高盛 (GS) 2014 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 2014 earnings conference call.

This call is being recorded today, January 16, 2015.

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 10K for the year ended December 2013.

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

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

This audiocast is copyrighted material of the Goldman Sachs Group, Inc, and may not be duplicated, reproduced or rebroadcast without our consent.

Our Chief Financial Officer, Harvey Schwartz, will now review the firm's results.

Harvey?

Thanks, Dane.

Thanks to everyone for dialing in.

I'll walk you through the fourth quarter and full year results, and then I'm obviously happy to answer any questions.

Briefly on the fourth quarter, net revenues were $7.7 billion.

Net earnings were $2.2 billion and earnings per diluted share were $4.38.

With respect to our annual results, we had firm-wide net revenues of $34.5 billion, net earnings of $8.5 billion, earnings per diluted share of $17.07, and a return on common equity of 11.2%.

Revenues were roughly consistent with last year.

We grew net earnings by 5%, book value per share by 7%, and earnings per diluted share by 10%.

If we take a step back and assess 2014, there have been challenges to the global economy, and therefore the operating environment for our clients.

We have seen a global economy that has been grinding itself towards growth.

Different countries are naturally at different stages of the economic cycle, and the interconnectedness of these different economies has made the transition to growth somewhat extended, choppy, and oftentimes unpredictable.

Having a global client footprint means that we are impacted by both global and regional fluctuations.

Most importantly, it also means that we are a diversified enterprise.

The consistency of our annual revenues is a testament to both the product and geographic diversity of our operations, and the stability they collectively provide.

Weakness in Asia or Europe can be offset by strength in the US.

Headwinds in institutional client services can be offset by strength in Investment Banking or Investment Management.

Ultimately, our shareholders own a combination of industry-leading global businesses that have collectively generated superior returns.

We have also achieved our results in the face of significant regulatory change.

The Financial Services industry, and our firm specifically, have been responding to unprecedented levels of new regulation.

The regulators and the industry have done a tremendous amount of work here, and as a result have made the system stronger and significantly safer.

Since 2012, we undertook several strategic initiatives to respond to new regulations, and at the same time derisked the firm.

This included a $55 billion balance sheet reduction over the past year.

In addition, we sold our Americas reinsurance business.

We sold our European insurance business, and we liquidate our investment in ICBC.

Along with those actions, we also sold our hedge fund administration business and our ready platform.

In 2012, the businesses and investments that I just listed produced $2.3 billion in revenue.

As a result, since then we had to replace in excess of $2 billion of revenues in 2014 just to match 2012 levels.

As I said, the last three years have required us to adapt and source new revenue opportunities at attractive returns.

Between 2012 and 2014, Investment Banking and Investment Management generated $2.4 billion of incremental revenues.

This achievement demonstrates the strength of our client franchise, the diversity of our operations, the commitment and quality of our people, and our culture of adaptability.

Now I'll discuss each of our businesses, starting with Investment Banking.

Before digging into the details here, it's worth noting a few achievements from 2014.

We were number one in M&A, advising on more than $1 trillion in announced transactions.

We also ranked first in global equity and equity-related and common stock offerings.

As it relates to the quarter, Investment Banking produced net revenues of $1.4 billion, slightly lower than the third quarter.

A decline in underwriting activity offset a pick-up in completed M&A.

For the full year, Investment Banking net revenues were $6.5 billion, up 8% from 2013 on the back of a significant improvement in advisory revenues and (technical difficulties) higher equity underwriting revenues.

This was slightly offset by lower debt underwriting revenues following record results in 2013.

Breaking down the components of Investment Banking in the fourth quarter, advisory revenues were $692 million.

The 16% increase relative to the third quarter reflects the increase in industry-wide completed M&A.

We advised on a number of significant transactions that closed during the fourth quarter, including Walgreen's $15.3 billion acquisition of the remaining 55% interest in Alliance Boots, Royal KPN's $8.4 billion euro sale of E-plus to Telefonica Deutschland, and Athlon Energy's $7.1 billion sale to Encana.

We also advised on a number of important transactions that were announced during the fourth quarter, including Allergan's $66 billion sale to Actavis, Baker Hughes $38 billion sale to Haliburton, and Talisman Energy's $13 billion sale to Repsol.

Moving to underwriting, net revenues were $748 million in the fourth quarter, down 14% sequentially, as both equity and debt issuance slowed.

Equity underwriting revenues of $342 million were down 20% compared to third quarter results, largely due to a decrease in secondary offerings and private placements.

Debt underwriting revenues decreased 9% to $406 million, due to a significant decline in leverage finance activity.

During the fourth quarter, we actively supported our clients' financing needs, participating in Beck and Dickinson's $7.2 billion financing to support their purchase of Care Fusion, ICBC's $5.6 billion debt offering, and Fiat Chrysler's $4 billion common stock and convertible offering.

Our investment banking backlog improved from third quarter levels, and finished at its highest level since 2007.

Turning to Institutional Client Services, which comprises both our FICC and equities businesses, net revenues were $3.1 billion in the fourth quarter, down 17% compared to the third quarter.

For the full year, $15.2 billion of net revenues were down 3% relative to 2013.

FICC client execution net revenues were $1.2 billion in the fourth quarter, and included $55 million of DVA gains.

Excluding DVA and last quarter's gain related to our trust preferred tender, revenues were down 41% sequentially, as certain businesses were impacted by either lower client activity or more difficult market making conditions.

Interest rates was lower sequentially, as client activity declined amid a challenging environment.

Credit decreased, as the market was characterized by widening high yield spreads and low levels of liquidity.

Mortgages declined versus the third quarter, as volatility and client activity were generally low.

While currencies was lower than a very robust third quarter, volatility remained high and client activity was still solid.

Given the higher volatility in energy markets, commodities improved sequentially, and was supported by stronger client activity levels.

For the full year, FICC client execution net revenues were $8.5 billion, down 2% year over year.

Excluding DVA, the gain related to our trust preferred tender and the impact of the 2013 European insurance sale, revenues were down 5% relative to 2013.

In equities, which includes equities client execution, commissions and fees and security services, net revenues for the Fourth Quarter were $1.9 billion, up 21% sequentially, and included $27 million in DVA gains.

Equities client execution revenues increased 75% sequentially to $751 million, due to a more favorable backdrop with higher equity prices and increased client activity.

Commissions and fees were $829 million, up 11% relative to the third quarter, supported by an increase in client volumes.

Security services generated net revenues of $351 million, up 2% sequentially, adjusting for last quarter's gain related to our trust preferred tender.

For the full year, equities produced net revenues of $6.7 billion, down 5% year over year.

Excluding DVA, the gain related to our trust preferred tender and the 2013 sale of our reinsurance business, results were down 4% relative to 2013.

Turning to risk, average daily VAR in the fourth quarter was $63 million, down from $66 million in the third quarter, with the largest decrease coming from interest rates.

Moving on to our Investing and Lending activities.

Collectively, these businesses produced net revenues of $1.5 billion in the fourth quarter.

Equity securities generated net revenues of $982 million, primarily reflecting Company-specific events, including initial public offerings and gains in public equity investments.

Net revenues from debt securities and loans were $358 million, which was relatively balanced between net interest income and net gains on certain investments.

Other revenues of $192 million include the firm's consolidated investments.

In the fourth quarter we sold our investment in Metro International.

For the fourth quarter and full year, Metro contributed $70 million and $325 million respectively to other revenues.

For the full year, Investing and Lending generated net revenues of $6.8 billion, driven by $3.8 billion in gains from equity securities, $2.2 billion of net revenues from debt securities loans, and $847 million of other revenues.

In Investment Management, we reported fourth quarter net revenues of $1.6 billion, up 7% from the third quarter, primarily as a result of $200 million in incentive fees, largely from alternative asset products.

Management and other fees were up 1% sequentially to a record $1.23 billion.

For the full year, Investment Management net revenues were a record $6 billion, up 11% from 2013 on record management and other fees, which benefited from growth in our assets under supervision.

During the fourth quarter assets under supervision increased $28 billion to a record $1.18 trillion, due to net inflows into liquidity products.

On a full-year basis, we had long-term fixed income inflows of $58 billion and equity inflows of $15 billion.

Alternative inflows were $1 billion, and included $6 billion from fund-of-funds offset by net outflows from other private equity and credit funds.

Moving to our performance.

Across the globe 83% of our client mutual fund assets ranked in the top two quartiles on a three-year basis, and 75% ranked in the top two quartiles on a five-year basis.

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 remain roughly flat at $12.7 billion for 2014, and translated into a compensation-to-net-revenues ratio of 36.8%.

Fourth quarter non-compensation expenses were $2.5 billion, 11% higher than the third quarter, reflecting a $137 million donation to Goldman Sachs Gives, our donor-advised charitable fund.

For the full year, non-compensation expenses were down 4%, primarily due to lower provisions for litigation and regulatory expenses.

Total staff at year end was approximately 34,000, up 3% from year-end 2013.

Our effective tax rate was 31.4% for 2014.

Our global core excess liquidity ended the quarter at $183 billion.

Our Basel III common equity Tier 1 ratio was 12.2% using the advanced approach.

It was 11.3% under the standardized approach.

Our supplementary leverage ratio finished the quarter at 5%.

The firm is now compliant with the 2018 minimum.

We repurchased 6.6 million shares of common stock for $1.25 billion during the quarter.

For the full year, we repurchased $5.5 billion, helping to reduce our average fully diluted share count by 26 million shares year over year.

In addition, we increased our quarterly dividend to $0.60 per share in the fourth quarter and paid out approximately $1 billion of common dividends during the year.

In total, we returned $6.5 billion of capital to shareholders, while at the same time continuing to grow our regulatory capital ratios.

Now before I take your questions, let me offer some closing thoughts.

Looking back on our performance in 2014, the firm continued to execute on a top-range strategy.

We remain committed to our clients, providing superior service and execution which is central to building any long-term relationship.

The strength of our client franchise is reflected in our returns and our leading market position.

For example, we ended the year as the global leader in M&A, with more than $1 trillion in announced transactions.

This is nearly $250 billion greater than our next closest competitor.

We were ranked first in global equity and equity-related and common stock offerings for 2014.

We helped deliver nearly $300 billion in equity capital from our investing clients to our corporate clients.

We executed more than 2 billion transactions for our institutional investing clients across equities, fixed income, currencies, and commodities.

And we are the trusted investment manager for in excess of $1 trillion in assets.

Our track record of performing for our clients has translated into a leading market position within each of our businesses.

Another area of focus has been on our efficiency, both operating efficiency and capital.

We announced an expense initiative from a position of strength in 2011.

We believe this was an important step which positioned us to remain externally focused over the past three years.

Continued discipline on compensation levels and focus on non-compensation expenses has contributed to 300 basis points of pre-tax margin expansion since 2012.

Our capital philosophy is also clear.

Having a strong capital base not only allows our firm to be front-footed in helping our clients and capturing opportunities, but also provides protection in more difficult operating environments.

The existence of multiple capital regulations has materially increased the need for robust capital planning tools.

To drive better capital efficiency and comply with new regulatory requirements, we have developed critical technology and operating infrastructure to inform our allocation decisions.

While they can never replace good judgment, these tools certainly help to inform it.

In closing, Goldman Sachs is essentially made up of our clients, your capital, and our people.

Our firm stands ready to use its financial and intellectual capital to serve our clients through this evolving period in the global economy.

We are committed to consistently delivering the firm in its entirety to our clients and maximizing our impact.

And we are equally committed to generating superior returns for our shareholders through the cycle.

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

(Operator Instructions)

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

Hi, thanks very much.

Hey, good morning, Glenn.

Good morning.

First one on investing and lending: You had mentioned that there are a bunch of sales inside the equity piece.

Would you mind just updating us on what's left in the book equity-wise that eventually has to be liquidated for Goldman?

And in conjunction with that, have you been replacing on balance sheet to backfill?

So, we'll just take a step back.

You'll remember from the third quarter, the investing and lending balance sheet was roughly $76 billion, which broke down roughly $4 billion of public equity, $18 billion of private equity, and the balance, really the vast majority of the balance sheet in debt, north of $50 billion.

And so, in terms of the equity line, I think what you're continuing to see is just really the idiosyncratic performance of the portfolio.

We've guided you over time, that over long periods the portfolio will correlate with the MSCI or other public indices, but there will still be times where we'll out-perform that or under-perform that.

And in this particular quarter, there were -- really the vast majority of the gains in the portfolio were driven by things that we refer to as event-driven.

So, it was either the potential for very near-term IPO, we took something public, or there was a refinancing event.

We don't look at this, of course, on a quarterly basis.

But you'll remember I highlighted to you in the last quarter that when we had taken Mobileye public, it had contributed $285 million in revenues.

That would be an example of something that was down during the course of the quarter; that was down a bit more than $70 million.

In terms of reinvesting and the portfolio, our strategy here is unchanged in terms of our philosophy, in terms of how we think about the capital.

Where we can deploy capital to our clients, and where we can find attractive returns, then we'll pursue them.

But we're going to be very disciplined about the kind of returns that we can gain out of the marketplace.

And so you'll continue to see us do this.

One good thing in the quarter that you saw was that the regulators finalized the extension of the Volcker Rule.

So, there will be two one-year extensions there.

So that was good to see.

I think it was thoughtful by the regulators because it would have -- otherwise we might have seen fire sales across the marketplace.

And equity left -- Goldman's equity piece left -- I think it went from $9 billion to $8 billion to $6 billion, if my memory serves me correctly.

Where are we at now?

Are you talking about -- there's two things that sometimes I think get interposed.

I think if you're referring to where the -- our investment is in terms of the private equity portfolio that was -- we were discussing under Volcker before the extensions, that's roughly around $8 billion.

There's some harvesting, but that was offset by some gains.

Again, now, that's been extended two years.

If you're talking about the significant financial institution deduction, which is a separate number but relates to our Basel III capital ratios, that's now roughly about $5 billion.

Okay, perfect.

That's what I was looking for.

Sorry, I wasn't sure exactly -- I probably should have gotten there faster.

I probably should have worded it better.

So, then a big-picture question: A couple quarters ago, we're all bumming out that every volatility chart points down.

Now, rates, volatility, oil volatility, FX volatility, credit volatility, all thumbs up, and all the banks get beaten up on inventories that we thought were a lot less.

So, could we talk about good vol versus bad vol, and what we're supposed to root for?

Yes, it's a little -- I guess it's -- what is it -- is it Goldilocks?

It's too cold, it's too hot, we can't find the right temperature.

I think when you look -- I find it very interesting to sort of juxtapose the third quarter and the fourth quarter, because I think it really highlights what you're saying.

We came into the third quarter and, as you said, everybody bemoaning the fact that there was nothing happening in the world in July.

And then we got into the summer doldrums of August.

And then we came back and foreign exchange was very active, there was a lot of momentum, and you saw big uptick in client activity in certain parts of the Business.

Now we come into the fourth quarter, and I don't know if you want to call it unhealthy volatility, but in October we had -- whatever you want to refer to it -- markets now refer to them as the Treasury flash crash.

And then Greece; the continuation of Russia; a huge decline in the oil price, which, of course, it started in June but really came into frame in the fourth quarter, which weighed heavily on credit markets.

And so, I don't think when you look back at the fourth quarter, any of this should be particularly surprising.

When you see that much pressure on credit markets in terms of the ability as a market maker in the course of a quarter to manage liquidity, I don't think it's particularly surprising, particularly the stress that came under high yield as a result of the energy decline.

Now, for us, there were some real bright spots in the quarter in fixed income, which is why we think about it long term.

I will tell you: As the energy price has been declining, our ability to be an active and valuable provider of hedging solutions and a market maker to our energy-sensitive and commodity-sensitive clients was -- it's the kind of thing that you really see.

But it's not always going to be the case that in a given quarter -- and these are pretty unique events we're talking about.

But again, in the end, it's all going to be driven by the client activity, Glenn.

And certain types of volatility will drive more client activity, and certain will make people want to recede and be a little more protective.

Again, I know we're all focused on it, but quarter to quarter, when you think of the events, I don't think it's that surprising, actually.

The last follow-on on that is just: In credit specifically, which is probably the most liquidity-dependent, do the desks themselves, or do your risk management practices -- do you tend to exit positions during times of stress like that, or should we be thinking about you're sitting on the same kind of book right now, just at lower prices?

So, we're always managing the risk components of many of our books, regardless of the environment.

And the kinds of markets that we're talking about, it's really very natural in what they are doing at the desk level.

So they are obviously fulfilling their client responsibilities in terms of making markets, but it can be particularly challenging from time to time.

But again, this is a long-term commitment.

I wouldn't say that there were any significant exposures in terms of that, that we're really focused on.

But obviously things that have been in frame for a while, Russia, Greece, energy, whatever the case might be, obviously we pay a lot of attention to those things.

Again, as we've said in the past, Glenn, it's a moving business, not a storage business.

It's just sometimes, moving's harder.

I appreciate that.

My times up, thank you very much.

Glenn, thanks so much.

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

Thanks.

Good morning, Mike.

Hi.

Harvey, just upfront you mentioned a lot of the businesses that have been repositioned -- I think you mentioned the $2.3 billion on the revenue side.

I guess, when we look at 2015, now that most of the rules are finalized, is the vast majority of the repositioning out of the way?

Because when I look at the ratios, you're basically where you need to be.

So, should we see ongoing revenue headwinds, or is the repositioning mostly through?

So, look, we'll have to see, as all the rules ultimately get finalized.

There's still a number of rules out there.

So I would say things that we very deliberately did in terms of de-risking the Firm or responding to regulatory requirements like the sales of the insurance businesses and the other things I listed, there's nothing right now that we're looking at that you should expect to see in the near term.

Now, having said that, these businesses have always been dynamic.

They will remain dynamic.

And over the next many years, things will continually evolve.

And we will look to be very dynamic in all those businesses, whether they are market structure changes, whether they're things like we've seen in terms of regulatory-driven.

I mean, it just -- I think it's just what you need to do to manage the businesses well.

So, we'll continue to focus on capital, and make sure we're using the capital as efficiently and effectively as possible.

All these things are just part of daily life.

Okay, got it.

And then just maybe on the same topic, or somewhat related to it: In terms of your Tier 1 ratio going up to 12.2 -- if you can give us the components?

It looks like RWA shrunk in the quarter, but just want to know what drove that?

And then going forward, is there anything else in the pipeline?

So, in the third quarter -- for everyone, it was 11.8; it went up to 12.2, as I referenced.

So, if you really want to break that down into the molecules, give or take roughly 10 basis points came from just growth in capital; another 10 basis points came from various steps we're taking in terms of managing the capital better; and then the balance really was about risk reduction.

And it was as much driven by the drop-off in client activity towards the end of the quarter than anything else.

So, you could see this bounce back.

In terms of staff, again, we're going to continue to digest all the capital rules.

And as I said, we've invested heavily in getting the tools out.

And as we discussed at your conference, we now have a uniform framework that we're deploying across the Firm in terms of how we think about best utilizing that capital, ensuring that we position it most effectively for all of our clients.

So, again, that's going to be -- I don't know if you want to call it part of the new world, but that's part of the world that we live in now.

Got it.

And then last one -- just given the volatility that we're seeing, both in the oil markets, more recently in the FX market, just want to get your guys' perspective of -- obviously you mentioned on the commodity side, that can present some opportunities in terms of more activity.

On the flip side, there's a lot of risk associated with that, depending on what happens.

Just want to see how you guys are managing that risk.

And in the quarter, was there anything significant, particularly in FICC, just because it was a little lighter than expected, that weighed on any of the segments?

So, as I said in the quarter, it really was a tough quarter in the credit business; also in mortgages on a relative basis.

But more pronounced in the credit businesses.

In terms of the commodity businesses, I think it's almost worth taking a step back.

If you think about it over the last couple years, we've often been asked the question: Hey, it seems like everybody else is getting out of the commodity business; how come you're not getting out of the commodity business?

And, for sure, commodities had been quiet for a little while.

But we got -- Mike, you remember, we got that question pretty frequently.

And the answer we gave was a pretty straightforward one, which is: When we dealt with our clients, we knew the business of hedging, managing their risk, investing in clients.

We knew that was an important part of what they did, and it ties very nicely into our investment banking franchise where we provide advice and capital to all those clients.

And so, I don't know, it's a bit of a reminder when you see the fourth quarter, when you see a pick-up in performance, that it reinforces that you really need to listen to your clients when you're thinking about your strategy in terms of the businesses that you invest in, and those businesses that you protect across the cycle.

And so, part of the consistency that you've seen from us is the investment in these various businesses across a long cycle.

It might be commodities.

A couple years ago, people were talking about the fact that mergers were never coming back.

And so, from a commodity perspective, in terms of risks, our risks are quite manageable to the sector.

You had asked that also, so I just wanted to finish with that.

Okay, sounds good.

Thanks a lot.

Thank you.

Your next question comes from the line of Christian Bolu with Credit Suisse.

Good morning, Harvey.

Good morning.

Thanks for dialing in.

Just on the outlook for 2015 -- in your press release earlier this morning, Lloyd struck an optimistic tone, speaking to seeing evidence of a pick-up in the global economy that will improve the opportunity set for 2015.

Could you be a bit more specific, and speak to how you see that improve the opportunity set evolving on a business-by-business basis?

So, I'll give you my perspective on that.

When you talk to the economists inside Goldman Sachs, the general view, whether you're talking about the US, which clearly they have a more optimistic view in terms of growth, Europe, Asia, is generally positive.

And as I said, it's more of a continued grinding forward.

And so, if we see continued stability, in terms of markets, normalization of interest rates, and really fundamentally steady growing GDP, those are the things that historically over cycles have translated well for us because it contributes to global confidence, and global confidence contributes to activity.

And so, it kind of gets back to the theme I started with earlier, which is: Over the last couple of years, we ourselves have made adjustments in an environment which has been choppy, as I said, and also a bit uneven.

And what we've needed to do is we've needed to replace significant revenues.

So, you see what we're doing.

To the extent at which we hopefully will have fewer revenues to replace in the future, hopefully this will translate into growth.

But again, it's all going to be driven by the environment.

That's the one thing we can't control; we can just respond to it.

Okay.

On the equities business, apologize if I missed this in your prepared remarks, but just curious as to what drove the strength in the equity client execution line?

So, for a couple quarters -- I know you were focused on it, it looked a little lower.

In this particular quarter, there were some very solid opportunities to provide capital to clients and volumes.

But again, when you look across the equity business, when we see uptick in client activity, and when you see trending prices, the strength of the franchise really comes to the front, whether it's in prime brokerage, client execution, or commissions and fees.

Okay.

It sounds like it's a little more lumpy than would -- you'd normally expect for the quarter?

There's some seasonality in there; there's some re-balances that we participate in and some other things.

But again, these aren't one-time events.

They are just annual events.

They happen throughout the course of the year.

Okay.

And then just lastly for me, a quick clean-up question: On the sale of Metro, you noted $325 million in revenues last year.

What kind of costs came with those revenues?

It's a very small contributor to pre-tax.

Perfect.

You shouldn't think of it as meaningful at all in pre-tax terms.

Perfect.

Thank you, Harvey.

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

Hi.

Good morning, Mike.

Given the big move in the Swiss franc, there's some reports that banks lost some big money.

Specifically to what's happened this week, can you comment?

And then more generally, how would this impact your move toward electronic trading of FX?

So, first of all, in terms of Goldman Sachs, immaterial from an economic perspective.

So, you don't need to worry about that; there's nothing there.

I will say what we all witnessed yesterday is pretty extraordinary.

I haven't confirmed any of these stats, but just going through with some of the folks, the single largest move in a day of any developed country.

I think it was something like a 20-plus standard deviation move.

And I think it was after three-plus years of 2% volatility.

So, you're right to call it extraordinary, but again, no issues here.

For us, it really is an opportunity, really for very high-level engagement with clients who both need liquidity.

And then, the longer-term questions about working with local corporates who have had an immediate shift in competitiveness, and what does it mean.

So, there'll be obviously a long-term focus.

In terms of eTrading, there's always things you take away from these.

So I'm sure there will potentially be some lessons learned, but I don't necessarily have any major take-aways.

It certainly doesn't change our investment philosophy in terms of how we think about eTrading.

And then one other question: You mentioned the 300-basis-point pre-tax margin improvement since 2012.

I have to imagine it might get tougher if revenues don't grow more.

What are some additional levers you have for pre-tax [markets]?

You've done a lot on non-comp, and you've certainly done a lot on comp.

Is there any more to go?

First of all, Mike, I appreciate you acknowledging our effort on expenses, because it has been really a multi-year effort in terms of being disciplined.

Again, it's going to be environment-driven.

Right now, when we look at the global footprint, we feel really, really well positioned in terms of our geographic footprint and our product footprint.

But, look, we're committed to staying very focused on expenses.

You are not going to see us take the foot off here.

So, we'll see.

The big thing that we've been trying to achieve in the last couple years, as we've talked about a lot, is putting in operating leverage.

And while we've replaced the $2 billion-plus in revenues over the last couple years, it would be great, we would all like to see the environment being one that provided another couple billion dollars in revenues.

And we think we have that operating leverage.

So, we feel well positioned.

All right, thank you.

Thanks, Mike.

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

Good morning.

Hey, Matt.

If I could first follow up on the expense question -- maybe just trying to get a little more detail in terms of the opportunity from here.

I think you and a lot of other firms have a relocation strategy, trying to bring down some of the -- especially back office and non-sales-facing costs.

Maybe you could just kind of frame it -- the opportunity there.

I think a lot of people also look at the street overall, and think there's opportunities to become less top heavy.

And then obviously there's been a structural reduction in comp that has contributed.

So, maybe just pushing a little bit on where you can go from here on expenses?

So, as part of the expense focus over the last couple of years -- and it's a great question.

As you know, we've been diversifying ourselves geographically in places like Salt Lake City, Bangalore and others; and it represented about 25% of the Firm's headcount at this stage, give or take.

I think there's continued opportunity.

One thing I'll say, which is something at this stage which is hard to quantify, but we're looking to take a leadership role in, which is: Over the next several years, as you really get all these rules in place around all the various trading venues around the world, there certainly will be a need for scale consistency across the various market participants and the way things are processed, the way information is managed, the way transactions are confirmed and things are reported.

And so, the short net of that is, internally we're going to continue to lever technology anywhere we can, and that's been a big part of what we've done.

But we're also going to try and do that as much as we can, working with other folks in the industry and our clients to make sure we're all being as efficient as we possibly can as we all work in the same rule set.

Now, you didn't specifically ask about it, but obviously we're going to stay relentlessly focused on the balance sheet and how we deploy our capital.

Okay.

Actually that brings me to the next question.

Earlier it was asked about looking at maybe businesses or areas to get out of, or swap, but as we just think about your current business mix and the opportunity to adopt to the new capital rules, how much opportunity is there to refine the balance sheet and have those ratios increase more than you would think, just based on, say, the net income less capital deployment?

Well, I think when you look at our ratios now, we think they are in quite a good place.

We'll see what happens with -- when the final rules are done.

I guess I would say: We start again with the client businesses.

And given the strength of all of our businesses at this stage -- equities, fixed income, investment banking, asset management, our investing and lending business -- when we look at the strength of those businesses and our competitive position, it really feels at this stage it's very, very tactical, and it's about fine-point execution.

Now, of course, that could all change, and again, we'll stay nimble, but that's where we would stand today.

Okay.

I guess just to push on that, it was just 1.5 years ago that the supplemental leverage ratio was even proposed.

So, I would assume it's hard to be completely efficient in adopting that throughout the businesses?

Yes, sorry, I think you'll continue to see improvement in things like that.

That's not what I was saying.

What I was saying is: It's going to be tactical.

We'll continue to work at it, because you're right, we're new and we're just living with it.

But I don't see it, at this stage, given the adjustments, the business we've sold, the things we've done, the balance sheet, I don't see us making bigger decisions in terms around our business commitment and our commitment to our clients.

That's what I meant.

So, you're not going to see the sale of another reinsurance business soon.

Okay, but just the -- adopting these -- basically the question is: How much optimizing is there out there for you to do, maintaining your current strategy and the strength that you have?

We can always do more, and you'll see us do more.

But I'm not in a position to quantify it for you today.

Okay.

All right, thank you.

Thanks.

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

Hi, good morning.

Good morning, Betsy.

I just wanted to ask a couple questions on VAR.

I was intrigued by the interest rate VAR, which came down Q on Q, and obviously we had the flash crash in October.

So, does this represent maybe a VAR that went up early in the quarter, and then, as folks moved to the sidelines, that came back down, or am I thinking about that wrong?

So, if you look in the VAR, quarter over quarter, it went from $66 million down to $63 million, and you see the rate category move down, currency was up.

It sort of followed more the flows and levels of activity.

In some businesses it was the result of position changes.

But I don't think there's any major take-aways.

Market volatility was a bigger driver, and position changes was really a net reduction.

Right, but as volatility -- you had essentially bad volatility in rates, so I suppose that's why it came down a bit, but should we expect that as -- if you get some slightly higher volatility, VAR, I would expect, would move higher.

Is that accurate or no?

So, I think maybe the best way to answer this question is to think about it in terms of average volatility across the quarter.

And so, the way we look at it, because, as we've discussed before from a risk perspective, VAR is an important risk measure, but obviously it can be influenced by market volatilities.

So, if you actually -- if you look at the change in terms of how it moved, the market volatility was an increase -- was more or less offset by position reductions during the course of the quarter.

And that's what drove the change.

In rates specifically, volatility was up, and our positions were down.

That probably gives you a really good road map in terms of how the risk moved during the quarter.

Yes, got it, okay.

And then separately, just could you give us a sense as to how you're thinking about the asset management business and opportunities to expand that inorganically -- if there's any sense of (multiple speakers)

Yes, sure.

So, you've seen us do small bolt-on acquisitions over time.

We're constantly looking at things.

Obviously, asset management has been a very important driver of growth over the last several years.

And this is -- we're really, I think, in the early stages of what you're seeing as strategic initiative to grow asset management, and the team has done a great job.

And I highlighted the three- and the five-year returns.

So, we're open to really looking at anything.

It's really all -- will all be driven by whether or not we think we can improve our performance and deliver better results for our clients.

I would say we're very open-minded.

But again, these things have to be accretive, and we look through them at a very careful lens.

And distribution -- is that something that you could potentially add to?

We feel quite good about -- we really do feel like we have a significantly differentiated private wealth franchise, and our institutional team is great, and we get a lot of value out of our third-party distributors.

So, Betsy, look, we're the leading M&A firm in the world.

So I think of a good idea -- walk in the door, and one of our bankers had it -- we would be the first firm to talk about it.

It would be a little inconsistent with our whole philosophy not to talk about it, but it's not a priority right now for us.

It's really about performance and delivering for the clients.

Okay, thanks.

Thanks.

Your next question is from the line of Jeff Harte with Sandler O'Neill.

Good morning, Jeff.

Good morning, Harvey.

A couple of things -- one, we've seen volatility kind of spike on and off for a number of months now.

Do you have a sense for how this is impacting kind of client risk appetites and their willingness to transact?

And I'm kind of thinking corporate investing clients in investment banking, as I suppose as well in trading.

So, look, I think when you think about investment banking clients and CEOs and boards and CFOs in terms of how they are making long-term, strategic decisions, that's really -- that will be influenced by day-to-day volatility, and obviously every informational fact is digested.

But those long-term, strategic decisions are really based more on long-term, competitive drive and global growth and that kind of stability.

And so, it's a factor, but as I said when we went through the call, we come in with our backlog at the highest point it's been since 2007, and that should give you some indication of what we think the momentum is in the advisory business.

It could always change, but that's where the momentum stands today.

In terms of the investing clients, and those involved in the capital markets more directly, it's an interesting question.

In periods where there's less friction and ease of volatility -- I'm sorry, ease of liquidity -- liquidity begets activity.

And maybe in the language we should be using is less about volatility, and more about volatility and liquidity.

Volatility with an absence of liquidity is maybe that unfriendly version that people are looking to try and find language to describe.

And when you have volatility but you have liquidity, you can then react and you can execute on the new information you receive.

I'm not sure I got to your questions, but I tried.

Okay.

You talked kind of on the M&A side.

I mean, is it similar for some of the underwriting businesses, that it -- maybe you're not seeing the volatility kind of cause corporate clients to maybe pull back on plans there?

I don't know if I'd necessarily say it's pulling back on plans in terms of the -- it's really more whether the market is more receptive or not.

If you really just wanted to contrast underwriting activity in the fourth quarter of 2013 with the fourth quarter of 2014, you just saw capital markets that thundered through the end of the year last year.

And this year, the capital markets just had a lot more to digest.

I would say that was more driven by the investing side, basically saying: Look, let's take a pause and let's reassess versus issuers' desire to issue at low yields.

And obviously there was spread pressure on a high yield as people digested the lower energy prices, but we'll see how the year goes.

I mean, I think at these rate levels and these equity market levels, the activity levels could be robust during the course of the year, but again, we'll have to see what the market delivers.

Okay.

And expenses have been hit on a couple times, but I think kind of maybe more directly my question would be: Have we hit a point where we need to see revenue growth to see further profit margin expansion?

It will depend on what happens in the environment.

Again, we're going to stay very focused on both lines.

And so, again, I guess I could answer that question, at the risk of sounding a little bit cute: We've actually grown it, and revenues have been flat, and they haven't really been flat because we've been growing other businesses.

So, we've displayed the ability to do it for the last couple of years.

Look, we're going to be very, very thoughtful, as we have been, about the balance of investing in the businesses where we see long-term growth.

But again, we're not going to stop our relentless focus on efficiency.

Okay.

And finally, we're starting to hear again some talk of some competitors at least exiting some of the trading businesses.

Do you see that as a kind of competitive opportunity?

Does it help you to maybe expand wallet share, improve pricing, or is it just some of the businesses aren't as profitable and the whole pie is going to shrink?

Are you seeing some of that?

So, we're certainly seeing, in various businesses, we feel it, at least.

Again, we don't have full transparency, but in our dialogue with our clients, we felt it in commodities this year.

We've seen it in other parts of the Business.

I guess what I would say is, in an environment like this, in terms of the competitive dynamic, I think if you want to be in these businesses through the whole cycle, I think some of the take-aways are: You have to have scale.

It's very hard just to be in cash equities, or to be in a very small component of the foreign exchange market.

And you have to be able to leverage that scale, really across the full franchise.

It's not really just about the equity business, the prime brokerage business, or the commodity business.

You need technology scale to really be effective through the whole cycle.

And then you need the diversity because, as we've seen, some pistons will fire sometimes, and sometimes they won't at other points as we go through this.

That's why we feel good about our competitive position, because we know our clients still want to trade bonds, and we know they still want to hedge FX, and we know they still want to manage their commodity risk.

As we work through this part of the cycle, it's just about us being well positioned and having that scale.

And we feel like we have it.

Okay, thank you.

Thanks.

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

Hey, Guy.

Good morning.

Just to follow up on the VAR question, but to ask it in terms of the change for the full year: Can you give us a sense, just as you walk through the different asset classes, how much of the change over the course of the year was position reduction versus volatility change?

So, you're saying last year versus this year?

Yes.

So, for example, if we look at rates, over the course of the year it fell from 62 to 41.

And I'm just curious how much of that change was reduction in positions versus change in volatility, sort of what are the (multiple speakers) components?

I apologize.

Dane can get it to you.

I don't have the line-by-line in my head, in terms of that, but I can tell you on the year over year in aggregate -- when I say line by line, I don't have the specific categories in my head -- but year over year, the basically position changes were a reduction that was about 3 times the increase in terms of the volatility levels.

So, it's real risk reduction.

Got it, okay.

That's exactly what I was trying to get to, and maybe I will follow up on the others, but that's real helpful.

Just a housekeeping question on the core Tier 1: The 12.2% is -- advanced approach is transitional, right?

Can you update us on the fully phased?

Sure, so, it's 11.1% under the fully phased.

Do you want me to give you the standardized just while we're talking about it?

Yes, exactly.

Okay.

So, 11.3%, as I said, under the transitional for standardized.

And then 10.2% under fully phased.

Just a reminder on this: Fully phased for us is really a conservative expectation, all other factors being equal.

In other words, if we just stood here today with exactly the same balance sheet and nothing changed, except for the retirement of funds as we comply with Volcker and do these other things, you should probably add back, call it, 40 basis points, 50 basis points to those fully funded numbers -- those fully phased numbers, okay?

Okay, that's also really helpful.

The question has kind of been asked a couple of times, but maybe I'll take a slightly different crack at it, in terms of the volatility that we've seen since the first of the year, not just in terms of what happened yesterday in the currency market, but more broadly with rates -- long rates.

I know we're only a couple weeks into the year, but do you expect a significant rethink in terms of the amount of risk that you and peers will be putting on the desks between now and the end of the quarter, or the middle of the year?

So, it's a great question because it allows me just to underscore a very important point.

We scale our risk deployment to our client demand, not the other way.

And so it will really depend on what happens in terms of clients and their perceptions in the marketplace.

And again, I think it goes back to, if you compare the third quarter to the fourth quarter.

If we see more Septembers, then I think you'll see increasing amounts of client activity and opportunities for us to provide liquidity to our clients and deploy capital.

I think if you see more Octobers and more Decembers, I think you might see less.

Again, that's why we run these businesses for the long term.

I think importantly, one of the take-aways around these businesses is that there are times when things do change structurally.

One of the structural changes has been a decade-plus shift to electronics rating and the need for technology.

But people still wake up every morning and they want to trade bonds and they want to hedge foreign exchange.

Nothing about that has changed.

It's just where we are in the cycle.

Got it.

One final question, and this isn't something that you frequently disclose, but there was a disclosure a number of years ago that -- sort of in the period between 2006 and 2009, about half of your FICC revenues had been from derivatives.

And now that we've been through a significant period of regulatory change in terms of derivatives and cost of carry and everything, I was wondering if you could comment, for 2014, roughly what percentage of FICC revenues would have come from derivative transactions?

Yes, I don't have that data handy, but we can dig into it, and if it's meaningful we can certainly share it with folks.

I guess (multiple speaker) is it meaningfully less than it used to be?

The one thing I would say to that, and maybe these are good things, but, post the crisis, lots of things that built up in 2006 and 2007, like clients trading correlation and other things, which, during the crisis, proved to be less liquid than other things -- that certainly looked like businesses that may be gone forever.

You always hesitate to say that, but it feels that way for now, and maybe they should be.

So, there's certainly elements of the derivative markets that appear structurally changed since the crisis.

But we don't track that specifically from an audited perspective.

So, I don't have that data.

Okay, well, thanks for the color though, appreciate it.

Thank you, sure.

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

Hey, Fiona.

Sorry, can you hear me?

Sorry, some problems with the phone.

Can you talk a bit about -- I think you said that in the fourth quarter the de-risking helped the RWAs.

But historically you've talked about mitigation going forward.

So can you talk about your plans -- Basel III RWAs?

And also, I know it's early days, but there's some new proposals out of Basel before Christmas.

Do you have any kind of thoughts on those or how they could affect you as a US bank?

On the new proposals, obviously we'll do what we've done in the past.

We want to be an active and constructive participant in the dialogue with the regulators, but it's pretty early days on lots of those discussions.

But again, we'll just participate in that dialogue, and you'll see our comments and things like that.

In terms of -- I think there's an important thing to highlight here.

There are no businesses here that we're looking to shut down, in terms of driving improving capital ratios.

We feel quite good with the significant progress our teams have made over the last couple years.

Now, having said that, again, this is something that I just think that is standard operating procedure for any regulated financial institution in terms of having technology, tools, education and a process towards making sure you deploy your capital in a way that's most impactful for your clients, and provides your shareholders with the best return.

And so, I think that's just standard operating procedure for us.

So, you'll continue to see us mitigate.

But at this stage, we've made a huge amount of progress.

There's a whole host of things I could highlight.

I think the balance sheet reduction exercise in the second quarter was a real demonstration of response and nimbleness.

Okay, thank you.

Thank you.

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

Good morning.

Good morning, Jim.

Just quickly, maybe if you can talk about some of the other, the more liquidity ratios.

Do you have any kind of update on where you guys stand on the LCR and NSFR?

Have you done any kind of back-of-the-envelope stuff with respect to those?

In relation to the LCR, which is -- we are in excess of the requirement.

In terms of the NSFR, that's an interesting one because obviously, if you take a step back in the NSFR, obviously any rule that's supportive of good, thoughtful, industry-wide asset liability management, we're supportive of.

It will be very interesting to see how the rule evolves in its discussions with the local regulators, because as you know, in the proposed rule that came out, there really are -- there's some interesting things in there.

One being, obviously this notion of how transactions get linked.

So, we'll have to see what the final determination on that is when we get that from local regulators.

And also, obviously the treatment of deposits, where different geographies have different legal and regulatory regimes.

And in the US obviously we have a restrictive regime in terms of how deposits can be utilized.

So, I'd say, on the NSFR, it's a bit of a wait and see.

Okay.

And I would imagine with you guys, given your structure, that the TLAC is probably not a problem.

Is that a fair statement?

Again, where we stand today, again at preliminary rule, right?

So, I caveat that with all the facts that we'll have to see where it goes, but that would be our take-away on our early read.

Okay.

Then maybe just broadly on the pipeline, record levels, it sounds like one area, advisory, is clearly strong.

Can you comment on the other areas where you're seeing -- is debt still holding in there, given the financing needs for the M&A environment?

How is equities doing?

How do we think about the pipeline in the different components?

So, as I said, the advisory side of the line was really the biggest driver.

That's probably not a surprise for you, given all of the announced transactions in the marketplace.

If you sort of look at it year over year, equity was down, debt was up a little bit, but it does feel like, at least if the marketplace and asset prices can stay here, it feels like a reasonable environment to me for the coming year.

But again, these things can change on a dime.

Right.

Okay, that's all I've got.

Thanks.

Thanks so much.

Your next question comes from the line of Chris Kotowski with Oppenheimer.

Yes, good morning.

Every quarter we go through this.

And in looking at the capital markets business, and rates and credits zigged, and currencies and equities zagged.

And you talk about the environment in October versus November and so on.

But when I look at the industry revenue totals on an annual basis, they are incredibly stable.

And my peer group is probably the same as yours, but it's been somewhere between $110 billion and $120 billion of revenues on an annual basis ever since 2011.

And we're probably like 7% or 8% below 2011 now.

And it just seems to me like the explanation must be that the buy side is becoming increasingly concentrated, larger entities, more resourced.

And just like you're able to measure client profitability, they are able to measure what they pay all of the brokers.

And isn't the issue more that there's kind of a fixed wallet that the buy side has on an annual basis, and that there's not going to be an environment in the future where they pay a whole lot more than they are now?

Well, I guess -- this is probably have a long philosophical conversation that probably requires having a glass of wine or a beer or something, but I think that if you -- you have to really look at these businesses over very, very long periods of time.

And so, for example, when there was growth, let's just say from the period of 2002 to 2007, I don't think clients were looking to pay more.

I think they were always very, very obsessed around transaction costs.

As a matter of fact, the vast reduction in transaction costs, for example, in the equity business, actually occurred during that period of growth.

And so, we assume that our clients as fiduciaries are always going to focus on transaction costs.

I think that's less the issue; I think it's much more environment-driven.

We've been in a period of near-zero global interest rates for an extended period of time, post the financial crisis.

And so I think our clients are, in some respects as a result, struggling for their own [alpha] production, in some cases, which translates again into reduced activity.

But our clients have always been focused on minimizing transaction costs, as they should be.

Fair enough.

(Multiple speakers) If I was right, would you manage your Business differently than you are?

It's hard for me to imagine any of our businesses and say, look, they are going to stay exactly the same for the next 10 years, which, that would be a nice way to live, but our businesses are just much more dynamic than that.

We think it's part of the competitive advantage of Goldman Sachs, just responding to the changes.

So, I think it's going to be dynamic.

All right.

Fair enough.

It would be very difficult sitting here today to predict, like it was a couple years ago, no one would have predicted the wave in M&A that we're experiencing.

But now, of course, it feels very natural, and now people feel like it will extend.

I do think this is a case of all of us -- there's just a natural inclination to extend the most recent set of data that we have.

Now, if it was going to stay like this for the next 10 years, and you promise me that, yes, there maybe we would even push harder on efficiencies.

But again, we're positioning for operating leverage and growth.

Okay.

All righty, thank you.

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

Good morning, Harvey.

Hey, Brennan.

First a quick one on Banco Espirito Santo -- lots of inquiries, given what happened this quarter and your involvement in the initial deal.

Did that have any impact on results this quarter at all?

So, in terms of (inaudible) results this quarter, it's immaterial.

For us, and I guess I would add, in terms of the -- on the FICC side of the Business, not the primary driver.

But for us, obviously, as you've seen in our public commentary, we were very surprised by the Bank of Portugal's unexpected and very surprising reversal of its prior written decision on this matter.

And so, for us, really, this is really about our clients.

It is not about Goldman Sachs.

And so, we have clients that relied on those representations, and so we remain in active dialogue with the Bank of Portugal, and obviously it's a very fluid situation.

Okay.

But is it fair to characterize it as maybe small, but in your view, immaterial impact?

I'd say not a primary driver of FICC, but obviously in FICC.

It's obviously part of the revenue decline.

Got it.

And then, thinking about your physical business on the commodity side, you guys are one of the few left.

We're seeing, given some of the dynamics there, that, in that market, improving -- an improving bid for storage.

How are you seeing that play out in your physical business as we move forward from here?

So, we always think of our focus in commodities is really -- and the way you should think about it as divided into two things.

Investments that we make in terms of things like Metro, which we sold during the course of the quarter.

When we purchased Metro, it was always purchased with the notion that we would add value to the enterprise and then ultimately sell Metro.

That was always part of the strategic design.

In terms of our commodity franchise, which we're, as you know, very committed to, the focus there is on the hedging of commodity price exposures and working with all those clients globally, whether they be corporates or investors.

And so, that's really how we think about the strategy.

Obviously, ownership of physical commodities is getting what we think is actually a good review by the Federal Reserve.

We're very focused on safety and soundness.

We think it's perfectly understandable that they are doing the same, so -- but that's our strategy in commodities.

Okay.

And then last one, also on sort of oil: Thinking about the drop here in oil, and your M&A franchise, energy has been a pretty meaningful part of the M&A market last few years.

What sort of near-term, and then maybe a bit longer-term impact do you anticipate the drop in oil would have to M&A activity from here?

Well, I think, big picture, the drop in oil, which really started in June but obviously started getting a lot of attention in the fourth quarter -- I think at the highest level, a lot has been written about the tradeoffs between near-term impact on markets, but obviously a big tailwind in terms of expense reduction and a benefit to the consumer.

And so, when we talk to our economists, net/net, as you've seen from us, we think the price decline, if it stays here, is a tailwind for global economic growth.

As it relates specifically to the industry, if we go through a period of sustained declined prices around this level, then clearly it's going to put certain parts of the industry under stress.

There will be opportunities to help those clients work through those stresses.

There will be opportunities to deploy new hedging strategies.

There will be potentially merger opportunities as the Organization works through what is really a case of excess supply.

So, again, it's very early days, and these things tend to play out over months and years when you get these kind of price declines, but clearly clients will be looking for advice from Goldman Sachs.

Okay, but no specific commentary as far as the M&A outlook is concerned and the impact there?

No, I think it's a bit early.

I think it will be very specific to certain situations in terms of how we work through the cycle.

Okay.

Thanks for the color, Harvey.

Thank you.

Your next question comes from the line of Steven Chubak with Nomura.

Hey, Harvey.

Good morning.

Hey, how are you?

Doing well, thanks.

So, I just had one follow-up question on the capital discussion, maybe looking at it from a different angle.

The presentation you guys had given a couple of months ago was extraordinarily informative; certainly helps us think about all of the different constraints that you're managing to.

But from your perspective, given that the business adjustments that you plan on making are merely going to be tactical at this juncture, and given our understanding of the constraints and the final rules and where they sit today, what do you believe your spot or required capital levels are at the moment to support your Business?

So, I don't think we should under-emphasize the word tactical.

I think tactical really means there are no big, strategic challenges over here in terms of businesses that we need to dispose of at this stage.

Really, we're quite pleased with the strength of our franchise businesses.

And so, I wouldn't underestimate -- I wouldn't mistake tactical for a lack of focus or a lack of opportunity.

As I said, I think it's really a prerequisite to running the businesses now, in terms of having a very focused, tactical strategy, and I appreciate your comments about the presentation we gave.

In terms of how we think about long-run capital levels, obviously the capital levels aren't finalized.

So maybe we should just talk about today's context.

In today's context, and we'll see what happens with the finalization of the G-SIB buffers, but in today's context, we would be at a minimum of [8.5%], and we had a stated buffer of [9.5%].

We've been spending time looking at the buffer.

I think the 1% buffer probably seems on the high end to us, but we're not going to spend a lot of time on it until we see the final rules.

Does that get to your question?

It does, but presumably, given what we know today, whether it's about CCAR being binding or the Fed's latest proposal, recognizing that there could be additional changes going forward, that [8.5%], plus whatever buffer you deem appropriate, is probably not where your required capital target is ultimately going to shake out.

Presumably it will be higher than that, and not just for you, but for industry peers as well.

Yes, I would agree with that.

Look, you didn't ask the question, but again, this is a very early read of the proposal that's out, and so, subject to change, so caveat it accordingly.

But our early read and interpretation of the documents out there was that it would add 1% for us.

And so, what you said earlier I think is the more important thing, which is, in terms of the binding constraints, the binding constraint for us is CCAR.

And so, we'll continue to focus very much on all aspects of the capital ratios; but for us, the binding constraint is proving to be CCAR.

Okay, maybe just one quick follow-up: Is it CCAR risk-based or leverage-based ratios?

It felt as though in the last exam it was leverage.

I didn't know if you felt that that would potentially evolve as CCAR changes over the next couple of years?

Yes.

So, look, I think that the Federal Reserve has said CCAR is going to be dynamic.

So, we'll see how they make changes.

And their test has proven to be dynamic.

We can only tell you it was constraining last year, as you saw publicly because of the leverage test.

And then you saw us subsequently take certain actions that obviously influenced our activity around the balance sheet, and how we had to think about repricing that capital.

All right.

Harvey, that's really helpful.

Thank you for taking my questions.

Good to hear from you.

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

Good morning, Harvey.

Thanks for taking my question.

Just a couple of quick administrative follow-ups -- just following up on the prior discussion, have you provided or given any thought to sort of the short-term wholesale funding buffer, and how that might affect your future ratios, and if there is any meaningful consideration being given within that calculation for the maturity, even within the short-term bucket?

As I said before, just so we're clear with everybody, our preliminary expectation -- and again, I caveat that because this rule is very fluid and it's in formation only -- would add an incremental 100 basis points to our G-SIB buffer.

In terms of how -- again, I think it's really most important for a take-away for everyone to understand the framework for how we think about managing the capital against multiple constraints.

So, any time -- in the new regulatory regime, any time we're deploying our balance sheet, you have to be able to think through multiple lenses and view things from multiple lenses.

That's why we created the framework that we discussed at the conference in November, which basically ascribes a weighting system to that.

And that gives us a consistent lens to look at things like the use of balance sheet and the supplementary leverage ratio, stresses from CCAR, Basel III standardized, Basel III advanced.

And you have to look at all those things individually at the same time.

So, capital management -- look, the regulators have done an immense amount of work to increase capital levels and make the system safer.

And as a market participant, we've needed to develop technologies and a philosophy and approach to basically work within that framework.

And that's what we've done.

That's helpful.

And then a question in terms of operational RWA: A number of your peers mentioned that they had increased operating, or operational, RWA this quarter.

Was that true for Goldman as well?

During the course of the quarter, from the third quarter to the fourth quarter, they were basically essentially flat; down a little bit.

Okay.

Thank you very much.

Thank you.

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

Good morning.

Good morning, Harvey.

Just a couple quick follow-ups from me as well here.

Just on the investment banking backlog comments -- glad to hear that the backlog is where it is.

But with debt underwriting specifically, can you speak to maybe some of the puts and takes of the high bar in recent years in corporate issuance that may be tough to match versus the opportunity that you're speaking about with M&A-related financings, and how much of an offset that could represent?

So, of all of the things that I've been I think really bad at predicting over the last couple years, it's been the annual question about what we think debt underwriting's going to do in the next year.

I think you could easily take a position, after the last two years, that maybe debt underwriting would be lower than the previous year.

But the markets have remained robust; M&A activity can be a significant driver of financing activity.

I think if rates stay low and the markets are stable and spreads are tight, I think you could see a very reasonable environment.

I think if you see the contrary, then obviously it'll have an impact on activity.

And very difficult to predict from here.

Rates are very low.

So, for many issuers, it's going to look quite attractive over the course of the year.

Okay, thanks for the color.

And then, just on comp, some of your peers are talking about changing their methodology around deferred comp.

And I know you don't specifically disclose the level of deferred comp, but in a roughly flat year for reported comp, is it reasonable to assume that deferred comp is also roughly flat, or is there any additional qualitative detail you can provide around how you guys are thinking about the mix there?

So, I think the better way to think about that is, we've been consistent in our compensation philosophy for a number of years in terms of really ensuring that our employees -- and it goes up as you go up through the seniority of the Firm through to the partners -- that you hold a significant amount of equity.

And there's been no change in philosophy over the last several years.

So, your assumption is (multiple speakers)

Fair enough, thank you.

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

Yes, thank you.

Good morning.

Two questions: First on FICC, and I'm just curious for your guys' perspective and opinion, Harvey.

Given the sort of change in liquidity that's come to these markets in the last, let's call it, five or six years since the credit crisis -- is your guys' position that credit is maybe a little bit more vulnerable to smaller shocks given the lack of liquidity, ie, I guess energy feels like it was the catalyst really for credit to weaken.

But it's still only -- I mean, it's bigger, but it's only like 14%, 15% of high yield.

So, is it more pronounced now, credit events, given the lack of liquidity?

Is that your guys' perspective, or it was just a tough quarter?

It would be very difficult to anticipate whether or not this is a new credit regime in terms of liquidity trading or these are one-off factors.

It's always hard to assess that, when you've had multiple years of tightening credit spreads, very low default rates.

I will say, when you look to the data, and I don't have it off the top of my head, particularly in Europe where liquidity was really challenged in the third quarter and then got worse in the fourth quarter, I think if you just look at market moves in terms of price movements, they were pretty significant; more significant than you would have thought in terms of the underlying credit itself.

And so, clearly liquidity played a role in terms of the degree of price movement.

But I wouldn't say at this stage you could draw any firm conclusions from that in terms of any long-term structural changes.

Okay, great.

And then, shifting to asset management, obviously a great year for you guys.

I was a little surprised to see sort of the fixed income bucket on the flow side a little flattish for the fourth quarter.

And I was wondering, did you guys close some strategies or did something change, just given how strong you guys have done, obviously with performance, and some of your competitors struggling throughout the year.

And it still looked like fourth quarter, industry-wide, that phenomenon still played out.

So I was just curious as to why you guys didn't have the same flow dynamic you had throughout the first three quarters?

I haven't had a chance to dig through sort of competitive results and maybe get more transparency over time than we do.

But when we look at it over the course of the year, which is really how we think about it, we took in $74 billion of long-term flows, of which you highlighted, $58 billion came in, in fixed income.

And this could just be the timing of how various mandates that are awarded arrive.

We feel quite good about our performance and our ability to continue to gather assets on the back of that performance.

Okay, great.

Thanks for taking my questions.

Thanks.

Your next question comes from the line of Brian Kleinhanzl with KBW.

Great, thank you.

I just want to call out that you had mentioned that you had $754 million of litigation and regulatory expense in the period.

I just want to make sure that that's all related to investigations, and not compliance cost in there?

So, that all -- those are litigation-related reserves that we assess every quarter, and we take it quarterly based on information we have on individual and specific cases.

That's not a compensation build or an expense related to additional compliance people or something.

I'm not sure I understood the question.

So I'm just trying to clarify it.

Yes, that's the question.

So if those investigations go away, is that what the expense savings would be, or what's more of a normalized level of litigation?

As we work through legacy costs, ultimately that is the case.

Okay, and will you be able to put most of the major investigations behind you in 2015, do you think?

So, in terms of litigation, you've seen us obviously make progress in the third quarter.

We settled with the FHFA.

I would encourage you to really dig through our disclosure where we give very vast disclosure around all facets of litigation and status.

Okay, thanks.

Thanks.

Your next question comes from the line of Eric Wasserstrom with Guggenheim Securities.

Good morning.

Eric, please check your line to see if you're on mute.

Thanks, sorry.

Hi, how are you?

That's only like the fifth time I've done that in this earnings cycle.

I just wanted to follow up on the RWA discussion, and see, Harvey, if you could just help me understand what the puts and takes of it might be over the course of this year?

Are you saying on a going-forward basis?

Correct.

Yes.

On a going-forward basis, again, I would say there's two things I'd underscore.

The first is, we're going to continue to be very focused on further rule compliance and being efficient about the capital.

But a lot of it will be driven by client activity.

Obviously, we're well positioned from a capital perspective.

And so, we really want to stay front-footed, as we are, to the extent to which clients demand our capital.

And so, we feel well positioned.

Hard for me to tell you what those demands are going to be as we sit here in January, but we feel very well positioned.

And in terms of the very broad-based reduction in assets that you undertook over the course of this year, should we view that as being largely completed, or is that something that is still under consideration for you over the course of this upcoming year?

So, immediately, we have no immediate plans to reduce the balance sheet from here.

But again, that's going to be subject to review continuously.

And so, again, it will be dynamic.

If we feel like we are not getting the proper returns, then we'll look to reduce.

It's really just going to be about discipline, and at the same time making sure that we invest strategically for the long run.

Great.

And then, if I can just transition for a moment, in terms of the M&A pipeline, could you give us any sense of the complexion of it?

Is it primarily in-country, is it more cross-border, are we seeing any changes?

I guess the real question is: Are we seeing any changes in terms of the complexion of M&A activity relative to what we've seen over this past year?

No.

Look, in terms of year over year, as you would expect, the growth, specifically in terms of the backlog -- it really came more from Americas and Europe.

And it was really down in terms of Asia.

That's how I'd describe the geographic mix, which probably doesn't surprise you.

And -- I guess I'm trying to understand: Is the strategic rationale changing at all among corporate boards in terms of growth orientation versus cost savings orientation, or any kind of that strategic level discussion?

I think when we talk to our M&A team, what they will tell you is it's very industry-specific.

It can be geographic, but the momentum level is quite high.

And so, I guess when you look back at it, as I said earlier, there were a number of folks who were saying, look, we'd never see M&A again, a couple years ago.

And that was just where we were in the cycle.

But I think that in a world which generally increasingly stable, low growth but stable, CEOs and boards will look to grow revenues, and if there's strategic opportunities.

The one thing that we've seen as part of this past cycle, driven by strategics, is large transactions tend to spin off lots of activity in particular sectors.

So, I don't know -- when we talk to our M&A team, I don't know that they would say, look, this is all cost driven or this is all top-line driven.

It's a mix of factors that will drive action, but momentum feels quite good.

Thanks very much.

Thank you.

Your next question is from the line of Richard Bove with Rafferty Capital Markets.

Hi, good morning.

This is kind of a broad question, so I apologize after a very long call.

But over the past couple of days, I've been getting questions on both sides of Goldman Sachs', if you will, long-term structure.

One is, given everything that you've mentioned about capital and the constraints on the Business placed by the regulators, should in fact Goldman Sachs be broken up?

And if not, why should it be kept together?

And on the other side, I'm being asked, given the high level of cyclicality in the two main businesses of the Company, should Goldman Sachs make a major acquisition of either an asset management company or a wealth management company, which would give the Company a recurring stream of revenue to eliminate some of the, if you will, volatility in its revenues and earnings?

I don't know -- it's the same question, basically, which is: What should the structure of Goldman Sachs be over the next four to five years?

So, it's a good question, Dick, and obviously there's been a lot of focus on this.

So I guess we first have to say to ourselves, so if anything, what's changed today, because I think prior to the crisis there was a belief that obviously there's benefits to scale.

And you can get scale and you can have synergies.

I think the change that people are focused on now is obviously there's a cost, a capital cost, that the regulators are putting on size.

And so it's very natural that the question that you're asking.

Now, for GS, I'd highlight a couple things.

First of all, we're just significantly smaller than many [of the other] firms.

Our balance sheet at $850 billion-plus, many of our competitors are more than twice our size.

And we have 34,000 employees, and they may have hundreds of thousands of employees.

So, we're smaller and we're less complex.

And as a result, we're somewhat simpler.

And so, what I would say is, when we look at the collection of businesses that we have, the way we answer the synergy question is, first and foremost, through the eyes of the clients.

Do we think we provide more value to our clients by having a collection of businesses together or not?

It doesn't matter to us within any given quarter, the stock markets maybe not valuing one of our businesses as perfectly as we would like it to be.

It's really a question of, over the long run, can we drive shareholder value by having that benefit to our clients.

So let's take fixed income and equities as one example.

In an environment where it's technology-driven and the clients increasingly get larger, you need scale across those businesses.

We started running those businesses as a collective shortly after 2000, I think.

And so, the ability to deliver one technology platform across those businesses, have one risk management system, all those things provide us with scale.

And we think we're able to execute better.

It then feeds into our ability to adapt and develop technology tools around capital.

And hopefully we're able to perform well in terms of deploying the Firm's capital.

When you think about investment banking, you bundle it in.

Think about the merger business today, and what we're able to do for our clients by having the ability to commit the capital and actually deliver it to the capital markets and connect investors with issuers.

All of these things are very synergistic.

Our private wealth business, with our banking business, with our asset management business, these are all things that we think we have synergies in.

Now, in terms of smaller or bigger, I think it's going to be environment-driven for us.

You saw us -- you've seen us shrink the balance sheet pretty dramatically.

Dick, you've known us for a long time.

We used to run at $1.1 trillion, $1.2 trillion.

We've been around $900 billion, and now well below that for quite a while.

So you're going to see us be dynamic about this.

If we thought we could drive more value for our clients and get more scale, then we would consider things.

I will say now, it's harder obviously, because there is the explicit pricing, and if you want to call it tax of incremental capital.

You have to be very confident that you can get those synergies and that scale.

Is that answer okay, given the breadth of your question?

Yes.

No, I think it makes a great deal of sense.

What about the flip side of the question, which is: Where can you come up with a recurring revenue stream that would lower the volatility in your current business mix?

It's funny; so, I can't help myself, Dick.

I know you say there's a lot of volatility in our current revenue mix, but we've actually produced $34 billion in revenues for three years running, and we've grown the ROE and we've shrunk the balance sheet and we've increased the pre-tax and we've replaced $2.5 billion of revenues that didn't disappear because of volatility, they disappeared because we sold them.

So, I'm not telling you it's going to always be this stable, but, touch wood, it feels pretty stable the last couple years.

Okay, thank you very much.

Thanks.

Your next question is from the line of Andrew Lim with Societe Generale.

Hi.

Good morning, Harvey.

Good morning.

I've got a question on the trading book review that obviously the Basel committee is undertaking, and whether you could give any more color on what kind of impact it might have on the industry on an absolute basis, and also how you stack up relative to your peers?

So, on the trading book review, we think it's very important obviously, and we're in active dialogue.

There's been the QISs.

And so, again, it's very early on that.

So I don't have any specific comments on the trading book review.

I think what I would say is that -- and again, I think you have to give credit and kudos to the regulators.

They've been incredibly productive over the last several years.

If we pause to list out all of the regulatory changes, it's incredible in terms of the impact on capital, liquidity, trading, swap execution facilities.

And so, one of the things I think we all need to consider as market participants, and when I say that I mean clients, folks like ourselves and regulators, is, we need to maybe at least think about pausing a bit and digesting the impact of these rules.

There's no doubt that these rules make the system stronger and safer, as I've said before.

I do think there's a benefit to observing how they interact over long periods of time, because you can't get all those benefits without some cost.

We can't necessarily always identify those costs immediately.

And so that would be my very high-level comment on that.

But I don't have any specific comments on any proposed revisions to the rules.

Is it something that you're running internally, just to see what the impact is at the moment?

Or is that too early to do that?

So, we are very consistent in our philosophy in this, in terms of proposed rules.

It follows a very normal course protocol for us.

We work as constructively as we can with the regulators in terms of trying to provide them with data and dialogue on the impact of a rule.

So we're always active participants, and we dedicate a lot of time and people and system and math to the QISs that come out, whether any rule, and we always try and be an active participant in terms of giving good balanced feedback to the regulators in terms of the benefits and cost of any proposed rule.

We're just very early in this potential rewrite.

It's just too early to comment on it.

Okay.

And then, just going on to another regulation -- the NSFR.

I know you said that was early as well, but any thoughts about how that might impinge on your prime brokerage business, in terms of like encumberment of your balance sheet assets?

Again, too early to tell.

We'll see how it ultimately evolves when we get a local regulation.

As I said, a big part of the discussion will be around the treatment of deposits.

But look, I think what you're going to see the world do as they adjust is, all firms, not just Goldman Sachs, all firms will look for what we'll call net stable funding ratio funding, whatever that ends up being defined as.

And so we'll see how the rule evolves.

But look, we'll adapt.

You've seen us do it, whether it's the Basel III ratio, the supplementary leverage ratio, all these things.

We still need to see a rule.

Okay.

And just one final question: Is there a target SLR that you're aiming for heading into the CCAR at all?

No, at this stage, not.

As you saw -- you said the SLR, right -- at this stage, as you saw, we're at 5%.

That's up about 80 basis points in the course of the year.

So now we're compliant with 2018.

One of the things is, we'll continue to review this.

There are a whole host of factors that could improve that ratio from here, but again, we'll be assessing all of our buffers as we get the final capital rules.

Again, they all interact, right?

So you really want to get to a point of stability of rule making, and then you can really set the parameters and dial them in more tightly.

Great.

Thanks a lot.

Thank you.

Appreciate you dialing in.

At this time, there are no further questions.

Please continue with any closing remarks.

So, hey, everyone, since there are no more questions, I just want to take a moment to thank all of you for joining the call.

Hopefully, myself and other members of senior management will see many of you in the coming months.

If there's any additional questions arise, please don't hesitate to give Dane a call.

Otherwise, enjoy the rest of your day and a long weekend.

And look forward to speaking with you on our first-quarter earnings call coming up in April.

Take care, everyone.

Thank you.

Ladies and gentlemen, this does conclude the Goldman Sachs fourth-quarter 2014 earnings conference call.

Thank you for your participation.

You may now disconnect.