GS GS
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/16/2013

Operator: Good morning. My name is Denise and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs's Second Quarter 2013 Earnings Conference Call. After the speakers' remarks, there will be a question-and-answer period. Also, this call is being recorded today, July 16, 2013.

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

Dane E. Holmes - IR: Good morning, this is Dane Holmes, Head of Investor Relations at Goldman Sachs. Welcome to our second quarter earnings conference call.

Today's call may include forward-looking statements. These statements represent the Firm's belief regarding future events that by their nature are uncertain and outside of the Firm's control. The Firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the Firm's future results, please see the description of Risk Factors in our current Annual Report on Form 10-K for our year ended December 2012.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our Investment Banking transaction backlog, capital ratios, risk-weighted assets, and global core excess, and you should also read the information on the calculation of non-GAAP financial measures and regulatory capital ratios that are posted on the Investor Relations portion of our website at www.gs.com.

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

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

Harvey M. Schwartz - CFO: Thanks, Dane and thanks to everyone for dialing in today. I'll walk through our second quarter results and then take your questions. Net revenues were $8.6 billion, net earnings $1.9 billion, earnings per diluted share $3.70. Our annualized return on common equity 10.5%. For the first half of the year, our return on common equity was 11.5%. All-in, a solid outcome and what continues to be a dynamic market environment.

On our earnings call last quarter, we discussed how the evolving economic outlook impacts client activity. Bearing economic data and substantial Central Bank actions during the quarter caused our clients to continually re-assess their expectations for global growth. As a result, our clients risk appetite and activity levels fluctuated over the course of the quarter.

At the beginning of the quarter, our clients remained focused on the European economic outlook. As the quarter progressed, solid economic data out of the U.S. began to moderate economic concerns. Client activity, risk appetite and asset prices improved as a result of the increased confidence in the U.S. economy. Macro concerns emerged again towards the end of the quarter and reflected in lower activity levels and risk appetite in certain businesses.

In addition, the market volatility created more challenging periods within the capital markets from managing client flows. As I previously mentioned, Central Banks around the world were particularly active during the second quarter. This activity was a key driver of market sentiment during the quarter. In Japan, the Central Bank undertook unprecedented monetary action to stimulate their economy. During the second quarter, the yen declined by approximately 5% versus the U.S. dollar and 7% versus the euro.

The marketplace strived away to potential near-term benefits for the Japanese economy against the relative headwinds for other parts of the world. In the U.S. commentary from the Federal Reserve about potentially tapering its bond buying program led to a significant rise in interest rates. Market participants continue to debate the timing and impact of tapering on both the market and economic activity.

Clients were also concerned with the potential slowdown in China during the quarter. Ultimately, our clients are assessing the broader global economy, specifically, whether recovering U.S. will offset potentially slower growth and other economic regions.

I'll now run through each of our businesses. Investment Banking produced second quarter net revenues of $1.6 billion, roughly consistent with the first quarter. Second quarter advisory revenues were $486 million, consistent with the first quarter.

Year-to-date, Goldman Sachs ranked first in worldwide announced and completed M&A. We advised on a number of important transactions that closed in the second quarter, including News Corporation's approximately $9 billion spin-off of its publishing business, Hess's $2.1 billion sale of its Russian subsidiary to Lukeoil, and Siemens GBP1.7 billion acquisition of Invensys Rail.

We're also an advisor on a number of significant announced transactions. They include; Canada Safeway's C$5.8 billion sale to Sobeys, Springer Science and Business Media's EUR3.3 billion sale to BC Partners; and Lender Processing Services $4 billion sale to Fidelity National Financial.

Second quarter underwriting net revenues were $1.1 billion, relatively consistent with the robust first quarter. Debt underwriting revenues were very strong at $695 million and represented a record quarter. While the pace of commercial mortgage-related activity slowed, leverage finance activity remained strong.

Equity underwriting revenues of $371 million were down 5% compared with the first quarter. Year-to-date, Goldman Sachs ranked first in global equity and equity-related common stock offerings and IPOs.

During the second quarter, there were several noteworthy transactions. Apple’s $17 billion first-ever debt offering; Valeant Pharmaceuticals’ $9.6 billion debt and equity financing; and JCPenney's $2.3 billion term loan. Our Investment Banking backlog was consistent with first quarter levels.

Let me now turn to Institutional Client Services; total net revenues were $4.3 billion in the second quarter. FICC client execution net revenues were $2.5 billion in the second quarter, lower than the first quarter, but higher than the second quarter a year ago. This quarter results continue to reflect a broad contribution across businesses and reinforce the benefit of having a diversified franchise.

While activity levels in our currency business remained strong as clients reacted to increased volatility, particularly in Asia, results in other businesses were lower than the first quarter. As you would expect, during a period of increasing interest rates and widening credit spreads, client risk appetite declined in rates, credit and mortgages, and inventory management was a bit more challenging during the latter part of the quarter. Commodity results decreased relative to the first quarter, as volatility remained low in many of our core products and client activity was lower as a result.

Turning to equities, net revenues for the second quarter were $1.9 billion, down modestly from the first quarter. Equities client execution revenues were $638 million, down 21% sequentially, largely reflecting the impact of the sale of our reinsurance business. Commissions and fees were $836 million, up 5% from the first quarter due to improved market volumes. Security services net revenues of $376 million were 18% higher sequentially due to seasonally stronger client activity. With respect to risk, average daily VaR in the second quarter was $81 million, up 7% from first quarter levels due to higher volatilities mainly in currencies. Adjusted for volatility, VaR was relatively unchanged quarter-on-quarter.

Let me now review Investing & Lending. We produced net revenues of $1.4 billion in the second quarter. Investing & Lending includes direct investing, investing we do through funds, as well as lending activities. These activities occur across a diversified set of asset classes, including both equity and debt. Equity securities generated net revenues of $462 million, primarily reflecting gains from private equity investments. This increase in fair value was driven by Company specific events and strong corporate performance. Also, we sold our remaining stake in ICBC during the quarter. The net gain over the quarter was a modest $7 million. Net revenues from debt securities and loans were $658 million, driven by Company specific events and interest income. Other revenues of $295 million were driven by the firm's consolidated investment entities.

Switching to Investment Management; we reported second quarter net revenues of $1.3 billion, roughly consistent with the first quarter. Management and other fees were $1.1 billion, up 4% sequentially. During the second quarter, assets under supervision decreased $13 billion to $955 billion, primarily reflecting net market depreciation in fixed income assets.

Now let me turn to expenses; compensation and benefits expense, which includes salaries, bonuses, amortization of prior year equity awards and other items, such as payroll taxes and benefits, was accrued at a compensation to net revenues ratio of 43%, which is consistent with the firm's accrual in the first quarter. Second quarter non-compensation expenses were $2.3 billion, 5% lower than the first quarter largely due to the sale of our reinsurance business. Our effective tax rate for the quarter was 27%, driven by earnings that were permanently reinvested abroad. Year-to-date, our effective tax rate was 30.4%.

On capital, we repurchased 10.5 million shares of common stock for a total cost of $1.6 billion during the quarter. Our basic shares outstanding were 468 million at the end of the second quarter, down close to 6% over the last four quarters. At the end of the second quarter, our estimated Basel 3 Tier 1 common ratio under the advanced approach was approximately 9.3% and reflects the final Basel 3 rules that were issued by the Federal Reserve on July 2.

Obviously we are still reviewing the final rule, but this is our best estimate subject to change depending on regulatory clarifications. Now, over the quarter we took a number of strategic actions to bolster our capital position. As you will recall, we announced the potential sale of a majority stake in our reinsurance business given the Basel 3 capital charges that we incurred and a 100% owner of the business.

We completed the sale of our reinsurance business in the second quarter. The sale improved our Basel 3 capital ratio by approximately 50 basis points and reduced the firm's balance sheet by $17 billion. This benefit was partially offset by implementation of the final Basel 3 rule set.

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

Regarding the leverage ratio, we received the NPR last week even if it is in the proposal stage it is hard to speculate on how it will ultimately be finalized. However, we have significantly reduced our leverage since 2007. Since then we reduced our reduced our assets by roughly 180 billion, while increasing our equity base by over 80%. As a result, we feel reasonably well-positioned for the new leverage requirements at both the holding company and the bank subsidiary. But once again, it is a proposal so we will work with the regulators over the coming months.

Effectively managing the Firm requires us to comply with a variety of different regulatory measures. Just as we have improved our Basel 3 capital ratio, we will have to continually adjust to any new regulations as they are finalized. As we have said in the past, a high level of risk-adjusted capital not only provides protection against tail events to all of our constituents, it also creates the foundation for capturing opportunities. When higher risk-adjusted capitalization we are better positioned to help our clients navigate an uncertain economic environment and we can provide them with risk capital where capacity is diminished. An essential part of our role is managers. On behalf of you our shareholders is to manage our capital effectively and efficiently in order to generate superior long-term returns.

Now in closing, we are cautiously optimistic about the outlook for the operating environment. Nevertheless, we remain vigilant regarding expenses and risks. Given the dynamic nature of the marketplace, it is natural for people to become somewhat short-term focused. However, everyone at Goldman Sachs remains keenly aware that our success will be measured over years as opposed to weeks or months. To that end, we are going to continue to invest in deepening and expanding our client franchise. Building relationships that will pass the test of time. We will continue to invest in our people, recruiting and retaining a group of professionals, who are committed to providing solutions to our clients and driving value for our shareholders.

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

Transcript Call Date 07/16/2013

Operator: Howard Chen, Credit Suisse.

Howard Chen - Credit Suisse: The more challenging conditions that you spoke to in the back half of the quarter with respect to client risk appetite and inventory management. I was hoping you just could comment how those difficult conditions persisted as we freebased it at new higher levels of U.S. benchmark rates or have they abated a bit?

Harvey M. Schwartz - CFO: So, I'd say we thus feel like they've abated a bit. I mean you see it in the day-to-day volatility and that merely is about I think the adjustments to people basically recalibrating to both somewhat wider credit spread environment, and obviously higher absolute interest rates, and you can see that obviously it's quite visible for example a movements in the 10 year. So, I think people are adjusting. What I would say is that it's now a very information centric environment and what I mean by that is people all of our clients going to be very keenly watching data, economic data, whether it's non-farm payrolls in the United States, GDP growth in Europe, Japan, China really trying to form their view because for a very long period of time, I think there was an expectation that if this unusual low rate environment would persist and to some extent people could build expectations around that and now that we might be entering a different regime, you'll see people probably respond more to data, but again it's hard – but I would say answer to your question the short way, which is it does feel like people have recalibrated at this stage. By the way some of it how it is, returning to kind of normal interest rate levels, it feels good in some respects, in some respect economic activity.

Howard Chen - Credit Suisse: That's where I was hoping to go next. It feels like we've been talking for a couple of years now about this world of client liquidity that's out there and the near zero interest rates creating more of a one way market in certain clusters like credit and mortgages. Have we seen enough of a move in your mind to see more two-way flow in some of these businesses that we've been hoping for?

Harvey M. Schwartz - CFO: I think it's too early to tell, which is why I highlighted the sensitivity to economic data. People are going to form their impressions over the next several months and certainly everybody would be watching. Clients are basically sitting on the edge of their seat for every communique out of the Federal Reserve, so there will be sensitivity. But it feels like we're tracking more back to a period of normal say.

Howard Chen - Credit Suisse: Then I was hoping you could just update us on all of what the firm experienced as we progressed through Phase 2 of U.S. mandatory clearing, not only in all of what you're doing with respect to centralized clearing efforts, but also maybe just broad health, liquidity, bid out spreads of the over the counter markets as we went through that transition?

Harvey M. Schwartz - CFO: Obviously from a Goldman Sachs perspective and just as an industry participant, we're thrilled to see clearing really coming now. As we talked about in the last call, while it's taken a while and people could be frustrating at the pace of things, the reality is that I think the regulators and market participants have done really an excellent job of the progression of Phase 1 and Phase 2. As you saw, there were lots of concerns in the marketplace and for instances and purposes it went through without any hiccups. I think as it relates to sort of any material moves in bid/ask spreads or volumes there are no material change there and it is too early for that. I think to the extent of which clearing has a long-term impact to market structure, it will happen over many months and years like we've seen in other marketplaces.

Howard Chen - Credit Suisse: And then just finally from me. Thanks for the color on Basel 3 preparation, but just given the proactive steps you took with reinsurance business and ICBC stakes I was hoping you could just update us on your current Basel 3 RWA breakdown and just where you are on passive and active mitigation?

Harvey M. Schwartz - CFO: It has been a while since we updated this audience on risk-weighted assets so I just want to walk through this a little bit carefully. The last time we talked to you last year we gave you a number of $728 billion in terms of risk-weighted assets. That number is now $600 billion. I am going to break it down and then I want to come back and reference the $728 billion I just mentioned. So, the $600 billion, our best estimate given the final rule, is $180 billion for market risk-weighted assets, $340 billion for credits, $80 billion for operational. Now you can obviously do the math, but that translate into $56 billion of Tier 1 common. The reason why I wanted to drive some attention to the comparison of the 600 to the 728 is because the way the final rules came out there were certain deductions that we were previously assuming would be risk-weighted assets which actually became deduction to capital. And so the 600 versus the 728 is not really apples-to-apples. The best way to think about our current position under the final rules is the 9.3%, which obviously as I said during my prepared remarks is 20 basis points within range of the buffer. In terms of passive you should be thinking about roughly $35 billion in risk-weighted assets that will roll-off between now and the end of 2015.

Operator: Roger Freeman, Barclays.

Roger Freeman - Barclays: I guess just maybe bouncing-off couple of things Howard was asking. So, the market quality in rates and credit, would you characterize that as more normalized now in July. It sounds like in June that lack of sort of dealer liquidity provision and it may be contributed somewhat to the gapping and spreads and I am just wondering if that’s kind of part of the new world we live in now with the new regulatory environment where asset prices move and moves and dealers are less to sort of take positional risk?

Harvey M. Schwartz - CFO: So, I think I would describe it more as things are episodic, in other words, I don’t think there is a massive transition that's occurred in terms of four weeks ago to today. Clearly, when you get big moves in interest rates, all market participants are going to adjust their risk profiles and you will see flows, for example, out of fixed income asset into other assets. I think that – as I said I think it’s quite normal for us to see this and people are really in a position of reassessing their risk profile. But in terms of Goldman Sachs, I can’t speak for the rest of the street Goldman Sachs is we feel quite well positioned in terms of our ability to make capital for our clients.

Roger Freeman - Barclays: In I&L, just wondering if you can – you've talked a lot about this in the past, but just help us think about maybe the average age of maybe buckets within them. I'm trying to – you've been coming in ahead of expectations, obviously it's the tough one to forecast, but I think you a lot of the public private firms probably have aged portfolios and there is a realization process going on, and wondering if you can kind of help us think about, kind of really where you're at in that cycle?

Harvey M. Schwartz - CFO: As we've guided everyone in the past, generally speaking for the equity portfolio, reasonable guide could be the MSCI. Obviously there is divergence in this period. As we've always told people, it's really just a guide. There are going to be periods where idiosyncratically there is elements of the portfolio where we underperform, there is going to be periods where we over perform, obviously relative to that kind of benchmark in this quarter we outperformed, and it really is a combination of things like debt repayments and adjustments, obviously interest income is in there, again idiosyncratic components of the portfolio. In terms of aging I didn't bring specific numbers with me Roger, but the private equity portfolio obviously tend to have the longer turn frame on it relative to the debt portfolio, but we can follow up with you and give you more details, if that's helpful.

Roger Freeman - Barclays: Maybe lastly just, liquidity levels continue to run high and again, it's kind of early days and thinking about leverage ratios and how some of those liquidity assets get sort of calculate into that. Does that change your thinking about how much liquidity you want to run with?

Harvey M. Schwartz - CFO: We're always going to run with an amount of liquidity which is really designed to protect the firm and at the same time put us in a position where we can provide capital and liquidity to our clients. With respect to the sort of metrics out there, things like the liquidity coverage ratio and we feel fairly comfortable with respect to things like that. I don't know if you are going there, but in terms of – because you mentioned leverage ratio, the only comment I'd say is that we are never going to modulate our liquidity down because of a given metric that's in the marketplace even if an incentive exists for that.

Operator: Michael Carrier, Bank of America Merrill Lynch.

Michael Carrier - Bank of America Merrill Lynch: First question, maybe just back on the leverage ratio, some of your peers have put out some guidance in terms of kind of a first stake. If we look at Goldman and what you have done on the Tier 1 common ratio, there is obviously some mitigation that can be done. So, if you are below that 5%, how do you guys think about achieving that whether it is through areas of asset mitigation that won't have significant impact on the earnings power of Goldman or raising preferreds or just – what are the levers that you guys have to get there?

Harvey M. Schwartz - CFO: Again, this is a rule that just came out. It is in proposal form. As I said, our first assessment is we are very comfortable with where we are. Now, again, that probably shouldn't be a surprise to anyone given all the work that's been done on the balance sheet since 2007, with an 80% increase in shareholder equity and a decrease of $180 million in the balance sheet. As I said, that's the kind of metric that we should reasonably well-positioned for. Having said that, it is in proposal form, so we will have to see the final rule, and the only reason I am not being more specific about numbers at this stage is team really hasn't had a time to go through the kind of diligence that we would normally want them to. But as I said, first read, we feel comfortable, let's see how the final rule goes. We'll work with the regulators.

Michael Carrier - Bank of America Merrill Lynch: Then, on the fixed side of business, there is a lot of, I'd say, uncertainty or debate on what the outlook is, just given higher rates potentially a decline on the down-rating side and then fund outflows in certain products. On the flip side though, you basically have market growth, and then if central banks are less or backing out and are not as intervening in the markets, it seems like volatility levels, particularly in rates and FX, could resume to more normalized levels. So, when you look at that the longer term outlook of FICC, it doesn't seem as if it’s that simple, that rising rates should be more negative to the business. But just wanted to get your take on when you think about the headwinds versus the potential for a more normalized market environment in some of the product areas, what could we potentially see over the next couple of years?

Harvey M. Schwartz - CFO: It's a good question, but obviously exceptionally difficult to answer. Time will tell on that, and we as a firm have had to navigate multiple rate regimes. If you just think about the rate regimes that we've experienced since 2000 and the volatility associated with that, and not to suggest we haven't been in an unprecedented period of sort of globally coordinated declining rates. But I do think that to extent of which rates are a proxy for thinking about the fixed income business from a forward view, I think it really depends on what the driver is. I think even though it seems exceptionally unlikely, if rate increases were due to things like inflation, then I think it's a different scenario than if it’s, as I said, kind of a returning to a normal world of more steady economic growth. I think that's a reasonably attractive opportunity set, not just for FICC potentially, but obviously across the entire firm. That's what we're rooting for. Now, in terms of strategically positioning the business, and we benefit from the fact that it’s diversified, we can interact with our clients across the full suite of their interest, whether it's currencies, mortgages, interest rates, and we have the global footprint required to do that. So, in a quarter like this where Asia becomes particularly interesting, we can deliver for our clients, because we're positioned and we're strategically connected to do that.

Michael Carrier - Bank of America Merrill Lynch: Then just finally, just on the expenses, I think you mentioned that non-comp impacted on the reinsurance business. On the compensation side, anything it just seems like the pick-up in activity you get some – a higher – competitive environment gets a little bit tougher, just any update on that front. Then just on the tax outlook, when you said the earnings permanently being I think directed outside, is there something that still need to be more like ongoing in terms of the tax rate or was this more of a quarterly benefit?

Harvey M. Schwartz - CFO: So, as it relates to the tax rate if you just think of this as a quarterly benefit. The war for talent, it's something we do every day. I would say that there is nothing that we see in terms of a shift. Goldman Sachs people are always in high demand and our competitors are always looking to take them over to their firms. I will say over the past several months, we've always felt like we're well-positioned to recruit, we'll say it's felt like we've had some recruiting tailwinds this year, whether it is sustainable, we'll see.

Operator: Betsy Graseck, Morgan Stanley.

Betsy Graseck - Morgan Stanley: Couple of questions. One, just on the leverage ratio when you say you are comfortable, what's your definition of comfortable?

Harvey M. Schwartz - CFO: Comfortable. I am not trying to be cute with you. Look, it has just come out. Our team has looked at it. Our early read is all the things we've done in the balance sheet over the past several years have left us reasonably well positioned. And so I know that perhaps you'd like me to get more specific into the math, but at this stage I just want to give the team the final time to really dot the i's and cross the t's. We think we can manage without any major adjustments certainly.

Betsy Graseck - Morgan Stanley: Okay, just to get by year end '18 to get to the 5% and 6%, is that –?

Harvey M. Schwartz - CFO: Sorry, sorry by comfortable I don't mean that timeframe. But again I want everyone to really know this is a proposed rule so let's see how the dialog evolves with the regulators.

Betsy Graseck - Morgan Stanley: On the RWA walkthrough which was helpful. I guess I am wondering that you mentioned the 56 billion on the Common Tier 1 and that there were incremental deducts relative to what was in the proposed rule. So, could you help us understand what you think you can do to mitigate those deducts going forward?

Harvey M. Schwartz - CFO: Well, right now as it relates to the ratio where we are pretty comfortable. As we stated before we plan to run with the 100 basis points buffer and putting us in range of 20 basis points of that given the incredibly long glide path to comply till 2019, we feel pretty comfortable. One thing I do -- you didn't ask specifically about this, but one thing I do want to get people sense for is we talked about this 100 basis point buffer as an – so that we could give people an estimate of where we thought we would ultimately land, of course that was operating under a proposed set of rules not finalized. So, the way we typically work with metrics at Goldman Sachs is we introduce our own metrics for example is we'll work with them, we'll monitor them, we'll see how they move. So, we're going to do the same with this final Basel 3 rule now that we have it, and so in that sense we feel quite comfortable. Now in terms of the specific redemptions and mostly related to financial institutions and as a specific deduction and we can get into this offline if you'd like, but it relates to investments and funds and other things on balance sheet. Now it happens to be the case that, that sort of coincidentally runs parallel with sort of mitigating actions that we're taking under what we think the Volcker Rule is going to be when finalized. So, we feel pretty good about that too.

Betsy Graseck - Morgan Stanley: I was just wondering what you -- what optionality you have to reduce those deducts? And it sounds like there is some and you'll work on it and you'll address it as it happens, is that fair?

Harvey M. Schwartz - CFO: It's always been the case and we'd like to build it into the muscle memory of the firm that everyone knows we're going to have to adapt. I think if you look at what we've done over the past 18 months as it relates to the Basel 3 ratio and that will be of the final rule we can really discuss with you in clarity, which is nice. I feel very good about our team's ability to continue to make progress.

Betsy Graseck - Morgan Stanley: On the tax rate, you indicated in the press release and on the call that you made elections to permanently reinvest some earnings overseas, does that imply a tax rate going forward that's different from where it has been in the past, the first half was 30%, is that what we should be using going forward?

Harvey M. Schwartz - CFO: I answered that question a second ago, but it seems you might have missed it. You should just think of it as a one-time event for this quarter.

Betsy Graseck - Morgan Stanley: Then lastly on the reinsurance business. Did you go through how that's going to be impacting – you indicated the capital impact, but I'm just wondering is there more to come with buybacks since it's positive for your Basel ratios? Did you do everything with the buybacks that you were going to do this quarter with the reinsurance business? The reinsurance business changed freed up capital. Did you finish through what you wanted to do with buybacks relative to that this quarter or is there more to come in the four quarters?

Harvey M. Schwartz - CFO: I think I understand the question, but if I don't you should correct me. We don't think about the capital management necessarily as being specifically linked to one individual asset disposition, so it's a much longer timeframe in terms of how we think about the capital management. So an easier way for me to say that would have been based on the quarter that we just went through, if we had ended up in the reinsurance business in the third quarter you would have seen the same repurchase activity. Am I getting to your question, Betsy?

Betsy Graseck - Morgan Stanley: Yes, I got it. So there is still…

Harvey M. Schwartz - CFO: Now actually, on the reinsurance business, again, I would say it was a business that we liked in Goldman Sachs, it didn't make sense obviously under the new rules. So we're in a position where quite frankly a win-win for us and our clients in the investing division because we're able to take the actions that we did.

Operator: Brennan Hawken, UBS.

Brennan Hawken - UBS: So, follow-up on Mike's question. If sort of the market is a bit more data driven does that mean that you guys would expect that the rates business should remain strong as clients continue to adjust and reposition based upon incremental data points coming out?

Harvey M. Schwartz - CFO: Very difficult to tell. And you know we don't run the business week-to-week in terms of how the market is responding. Obviously, we stay very focused on the risk dynamics in the marketplace and when we go through the risk committee and obviously in the trenches. But strategically the way you have to interact with clients whether it is, for example, long-term investors that are managing pension obligations or insurance companies and the flip side those might be even more market-sensitive to our total return business. So, we just have to make sure that we stayed very, very focused on our clients and it is a good opportunity because it is a content differentiating world right now and so we have an opportunity to do that, we just have to deliver.

Brennan Hawken - UBS: Then I guess when you think about in that context thinking about your business and how you guys are approaching it given what you are seeing. We are seeing some slowing growth out of China, strengthening dollar how do you think about positioning of the commodities business in that context and while certainly it might not change strategic perceptions of that business maybe does it have an impact on your thinking from a tactical perspective?

Harvey M. Schwartz - CFO: I think exactly to say it literally had zero impact on how we think about the data and management of the commodity business and I emphasize that zero only because we run that business for the long term. We entered that business in 1981; it's been core to our clients and core to the entire integrated strategy of the Securities Division, which includes both fixed income and equities. So, those kinds of near-term adjustments in the marketplace super-relevant to the conversations that our people on the ground are having with their clients all around the globe, but not addicted to us in terms of how we think about our multi-decade commitment to the commodity business.

Brennan Hawken - UBS: No, sure. I just was curious about whether or not it might impact more short-term tactical decisions as far as capital allocations and the like.

Harvey M. Schwartz - CFO: No, the capital – we don't dial down the capital to the business. The client demand and the client activity levels will drive the capital needs that we provide.

Brennan Hawken - UBS: Then last one for me, it looks like there was some moderate issuance of some preferred this quarter. Did that have anything to do with the leverage ratio coming out or was that something else driving that issuance?

Harvey M. Schwartz - CFO: No, that was part of our long-term capital plan. We had no insight into the leverage ratio.

Brennan Hawken - UBS: Had to give one last parting shot for the leverage ratio there.

Harvey M. Schwartz - CFO: I like the persistence.

Operator: Kian Abouhossein, JPMorgan.

Kian Abouhossein - JP Morgan: The first question is regarding SEF platform, we have some clarity in respect to this initial SEF platform. Just wondering how you're preparing for this, how you are positioning yourself, can you give us a little bit of color in that respect?

Harvey M. Schwartz - CFO: So, we have a long history of adopting and participating in platform developments, obviously it goes all the way back to Tradeweb and we've both developed our own internal platforms and we've participated in external platforms. So, I don't think this represents any specific hurdles in terms of participating in that. I do think it will be quite interesting as trading moved over to Swap Execution Facilities later in the year or maybe at the beginning of next year, I think it'd be quite interesting to see the market dynamic around that, and particularly as we enter a phase of finalized rules how the business evolves.

Kian Abouhossein - JP Morgan: In terms of technological platform, is there anything that you're developing new, now that you have a bit more clarity in terms of technological platform? Is there anything you can add in respect to how you respond to that, how you try to differentiate to keep flows or gain new flows?

Harvey M. Schwartz - CFO: We've evolved, the way – and we've talked about this before. One of our competitive advantages, assuming we execute, is the fact that we have SecDB, which is our internally developed platform. It is a platform that we use across all of our businesses, whether you are trading currencies in Asia or you are trading stocks in the United States. So, that should give us some advantage in terms of how we position ourselves and our speed and our ability to adapt. But I think the early phase of this – maybe I'm wrong, but I think the early phase of this is somewhat similar to clearing, in that it's all about educating the clients, interface with the clients, and making sure that connectivity works for them, because it’s a big adjustment in terms of execution protocol for them. Then what we just have to do is, really the differentiating thing is the content and we just have to keep providing content.

Kian Abouhossein - JP Morgan: Just on securitization. We clearly heard from some of the banks that at the current level of interest rates production of mortgages could decline. Just wondering – and it could have a material impact. Just wondering since you are such a big securitization player, especially on mortgages just wondering how do you see that business developing assuming that yields do stay at a higher level?

Harvey M. Schwartz - CFO: You have a better view on – to competitors and their exposure to securitization. We've never really been big in securitization as it relates to sort of the new issue pipeline, for example, residential mortgages. Obviously, we've been a big participant over the past several years arguably to commit capital for clients moving secondary portfolios. For example, people de-risking out of Europe and connecting investors in the U.S. But I don't know necessarily that I would attribute any concern to higher interest rates for us as it relates to the securitization activity level. Now, that may translate into less activity for the entire industry. And it is really I think to some degree a bit of how it evolves over the next six months in terms of people's expectations. Again if it is a particular volatile period, it could have a different impact. If we settle in and people feel certain confidence around economic activity it could clearly translate quite differently.

Kian Abouhossein - JP Morgan: The last question is on the securitization consultation document by Basel that came out quite a while ago now, six months ago. I am sure you had the chance to look through it and just wondering if this could have a material impact on your risk-weighted assets changes that you just outlined. Assuming that it comes as discussed in the paper.

Harvey M. Schwartz - CFO: So, I don't have any specific comments as it relates to the details in the paper. What I would say is I think the really important takeaway as it relates to all of these regulatory processes is it's all about an ability to adapt, all firms are going to operate in the same rule set. And so, historically we've done a pretty good job of adapting. We just need to continue adapting. And one of the thing I've said is and I would like to think of a bit of as an operating principal is there is a very, very low premium on trying to predict the outcome of rules, but a huge, huge premium on adapting once you see them. Predicting rules and responding can be incredibly costly, you can get wildly misdirected and you lose track to your clients. Responding to rules, once they are finalized that really is the differentiating factor and we have to execute.

Operator: Matt O'Connor, Deutsche Bank.

Matthew O'Connor - Deutsche Bank: A follow-up question to your comment that the pipelines are relatively stable versus end of last quarter, and I know it's early in the quarter here, but just any thoughts in terms of a change in the mix. I think a lot of people view that if rates increased like the way they did, that then the debt issuance will dry up. I mean, as we know that's not always the case, but has there been any change in the mix of the pipeline maybe even within the debt business and mix change in terms of like away from high-yield towards certain things.

Harvey M. Schwartz - CFO: As I said in the opening, the backlog was basically unchanged Q over Q from first quarter to second quarter. Just to give you a little bit of color. It was down a very small amount advisory at the end of the quarter and it was up in underwriting. In terms of where it is, it's too early in the quarter to see how things will evolve, so I wouldn't take any material takeaways from any changes over the past two weeks.

Matthew O'Connor - Deutsche Bank: Then the sale of the reinsurance business was there a gain or loss?

Harvey M. Schwartz - CFO: So there was nothing material with the sale of the reinsurance business. Just to give people some context on that business. Obviously I've gone through a lot of detail already, but interesting question. It represented just under 2% of last year's pre-tax income.

Matthew O'Connor - Deutsche Bank: Then just separately, if we back out some of the revenues from the reinsurance business, you just have a stub piece this quarter, if you backed out all that. It seems like the equity derivative business is doing pretty well, and we're seeing that with some other banks as well. Just wondering, obviously, volatility have been low – blowed out a little bit, sometimes that can be good, sometimes not, just what's driving some of the good trends in the equity derivative area?

Harvey M. Schwartz - CFO: So, as we mentioned last year second quarter 2012, there was $259 million from revenues in the reinsurance business, obviously significantly less, $80 million plus in this quarter. So when you adjust after that, you're right, strong performance in the equity business, part of that's equity derivatives. I will say there was – I'd say two other drivers, one is there was some good opportunities to provide our clients with capital around index rebouncings and other areas where we could really lean into the strength of client relationships, technology, and capital committing in a way that I think we are just quite well positioned, obviously, as I noted better performance in the equity-derivative business broadly. But there is a little bit of – everybody keeps talking about the rotation out of fixed income into equities and who knows how that will play out over the next decade. But certainly a lot of activity in equity space, particularly in Asia.

Operator: James Mitchell, Buckingham Research.

James Mitchell - Buckingham Research: On the central clearing, just a follow-up. Have you done any work, and I know it is early days, in terms of what the potential capital benefits could be in moving to more of the business to the central clearing house and what that may mean also with respect, if anything, benefit with respect to the leverage ratio as it relates to derivatives?

Harvey M. Schwartz - CFO: We haven't spent – it is early days, so we haven't spent a huge amount of time in terms of the capital benefits. As these leverage ratios unfold, one of the things that I am sure will get a lot of debate in the proposal process is the extent to which custody of client assets. Effectively, people just putting money in a safe or holding collateral, how that plays out in a leverage ratio. But we haven't done a huge amount of work as it relates to the capital benefits at this stage.

James Mitchell - Buckingham Research: I think it is fair to assume it should have some of that benefit, but you just haven't really put your arms around it?

Harvey M. Schwartz - CFO: Yeah. We would expect over a long-term capital benefit, but I think more importantly, we've always been quite conservative we feel relative to the broad marketplace as it relates to the extension of credit. The extent to which more activities cleared, obviously, that levels the playing field and remove the ability of, call it, a third or a fourth quartile more marginal competitor in a specific space to compete on terms. They have to compete on content and execution. So, again, early days; not seeing any tailwinds or headwinds at this stage.

James Mitchell - Buckingham Research: One quick question on the asset management business. You guys have seen pretty consistent outflows in alternatives last year or so. What's driving –I mean, if you look at the industry, you've seen pretty much inflows in alternatives. Has it just been a performance or is it a mix issue, how do we think about the alternative space for you guys?

Harvey M. Schwartz - CFO: So, we are very focused on it. In terms of the trends, obviously, it's been a very important component of our business, nothing specific there. The only thing I would say is that obviously as we previously announced in anticipation of adjusting for that component of local rule, which we think will be in the finalized rule, we have been removing our own capital.

James Mitchell - Buckingham Research: And that would show-up as outflows?

Harvey M. Schwartz - CFO: No, not as third party.

Operator: Guy Moszkowski, Autonomous.

Guy Moszkowski - Autonomous: This is slightly different kind of the question that was asked a minute ago, on OTC derivatives. I mean, as we transition to a regime of much more of what used to be OTC being centrally cleared, I mean, is it the right way to think about the existing OTC derivatives portfolio as essentially being a run-off portfolio in a way, and therefore sort of passive relief?

Harvey M. Schwartz - CFO: No, I am not sure – I want to make sure I understand your question clearly. The thing is that, for example, that we think we are in (indiscernible) businesses, for example, pre-crisis businesses like correlation books and things like that, which just aren't relative to – aren't relevant to our clients today and are quite capital consumptive under the new rule sets. So, as it relates to clearing, given the number of instruments we have cleared now, I don't think the two really overlap. I do think that – I'll speculate a little bit here. I do think that as these rules get finalized and we're only living with really clearing for a couple of months now, and then when we come into Swap Execution Facilities, the venture – very interesting to see the impact that has on client activity, which as best we can tell was a little dampened for the industry, given the uncertainty around the rule sets. So, as we get certainty, it could be a little bit of a tailwind for volumes.

Guy Moszkowski - Autonomous: The question really was sort of around, as you think about for example leverage ratio and I'll stipulate to the fact that all my numbers show that you guys are pretty much where you need to be. But as you think about ways of mitigating toward – down to where you might want to be if you weren't where you wanted to be, and the add back to the denominator of that ratio include a lot of off balance sheet OTC derivative driven assets. Won't those be coming down quite significantly, naturally over the next several years if in fact the regulatory shift towards centrally clear derivatives really take hold, or am I thinking about that the wrong way?

Harvey M. Schwartz - CFO: No, I think you're right, the extent to which the (indiscernible) leads to depending on the metric that we're observing, reduced notionals or other things, then that's a natural tailwind for the industry. I think more importantly one thing – look, we're all subject to having sort of knee-jerk reactions to these proposed rules when they come out. I won't say the regulators consistently at least so far have been very thoughtful about the glide path. So, the adjustment process if we needed to make one the way we would approach that is the way we've approached all the other rules that we've lived with as they come into place which is we evaluate the rule, we deploy tools to our people and in that context of delivering to our clients and at the same time maximizing the return to the shareholders we'd adjust. So, that's how we would handle it. But I think the nuance question around whether clearing is a tailwind to reduce I think the answer is yes on that, but I am not (keeping the weeds) on that specific issue. But we will get back to you on it.

Guy Moszkowski - Autonomous: Just a couple of quick housekeeping type questions. Have you spoken to the RWA that was associated with the reinsurance business?

Harvey M. Schwartz - CFO: No. And the reason why I didn't do that is not because I am not happy to have the conversation, but the way the sale of the reinsurance business work, it actually is – it is a bit of an adjustment to equity and it is also an adjustment to RWAs. So, I think the best way to frame it for all of you is just to say the net outcome is 50 basis points.

Guy Moszkowski - Autonomous: Then the final one would be you talked about your 9.3% estimated Core Tier 1 under Basel 3 under the advanced approach. Can you tell us what it would be under the standardized approach?

Harvey M. Schwartz - CFO: So, with respect to the standardized approach we are still finalizing the numbers there but our first review is we are comfortably over the minimum requirement. But at this stage sort of the same with the leverage ratio I want the team to really finalize the numbers before I cross the I and dot the t's on that. So, we're comfortably in access.

Operator: Mike Mayo, CLSA.

Michael Mayo - CLSA: You mentioned some inventory management in June, can you give us some sense for what sort of marks were involved?

Harvey M. Schwartz - CFO: No, there is nothing specific to comment on that, I was just trying to give you a little bit of extra color on how the quarter wrapped up, but I'm sure it wasn't surprising to anyone given the volatility in markets.

Michael Mayo - CLSA: Can you give us some sense of breakdown between the U.S. and non-U.S. what sort of revenue growth you're seeing and are you still as fully committed to the BRIC strategy as you've always been?

Harvey M. Schwartz - CFO: So, no change in commitment and the mix hasn't changed significantly, it's down a little bit in the Americas up a little bit in Europe, but there are no material changes. But the core part of your question, which I think is the most important part is in terms of the strategic approach of the firm, very, very committed very focused to those markets.

Michael Mayo - CLSA: I think the word of the day is comfortable and so I'll ask probably prior the fifth or sixth or seventh question on the leverage ratio, but it just seems -- you're comfortable with where you are with I think what I hear you saying is trust us we'll be there, on the other hand, you're not disclosing a number like your peers have done and perhaps other peers will do. So, on a disclosure basis, you're behind peers. I'm just trying to reconcile the two thoughts?

Harvey M. Schwartz - CFO: When we look at an NPRs, our approach might be a little bit different than you've seen from the peers. I suspect you could have said the same thing about Basel 3 process where I think you probably felt the same way in terms of being behind peers in terms of the level of disclosure. Look, one of the reasons that is, is because if we give you $728 billion and we updated quarter to quarter to quarter and then it dropped to $600 billion, I'm not sure we're giving you a lot of value in that. I think there is much more value in sharing the process with you. Now, when we have real confidence in the exact number then we'd be fine to share with you, but as I said may be comfortable is the word of the day, but we're comfortable.

Michael Mayo - CLSA: What can you guess, give us a sense of it's above some number and give us that number?

Harvey M. Schwartz - CFO: You're looking for shades of gray in comfortable?

Michael Mayo - CLSA: Yes.

Harvey M. Schwartz - CFO: Pretty comfortable.

Michael Mayo - CLSA: I'll ask a follow-up on that because it goes, someone said by 2018 you'll get there or by 2015 or you'll pass the said stress test, or will you able to buy back shares as quickly as you've done? That's really what it comes down to I think.

Harvey M. Schwartz - CFO: I wouldn't extrapolate too information from a proposed rule set with respect to – 2018 is miles away, if that gives you some context to how we're thinking about our initial review of the ratio. I'm not trying to be flipping with you. When we really finalize the numbers I'm happy to come back to on it.

Operator: Fiona Swaffield, RBC Capital Markets.

Fiona Swaffield - RBC: Sorry to come back to the 9.3% Basel 3, but I was trying to understand the movement in the quarter, I think you mentioned some offsets to the 50 basis points, so it was really I thought ICBC would also being positive and you made a little bit of money over and above the buybacks. So could you explain where it was the rules got tighter versus your original expectations, and the secondarily it was just generally there seems to be a lots of difficult discussion about wholesale funding particularly secured. Wondered if you could discuss whether you are doing anything to change your weighted average maturity or what your kind of view on wholesale funding area.

Harvey M. Schwartz - CFO: So, with respect to the first there always going to be pluses and minuses when you get a final rule set in terms of things that impact your ratio but the reality is that I think the key driver here, and we are happy to spend more time with you offline, is what's referred to as the financial institutions deduction and as I said before it is a deduction from capital and relates to both investments in funds and also financial institution now set that we hold on balance sheet as part of our liquidity provision to clients. So, we are happy to walk you through that in more detail. The rest of it is kind of pluses and minuses back and forth.

Fiona Swaffield - RBC: So, just to follow-up is the $600 billion number that you gave for Basel 3 has that been relatively consistent, excluding the insurance kind of noise over the last couple of quarters?

Harvey M. Schwartz - CFO: Well, the one reason why I tried to draw the distinction between you brought out in the fourth quarter of last year the 728 is just the change in the rule set. So, obviously there is passive things that occurred, there are incremental capital built up during the quarter but I think the primary take away should be the headline number of 9.3%. And now that we have the final rule, we will keep you updated with respect to how the RWAs move.

Operator: Douglas Sipkin, Susquehanna.

Douglas Sipkin - Susquehanna: Just wanted to drilldown actually on some of the operations, specifically debt. Just curious for your perspective I think it was touched on early, I mean, what do you guys think if rates start to move up. Obviously, debt underwriting has been a real nice area for you guys, my first question. And then secondly it does look like within that you guys are maybe outpunching I'd be curious to hear where you think you are gaining some market share either by product or geography with respect to debt underwriting?

Harvey M. Schwartz - CFO: So, in terms of the recalibration of interest rates, I think very difficult to predict. Near-term, what impact that has in terms of the debt markets appetite from your issues and issuer's ability to or desire to pull the trigger on a particular transaction. I will say that I think one of the most frequently asked questions we got at the end of the fourth quarter was the ability of the debt performance to continue and it was the same question at the end of the first quarter. So, obviously we'll see how things unfold. With respect to how we position the business, I listed off some of the transactions that we executed during the quarter and really leverage financed was a significant driver and this is all about, again staying extremely focused on our clients. Particularly in our Investing Banking franchise where we're working with CFOs and CEOs and how they think about their balance sheets or how they think strategically about merger activity. But again, the core message here is we're less focused on the quarter activity and much more just focused on the client long-term.

Operator: Christopher Wheeler, Mediobanca.

Christopher Wheeler - Mediobanca: Perhaps I could go back to leverage ratio without actually asking direct figure -- question about that, but it was really about the other components of your Tier 1 capital clearly apart from your core Tier 1 you have $7.3 billion now of preferred stock and I think about $2 billion at the end of the last quarter in junior subordinated debt. I am trying to look at my head around how much of that is Basel 3 compliance and whether or not any of that is going to have to be replaced as you go through the amortization, which obviously is important in terms of the leverage ratio. Also perhaps whether you've already considered part of your efforts to improve the leverage ratio, not improve it, but to reach the number is to actually start to issue some of this additional Tier 1 capital, which is going to be compliant with (Basel) and whether the regulations have given you any clue yet – your regulator, as to what exactly the characteristics of that new debt would have to be?

Harvey M. Schwartz - CFO: No, we don't have any specific insights in terms of any of the new debt proposals that you would have seen. As far as observations about the capital structure, obviously preferreds are fine. Trust preferreds are being looked at, but we'll circle back to you with respect to, but there is no change in anything as it relates to capital planning. By the way, I would say that with respect to how we're thinking about share repurchase too, no changes with respect to capital planning as a result of any of the finalized or proposed rules that we see in the marketplace.

Christopher Wheeler - Mediobanca: Have you looked at all what the cost of boosting your Tier 1 might be because clearly that's an issue a lot of banks are looking at certainly in the European markets at the moment?

Harvey M. Schwartz - CFO: We evaluate the cost all the time, but it's not a question of cost so much, it is a question about basically positioning the firm, to run it conservatively and position it for clients. So, I think if you were on a discussion with our treasury team, and myself talking about how we should think about cost at the margin, we're much more concerned about the stability of the capital structure and less about cost.

Operator: Matt Burnell, Wells Fargo.

Matthew Burnell - Wells Fargo: Just a couple of quickies I think. Your long-term unsecured debt, at least according to the press release is down roughly $5 billion quarter-over-quarter. How are you thinking about debt levels going forward and have you changed your thinking at all on OLA and how that will affect your debt balance going forward.

Harvey M. Schwartz - CFO: Orderly Liquidation Authority, just for everyone dialing in, obviously, any rules that conceptually is designed to create order in principal don't have any issues with. We haven't seen the detail on the weeds on that and it gets back to what I said earlier. We are not going to adjust the capital structure of the firm based on a discussion of where we kind of guess things would come out that's not the way we are going to think about or manage the capital structure. So, no changes now, that's best we can tell. Again these are rolling discussion, so we don't have details so it is best we can tell given the amount of debt we have at the Hold Co one might say that we are reasonably well positioned. But again really big caveat on that, we haven't seen any details.

Matthew Burnell - Wells Fargo: Let me come at the same question from a different direction. Are your capital markets team and debt underwriting looking positively at that idea or are they of the same opinion?

Harvey M. Schwartz - CFO: I think we need more details. We've seen a lot of views in the marketplace.

Matthew Burnell - Wells Fargo: Let me switch the question to activity levels across your broad geographic groups Europe, Asia, U.S./North America were there any meaningful improvements in activity levels maybe outside the U.S. this quarter that help the revenue side of things or were there any areas of particular weakness?

Harvey M. Schwartz - CFO: Well, certainly the activity levels in Japan. And when I say Japan I don't necessarily mean specifically Japan geographically, but activity that's driven around Japan. So, given the global nature of our clients one of the most important things that we need to do across the entire firm is to make sure that we connect geographically in a way to deliver content. So, it might be clients in Europe that are very focused on events in Japan same as the U.S. So, a lot of capturing that is making sure that the content mechanism works and the transmission mechanism works, and so I would say Japan was a driver certainly of increased activity but not just isolated to Japan that's knock on benefits.

Matthew Burnell - Wells Fargo: Would you characterize Europe as still being a little bit below Asia and the U.S. in terms of activity levels given the economic conditions there?

Harvey M. Schwartz - CFO: I think that's fair, I think there is more upside in Europe and I think there is more upside specifically and again this could play out over many years. I think there is more upside specifically for U.S. based firms like ourselves Goldman Sachs.

Operator: At this time, there are no further questions. Do you have any closing remarks?

Dane E. Holmes - IR: No, we'd like to thank everybody for dialing into the call. Obviously, if people have any questions, they should feel free to direct them to us in the Investor Relations department. Otherwise, enjoy the rest of your day and the week. Thanks.

Harvey M. Schwartz - CFO: Thanks, everyone.

Operator: Ladies and gentlemen, this concludes the Goldman Sachs second quarter 2013 earnings conference call. You may now disconnect.