高盛 (GS) 2013 Q3 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the Goldman Sachs third-quarter 2013 earnings conference call.

This call is being recorded today, October 17, 2013.

Thank you.

Mr. Holmes, you may begin your conference.

Good morning.

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

Welcome to our third-quarter earnings conference call.

Today's call may include forward-looking statements.

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

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

For a discussion of some of the risks and factors that could affect the Firm's future results, please see the description of risk factors in our current annual report on Form 10-K for 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 access.

And you should also read the information on the calculation of non-GAAP financial measures and regulatory capital ratios that are posted on in the Investor Relations portion of our website at www.GS.com.

This audio cast 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 will walk you through our third-quarter results and then take your questions.

Net revenues for the quarter were $6.7 billion.

Net earnings, $1.5 billion.

Earnings per diluted share, $2.88.

And our year-to-date annualized return on common equity was 10.4%.

While there was some headwinds in the third quarter, our year-to-date performance remained solid in what continues to be a challenging macro environment.

On last quarter's call, we talked about how market participants were trying to assess the outlook for the global economy.

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

In addition, the shifting commentary on monetary policy was leading our clients to question the potential economic and market impacts of reduced quantitative easing.

These discussions continued in the third quarter.

Ongoing uncertainty around the economic outlook and the traditional seasonal slowdown drove a significant reduction in client activity during the quarter.

This reduction in issue-wide client activity obviously impacted the opportunity set in many of our businesses.

In investment banking, equity and equity-related volumes declined 27% quarter over quarter.

Debt underwriting volumes declined 10% versus the prior quarter.

And completed M&A volumes declined 36% sequentially.

Within our institutional client services businesses, most product areas also experienced reduced levels of client activity.

For example, within credit products, investment grade and high yield volumes declined sequentially by 13% and 19%, respectively, when looking at trace data.

In US equity markets, stock buy-ins were down 13% to an average daily volume of 5.8 billion shares.

However, activity improved in September with our investment banking clients.

Announced M&A volumes increased significantly.

And overall backlog improved to its highest level in five years.

During the quarter, we also saw continued positive trends with our investment management business.

Assets under supervision reached a record level, aided by $17 billion of net inflows.

I will now run through each of our businesses.

Investment banking produced third-quarter net revenues of $1.2 billion, down 25% from the second quarter.

Third-quarter advisory revenues were $423 million, down 13% from the second quarter, reflecting a decline in industry-wide completed M&A transactions.

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 third quarter, including Softbank's $21.6 billion purchase of a majority stake in Sprint, Bausch & Lomb's $8.7 billion sale to Valeant, and Apache's $3.75 billion sale of selected assets to Fieldwood Energy.

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

They include Vodafone's US $130 billion disposal of its US group, whose principal asset is its 45% interest in Verizon Wireless.

Applied Materials' merger with Tokyo Electron, for a combined value of $29 billion.

And Grohe's $3.9 billion sale of a majority stake to Lixil.

Third quarter net revenues were $743 million, down 30% from a strong second quarter.

Equity underwriting revenues, up $276 million, were down 26% compared with the second quarter, driven by a decline in industry-wide activity.

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

Switching over to debt, underwriting revenues were $467 million and represented a 33% decline relative to a record second quarter.

During the third quarter, there were several noteworthy transactions.

BHP Billiton's $5 billion debt offering, Sheplers' $1.3 billion sale of a portion of its equity stake in Continentel.

And ADP's $1 billion high-yield offering.

Let me now turn to institutional client services.

Total net revenues were $2.9 billion in the third quarter.

Fixed client execution net revenues were $1.2 billion in the third quarter, substantially lower than the second quarter.

Clearly, not a good quarter for FIC.

The significant decline in revenues was driven in part by seasonally slower activity levels seen across the industry and a more challenging macro environment.

While rates was up relative to a weak second quarter, activity levels remain muted.

Revenues within currencies decreased significantly relative to the second quarter on difficulty managing inventory and reduced activity levels.

Commodities decreased significantly versus the second quarter on a challenging market-making condition and also lower client activity levels.

Revenues within credit decreased significantly on lower volumes.

Mortgage results decreased sequentially as clients became more risk-averse, given the potential for tapering in the US.

Turning to equities, net revenues for the third quarter were $1.6 billion, down 13% from the second quarter.

Equities client execution revenues were $549 million, down 14% sequentially.

If you adjust for the sale of our America's reinsurance business in the second quarter, revenues, essentially flat.

Commissions and fees were $727 million, down 13% from the second quarter, again, reflecting lower market volumes.

Security services net revenues of $340 million declined 10% from the seasonally stronger second quarter.

With respect to risk, average daily volume in the third quarter was $84 million, up 4% from second-quarter levels.

Let me now review investing and lending.

We produced net revenues of $1.5 billion in the third quarter.

Investing in lending includes direct investing, investing in mutual 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 $938 million, primarily reflecting gains from private equity investments.

This increase in fair value was driven by company-specific events like IPOs, strong corporate performance, and higher equity prices.

Net revenues from debt securities and loans were $300 million, primarily from interest income.

Other revenues of $237 million include the Firm's consolidated investment entities.

Switching to investment management, we reported third-quarter net revenues of $1.2 billion.

Management and other fees were $1.1 billion, 1% lower sequentially.

During the third quarter, assets under supervision increased $36 billion to a record $991 billion.

Net market appreciation of $19 billion was primarily in equity assets, while $17 billion in inflows were concentrated 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 taxes and benefits, was accrued at a compensation-to-net revenues ratio of 41% year to date.

This is 200 basis points lower than the Firm's accrual in the first half of the year.

The lower compensation accrual reflects year-to-date revenues and better visibility on expected compensation levels as we approach the end of the year.

Third-quarter non-compensation expenses were $2.2 billion, 4% lower than the second quarter, largely due to the sale of our reinsurance business and lower brokerage, clearing and execution costs.

Year to date, our effective tax rate was 30.3%.

On capital, we repurchased 10.2 million shares of common stock for a total cost of $1.65 billion during the quarter.

Year to date, we have repurchased 30.8 million shares, for a total cost of $4.77 billion.

Today we also announced an increase in our quarterly common stock dividend from $0.50 to $0.55 per share.

Moving on to regulatory capital ratios, our Basel III Tier 1 common ratio on a fully-loaded basis is 9.8%, up 50 basis points from the second quarter, driven by a reduction in risk.

The risk-weighted assets are approximately $590 billion -- $345 billion in credit risk, $165 billion in market risk, and about $80 billion in operational risk.

Our estimate for the proposed supplementary leverage ratio under US rules is approximately 5% for the Firm and approximately 6% for the bank.

This is our best estimate, subject to change, depending on regulatory clarifications.

Like all other proposed regulatory requirements, we will work closely with our regulators as they evaluate and finalize the proposal.

We believe it is our obligation to support safety and soundness within the financial services industry and the global financial system.

As it relates to how we'll run the business, similar to other regulatory metrics, the supplementary leverage ratio will be an important input.

Clearly, concerns about the global economic outlook created a more difficult operating environment for our clients in the third quarter.

These challenges were amplified by the seasonal slowdown, traditionally impacting client activity in July and August.

However, we don't build client relationships or build businesses for a quarter.

Client relationships and operating businesses require years, often decades of investment to build the durability that ultimately creates long-term shareholder value.

Across the globe, our investment banking clients seek our advice on their most important strategic decisions.

Corporate, government and institutional asset manager clients look to our execution and risk management capabilities across a variety of products and regions.

We are entrusted to provide investment management services and offer investment products across all major asset classes to a diverse set of institutional and individual clients, making us one of the largest asset managers in the world.

Our clients often value our advice and services the most when the outlook is less certain and when finding solutions becomes more challenging.

The US government shutdown and the debate in the United States surrounding the government debt ceiling have become a concern for our clients.

The political complexity involved in finding a long-term solution has created uncertainty about the world's economic outlook, and as we have all seen, has weighed heavily on market sentiment.

Now that the political impasse looks to be resolved for the near term, we are hopeful that greater certainty will drive improved client confidence and activity levels.

Having said that, a long-term solution is critical to a sustained recovery for the economy.

These fluctuations have not distracted us from focusing on the long-term drivers of our business.

So as a management team, we are focused first and foremost on our clients, building deep, meaningful relationships and providing solutions to their daily challenges.

We are focused on conservatively managing our financial profile and being prudent allocators of capital.

We are also focused on being efficient operators, while at the same time providing world-class service to our clients.

In the end, we are focused on creating long-term shareholder value for you, our shareholders.

With that, I would like to thank you again for listening today.

And I am happy now to take your questions.

(Operator Instructions)

Your first question is from the line of Howard Chen with Credit Suisse.

Good morning, Howard, how are you?

Good, thanks.

How are you?

Good, thanks.

I was hoping to come back to your commentary on FIC.

Understanding all of your peers' business mix is different, but the relevant revenue performance this quarter is pretty wide.

I was just hoping you could add a bit more color on how you would attribute that gap to your relative business mix, the positioning issues you noted and more challenging comparables.

Sure.

So as I said a few minutes ago, clearly a difficult environment for FIC, and we are not happy with the result.

So having said that, with respect to business mix, I think there could be something there in terms of how different franchises are positioned.

Certainly as we have discussed with you in the past, our FIC business may be somewhat more weighted towards institutional asset managers.

And in a quarter like we just had -- if I back up for a second, remember on last quarter's call, I can't remember who -- somebody asked me a question about how I thought the market would respond to the potential changes in monetary policy.

And the discussion really is around how data-centric people would be.

And of course we came into the summer with less certainty around monetary policy, and then there were events in the Middle East, and of course people actually couldn't get data with the government shutdown.

So I think there could be something in that.

I think the whole market environment is not good for that particular client base.

However, I don't want to sound offensive.

Again, just not a good quarter for us and FIC.

Okay, thanks.

And then you specifically mentioned foreign exchange in your commentary.

Can you talk a bit more on what exactly happened in the quarter in that business?

And are you able to size the potential facilitation issue and the impact it had on the quarter?

In terms of the currency business, obviously it was a business I highlighted where it was challenging market-making conditions, and certainly from an inventory perspective.

I think if -- we looked at various metrics.

One metric I could point you to, for example, would be the VaR schedule in the earnings release.

And as you can see, it's basically -- from the first quarter to the second quarter, there was a lot of activity in the franchise and risk had picked up in foreign exchange.

And then you will see quarter over quarter it's a pretty significant drop in the currency line.

And that's virtually all driven by risk reduction.

Okay, for ex --

Now -- sorry.

In terms of the franchise itself, this I will say.

We look at all the variety of metrics like you would think, all the numbers we can.

We look at our own internal numbers, sales activity, where we can get transparency into the market.

But there's nothing in that data that would tell us that when we look at the metrics, client engagement looks consistent with those kind of volumes.

So franchise feels good, we just had a tough quarter.

Okay, understood.

Thanks, Harvey.

Then shifting gears to the comp accrual, it's pretty unusual to see the Firm exchange the accrual in the third quarter.

So I was just hoping to better understand what's different this year.

Is the message that, in this still-challenged backdrop, your desire is to not to fall below a certain return threshold?

Well, as always, the comp accrual is based on our best estimate for what we think where we will end up for the end of the year.

But of course, we still have a quarter to go.

I think as it relates to compensation expense, as we talked about before, it's obviously the Firm's largest expense.

And so this process -- no different.

This I want to be clear with everyone -- no difference in terms of philosophy in the way we are approaching compensation.

So it is still all the same things we go through in terms of the pay-for-performance culture that we drive.

And so we will look at all the components, competitive dynamic, performance, as I mentioned.

And of course, shareholders and the way we incorporate [nanor] thinking, that is always, of course, an important, meaningful component of it.

Great, thanks.

And finally, for me -- with a few more months since the initial proposals have been out, was hoping you could just update us on your thoughts on supplemental leverage ratio, where the Firm may sit today and potential mitigating actions.

Thanks.

So as I said before, under the US rules which are proposed, we are at 5% for the hold co and 6% for the bank.

I said that was approximately -- we had time obviously in the quarter to analyze the proposed rule.

And again -- I caveat this -- that it is a proposed rule, will likely change.

And of course, it is not effective until 2018.

But I think you should assume that's a somewhat conservative estimate, the 5% and the 6%.

And in terms of mitigating actions, too early for us to really be thinking heavily about mitigating actions.

We want to see how the rule evolves.

We will engage the regulators.

And the way we incorporate this, for lack of better language, Howard, will be -- how we incorporate this into our tool kit will be no different than we do with other regulatory metrics.

Just like we talked about actually after a conference earlier in the year, which -- actually rolling out some sample tools has proved to be fortuitive, in terms of giving people an example of how we will deploy it.

But it's pretty early in the process.

We will see how it evolves.

Great.

Thanks for the update, Harvey.

Sure.

Thank you, Howard.

Your next question is from the line of Glenn Schorr with ISI.

Please go ahead.

Good morning, Glenn.

Good morning.

Maybe we could talk about I&L for a second.

I wonder if you could provide any update on capital and RWA in I&L.

Not sure if you feel like breaking it out equity versus MES, but I'm thinking down the process of -- is there a natural annual runoff rate or realization rate in I&L?

And if all that capital generation that you have, if you're finding opportunities to reinvest it back in.

Okay, really excellent question.

We haven't broken down and disclosed the allocation by those segments in terms of the capital.

And I think it's clear, if we think about the capital allocation in terms of the conventional market credit, et cetera, in terms of the way we are managing the capital deployment, as you have seen, we have been in somewhat of a harvesting mode because that's what the market opportunity has provided.

We obviously -- as we talked about before, we stayed very disciplined in terms of return characteristics.

As it relates to capital itself, as you know, the investments in funds are deductions from capital under the Basel III ratios.

Now, there are transitional provisions.

So, for example, under the transitional provisions, our Basel III capital ratio would be about 100 basis points higher than the 9.8%.

But I've been quoting you the fully loaded.

That is the way I would think about it.

Okay.

So from that standpoint, given that the market is providing you harvest opportunities, but not the same level of investing opportunities, it's just -- there is a natural run-up.

I don't want to put words in your mouth, but the production of the business unit or line item in general has been great.

But there should be some natural shrinkage until there is a reinvestment mode.

Is that not the right way to think about it?

I would think about it no differently than we have approached it in the past.

Which is, there will be cycles where reinvestment opportunities for us and our clients seem more attractive, and there will be parts of the cycle where harvesting is more attractive.

We happen to be slightly more in a harvesting cycle.

But recently, actually, we have seen good investment opportunities.

They tend to be a bit more geographically based, given some of the geographic differences and stress around the world.

But that is no different in terms of philosophy and I think the way to think about how we operate the business.

Understood.

Just shifting gears for a second, you just alluded to Howard's question a little bit.

But just curious -- the biggest users of gross balance sheet within FIC -- and you guys were early in pushing down Basel III requirements out onto the desk.

Is it way early on leverage?

I'm just curious on how the leverage focus even is going to start impacting yours and others' balance sheets.

Again, too early to tell in terms of how we will incorporate it as an operating metric.

But at this stage, based on what we know -- again, I want to be really careful about the caveats here because this is an evolving rule.

A couple of things.

One, based on what we know about the rule, something that we will be able to incorporate again into the tool kit.

And separately, remember again of course, it is effective in 2018.

So in terms of capital planning, given we are at 5% and 6%, again, under the proposal, could change.

Right now I see it as something that we will digest into our processes no differently than other rule sets.

Got it.

Last quickie, the Basel III numbers you gave, is that standardized or advanced?

What's the spread between the two?

Okay, that's a good question.

So Basel III, again, fully loaded was 9.8%.

Standardized is approximately 9.1%.

So lower than obviously the advanced.

And under -- again, referring to the transitional provisions, I'm giving you fully loaded as though we are standing many years down to the future.

They are both about 100 basis points higher with the provisions.

Got it.

And just target-wise, we should be thinking of the 7, plus the 2.5, plus a little buffer?

Yes, we had announced a buffer of 100 basis points, then targeting around 9.5%.

This is -- we are now living with the metric.

We are not too wedded to that particular number.

I think the way I would describe it strategically is, we want to run with enough capital first and foremost to position the Firm defensively.

We want to be in an exceptionally strong capital position.

But also obviously the flip side of that is, we really always want to be in a position to commit capital to our clients.

And it has been an environment for the last couple of years which has been trending better.

But I wouldn't call it a first-quartile client opportunity set.

And so the -- we are moving across.

Okay.

And to be clear, it's 1.5, not 2.5.

Yes, I appreciate that.

Thank you, I appreciate it.

Thanks.

Thank you.

Your next question is from the line of Roger Freeman with Barclays.

Please go ahead.

Hi, Roger.

Good morning, Harvey.

Coming back to the FIC business, just broadly speaking, you talked about client activity, client volumes, positioning.

Then there is also the factor of market liquidity, which ties across it, too.

But your ability to trade around positions, to think about the impacts broadly on the third quarter, where would you rate those three things?

I'm just trying to think about the balance of the impacts.

Well, as I said before, I think from a client activity perspective, when we look at all of those metrics, all that looks quite positive.

So I don't think that was an impact at all.

Liquidity is always a factor in markets, where you are in the summer, there's a fair bit of uncertainty.

I wouldn't overweight it.

Again, the shift in the second quarter to the third quarter, we just didn't execute as well as we would have liked to.

Okay.

And what is your sense of how the market environment going forward here -- with a whole evening to digest the deal in Washington last night, punting to January.

Do you think this is a headwind for client risk-taking, or a relief, or what?

Well, certainly a relief.

We will see how people digest -- what the events look like coming into the first quarter.

But certainly to the extent to which our clients, which are evaluating transactions, whether it's mergers, debt, equity activity, institutional clients, the -- look, one good thing about the crisis is, it's made everybody focus on tail risk.

And even though as we came into the debt ceiling negotiations, while I think you could have argued maybe the tail risk was quite low, the world and all of our clients are very respectful of tail risk.

It's much easier to do nothing than it is to do something.

So in the short-term, got to think having this removed from the marketplace is quite good.

The longer term solutions, the continued path back to normalcy, if you will, which I think we have been marching along pretty steadily -- but it's been kind of two or three steps forward, one step back.

I think getting to a point where we are just in a comfortable stride as a global economy.

But long term is quite important, obviously.

Right, okay.

And then on I&L.

Coming back to Glenn's question, are you guys -- if you think about a future investing cycle, in factoring in the deductions to the capital under the new framework.

What do you think -- and it might be too hard to answer here -- but what kind of return hurdles would make that worthwhile?

And do you think private equity-like investments where those firms target 20%-plus returns -- with that kind of an outlook, is that still viable with the capital hold-backs on those?

There have always been very high requirements to utilize the balance sheet for multi-year capital commitments.

And those would be more than enough to be beyond the hurdles of specific capital requirements.

So that is not a concern.

That is a factor that I'm not worried about.

As I said, what we are really seeing is more of the cyclical back and forth.

But in some respects -- and we have talked about this before -- you either get good, new investing opportunities or you get the opportunity to deploy the capital into other businesses, or you can return the capital.

Okay.

Just last quickly, just on commodities.

What does it take in your mind to get that business getting back to some sort of normalcy?

It's been challenging for you and others.

I mean, can this work inside of a broker dealer with the capital Volcker rules still to be determined, but --?

I would maybe add to your question a little bit.

The commodity environment has been a little bit difficult -- low volatility and obviously impacted by the macro backdrop.

But to specifically get to your question, the commodity business for us -- as you know, we have been in the business for 30-plus years.

It is an essential business for our clients.

The nature of the activities is, we are on the phone with CEOs, CFOs, treasurers.

The nature of the business itself in terms of their objectives is no different than it would be, for example, for a retailer.

It's about hedging.

It's about managing revenue.

It's about financing activities, timing of cash flows, where they need to get.

For example, it's very akin to receivables financing for a retailer, or managing their expense base for consumer commodities.

Those are all normal corporate treasury functions that we have performed now with clients for 30 years.

We will see what happens in the regulatory discussion.

It is an important discussion.

But it is not distracting us from the focus on our clients.

All right, thanks a lot, Harvey.

Your next question is from the line of Michael Carrier with Bank of America Merrill Lynch.

Please go ahead.

Hi, Mike.

Thanks, Harvey.

First, you had a comment that in September you saw pick-up on the investment banking side, and we can clearly see that.

Just anything on maybe the fixed side, just given the environment in the third quarter versus what you are seeing now.

There is still some obviously macro uncertainty, but just any color.

I know you guys don't tend to give too much color in terms of the current quarter.

It's only a short period of time.

But any trends that have been different -- September, October.

Again, you had the July and August normal, what I will call normal seasonal slowdown.

And then of course you had a pick-up in September.

But activity from the client base was picking up prematurely broadly in the early part of September.

But then of course people got very focused on the government debate.

So there really wasn't a chance for people to shift into what I will call a mode where they had more conviction.

It was still an environment of uncertainty.

But if I had to really sort of slice it for you, I would say that certainly there was a seasonal pick-up after August, with this backdrop of uncertainty.

Which fortunately, at least for a while, is behind us this morning.

Okay, that's helpful.

And then as we head into next year and you look at the FIC business, it seems like we have gone through this clearing portion in the OTC markets with no big issues.

It has run relatively smoothly.

The SEF, it seems like it's a bigger implementation project for the entire industry.

If we start looking at February as an important timeline, based on the different scenarios that can play out -- meaning they work, they partially work, it's a complete mess -- how do you think it impacts the FIC business heading into 2014 and beyond?

And particularly heading into that -- our clients still going to be transacting.

Do you think volumes are a bit weak?

Just any color on that.

We were, as you know, big supporters of clearing.

And I give the market and the regulars really high marks on our clients.

A huge amount of work went in by all participants, as you noted, to get clearing off.

It was really uneventful, as it should have been.

And I think the three stages of client introduction in clearing were quite thoughtful.

As you point out, the launch of SEF was -- it was harder.

There is a lot of infrastructure and it is complicated for clients -- various rule sets.

And so it is going to take a lot of work from everyone in the industry, regulators, SEF operators, market participants like Goldman Sachs, all of our clients who have a deep-vested interest in getting this right, to be active in that dialogue between now and the spring, to really work out all the issues.

I don't think you can read too much into the October launch of swap execution facilities, other than there is a lot of work to do.

And I think the regulators were quite thoughtful in pushing out some of the decisions to November 1. And of course, we had the government shutdown.

So they haven't been there to be able to focus on it.

But we are going to have to pay a lot of attention to this.

I don't think we can, as market participants -- when I say we, I don't mean Goldman Sachs, I mean all of us -- I don't think -- I can't remember what your language was -- we can't afford to have a total mess.

I don't think that is an option that we should all accept.

If it takes longer to get it in place, just like it took longer to get clearing in place, that's what we should do.

It is just too important for our clients and for the industry.

So it will be a big focus over the next couple of months.

But there is a lot of work to do.

Okay, thanks.

And then just finally, you guys haven't set any new like ROE or return on tangible equity targets.

Obviously there's still a lot of uncertainty in terms of the rules.

But when you do look at it in terms of what management, the Board wants to generate in terms of return that makes sense and you've been maneuvering, whether it's on the revenue side, the expense side comp this quarter.

What is still a -- call it adequate return, between now and when we get clarity?

Because obviously once we get clarity, then you can make more strategic moves.

But just trying to understand, it's been a fairly long time-horizon in terms that we haven't gotten the rules.

And so in this interim, is there a -- before you can set out that new cross-cycle target, something in the interim?

Okay.

So with respect to returns, this is what I would say.

Strategically, the way we are managing the Firm is, as we talked about, it is for the long run.

So it is for the long run positioning.

Now, having said that, we are very sensitive to components of the cycle.

And as you point out, this has been a slightly longer cycle.

So the simplified cliff note version of strategy for the Firm over the past several years has been -- one, extreme focus on the clients globally.

Two, to make sure that while maintaining that focus that we are also managing the cost base.

Which is why a couple years ago, we announced the multiple series of cost reductions, which brought us down another roughly $2 billion.

And then along with that, a whole host of efficiency efforts.

That's all been designed to create operating leverage.

And so we feel like we are really well-positioned from an operating leverage perspective.

We just need to move back to a market environment that, as I said earlier, is not two or three steps forward, one step back.

Because that's really what our clients will need, to feel a sense of conviction.

And then you get back to more of a run rate.

Now, the real uncertainty is still pretty significant.

And as we digest the rules, we will certainly be evaluating them in a context of an overall ROE target.

What I would say -- because I don't want to you get off the call without this message -- things that are going to be on the balance sheets for multiple years, we are still just as disappointed as we always have been.

There's no change to those return hurdles.

And we are exquisitely focused on that.

Okay, that's helpful.

Thanks a lot.

Your next question is from the line of Matt O'Connor with Deutsche Bank.

Please go ahead.

Good morning.

Hi, Matt.

How are you?

If I could just drill into the equity trading business a little bit.

I guess if we X the reinsurance and DVA in both periods, it seems like it is down about 10% year over year.

And I realize the base is always tricky.

But the three universal banks that have reported far have been showing up anywhere from 20% to 35%.

So any additional color there would be helpful.

Sure.

So there's ins and outs, as you pointed out, year over year.

Last quarter -- sorry, last year, of course, we facilitated the Knight transaction, which was obviously an input to a -- sorry, was a component to revenues last year.

And so there's back and forth, sort of ins and outs.

I think when you sum it all up, really what you do is, you get to a number that's more like flat.

Okay, all right.

That's helpful.

And then just on the expense side, as we think about non-comp costs and litigation, just thoughts on those two going forward?

I couldn't hear you.

I'm sorry?

Oh, thoughts on non-compensation expenses and litigation going forward.

Okay, sorry.

Okay, fine.

So on non-comp, as I said, a big part of the strategy, particularly in this environment, which is very new-sensitive from a client activity level, we are staying very vigilant on non-comp.

And just as we have in the past, you obviously would have seen in the earnings release, we accrued $142 million for litigation reserves this quarter, $149 million last quarter.

We are evaluating all the normal inputs we would with respect to litigation expense, and reserving accordingly.

Okay.

And then just lastly, on the comp, and I think you had said this in your prepared remarks.

But making some of the adjustments you normally do in 4Q this quarter, should we think about a more straight line approach in 4Q?

So if we look at the year-to-date comp level, about 41%.

Is that a good starting point as we think about a fourth quarter?

Yes.

We will get to compensation in the fourth quarter when we get to it.

But I more or less went through all the components of how we thought about compensation philosophically, which is no change.

So it's our best estimate.

But it also reflects the fact that on a year-to-date revenue basis, we are running $500 million ahead.

Okay, all right.

Thank you.

Thanks.

Your next question is from the line of Betsy Graseck with Morgan Stanley.

Please go ahead.

Hi, Betsy.

Hello, Betsy.

Your line is open.

Please go ahead.

Betsy, are you there?

Can you hear me now?

Yes.

Yes, sorry about that.

Okay.

So a couple of questions.

One is just on the comp ratio.

I know you talked about it a little bit earlier.

But in the past, I know you have paid on all revenues.

Is that still the same approach you are taking?

I just want to clarify that.

Because as was mentioned earlier, the ratio coming down in the third quarter is a little unusual.

Yes, no, I think it's our lowest accrual for nine months.

But it reflects, as it always has, Betsy -- it's the collection of businesses across the Firm.

And I won't bore everybody with all the other components in terms of our processes.

But again, it's our best estimate.

Okay.

And then on the FIC, just a little bit of a clean-up question.

You indicated the challenging macro environment, obviously.

I'm just thinking from a competitive positioning standpoint, obviously underwriting can tend to be important as to how you are able to generate trading revenues over the course of the quarter.

Do you feel like there was any reasoning you might have been behind competitors because you weren't involved in all of the high profile deals that were out this quarter?

Yes, there are certain large transactions obviously where we were on one side of a transaction versus others.

But that's going to be in the normal mix of business.

And so some quarters we will be a big dominant participant, and other quarters, less.

But over the cycle, as you know, you will see us be involved in most of the significant transactions.

Okay.

And then the other question has to do with the SLR.

You've talked a lot about the advance in [steroids] in the Basel common Tier 1 ratios.

I got that.

Just wondering on the SLR side, is that also fully loaded?

Well, yes, you should think of it as fully loaded.

Okay.

And I know there's a couple of different ways that you can calculate derivatives.

Which way are you guys choosing to do that right now?

We are just following the rules as we understand them, Betsy.

We are not -- there's no difference in terms of different alternatives.

But we are happy to discuss it with you more offline.

Okay.

I'm just wondering about the CEM approach or not.

Wasn't sure which one you are choosing.

Oh, sorry.

CEM approach.

Yes, okay.

All right.

Current exposure methodology for anyone on the call who is not familiar with the shorthand.

Okay.

All right, thanks a lot.

Thanks again, Betsy

Your next question is from the line of Chris Kotowski with Oppenheimer and Company.

Please go ahead.

Yes, hi.

There's been a lot in the press about how the regulators and the government officials want banks to divest their physical commodities business.

There was another article in the Journal this morning.

And I wonder if you can talk a little bit about, A, how critical is the physical commodities business to the whole of your commodities business?

And B, if hypothetically there were a sale or divestiture of the physical business, does that free up capital above and beyond whatever proceeds you would realize?

Meaning, does the physical commodity business come with meaningful RWAs or other operational risk surcharges or things like that?

Right.

So we haven't disclosed any specifics around risk-weighted assets or capital associated with physical commodities.

You know, the business for us, overly simplified, really splits into two parts.

One, there's investments that we own.

And then there's the franchise, which I talked a bit more about in an earlier question.

As it relates to investments that we own, they are on a normal lifecycle where we would intend to hold them for years.

As it relates to the commodities franchise, the extent to which we are involved in the physical business is the extent to which our clients need us to be involved in the physical business.

Because in commodities, which is a bit different from other businesses obviously, they need to at many times receive delivery.

And so we could be arranged in that.

Very often, though, under those types of transactions, we are not the holder of title.

We may be the holder of title, but it's important from the standpoint of being able to fulfill those earlier requirements that clients have hedging, financing, et cetera.

But that's how I would, very high-level, split out the way the physical aspect of our business is part of our strategy, if you will.

Okay.

So it's important to you.

It's important to our clients, so by extension, it's important to us.

Now, we have a long investment in the commodity business.

And we have, at this stage, no intention of selling our business.

We are very committed to our clients here.

So we will just work with the regulators.

But ultimately, the regulators will come to their own opinion about the business.

All right.

That's it for me.

Thank you.

Thanks.

Your next question is from the line of Mike Mayo with CLSA.

Please go ahead.

Hi.

Good morning, Mike.

Can you size the investment banking backlog?

You said it's the largest in five years.

No, we don't size it.

But it's a pretty significant move-up, as I said.

I will give you a little bit of color.

It's more significant in equity underwriting and in the advisory side of the business.

Okay.

And then back to FIC.

You know, we have heard a lot of reasons why FIC was weak.

And you said you are not happy with it.

I'm still trying to get my arms around it.

You said it's activity; it's seasonal; it's Washington, DC; it's macro.

You said for currencies, it's lower VAR and inventory; commodities, market making; credit, it's volumes; mortgage, it's tapering.

So let me just ask a real simple question.

Do you think the decline in FIC that you're not happy with is a one-quarter blip, or that some of those factors should continue?

Oh, it's just a quarter, Mike.

Now those factors, obviously -- the marketplace had to deal with a lot of those factors, too.

Which is why I say we are not happy with it.

But it's a quarter.

We, as you know, we have a very strong FIC franchise.

And that's why I highlighted earlier, we react to these things and we are very data-focused.

But when we look into, for example, all the other indicators of client activity, it's just a quarter.

Well, a follow-up to that.

Is any of the decline related to how you are managing the business differently?

Whether it's the balance sheet -- I know the rules don't take effect until 2018, but you can take actions now -- or the business, due to some regulatory changes, which you've talked about?

Or even how you empower the traders to manage around risk-weighted assets more?

No.

Not that we can see, Mike.

And again, I think that, for example, look at the second quarter and the first quarter.

There was no rule implementation or change in management in terms of the way we think about ratios or the proposed supplementary leverage ratio that would have affected the way we run the business.

It is a really important strategic takeaway -- the way we would run the business on July 1 and the way we would run it on June 30.

Just not a great quarter, Mike.

I know you haven't disclosed this before, but can you give us some detail with FIC, whether the revenues for currencies, commodities, credit and mortgage from the second to the third quarter?

Not beyond what I covered in my opening comments.

I highlighted currencies.

I think it's a good example of where we had some challenges.

But look, year over year, I think we have a bigger mortgage business than some other folks, and so you will recall last year, we were coming into the environment of QE.

And so appetite from clients was significantly greater in mortgages.

But I more or less covered it in my prepared remarks.

All right, thank you.

Thanks, Mike.

Your next question is from the line of Matt Burnell with Wells Fargo.

Please go ahead.

Hi, Matt.

Good morning.

Just wanted to focus a little bit on the inflows you talked about in assets under management.

Specifically in the $12 billion in fixed income.

Can you provide a little more color on what those assets were, and your thinking about how that trajectory could continue into the fourth quarter?

In terms of those assets, this is a bit of a, just a result of our strategy.

And I want to sound old-fashioned on this, because there's nothing new here.

This is just continued focus on performance.

And the fixed income team has done a good job in performance.

In terms of flows, and broadly speaking where they came from, the flows were diversified, institutional, also from our private well franchise, which has had a long record now, multi-quarter record of inflows.

But really, it's kind of old fashioned.

Nothing new.

Just performance.

And are the flows generally focused in lower yielding fixed income assets or slightly higher yielding fixed income assets?

It's a mix.

But quite frankly, I haven't -- I don't have that detail with me.

So I would be happy to have Dane and Heather follow up with you afterward.

But my recollection, it's a mix.

Okay.

And then just secondarily, the quarter-end balances for the GCE were down a little bit.

And granted, maybe I'm making too much of this.

But I'm just curious as to why those were down as you ended the quarter, given that we have heard from a number of clients that they were increasing their liquidity as a result of some of the macro issues in DC.

Yes.

If you look at the last two quarters, you will see second quarter, I think we averaged $180 billion, and then we finished at $183 billion.

So there was liquidity building up towards the end of the quarter.

And in a quiet market environment, you will see us generally -- not always, of course -- but generally, we will build liquidity.

And so you will see that the average for the quarter was even higher than the end point of June, with the average of $187 billion.

There were just individual one-off things that utilized liquidity at the end of the quarter as part of our franchise.

Okay.

And just finally, you talked about this a little bit in terms of the commodity VAR.

But overall, with the VAR being about $84 million for the quarter, up a little bit quarter over quarter, I'm just curious as to if the change quarter over quarter was as much due to market volatility, or is that just your positioning within the individual risk categories?

It was more due to volatility over the quarter.

If you look, for example, in currencies, the decline was, as I mentioned earlier, more related to positions.

Same with most the other businesses.

Race was a little bit the other way, but not much.

Okay.

That's it for me.

Thank you.

Thanks very much.

Your next question is from the line of Kian Abouhossein with JPMorgan.

Please go ahead.

Hi, Kian.

How are you?

Hi.

I'm fine.

How are you?

Good, thanks.

Few questions, starting with leverage.

I'm more interested in the Basel III proposal leverage.

And I was wondering if you could give us also some indication of how your leverage ratio would look like under the Basel III proposal which came out recently?

It's lower, Kian, but it is just a proposal.

So we are in the proposal phase on that.

What are the issues that you see as non-workable or -- let's put it differently -- in terms of concerns within the Basel III proposal, relative to what you see from the US proposal?

So our -- I wouldn't want to draw a lot of distinctions between the two proposals.

There are certain things that the industry broadly -- and obviously you can check, we submitted a letter.

I would say collateral for one and the treatment of collateral.

I think at the highest level, we like metrics.

And I think a leverage ratio can play a valuable role in a suite of metrics.

I just think, like all metrics, collectively, whether it's the US rule or whether it's the Basel III proposal, I think we just all as market participants always need to be focused on any unintended consequences.

So the things that we are most focused on are things like liquidity pools and how they are incorporated into metrics.

Because we just generally don't think people should be incented to hold liquidity at the regulatory minimum.

And that might not happen tomorrow, but these rules will be in place a very long time, and so we need to incorporate them that way.

But as I said, collateral will be one thing that we will be focused on, on the Basel III.

And credit-derivative notional hedging -- is that something where you feel quite comfortable with the Basel III guidelines and the proposal, that you could meet a lot of netting?

Or do you think that's something you would actually have to change the way you hedge your positions in order to justify the netting under the proposal?

It's very early to be thinking about responding to these.

So again, let's start high level.

Getting gross notionals down, it's a good thing.

It's clean living.

Gross notionals certainly can create risk.

But not risk in the sense of the way that we think about market risk.

And I'm not talking about market risk in RWA sense.

I'm talking about risk in the marketplace.

I think that the focus on gross notionals is an important one.

But I think -- and again, this is difficult.

But I think what you would see the industry do is get very focused on collapsing gross notionals.

To date, when the industry comes together to focus on gross notionals, obviously everyone is very focused on the economics.

I think you could see people be more open to the economic cost of shrinking gross notionals.

But all of this, Kian, is included in our letter.

Okay.

Thank you.

Moving towards the results, just, I wanted to come back to FIC.

If I look at the percentage decline that some of your peers have shown before in this quarter, and after even making adjustment additionally considering you may be slightly more impacted due to you being more of a credit-geared house, I calculate that the potential inventory effects impact could be around a $0.5 billion mark in terms of impacting your results.

I am just trying to understand the material decline in your FX, in your FIC results.

And I'm just wondering if there's something that I am doing incorrectly, looking at it from this perspective of looking at peer seasonality, giving you slightly more of a decline to tier mix, and then assuming the rest is FX inventory-related.

I think it's a little complicated to compare in an individual quarter if we are down a certain percentage and our competitors are down a certain percentage, and really take a lot of information away from that.

Now, obviously it's important.

But I think trying to draw conclusions on the math is harder.

So I don't know that I can give you any more information, as we talked about.

I think to sum it up, we had a tougher quarter.

By the way, we will have quarters where we will have out performance, and we will have tough quarters.

This happened to be a tough one.

But why would you have FX inventory in the first place?

A very liquid market.

I understand you run your FX with your EM business, together.

Just trying to understand what are the positions that would hold inventory, on behalf of clients.

As you would perfectly understand, Kian, I am not going to get into details about specific positions.

But as I said, you can see it in the VAR profile, the de-risking.

But I can't give you any more color than that.

Understood.

Last question on this then.

Are the positions that you had sold, or are they hedged?

All right, one more time?

Are the positions you had in the inventory, are they hedged or are they actually sold?

Sorry.

What I think you're asking is, are the positions -- is there -- I think you are misunderstanding my message at this point.

There are no core positions that are something that are significant concern.

So it sounded like that's what you are asking, the question.

Okay.

I won't talk about whether things -- on how we manage the risk, but --

Yes, that's what I was more interested in.

If you still have the notional on the books or you actually sold the notional.

No, I didn't answer the question, actually.

Okay.

All right, thank you.

Thanks very much.

Your next question is from the line of Douglas Sipkin with Susquehanna.

Please go ahead.

Yes, thank you, and good morning.

Good morning, Doug.

So I just wanted to follow up a little bit, drilling down on the I-bank pipeline.

Just given the commentary around the trading environment and uncertainty, I'm just trying to reconcile that with the record -- or, not the record, but the five-year record pipeline, which would require CEO confidence to do things with M&A and equity.

So maybe you can relate the two back.

It just seems like, while it's great, it just seems like it's abnormally high for the environment that we're in to have such a high pipeline.

What exactly are you guys seeing?

What's happening that it's so big, given the uncertain environment we are in?

Right.

It's a great question.

So as you know, the dialogue around M&A activity and financing activity -- but M&A activity in particular -- it's a very long lifecycle dialogue.

We can -- if we had one of our merger bankers in the room, very often, in a particular transaction, not just the client, but the particular transaction could be under discussion for multiple years.

In an environment with very high uncertainty, which is a low-conviction environment obviously, then transactions tend to get delayed.

So it's not one of these things that turns on or off in terms of like a light switch.

Nobody blows the all-clear whistle.

But I would say there is certainly a desire in the corporate base for -- to produce growth.

And when they see strong underlying synergies, people will take action.

But they need a backdrop in which they feel comfortable executing.

And as I said, the trend -- in terms of the backdrop, regardless of the fact that this quarter there might have been a step back in terms of confidence and increase in uncertainty -- the trend is positive.

But this is a multi-year phenomenon, obviously.

Got you, okay.

Shifting gears, maybe you could just spend a little bit more on the asset management business, maybe big picture.

Just from my vantage point, it seems like you guys are doing a little bit more to buy, build, et cetera, there.

Do you guys have any long-term targets as to how big you want that business to be, relative to the whole organization?

Obviously it's a capital-like business.

I know you guys have done some smaller acquisitions here recently.

So any color on strategic steps you guys are taking there that are different from maybe three, five years ago?

Well, the focus has been very intense for several years.

But as I said before, it's a bit old-fashioned.

The primary focus is performance.

And with performance, we know we will build assets.

We will look from time to time at acquisitions, if we think they make strategic sense and it's in the -- it fits our business, and it's additive to our clients and our performance.

But as I said, we are very pleased with the result and the growth, but we are relying on something that's a bit old-fashioned.

Got you.

Okay, that's helpful.

Thanks.

Thanks.

Your next question is from the line of Fiona Swaffield with RBC.

Please go ahead.

Hi.

I just had a follow-up question on the Basel III all-in, look-through number, I think the 9.8% versus the 9.3%.

Could you talk us through -- it looks to me like the deductions have gone down.

But I don't -- because obviously you've got buybacks offsetting profit, or more than offsetting profit.

And I think the [odd degrading] are centered on $10 billion.

Correct me if I'm wrong.

But is there something going on deductions, or something else?

As you recall, at the end of the second quarter, obviously we got the finalized rule.

One of the things about that rule, obviously there's the financial institutions deduction.

What you are really seeing is the reduction in a component of that risk, which isn't a deduction from capital, as you know.

So the fact that we -- and we have talked about this before.

The fact that our teams have both the tools and the ability to manage the balance sheets, what you're seeing, as we see in the finalized rule, is you are seeing them take actions that affect the ratio.

So for example, selling certain cash assets.

Okay.

So it's nothing -- it's not private equity deductions, per se.

It's the other deductions.

No, so, okay.

This is a -- you're bringing up a good subtly of the significant versus the non-significants.

The significant deductions -- and for anyone else on the call who is less fluent in this minutia, happy to set up some follow-up time with Dane and the team.

The significant deductions -- obviously, they will come with harvesting over time.

Because we are in the funds with our clients.

Okay.

Thanks very much.

Thank you.

Your next question is from the line of Guy Moszkowski with Autonomous Research.

Please go ahead.

Hi, Guy.

Good morning.

Just a question on the investment and lending, the equity side.

So the language that you used in the press release, and I think you also said in your prepared remarks, made a distinction between corporate performance and company-specific events.

So could we generally think in our mind that the corporate performance ones are probably marks to a model, and then the company-specific events are more going to be either realized gains or marks to a market value that's visible?

What I was referring to in the opening remarks, obviously, is public market equities versus private equities.

And we are very rigorous, as you know, in our mark to market policies.

So we incorporate all variables.

But I will list a few.

Obviously specific performance are the assets, which we have visibility into, and the market environment, and pending events.

So if, for example, we think an asset is going to go public in the next quarter potentially -- if that's the strategic plan for the enterprise -- or subsequent quarter, if that's there, then we will have other valuation techniques, which we are in receipt of obviously.

It's a very rigorous process, as you know.

Oh, yes.

No, I don't doubt that at all.

Is there any color that you can give us on the gain that you recognized in the quarter, how much of that was actually a realized gain versus some element of a mark?

Well, it's all fair value, right?

So I think if you're asking about specific monetizations, no, I haven't delineated that.

But we are marking the balance sheet every day.

Sure.

So in that sense it, is realized.

Okay.

Let me move on to the SLR.

I know you're right.

It's years off and you're already basically compliant, as you said.

So you're not going to rush to do mitigation things.

But you also had commented on the fact that compression and reduction of notionals was probably a healthy thing.

So I'm wondering to what extent you're engaged in more compression, more maybe looking to re-document existing transactions that are long term in nature into central clearing, so you can get rid of the CAVA drag on the denominator of the leverage ratio, things like that.

Again, just from a risk management perspective, we have always been very engaged in trying to reduce those notionals.

As I said, it's just a good way to run the business.

Now, because of the developing rule set, the whole marketplace is more engaged, and we are very engaged.

And that's not to imply people weren't as engaged as we are.

The nuance I was trying to explain earlier is that people historically -- over many years, everyone likes to reduce gross notionals, but sometimes couldn't agree on costs.

Now there is just a greater forcing function.

So there's more of a tailwind to everybody reducing gross notionals.

And so -- now again, this is a little bit of the process of I think how we certainly -- I suspect the rest of the industry -- this is a little bit -- the leverage ratio, what it encourages you to do is to basically rank the exposures basically from a return asset perspective, start with the low ones, and mitigate from there.

And this would be high on the list for the whole industry, I assume.

Certainly high on the list for us.

So I could interpret your remarks to mean that you probably are spending quite a bit more time and hopefully getting more resolutions when you are sitting across the table from a counter party who is another dealer, in getting these notionals down and maybe moving some of these long data transactions, as I said, into a central clearing environment.

Or is does that not really work that well?

Yes, that's a correct assessment.

But it's just started.

We just started, and the industry just started.

So it's early goings.

But the answer is yes.

Yes, fair enough.

Like I said, I was just trying to get a sense of the direction of travel in that.

Yes, I know.

I understand.

And then just a final question on the intersection of the I&L business and the comp ratio reduction.

I know you've always had, or generally have had this policy of straight-lining it for three quarters.

But isn't it economically logical to conclude that the reason that the ratio came down as much as it did is just the degree to which your profit mix this quarter was driven by investing in lending activities that really have inherently a very low compensation ratio?

Yes, so again, no change in philosophy.

I want to be really clear with everyone.

It's our best estimate.

It reflects the collective contribution of all businesses, certainly not an individual business segment.

And we have reduced before in the third quarter.

So it's not completely out of sync with what we've done historically.

But it does reflect all those things I talked about earlier, the fact we are running $500 million ahead, we have more visibility into year end, which is another way of saying best estimate.

We have more visibility into year end.

And of course, the cost reduction efforts give us flexibility.

Yes, that's fair.

Okay.

Thanks very much for taking my question.

Thank you.

Your next question is from the line of Brennan Hawken with UBS.

Please go ahead.

Hi, Harvey.

Hi, Brennan.

How are you?

Good.

Just a quick one at this point.

And it's again on comp.

Sorry.

Hate to beat the dead horse.

But just want to take a slightly different angle on this.

During earnings here, we have seen another dominant FIC franchise cut their comp ratio materially this quarter too.

And obviously, you can't speak to the actions of a competitor.

But in your view, is it appropriate to assume that as an industry, we are maybe rationalizing FIC to a new regulatory and business environment through these actions?

I have, as you know, zero visibility.

You would have a lot more visibility in your engagement with our competitors than I would.

You know, not to wax on and make the call long, but I remember the first day I showed up at Goldman Sachs.

One of the first things I was taught and mentor was that compensation was first and foremost how the Firm did, then how your division did, then how your business unit did, and then how you did as an individual.

We haven't changed any of that.

If anything, we are protective of that cultural mantra.

And I hope that every new summer hire that we brought in this year, I hope they got the same lecture we had -- I had back then.

So again, it's the same culture.

And you're just seeing it based on performance.

And when I say performance, everything -- the year-to-date run rate being ahead in revenues, and also all the multi-year efficiency efforts we have built in.

Okay, thanks a lot.

Your next question is from the line of Christopher Wheeler with Mediobanca.

Please go ahead.

Yes, good morning.

A couple of related questions, really.

And the first one really touches on what the last gentleman said.

Because I suppose you've been very honest about how difficult the quarter was for fixed income.

But I guess we've seen so many headwinds build up around [16 come] since the crisis.

And then during the summer, we obviously saw the possible issues around [tapering], which will come, of course, not just in the United States, but elsewhere, where a lot of liquidity will come out of the market, interest rates go up.

And you guys have tended to be the cutting edge of thinking through these issues, as you were on post crisis.

I suppose what I'm interested in -- and maybe compensation is one of the issues.

But what else are you thinking about in terms of that withdrawal of liquidity, which may mean that you're going into a -- if you want, a market where fixed income revenues are not going to be anywhere near as robust as they were even in the post crisis period, when you were having to deal with [bar flee] and the other capital issues?

And I guess relating to that, perhaps linked to it, the 10.4% return on equity.

I know you're not happy with that.

You talked about the legacy assets, you've always talked about when the markets pick up.

You already perform very strongly because of your clear strength in the market.

But I suppose when I look at some of your diversified competitors in the investment banking space, they are already moving towards the mid-teens.

And I'm just wondering, again, given that you're normally at the front edge of these things, at what point do you start looking at the business model and enhancing it by looking to broaden it, rather than perhaps now as you've had to do with Dodd Frank and et cetera?

Thank you.

Okay.

That's a big question.

So in terms of fixed income, we don't really try and predict what happens in terms of the market reaction.

And what I mean by predict, I mean over a multi-year period.

And let's just say we go into a period of rising interest rates.

A lot of what will determine the size of the market for fixed income -- when I say that, I mean the activity levels for us and all of our competitors -- won't be the absolute level of rates.

It will be the backdrop of the environment.

And so again, an environment where it wasn't -- isn't so news-sensitive, and clients were high conviction, low conviction, and very nervous, is a much better environment for our clients.

Which, by the way, translates generally to better volumes in the marketplace, and better liquidity for everyone.

The best case history is really the equity business.

Which, as you know, went through a massive transformation from the late 1990s to today, as an industry.

And yet revenues continue to grow.

So our responsibility to our clients and in running the business is how we adapt.

In the past we have been good adapters.

And we just have to continue to adapt.

But the cornerstone of adapting will be the interface with the clients and making sure we deliver to them.

That's what we have done in the past.

We just need to continue doing it.

But the changing interest rate environment, that will determine strategy over a multi-year period.

As it relates to returns -- look, we strive every day to ensure that we have the highest absolute returns while managing the Firm conservatively.

And we really want to make sure we have the highest relative returns.

For us, this has been a good relative return environment.

We would love to see better absolute returns.

But it's been a pretty strong relative environment.

Okay, thank you for that.

But we just talked about rising rates on tapering.

But it's this sort of liquidity as well, which I think is one of the great fears we have seen.

And that does suggest the need to realign the business.

And I think what you're saying is that you will just keep an eye on that, and you have no plans at the moment to do that in respect to something that hasn't actually started.

Albeit, it will keep going for a long time, once tapering starts.

So changing the market -- what's critical about certain changes are whether or not they change what clients need, first.

And then how it impacts market structure.

I don't see anything in a rising rate environment that changes market structure.

What will change is how clients view the marketplace.

Again, if it's a high confidence, we are back to more certain economic growth several years from now and interest rates are higher, that could be a very positive environment for fixed income investors.

But it might not be.

All I know is we will have to adapt and make sure we respond to it better than our competitors.

Thanks for taking a stab at it.

Thank you.

Thank you.

Your next question is from the line of Devin Ryan with JMP Securities.

Please go ahead.

Good morning.

Thanks for taking my question.

With respect to some of the positive secondary impacts of regulation, can you update us on which businesses you feel like you've been gaining some market share in, and where you're seeing some opportunities as competitors are just re-evaluating their strategies or how they are allocating resources?

I think it's too early to see that.

Obviously earlier in the year and continuing, we have seen some pullback from some competitors.

I think that is a multi-year phenomenon as it relates to the impact of regulation.

And so that will -- we will see that again over time.

That will be a big part about this operating flexibility that I was talking about earlier.

The real differentiating characteristics, firm by firm -- and we all will live with the same rules, we will have all the same resources -- is which firm can better deliver to their clients and which firm can better adapt.

You know, I've talked about this a lot.

Adapting too early can be a mistake, and adapting too late can be a mistake.

And so we will be watching it very closely and doing everything we can to deliver to our clients.

Okay, great.

And then just lastly, not to beat a dead horse on FIC, but we have seen some flows out of bond funds in recent months.

And we all understand they are small in the absolute.

But given your exposure to institutional asset managers, as you mentioned, did you see any change in client behavior in the quarter or anything that was a little bit concerning just with some of the outflows out of bond funds?

It's been a while now, but obviously I grew up in that business and I co-headed it before my current responsibilities.

I think what clients did is just normal client risk management.

Maybe a little different than you would have seen pre-crisis, because people are just very sensitive to potential tail risk.

Quite frankly, I think it's a good thing for the marketplace, not a bad thing.

But no, I think that all the behavior was very predictable.

Okay, thank you.

And at this time, there are no further questions.

Please go ahead with any closing remarks.

So since -- look, no more questions.

I just want to thank you for joining today.

Look forward to seeing all of you in the upcoming months.

And again, if you have any other follow-up questions, please reach out to Dane, Heather and the team.

And otherwise, see you in January.

Thanks again.

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

You may now disconnect.