高盛 (GS) 2012 Q2 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 second-quarter 2012 earnings conference call.

(technical difficulty) Also, this call is being recorded today, Tuesday, July 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 second-quarter earnings conference call.

Today's call may include forward-looking statements.

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

The Firm's actually 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 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'll give an overview of our second-quarter results and then I'll take your questions.

Net revenues were $6.6 billion.

Net earnings were nearly $1 billion.

Earnings per diluted share were $1.78 and our annualized return on common equity was 5.4%.

Year to date, our annualized return on common equity was 8.8%.

Questions surrounding the stability of the global economy and its future prospects resurfaced in the second quarter.

The situation in Europe remains the primary concern.

Despite the systemic benefits of the European Central Bank's long-term refinancing operations, the market refocused on the broader sovereign challenges that remain.

In particular, client psychology suffered from continued skepticism regarding the mechanisms and political will required to address the complex series of issues facing European governments.

The outlook for the global economy was further clouded by concerns about slowing economic conditions in the United States and China, given weak economic data during the quarter.

The accumulation of these various macroeconomic concerns increased market uncertainty and reduced client activity.

For example, during the second quarter industry underwriting volumes declined significantly, with debt and equity volumes down by 36% and 15%, respectively.

Market volumes also posted quarterly declines in various fixed income and equity products.

While a challenging macro environment may translate into lower industry volumes, our focus on our clients is unwavering, as the advice, execution, and investment management services that we provide to our global client franchise are more highly valued in a difficult environment.

The uncertainty has also led the Firm to conservatively manage its risk profile, maintaining a high level of risk-adjusted capital and a significant liquidity cushion.

We believe our continued focus on serving our global client franchise and managing our risk prudently is essential to the Firm's ability to create shareholder value over the long term.

I will now review each of our businesses.

Investment Banking produced second-quarter net revenues of $1.2 billion, up 4% from first-quarter results.

Second-quarter Advisory revenues were $469 million, down 4% from the first quarter.

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

We advised on a number of important transactions that closed in the second quarter, including Johnson & Johnson's $19.7 billion acquisition of Synthes; Sara Lee's $7.2 billion spinoff of its international coffee and tea business; and Austar United Communications' AUD2.7 billion sale to FOXTEL.

We are also adviser on a number of significant announced transactions including Cooper Industries' $12.6 billion sale to Eaton; Walgreens' purchase of a 45% stake in Alliance Boots for $6.7 billion; and Catalyst Health Solutions' $4.4 billion sale to SXC Health Solutions.

Second-quarter underwriting net revenues were $734 million, up 10% sequentially.

Equity underwriting revenues of $239 million were down 6% from the first quarter, reflecting weaker issuance activity.

Debt underwriting increased 21% to $495 million, diverging from lower industry-wide issuance volumes due to our involvement in several significant transactions.

During the second quarter, we participated in many noteworthy underwriting transactions including BTG Pactual's $1.7 billion IPO; IHS's $1 billion secondary offering; and Chesapeake Energy's $4 billion bridge loan.

Our Investment Banking backlog increased from the end of first-quarter levels.

Let me now turn to Institutional Client Services, which is comprised of FICC and Equities Client Execution, commissions and fees, and securities services.

Net revenues were $3.9 billion in the second quarter.

Our FICC and Equities Client Execution business produced significantly lower results relative to the first quarter, driven by macro concerns and weaker market sentiment.

FICC Client Execution net revenues were $2.2 billion in the second quarter, down 37% from the first quarter as most businesses produced lower results.

Our rates, currencies, credit, and commodities businesses were negatively impacted by client risk aversion and lower volumes following more acute concerns about the situation in Europe and broader macroeconomic weakness.

While volumes were also lower in mortgages, the business benefited from better asset price stability.

Turning to Equities, which includes Equities Client Execution, commissions and fees, and securities services, net revenues for the second quarter were $1.7 billion, down 25% sequentially.

Equities Client Execution revenues were 51% lower to $510 million, reflecting higher levels of volatility and declining market values.

Commissions and fees were $776 million, down 7% from the first quarter on lower volumes.

Securities services net revenues of $409 million were 11% higher sequentially due to seasonally stronger client activity.

Turning to risk, average daily value at risk in the second quarter was $92 million, down 3% relative to the first quarter.

Let me now review Investing & Lending, which produced next revenues of $203 million in the second 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 a loss of $194 million during the quarter.

Other equity investments generated net losses of $112 million, reflecting losses in public equities largely offset by gains in private equities.

Net revenues from debt securities and loans included net interest income and net gains of $222 million.

Other revenues of $287 million were primarily driven by the Firm's investments in consolidated investment entities.

In Investment Management we reported second-quarter net revenues of $1.3 billion, up 13% from the first quarter, largely due to incentive fees related to the sale of our clients' remaining investment in ICBC.

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

During the second quarter, assets under management increased $12 billion to $836 billion.

Inflows in fixed income due to the acquisition of Dwight Asset Management were partially offset by $4 billion of market depreciation.

Now let me turn to expenses.

Compensation and benefits expense, which includes salaries, bonuses, amortization of prior-year equity awards, and other items such as payroll taxes and benefits, was accrued at a compensation to net revenue ratio of 44%, which is consistent with the Firm's accrual in the first quarter of 2012.

Second quarter non-compensation expenses were $2.3 billion, 4% lower than the first quarter, reflecting reduced costs across a number of expense categories.

Total staff at the end of the second quarter was approximately 32,300, relatively flat from the first quarter of 2012.

Our year-to-date effective tax rate was 33.2%.

Many of the last several quarters presented challenging operating conditions, with macroeconomic concerns taking center stage.

As we have said many times, our opportunity set begins with a client's decision to transact, and the recent environment has damaged client sentiment and reduced overall activity levels.

As a management team we recognize that we cannot control the macro environment.

However, we remain committed to using all the appropriate levers available to us to improve returns without negatively impacting our client franchise or longer-term prospects.

We have a long history of adapting and will need to continue to allocate resources effectively to meet our clients' needs and maximize returns.

In a difficult operating environment we have two principal levers to enhance returns -- expense and capital management.

A year ago we announced a $1.2 billion expense initiative.

We subsequently increased the amount to $1.4 billion.

We have met that target, and continue to focus on improvement operating efficiencies across the Firm.

We are currently targeting approximately $500 million in additional run-rate cost savings to be achieved by year-end.

During the quarter, we repurchased 14.3 million shares of common stock for a total cost of $1.5 billion.

We believe that we have sufficient flexibility to manage our capital levels appropriately for the remainder of the year.

However, the level of ongoing share repurchases will continue to be driven by our assessment of the risk to the broader operating environment, our earnings generation, and the potential for more attractive opportunities to put our capital to work for clients.

In this environment, we will continue to focus on helping our clients navigate the challenging market conditions.

We will work to balance near-term uncertainties with longer-term strategic goals.

We will invest for growth in attractive regions and businesses and reduce our commitment to businesses experiencing lower client demand.

Doing this effectively is the key to protecting our global client franchise and, thus, our ability to generate attractive long-term returns for our shareholders.

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

Howard Chen, Credit Suisse.

Hi.

Good morning, David.

Just picking up where you left off the prepared comments, with all that you are willing and trying to do to control expenses and capital management, we still have a 5% return on tangible equity.

Just curious what else is in your mind and the partners' minds about getting back to kind of exceeding cost of capital?

And -- other than just waiting for a more vibrant macro environment.

Howard, look, I think you've heard me talk about this before.

We are controlling the levers we can, which are expenses and capital.

We obviously don't want to go too far on either one, because we think at some point the world will get better.

But I think that all of those things will let us a form a little bit better in a tough environment.

They are not -- we're not going to cut our way to prosperity, and we are not going to cut our way to the appropriate levels of returns.

I think that we will continue to do the best we can with our clients, manage our expenses, and manage our capital.

But I would not expect that we're going to have acceptable ROEs in a macro environment like this.

Understood.

Thanks, David.

Then given the recent Fed 2.5 and Basel III NPRs, was just hoping you could give some thoughts on some of the Basel III guidance after you and the team incorporate some of these recent NPR rules.

Yes, what I will tell you is, when we sit here today, best estimate -- and these are still rough and all done manually -- if we looked at Basel III today it would be slightly below 8%.

And if we roll forward -- and only just pure math -- at consensus estimate and largely the passive items like credit correlation, mortgage securitization, they are going to roll off by the end of 2013, we get to slightly under 10%.

That's about 0.5% lower than we told you last time because of some of those, the new Fed rules; and about 0.5% lower because of lower consensus estimates that have come out.

So those are two things that have really changed since we spoke last.

Great, thanks.

Then finally for me, $1.5 billion of share repurchases is pretty impressive this quarter.

I think if -- I know there's a lot of variables in this.

But if the stock does the same trajectory as it did last year, i.e.

remains below tangible book, we saw you pick up share repurchase in the third quarter and then get a little quieter in the December quarter.

Is that still a fair assumption to use?

Or are there other things specific to this operating environment or valuation that we should be thinking about for this year?

You know, we can't give you a prediction.

It is going to depend on a lot of things.

Again, you've heard me talk about this before.

It is a very big dilemma.

In an environment like this we are -- tend to be very cautious.

We tend to conserve cash and conserve capital.

And yet we have a stock price trading well below tangible book; and I know when we look back in the future, we are going to wish we had bought back more at this price.

So it is a trade-off between caution in a difficult environment, seeing what our earnings are, and calibrating it with the very low stock price.

So it is not a science, and it is something we look at all the time.

And we will just have to see as we go.

Great.

Thanks for all the thoughts, David.

Glenn Schorr, Nomura.

Hello.

Good morning.

First of all, I love the 9-minutes prepared remarks.

Is there anything you can tell us on the asset servicing sale, on the capital freed up, potential gain, revenues impacted?

Anything you can help us with?

Because I think I get the strategic rationale of not investing in core business.

There wasn't a lot of capital attributed to the business so I don't think it's going to free up that much capital.

We have very little book value, so a very large portion of the purchase price will be gain.

I think the transaction is expected to close in the fourth quarter, so it probably won't come until then.

And there was not a lot of revenue and earnings associated with it, so it is not going to have -- it will have a very immaterial effect on our business going forward.

Okay.

Appreciate that.

This might be nitpicky, but is it fair to assume that what you and others have bought -- well, let's just stick with you guys; what you bought back in the quarter was one-quarter of your CCAR approval?

We have not disclosed that number nor am I going to start right now.

All righty.

But it was a good try, Glenn.

Alliance Boots, on the Advisory side; I could take my guesses.

But can you help us, of what you owned and what it contributed in the quarter?

With that -- I'm not going to give you the exact numbers, but we had a very small, very small equity investment in it.

So -- and a slightly larger but still very small amount of debt.

So the gains from those were not terribly material.

Okay.

That's good.

Then lastly, this is -- any color would be helpful.

But you have the expense plan going on.

You just told us about more.

You have the buyback, which is actually reducing your share count.

Can you talk about how you think about the potential operating leverage, God help us, if revenues actually do go up some day?

Because it seems like the incremental margins are -- the potential is big.

Look, I think you said it well.

We think we are very well set up because the other thing you didn't mention was the amount of liquidity we have.

We have a lot of liquidity also which can be used if we see good business opportunities.

So we think that we have staffing levels at the right places and the right seniority.

Our expense base about -- taking it down to where we think it ought to be.

Capital levels where they ought to be.

And if we see good opportunities, obviously we will start generating capital again.

Remember, in addition to that our risk is extremely low.

The VaR, while it is just one measure of risk, $92 million is the lowest it's been since the third quarter of 2006.

It's almost six years.

So I think if we see the world get better -- and you know my view on this.

It will get better; I just don't know when.

We're in a cyclical business.

I think we are extremely well set up.

I guess the last thing I would add to that is our client franchise.

We continue to have a very high market share in all of the most important businesses.

And I think if there is more to do, we will get more than our fair share of it.

Last one -- it's related to that -- is you made your comments in Europe.

You guys have been very defensive on it and right.

Have you seen any signs that either the logjam or the ultimate solution is near?

Look, I'm not an economist and I am not an expert on this.

But there is nothing that we have seen that -- you heard my comments -- that gives us a lot of confidence that there is a solution coming any day now.

I hope I am wrong there.

And as I said, I am not an expert in this; and I know there's a lot of people over there who are working very diligently to come up with the right solution.

But we've been through this for a very long time.

Got it.

Thank you for all that.

Betsy Graseck, Morgan Stanley.

Hey there.

A couple of clean-up questions on that.

On the sale to STT, what is the impact on FTE?

The impact on --?

FTEs?

Oh.

Headcount?

You know, Betsy, I don't actually know that number offhand.

So how about if we get back to you on that?

I think it is going to be maybe a couple hundred people, but I am not 100% sure.

So we will come back to you on that.

Okay.

Then the $500 million in cost saves by year end, does that include the STT sale?

It is going to be pretty immaterial.

It is really going to be a $500 million run-rate savings on our ongoing expenses.

The expenses that we had associated with that were not very big.

Right, okay.

Both the revenues and the expenses were not very big.

Can you just dig in a little bit to where the opportunity set is for the expenses?

Is it more coming from non-comp line where there is opportunities for you to leverage some of the investment spend you have been making in your IT backbone?

I would say it is actually more -- it is on the margin non-comp expenses and more people related.

And it won't necessarily result in lower headcount.

In fact, I would expect that with campus hiring coming on we will have probably have higher headcount by the end of the year.

But we will have a more junior and less senior weighted headcount going forward.

Okay, so more skewed towards comp than non-comp?

Yes, that's right.

Okay.

Then just lastly, we have been getting closer to derivative proposals coming out of the CFTC.

Can you just walk us through how you are thinking about shifting the business, if at all?

I think you said it well.

We are getting closer, but we are still not there.

Even some of the things that have been agreed upon haven't been released yet.

We are I think not saying wait-and-see, because we have a lot of people working on getting ready.

But we are not really making wholesale changes yet until we know the final rules.

But I think you're right.

We are getting closer, but we are just not there yet.

Okay.

Then last, when you mentioned the under 8% Basel III, that included the 2.5, right?

Correct.

That is all-in?

Yes, all-in.

Okay, thanks.

Kian Abouhossein, JPMorgan.

Yes, hi, David.

A few questions.

On NPR2, I assume you are assuming in your 8% calculation or below 8% a standard methodology for NPR2 rather than an internal one.

Is that correct?

Yes, that is correct.

Is it likely that you will be able to move to an internal model?

I.e., the 50 basis points could come back?

We don't know yet.

It is something we have to work through and we will work with the regulators.

It will take a little bit of time.

But I would be -- I don't want to overstate it.

We just don't know.

Can you give us an idea?

The 283 market risk-weighted assets that you have disclosed in the past for 2011 in one of your presentations, where would we be standing at this point for the 283?

Kian, I'm sorry.

I don't have that number right at my tip of my fingers either.

We will come back to you on that one.

Okay, no problem with that.

Lastly, if we look at the risk weighting of NPR2 on the secularization, which will be about 20% on the highest tranche, if I look at Europe we would be around 7% under CRD3.

How do you see your business developing in such a context, considering the European have an advantage on the securitization front going forward?

You ask a very fair question there.

I would tell you that some of the rules, even the ones you talked about, didn't come out as badly as we thought they might have, which would have made the divergence even greater.

But I think we are looking at this and we're just going to have to see how it unfolds.

But I think it does put the US firms at a competitive disadvantage.

I think you are right.

And it might end up with a smaller mortgage securitization business for us.

If I may, one more.

In terms of capital movement within the Firm, how do you see the capital moving towards higher-growth areas?

Where are the segments, either by business where you see opportunities or geographies, from your perspective?

Look, we've talked a little bit about this before.

We continue to be pretty optimistic about the growth markets.

Obviously, they are not a straight line up, and some of them are experiencing some difficulty now; but over the next three to five years we continue to think that there is going to be greater economic growth in some of the growth markets than some of the developed markets.

But we are also pretty bullish as the world starts to get better, which I just don't know when it's going to happen, in most of our businesses all around the world.

So where -- you have heard Lloyd say we want to be Goldman Sachs in more places, but we also want to grow Goldman Sachs where we are.

Okay.

Thank you very much, David.

Mike Mayo, CLSA.

Hi.

I just wanted to follow up on the article I am reading in The Wall Street Journal.

Goldman Built Private Bank, Sets a Target for $100 billion in Additional Loans.

Can you describe what you are doing in the private banking area and with regard to targets for loans?

Sure.

I think there might have been some overstatement there.

Look, we have been in the private wealth business for a long time.

You know that is a very important business to Goldman Sachs.

We have always lent to our private wealth clients, and having the bank has just made that a more efficient, more profitable business.

So we intend to continue to grow that slowly, as we have been.

As far as corporate loans go, as we have mentioned, especially with the retrenchment of some of the European banks there are some of our clients who really need dollar funding.

We have some available through the bank.

We will use it where we think it is most efficient, we have the most profit opportunities, we have the clients who need it most.

So again, I think we are just going to be more efficient.

What I will tell you is the total bank has a little over $100 billion in assets, and only about $50 billion in deposits, which are used for a variety of things.

So you can do the math on the loans.

So do you have a $100 billion loan target?

I would say we have $50 billion of deposits right now.

They are going to grow slowly over time as we can grow them, and we will use some amount of that for our loans.

So as I say, you can do the math.

So now a real big-picture question.

In deciding to go this direction more aggressively, you could either decide to expand the balance sheet, expand loans, expand the bank.

You could have gone the other direction and said we are going to de-bank and really shrink what we have, especially trading below tangible book.

Or you could just put off this decision to another day.

So, why decide this now?

What was the urgency, in addition to the European bank situation?

And did you consider the idea of de-banking or just dramatically shrinking your balance sheet?

Mike, I think I told you there might have been some overstatements, to start.

I think that -- again, I have told you before that I think the idea of de-banking is not really something that is on our minds.

We are regulated by the Fed; we are going to be regulated by the Fed.

We are a bank holding company and we are going to be one for the foreseeable future.

So that hasn't changed, but I don't think there is any big change in our strategy that is coming.

This is something that is part of what we are.

We are going to grow it where we see opportunities.

We're going to take advantage of the opportunities we see, but it is not a big change in strategy.

Then lastly, you are still trading below tangible book value.

I know you have a lot of confidence that your assets are marked accurately.

Anything else you can do to realize that value in addition to more aggressively repurchasing your stock?

I think that is really the main way.

All right, thank you.

Michael Carrier, Deutsche Bank.

Thanks, David.

Maybe a follow-up question just on the return environment.

It seems like, if you look across the industry, it is tough enough for someone like you or even the top five players in the industry to still generate a 10% ROE.

So it has got to be, depending on mix and stuff, even tougher for firms that are in the five to 15 ranking.

Given that you're big on the advisory side in the financial service sector, has there been any pickup in discussions, dialog on bigger moves?

Instead of just the cost cutting, strategic decisions in the industry of exiting certain businesses, paring down certain regions?

Like, are we at that point, just given that this weak macro environment has been just slugging along for a few years?

Look, it's a really hard question, as we have talked about.

You never know what the future is going to bring.

We're in a cyclical business.

We know we're in a cyclical business.

It is hard to know when the cycle is going to change.

We think we have tremendous upside in a lot of our businesses.

While we are trying to pare down and perform as well as we can in this difficult environment -- it is not returns that are acceptable to us or to our shareholders and we know that -- but the question is, how much of the upside do we want to give away to have slightly better performance today?

So we are not at the point now where we are thinking of wholesale strategic changes or wholesale shrinkages in any way.

We have a long history of doing this incrementally as we see how the world unfolds.

And I think I would expect that that is what we are going to continue to do.

Okay.

That was for you.

I was saying more for the industry.

Like meaning when you look across like the financial services sector, based on the conversations through like on the advisory side.

Have you seen a pickup in dialogs based on the environment and potential changes taking place?

I think we have talked about seeing some of the European banks retrench as -- with some of the difficulty.

But other than that, we are not really seeing wholesale changes.

Okay.

Then on your cost reductions, just that $500 million, that makes sense; no wholesale changes.

But in terms of where you are seeing those opportunities, are you still over-invested in Asia or Europe and so you're pulling back more there?

Is it certain product areas or certain businesses, or is it across-the-board still?

No, the only thing I would say is while we are -- because we still think it is a great long-term opportunity we are certainly pulling back less in the growth markets than other places.

But that doesn't mean that -- as we said -- they are not a straight line up either.

But we are pulling back less there.

Okay.

Then a last one just on the OTC shift.

It seems like we are getting closer in terms of the number of rules that are out there.

But still seems that it's going to get kicked to 2013.

When you look at it, whether it is the clearing opportunity and then obviously the give-up on some of the revenues, do you have any indication or any estimate of -- I think most would expect the OTC market can get cleared.

The challenge is what portion can trade on a [SAF] or can transact, and then the pricing goes away or goes to those platforms.

So when you look at the OTC market, what portion either can go in that direction?

And then even though pricing goes down there, how much capital can you be saving as a lot of these products get clarity?

Mike, it's really hard for me to give you specificity on that question.

The rules aren't done yet.

The industry is still looking at how these things are going to unfold.

If I gave you specific numbers there, I would literally be making them up, and I don't want to do that.

Okay.

All right.

Thanks a lot.

Brennan Hawken, UBS.

Hi.

A lot of my questions have been asked, just maybe a couple quick ones.

I think results were actually a little bit better than we had been looking for.

In the press release at least you highlighted the strength in the mortgage business and you commented on asset price stability helping out there.

Was there some benefit from Maiden Lane?

Or can you give us a little more granular impact on what that was?

I think that is one of the things that helped.

I think with some of the Maiden Lane transactions being cleaned up, I think that took a little bit of overhang off the market.

I think that was good.

I think you probably saw there have been some tenders in Europe which have been helpful.

So there have been a lot of things that have taken some of the overhang off the market.

And as investors have also been searching for yield, I think they felt pretty good about the mortgage space.

So I think it's been a pretty attractive space for people.

Okay.

Then circling back to the private bank question, and I know you stated pretty clearly that the article overdid it a little bit.

But when you think about some of the regulatory constraints that are being applied to the capital markets businesses, couldn't this potentially be an opportunity to create some more stability in your earnings base?

And given, as you said, the great relationships you already have with many of your high net worth clients and such, the opportunity to maybe grow the bank, to just give a bit more of a baseline for Goldman?

Is that something that you guys are thinking about as well, or not really?

Am I overdoing it?

I don't want to -- I want to neither overstate nor understate the opportunity.

I mean as I said, private wealth business is a good business for us.

We have a bank.

We are a bank, or a bank holding company with a bank.

We're raising deposits and we will use some of those deposits for private individual loans, some of it for corporate loans.

But we are not a retail bank.

We don't have branches.

We are not going to bring in $1 trillion in deposits.

So there is no change in the strategy at Goldman Sachs.

We are largely a wholesale firm.

We also have a bank, and we will use those deposits that we have and grow them and use them wisely for profitable opportunities where we see them.

Okay.

Thanks a lot.

Christopher Wheeler, Mediobanca.

Yes, good morning.

A couple of questions on the Investment Management business if I may.

First, just a point of clarification.

In terms of the incentive fees in respect of ICBC, is it fair to say that probably if we stripped those out we would have the normal kind of seasonal double-digit millions of incentive fees?

That is the first question.

Yes.

Okay.

The second one is back on the private banking segment.

Can you give us some clue as to the portion of the $839 billion of AUM that at the moment you would classify as being with wealthy individuals, as opposed to being institutional or retail?

Chris, again, I don't have those numbers with me.

So we are going to have to come back to you with that.

Okay.

Then really following on from that, in terms of -- I'm sorry to push on the strategy, but it is a really topical issue, particularly given obviously what seems to be a desire to diversify here.

But would the focus you would say remain on your traditional US client base?

Or would you focus perhaps a little bit more of your effort on obviously what is the faster-growing Asian markets, where obviously you have a strong footprint in the Investment Bank?

Well, we have talked about before growing the private wealth business outside the United States; been a big focus of ours, and especially in some of the growth markets you mentioned, like Asia, where we think there is a lot of wealth that has been and being created.

Given our Investment Banking relationships and given the strength in our private wealth business, that has been a strategic focus of ours for a while and continues to be.

Okay.

Then if I was to ask you what portion of your -- I thought you've answered the question, but your portion of your wealth management assets that are actually outside of the United States, would you have an idea whether it was 20%, 10%?

It's very small right now.

It's a very small number but it's something we are looking to grow rapidly.

Okay.

Well, thanks so much.

Thank you.

Roger Freeman, Barclays.

Good morning.

I am just going to come back to a couple things that have been asked already.

One, on the buybacks; were you fairly spaced across the quarter?

Or were the buybacks more concentrated earlier part than the latter part, given the gyrations in the markets?

I think it was -- I mean, you can see by the average; I think we were relatively evenly spaced across the quarter.

Okay.

As you balance all the things that you've talked about, and if the risk environment, as you would characterize it, it appears not as -- certainly not as bad as parts of the fourth quarter last year were.

I think you did pull back on the buyback.

Is that a fair characterization?

Look, as I said before, this is something that we are going to consider as we go forward.

I don't think you should take the fourth quarter as an example of anything other than it's what we decided to do in the fourth quarter of last year.

Yes, okay.

And we are just going to see how things unfold as we go forward.

Okay.

Then on the $500 million in additional run-rate costs you're going to take out, does that assume a current-ish run rate for the balance of the year?

I am not sure I understood that question.

Well, does it -- is it an assessment of where you need to get your cost base to relative to current levels of revenue generation?

It is -- yes -- assuming things are kind of stable as they are, we expect that by the end of the year we will have taken out -- round numbers -- another $500 million of costs.

It will come out over the next couple of quarters.

Okay.

Is there anything that you or the Board, management, will be looking to make a determination otherwise?

In other words, if there is a bigger structural cost change that would have to occur -- given a view that the revenue profile is going to be challenged for a long period of time.

I know that is not your view right now.

That is always the hard question, and it is always hard -- I can't tell you we won't reach that conclusion.

It is hard to reach that conclusion.

History tells us that we will do things more on an incremental basis, but we'll have to see how the world unfolds.

Okay.

Just two more quick ones.

Investing & Lending, you talked about some private equity gains.

I guess within that, how much was realized versus unrealized?

Was most of the realized the Alliance Boots that Glenn was asking about?

Well, the second question is easy.

Most was not the Alliance Boots.

It was a pretty small number, as I said.

I don't have what was realized versus unrealized with me.

But most of it was what we would call event-driven, which means it was based on a company that was private, went public.

Got it.

So then we were able to see the price, a bid for a company that we have an investment in.

So it was mostly event driven.

Okay, fair.

Then lastly, just on securities services, you mentioned revenues were up sequentially.

Were prime brokerage balances up?

They were roughly flat.

Okay.

Great.

Okay, thanks.

Brad Hintz, Bernstein.

Hello, David.

Good performance.

Tough environment.

Thank you, and yes.

Yes, right.

Hey, I have been looking at the British Bankers' Association site, and your name doesn't appear on the list as a LIBOR bank.

But I guess I have a question.

That is, as a major player in fixed income over the counter and listed derivatives, and as a major money market provider, would that make Goldman Sachs an aggrieved market participant if LIBOR was manipulated?

Let's just say we are not a provider of LIBOR, and we will just leave it at that, Brad.

Okay, well (inaudible).

Can we talk about history, though?

Sure.

In the 1990s, Solomon attempted to manipulate the US Treasury auction, and there was a series of civil claims against settlement by the other primary dealers.

Was Goldman a plaintiff?

I actually do not know.

I don't believe so, but I don't remember.

I would have to go back and look.

Oh, okay.

I think in this one, we are going to watch this for a while.

Well, okay.

So, no comments on LIBOR at this point?

Other than we are not involved.

Bravo.

Thank you.

Fiona Swaffield, Royal Bank of Canada.

Hi, good morning.

Just two small things.

Just a little bit more clarification on the Basel III.

You mentioned 11% now being closer to 10% for 2013.

I just wanted to check that excludes any additional mitigation, and whether now you've got more sight of the rules, whether you may up the mitigation, or give us some details on that.

It excludes active mitigation.

As I said, there is some stuff that just rolls off.

That is included in there.

It largely includes any active mitigation, and it is something that we are really starting to go through with the businesses now, so I don't have a better update for you on it.

But we are going to start looking at it pretty closely.

Okay.

Just a clarification on Investment Management.

You obviously mentioned the impact of the acquisition on the net new assets.

But would it have had any impact on the absolute revenues, Q2 on Q1?

Very, very minor.

Okay.

Thanks very much.

Jeff Harte, Sandler O'Neill.

Good morning.

A couple of, I think, clean-up ones.

On the expense side, it seems most quarters recently we've had the -- an impairment charge related to consolidated investment entities running through the D&A line.

I don't know; it's been something in the neighborhood of $100 million a quarter.

How should we think of that going forward?

Because to the extent that that continues, that would be potentially a meaningful part of the $500 million.

It is not what we were thinking of in the $500 million, but we certainly hope that those diminish over time.

We like our investments to be good investments, and obviously the ones that are impaired are not.

We think we are through a lot of it, but I can't tell you that other things aren't going to go the wrong way.

Is that something we should look at market trends and -- almost like a private equity type, we should mark things up or down?

Or is it -- does that -- ?

No, it tends to be very idiosyncratic.

And it tends to be more based on the performance of an investment rather than the market.

Okay.

You mentioned earlier Europe, and we've heard a lot -- at least we were hearing a lot about market share gains in different businesses as European competitors have pulled back.

As we come into summer and the environment really hasn't been a whole lot better, I guess, A, are you still seeing that?

Is it spreading at all?

And B, how meaningful of an opportunity really can that be for Goldman Sachs?

Look, again, you've heard me say this.

We think that it is an opportunity.

We think that there is going to be needs in Europe and that the banks are retrenching.

But so far there just hasn't been that much activity, and so it is really hard to see it come through.

We think that over time that will be a really -- and certainly over the near term, it could be a meaningful opportunity for us.

But we haven't seen it yet.

Okay.

I guess finally, was there any DVA gains to note in the quarter?

Less than $10 million.

Okay, thank you.

Steven Wharton, JPMorgan.

Hi, David.

I am still struggling a little bit with the comp issue.

I mean, I think we've had this discussion; but it's becoming more material now.

I mean, basically under the Basel rules the capital that you have to have today more than has doubled.

I recognize we're in a cyclically slow environment, but in the past you guys said -- well look, relative to the peer group, our ROTE is better so it justified like the comp ratio that you were producing.

But now your return on tangible equity is in line or even below some of the peer group, and you are still comping at like 44%.

Now, I recognize in the fourth quarter you tend to true that up, so that the aggregate full-year number tends to go into the lower 40%s.

But I mean, at what point do you just recognize like that the business has changed, because of the capital or maybe the revenue environment, and that the new structural, normal comp ratio should be something materially lower, like maybe in the 30%s, so shareholders get appropriate return above their cost of capital?

First of all, I think it is a dangerous thing to compare comp ratios.

Because you have a lot of very, very differently structured firms.

So I don't think you can compare comp ratio amongst firms.

I think we are doing -- we are very cognizant of the returns that our shareholders get versus what our employees get.

As you know, the ratio itself has come down pretty meaningfully in the last several years.

We will see what it ends up being this year.

We also live in a competitive environment.

We could cut comp very dramatically in one year and it would help our returns; but we live in a competitive environment.

We still have people leaving for multiyear offers away from us, some from our competitors, some from other industry participants.

And so we try and balance those two things as best we can.

All right, thanks.

Douglas Sipkin, Susquehanna.

Yes, hi.

Good morning, David.

How are you?

Good, thank you.

Just two questions.

One, you mentioned the IB pipeline had improved a little bit.

Can you talk about maybe where you are seeing that?

Then just a follow-up.

It just seems like on the margin you are starting to see a little bit more M&A activity.

Obviously very gradual.

Maybe you can comment on if something is happening, or is it just guys saying -- all right, this is the environment and we still want to do something?

Thanks.

So the [covenants], first of all, you've heard me talk before about our backlog was up.

It's an indication; you shouldn't read too much into it.

As you know, some deals never get into backlog; some deals that are in backlog don't get done.

But I think it is an indication, and we saw a little bit more activity in the first quarter.

And it was -- yes, I would say more M&A and debt focused than equity focused, given how tough the equity markets were.

You're right; we are seeing a small pickup in M&A volumes.

We continue to see a very large number of discussions.

I think some of that pickup are cross-border deals where people think that they can pick up assets cheap in various locations.

But I think where it is still a question of CEOs becoming more confident before we see a very big pickup in the merger business, which is at historic lows.

So I think we are poised for that to happen, but it's not going to happen until CEOs become more confident.

Great.

Thanks.

Matt Burnell, Wells Fargo Securities.

Good morning, David.

Thanks for taking my questions.

First of all, on the I&L portfolio, given now that you have seen the text of the NPR, are you thinking of any changes to the overall balances within that portfolio from what you have already read in the NPR?

Are you thinking about potentially changing the amount of capital supporting that business?

There are some things that are just proposals, and we are still going through them and trying to understand exactly how to interpret them, because they are not so clear.

But as of now, we are not thinking necessarily of a change in strategy.

But we are going to have to look at what the capital requirements are, and we are going to have to make sure that investments we make will have the appropriate returns given the capital requirements that we have.

And if they don't, we won't make them.

Then forgive me if you've already mentioned this, but I jumped on the call just a couple minutes late.

Any material changes to your stated exposures to the GIPS countries in the second quarter relative to what you put out for the first quarter?

No, they are up a little bit but they are still -- our gross exposure, which as you know is exposure only net of cash and US Treasury collateral but before any hedges, is still under $4 billion; and net, after you take into account CDS hedging, which are with banks outside of the countries, roughly $2.5 billion.

So about as low as it can be and still be operating in those countries.

Then I guess within that, just one additional question on the commercial/high net worth business.

Would there be loans that would be made in that business that would be included in future GIPS exposures potentially?

Or is it more a focus on Asia?

No, it would be there, too.

If we have clients in those areas, if we can structure them well and have the right protections, maybe with collateral outside the GIPS area, maybe with collateral with very big haircuts, we would certainly use the dollar funding capacity that we have, possibly, because we have a lot of important clients in those regions, for loans in those regions as well.

Okay.

Thanks for taking my questions.

At this time there are no further questions.

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

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

If anybody has any additional questions please feel free to reach out to us in the Investor Relations Department.

Otherwise, enjoy the rest of your day.

Ladies and gentlemen, this now concludes the Goldman Sachs second-quarter 2012 earnings conference call.

You may now disconnect.