldn't actually think we are always that good at looking forward.

I think we are actually better at adapting to the environment, very good at being nimble and being able to move to where we think -- where the environment is going.

Look, we have told you for a while, two big concentrations are the growth markets and the whole investment management business; those continue to be.

But we are not -- we think that over time we will grow all of our businesses around the world.

You have heard Lloyd use the term that we are going to be Goldman Sachs in more places.

We are going to do that, and we're also going to grow all of the businesses around the world as the environment improves.

Great, very helpful.

Thanks, David.

Mike Mayo, CLSA.

I just wanted to follow up more on the buyback.

Is there anything that would keep you from buying back your stock aggressively before -- below tangible book value?

Within the context of what we can do with the Fed, no, there is nothing to keep us from doing that.

And is there anything that would keep you from frontloading your buybacks even if it wasn't spread out evenly over quarters?

The only thing would be the inability to fully predict where the stock price is going and wanting to make sure that we have some powder for later in the year, depending on what the environment is like.

Separately, there has been all sorts of regulatory investigations into the industry, and there was one news report saying that one investigation was complete, and an article -- this relates to the Department of Justice -- and I know it hasn't come up a whole lot, but it is still out there in some investors' minds.

Would we ever hear if they were done with their investigation into you or not?

I actually don't know the answer to that question.

Okay.

Sorry.

And, lastly, what this quarter could you say we can extrapolate for?

You don't like giving guidance on capital markets, and so I know you're not going to give any guidance there, but I guess your non-comp expenses, we could say are recurring?

Look, I think you can extrapolate somewhat, but remember one of the biggest non-comp expenses, which is brokerage, clearance and exchange fees, is activity related, so that is one that I certainly hope gets higher.

If you saw that go up from a non-comp point of view that would actually be a really good thing, not a bad thing.

So there is some activity basing within the -- even the non-comp.

So all other things being equal, I think it is probably a reasonably good proxy for where we are going to go, but all other things are never equal and so hard to predict.

And as far as anything else, you know, I don't think one quarter is at all a predictor of the future.

Well, however you look at it, if you strip out activity-based non-comp expenses how much did non-comp expenses go down for the quarter?

Look, you see them.

You see what they are.

And I think, as I said, given similar levels of activity I think that is a pretty good baseline for around where we will be.

All right, thank you.

Betsy Graseck, Morgan Stanley.

I just wanted to follow up on the capital ratio question.

I just want to make sure I get the denominator right.

You are presenting capital ratios on a Basel III basis, but not including the NPR -- expected NPR impact?

That is correct.

Okay.

That is correct.

All right, so not 1 or 2.

And so when would you anticipate incorporating that into your numbers?

When we know what the rule is going to be.

Okay, and so -- I mean, the same with Basel III though too, right?

We have a lot more clarity on Basel III.

But we will see if that rule got passed as is then we would incorporate it in, and we would tell you what it was.

Okay.

And then just on the insurance side of the business that you talked about earlier.

Could you just give us a sense of how you are integrating that into not only your equities business, but also just how you are integrating that into your overall organization?

It is run largely separately, although our risk management is very integrated into it because there are a lot of market-related risks in that business and so our risk management infrastructure is very integrated into that.

So it should help with your own VaR I would think, no?

It is very, very minor in that.

Okay, and then what about funding, does it help at all with the funding side?

Is largely kept separate.

Okay, all right, thanks.

Fiona Swaffield, RBC.

I just had two questions.

One was on the Basel III look through, and I think you said roughly 8%.

And I think at Q4 it was roughly 8%.

Correct.

Am I able to impute -- I mean, I know you also caveat it with moving parts.

But obviously your Basel I improved due to retained earnings and the RWA is going down.

So has it improved at all through earnings or is it the Basel III RWAs are going up?

I just wondered if you could help on that.

The changes are really immaterial.

That is why I gave you roughly the same number there.

You're talking about tenths of a percent.

Is that because your Basel I RWAs going down wouldn't have been reflected in the Basel III number?

Again, that is largely correct.

Okay, thanks.

And, then, I am just trying to understand the cost number, and you gave a total cost reduction number.

And then how do I -- I am assuming we will see something in salaries potentially at some point, but that won't be clear until the comp ratio -- I mean, because it is not just non-comp, is it?

It is not just non-comp at all.

And you saw some of that last year in the comp line.

So a lot of that is already in there and you saw it last year.

But if I knew the comp -- I mean, so there would -- could there have even been lower salaries, for example, in absolute salary cost in Q1 as well?

When you say salary, I assume you mean compensation not salary.

Yes, sorry, I am just trying to get -- obviously, I have got the variable compensation which is related to -- I am trying to understand if you have got a number of heads going down.

I am sorry, I'm not understanding your question.

Well, it is because of the 44% ratio.

I'm just wondering if there could be a lower comp ratio because of the staff reductions.

That (multiple speakers).

We won't know until --.

That will be dependent on how things unfold between now and the end of the year.

Okay, thanks.

Matt Burnell, Wells Fargo Securities.

I just wanted to get a quick characterization of the business condition changes in both your Asia/Chinese markets and the European markets in Q1 versus Q4, because we have seen a number of competitors -- at least their revenues numbers suggest that those numbers were up fairly dramatically quarter-over-quarter.

But I guess I'm just curious if you can provide some color as to how you're thinking about those markets.

Look, I would actually say the Asian markets -- I mean, you saw there was actually a pretty big underperformance of the Chinese market in the first quarter.

And I think that reflected a little bit some of the activity, but the business was still pretty good.

And European activity was better as you saw the markets get better.

And as the markets have -- the improvement in the markets has stalled a little bit in the last few weeks is that had a chilling effect on activity within the European markets?

Look, two weeks doesn't really tell you anything.

But, yes, I think it has had somewhat of a chilling effect on activity in Europe as markets have stalled, and we will see how things unfold over the course of the quarter.

Okay, thank you, David.

Douglas Sipkin, Susquehanna.

Just one quick question.

I am just curious, what do you guys think is wrong with the M&A markets?

I would just expect with the stock market as strong as it has been, the debt market as strong as it has been, balance sheets, et cetera, it just feels like last year at this point in time things were a lot stronger for M&A.

I am just curious if you guys have a pulse into that?

Thank you.

That is a really good question, because if you gave me the whole picture of the economic environment in the first quarter and said what do you think will be M&A volumes, I would have said it will be a lot higher than they were.

And there is a lot of dialogue, and dialogue has really continued to pick up.

I think what you are seeing is, given how much economic uncertainty there has been for a while, CEOs are very much in a prove it mode.

And they want to see -- they want to see solid growth or at least growth and resolution in Europe and things like that for a longer period than they saw in the first quarter.

And until they have that confidence come back -- and it is just going to take a while longer -- it is just not going to result in that many transactions.

As I said, there are a lot of dialogue, and enough dialogue that if that CEO confidence comes back, you could see a fairly dramatic pickup in that market, but the confidence has to come back.

Would you say that Europe is the predominant driver of that, meaning -- you know, I say that just feels like this thing could go on for a lot longer or is it more the United States or non-Europe economies that are driving some of that?

I would put Europe as the top of the list, but not the only thing on the list.

So if you saw a whole slew of continued better economic data in the US I think that could be a driver.

A pickup in China, that could be a driver.

But Europe is the number one thing that is out there.

Okay, great, thanks for the color, David.

Brennan Hawken, UBS.

I know this is sort of a tough one to answer, but I'm going to give it a shot anyway.

Is there any way you could give us some color or an idea about how much of a headwind the levered loan market being shut was to your FICC revenues?

I am sorry, which market?

Levered loans.

Oh, look, the levered loan market was not shut in the first quarter.

I think it was -- there is just -- while there wasn't that much activity because there wasn't that much deal activity, the market was actually pretty aggressive.

So I actually think deals that were out there got done and got done pretty well.

So I wouldn't call the market shut at all.

I think it was just really lack of activity, which goes back to lack of merger volume and lack of CEO confidence more than the market not being receptive.

I think the credit markets are actually quite strong.

Okay.

And on equities, is there any way you could give some color on how derivatives volumes held up in March and April -- so what you have seen so far in April and how things are looking?

I know it is early but --.

I actually don't have that, so we can get back to you on that.

Okay, thanks.

Ed Najarian, ISI Group.

My question has been answered.

Thank you.

Guy Moszkowski, Bank of America Merrill Lynch.

Hey, David, I just wanted to circle back on something that came up a few quarters ago regarding the potential for share gains perhaps on share given out by some of the European banks.

I seem to remember that you were a little skeptical of the potential opportunities presented by forced European Bank deleveraging.

Now that some time has passed, have any of the investment opportunities materialized as there was a general expectation in the market we might see from the forced deleveraging of the European banks?

You mean from the ability to buy assets, is that what you're talking about?

Primarily, yes.

Look, I think there have been some, but not a lot.

I would say we have seen some opportunities to buy assets that we think would be profitable to hold.

We have seen some opportunities to buy that we think would be very good to distribute to our franchise and we have participated in some of that, but I would call it some bit muted.

Okay, thanks.

That is very helpful.

At this time there are no further questions.

Please go ahead with any closing remarks.

We would like to thank everyone for joining us for our first-quarter earnings call.

If you have any questions, please feel free to contact us in the Investor Relations department, otherwise, please enjoy the rest of your day.

Ladies and gentlemen, this does conclude the Goldman Sachs first-quarter 2012 earnings conference call.

You may now disconnect.