Goldman Sachs Q4 Earnings Call Transcript

123jump.com Staff
29 Jan, 2010
New York City

The financial services firm reported net quarterly revenue of $9.6 billion. Net quarterly earnings were $4.9 billion as revenue surged in its investment banking and trading and principal investments segments. The company earned $8.20 a share compared to a loss of $4.97 a share a year-ago quarter.

The Goldman Sachs Group, Inc. ((GS))
Q4 2009 Earnings Call Transcript
January 21, 2010 11:00 a.m. ET

Executives

Dane Holmes – Director of Investor Relations
David A. Viniar – Executive Vice President & Chief Financial Officer

Analysts

Guy Moszkowski - Bank of America/Merrill Lynch
Glenn Schorr - UBS
Howard Chen - Credit Suisse
Roger Freeman - Barclays Capital
Meredith Whitney - Meredith Whitney Advisory Group LLC
Chris Kotowski - Oppenheimer & Co.
Michael Mayo – CLSA
Jeff Harte – Sandler O’Neill & Partners, L.P.
Michael Carrier - Deutsche Bank
David Trone – Macquarie Securities
Michael Hecht - JMP Securities
Steve Stelmach - FBR Capital Markets
Robert Lee – Keefe, Bruyette & Woods
Matthew Burnell - Wells Fargo Securities
Ron Mandel – GIC

Presentation

Dane Holmes

Good morning. This is Dane Holmes, Director 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 affect the firm''s future results, please see the description of risk factors in our current Annual Report on Form 10-K for the fiscal year ended November 2008. 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, 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 audio cast is copyrighted material of The Goldman Sachs Group, Inc. and may not be duplicated, reproduced, or rebroadcast without our consent.

Our Chief Financial Officer, David Viniar, will now review the firm''s results. David.

David A. Viniar

Thanks Dane. I’d like to thank all of you for listening today. I’ll give an overview of our fourth quarter and full-year results and then take your questions.

Full year net revenues for 2009 were $45.2 billion. Net earnings were $13.4 billion and earnings per diluted share were $22.13. These results generated a return on common equity of 22.5%. Over the past year book value per share was up 23% to $117.48.

For the fourth quarter net revenues were $9.6 billion, net earnings were $4.9 billion and earnings per diluted share were $8.20. At the end of 2008 governments around the world implemented significant liquidity, capital and funding initiatives to help stabilize the capital markets.

These actions were critical to reversing the market panic that was pervasive in the fourth quarter of 2008 and the early part of 2009. In 2009, the equity and credit markets were generally characterized by increasing asset prices, lower volatility and improved liquidity.

During 2009, the S&P 500 increased by 23%, the LCVX improved by over 700 basis points, and the VIX declined by nearly 50%. As would be expected the improving market environment had a positive impact on client activity.

While several operating dynamics significantly improved in 2009, the broader macro operating environment remained challenged with negative global GDP growth, rising unemployment, and limited credit availability.

In addition, certain asset classes like commercial real estate continued to deteriorate during the year. Since economic growth continues to be the single most significant driver of our firm’s opportunity set, improvement in these macroeconomic factors will be important to our ongoing performance.

As in 2008 a diversified business model, global client franchise, and our people’s unwavering commitment to client service, positioned the firm to generate profitable annual results. Given the tumultuous market environment 2009 was a year in which our clients placed extraordinary value on sound advice and timely execution.

Our ability to stay externally focused provided liquidity and capital to clients when resources were scarce. Our vigilant focus on clients helped differentiate the firm in the marketplace and positively impacted our performance.

We undertook significant risk reduction actions in 2007 and 2008 which translated into the firm beginning 2009 with robust levels of risk based capital and liquidity. Nevertheless, we remain committed to actively managing risk and improving our already conservative financial profile in 2009 as demonstrated by our current Tier 1 ratio on the Basel I of 15% and a global core excess pool of liquidity which averaged $166 billion during the year.

Record net earnings of $13.4 billion in 2009 were the primary driver of the firm’s improved financial position. We also accessed private capital markets during the year to enhance our financial profile, raising $5.75 billion in April 2009.

This brought the total amount of equity raised from the private markets over an eight-month period to $16.5 billion. Our actions positioned the firm to repay the US Treasury in full, for TARP funds invested in the firm. In addition, we provided an incremental $1.4 billion in dividends and gains resulting in a 23% annualized return to the US taxpayers.

I’ll now review each of our businesses. Investment banking produced fourth quarter net revenues of $1.6 billion, up 82% from the third quarter due to significant quarterly increases of financial advisory and underwriting revenues.

For the full year, investment banking net revenues were $4.8 billion, down 7% from 2008 with equity underwriting net revenues of $1.8 billion, its best annual performance since 2000 partially mitigating the decline of financial advisory revenues.

Our backlog increased during the fourth quarter and increased significantly during the year. Within investment banking fourth quarter advisory revenues were $673 million, up over 100% from the third quarter. Goldman Sachs ranked first in announced and completed M&A globally for calendar 2009.

We advised on a number of important transactions that closed in the fourth quarter including Pfizer’s $68.4 billion acquisition of Wyeth, Sumitomo’s $5.7 billion acquisition of Nikko Cordial Securities, and Perot Systems $3.9 billion sale to Dell.

We were also advisor on a number of significant announced transactions, including Burlington Northern Santa Fe’s $35.9 billion sale to Berkshire Hathaway, NBC Universal’s $22.9 billion sale to Comcast, and Stanley Works $4.6 billion acquisition of Black & Decker.

Fourth quarter underwriting net revenues were $962 million, up 68% sequentially from weak third quarter levels. Equity underwriting revenues of $624 million were up 72% from the third quarter reflecting a significant increase in IPO activity.

Debt underwriting increased 60% to $338 million reflecting a solid new issue market across high yield investment grade and municipals. During the fourth quarter, we participated in many noteworthy underwriting transactions including ING Group’s $11.1 billion writes offering, Sands China Limited $2.5 billion IPO, and Clear Channel’s $2.5 billion high yield notes offering.

Let me now turn to trading and principal investments which is comprised of FICC, equities and principal investments. Net revenues were $6.4 billion in the fourth quarter. Net revenue generation within FICC and equities declined significantly as client activity leading into and through the holiday season was low.

We believe the lower client activity levels were reflective of a pronounced seasonal slowdown. Full year net revenues of $34.4 billion were up materially from 2008. FICC net revenues were $4 billion in the fourth quarter, down 34% sequentially as client activity slowed meaningfully in the second half of the quarter.

Credit and rates net revenues were down on lower volumes across cash and derivatives and client de-risking into year-end. Currency revenues were also weaker sequentially on low customer risk appetites. Mortgage revenues were largely flat and reflect the continued strength in residential mortgage trading.

Commodity net revenues were up as we experienced higher levels of institutional customer activity and favorable market conditions. For the full year, FICC net revenues of $23.3 billion which includes a $1.5 billion loss on commercial mortgage loans were up materially from 2008.

Turning to equities, net revenues for the fourth quarter were $1.9 billion, down 30% sequentially. Equities trading revenues reflected lower customer volumes across our cash trading and derivatives businesses. While equity markets ended the quarter higher, price moves were not nearly as significant as during the second and third quarters.

Equity commissions were down 2% to $915 million on lower trading volumes. For the full year, equities produced net revenues of $9.9 billion, up 7% from fiscal 2008. Turning to risk, average daily Value at Risk in the fourth quarter was $181 million, compared to $208 million for the third quarter.

Let me now review principal investments which produced net revenues of $507 million in the fourth quarter. Our investment in ICBC produced a $441 million gain in the fourth quarter. Our corporate principal investing portfolio generated gains of $610 million across both public and private investments.

These revenues were largely offset by continued weakness in our real estate principal investing business which produced negative net revenues of $559 million. For the full year, principal investments produced net revenues of $1.2 billion driven by $1.6 billion in gains from our ICBC investment, $1.3 billion in gains from our corporate portfolio, offset by $1.8 billion in losses from our real estate principal investment portfolio.

In asset management and securities services, we reported fourth quarter net revenues of $1.6 billion, up 8% from the third quarter. Full-year revenues were down 25% to $6 billion. Asset management produced net revenues of $1.1 billion, up 16% from the third quarter due to higher average assets under management and $112 million in incentive fees generated from certain alternative investment funds.

For the full year, asset management net revenues were $4 billion, down 13% from a record 2008 due to changes in the competition of assets managed. During the fourth quarter, assets under management grew $23 billion to $871 billion. The increase was driven by $12 billion of net inflows, primarily reflecting inflows in fixed income assets partially offset by money market outflows, as well as $11 billion in market appreciation across all asset classes.

On a full-year basis, assets under management grew by $73 billion reflecting market appreciation. Securities services produced net revenues of $443 million in the fourth quarter, down 6% sequentially. For the full year, securities services net revenues were $2 billion, down 41% from a record 2008.

This decline reflected a significant decrease in industry wide hedge fund assets under management. While it’s impossible to predict the future we’ve seen a stabilization of client asset levels and net inflows into certain hedge funds over recent months.

Now let me turn to expenses. Compensation and benefits expense which includes salaries, bonuses, amortization of prior year equity awards, and other items such as payroll taxes and benefits, was negative $519 million in the quarter which means we reversed compensation previously accrued through the third quarter.

In the fourth quarter, compensation to the firm’s partners was reduced by $500 million to fund the charitable contribution to Goldman Sachs Gives, a donor advised fund. The fourth quarter reversal results in a full year compensation to net revenues ratio of 35.8%, which is a record low full year ratio for the firm and is nearly 1100 basis points lower than our average compensation ratio between 2000 and 2008.

While 2009 total net revenues are only 2% less than the record net revenues that we posted in 2007, total compensation and benefits is 20% lower than in 2007, equating to a nearly $4 billion difference in compensation and benefits expense between the two periods.

Our approach to compensation reflects the extraordinary events of 2009. In addition, the firm improved its compensation structure during this year to reinforce the compensation principals that we announced in our Annual Shareholders meeting in May. Our compensation principals are designed to encourage a real sense of teamwork and communications, binding individual interest to the firm’s long-term interest, to evaluate performance on a multi-year basis, to discourage excessive or concentrated risk taking, to allow the firm to attract and retain proven talent, and to align aggregate compensation with performance over the cycle.

And although we are not subject to the rules set forth by the Special Master for Compensation we consulted with him regarding the specific details of our compensation structure. Our approach broadly follows and in many cases exceeds the guidelines he set out.

Fourth quarter non-compensation expenses were up 24% sequentially, largely in other expenses and primarily related to approximately $620 million of charitable contributions including the $500 million donation to our donor advised charitable fund GS Gives, and $100 million to the Goldman Sachs Foundation.

Goldman Sachs Gives will provide senior employees with a firm sponsored mechanism for recommending charitable contributions. This effort will be focused on those areas that have been proven to be fundamental to creating jobs and economic growth, building and stabilizing communities, honoring service and veterans, and increasing educational opportunities.

For the full year, non-compensation expenses were up 2% over 2008 primarily due to charitable giving of approximately $850 million during the year. In addition to charitable contributions, depreciation and amortization expenses increased compared with 2008 and included real estate impairment charges of approximately $600 million related to consolidated entities help for investment purposes.

Excluding charitable giving and real estate impairment charges in 2008 and 2009, our core non-compensation expenses were down by 11%. Headcount at the end of the fourth quarter was approximately 32,500, up 3% from the third quarter and down 6% versus fiscal year end 2008.

Our effective tax rate was 32.5% for the full year, resulting in $6.4 billion in tax expense. The events of the last two years have understandably caused many of us to reflect on the previous set of assumptions and expectations surrounding the financial services industry.

As a consequence there have been significant changes within our firm and the industry at large. Whether it is greater focus on leverage and liquidity risks, or the importance of robust systemic regulations, we’ve already seen significant strides taken by many regulators and industry participants.

We believe that financial institutions have a significant and critical role to play in promoting economic growth, jobs, and wealth creation for society. We remain committed to supporting initiatives that improve the long-term stability of the global financial system.

Thus we will continue to work with governments, regulators, and competitors across the world to strengthen standards and processes. Many of our core beliefs were also confirmed over the past two years, principally the importance of our client franchise, employees, reputation, and our long-term focus on creating shareholder value.

These tenants are encapsulated in the firm’s first three business principles, and they remain as relevant today as they did when they were written over three decades ago. In addition, our commitment to fair value accounting was validated and continues to be our lifeblood as it helps establish a clear view of risk.

Our core beliefs are integral to our broader corporate strategy, which will continue to be driven by our obligation to meet the needs of our diverse client base. Our clients want integrated solutions, superior execution, and global capabilities. As a result, we will continue to offer integrated advice, financing and co-investing along with best in class risk management. We will invest internationally, as our client franchise and the demand for global perspectives or local advice in execution grows.

We will invest in our people to ensure that our broad set of skills and competencies is available to produce effective solutions for our clients. We will continue to manage our financial profile conservatively, placing the utmost importance on risk management and maintaining a diversified risk profile.

Managing risk effectively is critical to having the financial wherewithal to advise and execute for clients, particularly during times of stress. Furthermore, effective risk management is central to mitigating incremental risk to the broader financial system.

And last but certainly not least, we will continue to operate the firm with the goal of providing superior long-term results for our shareholders. With that, I’d like to thank you again for listening today, and I’m now happy to answer your questions.

Question-and-Answer Session

Operator

As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Again, it’s star one to ask a question. And your first question comes from Guy Moszkowski with Bank of America/Merrill Lynch.

Guy Moszkowski - Bank of America/Merrill Lynch

Good morning.

David A. Viniar

Good morning, Guy.

Guy Moszkowski - Bank of America/Merrill Lynch

Let me ask a question about comp, what do you think that we should be using as a baseline for the comp to net revenue ratio as we model the early part of this year. It would appear that the baseline is lower than sort of the high 40s kind of ratio that we’ve been looking at in the past.

David A. Viniar

That’s a very hard question to answer, Guy. You know how bad I am at predicting the future and I don’t have an answer for you. It’s going to depend on revenues, it’s going to depend on the economic environment. It’s going to depend on a lot of things and I take this year’s ratio, not necessarily as a one-time thing and not necessarily -- not as a one-time thing.

We’ll know more as the quarter and the year unfold.

Guy Moszkowski - Bank of America/Merrill Lynch

Okay, so although in the past you’ve always sort of been comfortable saying think in the high 40s to 50% range, at least in the early part of the year, right now you really can’t provide that kind of guidance.

David A. Viniar

Not right now.

Guy Moszkowski - Bank of America/Merrill Lynch

Okay, that’s fair. Maybe you can just tell us a little bit about the impact on the 2009 ratios of increasing the stock component of comp across the firm and whether you also stretched out the vesting period materially.

David A. Viniar

We’ve always had a fair amount of equity in our compensation, and so we put some more in. We also, what we did was really stretch out more than the vesting; we made sure that the shares were at risk for a long period of time. And so really the critical element not from an expense point of view, but from we think a -- aligning people with the firm and tying them in is how long people have to hold the shares and people largely have to hold their shares for five years.

And so, I would tell you that from a ratio point of view, it did not have that big an effect.

Guy Moszkowski - Bank of America/Merrill Lynch

The stretching out of time period?

David A. Viniar

Correct, that did not -- and the amount of equity gave did not have that big an effect. When you look at what’s coming in from the past and what’s going to be vested in the future, you shouldn’t think it’s going to have that material an effect.

Guy Moszkowski - Bank of America/Merrill Lynch

Okay, thanks for that. Within the comp expense, last question on comp. Within the comp expense, can you give us a sense for how you handled the UK bonus tax proposal and will we see some offset to any reduction in the comp because of that as a tax hit in the second quarter.

David A. Viniar

There will definitely be a tax hit sometime next year. We expect it will be several hundred million dollars but we don’t know how much yet because the legislation has not been passed and we took that into consideration in coming up with our compensation across the firm this year.

Guy Moszkowski - Bank of America/Merrill Lynch

Okay, that’s helpful. Thanks. And then maybe you can just give us a sense for given that the end of the year was seasonally as you said quite sluggish, how the New Year is starting off, what are the areas of strength and weakness that you’re seeing as we go into the year compared to the fourth quarter trends.

David A. Viniar

Well, we’re only two-and-a-half weeks into the year, so it’s hard to read very much into it and I wouldn’t say anything about performance or anything. The only thing I would say is the dramatic slowdown in client activity that we saw over the last say six or so weeks, has reversed itself for the first two-and-a-half weeks of this year.

Guy Moszkowski - Bank of America/Merrill Lynch

And as you see that happening can you give us a sense for where in terms of key product areas you’re investing, where you might be pulling resources back and along those lines as well, do you envision rebuilding your leverage off the level that you were running at the end of the year.

David A. Viniar

Well, as far as what lines of business, we’re very happy with the lines of business we have and we’re investing in all of them. I would say we’re probably investing somewhat more outside the United States and especially in emerging economies than we are in it, although we’re investing in the United States as well.

We’ve talked before about the fact that we’re very much investing and building our asset management business but that did not mean we’re not investing in our other businesses; we’re investing in those as well.

As far as leverage goes, I would not tell you that we’re going to have a balance sheet under $850 billion forever. I don’t expect we will or leverage this low forever, but it’s really going to depend on where and when we see opportunities and what kind of opportunities we see.

Guy Moszkowski - Bank of America/Merrill Lynch

Thanks for taking my questions. I appreciate it.

Operator

Your next question comes from Glenn Schorr with UBS

Glenn Schorr – UBS

Hi, thank you. Good morning. This is going to be hard but important and so with talk obviously today and President Obama speaking later on, potential reinstatement of some form of (inaudible) is really limiting some form of what they’ll define as speculation however they define it, it’s an involved topic so I want to break it down into bite size. So the first question is, is it that big of a deal if the Administration decided things like private equity and a dedicated hedge fund/process inside off desk, right, was something that they didn’t want a financial holding company to own and you could do that through third party, that’s part one of the question.

David A. Viniar

So, first it’s going to be, I’ll answer your question, but it’s going to be really hard for me to comment on the Administration’s proposal because we don’t exactly know what it’s going to be yet.

Glenn Schorr – UBS

What if I proposed that if private equity and hedge fund and internal prop was something that they did not want as part of the holding company.

David A. Viniar

What I would tell you is we think our private equity business is an important business for Goldman Sachs. It’s very integrated in the rest of our business. As you know our private equity business works, there are a lot of our very important clients invested in our private equity business. We invest alongside other clients of the firm and we invest in clients to help them grow.

So, it is very much at Goldman Sachs of an integrated client-oriented business and so I would leave it at that. As far as the importance to the firm, as far as the incremental revenues, you see them. We disclose what they are so you can see exactly what our revenues from our principal investment business are.

Glenn Schorr – UBS

And dedicated, in the past you’ve moved some pieces of dedicated off trading desk hedge fund inside asset management, raised third party funds and it’s been very successful, any reason to think that that couldn’t continue if that’s what a proposal wanted.

David A. Viniar

If we had to do that, we could. Again, the couple of things I would say is the pure walled off proprietary trading businesses at Goldman Sachs are not very big in the context of the firm. So, if we had to do something with them, we could. Again, those businesses have been at the firm for decades and been very successful and I would also tell you if people are focused on things that cause or were real contributors to the crisis, it wasn’t traded. Most trading results were actually pretty good, not just at Goldman Sachs, but at most firms and that’s not really where the problems were.

Glenn Schorr – UBS

I agree, I think there’s a notion of protecting taxpayer and government support in one way shape or form, and it shouldn’t involve what they would deem as speculative risk taking, so I hear you. I’m not pitching that that’s the party line. So part two is tougher and I actually think this is the most important part and I thought Lloyd did a great job trying to explain it to the financial crisis commission, but maybe this audience would be better.

Defining principal and prop in the context of customer flow is extremely difficult, so is there any and I think by the way that would be the most impact, and that’s why people are reacting today to what the President may or may not say later, but could you help in any way in breaking that down or maybe even literally just reiterate what Lloyd said last week because defining is difficult and I don’t think it’s easier said than done to say, yes’ we shouldn’t have prop as part of a government implicit guaranteed financial holding company.

David A. Viniar

Look Glenn, you and I have talked about this before; it’s a very, very hard line to draw. The great majority of what we do we do for and on behalf of our clients because our clients want to do something. Whether our clients want to sell something they have, buy something they don’t have, hedge something whether it’s an interest rate, a commodity price, a currency, something that is important to the operations of corporations, governments, around the world that help them manage their risk and grow, they need someone to provide capital to be on the other side and we are there for them.

And we have been there for them throughout. That though results in us taking risk and in us trading. And so, if a client wants to sell us a security, we’ll buy the security, we’ll make them a price, and then we’ll sell it out over time but until we do we have some risk.

If a client wants to hedge their energy prices so they can have more stable operations, we’ll take the other side of that but then we need to sell that out or hedge ourselves over time. And all of that risk which is principal risk ends up on our balance sheet, it’s the great bulk of what we do all day long in all of our products for all of our clients which hopefully helps them results in us taking risk and if we manage it well, results in us making a profit.

There is a very, very small piece of what we do which is walled off people who are just taking positions on behalf of the firm with no client involved. The great majority is the first piece I gave you.

Glenn Schorr – UBS

Awesome, last quickie. In FICC and by now we get the joke because you’re actually percentage decline was better than most even off a higher level, but I know activity levels were down but can you just somehow size the impact of spread normalization versus the impact of just the lower activity levels.

David A. Viniar

Again very hard to give quantification but I would tell you the great majority of the decline was based on activity levels. There was some decline in spread, I’m not sure I can tell you that was normalization or because of the decline in activity levels, but it was largely caused by a really significant drop off in activity levels.

Glenn Schorr – UBS

All right, thank you.

David A. Viniar

You are welcome.

Operator

Your next question comes from Howard Chen with Credit Suisse

Howard Chen - Credit Suisse

Good morning, David. A follow-up to Glenn’s last question, I know it encompasses a lot of businesses but as the markets continue to normalize any thoughts on how the competitive landscape has evolved with respect to the amount of risk capital that’s out there.

David A. Viniar

You know, for the time being we have continued to have a pretty high market share. There’s been some risk capital that’s come back into the markets and it varies somewhat by product. But I think there’s still not nearly as much as there was before the crisis and our market share is still pretty high.

Howard Chen - Credit Suisse

Great, thanks. And then on the comp accrual, however you cut it the past year marks the lowest comp accrual by far since the firm went public, are you anticipating and planning for above average partner and producer turnover this year.

David A. Viniar

We certainly hope not and we’re not planning it and we’re not thinking it’s going to happen. We did our best, as best we could, to reward our people for what we thought was a truly outstanding year and great performance that they had and also take into account what we saw and what we heard in the economic environment and from various constituencies and to try to strike that balance.

And we tried to balance the needs of the public versus being fair to our people and we hope we struck it well. We hope we will not see large amounts of turnover but time will tell.

Howard Chen - Credit Suisse

Great, thanks. And then, I know your outlook on real estate has been generally less constructive but nonetheless the repay write-downs are little bit larger than we anticipated, is your expectation we’re near bottom here, maybe any additional color there would be helpful.

David A. Viniar

I don’t necessarily think we’ve hit a bottom in commercial real estate. We don’t have that much left so I think you’ll see hopefully not all that many write-downs going forward but again, I can’t predict that but I think that commercial, there’s still a lot of very over-levered commercial real estate assets with a lot of debt that will mature in the next several years and so I think we’re not at the bottom there.

Howard Chen - Credit Suisse

Okay. Thanks so much for taking my question.

David A. Viniar

You are welcome.

Operator

Your next question comes from Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

Good morning, David. I guess just inside of FICC your credit business specifically, I think one thing that’s interesting is your business seems to have shifted this year, at least the last half of the year to more cash focus than derivatives CDS and I’m wondering will all the competition that’s come back, is that something we’d expect to, or it maybe already is shifting back to CDS in terms of mix.

David A. Viniar

Not yet, and you’re right, the market really has shifted to much more of volume in cash rather than derivatives in the credit business in the second half of the year. For the early part of this year I’d say that’s still pretty much the same. But we’ll see what will happen over the course of this year.

Roger Freeman - Barclays Capital

Okay. And then also I guess in the commodities part of your business, what are your thoughts in interpreting the CFTC proposed rules around tighter swap dealer hedge exemptions and how that might impact your customer business. It looks like they’re really going to be putting some restrictions on --

David A. Viniar

So far they’ve put some rules out for comment. We’ll start looking at them; we’ll probably with the industry comment. It’s too early to tell what if any effect it’s going to have but we’ve in the past done a pretty good job at working with whatever rules there were and managing our business that way to be able to work with our clients which is the most important thing we’ve got to be careful of here, that it doesn’t effect our ability to do things with our clients but stay profitable.

So we’ll see as it evolves.

Roger Freeman - Barclays Capital

Okay. And then in equities it looks like VaR went up despite lower volatility in equities, is that a function of the way you calculate VaR with sort of the lagging input or did you actually increase risk in equities.

David A. Viniar

Our inputs in VaR are very heavily weighted towards the recent events so it was reflected pretty quickly and shows somewhat of an increase in positioning over the course of the quarter.

Roger Freeman - Barclays Capital

So then if you look at the equity trading revenue, they were down about 45% sequentially and underwriting I think doubled in the fourth quarter, and your market share was up and I’m just kind of thinking back like the second quarter you had a really strong equities performance off the back of a lot of deal flow that you were underwriting, it doesn’t look like that sort of happened this quarter. Can you compare and contrast maybe the period?

David A. Viniar

Yes, you’re absolutely right, and basically although there was a lot of underwriting which usually leads to a lot of client activity, the same phenomenon we saw in FICC happened in equity with the trading activity, people kind of closing up shop by the middle of November and saying we’ll see you in January.

And so the usual expectation of a lot of activity around underwriting just did not develop.

Roger Freeman - Barclays Capital

Okay. And principal ICBC, I think you’ve got about a billion dollar liquidity discount there, and you’ve got that I guess that lock up coming up for renegotiation so do we see that come in to earnings this quarter or does it actually go up if you extend it.

David A. Viniar

We don’t comment on the amount of the discount and we’ll have to see how things develop with ICBC.

Roger Freeman - Barclays Capital

All right. And on performance fees, that was stronger than we had expected, any kind of read through in the first quarter because that’s seasonally when this hits and I know you’ve got high watermarks from last year, last time you had this kind of performance fees in the fourth quarter you had a very strong first quarter.

David A. Viniar

Now just to clarify, one of the -- I don’t want to mislead you in how you’re thinking about things, when we had the really strong first quarter in performance fees, it was when we were in November fiscal year end, so performance fees although will have some during the year will normally accrue on December 31st.

So maybe they’ll be better in the first, second, third quarter than they were last year, but the biggest should be in the fourth quarter.

Roger Freeman - Barclays Capital

That makes total sense. All right, last question. On comp, the Goldman Sachs Gives contributions, is there going to be any kind of passing through of tax deductibility to partners on donations that they’re --

David A. Viniar

No, that is a firm contribution, partners will be able to make recommendations but it’s a firm contribution.

Roger Freeman - Barclays Capital

Got it. Okay, thanks a lot.

David A. Viniar

You are welcome.

Operator

Your next question comes from Meredith Whitney with Meredith Whitney Advisory Group.

Meredith Whitney - Meredith Whitney Advisory Group LLC

Man the timing is incredible, Obama is speaking now, but I’ll take advantage of this anyway. I wanted to ask you on three questions, number one, you had talked about the government participation stabilizing the market, but what about the government participation adding to the flows last year and then they’re pulling back from a lot of their programs, almost all of their programs, ending in March, how you expect that to affect the flows this year.

David A. Viniar

It’s a very good and very hard question to answer. One of the things with providing stimulus and the Fed being in the markets is it’s easy to get in and it’s hard to get out. ‘And how you get out and getting out carefully is very, very important and I know that they’re putting a lot of, lot of thought to this.

So there are some places where I think them pulling back might cause less volume in the market. There’s some places where it will actually cause more volume in the market. You look at the agency trading business, they’re the only buyer, there’s really no other participants. When they pull out hopefully that will mean others will fill the void and there’ll actually be an active market again.

So I think, it’s something that has to be done extremely carefully and I think they’re putting a lot of thought into this and so hopefully it will not have a big effect on the markets.

Meredith Whitney - Meredith Whitney Advisory Group LLC

Okay. The other question I have is with, do you have, have you granted your -- I assume you have not granted your employees stock yet, when do you do that or if you have when did you do it.

David A. Viniar

That’s not something we necessarily want to talk about.

Meredith Whitney - Meredith Whitney Advisory Group LLC

Okay. Given the uncertain regulatory environment in terms of how much capital you have to hold can you give us any guidance in terms of when you might think of addressing your share buyback program. And then I have just one after that.

David A. Viniar

Sure, no problem Meredith. Look we are hopeful that over the course of this year, at least the broad outlines of regulatory programs will become a little bit more clear and we’ll be in a better position to think about returning capital. I’m not sure we will, it will depend on what opportunities we see. If we see great opportunities to use all the capital we have then we might not return any.

And if we don’t and things unfold as I hope they will, kind of during the course of this year we’ll be in a better position to do so.

Meredith Whitney - Meredith Whitney Advisory Group LLC

Okay. And then alternatively given the fact that you’re going to be required, the industry is going to be required to hold so much more capital, why not just raise your dividend, it’s a more tax effective way to pay your people anyway.

David A. Viniar

Well that, if we have to hold more capital buying back shares and paying dividends do the same thing to capital.

Meredith Whitney - Meredith Whitney Advisory Group LLC

I appreciate that, but in terms of at least if they --

David A. Viniar

There are very mixed views on the benefits of dividend versus share buyback. Look, there are positives and negatives on both sides. There are some investors who actually would like higher dividends. There are some who definitely don’t want it, they’d rather we either kept it in the company and used our equity to grow, or that we bought back shares because in some ways for them it’s a more tax efficient way of getting capital back and when you buyback shares you reduce capital and share count whereas dividends only reduce capital.

And so there’s very mixed views on that.

Meredith Whitney - Meredith Whitney Advisory Group LLC

Okay, I’ll take end. Thanks so much.

David A. Viniar

Okay. Thanks Meredith.

Operator

Your next question comes from Chris Kotowski with Oppenheimer & Co.

Chris Kotowski - Oppenheimer & Co.

Good morning. I’d like to come at the comp accrual revenue ratio a little differently and that’s that in the past you’ve articulated a ROE goal of 20% and I wonder if you think that’s still realistic for a company with nearly $60 billion of tangible common equity and if you think it is, should we think of the comp ratio as being reverse engineered to hit the ROE target, whatever the revenues are.

David A. Viniar

Well, let me answer the second question first, the comp ratio was not reverse engineered to hit 20% ROE target. The comp ratio was done one person at a time figuring out what the fair compensation was taking into account what’s going on in the economic environment. So it was not meant -- it was not reverse engineered that way.

I think what we’ve said pretty consistently Chris is that we expect to be at a 20% ROE over the cycle. We don’t expect to be it every year. I actually when I look at the economic environment of this year, wouldn’t necessarily think this would be one of the years we would hit it because the economic environment wasn’t so good.

But I think it’s a testimony to the really good performance of the people at Goldman Sachs.

Chris Kotowski - Oppenheimer & Co.

Okay. And then separately looking at your principal investments I see they are up about 22% linked quarter, does that mean you’re actively putting money to work there or is it still write-ups on existing positions.

David A. Viniar

When you say our principal investments are you talking about the revenues?

Chris Kotowski - Oppenheimer & Co.

No, it’s the page 12 of the press release, the --

David A. Viniar

I think most of that increase was companies going public, and write-ups in increases, and there were small amounts of money put to work.

Chris Kotowski - Oppenheimer & Co.

Okay. Just some of the other, the publicly traded private equity companies, it looks like they’re accelerating the pace of investments as well, do you see that in the next couple of months and quarters.

David A. Viniar

It’s going to depend on opportunities. I would say we’ve seen a few more than we had seen over the course of the last year but I would emphasis that word few. And maybe they’ll accelerate but so far it’s really been just a few.

Chris Kotowski - Oppenheimer & Co.

Okay. Thank you.

David A. Viniar

You are welcome.

Operator

Your next question comes from Mike Mayo with CLSA.

Michael Mayo – CLSA

Hi, good morning. It’s good timing because I was able to listen in both ears here, so the short of it was the Volcker Rule, which would be if you have backing of the safety net of the government directly, I interpret it as directly or indirectly, then you shouldn’t be engaged in private equity, internal hedge funds, proprietary trading, or activities that don’t serve your customers. So using the Volcker Rule as a guide and I know we’ve always talked about proprietary trading philosophically, because when you’re in business you always have capital at risk, but what percentage of your activities if you were to interpret this very liberally, would be somehow engaged in some of these proprietary activities.

David A. Viniar

First of all, it’s going to be very hard for me to answer this because I don’t know what the Volcker Rule is and I was not able to listen out of both ears, I was spending all of my time listening on this call so I just don’t know what the proposal is. We haven’t seen any detail and it’s just going to take us a while to work through it and figure out what it is.

Michael Mayo – CLSA

(Inaudible) said you don’t have too much business that’s solely proprietary and that’s not part of facilitating business for customers, can you give us a little bit more of a percentage as far as what those activities would be.

David A. Viniar

If you take our pure walled off prop business that has nothing to do with clients, you’re talking about a number that probably in most years is 10-ish type of percent, plus or minus a few percent.

Michael Mayo – CLSA

So 10% of the total revenues?

David A. Viniar

In that range. I don’t want to be too specific because it changes.

Michael Mayo – CLSA

Okay. And then on top of that you’d have your private equity, your principal investing business.

David A. Viniar

I can’t tell you what’s going to be included or not included. Mike, this proposal was talked about a couple of minutes ago. I haven’t seen anything. You’re asking me to answer questions that are not answerable at this time.

Michael Mayo – CLSA

That’s fine; at least we have some sense for the size. And then the separate question is let’s assume the worst case scenario where you are not allowed to do those two activities, I know one questioner gave some ideas of how you could handle it, what would you do if they said you can no longer do any walled off proprietary business, you can no longer do any private equity, what would your alternative be.

David A. Viniar

First of all, again I’ll start with what I said before, which is in looking at what things might have caused crisis and risk that’s the wrong place to look because that’s not what really caused it. But it’s just too early for me to answer what our plans are going to be because this is just coming up.

Michael Mayo – CLSA

Right. But it sounded like with regard to private equity you had some alternatives in mind if you had to, you could work with third parties more.

David A. Viniar

I didn’t say that was a question, someone said could you do that, I said of course we could do that.

Michael Mayo – CLSA

Okay and then --

David A. Viniar

But we don’t have plans to address this because it’s come out in the last two minutes.

Michael Mayo – CLSA

I understand. And then a more mundane question, what percentage of your revenues are outside the US right now and how is that linked quarter?

David A. Viniar

Over the course of the quarter I think it was roughly 46% was outside the US, 54% was in the US and we’re kind of running in the range of 50-50 around now and obviously it can go up or down in quarter. This also is not, it’s a hard thing to measure because you have a lot of trading books that are global trading books and they just get handed off from one place to another but in terms of direction, I think in terms of around 50-50 with probably more of it heading outside of the US.

Michael Mayo – CLSA

And linked quarter trends, was it faster, slower, non-US versus US.

David A. Viniar

It was a little bit more outside the US.

Michael Mayo – CLSA

And what specific regions or countries?

David A. Viniar

It’s still a little of outside US, a little bit more in Europe than in Asia but I would think that Asia has grown faster than Europe.

Michael Mayo – CLSA

All right. Okay, thanks a lot.

David A. Viniar

You are welcome.

Operator

Your next question comes from Jeff Harte with Sandler O’Neill.

Jeff Harte – Sandler O’Neill & Partners, L.P.

Good morning. I’ve got a couple of longer outlook questions, one on fixed income trading. I’m having flashbacks to if I recall it was early 2006 when you first broke the $4 billion mark and a lot of the questions I got were, it can’t get any better than that, what’s going to drive fixed income trading revenues up. Well I’m getting a lot of the same questions now that you, depending on what we include or exclude, broke in the $7 billion mark. When we look forward over the next few years let’s say, what are the drivers and how do you look at the growth potential in fixed income trading given just how good 2009 has been.

David A. Viniar

First, you know I’m very bad at predicting the future and I admit that upfront. Hopefully what we’re pretty good at is reacting to what’s happening as opposed to predicting but and I’m not saying this is going to happen, but what could drive it bigger, first of all the world’s getting bigger.

Markets are developing in many places where there aren’t markets now, a very small percentage of our FICC revenues this year came from the developing economies. And I would expect that those economies are going to grow very rapidly and that there are going to be more opportunities.

Second thing I would tell you is that FICC like every other part of our business when there’s more economic activity and more global GDP growth, there’s more activity and this was not a year of great GDP growth or global economic activity so I think both of those things over the course of the next several years could certainly grow the FICC opportunities for us.

Jeff Harte – Sandler O’Neill & Partners, L.P.

Okay. And then similarly on investment banking you mentioned or it was written that the backlogs increased during the quarter, how meaningful are the backlogs now when a lot of underwriting deals seem to hit quickly and get executed that day and when you say the backlogs are up, is that kind of viewed within the context of a pretty good $1.6 billion investment banking quarter.

David A. Viniar

I think you’re point is a very fair one. I think backlogs are more directional than quantitatively important. So the absolute size is not as important because certainly on the underwriting side, on the advisory side almost everything gets into backlog that becomes a deal. On the underwriting side a lot of transactions really never get into backlog.

You got a call on a day and you do an accelerated book build and you do it two days later. They certainly are not in a backlog at the end of the quarter because they happened during the quarter. So I think it’s less meaningful there but directionally I think it gives you a sense of what’s going on activity wise.

Jeff Harte – Sandler O’Neill & Partners, L.P.

And you talked a lot over the last year about bankers being extremely busy especially some of the M&A guys, but maybe people not pulling the trigger, we’re starting to see some triggers pulled now as far as deals being announced, has the pre-pipeline activity continued to grow and stayed big in M&A now that some of, I guess I’m asking with some deals actually being announced are you seeing an acceleration in M&A conversations or is it just kind of busy like it’s been.

David A. Viniar

Yes, there’s a lot of activity going on there. It’s really, it’s meaningful activity. Again I think it could be a pretty good year for investment banking if the world stays pretty stable. And if no downturn which causes confidence to go down, if it stays pretty stable, I think there could be a lot of activity.

Jeff Harte – Sandler O’Neill & Partners, L.P.

Okay. Thank you.

David A. Viniar

You are welcome.

Operator

Your next question comes from Michael Carrier with Deutsche Bank

Michael Carrier - Deutsche Bank

When you look over the past say 10 years, you have been very innovative at really whatever the industry throws at you, whether it’s competition from the big banks, whether it’s increased regulation, you always find a way to invest the capital and still generate pretty attractive returns relative to the industry. I think obviously everything is in flux in terms of what the new rules are going to be and what changes and what doesn’t, but when you look at it having stuff that’s housed on the balance sheet versus stuff that’s off, and the asset management business and what that can provide, and you have launched some new funds recently on the credit side, but is that an opportunity especially when you’re looking at the balance sheet tax, the focus on leverage and regulatory constraints, do you see that business not just for Goldman but just for the broader industry growing just because of the capacity that’s there, the investor demand and what it does in terms of freeing up capital for some of the financial institutions.

David A. Viniar

It is, I think it’s a fair point. It is certainly a possibility. But it’s just too early to tell if that’s exactly what’s going to happen. The asset management is a good way to raise money for clients with very little of the firm’s or none of the firm’s money involved and it’s certainly a direction that people could head but it’s just too early to tell. None of these rules are written yet. Nobody has seen them.

We will try to react as best we can to whatever the rules are.

Michael Carrier - Deutsche Bank

Okay. And then just one last on the expenses, given the reduction in non-comp expenses and just the industry reining in expenses over the past year or two, when you look out whether it’s 2010, 2011 are there some areas that you need to start reinvesting in or are you still going to be pretty cost conscious on the non-comp side.

David A. Viniar

We’re going to be cost conscious but we are certainly going to invest in things especially in the developing markets. And so there will, but it’s not going to be a -- I don’t think it will be a material increase in the non-comp expenses.

Michael Carrier - Deutsche Bank

Okay. Thanks a lot.

David A. Viniar

You are welcome.

Operator

Your next question comes from David Trone with Macquarie Securities.

David Trone – Macquarie Securities

Good morning. The headcount went up about 2.5% in the quarter and annualizing that that’s maybe 10% right, so can we think about that going forward, what are the hiring plans and also what implication could that have for the comp ratio.

David A. Viniar

What I’d tell you first of all you shouldn’t annualize because you’ll see more, you will tend to and you will grow and see more headcount growth in the second half of the year as people join from various colleges and universities and business schools. But I would expect as we sit here now, subject to change that we will grow next year and I think 10% might be a little high to think, but I would expect we’ll grow next year.

And hopefully it won’t have any effect on the comp ratio because hopefully people we bring in will produce more revenues than we’re going to pay them. But we’ll see, that’s the goal. But we’ll see that over time.

David Trone – Macquarie Securities

Right. So you mentioned that you didn’t think the increase in the mix of deferred and cash had a big impact on the ratio, so can you explain why that is. That’s kind of non-intuitive right, because as long as you still have forfeiture terms you do have the expense deferred as well as the payment itself, so I guess I’m not sure why that wouldn’t have a bigger impact.

David A. Viniar

We had a lot of equity in the past that came in this year that kind of offset the equity that is deferred to the future.

David Trone – Macquarie Securities

But isn’t the mix pretty dramatically increased this year.

David A. Viniar

It’s increased everywhere. But we had in some cases higher compensation in the past that would have led to more equity coming in this year.

David Trone – Macquarie Securities

Okay, got it. So going back to the question and maybe you won’t bite on this one, but if you had exactly the same kind of year, same revenue, same mix, same competitive environment, do you think, would you dare do a 36% comp ratio again.

David A. Viniar

I can’t answer that question. You knew I wouldn’t answer it when you asked it.

David Trone – Macquarie Securities

Got to try, okay so last question you mentioned, two questions actually related on equities trading. First of all, the commissions were sort of flat but the trading was materially lower just sequentially, what’s happening there and also is the equity trading also bouncing back in the first quarter like FICC.

David A. Viniar

I’ll answer them in order, yes, basically what we saw was although commissions are not that good an indication, that’s really just exchange-traded volumes and it also includes things like how much hedging we’re doing and other things that don’t, so they were down a little but really client trading activity in the fourth quarter was just very, very low in FICC and in equities and yes, we’ve seen that pick up dramatically in the first quarter.

But again, I don’t want anyone to think that means it’s going to be great because who knows what’s going to happen, it’s only two-and-a-half weeks.

David Trone – Macquarie Securities

And then lastly, big kind of philosophical/hypothetical, let’s just say Obama does break up some of the universal banks and I know that’s a big hypothetical but wouldn’t that benefit you competitively.

David A. Viniar

It’s just something I don’t even know how to address. I really don’t.

David Trone – Macquarie Securities

Okay, thanks a lot.

Operator

Your next question comes from Michael Hecht with JMP Securities.

Michael Hecht - JMP Securities

This has to be a record for a call, usually wrap these up in half the time, so while we’re talking hypothetical things, obviously lots of new capital and tax proposals out there, I’m just wondering if removing your bank holding company status is an option or something you are contemplating in response to some of these various proposals out there.

David A. Viniar

I think it is not any option at all. It’s not something we even think about or talk about.

Michael Hecht - JMP Securities

Okay, fair enough. And then just on the revenue side, investment banking obviously picking up nicely but a smaller revenue contributor in a direct sense versus trading but can you help us think about the linkage and the magnifier effect that the primary business tends to have on the secondary trading business.

David A. Viniar

That’s a very good point, while the investment banking business is smaller, less revenue than the trading business, the two are very linked and generally although the question was asked before about equity underwritings and the fact that it did not result in higher trading volumes, but generally as there are more investment banking transactions there is quite a bit more trading revenues.

So, merger deals tend to have financing, they tend to -- some request (inaudible), they’ll have currency hedging or depending on the industry they could have commodity hedging and underwritings tend to have a lot of activity going with them. And so, if the investment banking business really does pick up it should drive more revenues in trading.

Michael Hecht - JMP Securities

Okay, that’s fair. And sorry if I missed this but were there any DVA marks in FICC or equities this quarter.

David A. Viniar

Yes, there was about -- a loss of about $280 million of which probably 80% of that was in FICC and the rest in equities.

Michael Hecht - JMP Securities

Okay. And then just to come back on the comp ratio one more time, and the impact that stock-based comp had, the answer sounds like not much and therefore, the decline here is just plain and simple paying people less as a percentage of revenues than you have historically, correct.

David A. Viniar

I think that was the biggest driver.

Michael Hecht - JMP Securities

And I can understand not wanting to commit to a specific lower number but would it be a stretch for us to assume that comp ratios should be structurally lower for some time considering the current political climate.

David A. Viniar

I don’t know.

Michael Hecht - JMP Securities

Okay, I understand. Just a geographic one for me. On the $500 million of charitable contributions, that was an adjustment to comp but that also shows up in other expenses, is that right.

David A. Viniar

Correct. Absolutely right.

Michael Hecht - JMP Securities

Okay, got it. That’s all I have. Thanks a lot.

David A. Viniar

You are welcome.

Operator

Your next question comes from Steve Stelmach with FBR Capital Markets.

Steve Stelmach - FBR Capital Markets

Hi, good morning. Just real quick to follow-up on the trading environment. I think you mentioned earlier that 2010 performance is going to depend largely on the macroeconomic environment, you also mentioned 2009 benefited from better asset, higher asset yields, I guess the question is, is it better macro environment enough to sustain trading revenue on pace of 2009 or do you need continually higher asset levels to repeat 2009.

David A. Viniar

I think it’s a good question and it’s just a question of how much they offset each other. A better macro environment should drive more activity. And a better macro environment on the other hand should also drive more competition because competition should get healthier. That should cause spreads to lower and the theory is that those things will somewhat offset each other.

But the timing is never perfect. And so, the question is what happens first and if you have the better environment then you can have enough activity so that even if spreads come down a little bit then they offset and you have a robust environment so you can with spreads coming down which I expect they might do, you can certainly continue to have very robust trading environment and very robust trading revenues because activities go up.

Steve Stelmach - FBR Capital Markets

Got it. Okay, that’s helpful. And then just one last question on global core access obviously pretty elevated levels from historical perspective but it looks like it’s kind of plateaued here, is that a reflection of just better market conditions or your outlook for the regulatory environment going forward.

David A. Viniar

I would say it’s a reflection of the market conditions kind of stabilizing. So, we didn’t feel the need to increase it any more than it was because it didn’t feel like it was getting any worse.

Steve Stelmach - FBR Capital Markets

Okay, great. Thank you. That’s very helpful.

David A. Viniar

You are welcome.

Operator

Your next question comes from Robert Lee with KBW.

Robert Lee – Keefe, Bruyette & Woods

Thanks. I appreciate the patience. I guess it’s hard to believe that there’s any more questions at this point, but real quick one on the regulatory front. There’s been a lot of lip service paid to China to coordinate global regulation yet you kind of have the UK doing their tax thing and then proposals, here at least from the outside looking in doesn’t seem like there’s a lot of coordination, are you getting any sense globally that there are -- behind the scenes there is a lot more taking place, or do you think it’s more lip service at this point and you’re still maybe I’ll call it at risk of different people kind of taking pot shots at the industry without really coordinating things.

David A. Viniar

I think the answer to everything you said is yes. I think there are different things being done in different locations and I wish that wasn’t the case but I do think the main regulators in the biggest financial standards are actually talking to each other and trying to coordinate things and to do something that is sensible on a global basis.

That’s going to be hard but I think they’re actually trying.

Robert Lee – Keefe, Bruyette & Woods

Okay, that was it. Thank you very much.

David A. Viniar

You are welcome.

Operator

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

Matthew Burnell - Wells Fargo Securities

Thanks very much. Most of my questions have been answered at this point. But just a quick question in terms of the composition of the level three assets, they’re obviously down from peak levels earlier this year. Was there any major moves within that category this quarter from level two and what are your expectations going forward?

David A. Viniar

No, there wasn’t that much. The biggest cause of the decrease this year was actually that we sold a bunch of the commercial real estate loans that we had. So that was probably the biggest driver of that and level three assets are not going to keep going down forever. Now I’ve said that a couple of quarters in a row and they’ve kept coming down so I’m proven wrong so I hate to predict the future but look if we found opportunities to buy distressed assets that would be really good return opportunities and good for our shareholders we would do that and it would increase level three assets and that would be a good thing.

So I think we’re k