高盛 (GS) 2013 Q1 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 first-quarter 2013 earnings conference call.

After the speakers' remarks there will be a question-and-answer period.

(Operator Instructions) Also, this call is being recorded today, April 16, 2013.

Thank you.

Mr. Holmes, you may now 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 year ended December 2012.

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, Harvey Schwartz, will now review the Firm's results.

Harvey?

Thanks, Dane; and thanks, everyone, for dialing in today.

I'll walk you through our first-quarter results and then take your questions.

Net revenues were $10.1 billion; net earnings $2.3 billion; earnings per diluted share were $4.29; and our annualized return on common equity was 12.4%.

Overall, a solid result.

As we have talked about in the past, client activity levels are generally correlated to the broader macroeconomic environment.

This certainly proved to be true in the first quarter, as activity levels were mixed as the quarter progressed.

Early in the quarter, continued positive developments in the US economy, specifically in housing and unemployment, drove increased client activity and greater risk appetite.

In January, US new home sales grew by almost 15% month-over-month, one of the largest month-over-month increases in the last few decades.

The US nonfarm payroll report for February came in significantly higher than expectations, with 236,000 jobs created versus expectations of 160,000.

In addition to driving increased client activity and risk appetite, these economic developments helped support rising asset values.

Most notably, the S&P 500 was up by 10% and key credit indices, such as the LCDX and high-yield CDX reached higher by more than 50 basis points.

This created a backdrop for generally improved liquidity and a more favorable environment for managing client flows.

However, later in the quarter market sentiment was mixed, as political uncertainty in Europe and the US began to resurface.

The Italian election and the situation in Cyprus added further complexity to the European outlook.

Specifically, it is events like these that create uncertainty for market participants, who struggle to understand the mechanism and approach for resolving sovereign issues within the euro zone.

Likewise, in the US our clients focused on the potential negative impact of sequestration and the continued impasse related to budget negotiations.

In aggregate, as the quarter progressed, these concerns impacted both client activity and risk appetite.

Client activity levels were mixed across our Investment Banking businesses during the quarter.

Debt underwriting activity continued at the robust pace we experienced in the fourth quarter, as corporate issuers took advantage of a low interest rate environment and strong investor demand.

Equity underwriting activity improved sequentially with higher issuance activity, but is still relatively muted by historic standards.

And announced M&A volumes were down 37% sequentially.

Macroeconomic uncertainty has been an understandable and consistent theme following the onset of the financial crisis and has quite naturally led many of our clients to approach strategic decisions with greater caution.

As CEO confidence is such an important input to M&A and IPO activity, continued improvement in the macro environment will be a key driver of opportunity in these businesses.

Regardless of the macro uncertainty, our people remain focused on serving our clients by providing them with superior advice, and execution, and of course the capital necessary to meet their goals.

I will now run through each of our businesses.

Investment Banking produced first-quarter net revenues of $1.6 billion, up 12% from the fourth quarter.

First-quarter Advisory revenues were $484 million, down 5% sequentially.

Year-to-date, Goldman Sachs ranked first in worldwide completed M&A.

We advised on a number of important transactions that closed in the first quarter, including the SEK21 billion sale of Ahold's stake in ICA to Hakon Invest; the $3.3 billion sale of select Supervalu assets to an investor group led by Cerberus Capital Management; and the $2.4 billion sale of McGraw-Hill Education to Apollo.

We're also an advisor on a number of significant announced transactions.

These include the $23.3 billion sale of Virgin Media to Liberty Global; the $6.7 billion sale of Repsol's liquefied natural gas assets to Royal Dutch Shell; and the $2.6 billion acquisition by ORIX Corporation of a 90% equity stake in Robeco Group.

First-quarter underwriting net revenues were $1.1 billion, up 21% sequentially, a record debt underwriting quarter, with revenues up 17% to $694 million.

In particular, this reflects significantly higher net revenues from leveraged finance and commercial mortgage related activity.

Equity underwriting revenues of $390 million were up 28% from the fourth quarter, reflecting an increase in IPO activity and secondary offerings.

Year-to-date, Goldman Sachs ranked first in global equity and equity related common stock offerings and IPOs.

During the first quarter there were several noteworthy transactions -- Sinopec's $3.1 billion private placement; ArcelorMittal's $4 billion gold tranche equity and mandatory convertible offering; and Intelsat's $3.5 billion high-yield offering.

Our Investment Banking backlog declined modestly from year-end levels.

Let me now turn to Institutional Client Services.

Total net revenues were $5.1 billion in the first quarter.

These businesses produced stronger results in the seasonally weak fourth quarter, driven by an overall improvement in activity levels and market sentiment.

FICC Client Execution net revenues were $3.2 billion in the first quarter, significantly better than the fourth quarter.

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

Rates reflected generally higher activity levels, as clients reacted to the improved economic outlook at the beginning of the quarter.

Our credit business experienced solid client activity and a favorable market environment, with strong issuance trends and generally tighter credit spreads.

Mortgages continued to benefit from strong client demand, relatively limited new supply, and improving prices.

Our currency business reflected higher levels of client activity.

And finally, commodity results improved from what was a relatively weak fourth quarter.

Turning to Equities, net revenues for the first quarter were $1.9 billion.

Excluding the $500 million gain from the sale of our hedge fund administration business in the fourth quarter, results were up 7% quarter-over-quarter.

Equities Client Execution revenues were $809 million, up 6% sequentially.

Commissions and fees were $793 million, up 10% from the fourth quarter on improved market volumes and generally higher market values in Europe and Asia.

Excluding the one-time gain in the fourth quarter, Securities services net revenue of $320 million were roughly flat sequentially.

With respect to Risk, average daily VaR in the first quarter was $76 million, consistent with fourth-quarter levels.

Let me now review Investing & Lending.

We produced net revenues of $2.1 billion in the first quarter.

Investing & Lending includes direct investing, investing we do through funds, as well as lending activities.

These activities occur across a diversified set of asset classes including both equity and debt.

Other Equity Investments generated net revenues of $1.1 billion, primarily reflecting gains from private equity investments.

This strong performance reflects higher global equity prices during the quarter as well as increases in fair value driven by company-specific events.

Net revenues from debt securities and loans were $566 million, driven by continued tightening of credit spreads as well as interest income.

Our investment in ICBC produced a $24 million gain in the quarter.

Other revenues of $375 million were driven by the Firm's consolidated investment entities.

Switching over to Investment Management, we reported first-quarter net revenues of $1.3 billion, down 13% from the fourth quarter, due to lower incentive fees.

Management and other fees were consistent with the fourth quarter at $1.1 billion.

During the first quarter, assets under supervision increased $3 billion to $968 billion, primarily reflecting net market appreciation and net inflows in both fixed income and equity assets, partially offset by outflows in money market assets.

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 43%, which is 100 basis points lower than the Firm's accrual in the first quarter of 2011 and 2012.

Over the past two years we have focused extensively on cost reduction and efficiency efforts.

From a headcount perspective, total staff at the end of the first quarter was approximately 32,000, down 1% from the end of 2012 and 10% from [year-end 2010].

First-quarter non-compensation expenses were $2.4 billion, significantly lower than the fourth quarter, due larger largely to lower other expenses.

In the fourth quarter, other expenses included higher litigation and regulatory expenses and higher charitable contributions.

Noncomp expenses were essentially unchanged from the first quarter of 2012.

And our effective tax rate was 33% for the first quarter.

In terms of capital, there are a number of items to cover with you.

During the quarter, we repurchased 10.1 million shares of common stock for a total cost of $1.5 billion.

These repurchases reflected the completion of our 2012 capital plan.

We also recently amended the terms of our warrant agreement with Berkshire Hathaway, which required a net share settlement on October 1 of this year.

At the end of the first quarter, our Basel I Tier 1 common ratio was approximately 12.7%.

This includes the revised market risk framework that became effective on January 1. Our estimated Basel III Tier 1 common ratio is approximately 9% -- of course, with all the caveats that the rule has not been finalized.

During the first quarter, the Federal Reserve announced that it did not object to our proposed capital actions.

But as required by the Federal Reserve, we will resubmit our capital plan by the end of the third quarter, incorporating certain enhancements to our stress test processes.

We intend to work closely with the Federal Reserve to implement these enhancements.

Before I take questions, let me close with a few summary thoughts.

As I mentioned earlier, macro uncertainty continues to be a meaningful consideration for the global marketplace.

While the environment is slowly improving, there will clearly be bumps along the way; so despite an improvement in the outlook, some uncertainty remains.

Another uncertainty that has occupied investors' minds is the potential impact of regulatory reform on our industry.

While everyone would like clarity, it is natural for these rules to be developed over multiyear time frames, especially given the complexity and the potentially significant ramifications for the global economy.

As a firm we remain a constructive participant in these discussions.

We understand the importance of creating a safe financial system, while meeting our client needs and supporting global economic growth at the same time.

In light of the continued macro uncertainty, we have continued to stay focused on managing the Firm's risk exposures, capital usage, and our expense base.

It has allowed our people to be principally focused on serving our clients.

We believe the combination of our operating discipline and our steady investment in our client franchise has us well positioned competitively.

In addition, it has provided the Firm with the opportunity to generate significant operating leverage as the environment improves.

Regardless of the operating environment, we will continue to rely on the strength of our client relationships, the diversity of our businesses, the caliber of our people, and the adaptability embedded in our culture to deliver superior results for our shareholders.

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

(Operator Instructions) Howard Chen, Credit Suisse.

Hey, Harvey.

I was hoping to get your takeaways on the 2013 CCAR now that it is all said and done.

There was some disparity on the PPNR and stress ratios between you and the Fed.

And I was wondering how that impacts your view on capital planning or running that process internally, if it does at all.

When we think about capital planning, obviously first and foremost, Howard, we think about making sure that we strike that careful balance between making sure that we have capital from a defensive perspective, but also we want to be positioned for the opportunities for our clients.

So that is how -- and we manage that process, obviously, dynamically as we go through.

Specifically with respect to the CCAR, what I would say is we don't have visibility into their numbers; so I really can't comment to any extent on the differences between our submission.

When we go through our submission we think about the events and we approach it from a very conservative framework.

Did that answer your question, Howard?

Glenn Schorr, Nomura.

Curious.

With the market up so much and sluggish revenue backdrop across industries and everything that we know about balance sheets and sheet debt, normally this would be a pretty good world for M&A.

But, of course, there's some bigger overhangs out there.

I am just curious to see what you are seeing.

You made a comment about pipelines.

But as a general comment, as you look out the next year -- plus, why don't we have a better M&A backdrop?

I mean the backdrop is good; why isn't there better M&A activity?

So I think -- and I highlighted it in my prepared remarks -- I really think it is a question of we are very close still to the epicenter of the crisis.

At least in the context of history, right?

So people's memories are very fresh.

And when you have periods of uncertainty, as I said, bumps along the way like events in Europe or big shifts in employment data and economic growth, it doesn't translate well when you think about CEOs who are making what obviously is the most significant decision they are making for their organization strategically.

So I think it is going to be a bit of a lagging indicator, because it will be one of those things that, when we really have stability and confidence, you will start to see it come out of the pipeline.

Having said that, obviously, we feel really good about our position competitively in our M&A franchise.

And it really is just a question of when activity picks up.

Okay.

But I wish I could tell you when.

No, I hear you.

Investing & Lending, is anything you can tell us in terms of much realized this quarter?

I mean markets were up huge, so I would imagine that there were some gains along the way.

But a lot of that is marks?

It really was in line with broad equity markets.

In the past we have pointed you to the MSCI, and so there are going to be periods where we obviously outperform that because of the idiosyncratic nature of the portfolio; periods where we underperform.

But more or less in line.

Still, there is a decent private component to it.

So I am assuming that there are still some big illiquidity discounts used on the private positions.

I don't know that I would say -- I'd want to be careful about the word liquidity discounts.

But I would tell you that we are, as you would expect us to be, very thorough in terms of how we mark the portfolio and as well as our orders.

So these things will be in line with the market as appropriate.

Understood.

Then in commodities, I get the component of the business that would be weak due to just trending lower prices and less structured transactions.

But is there anything on the regulatory front that is changing how you do business, how you think about the business going forward?

Or is it strictly a cyclical phenomenon right now causing the weakness?

No, there is nothing on the regulatory environment that is impacting the way we think about the business specifically now.

Of course there are a lot of rules to come, and so we will get more visibility; and commodities and other of our businesses could be impacted as we see -- as we get more transparency.

But there is nothing in the regulatory aspects of it.

Okay, excellent.

Thank you, Harvey.

Roger Freeman, Barclays.

Hi, good morning.

The Volcker Rule presumably getting pushed out further; I guess latest reports are not till sometime during the second half.

How do you view that, good or bad?

Bad being the uncertainty lasts longer; good is a potentially better outcome.

I think in the end it is all about quality of the rulemaking process.

These are -- and it is not just Volcker.

These are exceptionally complex rules.

They are obviously incredibly critical, not just to the financial institutions that will live with the rules, but really quite frankly more broadly in terms of their impact on the capital markets.

And given the complexity I think it is quite natural that these are going to take time to implement.

The regulators themselves, it is a massive amount of work that they have to go through to get to a place to introduce these rules.

So I think this process in terms of the time it is taking, I think we would love to -- I think everyone would like to have the final rule set in front of us.

Clients would certainly want that.

We would want that.

Our constituencies would want that.

But I think this is very natural and on balance I think even improves the quality of the rulemaking, which to date is what we have seen.

For example in clearing.

I think it is a good thing, on balance.

Okay.

That BDC you are setting up, is that in any way tied to view of the regulatory outcome?

It seems like that might be investing in things that SSG does.

No, not at all.

That is very much just part of our asset management strategy, where we are managing assets on behalf of our clients as a fiduciary.

We obviously have, as a core competence in there, credit risk management skills.

So no, there is -- that has nothing to do with Volcker.

Okay.

Then one other on the reg front.

I guess the first phase of the mandatory clearing has been in effect over a month or so now.

Any comment on how that has gone?

And specifically, anything you can identify on activity levels, like rate and CDS, that is separate from broader market impact?

As you know, and we have talked about this a lot in the past, we are huge proponents of clearing.

And obviously that comes with a caveat, the obvious caveat, that -- as long as it is done safely.

But in terms of as a mitigant to systemic risk we think it ranks quite highly, and so we have been a huge proponent of it.

I think, just getting back to your earlier question, I think in terms of things that were delayed I actually think the delay here was quite thoughtful.

And I think the CFTC in their rollout plan, having the first rollout in March, the second wave in June, I think that is a very constructive way to approach the market.

Because it gives clients an opportunity, particularly the second wave of clients, not the most frequent users, an opportunity to adjust.

And they have a lot of work to do.

There are workflow issues, processes, etc., that go into this.

So I think it has been thoughtful.

With respect to impact on business activity, etc., I do think this is one of these things that, as we get more clarity, it definitely provides people the rules so they can operate in; they're more willing to engage.

It is way too early to measure the impact.

Okay.

Just lastly, inventory levels across FICC, I think they were higher in the first quarter.

Did they end at around the average of the quarter?

Any kind of trends coming into 2Q?

I didn't hear the very first part of what you said.

Did you say (multiple speakers) ?

No; inventory levels.

Oh, no.

No big trends.

Nothing meaningful in terms of inventory.

Okay.

All right, thanks.

Michael Carrier, Bank of America Merrill Lynch.

Thanks.

Just on the OTC side, just given that we are starting down that process, if you think about the different users in the market -- so like corporates, pensions, asset managers, hedge funds -- and if you look at the increased margin requirement, when they're thinking about alternatives -- meaning using a future versus an OTC contract -- is there something that Goldman or the dealers, particularly on that margin disadvantage, is there something that you can provide to make that less of an issue?

So maybe like on the collateral management side.

Just trying to figure out.

Because it seems like there is going to be some users that there will be more incentive to try to use an alternative if they don't have the hurdles like hedge accounting.

But I don't know if on the dealers' side if there is something that you can provide to kind of ease that burden.

Yes, I think that when -- first of all, I would say the following.

We in the industry have lived with uneven requirements in terms of whether it is margin or capital standards; and so some of these things are going to exist.

I think as we get the full view of everything that is out there, I think that the regulatory community and all of us as participants will then have to view to the extent to which there is differences and understand whether or not those incentives are actually the right incentives in terms of reducing systemic risk.

Because remember, the overarching objective here is to reduce systemic risk.

And again I go back to my earlier comment about clearing.

So you don't necessarily want to have significantly different collateral requirements for essentially the same type of risk, because then you can get some unwanted incentives.

Now, having said that, putting that aside for a moment, our clients are driven by their long-term incentive goals.

So they are going to make the best choice they can for executing; and at times collateral may be a more significant component of their thought process, other times other issues will guide how they execute.

Okay.

That makes sense.

Then just on the market share opportunity, there is a lot of stuff that is shifting around, whether it is the increased cost or regulation on the fixed income side.

You guys -- different rules on comp coming out of Europe.

Maybe foreign entities in the US having different capital requirements going forward.

But when you guys size it up, just given the competitive landscape in the different product areas, how much market share opportunity do you think is shifting around and potentially up for grabs over the next, call it, one to two years?

It's a great question.

It is a difficult thing to quantify.

So strategically the way we approach it is making sure that -- and let's just take, for example, the Securities Division.

If you think about the diverse nature of that business, and what you really need to be successful in terms of having scale, but also an ability to deliver the full range of services to your clients -- so whether it is commodities, or interest rates, or prime brokerage, executing blocks in equities -- so first of all, you need to be at scale in this market environment.

Because trying to build, I think, the headwinds are hard given the activity levels.

We feel we are at scale.

We feel quite good about our position both within those individual businesses, but of course geographically also.

So we will have to see over the next several years.

But it feels like there is reasonable market share opportunity, given the environment.

Because as I said, unless you're a leader in some of these businesses I think it is a difficult time to build.

Okay.

All right.

Thanks a lot.

Betsy Graseck, Morgan Stanley.

hi, good morning.

A couple of questions.

One on the reinsurance business.

You broke that out, which is helpful.

Just wanted to understand what kind of impact that has on capital relief when that deal closes.

In the insurance business we're in the midst of the sale process.

So if it is okay, Betsy, I will come back to you with that when the sale process closes.

However, as we go through the new capital rules, the driver here was, as I mentioned earlier, the amount of capital that business attracts under the new rule set.

So we like that business; but under the new capital rules it is really better held in other people's hands.

So it just felt like it was appropriate to move forward with the sales process.

But as it completes we will certainly update you with more info.

Okay.

Then you have in the past outlined opportunities for active and passive RWA mitigation.

Is there any changes at all to the outlook over the next year or two?

No, there are no changes to the outlook.

Obviously, we continue to focus on it very closely.

I've talked about the tools that we have been rolling out; that all continues but on schedule.

So we just continue to work through the process.

Okay, because it just looks like maybe there wasn't as much this past quarter as an average would have suggested.

Is that fair or you --?

No, I wouldn't necessarily say that.

But I think it is hard to look at it in a quarter-over-quarter period.

I think we have to look at it over longer periods.

But we are comfortable with our progress.

Sure, okay.

Do you give details just on numerator/denominator on the Basel III?

The RWAs, for example.

No, we have not.

Okay.

Thanks.

Matt O'Connor, Deutsche Bank.

Good morning.

If I could follow up with a couple questions on the commodities business, there was a blurb last week that you might be selling the metals warehousing unit.

I was just wondering if there was any comment you could provide on that.

No, we have no comment.

Although the only thing I would say is that I know when those things come out and they are picked up in the press they often have not knock-on questions that relate to our commitment to commodities or anything like [dalisen].

We got into that business in 1981 and have invested a huge amount in being a market leader, so we are very committed to that business.

Then just related to just commodities pricing that we have seen the last couple days, obviously a lot of volatility.

And maybe it is too early to know, but is this potentially good for the business, because maybe volumes increase?

Or bad because it is just too much volatility?

Or again, maybe too early to know?

Well, it's definitely too early to know.

But it's really a question of degree of volatility and causes.

I think some of the volatility we have seen, particularly in commodities, looks more like liquidation of crowded positions.

So I wouldn't read too much into it.

Over time, investors will digest the information; and that will translate either into expanded client activity or not.

But I think in the near-term reaction is what I said, mostly liquidation.

Okay.

Then just separately, some other firms have talked about structured products being a little bit better in 1Q.

I would assume that is somewhat broad-based.

But any thoughts on what is driving that?

Is it just as clients look for a yield, or optimism over the economy, or a combination of both?

Yes, I can't comment on anything else -- any of what the competitors said.

What I would say is that -- and you certainly see it in terms of yield activity, and it was reflected in the quarter with respect to both issuers, the opportunity issuers have to issue, and obviously investor appetite as people search for yield.

I guess any thoughts on -- rates have been so low for so long, and obviously this is broadly an area that has been fairly quiet, and it seemed to pick up quite a bit in 1Q.

So it just seems like rates have been low for a while.

I didn't know if it was a combination of that and the economy, or --?

Well, there is certainly a cycle of reinvestment that is occurring.

I think back to last year, at capital committee we were reviewing financing opportunities for our clients, committing capital, bringing things to market.

And many times those same clients were back hat 6, 9 months later in a position to refinance because of the compression of credit spreads and the market appetite.

But if you're asking me when that will change, that is a question I definitely don't have a view on.

And I can guarantee I would be wrong.

Okay.

Thank you very much.

Mike Mayo, CLSA.

So your prior ROE target was 20%.

You have not given a new target, I don't think.

You were 12% this quarter.

Can you just give us some sense of what sort of ROE you guys would hope to have over several years?

With respect to the ROE, it is an important question, Mike; and we still just don't have enough information in terms of capital rules, all the regulatory activity, to give you a view.

What I will tell you is that we remain very focused on our returns both on a relative and an absolute basis, and certainly in the way that we are deploying and managing the balance sheet.

You said your Basel III Tier 1 common ratio was about 9%.

With your passive strategies, if they were all done today, what would that 9% ratio be?

We haven't updated that, Mike.

Okay.

I guess I won't get an answer to the active strategies either.

I am just trying to figure out how much potential there is with both the passive and the active strategies for managing the risk-weighted assets to create a whole lot more capital.

Because it seems like you're willing to buy back a lot of stock here.

You bought at an average price of $150; the stock is below there.

So why not be even more aggressive, I guess?

Well, with respect to capital first of all, in terms of the ratio, you are going to see the work as we do it.

So we want to present it to you.

I am not sure there is a whole lot of value in forecasting it.

In terms of how we think about share repurchase and how we are managing the capital dynamically from quarter to quarter, we are going to make adjustments as we work through.

So if we think the best use of our capital is to return it, we will do that.

And if we think it is best deployed in the business, we will do that.

Then just lastly a separate question.

In terms of rightsizing the business, how do you know if you have downsized too much, you or your competition?

Some are cutting a lot more than others.

How do you know what is the right amount and when you have cut too much?

Right.

That is a great question, because if you look back over the past two years in some respects if you knew you were going to end up down 10% in headcount, you would have rather done that on day one, rather than take two years to do it.

Okay?

But really we don't have a crystal ball.

And this is a really important strategic point about how we have to think about the business.

First and foremost, we need to be there for our clients in all aspects of our business -- Investment Banking, Asset Management, Securities Division.

So we can't shape the opportunity set.

We can only shape how we respond and compete with other market participants.

So we are constantly reviewing it, and that is why you have seen us take the steps that you have seen us take.

Right now for the current environment we feel quite comfortable.

If the opportunity set expanded and the environment continued to improve, you could see us deploy more resources.

And likewise if the environment was to trend downward, I think you would see us respond there, too, of course.

All right, thank you.

Guy Moszkowski, Autonomous.

Good morning.

I am looking at your FICC revenues.

If I adjust them for DVA year-over-year, and I look at the percentage change, you are down about 9%.

And the couple of big peers that have reported so far are also down, but more like mid single digits.

You have identified the drag on the year-over-year comparison as being rate product; but I would expect that some of those other guys who are more big banks would have been hit maybe more by that just based on mix.

Are we still seeing a process of adjustment to your business mix towards the new regulatory realities?

Can you comment maybe on the revenue mix between cash and derivative instruments on a year-over-year basis?

No, those quarter-over-quarter numbers, we don't view those as a big deal.

I don't think there is a lot of information in it.

If the numbers were completely reversed, I wouldn't be pointing you to that as a material item.

There is going to be noise in the numbers back and forth, and we feel quite comfortable with the position of our FICC business.

But again, just to probe on that a little bit, you talked before about the opportunity relative to some of the issues that a lot of the European banks are facing.

And I believe that a Goldman Sachs should be able to actually benefit pretty meaningfully from some of that.

Is that something that we're going to see longer-term?

And again I am going to come back to this idea that, given that you are seeing some change in the regulatory environment because of the change in OTC protocols and everything else, are you making changes to your business in the short term that are driving short-term revenue contraction and preparing yourself for some of these market share opportunities longer term?

Or is there something else that I am missing as I try to figure out what is going on?

Yes, okay.

That's a very important question, so I want to make sure I am clear on this.

In terms of -- again, quarter-over-quarter I don't think there is a lot of read-through for you there.

I think in terms of the opportunity set, as it relates to the regulatory issues, really difficult to speculate on.

For example, the impact of clearing or swap execution facilities we don't have yet; and many of the rules are still outstanding.

If you asked me, I think as you get more clarity on rule sets, clients respond well to that.

Now, with respect to how we adjust -- and this is the strategic issue.

You can -- I covered this, I don't know if you saw; I covered this a bit at the Credit Suisse conference back in February.

But one of the things that we have found is that trying to anticipate rules can be quite costly and you can make major mistakes.

The mortgage business being a really concrete example of when you first saw the Notice for Proposed Rulemaking for mortgages a couple years ago, versus responding to final rules.

So you're not seeing us dial down or up our businesses in anticipation of rules.

With respect to market share opportunities, those are always, in my experience, multiyear events; and they will play out over time.

Okay.

That is actually very helpful.

Thank you.

Matt Burnell, Wells Fargo Securities.

Good morning.

Just a couple of I guess relatively quick questions.

We have heard from a couple of your competitors that the client activity levels over the course of the first quarter were strongest in the first, earlier part of the quarter, weakest perhaps in March.

I guess I am curious, given that your assets were up about 11% quarter-over-quarter but VaR was stable.

Can you give us a sense as to what your activity levels were over the course of the quarter, and what the level of, I guess, conversations were in the Advisory businesses over the course of the quarter?

Client activity, as I said in my prepared remarks, was more active really in the first two months of the quarter, and then it slowed down a bit in March based on just the data that came through.

What we have seen is that clients, whether it is in the Advisory business or those on the investing side, are obviously very sensitive to data and information.

So, for example, as issues started to come back more onto front screens as it relates to issues in Europe, clients obviously pulled back towards the end of the quarter.

But I would say that overall the trend in terms of outlook feels like it is continuing to improve, steady.

But it is not going to be a straight line from here to there.

So our strategy during this time period, obviously, is to stay extremely focused on our clients.

It is an environment where you can really compete on content with your clients because there is uncertainty that they are dealing with.

Right.

Then just back on -- a quick question on I&L.

Can you -- given the strong performance of the markets in the quarter, did that incent you to potentially accelerate a bit of your realizations in the first quarter, given the strong performance of the markets?

Or was that pretty much at steady-state?

No, it's always going to be a function of the market and idiosyncratic events.

And obviously I said there is a correlation.

But there are things -- we don't [look] opportunistically, and the markets will give us opportunities.

I guess just back to VaR, given the volatility in the markets of Cyprus in March, did that have a meaningful impact on VaR over the course of the quarter?

No.

With respect to VaR over the quarter, it was virtually unchanged from the fourth quarter.

Where you see the bigger drop is from first quarter last year to this year; but that is virtually all driven by market volatilities.

Okay.

Thank you.

Brennan Hawken, UBS.

Good morning.

So quick question on the competition for talent here, and maybe potential impact on expense flexibility.

Could you give some color on what you are seeing so far?

And maybe were you guys trying to signal something in that regard with the moderate drop in comp ratio?

I know where you guys peg it in the first nine months; it almost turns out to be arbitrary, given how big the fourth-quarter delta is.

But was that something you were trying to get across?

No.

In terms of talent, quite frankly it feels like one of the better market environments we have seen in quite a long time.

Our ability to acquire and add people to our team seems pretty good.

In terms of attrition, attrition is very manageable and has no -- it is not reflected at all in how we think about the compensation ratio.

Okay.

Then a follow-up on Howard's question.

Is there any color you can give on the resubmission process, how those discussions are going with the Fed?

Maybe any granular specifics about what drove that request and such?

We don't have any color yet; and to the extent to which we can share it over time, we will.

Of course, it is supervisory-level data, but whatever we can share over time we will.

What I will say is that as a Firm that has invested a lot of time and energy both in terms of analytics but culturally around risk, we always look for opportunities to learn.

So we will work closely with the Fed, with the Federal Reserve over the next six months, and we look forward to enhancing any process changes we make.

Okay.

I guess following up on that, the idea of learning as we are going through this, given that now we are starting to see the impact of the stress tests as we move closer to Basel III and some of these rules start getting implemented and included in stress tests, do you continue to think that firms with large -- well, complex global investment banks running with about a 10% Tier 1 common ratio is realistic?

Or do you think that it might end up working out higher than that given how the stress test process has been going so far?

I think it is too early to tell.

And I do think -- look, what I will say is the stress test is a really good concept.

Quite frankly, if there was a version of a stress test prior to the crisis maybe it would have had some mitigating effects in terms of the crisis.

But it is evolutionary, and it is complex, and so we will have to see how it evolves.

Okay.

Then last one for me is just sort of a nit question.

Incentive comp in Investment Management stood out as pretty high, particularly given it is the first quarter.

Was there anything specific behind that, or just the strong markets?

No, I think you are referring -- sorry, just to incentive fees?

Yes.

No, there was nothing --

I'm sorry, yes, incentive fees, not comps.

That's okay.

Nothing there, Harvey?

Sorry.

No, nothing specific to highlight for you.

Okay.

Thanks a lot.

Christopher Wheeler, Mediobanca.

Yes, good morning.

Three questions if I may.

The first one is on the VaR; just interested in the increase in the currency and rates.

Obviously it's an area where you don't normally see too much movement, but you seem to have seen an increase there.

Perhaps give us some background on that.

Second question is on revenue mix.

I think 59% of the revenues last year were in the United States.

I wondered if you could give us a flavor for whether that has changed much in the first quarter, given obviously how rather more robust the US markets were.

And then finally just a follow-up really on that question on the realizations in I&L on equities, because I think you had about $120 billion of [Basel] for the RWA in there at the end of the year.

I wondered had that moved a great deal on the back of the gains you have made, and really what sort of progress you want to make on that over the next 12 months.

Okay, let me make sure I rattle through those.

On VaR, as you know, VaR is measured with a lag.

Our VaR I think relative to competitors is more heavily weighted to the more recent observable time period.

So about the 50% of the contribution.

But there is nothing meaningful in those shifts.

They reflect, generally speaking, client activity and obviously the resultant position.

So there is nothing meaningful about VaR.

The more -- I think more significant observation that everybody should take away was the one I made with respect to last year versus this year, and that as market volatilities increase I think you could easily see increasing VaR over time, but perhaps with the same position profile.

So people shouldn't be -- we are certainly not lulled into any complacency as a result of the fact that the VaR signal is low, because that is mostly driven by market volatilities.

With respect to your second question on business mix, there is nothing significant really to highlight for you there.

Obviously as you would expect, activity in Europe towards the end of the quarter, a little more impacted.

But it really just natural outcome of client activity.

So where you see uncertainty, client activity obviously is going to be impacted.

But I wouldn't say that the mix issue is material.

(multiple speakers)

Your last question on I&L, your last question -- you had I think also a question on I&L.

I did, yes.

Look, we are going to continue to manage that business as we have in the past.

So that is obviously about investment selection, but that includes obviously the lending activities, the debt and the equity.

So it is a diversified portfolio.

It is diversified geographically.

So we will continue to manage that business as we have in the past.

So nothing really to comment there.

Thank you very much.

Thank you.

Douglas Sipkin, Susquehanna.

Good morning.

Two questions.

First, can you just update us on the framework or thinking around capital usage at this very point?

Obviously you've talked about capacity coming out of some businesses.

The stock is at about $143.

You have a pretty significant authorization.

So any change in the philosophy there?

Or is it sort of -- should we be thinking about the 2012 dynamic?

And then on the Asset Management side, I know -- not mentioned yet, but it did look like you guys had one of your better quarters in a while with respect to some long-term flows.

I am just wondering if there was anything you guys could attribute that to.

Thanks.

Sure.

In terms of capital, no, there is nothing there.

And with respect to the Investment Management, we obviously continue to stay very focused on performance; and improved performance always attracts client flows, and we are certainly seeing that.

If I could just follow up with the first question, I guess, when we think about repurchase activity, the framework for 2012 is a reasonable framework for '13; is that a fair statement?

I wouldn't extrapolate 2012 into 2013, because it will be based on the environment.

So if we see continually improving opportunities, which again will be driven by our clients, then we may deploy capital into the business.

And it is a balance.

Got you.

Okay, great.

Thanks a lot.

Fred Cannon, KBW.

Thanks, I just had a follow-up on the BDC issue and Liberty Harbor.

I was wondering if you might be able to size the opportunity there in terms of growth.

You mentioned it is part of an asset under management.

And also if that is part of a broader strategy to attack midsized firms.

Well, no; it's not a strategy specifically targeted against any firm.

It really is just again what I said earlier about deploying our competencies into opportunities that we feel our clients are interested in and would benefit from.

So we will have to see how the business grows over time.

Of course, this will be a multiyear effort, and I think it really gets to the point that we are always looking for opportunities and new products to introduce that our clients want to utilize.

Okay.

Then just one other follow-up.

You have addressed a lot of the issues about the US regulatory environment.

I was wondering if you could comment on some of the issues going on in Europe, particularly the push for a financial transaction tax.

Of course, we are monitoring all that and we are engaged with regulators in terms of discussion.

Of course, it is unclear at this point exactly how this will ultimately be adopted, so it is really not possible at this stage to estimate the overall impact.

I guess I would say that when evaluating any of these rules, all the market participants -- obviously we all have a huge obligation, regulators and clients and ourselves, to make sure that we strike the right balance.

Because we want to make sure that we are ensuring that the best capital markets are built with proper liquidity.

And so these are important decisions.

Then along those lines, I guess I would just follow up.

Is there any sense of where regulation seems to be headed to be the most onerous, whether it is Europe or the US?

Or does it feel like it is the same across the globe?

I don't know if I would say onerous.

I think I would say that if there was a consistent pattern, I think generally speaking for the rules that have been proposed versus how they have been finalized, they have generally started in one place; there has been engagement with market participants; and they generally have migrated to a place that is better for the capital markets.

All right.

Thanks so much.

Fiona Swaffield, RBC.

Good morning.

I just have two quick questions.

One was on the issue of Basel III, where I am struggling to reconcile what happened with the new market risk rules.

It looked to me like it came in a bit better; because you had talked about 350 basis points of improvement, and I thought I'd see that in the RWAs under Basel III.

I wonder if you could talk about why that is not the case.

And the second issue is just if you had any comment on Securities services, just in terms of year-on-year.

Is this a seasonal impact, or is there anything in particular you wanted to note?

Thanks.

On the second question, nothing in particular to note.

The only other thing I would say with respect to the ratios, you're right.

Reference what we -- I think you are referring to what we put in the 10-K.

So what was in the 10-K.

So obviously the performance for the quarter and also we received some feedback from the Fed with respect to the numbers, which improved to them.

But then what I can't quite understand is why we didn't see that in the Basel III number, because obviously it is part of the component.

No.

Well, I did say approximately, so I am not going to be specific as to the number, but there is improvement there as well.

Okay.

Thanks.

Jeff Harte, Sandler O'Neill.

Hey, good morning.

Kind of a macro thought question.

Thinking about the FICC revenue outlook, and I guess I am specifically thinking -- we've been waiting for higher-margin businesses like mortgages to pick up for a while.

Now that we are seeing it, we are actually seeing FICC decline.

I am having a little trouble balancing between the importance of larger what I usually think of as being lower-margin businesses like rates, versus the smaller but typically much higher-margin businesses like mortgages.

As activity picks up, obviously you're going to see it.

But I think the key for us is the diversity of the franchise.

So as I said earlier, we are want to make sure strategically that -- and look, we are far from perfect and there's always work we can do on improving our businesses, and we stay very focused on that.

But we want to make sure that we are positioned within each one of the businesses.

Where we really get the benefit in a market environment like this is the diversity, both within products but also geographically.

Should we sitting here today be happy because we see mortgages picking up?

Or should we be more concerned that rates is probably not going to hit the revenue levels that it hit historically?

We don't -- I don't know if I'd describe it as happy or sad.

I think again we have to -- we don't create the environment.

We just have to make sure we are best positioned for our clients to respond to it.

So for example right now, as you point out, we've had -- and I mentioned it in the earlier comments -- a big improvement in housing.

There has also been investors desirous of yield, and so you see things starting to turn on in terms of the mortgage business.

But it may not correlate, for example, with the rates business, which is why I highlighted the diversity aspect.

It will be the case -- I don't think -- we don't expect necessarily very frequently all the cylinders to fire at the same time.

Okay.

As we are thinking about comp expense, what should we -- and this may have been touched on.

But what, if anything, should we read into a year-over-year decline in the accrual ratio, despite I&L actually being a smaller portion of revenues year-over-year?

Should we be looking for continued comp expense efficiency-driven improvements going forward?

There was no change to the way we thought about the compensation ratio this year versus prior years.

Just to be thorough, as you know and we talk about this a lot, it is driven by performance, other issues, the competitive dynamic, and what is happening in the broader environment.

And in the end it is our best estimate.

Now, what I would say is that certainly the expense efforts and the control efforts we put in over the past two years give us some degree of flexibility.

And that is represented in the number.

Okay.

So your best estimate now is lower than your best estimate a year ago.

Can I paraphrase to say that is at least partially structurally driven, as opposed to business mix driven?

I'm thinking about that exactly.

I think that is fine.

Okay, thank you.

Eric Wasserstrom, SunTrust.

Thanks.

Harvey, I just wanted to return to the VaR issue.

Most of my questions have already been answered.

But you made a comment, I just wanted to make sure I understood it, which was that we should directionally expect the VaR dollars to increase but in a similar mix of categories.

Is that correct?

What I was trying to say was the following.

There is obviously multiple inputs that go into the VaR calculation.

One dominant factor obviously is market volatilities that we experience during the process.

So for us there is a bit more of a weighting towards the more recent time period.

Roughly 50% of the VaR calculation is impacted by the last three months' volatilities.

So when we saw -- what I was trying to do was just draw a line under the 95% from last year I think it was, down to 76% this quarter.

And that was driven mostly by drops -- a decline in implied volatilities in the marketplace.

Okay.

Not from position change.

What I was really saying was it wouldn't surprise me; at some point, volatility will increase.

Who knows?

It could be soon, it could be a long time from now.

But I also wouldn't read too much into my comment.

Okay.

I guess the real crux of my question, though, is that it sounds like based on what you are seeing from client activities this current VaR profile would remain pretty consistent, without any changes in broader volatility.

That is too hard for me to predict.

If you're basically saying if the second quarter is exactly the same as the first quarter, it might look like that; but I think clients are going to drive activity as they always do, and it is a dynamic world.

Great.

Thanks very much.

Chris Kotowski, Oppenheimer & Company.

Yes, hi.

I just wanted to see if I could pin you down on the compensation question with a little bit more specificity.

Should we read into that decline that the Goldman Sachs company is dedicated to achieving positive operating leverage, in the sense that if revenues are flat to up by when we see the fourth-quarter number the compensation ratio should be slightly down?

I don't want to attach too much to the compensation ratio itself.

What I would say, Chris, is you should 100% assume that in all aspects of our business we are always looking for operating leverage.

And at the same time we are making sure we find that balance between how we compete for talent, compete against our competitors generically, and most importantly how we serve our clients.

Okay.

Fair enough.

Thank you.

Jim Mitchell, Buckingham Research.

Yes, good morning.

Just one follow-up on the derivatives reform.

With the May 1 deadline looming for signing up clients, for them to register for swaps trading, do you see that as an issue in terms of activity levels?

Do you think it gets extended?

How do you think of -- how should we think about that impact this quarter?

This is again one of these things that is really, really difficult to predict.

So we will monitor it.

And one of the things that we have learned in terms of regulatory changes and market structure changes is that the key is less about predicting output -- outcomes and more about responding to them.

So we have a long history of adapting, and so as these rules become live we are going to have to adapt as are our clients.

And we will have to adapt better than our competitors.

Historically we have been good at that, but we will have to deliver in the future.

Fair enough.

Maybe taking a little bit of a longer-term view, as you get more prepared for and moving things to clearing and the increasing electronification of FICC, do you see offsets here?

What is your view on how expenses react to greater electronificaiton?

And should that offset I guess most people's view of declining revenues in that type of environment?

Again, difficult to predict; so I think it is better to look at history as a guide.

The electronification of FICC has been obviously happening for a number of years.

You can go back to early part of 2000s with the advent of Tradeweb in government bonds, and then simultaneously the foreign exchange markets.

So electronification is not new to us in FICC and obviously Equities broadly.

So for us electronification I think is a bit of a muscle memory issue.

And of course as you know, I do think we have some competitive advantage given that we have one platform in SecDB which, when rules become final and as markets become more electronic, a lot of this is about speed and ability to adopt new procedures and respond, because that is what our clients need.

So with respect to the forward, obviously there are some operating efficiencies that can be gained.

You may get new revenue development and new products.

But I think those things are much harder to forecast.

No, fair enough, but I guess --

You really have to look at our experience in terms of how we have done it.

Sure, I guess.

But if we look at Equities it did seem like you had -- following more electronic move to commission, you had less volatility and better returns.

Do you think that that is a logical outcome for fixed income as well?

Again, like I said, I think if you look at the case study -- and we can -- Dane I think can walk you through more specific examples off-line.

But if you look just at us, case study of equities, foreign exchange, government bond trading, etc., I think our history is good.

But we have to execute.

Okay.

Fair enough.

Thanks.

At this time there are no further questions.

Great.

This is Dane Holmes.

I would like thank all of you for joining us for our first-quarter earnings conference call.

If you have any additional questions please feel free to contact the Investor Relations Department.

Otherwise, enjoy the rest of your day.

Thanks very much, everybody.

Ladies and gentlemen, this does conclude the Goldman Sachs first-quarter 2013 earnings conference call.

You may now disconnect.