高盛 (GS) 2013 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 2013 Earnings Conference Call.

Also, this call is being recorded today, July 16, 2013.

Thank you, Mr. Holmes, you may begin your conference.

Good morning.

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

Welcome to our second-quarter earnings conference call.

Today's call may include forward-looking statements.

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

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

For a discussion of some of the risks and factors that could affect the Firm's future results, please see the description of Risk Factors in our current annual report on Form 10-K for our 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 and regulatory capital ratios that are 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 to everyone for dialing in today.

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

Net revenues were $8.6 billion.

Net earnings, $1.9 billion.

Earnings per diluted share, $3.70.

Our annualized return on common equity, 10.5%.

For the first half of the year, our return on common equity was 11.5%.

All in, a solid outcome in what continues to be a dynamic market environment.

On our earnings call last quarter, we discussed how the evolving economic outlook impacts client activity.

Varying economic data and substantial central bank actions during the quarter caused our clients to continually reassess their expectations for global growth.

As a result, our clients' risk appetite and activity levels fluctuated over the course of the quarter.

At the beginning of the quarter, our clients remained focused on the European economic outlook.

As the quarter progressed, solid economic data out of the US began to moderate economic concerns.

Client activity, risk appetite, and asset prices improved as a result of the increased confidence in the US economy.

Macro concerns emerged again towards the end of the quarter, and were reflected in lower activity levels and risk appetite in certain businesses.

In addition, the market volatility created more challenging periods within the capital markets for managing client flows.

As I previously mentioned, Central Banks around the world were particularly active during the second quarter.

This activity was a key driver of market sentiment during the quarter.

In Japan, the Central Bank undertook unprecedented monetary action to stimulate their economy.

During the second quarter, the yen declined by approximately 5% versus the US dollar, and 7% versus the euro.

The marketplace tried to weigh the potential near-term benefits for the Japanese economy against the relative headwinds for other parts of the world.

In the US, commentary from the Federal Reserve about potentially tapering its bond-buying program led to a significant rise in interest rates.

Market participants continued to debate the timing and impact of tapering on both the market and economic activity.

Clients were also concerned with the potential slowdown in China during the quarter.

Ultimately, our clients are assessing the broader global economy.

Specifically, whether a recovering US will offset potentially slower growth in other economic regions.

I'll now run through each of our businesses.

Investment Banking produced second-quarter net revenues of $1.6 billion, roughly consistent with the first quarter.

Second-quarter advisory revenues were $486 million, consistent with the first quarter.

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

We advised on a number of important transactions that closed in the second quarter, including News Corporation's approximately $9 billion spinoff of its publishing business, Hess's $2.1 billion sale of its Russian subsidiary to Lukoil, and Siemens's GBP1.7 billion acquisition of Invesys Rail.

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

They include Canada Safeway's CAD5.8 billion sale to Sobeys.

Springer Science+ Business Media's EUR3.3 billion sale to BC Partners, and Lender Processing Services' $4 billion sale to Fidelity National Financial.

Second-quarter underwriting net revenues were $1.1 billion, relatively consistent with a robust first quarter, yet underwriting revenues were very strong at $695 million, and represented a record quarter.

While the pace of commercial mortgage-related activity slowed, leverage finance activity remained strong.

Equity underwriting revenues of $371 million were down 5% compared with the first quarter.

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

During the second quarter, there were several noteworthy transactions -- Apple's $17 billion first-ever debt offering; Valiant Pharmaceuticals' $9.6 billion debt and equity financing; and JC Penney's $2.3 billion term loan.

Our investment banking backlog was consistent with first-quarter levels.

Let me now turn to institutional client services.

Total net revenues were $4.3 billion in the second quarter.

Fixed client execution net revenues were $2.5 billion in the second quarter, lower than the first quarter, but higher than the second quarter a year ago.

This quarter results continue to reflect a broad contribution across businesses, and reinforce the benefits of having a diversified franchise.

While activity levels in our currency business remained strong, as clients reacted to increased volatility, particularly in Asia, results in other businesses were lower than the first quarter.

As you would expect during a period of increasing interest rates and widening credit spreads, client risk appetite declined in rates, credit, and mortgages, and inventory management was a bit more challenging during the latter part of the quarter.

Commodity results decreased relative to the first quarter, as volatility remained low in many of our core products, and client activity was lower as a result.

Turning to equities, net revenues for the second quarter were $1.9 billion, down modestly from the first quarter.

Equities client execution revenues were $638 million, down 21% sequentially, largely reflecting the impact of the sale of our reinsurance business.

Commissions and fees were $836 million, up 5% from the first quarter, due to improved market volumes.

Security services net revenues of $376 million were 18% higher sequentially due to seasonally stronger client activity.

With respect to risk, average daily borrowing in the second quarter was $81 million, up 7% from first-quarter levels, due to higher volatilities, mainly in currencies.

Adjusted for volatility, VaR was relatively unchanged quarter on quarter.

Let me now review investing and lending.

We produced net revenues of $1.4 billion in the second quarter.

Investing and 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.

Equity securities generated net revenues of $462 million, primarily reflecting gains from private equity investments.

This increase in fair value was driven by Company-specific events and strong corporate performance.

Also, we sold our remaining stake in ICBC during the quarter.

The net gain over the quarter was a modest $7 million.

Net revenues from debt securities and loans were $658 million, driven by Company-specific events and interest income.

Other revenues of $295 million were driven by the Firm's consolidated investment entities.

Switching to investment management, we reported second-quarter net revenues of $1.3 billion, roughly consistent with the first quarter.

Management and other fees were $1.1 billion, up 4% sequentially.

During the second quarter, assets under supervision decreased $13 billion, to $955 billion, primarily reflecting net market depreciation in fixed income 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 and benefits, was accrued at a compensation-to-net-revenues ratio of 43%, which is consistent with the Firm's accrual in the first quarter.

Second-quarter non-compensation expenses were $2.3 billion, 5% lower than the first quarter, largely due to the sale of our reinsurance business.

Our effective tax rate for the quarter was 27%, driven by earnings that were permanently reinvested abroad.

Year to date, our effective tax rate was 30.4%.

On capital, we repurchased 10.5 million shares of common stock for a total cost of $1.6 billion during the quarter.

Our basic shares outstanding were $468 million at the end of the second quarter, down close to 6% over the last four quarters.

At the end of the second quarter, our estimated Basel III Tier 1 common ratio under the advanced approach was approximately 9.3%, and reflects the final Basel III rules that were issued by the Federal Reserve on July 2. Obviously, we are still reviewing the final rule, but this is our best estimate, subject to change, depending on regulatory clarifications.

Now, over the quarter, we took a number of strategic actions to bolster our capital position.

As you will recall, we announced the potential sale of a majority stake in our reinsurance business, given the Basel III capital charges that we incurred, and a 100% owner of the business.

We completed the sale of our reinsurance business in the second quarter.

The sale improved our Basel III capital ratio by approximately 50 basis points, and reduced the Firm's balance sheet by $17 billion.

This benefit was partially offset by implementation of the final Basel III rule set.

Now, at 9.3%, we are close to having achieved our previously stated target of the 8.5% requirement, plus an approximate 100-basis-point buffer.

Regarding the leverage ratio, we [all saw we] received the NPR last week.

Given it's in the proposal stage, it is hard to speculate on how it will ultimately be finalized.

However, we have significantly reduced our leverage since 2007.

Since then, we've reduced our assets by roughly $180 billion, while increasing our equity base by over 80%.

As a result, we feel reasonably well positioned for the new leverage requirements at both the holding company and the bank subsidiary.

But once again, it's a proposal, so we will work with the regulators over the coming months.

Effectively managing the Firm requires us to comply with a variety of different regulatory measures.

Just as we have improved our Basel III capital ratio, we will have to continually adjust to any new regulations as they are finalized.

As we have said in the past, a high level of risk-adjusted capital not only provides protection against tail events to all of our constituents, it also creates the foundation for capturing opportunities.

With higher risk-adjusted capitalization, we are better positioned to help our clients navigate on uncertain economic environments, and we can provide them with risk capital where capacity is diminished.

An essential part of our role as managers on behalf of you, our shareholders, is to manage our capital effectively and efficiently, in order to generate superior long-term returns.

Now, in closing, we are cautiously optimistic about the outlook for the operating environments.

Nevertheless, we remain vigilant regarding expenses and risks.

Given the dynamic nature of the marketplace, it's natural for people to become somewhat short-term focused.

However, everyone at Goldman Sachs remains keenly aware that our success will be measured over years, as opposed to weeks or months.

To that end, we are going to continue to invest in deepening and expanding our client franchise, building relationships that will pass the test of time.

We will continue to invest in our people, recruiting and retaining a group of professionals who are committed to providing solutions to our clients, and driving value for our shareholders.

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

Howard Chen with Credit Suisse.

Hello Howard, how are you?

Well thanks.

How are you?

Great, thanks.

The more challenging conditions that you spoke to in the back half of the quarter with respect to client risk appetite and inventory management, was hoping you just could comment, have those difficult conditions persisted as we've re-based it at new higher levels of US benchmark rates or have they abated a bit?

So I'd say it does feel like they've abated a bit.

You see in the day to day volatility, and that is really about I think the adjustments to people basically recalibrating to both a somewhat a wider credit spread environment and obviously higher absolute interest rates.

And you can see that obviously it's quite visible for example in movements in the 10 year.

So, I think people are adjusting.

What I would say is that, it's now a very information-centric environment.

And what I mean by that is, people, all of our clients, are going to be very keenly watching data, economic data, whether it's non-farm payrolls in the United States, GDP growth in Europe, Japan, China, really trying to form their view.

Because for a very long period of time, I think there was an expectation that this unusual low rate environment would persist.

And to some extent, people could build expectations around that.

And now that we might be entering a different regime, you'll see people probably respond more to data.

But then again, it's hard to [read].

But I would say, to answer your question the short way, which is it does feel like people have recalibrated at this stage.

Okay.

And by the way, and some of this, Howard, is returning to kind of normal interest rate levels.

It feels good in some respects.

In terms of the economic activity.

And that's where I was hoping to go next.

It feels like we've been talking for a couple years now about this wall of client liquidity.

That's out there.

And the near zero interest rates creating more of a one-way market in certain clusters like credit and mortgages.

Have we seen enough of a move in your mind to see more two-way flow in some of these businesses that we've been hoping for?

I think it's too early to tell, which is why I highlighted the sensitivity to economic data.

People are going to form their impressions over the next several months, and certainly everybody will be watching.

Clients are basically sitting on the edge of their seat for every communique out of the Federal Reserve.

And so there will be some sensitivity.

But it feels like we're tracking more back to a period of normalcy.

Great, thanks.

And then I was hoping you could just update us on all of what the firm experienced as we progressed through Phase II of US mandatory clearing.

Not only in all of what you're doing with respect to centralized clearing efforts, but also maybe just broad health, liquidity, bid-ask spreads of the over-the-counter markets as we went through that transition.

All right.

So obviously from a Goldman Sachs perspective and just as an industry participant, we're thrilled to see clearing really coming into vogue now.

And as we talked about on the last call, while it's taken a while and people can be frustrating at the pace of things, the reality is that I think the regulators and market participants have done really an excellent job of the progression of Phase I and Phase II.

And as you saw, there were lots of concerns in the marketplace, and for all intents and purposes, it went through without any hiccups.

I think as it relates to sort of any material move in bid-ask spreads or volumes, there are no material change there.

And it's too early for that.

I think to the extent to which clearing has a long-term impact to market structure, it will happen over many months and years like we've seen in other marketplaces.

Okay.

Thanks.

And then just finally for me, thanks for the color on Basel III preparation.

But just given the proactive steps you took with the reinsurance business and I see [BC stakes], I was just hoping you could just update us on your current Basel III RWA breakdown, and just where are you on passive and active mitigation.

Thanks.

Sure.

So it's been a while since we've updated this audience on risk-weighted assets.

I do want to walk through this a little bit carefully.

The last time we talked to you last year, we gave you a number of $728 billion in terms of risk-weighted assets.

That number is now $600 billion.

I'm going to break it down, and then I want to come back and reference the $728 billion I just mentioned.

So the $600 billion, our best estimate, given the final rule is $180 billion for market risk-weighted assets, $340 billion for credit, $80 billion for operational.

Now you can obviously do the math, but that translates into $56 billion of Tier 1 common.

The reason why I want to draw everyone's attention to the comparison of the $600 billion to the $728 billion, is because the way the final rules came out, there were certain deductions that we were previously assuming would be risk-weighted assets, which actually became deductions to capital.

And so the $600 billion versus the $728 billion is not really apples-to-apples.

The best way to think about our current position under the final rules is the 9.3%, which obviously, as I said during my prepared remarks, is 20 basis points within range of the buffer.

In terms of passive, you should be thinking about roughly $35 billion in risk-weighted assets that will roll off between now and the end of 2015.

Thanks, Harvey.

Roger Freeman with Barclays.

Good morning, how are you?

Good thanks.

Thanks for taking the questions.

I guess one, just maybe bouncing off a couple of things Howard was asking.

So the market quality in rates and credit, would you characterize that as more normalized now in July?

It sounds like in June, that lack of sort of dealer liquidity provision has maybe contributed somewhat to the gapping in spreads.

And I'm just wondering if that's part of the new world we live in now with the new regulatory environment where asset prices move and dealers are less apt to sort of take positional risk?

Yes.

So I think it's -- I would describe it more as things are episodic.

In other words, I don't think there's a massive transition that's occurred in terms of four weeks ago to today.

Clearly when you get big moves in interest rates, all market participants are going to adjust their risk profiles.

And you'll see flows, for example, out of fixed income assets into other assets.

I think that's, as I said, I think it's quite normal for us to see this.

And people are really in a position of reassessing their risk profile.

But in terms of Goldman Sachs, I can't speak for the rest of the Street, Goldman Sachs is -- we feel quite well positioned in terms of our ability to commit capital for our clients.

Okay.

Thanks.

And in I&L, I was wondering if can -- and you've talked a lot about this in the past, but just help us think about maybe the average age of maybe buckets within there.

I'm trying to -- you've been coming in ahead of expectations.

Obviously this is a tough one to forecast, but I think you, like a lot of public/private equity firms we cover have aged portfolios, and there's a realization process going on.

And I wonder if you can kind of help us think about really where you're at in that cycle.

Well, as we've guided with everyone in the past, generally speaking for the equity portfolio, a reasonable guide could be the MSCI.

Obviously, there's divergence in this period.

And as we've always told people, it's really just a guide.

And there are going to be periods where idiosyncratically there's elements of the portfolio where we under perform and there's going to be periods where we over perform.

Obviously relative to that kind of benchmark, in this quarter, we outperformed.

And it really is a combination of things like debt repayments, and adjustments, obviously interest income is in there.

And again, idiosyncratic components of the portfolio.

In terms of aging, I didn't bring specific numbers with me, Roger, but the private equity portfolio obviously tends to have a longer term frame on it relative to the debt portfolio.

But we can follow-up with you and give you more detail, if that's helpful.

Okay.

All right.

Thank you.

And just maybe lastly, just the liquidity levels can either run high, and again it's kind of early days and thinking about leverage ratios, and how some of those liquidity assets get sort of calculate in into that.

Does that kind of change your thinking about how much liquidity you want to run with?

So we're always going to run with an amount of liquidity which is really designed to protect the Firm, and at the same time, put us in a position where we can provide capital and liquidity to our clients.

With respect to the sort of metrics out there, things like the liquidity coverage ratio, and we feel very comfortable with respect to things like that.

I don't know if you were going there, but in terms of -- because you mentioned leverage ratio, the only comment I'd say is that we're never going to modulate our liquidity down because of a given metric that's in the marketplace, even if a incentive exists for that.

Okay.

Great.

Thanks a lot, Harvey.

Michael Carrier with Bank of America.

Thanks, guys.

Hello, Michael.

Hello.

First question, maybe just back on the leverage ratio, some of your peers have put out some guidance in terms of kind of a first take.

If we look at Goldman and what you've done on the Tier 1 common ratio, yes there's obviously some mitigation that can be done.

So if you are below that 5%, how do you guys think about achieving that, whether it's through areas of asset mitigation that won't have a significant impact on the earnings power of Goldman, or raising preferreds, or just what are the levers that you guys have to get there?

Again, this is a rule that just came out.

It's in proposal form.

And as I said, our first assessment is we're very comfortable with where we are.

Now again, that probably shouldn't be a surprise to anyone, given all the work that's been done on the balance sheet since 2007.

With an 80% increase in shareholder equity, and a decrease of $180 billion in the balance sheet.

As I said, that's the kind of metric that we should be reasonably well positioned for.

Having said that, it's in proposal form.

So we'll have to see the final rule.

And the only reason I'm not being more specific about numbers at this stage is the team really hasn't had the time to go through the kind of diligence that we would normally want them to.

But as I said, first read, we feel comfortable.

Let's see how the final rule goes.

We'll work with the regulators.

Okay.

Got it.

And then on the fixed side of the business, there's a lot of I'd say uncertainty or debate on what the outlook is.

Just given higher rates, potentially as a client on the [down] rating side and then fund outflows in certain products.

On the flip side though, you basically have market growth.

And the if Central Banks are less, or are backing out and are not as intervening in the market it seems like volatility levels, particularly in rates and FX, could resume to more normalized levels.

So when you look at the longer term outlook of [FIC], it doesn't seem as if it's that simple, that rising rates should be more negative to the business.

But just wanted to get your take on, when you think about the headwinds versus the potential for a more normalized market environment in some of the product areas, what could we potentially see over the next couple years?

It's a good question, but obviously, exceptionally difficult to answer.

Time will tell on that.

And as we, as a Firm, have had to navigate multiple rate regimes.

If you just think about the rate regimes that we've experienced since 2000, and the volatility associated with that, and not to suggest we haven't been in an unprecedented period of sort of globally coordinated declining rates.

But I do think that the extent to which rates are a proxy for thinking about the fixed income business from a forward view, I think it really depends on what the driver is.

I think even though it seems exceptionally unlikely, if rate increases were due to things like inflation, then I think it's a different scenario, than if it's as I said, kind of a returning to a normal world of more steadily economic growth.

I think that's a reasonably attractive opportunity set.

Not just for FIC potentially, but obviously across the entire firm.

And so, that's what we're rooting for.

Now in terms of strategically positioning the business, and we benefit from the fact that it's diversified.

We can interact with our clients across the full suite of their interests, whether it is currencies, mortgages, interest rates, and we have the global footprint required to do that.

So in a quarter like this where Asia becomes particularly interesting, we can deliver for our clients, because we're positioned and we're strategically connected to do that.

Okay.

That makes sense.

And then just finally, just on the expenses, I think you mentioned the non comp it impacted on the reinsurance business.

On the compensation side, anything -- it just seems like with the pickup in activity, you get some higher competitive environment, it gets a little bit tougher.

Just any update on that front.

And then just on the tax outlook, when you said the earnings permanently being I think directed outside, is there something that's going to be more like ongoing in terms of the tax rate or was this more of a quarterly benefit?

No.

So as it relates to the tax rate, you should just think of this as a quarterly benefit.

The war for talent, this is -- it's something we do every day, I would say that there's nothing that we see in terms of sort of a shift.

Goldman Sachs' people are always in high demand, and our competitors are always looking to take them over to their firms.

I will say over the past several months, we've always felt like we're well positioned to recruit.

I will say it's felt like we've had some recruiting tailwinds this year.

Whether they're sustainable, we'll see.

Okay.

All right.

Thanks a lot.

Betsy Graseck with Morgan Stanley.

Hello, Betsy.

Hello, how are you?

A couple questions.

One just on the leverage ratio, when you say you're comfortable, what's your definition of comfortable?

Comfortable.

So like --

I'm not trying to be cute with you.

Look, it's just come out.

Our team has looked at it.

Our early read is all the things we've done on the balance sheet over the past several years have left us reasonably well positioned.

And so I know that perhaps you would like me to get more specific into the math, but at this stage I just want to give the team the final time to really dot the Is and cross the Ts.

But as I said, we think we can manage without any major adjustments certainly.

Okay.

Just to get, by year end '18, to get to the 5% and 6%, is that -- because when you --

No.

Sorry, sorry, by comfortable, I don't mean that time frame.

But again I want everyone to really note, this is a proposed rule.

So let's see how the dialogue evolves with the regulators.

Yes, I get it.

Okay, on the RWA walk through which was helpful, I guess I'm wondering, you'd mentioned the $56 billion on the common Tier 1. And that there were incremental deducts, right, relative to what you had -- what was in the proposed rule.

So could you help us understand what you think you can do to mitigate those deducts going forward?

Well, right now as it relates to the ratio, we're pretty comfortable.

As we stated before, we plan to run with 100 basis point buffer and putting us in range of 20 basis points of that, given the incredibly long fly path to compliance in 2019, we feel pretty comfortable.

And one thing I do, you didn't ask specifically about this, but one thing I want to give people a sense for, is we talked about this 100 basis points buffer.

So that we can give people an estimate of where we thought we would ultimately land, of course that was operating under a proposed set of rules, not finalized.

So the way we typically work with metrics at Goldman Sachs is we introduce our own metrics, for example, is we'll work with them.

We'll monitor them.

We'll see how they move.

And so we're going to do the same with this final Basel III rule now that we have it.

And so in that sense, we feel quite comfortable.

Now, in terms of the specific deductions, they mostly relate to financial institutions.

And it's a specific deduction, and we can get into the weeds offline if you'd like.

But it relates to investments in funds and other things on balance sheet.

Now, it happens to be the case that that sort of coincidentally runs parallel with sort of mitigating actions that we're taking under the what we think the Volcker Rule will be when finalized.

So we feel pretty good about that too.

Yes, I was wondering what optionality you have to reduce the deducts.

And it sounds like there's some, and you'll work on it and you'll address it as it happens.

Is that fair?

It's always been the case, and look, we like to build it into the muscle memory of the Firm that everyone knows we're going to have to adapt.

I think if you look at what we've done over the past 18 months as it relates to the Basel III ratio, and now we have the final rule we can really discuss it with you in clarity, which is nice.

I feel very good about our team's ability to continue to make progress.

And on the tax rate, you indicated in the press release and on the call that you made elections to permanently reinvest some earnings overseas.

Does that imply a tax rate going forward that's different than what it's been in the past?

The first half was 30%.

Is that what we should be using going forward?

No.

I answered that question just a second ago, Betsy, you might have missed it.

You should think of it as a one time event for this quarter.

Okay.

All right.

And then lastly on the reinsurance business, did you go through how that's going to be impacting -- you indicated the capital impact, but I'm just wondering, is there more to come with buybacks since it is positive for your Basel ratios?

Did do you everything with the buybacks that were you going to do this quarter with the reinsurance business?

The reinsurance business change freed up capital.

Did you finish doing what you wanted to do with buybacks relative to that this quarter, or is there more to come in the four quarters?

Okay.

I think I understand the question.

But if I don't, you should correct me.

Okay, sorry.

We don't think about the capital management necessarily as being specifically linked to one individual asset disposition.

So, it's a much longer time frame in terms of how we think about the capital management.

And so, an easier way for me to say that would have been based on the quarter that we just went through, if we ended up selling the reinsurance business in the third quarter you would have seen the same repurchase activity.

Am I getting to your question, Betsy?

Yes, I got it.

So actually on the reinsurance business, again, I would say it was a business that we liked in Goldman Sachs.

It didn't make sense, obviously, under the new rules, and so we're in a position where quite frankly, a win-win for us and our clients in the investing division, because we're able to take the actions that we did.

So --

All right.

Thank you.

Brennan Hawken with UBS.

So a follow up on Mike's question.

If sort of the market is a bit more data driven, does that mean that you guys would expect that the rates business should remain strong as clients continue to adjust and reposition based upon incremental data points coming out?

Very difficult to tell.

And we don't run the business week to week in terms of how the market is responding.

Obviously, we stay very focused on the risk dynamics in the marketplace, when we go through it in the risk committee and obviously in the trenches.

But strategically, the way you have to interact with clients, whether it's, for example, long-term investors that are managing pension obligations or insurance companies, and the flip side, those that might be even more market sensitive to our total return business, so we just have to make sure that we stay very, very focused on our clients.

And it's a good opportunity, because it's a content differentiating world right now.

And so, we have an opportunity to do that.

We just have to deliver.

Okay.

And then I guess when you think about, in that context, thinking about your business and how you guys are approaching it given what you're seeing, we're seeing some swelling growth out of China, the strengthening dollar.

How do you think about the positioning of the commodities business in that context?

And while certainly it might not change strategic perceptions of that business, maybe does it have an impact on your thinking from a tactical perspective?

I think it's accurate to say it literally has zero impact in how we think about the data we match in the commodity business.

And I emphasize the zero only because we run that business for the long term.

We entered that business in 1981.

It's been core to our clients, and core to the entire integrated strategy of the security division, which includes both fixed income and equities.

And so those kinds of near-term adjustments in the marketplace, super relevant to the conversations that our people on the ground are having with their clients all around the globe.

But, not a dictator to us in terms of how we think about our multi decade commitment to the commodity business.

No, sure.

I just was curious about whether or not it might impact more short-term tactical decisions as far as capital allocations and the like.

No the capital, we don't dial down the capital to the business.

The client demand and the client activity levels will drive the capital needs that we provide.

Okay.

That's fair.

And then last one for me, it looks like there was some a moderate issuance of some preferred this quarter.

Did that have anything to do with the leverage ratio coming out, or was that something else driving that issuance?

No, that was part of our long term capital plan.

We had no insight into the leverage ratio.

Okay.

I had to give one last parting shot for the leverage ratio there.

I like the persistence.

Kian Abouhossein with JP Morgan.

Hello, Kian.

Yes, hello.

The first question is regarding [SAP] platform.

We have some clarity in respect to the definition of SAP platform.

Just wondering how you are preparing for this.

How are you positioning yourself?

If you can give us a little bit of color in that respect.

So we have a long history of adopting and participating in platform developments.

Obviously it goes all the way back to Tradeweb and we've both developed our own internal platforms, and we've participated in the external platforms.

So I don't think this represents any specific hurdles in terms of participating in that.

I do think it will be quite interesting as trading moves over to swap execution facilities later in the year, maybe at the beginning of next year, I think it will be divide interesting to see the market dynamic around that, and particularly as we enter a phase of finalized rules, how the business evolves.

And in terms of technological platform, is there anything that you developing new, now that you have a bit more clarity, in terms of a technological platform?

Is there anything you can add in respect to how you response to that, how you try to differentiate to keep flow, so -- or gain new flows?

So we'll see low it evolves.

The way -- and we talked about this before.

One of our competitive advantages, assuming we execute, is the fact that we have [sect TB], which is our internally developed platform.

It is a platform that we use across all of our businesses, whether you're trading currencies in Asia or you're trading stocks in the United States.

And so that should give us some advantage in terms of how we envision ourselves, and our speed and our ability to adapt.

But I think the early phase of this, and maybe I'm wrong, but I think the early phase of this is somewhat similar to clearing, in that it's all about educating the clients, interface with the clients, and making sure that connectivity works for them.

Because it's a big adjustment in terms of execution protocol for them.

And then what we just have to do is really the differentiating thing is the content.

And we just have to keep providing content.

Okay.

That's helpful.

That's very helpful.

Just on securitization.

We clearly heard from some of the banks that at the current level of interest rates, production of mortgages could decline.

Just wondering -- and it could have a material impact.

I'm just wondering since you are such a big securitization player, especially on mortgages, so I was wondering, how do you see that business developing?

Assuming that yields do stay at a higher level?

I would probably --

Material.

You'll have a better view on the competitors and their exposure to securitization.

We've never really been big in securitization as it relates to the new issue pipeline, of for example, residential mortgages.

Obviously, we've been a big participant over the past several years in our ability to commit capital for clients, moving portfolios, secondary portfolios.

For example, people de-risking out of Europe and connecting investors in the US.

But I don't know necessarily that I would attribute any concern to higher interest rates for us as it relates to the securitization activity level.

Now that may translate into less activity for the entire industry.

And it's really I think to some degree a bit of how it evolves over the next six months in terms of people's expectations.

Again, if it's a particular volatile period, if it has a different impact.

If we settle in and people feel a certain competence around economic activity, it could clearly translate quite differently.

Okay, that's quite helpful.

And the last question is, on the securitization consultation documents by Basel that came out quite a while ago now, six months ago, I'm sure you had the chance to look through it.

And just wondering, if this could have a material impact on the risk-weighted assets changes that you just outlined.

Assuming that it comes as discussed in the paper.

Yes.

So I don't have any specific comments as it relates to the details of the paper.

What I would say is, I think a really important take-away as it relates to all of these regulatory processes, is it's all about an ability to adapt.

All firms are going to operate in the same rule set.

And so historically, we've done a pretty good job of adapting, we just need to continue adapting.

And one of the things that I've said is -- and I like to think of it as bit of an operating principle, is there's a very, very low premium on trying to predict the outcome of rules.

But a huge, huge premium, on adapting once you see them.

Predicting rules and responding can be incredibly costly.

You can get wildly misdirected, and you can lose track of your clients.

Responding to rules, once they're finalized, that really is a differentiating factor, and we have to execute.

Okay, that's very helpful.

Thank you very much.

Thanks Kian.

Matt O'Connor with Deutsche Bank.

Good morning.

A follow-up question to your comment that the pipelines were relatively stable versus the end of last quarter, and I know it's early in the quarter here, but just any thoughts in terms of a change in the mix?

I think a lot of people view that if rates increase like the way they did that some of the debt issuance would dry up, and as we know that's not always the case.

But has there been any change in the mix of the pipeline, maybe even within the debt business, a mix change like away from high yield towards certain things?

Well as I said in the opening, the backlog was basically unchanged Q over Q, from first quarter to second quarter.

And just to give you a little bit of color, it was down a very small amount in advisory at the end of the quarter and it was up in underwriting.

In terms of where it is, it's too early in the quarter to say how things will evolve.

So I wouldn't take any material take-aways from any changes over the past two weeks.

Okay.

And then the sale of the reinsurance business, was there a gain or a loss?

So, there was nothing material with the sale of the reinsurance business.

Just to give people some context on that business, obviously I've gone through a lot of detail already, but since you're asking the question, it represented just under 2% of last year's pre-tax income.

Okay.

And then just separately, if we back out some of the revenues from the reinsurance business, you just had the stub piece this quarter.

And if you back that all out, it seems like the equity-driven business is doing pretty well, and we're seeing that in some other banks as well.

Just wondering, obviously volatility had been low, blowed out a little bit, sometimes that can be good, sometimes not.

Just what's driving some of the good trends in the equity-driven [varier]?

So as you mentioned, last year, second quarter 2012, there was $239 million from revenues in the reinsurance business.

Obviously significantly less, $80 million plus in this quarter.

So when you adjust out for that, you're right.

A strong performance in the equity business.

Part of that is equity derivative, I will say there were I would say two other drivers.

One is, there were some good opportunities to provide our clients with capital around index re-balancings and other areas where we could really lean into the strength of client relationships, technology, and capital committing in a way that I think leaves us quite well positioned.

And obviously as I noted, better performance in the equity derivative business broadly.

But there's a little bit of a -- everybody keeps talking about the rotation out of fixed income into equities and who knows how that will play out over the next decade.

But certainly a lot of activity in equity space.

Particularly in Asia.

Okay.

Thank you very much.

Thanks.

Jim Miller with Buckingham Research.

Hello, it's Jim Mitchell.

Quick question --

Hello, Jim.

Sorry about that.

That's okay.

On the central clearing, just a follow-up, have you done any work yet -- I know it's early days -- in terms of what the potential capital benefits could be in moving to more of the business to central clearinghouse and what that may mean also with respect if anything, benefit with respect to the leverage ratio as it relates to derivatives?

Yes, we haven't spent -- it's early days, so we haven't spent a huge amount of time in terms of the capital benefits.

As these leverage ratios unfold, one of the things that I'm sure will get a lot of debate in the proposal process is the extent to which custody of client assets effectively people just putting money in a safe or holding collateral, how that plays out in a leverage ratio.

But we haven't done a huge amount of work as it relates to the capital benefits at this stage.

I think it's fair to assume it should have some net benefit, but you just haven't really put your arms around it.

Yes, we would expect over the long term capital benefit.

But I think more importantly, we've always been quite conservative we feel relative to the broad marketplace as it relates to the extension of credit.

And the extent to which more activity is cleared, obviously that levels the playing field.

Right.

And removes the ability of I'll call it a third or a fourth quartile more marginal competitor in a specific space to compete on terms.

They have to compete on content and execution.

So but look again, early days, we're not seeing any tailwinds or headwinds at this stage.

Okay.

Thanks.

And one quick question on the asset management business, you guys have seen pretty consistent outflows in alternatives the last year or so.

What's driving -- if you look at the industry and you've seen pretty much inflows in alternatives, is it just been a performance or is it a mix issue?

How do we think about the alternative space for you guys?

So, we're very focused on it in terms of the trend.

Obviously, it's been a very important component of our business.

Nothing specific there.

The only thing I would say is that obviously, as we previously announced, in anticipation of adjusting for that component of the Volcker Rule, which we think will be in the finalized rule, we have been removing our own capital.

And that would show up as flow, outflows?

No, not as third party.

Okay.

All right.

Thanks a lot.

Guy Moszkowski with Autonomous.

Hello, Guy.

Good morning.

This is a slightly different kind of a question than was asked a minute ago, on OTC derivatives.

As we transition to a regime of much more of what used to be OTC and being centrally cleared, is it the right way to think about the existing OTC derivatives portfolio as essentially being a runoff portfolio in a way, and therefore a sort of source of passive relief?

No, I'm not sure -- I want to make sure I understand your question clearly.

The things that for example that we think of are in passive relief, are really businesses.

For example, pre-crisis businesses like correlation books and things like that which just aren't relevant to our clients today and are quite capital consumptive under the new rule sets.

So as it relates to clearing, given the number mentioned which we have cleared now, I don't think the two really overlap.

I do think that, and I'll speculate a little bit here, I do think that as these rules get finalized, and we're only living with really clearing for a couple of months now, and then when we come into swap execution facilities, it will be very interesting to see the impact that has on client activity.

Which, as best we can tell, was a little dampened for the industry given the uncertainty around the rule sets.

And so as we get certainty, it could be a little bit of a tailwind for volume.

Yes.

And the question was, and that was helpful, but the question really was sort of around as you think about for example leverage ratio.

And I'll stipulate to the fact that all my numbers show that you guys are pretty much where you need to be.

But as you think about ways of mitigating toward -- down to where you want to be, you might want to be, if you weren't where you wanted to be.

And the add-backs to the denominator of that ratio include a lot of off-balance sheet OTC derivatives driven assets.

Won't those be coming down quite significantly naturally over the next several years if in fact the regulatory shift towards centrally cleared derivatives really takes hold?

Or am I thinking about that the wrong way?

No I think you're right.

In the extent to which clearing leads to, depending on the metric that we're observing, reduced [notionals] or other things, then that's a natural tailwind for the industry.

I think more importantly, one thing -- and look, we're all subject to having sort of knee jerk reactions to these proposed rules when they come out.

I will say the regulators consistently, at least so far, have been very thoughtful about the glide path.

So the adjustment process, if we needed to make one, the way we would approach that is the way we've approached all the other rules that we've lived with as they've come into place.

Which is, we evaluate the rule, we deploy tools to our people, and in that context of delivering to our clients, and at the same time, maximizing the return to the shareholders, we'd adjust.

So, that's how we would handle it.

But I think if you're -- the nuanced question around whether clearing is a tailwind to reduce notionals, I think the answer is yes on that.

But I'm not getting into the weeds on that specific issue.

But we can get back to you on it.

Okay, that would be great.

Just a couple of quick housekeeping type questions.

Have you spoken to the RWA that was associated with the reinsurance business?

No, and the reason why I didn't do that, is not because I'm not happy to have the conversation.

But the way the sale of the reinsurances would work, it actually is it's a bit of an adjustment to equity, and it's also an adjustment to RWAs.

So I think the best way to frame it for all of you is just to say, the net outcome is 50 basis points.

Okay.

That helps.

And then the final one would be, you talked about your 9.3% estimated core Tier 1 under Basel III under the advanced approach.

Can you tell us what it would be under the standardized approach?

So with respect to the standardized approach, we're still finalizing the numbers there.

But our first review is we're comfortably over the minimum requirements.

But at this stage, it's sort of the same with our leverage ratio, I want the team to really finalize the numbers before I cross the I and dot the Ts on that.

So we're comfortably in excess.

Fair enough.

Thanks very much for taking my questions.

Mike Mayo with CLSA.

Hello.

You mentioned some inventory management in June.

Can you give us some sense for what sort of marks were involved?

No, there's nothing specific to comment on in that.

I was just trying to give you a little bit of extra color on how the quarter wrapped up.

But I'm sure it wasn't surprising to anyone given the volatility in markets.

And can you give some sense of breakdown between the US and non US sort of revenue growth you're seeing, and are you still as fully committed to the BRIC strategy as you've always been?

So no change in commitment, and the mix hasn't changed significantly.

It's down a little bit in the Americas.

Up a little bit in Europe.

But there are no material changes.

But the core part of your question, which I think is the most important part is, in terms of the strategic approach of the Firm, very, very committed, very focused to those markets.

All right.

And I think the word of the day is comfortable.

And so I'll ask probably the fifth or sixth or seventh question on the leverage ratio, but it just seems you're comfortable with where you are, which I think what I hear you saying is trust us, we'll be there.

On the other hand, you're not disclosing a number like your peers have done and perhaps other peers will do.

So on a disclosure basis, you're behind peers.

And I'm just trying to reconcile the two thoughts.

When we look at NPRs, our approach might be a little bit different than you've seen from the peers.

Look, I suspect you could have said the same thing about Basel III process where I think you probably felt the same way in terms of being behind peers in terms of level of disclosure.

And one of the reasons that is, is because if we give you $728 billion, and then we update it quarter to quarter to quarter and then it drops to $600 billion, I'm not sure we're giving you a lot of value in that.

I think there's much more value in sharing the process with you.

Now, when we have real confidence in the exact number, then we'll be fine to share with you.

But as I said, maybe comfortable is the word of the day, but we're comfortable.

Well you can give us a sense of it's above some number and give us that number?

You looking for shades of gray in comfortable?

Yes.

Pretty comfortable.

Pretty comfortable.

Now just last follow-up on that, because it goes, someone had said by 2018 you'll get there or by 2015 or you'll pass the Fed's stress test or will you be able to buy back shares as quickly as you've done?

That's really what it comes down to I think.

Yes, I wouldn't extrapolate too much information from a proposed rule set with respect to -- 2018 is miles away, if that gives you some context of how we're thinking about our initial review of the ratio.

And I'm not trying to be flippant with you.

When we really finalize the numbers, I'm happy to come back to you on it.

All right Thank you.

Fiona Swaffield with RBC Capital Markets.

Hello.

Good morning.

I just had questions in two areas.

Sorry to come back to the 9.3% Basel III, but I was trying to understand the movement in the quarter.

I think you mentioned some offsets to the 50 basis points, so it was really -- I thought ICBC would also be in positive, and you made a little bit of money over and above the buybacks.

So could you explain where it was, where the rules got tighter versus your original expectations?

And the secondary, was just generally, there seems to be a lot of discussion about wholesale funding, particularly secured.

And I wondered if you could discuss whether you're doing anything to change your weighted average maturity, or what your view is on the wholesale funding area?

So with respect to the first, there are always going to be pluses and minuses when you get a final rule set in terms of things that impact your ratio.

But the reality is that I think the key driver here, and we're happy to spend more time with you offline, is what's referred to as the financial institutions deduction.

And as I said before, it's a deduction from capital and it relates to both investments in funds and also financial institution assets that we hold on balance sheet as part of our liquidity provision to clients.

And so we're happy to walk you through that in more detail.

The rest of it's kind of pluses and minuses back and forth.

So just to follow up, is the $600 billion number that you gave for Basel III, has that been relatively consistent excluding the insurance kind of noise over the last couple of quarters?

Well, the one reason why I tried to draw the distinction between what we've run out in fourth quarter of last year, the $728 billion, is just the change in the rule sets.

So obviously, there's passive things that occur.

There's incremental capital built up during the quarter.

But I think the primary take away should be the headline number of 9.3%.

Thanks.

And now that we have the final rule, we'll keep you updated with respect to how the RWAs move.

Douglas Sipkin with Susquehanna.

Yes, thank you.

And good morning.

Just wanted to drill down actually on some of the operations, specifically debt.

Just curious, for your perspective, I think it was touched on earlier, what do you guys think if rates start to move up?

Obviously debt underwriting has been a real nice area for you guys.

My first question.

And then secondly, it does look like within that you guys are maybe out-punching.

I'd be curious to hear where you think you're some gaining some market share either by product or geography with respect to debt underwriting.

Thanks.

Sure.

So in terms of the recalibration of interest rates, I think it's very difficult to predict near-term what impact that has in terms of the debt market's appetite for new issues and issuer's ability or desire to pull the trigger on a particular transaction.

I will say that I think one of the most frequently asked questions we got at the end of the fourth quarter was the ability of the debt performance to continue.

And it was the same question the end of the first quarter.

So obviously, we'll see how things unfold.

With respect to how we position the business, I listed off some of the transactions that we executed during the quarter, and really leveraged finance was a significant driver.

And this is all about, again, staying extremely focused on our clients.

Particularly in our Investment Banking franchise, where we're working with CFOs and CEOs, and how they think about their balance sheets, or how they think strategically about merger activity.

But again, the core message here is we're less focused on the quarter activity and much more just focused on the client long term.

Great.

Thanks for answering.

Thanks.

Christopher Wheeler with Mediobanca.

Yes, good morning.

And perhaps I could go back to the leverage ratio without actually asking a direct figure question about that.

But it was really about the other components of your Tier 1 capital.

Clearly apart from your core Tier 1, you have $7.2 billion now of preferred stock, and I think about $2 billion at the end of the last quarter, in June, your subordinated debt.

And I'm trying to get my head around how much of that is Basel III compliant, and whether or not any of that is going to have to be replaced as you go through the amortization, which obviously is important in terms of the leverage ratio.

And also perhaps whether you've already considered part of your effort to improve the leverage ratio, not improve it but to leech the number is to actually start to issue some of this additional Tier 1 capital which is going to be compliant with Basel III and whether the regulator has given you any clue yet, your regulator, as to what exactly the characteristics of that new debt would have to be.

No, we don't have any specific insights in terms of any of the new debt proposals that you would have seen.

As far as observations about the capital structure, obviously preferreds are fine.

Trust preferreds are being looked at, but we'll circle back to you with respect to it.

But there's no change in anything as it relates to capital planning.

And by the way, I would say that with respect to how we're thinking about share repurchase, too.

No changes in respect to capital planning as a result of the any of the finalized or proposed rules that we've seen in the marketplace.

And have you looked sort of what the cost of boosting your Tier 1 capital might be?

Because clearly that's an issue a lot of banks are looking at certainly in the European markets at the moment.

We evaluate the cost all the time.

But it's not a question of cost so much as it's a question about basically positioning the Firm to run it conservatively and position it for clients.

So and look, I think if you were on a discussion with our treasury team and myself talking about how we should think about costs at the margin, we're much more concerned about the stability of the capital structure and less about costs.

Okay.

That's encouraging.

Thank you very much.

Thank you.

Matt Burnell with Wells Fargo Securities.

Hello Matt.

Good morning Harvey.

Thanks for taking my questions.

Just a couple of quickies, I think.

Your long term unsecured debt, at least according to the press release, is down roughly $5 billion quarter over quarter.

How are you thinking about debt levels going forward?

And have you changed your thinking at all on OLA and how that will affect your debt balance going forward?

So, just orderly liquidation authority, just for everyone dialing in, obviously any rule set that conceptionally is designed to create order, in principle, that we don't have any issues with.

We haven't seen the detail in the weeds on that, and it gets back to what I said earlier, we're not going to adjust the capital structure of the Firm based on a discussion or where we kind of guess things could come out.

That's not the way we're going to think about or manage the capital structure, so no changes.

Now as best we can tell, again, these are all in discussions so we don't have details, and as best we can tell, given the amount of debt we have at the hold co, one would might say that we're really well positioned.

But again, really big caveat on that.

We haven't seen any details.

Let me come at the same question from a different direction.

Are your capital markets teams and debt underwriting looking positively at that idea, or are they of the same opinion?

I think we need more details.

We've seen a lot of views in the marketplace.

Okay.

Let me switch the question to activity levels across your broad geographic groups, Europe, Asia, US/North America.

Were there any meaningful improvements in activity levels maybe outside the US, this quarter that helped the revenue side of things, or were there any areas of particular weakness?

Well, certainly the area -- the activity levels in Japan, and when I say Japan, I don't necessarily mean specifically Japan geographically, but activity that's driven around Japan.

So one of the -- given the global nature of our clients, one of the most important things that we need to do across the entire Firm is to make sure that we connect geographically in a way to deliver content.

So it might be clients in Europe that are very focused on events in Japan.

Same as the US.

So a lot of capturing that is making sure that the content mechanism works, and the transmission mechanism works.

And so, I would say Japan was a driver, certainly, of increased activity, but not just isolated to Japan.

That's not on benefits.

And would you characterize Europe as still being a little bit below Asia and the US in terms of activity levels given the economic conditions there?

I think that's fair.

I think there's more upside in Europe, and I think there's more upside specifically, and again this could play out over many years.

I think there's more upside specifically for US-based firms like ourselves, Goldman Sachs.

Okay.

Thanks for your time.

Thank you.

Chris Kotowski with Oppenheimer.

Hello.

My questions were asked and answered, thank you.

Okay Chris.

Thanks for dialing in.

And at this time, there are no further questions.

Do you have any closing remarks?

No, we'd like to thank everybody for dialing in to the call.

Obviously, if people have any questions, they should feel free to direct them to us in the Investor Relations department.

Otherwise, enjoy the rest of your day and the week.

Thanks.

Thanks everyone.

Ladies and gentlemen, this concludes the Goldman Sachs second quarter 2013 earnings conference call.

You may now disconnect.