高盛 (GS) 2013 Q4 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 fourth-quarter 2013 earnings conference call.

This call is being recorded today, January 16, 2014.

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 fourth-quarter earnings conference call.

Today's call may include forward-looking statements.

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

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

For a discussion of some of the risks and factors that could affect the Firm's future results, please see the description of risk factors in our current annual report on Form 10-K for our fiscal year ended December 2012.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our investment banking transaction backlog, capital ratios, risk-weighted assets, and global core excess.

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

This audiocast is copyrighted material to 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.

I will walk you through our full-year and fourth-quarter results, then I am obviously happy to answer any questions.

Let's start with the annual results.

We had Firm-wide net revenues of $34.2 billion, net earnings of $8 billion, earnings per diluted share of $15.46, and a return on common equity of 11%.

This is a solid result, and a modest improvement over last year's performance, despite what, at times, was a difficult operating environment.

With regard to the fourth quarter, net revenues were $8.8 billion, net earnings were $2.3 billion, and earnings per diluted share were $4.60.

In looking at the broader operating environment, many of the global themes that dominated 2012, for example, improving economic data in the United States, central bank activity and political uncertainty, continued into 2013.

Starting with US economic data, we saw relatively consistent improvement over the course of the year -- reported GDP consensus estimates in each of the last two quarters.

US unemployment rate declined by over 100 basis points to 6.7%, its lowest level since October of 2008.

And housing prices, as reflected by the Case-Shiller housing price index, increased by 14% through October.

2013 represented a slow, steady improvement in the US economy, which, at roughly a quarter of global GDP, naturally served as a stabilizing and positive influence on global market sentiment.

2013 was also marked by significant central bank activity.

In Japan, the central bank announced unprecedented monetary stimulus to achieve stated inflation targets.

Japanese credit spreads tightened, and the yen weakened throughout the year.

In addition, the Nikkei enjoyed its largest annual gain since 1972.

In the US, initial commentary from the Federal Reserve about tapering its bond-buying program ultimately translated into a December announcement of a $10-billion monthly reduction in the program, leading the marketplace to contemplate a world without quantitative easing.

Finally, political risk and uncertainty were constant during the year, starting with the Italian elections in the first quarter, continued unrest in the Middle East, and the 16-day US government shutdown.

This created an environment that required clients to constantly reassess their outlook for the global economy.

For example, what are the implications of central bank activity on the global economy, individual regional economies, and specific industry sectors?

What are the pushes and pulls associated with monetary policy versus fiscal policy?

Are rising rates and tapering a headwind for the US economic recovery, or a return to a more traditional supply-and-demand-driven economy?

Not surprisingly, our clients' activity fluctuated over the course of the year, as they were constantly digesting new information.

When you boil it all down, the 2013 environment: it is just one where the world took two steps forward, followed by one step back, a dynamic which you could see reflected in both price movements in the markets, and client activity.

To sum it up, while we wouldn't characterize the last two years as a normal cyclical environment, given all of the items I previously listed, it shouldn't be lost on us that the long-term trend is slowly and steadily improving.

Now I will discuss each of our businesses.

In investment banking, we produced fourth-quarter net revenues of $1.7 billion, up 47% from the third quarter.

Three factors drove the increase: A robust IPO calendar; higher completed M&A volumes; and debt financing activity that remained strong.

For the full year, investment banking net revenues were $6 billion, up 22% from 2012, on the back of solid underwriting activity.

Breaking down the components of investment banking, advisory revenues were $585 million in the fourth quarter.

The 38% increase relative to the third quarter reflects the increase in industry-wide completed M&A.

Goldman Sachs continued to be ranked first in worldwide announced and completed M&A for 2013.

We advised on a number of significant transactions that closed during the fourth quarter, including Vivendi's $8.2-billion sale of its controlling stake in Activision.

Ingersoll-Rand's $5.3-billion spin off of Allegion, and the $2.9-billion sale of Saks to Hudson's Bay.

We also advised on a number of important transactions that were announced during the fourth quarter, including Sysco's $8.2-billion acquisition of US Foods, ViroPharma's $4.2-billion sale to Shire, and Deutsche Telekom's EUR2-billion sale of Scout24 to Hellman & Friedman.

Moving to underwriting, net revenues were a record $1.1 billion in the fourth quarter, up 52% sequentially as equity issuance improved significantly.

Equity underwriting revenues, up $622 million, were more than double our third-quarter results, largely due to an increase in IPOs and convertibles.

Goldman Sachs continued to be ranked first in worldwide equity, equity-related, and common-stock offerings for 2013.

Debt underwriting revenues increased 9% to $511 million.

During the fourth quarter, we actively supported our clients' financing needs, participating in Darling International's $2.7-billion debt and equity offering, Twitter's $2.1-billion IPO, and Moncler's $1.1-billion IPO.

Our investment banking backlog further improved from third-quarter levels, which, you will recall, were already at our highest level in five years.

Turning to institutional client services, which comprises both our FICC and equity businesses, net revenues were $3.4 billion in the fourth quarter, up 19% compared to the more challenging environment in the third quarter.

For the full year, $15.7 billion of net revenues were down 13% relative to 2012.

FICC client execution net revenues were $1.7 billion in the fourth quarter, or $1.9 billion excluding DVA losses of $163 million.

Excluding DVA, revenues were up 46% sequentially.

In particular, currency revenues increased significantly compared to a challenging third quarter.

Credit was up on stronger client activity that was supported by tighter credit spreads and solid issuance trends.

Commodities revenues were largely flat sequentially, and remained depressed by lower volatility and client activity levels.

Rates and mortgages declined as client activity levels remained low.

For the full year, FICC client execution net revenues were $8.7 billion, or $8.9 billion excluding $220 million in DVA losses.

Excluding DVA, revenues were down 14% relative to 2012, as macro uncertainty, particularly around central bank policies, and lower volatility levels, impacted client risk appetite and activity.

The decline was more pronounced for rates and mortgages.

In equities, which includes equities client execution, commissions and fees, and securities services, net revenues for the fourth quarter were $1.7 billion, up 4% sequentially, and included $43 million in DVA losses.

Equities client execution revenues increased 9% sequentially to $598 million.

Commissions and fees were $747 million, up 3% relative to the third quarter, supported by rising equity markets and strong issuance trends.

Security services generated net revenue of $337 million, largely consistent with the third quarter.

For the full year, equities produced net revenues of $7.1 billion, down 14% relative to 2012.

This decline was due to the sale of our Americas reinsurance business in 2013, and the sale of our hedge fund administration business in 2012.

In our equity business during 2013, stronger performance in cash products was offset by weaker derivative revenues.

Turning to risk, average daily VAR in the fourth quarter was $81 million, down from $84 million in the third quarter.

Moving on to our investing and lending activities, collectively these businesses produced net revenues of $2.1 billion in the fourth quarter.

Equity securities generated net revenues of $1.4 billion, primarily reflecting company-specific events, including initial public offerings and gains in public equity investments.

Net revenues from debt securities and loans were $423 million, and benefited from net gains and net interest income.

Other revenues of $234 million include the Firm's consolidated investments.

For the full year, investing and lending generated net revenues of $7 billion, driven by $3.9 billion in gains from equity securities, $1.9 billion of net revenues from debt securities and loans, and $1.1 billion of other investments.

In investment management, we reported fourth-quarter net revenues of $1.6 billion, up 31% from the third quarter, primarily as a result of $333 million in incentive fees generated largely from the Firm's alternative asset products.

Management and other fees were up 5% sequentially at $1.1 billion.

For the full year, investment management net revenues were $5.5 billion, up 5% from 2012 on stronger management and other fees, which benefited from growth in assets under supervision.

During the fourth quarter, assets under supervision increased $51 billion to a record $1.04 trillion.

This growth was driven by long-term net inflows of $13 billion, largely in fixed-income assets.

We also had market appreciation of $20 billion, largely in equity assets.

On a full-year basis, $41 billion of long-term net inflows and $40 billion in market appreciation drove these record levels of assets under supervision.

When it comes to investment management, we all know that performance is critical.

We are intensely focused on delivering returns for our investment management clients, and have seen improvement in our multi-year performance.

The $41 billion of long-term net inflows in 2013 were the highest annually since the onset of the crisis.

We will continue to focus on delivering performance for our clients, and have confidence that the rest will follow in due course.

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 benefits, decreased 3% to $12.6 billion for 2013, and translated into a compensation-to-net-revenues ratio of 36.9%.

Fourth-quarter non-compensation expenses were $3 billion, 40% higher than the third quarter, and up slightly compared with the fourth quarter of 2012.

Other expenses were significantly higher, reflecting net provisions for litigation and regulatory proceedings of $561 million, more than $400 million higher than the third quarter.

Depreciation and amortization included $196 million impairment charges, primarily related to consolidated investments.

Finally, the fourth quarter also included a $155-million donation to Goldman Sachs Gives, our donor-advised charitable fund.

For the full year, non-compensation expenses were down 2%.

Total staff at year end was approximately 32,900, up 2% from year-end 2012.

Our effective tax rate was 31.5% for 2013.

Before moving on to capital, it is worth taking a step back to review our improvement in operating efficiency over the past few years.

In the first half of 2011, we announced a comprehensive expense initiative.

If you look at our cost structure this year versus 2010, before we launched our expense initiative, total expenses are lower by $3.8 billion.

As a result, our pre-tax margin in 2013 increased 140 basis points to its highest level in the last four years, this despite having $5 billion less in revenues.

Delivering more operating efficiency is never easy, and requires a real focus on striking the right balance.

By balance, I mean making sure that our actions position us to deliver for all of our constituents: Our clients, our regulators, our employees, the broader financial system, and of course, for our shareholders.

We believe this early and ongoing focus on our expense structure has not only benefited recent performance, but more importantly, also serves as a basis for better results in the future, particularly as the opportunity set expands.

Now, regarding capital, we repurchased 8.5 million shares of common stock for a total cost of $1.4 billion during the quarter.

For the full year, we repurchased 39.3 million shares for a total cost of $6.2 billion.

With respect to our regulatory capital ratios, our Basel III Tier 1 common ratio on a fully loaded basis was 9.8%, using the advanced approach.

Under the standardized approach, our ratio was 9.2%.

Of course, it is important to note that our transitional ratios are both more than 100 basis points higher.

Risk-weighted assets under the advanced approach are approximately $595 billion: $350 billion in credit risk, $160 billion in market risk, and about $85 billion in operational risk.

Our estimate for the proposed supplementary leverage ratio under US rules remains approximately 5% for the Firm, and approximately 6% for the Bank.

These are our best estimates, subject to change depending on regulatory clarifications.

Of course, last month, we also gained regulatory clarity on the Volcker Rule.

Most importantly, the final Volcker Rule explicitly permitted market-making, lending, and investing on balance sheet.

Regulators permitted these activities, given the essential role that they play in supporting healthy capital markets and economic growth.

Although we only received the finalized Volcker Rule last month, we have obviously been preparing to comply with certain portions of the rule for nearly three years.

In 2010, we began closing down our proprietary trading operations, specifically Goldman Sachs Principal Strategies and our Global Macro Proprietary trading desk.

In addition, we announced in 2012 our intention to redeem certain hedge funds -- excuse me -- certain hedge fund investments.

Since 2012, we have redeemed approximately $2.2 billion of hedge fund investments, and we will continue to redeem our interests.

Now that we have a final rule, the first thing that we did was establish a Volcker implementation team comprised of senior leaders with expertise across a wide variety of control and business functions.

They are focused on making sure that we are in the position to effectively and efficiently meet the numerous requirements outlined under this new and intense compliance regime.

In summary, as I mentioned earlier, while we are still not at what I would describe as a normalized cyclical environment, the underlying macro trend has been improving.

To maximize our opportunity set and drive shareholder value, we need to continue to focus, first and foremost, on our clients.

Their activity, and our connectivity to their needs, is our highest priority.

We need to continue to recruit and retain a high-caliber and dedicated global work force.

We need to leverage our technology expertise to adapt to new regulations and evolving market structures.

And we need to remain focused on improving our efficiency, both from a cost and a capital perspective.

Our goal is not only to enhance returns in the current environment, but more importantly over the long term to position the Firm for significant operating leverage as the opportunity set improves.

We believe that we have the competitive position, the diversity of businesses, the caliber of people, and the institutional will to capture and maximize these opportunities as they present themselves for the benefit of you, our shareholders.

Thank you again for dialing in, and now I am happy to answer any questions.

(Operator Instructions)

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

Please go ahead.

Thanks very much.

Good morning, Glenn.

Good morning.

Just a quickie follow-up.

I heard all of your comments on Volcker.

Just making sure, the hedging component, you mentioned about market making lending and investing.

Anything different on the verbiage on hedging, and your ability to just manage risk across the desk?

No, we don't see anything in the rule that prevents us from continuing to hedge.

I think the early concerns, before the final rule came out was this reference to portfolio hedging, but we hedge within the businesses.

There is no hedging at the firm-wide level.

So hedges are hedges.

Good.

Also the Fed recently just put out a quick white paper on -- that had a testimony on commodities.

I think a lot of that was expected, but I am curious to get your updated thoughts on plans for the business?

But there was a piece in there that threw me for a loop a little bit on the merchant banking, and I wasn't sure if it relates to your entire merchant banking business, or merchant banking within the commodities businesses.

So if you could give quick thoughts on that.

I know it just came out, it would be helpful.

No, that's fine.

It is an important question.

So as you know, the commodity business has been an important business for Goldman Sachs, and quite important for our clients for an extended period of time.

I think, to simplify it, I would break down the business ruling to two parts.

There is our activity that relate to investing activities, and then there is our franchise business where we are working with clients in the market making activities, and in that function, we are essentially providing the same services as anyone would working with a treasurer or a CFO on any risk that they would be hedging.

So in terms of a corporate treasurer, if they need manage their exposure to a dollar/yen, they will work with us in our currency business.

And if they need to manage their exposure to a cost input in commodities, they will work with us on the same hedging profile.

So that is a high level how the business breaks down.

On the investing side, we have been an important provider of capital and working with our clients through a capital intensive industry.

I think as it relates to the white paper, I think it is a good step.

It is another step in the regulatory process where people are reviewing the businesses.

I think the questions make sense.

These are things that we consider all the time in our businesses, from the safety and soundness perspective.

So I think it is a healthy exercise, and we will work with the regulators.

But certainly no change in strategy from Goldman Sachs as it relates to commodities.

It is just too important of a business for our clients.

Appreciate that.

The merchant banking component within that paper, it seemed to be chucked in at the end.

Is that questioning whether we limit bank holding companies ability to do merchant banking in totality, or within the commodity space?

Don't know.

Don't have any special insight, in terms of that.

I know it is early.

We will see as it moves along.

I don't want to minimize it, but it is a question.

Okay.

Moving on to [SCA], you have been doing this for a while, other -- some banks are catching up.

I am just curious on, if more of the competition is accounting for their credit spreads in pricing, does that make the business on more equal footing?

Does it -- is it -- do you envision an impact on the actual pricing of the business in the competitive landscape?

So, obviously there has been a lot of attention to the SCA over the last couple of days.

So obviously, you are aware of this, Glenn, but we incorporated SCA into our pricing methodologies back into 2010.

And if you take a step back for a second -- just from the general mismanagement perspective and the way we think about risk parameters and inputs, if we identify a cost or a parameter, we try and incorporate it as quickly as possible.

So we adopted this in 2010.

In terms of its implications, I think there is probably two.

One is really more for you and folks on your side of the table, which has obviously it has some degree of distorting effect when you look at things like revenue market share.

And it is one reason why we look at revenue market share, but we don't emphasize it as much as you do necessarily because these pricing inconsistencies, they can lead to anomalies at certain points in time.

I think the more important issue really, in terms of how we run the business is the one that you mentioned.

Which is, regardless of what the particular asset class is, if one firm, say Goldman Sachs in this particular case, ends up being the one firm that is actually pricing a parameter, and all the other competitors aren't, it leads to challenging conversations with the clients, because you look like an outlier.

And so to get to the gut of your question, the extent to which the playing field is level, and everyone is pricing on the same terms and managing their risks the same way, obviously we prefer that.

But in the end, we are always going to prioritize the risk management over things like market share.

Pretty consistent.

All right.

Thanks very much.

Appreciate it.

Glenn, thanks.

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

Please go ahead.

Good morning.

Hello, Matt, how are you?

Good, thank you.

The question I get asked most often when I talk to clients about you is how you can improve the ROE over time.

And to be fair, the 11% for the year is above many peers, especially if you adjust for the business mix.

But as we think about -- obviously revenue is a driver, but if revenue stays kind of in this type of environment, what can you do to optimize the capital?

And is there still some expense opportunities, even after all of the progress you have made to date?

So if you go back again, a couple of years ago, we really were focused on building operating leverage into the enterprise.

And I think at the end of last year, you saw that reflected in the response, sort of our performance with a 10.7% ROE, and this year you are seeing increasing operating leverage.

But obviously, it is important to see the back-to-back consistency.

Now we are always looking to be more efficient.

We could certainly do things -- we are far from perfect.

We can certainly do things in terms of capital efficiency and expenses, and we are constantly looking at how to leverage technology, particularly as we get more visibility into the finalized rules, so we can adapt.

I would say my comments before, about finding balance.

As we have been doing this, the most important thing is we want to make sure we are well-positioned for our clients, when revenue opportunities do look better.

And I think you see it kind of across the board in terms of market share and investment banking, and lead table presence, growth in asset management.

All across our businesses, you are seeing that we are trying to find that balance.

And look, we don't always get these things right, but that is really what we're trying to do.

I guess as a follow-up, this is just a general question for you in the industry, but when people look at the fixed income environment, I think there is a lot of focus on all of the structural changes occurring and concern that there will be revenue pressures.

I also get the sense that there hasn't been maybe an entire adjustment to that franchise or to the platform as people wait to see what all the new rules are, and kind of when the fed is out of buying bonds, what happens to that market.

So I am just wondering is that an area where we could some capacity adjustment we could see for the industry as a whole?

So it is a really good question.

I am going to break it down in two parts.

On the first part, in terms of the impact of regulation, I think it is early.

We haven't even really seen the launch of things like swap execution facilities, and the real impact is ultimately in how market structures adjust.

I do think though, that the big impact from a regulation perspective is the fact that the entire industry is carrying more capital.

And I think implicit in your question, but you should correct me if I am not hearing correctly, it would appear that perhaps there is excess capacity in the industry.

Now we have been building a lot of operating leverage into our fixed income franchise over the last couple of years, and at the same time we feel very comfortable with our relative position in all of our businesses.

And so to the extent to which capacity comes out, we think we will benefit from that in terms of our competitors exiting businesses.

But we will have to see.

We are just focused on doing what we can with our opportunity set.

Okay.

That's helpful.

Thank you very much.

Thanks.

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

Please go ahead.

Good morning, Mike.

Good morning.

Thanks a lot.

Maybe first question, just getting back to the ROE.

Given that you have more clarity on some of these rules, whether it is RWA leverage Volcker, and you spend a few years trying to kind of reposition the business, I guess what inning do you feel like you are in, in terms of repositioning?

And then at some point, you sold some of the US reinsurance business, I think the Europeans there.

Like at some point, do you need to be able to either redeploy more than your earnings in terms of capital?

Or are you seeing enough opportunities globally as the economy and the macro environment improves that you can start reinvesting to generate higher returns?

So it is a great question.

So obviously, we have taken a number of steps over the past several years to -- in terms of selling businesses that because of rule changes were quite frankly just better held in other people's hands and wouldn't provide the proper returns.

And as I said, under the hood we have been building in as much operating flexibility into, for example our fixed income franchise as we can during in this portion of environment.

So I would say with respect to capital, first and foremost, we just want to make sure the firm is positioned safely and defensively, and at the same time we can be offensive when opportunities present themselves.

But it is really going to be determined by client activity, economic growth, confidence.

That will be the opportunity set, and we will just adjust.

It will always be incremental, so you will see us make incremental steps.

You have seen us take some -- move selling things, but you will see us making incremental steps.

But really now it is about that balance, because we don't want to forego the upside.

Okay.

That's helpful.

And then just on the banking side, you mentioned the pipeline remains strong.

It feels like we are coming off a very strong 2013, just given particularly on the equity side and even on the debt side.

But when you look at the outlook and you look at the conversations, is it possible to have multiple years, meaning 2014, 2015, with an improving economy where the Investment Banking revenues are continuing to grow off this base?

And maybe partially, it is because we have had five years of pretty anemic inactivity in some areas.

Just want to get your outlook, because there are some of you -- that 2013 was a great year in some spots.

And so, the growth rate from here, might be tougher?

It is a good question.

So if you sort of just think about our Investment Banking franchise and you break it down, let's just say underwriting on one side and advisory services, the merger business on the other.

The underwriting activity, clearly there is a market component to that in terms of timing credit spreads, people looking to put capital to work.

And then, obviously, you saw it in the fourth quarter, a big uptick, in equity underwriting.

The market was there.

The advisory business, for a CEO, making a decision around a merger, it is a career-defining decision.

And against a backdrop, again, go back and look at 2013, against a backdrop where in one quarter you are contemplating what does tapering mean?

And then, two quarters later, you are contemplating a government shutdown, that is a difficult backdrop to make a career-defining decision in.

And so, it is going to lag.

You are going to see pickup in M&A activity in sectors where you see global confidence.

And so, not surprising to us at all, and we have been very protective of that franchise, obviously a leading franchise.

Now as it relates to some the other markets, like for example, take the debt market.

One thing I learned in the past year, because I think it was one of the most frequently asked questions I got at the end of the year, is what does the debt underwriting look like in the environment in 2013?

I couldn't have told you that there would be as much activity as there was.

We just respond to it, and we look to deliver for our clients in it.

Now, you could paint a picture of a declining debt environment, but also you could see debt transactions of significance linked to mergers.

We have seen some of that.

Europe recovery, in a long term shift to the capital markets.

Growth markets shifting more towards the capital markets.

These are very long term trends that are in place.

So, but we will see.

Okay.

And then, just last question, on FICC, I guess just given some of the near-term new trends that we can see.

I just wanted to get an update on how you see some of this transition of the OTC markets onto these swap execution facility platforms.

Maybe we will get it mid February.

Who knows if we will get a delay, but it seems like clearing was fine last year.

Just wanted to get your sense on talking to clients, talking to customers, is it progressing, so we don't have many hitches, or is it a little bit more challenging?

Sure.

So I actually think the regulators approach and all of the industry participants, clients, exchanges and clearers, I thought that the process of clearing, I don't know that you could give it higher marks.

It was done in stages.

It was very orderly.

I think the issue with swap execution facilities is obviously, there is a big technology build and a change in behavior across all of our clients.

And so, the only thing I would say about it, and want to see what happens in February is, I think that measured approach to clearing was quite thoughtful, and I know there is lots of discussion about the approach.

The burden is on all of us to make sure that as an industry, we adopt these protocols.

A lot of burden obviously on swap execution facilities because they are at the center of all of this connectivity.

But clients need to be ready.

It is hard for me to gauge their preparedness.

But I think if it was staged, and I don't mean extended, but I think if it was staged and it mirrored the approach to clearing, I think at the margin it just -- I don't know, maybe it is just more prudent.

Yes.

That's helpful.

All right.

Thanks, Harvey.

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

Please go ahead.

Hello, Roger.

Hello, good morning.

I guess, just on I&O, can you just remind us what you think the, obviously market conditions dependent -- but what the realization profile looks like in terms of the tail?

I mean, is this kind of still a couple three years of mature investments that we will see coming out?

So obviously, and we have talked about this during the course of the year, it has been an environment that has been favorable for harvesting.

So you are seeing that as we go through.

But we are also seeing interesting opportunities around the globe for investing.

But you are seeing the performance as they come through.

Okay.

How should we think about the comp ratio?

There is probably, not maybe as explicit there, but how do you thing about compensation on those, and how it is beneficial throughout the -- sort of managing compensation around the firm?

So absolutely no change to how we think about compensation.

First, we manage the compensation across the firm as a collection of businesses.

The pay is based on firm performance, and then we go into the divisions, and then obviously down to the individual.

And so obviously, as our largest expense, we spend significant time on it.

I think you are seeing the benefit of some of the tough cost-cutting that we embedded into the business over the last couple of years.

Okay.

And then I guess, just one more on I&O.

And with Volcker out of the way now, do you think you have got enough clarity around the -- all of the rules, the capital requirements, et cetera, to step up investing on balance sheet again if the opportunity sets are there?

So I would -- the short answer is yes, but I would break down regulatory clarity from the opportunity set.

The opportunity set is going to be driven by what we see, working with our clients and being very disciplined about returns, as we have in the past.

In terms of the rule set, the rule set gives a road map for the various alternatives under which you can undertake the activities.

You can invest in for clients in 3% funds.

You can work within other Volcker compliant structures, and obviously we can lend and we can invest off our balance sheet so.

But that speaks to how, the when, and working with clients, that will be opportunity-driven.

Okay.

And separately, you mentioned that you thought we are still not quite in a normal cyclical cycle.

So I guess, how far off do you think we are -- not time-wise -- but just how much of an impact are these other things having, and what are -- I mean at this point, what would you say the top two or three sort of issues are there, that keep you from saying this is within the balance of cyclical, cyclical norms?

Yes, so I mean, what I was really trying to underscore there is, and some of the things I mentioned earlier, which is focusing on a shift from quantitative easing to tapering, or the entire financial [investor] adjusting to multi-year processes and regulatory reform, or a government shutdown.

Again, these are not normal characteristics of a cycle, and so I referenced in the script it is sort of supply and demand driven.

So really, what are the fundamentals of the economy?

What are the fundamentals of the performance of companies?

And that is really what I was talking about.

It is maybe not the best world, but it is more of a return to sort of the normal day to day challenges.

And as you have seen in the past, when there is economic growth and activity and a degree of certainty, our clients are willing to make significant decisions, commit more capital, and we get to work with them, and the activity levels pick up.

Okay.

Generally, the trend, slowly improving steadily.

We, only obviously just had a couple of weeks here at the start of the year, but how would you characterize client engagement so far?

Client engagement, we are very, very focused on our clients.

In terms of the first couple of weeks, way too early to extrapolate anything.

Okay, thanks.

Thank you.

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

Please go ahead.

Good morning, Guy.

Thank you, good morning, Harvey.

So on the I&L, obviously, you had significant gains.

Whether they were to the extent that they were realized or not, in a sense it maybe doesn't even matter because given the IPO environment, and the apparently very much improving M&A environment, a significant amount of this probably will be over the course of the next year or so, it seems to me.

And so, then the question is, what is your philosophy with respect to capital return of discrete amounts like that?

And do you think it is possible to make a case to the fed that for significant freeing up of capital of this type, it is not necessarily the right approach to kind of compare it to earnings as a payout?

So it is a good question.

And I think at the core of your question, what you are saying is basically, if risk is down -- so the consumption of capital is lower and the demand for capital isn't there, the question is, can we return or not return it?

Okay?

Now the way we would look at that question is, first and foremost, running with periods of excess capital is not a problem if we feel like we are going to be able to deploy that capital.

We are never going to force that deployment.

So first and foremost, it is going to be a risk judgment about how we utilize it.

If we see opportunity where capital cannot be deployed, and I will say for the long-term, for example, in our insurance business where the rule set changes, then we will look to return it.

And we will work with the fed over time and the construct to return that capital.

Now I am certainly not speaking for the fed here, but I don't think any industry benefits from holding excess capital in the system for an extended period of time.

That's fair.

On Volcker, you mentioned that you have a very high level committee that is looking at implementation and the things that you need to do in order to implement it fully.

As analysts, should we be focused more on potential revenue impacts of that implementation, or the cost of that implementation?

I think, clearly the cost structure issue is one you can focus on, because as I mentioned the compliance burden is pretty intense.

I think the revenue again -- one of the things in the rule obviously, and I forget the exact language, but it basically said that market-making activity is effectively essential, because it promotes healthy capital markets.

So I think that, the Volcker rule has covered, we will have to see ultimately in the implementation what happens.

But at least in the intent of the final rule, that seems clear that they want to support capital markets.

And so, those revenue opportunities again are going to be predominantly driven by the opportunity set.

So that is how I think about it.

Now in terms of our implementation team, this is just kind of typical of how we approach it, just making sure that we have identified the right people across entire Firm to make sure that we do it as efficiently as possible.

And then there will be a build.

But at this stage, it is way too early to sort of quantify any ongoing cost structure for you.

Okay.

That's helpful though, just to get the philosophy of how you are thinking about those things.

The comp to revenue ratio as was mentioned earlier, did come in lower for the year.

And to the extent that there was a significant revenue shift certainly in the latter part of the year, it seems to have been in favor of I&L.

Is 37% sort of a benchmark that we should be thinking about now for next year?

Or if for example in 2014, revenue were similar, but the composition was more traditional markets and investment banking and less I&L, would we expect that comp ratio to be higher?

So that is a great question.

It is way too early to tell, obviously, in terms of how we will think about compensation in 2014.

It will be driven as I said before, by performance, and the performance will be driven by obviously the collection of businesses that we run.

I think that the mix issue -- I understand why you are asking the question, but there is no single business or segment that drives compensation expense for Goldman Sachs.

And so, for example, if you had asked that question slightly different and said listen, let's just say, I &L, everything else being equal and I&L was down.

I would expect -- that means performance of the Firm is down, and if the performance of the firm is down, it is possible compensation expense would be down.

But at that point in time, we would be incorporating all factors, competitive position, businesses we are building, because while it is pay for performance for the year, it is also investing for the long-term.

Got it.

Just a couple of housekeeping questions.

I don't know if you have talked about the impact of the Rothesay sale on FICC revenues in the quarter?

I didn't see it in the release.

If you could help us with that, that would be good?

Sure, no problem.

So on a DVA adjusted basis sequentially, and obviously we had a challenging third quarter in FICC and it got a lot of attention.

But sequentially, DVA adjusted revenues were up 46%.

If you adjust for the sale of the European insurance business, it is more like 30%.

It is roughly about $200 million.

Got it.

Okay.

That is very helpful.

And then final house keeping type of question.

You talked about the SLR being pretty much in compliance on an NPR basis.

Have you had a chance yet to think about what the impact would be of adoption of the final Basel add-ons?

No, we haven't.

We are still digesting the rule.

As you would imagine under that paradigm obviously, just because of the nature of our business, it impacts our ratio more as a result of things like netting and collateral.

But we are still digging through the rule.

Okay.

Fair enough.

Thanks very much for taking my questions.

Thank you.

Your next question comes from the line of [Christian Mallou] with Credit Suisse.

Please go ahead.

Good morning, Harvey.

Hello, Christian.

Thanks for taking my question.

Just to follow-up on the leverage question earlier on.

Just in light of your relatively stronger positioning there, just given the lengthy time line for implementation, as leverage becomes the binding constraint for your competitors, I would be curious on your thoughts on Goldman's appetite to be more aggressive, or more aggressively compete for market share in client-centric but balance sheet happy businesses like [prime] brokerage?

So -- it is an important question.

If you just split it into two parts for a second.

On the first part, we are not going to change our approach to risk.

And by the way, the FDA was a good example earlier, we are not going to change our approach to risk management and how we deploy our resources to the extent to which our competitors change their strategy.

The other half of the question, is what I think you are asking is, for example, whatever the constraint is, it doesn't have to be the leverage ratio.

But if a firm is constrained, if our competitors are constrained in a particular business, and we have relative strength in that business, we would assume that we could be a more valuable provider to our clients on a relative basis, and that relative strength would just improve.

I think that paradigm applies for everybody.

That is exactly what I was asking.

Thank you.

On the compensation policy, just given the importance of lower earnings volatility to the regulators and investment community, I was a bit curious for kind of updated thoughts on how the firm, the firm's approach to managing the quarterly compensation accrual?

Do you anticipate quarterly comp accrual will be more sensitive to the revenue environments, or should we expect practice of a 4Q true-up to continue?

Thank you.

So the practice of the 4Q true-up is just that, we set compensation, we have full visibility into the performance of the businesses.

So again, no change in compensation philosophy.

We actually think it is quite important to maintain our philosophy around compensation, and for all of our employees at Goldman Sachs to understand it, understand their obligation to the firm in the context of the compensation philosophy.

Ultimately, obviously, as the largest element of our cost structure, we incorporate everything that we think we would put into that, including our obligation to our shareholders.

Thank you.

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

Please go ahead.

Hello, good morning, Harvey.

Good morning.

So just wanted to follow up on the Volcker question.

I know you got a lot of that already this call.

But in thinking about the I&L, I know you called out Volcker pertaining to PE and to the hedge fund investments you have got.

But do I take that to mean that the other components of I&L -- you don't -- you are not constrained by Volcker, so the real estate piece, the credit piece, the loan funds?

You are into a pretty intricate territory.

So the rule is 900 pages.

Right.

So I wasn't -- what I was basically saying is, I was breaking it down -- there is going to be 3% funds.

Right.

And there are going to be other Volcker approved structures.

So for example, historically, the way people may have defined CLOs, you may have included securities, and depending on the very intricate definition of the rules, you may not be able to include certain securities.

And so, however the investing activity and working with our clients needs to be structured, we are going to comply.

I think that the Volcker Rule, what it does is that it outlines a set of rules where market participants can do that.

Again, 3% funds, other covered structures, and of course, you can invest and lend on balance sheet which is a pretty straightforward activity.

But that is really what I was trying to emphasize.

You really have to go to the rule set to determine whether you can do real estate in a particular way or not, and we will comply.

Right.

No, I get that.

It is just that as you know, and you give some good detail about the balances in I&L, and how they are broken down in a couple of different ways.

So I mean I think the Street is just going to be looking at that to understand how the capital is getting freed up and then reinvested in that space.

Because clearly, if there is opportunity to reinvest, that would be great, and if not, you want to see it brought back.

So I was wondering how you are thinking about disclosing the balances in I&L?

I mean, I guess I am just wondering to the degree you can put it in a Volcker/non-Volcker kind of disclosure that would be, I think helpful for the Street.

So I think we have been pretty good in terms of disclosure around, for example, what the Firm's investment in funds are, and it is roughly $15 billion at the end of the third quarter.

Right.

I think the investing process is going to be one again, which is going to be driven by the opportunity set, and what our clients want us to do.

And so, the decision of reinvestor return, we are going to continue to make that decision the same way.

If the opportunity set is not there, we are definitely not going to be a firm that is going to force investing.

We are just going to be disciplined, and if we don't think the opportunity set is there, we are going to look to return the capital.

Now you are certainly seeing the impact of those businesses on our capital ratios.

We talked about things like the financial institution production in the past, and so there are -- there is a lot of aspects to all of the rules, not just Volcker.

But I am not actually 100% certain I understand the question, so we need to -- we can connect with Dane afterwards, and we can go through it a bit more.

Okay, sure.

Okay, thanks.

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

Please go ahead.

Hello, Harvey.

How are you?

Okay.

So you have VAR ticked up here this quarter.

It is actually kind of at a level that we haven't seen in quite some time.

But could you walk through and help us understand what drove that?

So really all driven by basically an overall decline in market volatility, and then an increase a bit in positional risk, but that really is virtually all concentrated in equities.

As you would expect, very active equity quarter.

Lots of activity.

Okay.

Was there any kind of positional and tailwind for your equities business, or should we think about this as all sort of solid flow revenue?

You should think of it as solid flow revenue.

When you do block transactions -- and it was a particularly active block quarter, and I got to give credit to our teams, I think they did a fantastic job in executing blocks, because it was a competitive environment.

Those block transactions can be large.

So they will drive the VAR.

Got it.

Okay.

Thanks.

And on the equities business, this quarter certainly was a better quarter, but when you look back at 2013, and you adjust for the sale of the insurance business, the revenues really are not all that strong and they kind of stand out on the Street as rather weak.

Are you thinking about -- how are you thinking about loss of share in the equities business, and what do you want to maybe do to try to counter that?

Have you come up with some strategies?

What is your view there?

So we are always focused on any area of the business that we can grow and deliver more value to our clients.

I would say, given our starting position in terms of just our aggregate position in the marketplace, in terms of whether it is prime brokerage, underwriting, the derivative business, our cash business, we are in a pretty significant position in terms of aggregate market share.

So it kind of gets back to this earlier issue of, all revenues aren't created equally.

And so, I completely understand your focus on quarter to quarter changes in revenues.

We are focused on delivering over the long term.

And it is not that we don't look at it, but there is risk in these revenues.

And so, you really have to look at the entire set of metrics, and how does our pretax margin look versus other people's, and how are we driving ROE?

So, but we feel very good about our franchise position.

Okay.

And that's fair.

Look, we have only blunt tools, so we use the tools we got.

I know, I know.

And then last one for me, litigation expense, we saw a pretty big uptick.

Certainly when we include many of the money center bank competitors, that has been a big theme the last few quarters, it definitely feels like this is something we should probably count on in the near-term.

Are you -- do you feel as though you are part of that scrum, and how do you feel about your reserve for litigation?

Have you had a chance to build it up?

Do you feel like you might be a little bit behind the eight ball in that front?

Should we count on some build here for the medium-term here?

Can you give us some color on that?

I know it is a hard one.

This is a very, very important question, because all firms in this particular case are not created equally.

The way I think for us, and for the entire marketplace, this is our best estimate.

So every quarter, really no different than mark-to-market accounting, every quarter we do our -- what is basically the best estimate in that particular quarter, and we add to the reserves.

Now we also obviously disclose the reasonably possible loss, which you saw most recently at the end of the third quarter.

But this is a quarter to quarter activity.

This is not a budgeted forward-looking activity.

We incorporate all of the information sets that we have at this point in time.

And, do you have a view on where your year-end potential losses above reserve levels will shake out, or how that will change versus your last reported number?

Or is it too early to know on that?

No, again, this is not a budgeted.

If I knew at the beginning of 2014, that my estimate-able and probable number was $962 [million], sorry, at the end of 2012 starting at the end of 2012, I would have taken $962 [million] in the first quarter.

I would encourage you to go -- in the financial statements, if you look at our reasonably possible loss, that is a good disclosure item which was $4 billion at the end of the third quarter.

Okay.

Thanks, Harvey.

Thanks.

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

Please go ahead.

Hello, Mike.

Hello.

I am still not sure on the answer to the Volcker Rule, and I understand it is 900 pages, and there is a lot of work to be done.

But one of your competitors said it should not have a material impact, and we can all come up with our own estimates of what the impact of Volcker might be on you, but can you just give us some range, like it should impact our revenues from X to Y percent, or expenses from Y to Z percent, or size it to some degree?

No.

So I thought I was -- in terms of the revenue that this stage, it doesn't look like a revenue impacting item in terms of the final rule.

But, of course, we have already jettisoned other businesses early on in the process, and made changes.

And so, I don't think the primary issue at this point in Volcker is about revenue impact, although we have to see how regulators ultimately digest all of the data they are requesting, et cetera.

And with respect to the compliance costs that I mentioned, it is just too early to quantify.

But there is a pretty extensive compliance regime.

Okay.

And as relates to VAR, to what degree are you deliberately taking more risk?

I think your predecessor used to say, we want to live to fight another day as far as risk-off mentality.

It seems like you are taking a little more risk in equities but not necessarily elsewhere.

Or what is your risk stance?

So I think my predecessor also would have said, we will never deliberately take more risk.

It is just not the way we are going to run the enterprise.

It is all activity-driven.

So that's why I emphasize the equity number of picking up during the fourth quarter.

Okay.

And for the year, revenues were flat, even with much higher stock markets, even with gains in investing and lending.

So when you look out, looking for revenue growth, where do you think that can come from?

Well, I think the most important thing for us this year, was how we found that balance, in terms of achieving the 11% ROE, and at the same time continuing to drive operating leverage.

We feel very good about our franchise position, in an absolute sense and a relative sense.

So I am certainly not predicting the future, but as economic activity picks up, confidence picks up, capital markets around the world, particularly regions, I think you could certainly paint an optimistic picture.

But I want to be clear.

I am not doing that.

Okay, and what is the ROE target for Goldman?

Yes, thanks for asking the question that way, Mike.

Look, I understand this is an important issue for all of you, and we are getting increasing clarity around the rule sets, although there is still a fair bit to go.

When we put out an ROE target, I think first and foremost, we want it to be credible and we want it to be achievable.

And so, when you hear from us, that's what it will be.

Now between now and then, no one should get off this call thinking that we are not exquisitely focused on how we are deploying our capital, and how we are focused on returns, and how we are thinking about returns to our shareholders.

And so -- (Multiple Speakers).

We don't have target for you today, Mike.

No, I understand.

But I mean, when do you think you will have enough target, when do you think you will have enough clarity around the capital rules to highlight an ROE target.

I don't know.

I can't predict the ultimate visibility into the rule set and what it means for the market, but -- when we have it.

We know it is important to you.

All right, thank you.

Thanks, Mike.

Your next question is from the line of Jim Mitchell with Buckingham Research.

Please go ahead.

Good morning.

Hello, Jim.

Hello, first question, on equity derivatives.

You mentioned that it was significantly lower this year versus last year.

I get that volatility is down.

But the market environment was pretty constructive, and typically lower volatility means a little more risk taking.

So was there anything unusual this year -- or I should say last year in terms of derivatives that was so much weaker than 2012?

How should we think about that going forward?

No, there was nothing in there.

I think you're just seeing the natural toss and fros of client activity and end markets, but there is no single item I would draw your attention to.

Okay.

And then maybe on the capital side, you highlight about a 60 basis points difference between the standardized and advanced approach.

Do you envision that converging over the next few years, and what would be the major drivers?

So as you know the standardized approach really is, incorporates factors that are not as risk-centric.

Sure, yes.

So that is not something that we focus on as much.

So things like collapsing derivative notionals, which is a good thing to do for managing operational risk.

So it is really something that we are starting to focus on now.

Because you are going to -- the fed wants you to report the lower of the two, right?

Well, both.

Right.

Now, of course, under the transitional rules as I mentioned, we are north of 100 basis points higher.

Anyways, so we are giving you fully phased-in numbers which we have a couple years on.

Right.

So from your perspective, I wouldn't consider this a significant issue.

Okay.

Fair enough.

And lastly, on the compression [trades], do you view that as a material benefit for you going forward?

Do you think it is early stages, and so a lot of room there?

Or is it sort of more on the margin?

So it is early, but certainly the rule set -- look, that is an example of where a rule set comes out and a rule set dictates behavior.

And in this case you're starting to see the behavior, and I would think you would continue to see it pick up momentum.

Okay.

All right.

Great, thanks.

Thanks.

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

Please go ahead.

Good morning, Fiona.

Good morning, hello.

Just a clarification on the moving parts on the Basel III look-through, the 9.8 which seems pretty static, could you talk us through?

I think you have given the RWA number, but in the last quarter, the deductions moved quite significantly and I thought they might continue to do so.

It doesn't look like much is happening there.

And also, is there some operational risk inflation?

I think it is marginal, but I do remember the number being a bit lower than that, six months ago.

Thank you.

Sorry, could you say the second half of the question, Fiona?

Well, the operational -- I think you said a number of operational risk weighted assets of $85 billion.

I am not sure I caught it.

I think that it is slightly higher.

I am just trying to understand why the RWAs aren't going down a bit more with the natural roll-off?

Oh, okay.

So with respect to the ratio, there are a lot of gives and gets under the hood.

And one of the biggest drivers as you know since the final rule came out, has really been the financial institution's deduction, both significant and non-significant.

And so, that was really the most significant change in the final rule which drove it.

But for example, we picked up a benefit on the sale of the European insurance business of 20 basis points, but that was then offset by other risk factors.

So as I said, there is a fair bit happening under the hood.

And is it right that [operational] risk weighted assets, they are trending slightly up?

Is that an offset to the roll-off of credit risk?

No, that is correct.

It is slightly higher.

And as you know, operational risk RWA, they are slow moving, and they are sticky.

Okay.

Thanks very much.

Thank you.

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

Please go ahead.

Good morning, Matt.

Good morning, Harvey.

Thanks for taking my questions.

Just a couple of I guess more housekeeping related items, given that we have gone through most of the important questions at this point.

In terms of the fixed income inflows that you highlighted in your prepared remarks, I guess I am just curious as to if you can provide some further color on why those inflows were so much bigger than some of the other areas, given most people's view that rates are going to be going higher, and that presumably that means investors would be thinking about moving money into less rate sensitive areas.

So I think it is a pretty straightforward answer.

There are two parts.

One is just about differentiated performance in fixed income.

And also, there are funds that we have that are unconstrained fixed income products.

Which are, give investors the flexibility to think, and give us a more dynamic ability to manage in the rate environment.

But it is really performance-driven.

Okay.

And I guess let me follow up on a prior question, talking about your opportunities.

How do you think about the revenue opportunities over the next couple of years across your geographic region, I guess, broadly speaking, US, Europe, and Asia?

Is the greatest opportunity in the US, given some of the confidence we are getting relative to the economy?

Or some of the trends that you were talking about that we have been hearing about for a long time, in terms of fixed income issuance in Europe finally moving out of the banks into the capital market?

Yes.

So quite frankly, hard if not impossible to predict.

But with respect to our position and our commitment, we feel quite good about how we have deployed the resources, and how we have made adjustments of the resources during this portion of the cycle.

And for example, we have maintained a very strong commitment to Japan, while certain of our competitors have decreased their emphasis on Japan.

Because as I referenced in my comments, the equity markets haven't been at these levels since 1972.

And so, we feel well-positioned to capture the opportunity.

Now, importantly, it is not about any individual region, but it is the connectivity across our businesses.

An ability to connect, for example, our investment banking clients with resources in institutional client services, our securities division, where we can deliver solutions globally.

So if in Asia people are looking to raise capital, and it wants to go to US investors.

That is really where you get the synergistic leverage across the enterprise.

And I realize a question about the backlog is fraught with issue, but presumably, if you were at a five-year high in the backlog three months ago, it has grown a little bit since then as of year end.

You have seen very strong improvement in IPOs, IPO issuance, M&A looks like it is building -- is the composition of the backlog now moving more towards M&A and less from equities and fixed incomes?

No, there is not a huge shift terms of in mix, although there was some adjustment certainly.

But what you are really seeing is -- and this might be hard to predict at the end of the third quarter, is replenishment, because it was pretty active fourth quarter.

And so, to the extent to which it is a leading indicator, it is obviously a positive one, and I do think it reflects as I said earlier sort of global sentiment if you will, and confidence in our corporate client base.

But look, that could change.

Okay.

Thanks for taking my question.

Thanks.

Your next question is from [Steven Chubak] with Nomura Securities.

Please go ahead.

Good morning, Harvey.

Hello, Steven.

So I had a question regarding the investment considerations, particularly as it relates to Volcker on fund-related invests versus direct balance sheet-investing.

So fund-related investing, largely limited, direct balance sheet-investing, appears to be permissible.

But I didn't know if internally, are the IRR, or at least investment considerations meaningfully different between the two?

No, so IRR are IRRs.

We don't adjust for vehicle if you will, in terms of how we deploy that capital.

So we would never allow the -- what would you call -- the return discipline to be corrupted by the particular vehicle of choice.

I do think that the capital treatment can vary, obviously, as we have talked about.

The financial institution's deduction, and the money we have in funds which obviously has to come out anyway, is quite significant.

But the risk gets captured in any number of metrics.

It will be in the capital ratios.

It is obviously stressed under CCAR.

So it is not a vehicle choice.

Okay.

Well, actually as a follow-up to that, I didn't know if you could disclose the RWAs attached to the other $45 billion or so of I&L investments that I suppose, that are in fact Volcker-compliant.

I don't have that number, but you are welcome to follow up with Dane after the call.

Okay.

And do you happen to have the number for the financial institution deduction for -- I guess, it was roughly $8 billion last quarter, I didn't know if was roughly around that same level?

Yes, it is up a bit since the third quarter.

Okay.

And just last one for me, on the leverage ratio, I didn't know if there is a specific target that we should be contemplating, longer-term?

So assuming that the 5% ratio, or mandated buffer level is the binding constraint, is there some sort of buffer that we should be contemplating on a go-forward basis?

We haven't.

Given where we, are in terms of the proposed rules, obviously -- and as you know, our philosophy on these things is, given the regulators have provided an adequate glide path, we will wait to see the final rule before we will adjust any aspects of our business.

And ultimately, you will see us run with a buffer, but we haven't invested any energy in that yet.

Okay, that's it for me.

Thank you for taking my questions.

Thanks so much.

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

Please go ahead.

Yes, thank you, and good morning.

A couple of questions.[ The first one, is on something that is sort of topical this morning, in the [FC] after your former partner's testimony yesterday to the [Social] committee where he mentioned that the European bonus cap -- wasn't something of a -- or wasn't the most appropriate method of managing bonuses.

Can you talk a little bit about you're dealing with that issue, because obviously with the [FT] is running with the view that New York is a much more [excited] place for people to be, rather than (inaudible) just given this bonus cap?

I was just wondering what you think the impact might be in terms of increase in fixed compensation.

I know I think you said, it is not too many people impacted.

But have you had to make, or will you have to make any changes with respect to this?

So, look, is small in the context of the firm.

Obviously, Europe as a region is critically important to us strategically, so we are very committed to our clients there and our people there.

And so, we will work with the regulators, and we will comply accordingly.

Okay.

And the second question is really a follow-up from what I think Guy and Betsy had been asking.

But I was just trying to get really clear in my mind about the capital allocated to I&L, and how you are thinking about that from a planning perspective?

It seems to me that whereas perhaps, when, it would be a couple of years ago, the thought was that you going to be reducing capital, because obviously Volcker was going to force you out.

It sounds to me that you have no clear view at the moment on reducing capital in that business.

It is merely the fact that you will naturally spin-off some capital, and you will leave it very much depending on the state of the market as to whether you actually leave it in I&L or whether you actually move it elsewhere in the business where you can get higher returns?

Is that a fair way of describing things?

So with respect to capital coming out of the business, obviously the Volcker Rule is very definitive on what we need to achieve.

So we early on, as soon as we identified that as a likely finalized rule item, we announced the reduction in our hedge funds.

In terms of some funds, some funds will just roll off depending on the opportunity set.

But obviously, we are committed to complying with the rule.

That is not optional.

Yes.

But what I am asking, it sounds like where capital has flowed off, you are perfectly happy to perhaps leave it in I&L, rather than deploy it elsewhere in the business, if you see the opportunity?

It is not sort of fixed in concrete, that you really want to reduce the amounts of capital in your principal business?

Oh, okay.

I am sorry, I understand.

I understand the heart of your question now.

We don't think about capital allocations, in other words we are going to deploy an explicit amount of capital to I&L, because it is all return opportunity set client-driven.

So we would be happy to redeploy that capital, if its best use was in another part of our business, and if necessary we will look to return the capital.

Okay.

Thanks very much.

Thank you.

Thanks.

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

Please go ahead.

Yes, thank you.

Good morning.

Good morning, Doug.

Just two questions.

One, maybe just on the outlook for head count growth.

I guess, year over year, about a flattish year.

I think net adds is about 200.

Any feel for if you are going to be looking to grow that or sort of keep it steady-state right now, based on the environment that you are seeing in front of you right now?

So no plans for any significant changes.

If you dig under the hood a little bit, the headline numbers sort of mask some of the efficiencies we built.

Obviously, we have talked about that in terms of the build-out of, for example our Salt Lake City office, et cetera, and how we are leveraging technology and people, and kind of what I will call the pyramid, if you will around the organization, but there are no significant plans one way or another.

But it will be dynamic.

If we see growth opportunities, then you should expect to see us add if we need to.

And if the early environment is less favorable, we will make other adjustments.

But it will be dynamic.

Got you.

With respect to the asset management segment, obviously you have had some positive progress there.

I know you have done a couple of small sort of -- it feels like opportunistic acquisitions.

Given how the capital model of the firm is changing, would you consider something, doing something bigger in asset management on the acquisitive side if it presented itself, given sort of the favorable capital/returns that business provides in the new world?

I think that, first of all, the business itself has been a huge strategic priority for us, and what you are seeing is not the result of a quarter's performance.

You are seeing a multi-year commitment to the business, which is now starting to show some differentiated yield.

In terms of opportunity sets, look, if there are opportunities that are accretive with Goldman Sachs, our business and our clients, you should expect us to consider anything.

Okay.

Great.

No, that's helpful.

Thanks for answering.

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

Please go ahead.

Good morning.

Good morning, thank you.

So I just have a question on the FICC business.

I asked a similar question last quarter.

But we have now seen outflows out of bonds in 29 out of the past 31 weeks.

So and I know the numbers are pretty small in the absolute, but just given that your FICC business is more institution in nature, is that something that maybe you are paying closer attention to now that the trend has picked up some more steam?

And are you actually seeing any change in client behavior as a result of that?

So no change in behavior that I have come in touch with.

The behavioral changes have been more in response to the news dynamic during the course of the year, the issues that I talked about.

What is tapering mean versus QE?

What does the government shutdown mean?

Those are the kind of things that were a little paralyzing at times for our clients I think, as they contemplated the implications.

Obviously, over very long periods of time, fund flows have an impact potentially, and in the short run they can when there are dramatic withdrawals whether -- it doesn't matter whether it is bond funds or equity flows.

But I don't think yet we are seeing any major change in behavior.

Okay, great.

Appreciate the color there.

And just a question on comp.

Can you give any color on the mix of cash versus restricted shares, and whether there was any meaningful change from last year, in terms of how you thought about that?

And then just more broadly, what the competitive environment feels like today, to recruit and retain talent maybe relative to a year ago?

No, so we don't disclose details on the compensation mix.

But you should rest assured, that for everyone that is participating that it is receiving equity, that there are long term restrictions on that, and we believe that just basically aligns the broad employee base interest with our shareholders.

And that has been historically the case, and how we thought about it for a long time.

With respect to talent, we have seen some tailwinds in the ability -- and this isn't recent, but certainly, over the last year and a half, we have seen the ability to acquire talent when needed.

And so, now having said that, our people are always highly pursued also, but that is not a new phenomenon.

Great.

Thank you.

This concludes the Q&A session.

Please continue with any closing remarks.

So just want to thank everyone on behalf of the team here for dialing in.

We look forward to seeing you during the course of the year.

And if we don't see you in the next couple of week, we will certainly catch up with you on next quarter's call.

Thanks again, everybody.

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

You may now disconnect.