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Company Name: Goldman SachsCompany Ticker: GS USDate: 2009-04-14Event Description: Q1 2009 Earnings CallMarket Cap: 65,679.82Current PX: 130.15YTD Change($): +45.76YTD Change(%): +54.224Bloomberg Estimates - EPSCurrent Quarter: 2.029Current Year: 8.162Bloomberg Estimates - SalesCurrent Quarter: 7566.273Current Year: 29953.364Page 1 of 12
Q1 2009 Earnings CallCompany Participants
•Dane Holmes, Head of Investor Relations•David A. Viniar, Executive Vice President and Chief Financial Officer
MANAGEMENT DISCUSSION SECTION
Operator
Good morning. My name is Gerald, and I will be your conference facilitator today. I would like to welcome everyoneto the Goldman Sachs first quarter 2009 earnings conference call. Thank you. Mr. Holmes, you may begin yourconference.
Dane Holmes, Head of Investor Relations
Good morning. This is Dane Holmes, Director Investor Relations at Goldman Sachs. Welcome to our first quarterearning conference call. Today's call may include forward-looking statements. These statements represent the firm'sbelief regarding future events that by their nature are uncertain and outside of the firm's control. Firm's actual resultsand financial condition may differ possibly materially from what is indicated in these forward-looking statements. Fordiscussion 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 the fiscal year ended November 2008. I would also direct you toread the forward-looking disclaimers in our quarterly earnings release particularly as it relates to our investmentbanking transaction backlog and you should also read the information on the calculation of non-GAAP financialmeasures that is posted on the Investor Relations portion of our website, www.gs.com. This audiocast is copyrightedmaterial of the Goldman Sachs Group, Inc. and may not be duplicated or rebroadcast without our consent. Our Chief Financial Officer, David Viniar, will review our results
David A. Viniar, Executive Vice President and Chief Financial Officer
Thank you, Dane I would like to thank all of you for listening this morning. I will give you an overview of our 2009results and take your questions. In light of the continued, challenging macroeconomic backdrop, I'm pleased to reportsolid first quarter results for Goldman Sachs. First quarter net revenues were $9.4 billion. Net earnings were $1.8billion and earnings per diluted share were 3.39. These results generated an annualized return on common equity of 14.43%. Before reviewing our first quarter results, let's briefly discuss the month of December. The difficult marketenvironment that we faced during the first quarter of 2008 continued into December with downward pressure on assetvalues, weak investment banking activity and lower equity volumes which more than offset continued strength in oursix franchise businesses. December net revenues were $183 million.Net earnings were negative $780 million and earnings per diluted share were negative $2.15. December is also anegatively impacted by $2.7 billion in fair value losses including approximately $1 billion in noninvestment gradeloans which included approximately $850 million for line Dell BIZELL, 625 million in our commercial real estateloans, approximately 525 million related to principal investment business and 538 million for corporate portfolio.December results included a CVA loss of more than $100 million as a result of a tightening of the firm's credit spreads.Compensation expense for December was comprised of salaries, severance and amortization of prior year's awards asnew accrual for discretion or compensation was included. Although the market environment had its challenges during
 
Company Name: Goldman SachsCompany Ticker: GS USDate: 2009-04-14Event Description: Q1 2009 Earnings CallMarket Cap: 65,679.82Current PX: 130.15YTD Change($): +45.76YTD Change(%): +54.224Bloomberg Estimates - EPSCurrent Quarter: 2.029Current Year: 8.162Bloomberg Estimates - SalesCurrent Quarter: 7566.273Current Year: 29953.364Page 2 of 12
the first quarter, our results demonstrate the breadth, resiliency and strength of our business model and franchise. Theresult for several of our businesses including mergers and acquisitions, equity underwriting, security services andprincipal investing reflect extremely difficult operating conditions. However, having establish Adie verse set of globalbusinesses, strong performance in other franchise businesses like rates, commodities, currencies, credit trading andasset management offset those negative pressures. Despite more than $2.5 million of fair value losses in the firstquarter, $2.2 billion in revenues and $300 million in additional expenses, we generated an annualized return oncommon equity of 14.3%. Our performance in the first quarter was also a byproduct of significantly altered competitivelandscape. Many of our traditional competitors retreated from the marketplace either due to financial distress, mergersor a shift in strategic priorities. Throughout this cyclical downturn, we have remained committed to serving our clientsas an adviser, financier, market maker, asset manager and co-investor. Our first quarter results demonstrate the benefitof this uninterrupted focus on client service.This was particularly evident in our multifaceted SIC business which posted quarterly revenues. The reduced levelsafter Vailable risk capital created more market share opportunities and attractive margins across most of our franchisebusinesses particularly in plain vanilla liquid products. In 2009, we have remained committed to actively managing risk and strengthening our conservative financial profile. As a result, our exposure to legacy risk positions, includingleveraged loans and residential commercial real estate continued to be at low levels relative to our capital base. Ourfinancial profile is further enhanced by the fact that we have no direct exposure to the consumer. At the end of the firstquarter, our capital ratios remained at robust levels with a tier 1 ratio on the basil 2 of 16% and tier 1 under basil 1 of 14.7%. Our strong level of capital provided prudent capital cushion to weather current conditions while maintaining ourability to be opportunistic. We have taken a similar approach to managing our liquidity profile. Our global core excesspool of liquidity reached record levels during the first quarter of 2009. Averaging $164 billion during the quarter. Asyou know, we're in the process of raising common equity. After the completion of the stress assessment if permitted byour supervisors and supported by the results of the stress assessment, we would like to use the private capital we areraising in addition to other resources to redeem all of the TARP capital. We never believed the investment of taxpayerfunds was intended to be permanent. Thus, we view it our duty to return the funds as long as we can do it withoutnegatively impacting our financial profile or ability to act as a central liquidity provider to the global Capital Markets.I'll now review each of our businesses. Investment banking produced net revenues of $823 million, down 20% from thefourth quarter.With a broad-based slowdown in global activity, our backlog declined during the first quarter. Within investmentbanking, first quarter advisory revenues were $527 million, down 8% from the fourth quarter. Goldman Sachs rankedfirst in completed A&M globally as we advised on a number of important transactions that closed in the first quarter.These include Gentech's $40 billion sell, Time Warner's $47 billion spinoff of Time Warner Cable and the acquisitionof UST. We are also adviser on a number of significant announced transactions, including Pfizer's $64 billionacquisition of Wyeth, Schering Plow's 64 billion sell to Merck and the sell to Vattenfall.First quarter underwriting revenues were down 36% sequentially. Equity underwriting revenues of $48 million weredown 82% from the fourth quarter reflecting very limited industrywide activity following continued instability of theglobal equity markets. Debt underwriting improved 33% to 248 million, given the resurgence in investment gradeissuance during the quarter. Let me now turn to trading and principal investment wis is comprised of SIC, equities andprincipal investments. Net revenues were $7.2 billion in the first quarter reflecting strength in client facilitation despitesignificant asset priced declines across our principal investment businesses. SIC net revenues were a record of $6.6billion in the first quarter representing 34% increase from the previous quarterly record of $4.9 billion in the thirdquarter of 2007. Our record SIC performance was principally driven by favorable competitive dynamics, widermargins, a shift to more plain vanilla liquid transactions and higher volatility which more than offset lower volumes.Net revenues in our rates and commodities businesses were up substantially in the first quarter reaching record levelsdue to strong customer flow in response to a macro environment characterized by coordinated monetary and fiscalactions by central banks. Credit also posted strong revenues due to increased trading of cash and other liquid creditproducts. Mortgage results improved sequentially but continued to be negatively impacted by losses within ourcommercial real estate portfolio which totaled approximately $800 million. Turning to equities, net revenues for thefirst quarter were $2 billion. Down 24% sequentially.
 
Company Name: Goldman SachsCompany Ticker: GS USDate: 2009-04-14Event Description: Q1 2009 Earnings CallMarket Cap: 65,679.82Current PX: 130.15YTD Change($): +45.76YTD Change(%): +54.224Bloomberg Estimates - EPSCurrent Quarter: 2.029Current Year: 8.162Bloomberg Estimates - SalesCurrent Quarter: 7566.273Current Year: 29953.364Page 3 of 12
Equities trading declined from robust fourth quarter due to lower customer volumes and less volatility across our cashtrading and derivatives businesses. Equities commissions were down 26% sequentially to $974 million reflecting aslowdown in client trading activity particularly outside of the United States. Turning to risk, average daily value at risk in the first quarter was $240 million, compared to $197 million for the fourth quarter. The increase was driven byhigher credit spread risk. Let me now review principal investments which produced negative net revenues of $1.4billion in the first quarter. Our corporate principal investing portfolio generated net losses of $621 million during thequarter due to further depreciation of global equity markets. Our real estate investing portfolio generated $640 millionin losses due to incremental valuation adjustments that incorporate deteriorating commercial real estate fundamentalsand higher cap rates. During the quarter, we extended our transfer restrictions for 80% of ICBC, demonstrating ourbelief in the long-term prospects for the company and the broader Chinese market. Although ICBC stock priceincreased modestly during the quarter, the extension of the transfer restrictions increased our liquidity discount andresulted in $151 million loss. In asset management security services, we reported first quarter net revenues of $1.5billion, down 17% from the fourth quarter. Asset management produced net revenues of $949 million, which wascomparable with the fourth quarter as assets under management remain fairly constant as $771 billion. We remain wellpositioned in asset management as we continue to possess one of the most diversified product platforms in the business.Security services produced net revenues of $503 million in the first quarter, down 30% sequentially due principally tolower customer balances. As we mentioned in the fourth quarter, we expected AUM across the hedge fund universe todecline in 2009 due to weaker hedge fund performance in redemptions.The reduction of AUM within our business was in line with the broader industry experience. Now let me turn toexpenses. In the first quarter, compensation and benefits expense which include salaries, discretionary compensation,amortization of prior year equity awards and other items such as payroll taxes, severance costs and benefits was $4.7billion, accrued at 50% of net revenues which is consistent with historical accrual levels and lower returnedenvironments. First quarter noncompensation expenses excluding those related to consolidated investments were down25% sequentially. The largest drivers of the decline were lower brokerage clearing and exchange fees and professionalfees. The increase in noncompensation expenses related to consolidated investments primarily reflect impairmentcharges of approximately $300 million related to real estate assets. Headcount at the end of the first quarter wasapproximately 28,000, down 7% from fiscal year end 2008. Our effective tax rate was approximately 31% for the firstquarter. While the global financial services industry continues to navigate through extremely difficult macroeconomicconditions, our competitive position has improved significantly over recent years. We have a leading global franchiseserving the world's most important corporations, financial institutions, governments and high net worth individuals. Weprovide our clients with a prod set of products on integrated basisWe have strong capital ratios, record levels of liquidity and a fair value balance sheet. And most importantly, we have aculture of teamwork, risk management and client service that has positioned Goldman Sachs to perform well in avariety of operating environments. Across many of our businesses, trading margins are robust and those willing andable to commit capital are earning even higher risk premiums particularly in plain vanilla businesses. Furthermore, theproduct and geographic diversity of our business provides Goldman Sachs with significant flexibility and a broadopportunity set. Given the challenging fundamental backdrop in the global economy, we continue to be cautious aboutthe near term outlook for our businesses. Nevertheless, we remain focused on our core strategy as an adviser, financier,asset manager, co-investor and market maker and believe this integrated model provides the ability to deliver strongreturns for our shareholders over the long term. With that, I'd like to thank you again for listening today and I'm nowhappy to answer your questions.
Q&A
Operator
And your first question comes from the line of guy moss cause ski with Merrill Lynch.
<Q>
: Good morning, David.
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