The Goldman Sachs Group, Inc. F4Q08 (Qtr End 11/28/08) Earnings Call Transcript

Dec.16.08 | About: Goldman Sachs (GS)

The Goldman Sachs Group, Inc. (NYSE:GS)

F4Q08 Earnings Call

December 16, 2008 10:00 am ET

Executives

Dane Holmes – Director, Investor Relations

David Viniar - Chief Financial Officer

Analysts

Guy Moszkowski - Merrill Lynch

Roger Freeman - Barclays Capital

Glenn Schorr - UBS

Meredith Whitney - Oppenheimer & Co.

Mike Mayo - Deutsche Bank

Patrick Pinschmidt - Merrill Lynch

James Mitchell - Buckingham Research

Ron Mandel - GIC

Richard Staite - Atlantic Equities

Operator

Good morning. My name is [Gerald] and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs first quarter 2008 earnings conference call. (Operator Instructions)

Mr. Holmes, you may begin your conference.

Dane Holmes

Good morning. This is Dane Holmes, Director of Investor Relations at Goldman Sachs. Welcome to our first quarter earnings conference call.

Today's call may include forward-looking statements. These statements represent the firm's belief regarding future events that by their nature are uncertain and outside of the firm's control. The firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm's future results, please see the description of risk factors in our current annual report on Form 10-K for our fiscal year end November, 2007.

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 on non-GAAP financial measures that is posted on the Investor Relations portion of our website at www.GS.com.

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

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

David Viniar

Thanks, Dane. I'd like to thank all of you for listening today and would also like to wish everyone happy holidays.

I'll give an overview of our fourth quarter and full year results, and then take your questions.

Full year net revenues for 2008 were $22.2 billion, net earnings were $2.3 billion, and earnings per diluted share were $4.47. These results generated a return on common equity of 4.9%. Book value per share was essentially flat at $98.68.

For the fourth quarter, net revenues were negative $1.6 billion, net earnings were negative $2.1 billion, and earnings per diluted share were negative $4.97.

Clearly, 2008 represented one of the most difficult operating environments in modern financial history and certainly the most challenging year since we became a public company. Asset price declines, volatility and illiquidity were unprecedented across both equity and credit markets.

In the first nine months of the year these stresses had a varied impact on our results and were largely offset by other revenues within our diversified business mix. However, the significant magnitude of the stresses and the fact that they occurred simultaneously negatively impacted fourth quarter results.

During the year, the MSCI was down 45%, with a 34% decline occurring during the fourth quarter alone. Certain high-quality leveraged loans decreased in value by more than 25 points during the quarter. Commercial real estate assets were under particular pressure, with the CMBX AA Index off by nearly 60%.

In the midst of this asset price pressure, the VIX increased over 150% during the fourth quarter, reaching an all-time high. In addition, rapid deleveraging by many market participants and continued supply/demand imbalances results in increasing illiquid markets across a broad spectrum of asset classes. As would be expected, the market environment had a negative impact on client activity and fee income for many of our businesses.

While our fourth quarter performance obviously did not meet our expectations, it needs to be placed in context.

First, the vast majority of our balance sheet is subject to fair value accounting. The stresses during 2008 and in the fourth quarter are reflected in our earnings, so it's appropriate to consider what these market levels implied at the end of the quarter. Credit indices, which represent an important input to our fair value process, can be illustrative of the stress at the end of the quarter. The U.S. Investment Grade Index was implying that roughly 1 in 5 investment grade issuers would default over the next five years. Within the mortgage space, the CMBX Index of AAA commercial mortgage-backed securities was implying that almost 60% of the underlying mortgage loans would default over their term.

Second, many of our marks during the quarter came from investing businesses. We have a strong track record as an investor. These positions are the product of long-term investment decisions. We entered into these positions with a full understanding of the fair value implications and with a focus on meeting our clients' needs for co-investment and generating long-term returns for our investors and shareholders.

Finally, it is important to recognize that we generated net profits of over $2.3 billion in 2008 despite this environment. Furthermore, given that this included significant losses related to asset price declines, you can see the true earnings power of the Goldman Sachs franchise throughout the year. Businesses such as M&A, rates, currencies, commodities, equities and asset management performed exceptionally well, and clients continue to look to Goldman Sachs for advice, innovation, and execution and our client franchise will continue to drive opportunities for the firm into 2009.

During the quarter, the firm took a number of steps to fortify our balance sheet and position it. Our total balance sheet declined by almost 20%, to $885 billion, and our Tier 1 ratio remains robust at 15.6%. Our global access pool of liquidity averaged over $110 billion during the quarter. We continued to reduce concentrated risk positions, including leverage in real estate related loans. These asset classes represented 57% of tangible common equity at year end, down from 85% in the third quarter and 224% at year end 2007. Legacy leveraged loan exposure now stands at $7 billion, down from $52 billion at its peak last year. Our commercial real estate portfolio declined by approximately 25%, to $10.9 billion in the fourth quarter alone.

In short, Goldman Sachs is well positioned to withstand difficult markets and take advantage of near-term opportunities.

I'll now review each of our businesses.

Investment Banking produced net revenues of $1 billion, down 20% from the third quarter. For the full year, Investment Banking net revenues were $5.2 billion, down 31% from a record 2007. Our backlog declined during the fourth quarter.

Within Investment Banking, fourth quarter advisory revenues were $574 million, down 7% from the third quarter. Goldman Sachs once again ranked first in announced M&A globally for calendar 2008 through November. We advised on a number of important transactions that closed in the fourth quarter, including Anheuser-Busch's $60.4 billion sale to InBev, Wrigley's $23.2 billion sale to Mars, and APP Pharmaceuticals' $5.6 billion sale. We're also adviser on a number of significant announced transactions, including Wachovia's $15.1 billion sale to Wells Fargo, Altria's $11.6 billion acquisition of UST, and Dresdner Bank's 5.6 billion euro sale to Commerce Bank.

Fourth quarter underwriting net revenues were $460 million, down 32% sequentially. Equity underwriting revenues of $273 million were down 7% from the third quarter, reflecting the continued weakness in global equity markets. Debt underwriting declined 51% to $187 million given significant credit market dislocation and weak new issuance markets during the quarter.

During the fourth quarter, we participated in many noteworthy underwriting transactions, including GE's $12.2 billion common share offering, Equilab's $1.9 billion common share offering, and SunGard's $1 billion combination term loan and senior note financing.

Let me now turn to Trading and Principal Investments, which is comprised of FICC, equities, and principal investments.

Net revenues were negative $4.4 billion in the fourth quarter, reflecting significant asset price declines across credit and principal investing businesses. Full year net revenues were down 71%, to $9.1 billion. FICC net revenues were negative $3.4 billion in the fourth quarter, principally driven by losses from investments, including corporate debt and private and public equities and trading and credit products.

These results were adversely impacted by unprecedented weakness across the broader credit markets, reflecting deteriorating asset values, substantially reduced market liquidity, and dislocation between cash and related derivative instruments as well as indices in the underlying single names.

Credit also included $1.3 billion in losses, $1 billion net of hedges, associated with our legacy leveraged loan positions. Mortgage revenues declined sequentially due to continued asset price weakness, particularly in our commercial real estate portfolio, where we generated net losses of $700 million.

Our franchise businesses generated solid performance despite the challenging market conditions. Revenues from our rates business were up sequentially due to increased volatility and strong customer flow. Currencies and commodities continued to be solid, though down from the third quarter. Fourth quarter results include approximately $700 million in gains from the impact of our wider credit spreads on certain long-term debt, largely in FICC.

For the full year, FICC net revenues were $3.7 billion, down 77% from fiscal 2007, primarily reflecting losses in credit products, including $3.1 billion in losses related to legacy leveraged loan positions and losses from investments.

Full year mortgage results included approximately $1.7 billion of net losses on residential mortgage assets and $1.4 billion of commercial mortgage loans and securities. Importantly, our macro franchise businesses, including currencies, rates and commodities, each produced exceptional results during the year that were up from 2007 levels.

Turning to equities, net revenues for the fourth quarter were $2.6 billion, up 69% sequentially. Equities trading rebounded from a weak third quarter due to higher customer volumes across our cash trading and derivatives businesses. We recorded losses in principal strategies. Equities commissions were up 9% sequentially, to $1.3 billion, reflecting robust client trading activity and growing market share.

For the full year, equities produced net revenues of $9.2 billion, down 19% from fiscal 2007. These results reflect the overall challenging environment for equities as major indices declined more than 40% during the year. We also recorded losses in principal strategies for the year.

Turning to risk, average daily value at risk in the fourth quarter was $197 million compared to $181 million for the third quarter. The increase was driven by greater volatility across mortgage and credit products. If volatility had remained constant, VAR would have declined during the quarter.

Let me now review Principal Investments, which produced net revenues of negative $3.6 billion in the fourth quarter.

Our corporate principal investing portfolio generated losses of $2 billion during the quarter due to the significant decline in global equity markets. Our investment in ICBC produced a loss of $631 million. Our real estate principal investing portfolio generated $961 million in losses due to valuation adjustments that reflect higher cap rates and weaker fundamentals in commercial real estate.

For the full year, principal investments produced net revenues of negative $3.9 billion. Once again, it is important to distinguish between fair value losses on these long-term portfolio assets and losses on residual troubled asset exposures. Although we have no intention of selling these assets in the near term, fair value accounting rules require that we value them based on current market conditions. That doesn't mean they can't go down in value from here. They can. But many of these positions represent excellent long-term investments. Moreover, our merchant banking businesses are critical to our fundamental strategy of acting as adviser, financier and coinvestor with our clients.

In Asset Management and Security Services, we reported fourth quarter net revenues of $1.7 billion, down 15% from the third quarter. Full year revenues were up 11%, to $8 billion.

Asset Management produced net revenues of $945 million, down 16% from the third quarter, due to lower assets under management and the corresponding impact on management fees. For the full year, Asset Management net revenues were a record $4.6 billion, up 1% from fiscal 2007. During the fourth quarter, assets under management declined 10%, to $779 billion. The decrease was driven by $90 billion in market depreciation, largely in equity assets, partially offset by $6 billion in net inflows.

Security Services produced net revenues of $799 million in the fourth quarter, down 13% sequentially due to lower customer balances, partially offset by a more favorable mix of securities lending customer balances. For the full year, Security Services net revenues were a record $3.4 billion, up 26% annually.

Given weaker hedge fund performance and redemptions this year, it is likely that assets under management across the hedge fund universe will decline into 2009. Many of you have asked how this will impact our prime brokerage business. While difficult to quantify, we expect that a decline in customer balances can be somewhat offset by optimizing our cost structure and business mix to improve margins, as we have witnessed during the fourth quarter.

Now let me turn to expenses. Compensation and benefits expense, which includes salary, bonuses, amortization of prior year equity awards, and other items, such as payroll taxes and benefits, were negative $490 million in the quarter, which means we reversed compensation previously accrued through the third quarter. This results in a full year compensation and net revenue ratio of 48%, excluding approximately $275 million in fourth quarter severance costs.

Fourth quarter non-compensation expenses, excluding those related to consolidated investments, were up 9% sequentially, largely in other expenses primarily related to our reinsurance businesses. For the full year, non-compensation expenses, excluding those related to consolidated investments, were up 5% over 2007.

Headcount at the end of the fourth quarter was approximately 30,000, down 1% versus year end 2007 and 8% from the third quarter.

Our effective tax rate was approximately 1% for the full year. The decrease in the effective income tax rate was primarily due to the greater impact of permanent benefits as a percentage of lower earnings, as well as changes in the geographic mix of our earnings.

The global financial services industry has faced considerable challenges over the past 18 months. What started as a subprime issue in the United States has evolved into a significant global crisis. As a central player in the global capital markets, Goldman Sachs was not immune from these broader market challenges and during the fourth quarter widespread asset price declines drove meaningful losses drove meaningful losses across many of our balance sheet positions.

However, as I previously commented, it is important to keep our results in context. Goldman Sachs was solidly profitable in 2008, able to remain profitable due to our continued commitment to our fundamental risk management culture, the strength of our client franchise, the diversity of our businesses, and the resilience of our people.

Given our significant reduction of legacy assets and our lack of direct consumer exposure, we believe that our balance sheet is strong. Importantly, we have significant capital to take advantage of market opportunities as they arise in 2009.

As a result of the broader market dislocation, the competitive landscape has changed. Across many of our businesses, trading margins are robust and the premium on risk capital is higher than we've seen in years. In this type of environment, return on assets is improving.

Given the current dislocation in certain of the world's capital markets, we are of course cautious about the near-term outlook for our businesses. However, we remain optimistic about the medium and long-term outlook for Goldman Sachs. Our status has changed to a bank holding company, but the traditional role we play as an adviser as well as a financial intermediary for clients across the globe has not changed.

Although we, like many, are concerned about the potential for a slowdown in global economies, we feel confident about the strategic steps we've taken and will look to leverage our global client relationships, risk management culture, and the talents of our people to maximize shareholder returns over the long term.

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

(Operator Instructions) Your first question comes from Guy Moszkowski - Merrill Lynch.

Guy Moszkowski - Merrill Lynch

David, could you start off by quantifying, if you could, the extent to which hedging helped you or hurt you during the quarter? There's an allusion in the release to dislocation between cash and derivative prices and between indices and single names which seems meant to say that that was an issue, and the only quantification I can get of it in one of the other categories seems to indicate that there was a little bit of benefit in that one category. But it looks like more broadly there was an issue.

David Viniar

Well, first of all, that's a very broad question, to say that hedging helped us or hurt us, because we have hedges in many, many, many places of many different types.

Now, look, it's very hard to quantify that. One of the difficulties in trading in credit during the quarter and really across many asset classes was what I would call the significant divergence between the performance of more liquid and less liquid assets. Basically, the way you can think about it, Guy, is the less liquid an asset was, the worse it performed; the more liquid an asset was, you can either say the better it performed or the less bad it performed.

And that took many, many forms in many asset classes, and one way to think about it is indices tend to be more liquid than any single names. Any single name you had that was hedged with an index, there was a divergence in performance. Cash assets tend to be less liquid than derivatives, especially in a credit crisis, and so there was a divergence there, and that was across many categories, but especially in credit you saw that divergence. And anytime you hedge something, while you reduce certain risks, you increase other risks, and we know that going in.

And so it made it a very difficult operating environment, especially across credit products.

Guy Moszkowski - Merrill Lynch

But there's no way to quantify that to help us understand the extent to which that particular set of mismatches hurt?

David Viniar

No, because it was different in different places.

Guy Moszkowski - Merrill Lynch

In FICC, you had about a $5 billion negative swing from third quarter results to fourth quarter at about $1.5 billion negative net revenue. Can you give us a sense for how much of that decline came from something that you alluded to in your remarks, which would be positions held essentially as longer-term investments, say by the special situations group, rather than markedto-market and realized losses on shorter-term trading inventory?

David Viniar

Yes. I would tell you that certainly not all of it, but a reasonably large part of that swing was caused by marked-to-market on investments within our credit business. There were some offsets because some of our franchise businesses did quite well, but yes, a fair portion of it, but far from all.

Guy Moszkowski - Merrill Lynch

You alluded in Security Services to changing the mix more favorably in terms of securities lending customer balances. I was wondering if you could give us a little bit more color and granularity on that given that it already does appear to have helped and that you seem to be counting on it to help you offset the decline in the hedge fund industry.

David Viniar

Well, some of the things we do is we are able to source securities that are important for our clients that others might not be able to source because of our network and our distribution. And we think we're able to perform some of the services that they require better than many others because we've been in the business for a very, very long time, and so that allows us to keep more profitable business.

Guy Moszkowski - Merrill Lynch

On the deposits side, I think you alluded in a press interview that you did earlier today to wanting to increase your deposits to the $50 to $100 billion level, which would be anywhere from, I guess, a doubling to almost a quadrupling. What's your strategy at this point for raising those deposits and at this point how would you quantify the total dollars worth of deposit-eligible assets in terms of funding?

David Viniar

We've said this pretty consistently, Guy, and if you remember, Lloyd talked about this at your conference, so what I said is completely consistently with what he said. And our strategy is to build that through third-party distribution, like brokered CDs; to build it through our internal network of private wealth management, where we have a lot of cash in the system; to find other, maybe less traditional ways, of building it internally, considering Internet banking and other things; and to look at, if anything made sense, acquisitions as well. And so those are basically the methodology that we're going to use.

And we have about $150 billion in the bank right now. That could be largely funded with deposits.

Operator

Your next question comes from Roger Freeman - Barclays Capital.

Roger Freeman - Barclays Capital

With respect to the balance sheet, obviously, a pretty impressive decline in terms of the total. Can you just elaborate a little bit on where that's coming from? I think in your press interview earlier I thought you said that gross leverage came down to like 13.7 times. Is that right? That's, I guess, the [mortgage] book is really where it came from?

David Viniar

It came from a whole lot of categories across the balance sheet. There's no one individual category. It came down from a fair number of places.

Roger Freeman - Barclays Capital

Let me ask it this way. If you sort of think about what we've seen in capital markets, just across most asset classes there's been very much of a liquidity freeze and, you know, a $200 billion or so decline in balance sheet, it seems like a big number relative to what you could move into market. Can you maybe frame it in that perspective?

David Viniar

Sure. Yes, it is a big number. Most of the assets were more liquid rather than less liquid because there wasn't much of a market for the less liquid, although we did sell some of our leveraged loans. We did sell some of our commercial real estate, which seemed big in the context of how much of those we have but small in the context of $200 billion. So more of it was more liquid, interest rate or credit or other types of assets; our prime brokerage balances were down as well, so that contributed to it. So it was really across all of those asset classes.

Roger Freeman - Barclays Capital

I recall when we were in there a couple of months ago one of the comments was that you look at the asset classes that could be levers, things like Treasuries and agencies, that, you know, you could get the balance sheet down quickly, you could get leverage down quickly, by reducing those businesses, and I guess it's fair to say that's some of what you did.

David Viniar

Yes, because that is some of what we did because, while they may be more liquid, there was also risk in them and we felt that at this time reducing those assets made sense because of the riskiness of the environment. While less liquid assets were riskier, more liquid assets had a lot of risk as well, and that risk went up during the quarter also.

Roger Freeman - Barclays Capital

To segue from there into your total equity position, particularly with the TARP funds and Buffet and the equity raise he did, where are you on the spectrum at this point with respect to deploying any of that capital? It sounds like it's still sort of a risk-averse mode; you'd rather have more of a cushion. Are you getting closer to maybe next quarter starting to put some of that to work or what are you looking for to take a little bit more risk?

David Viniar

That's a very hard question to answer. We know that we are not smart enough to call the bottom of the market, so we're likely to invest in things either a little bit before or a little bit after the market turns. We hope a little bit after, but we don't know for sure. And there's no good answer other than we evaluate every opportunity when it comes up, looking in this environment only for what we think are very good investments.

But, as I said, we are well positioned. We do have a lot of capital. We do have a lot of cash. And so if we see good investment opportunities, we're going to take advantage of them with full knowledge that if the world continues to get worse, we're going to have to, because we mark them at fair value, mark them down and take losses.

But we have traditionally found very good opportunities in this environment and we're hoping to find more.

Roger Freeman - Barclays Capital

And then I guess on the client side, where would you sort of characterize deleveraging at this point with respect to hedge funds? What are you seeing in terms of year end redemptions? Are the 25% numbers we're seeing consistent with what you're seeing?

And are there any asset classes that you think still are going to see much higher collateral requirements? CDS seems to be one that pops up. Anything else?

David Viniar

I think your numbers for year end are probably as good as mine. Obviously, there is more deleveraging and if the world gets worse again, there'll be more deleveraging and, if it doesn't, it'll kind of slow down.

I'm a little confused by your last question on the asset requiring more collateral.

Roger Freeman - Barclays Capital

Well, what we've seen here over the course of many months is various asset classes suddenly getting either margin calls or it'd usually be a higher collateral requirement. For example, the convertible bond market last quarter, there's been discussions - I think we even discussed  that when CDS moves into the central clearinghouse you might see higher collateral requirements against that. Those are the types of things that have caused deleveraging to date. I'm wondering if you see any other assets like that that maybe don't have high enough collateral requirements against them yet.

David Viniar

There's nothing specific that comes to mind but, again, if the world continues to worsen, then people will ask for more collateral on everything.

Roger Freeman - Barclays Capital

Just lastly, any exposure to Madoff?

David Viniar

No.

Operator

Your next question comes from Glenn Schorr - UBS.

Glenn Schorr - UBS

One quickie follow up on the FICC line of questioning. Just give an example of what kind of assets you might hold in the special situations group, just because it's such a big move this quarter.

David Viniar

Well, that's a group that you talk about more than we do within the whole credit complex. Look, we make all different kinds of assets and I'll give you an example. And this is not to say that everything is like the example I'm going to give you; I wish it was. But we invest in different types of assets. We invest in distressed debt sometimes that will turn into equity. We'll invest in other types of debt across the capital structure. We'll also make small private equity investments into situations that we think are interesting.

And to give you an example of what happened during the quarter, I'll take two investments we made. I won't name them, but we made two investments where the total investment size between the two was $68 million. Those investments have a life-to-date profit after the fourth quarter of in excess of $300 million.

Now, the companies went public, so part of that was written up, which we do. We've been selling some of those but, you know, it takes awhile to get out of those. But we have $300 million of lifetodate P&L, but in the fourth quarter we had over $200 million of losses on those investments.

So terrific investments; we think that there's still upside in those investments. But in an environment where you have every equity index in the world down between 25% and 35% and you have credit markets down a commensurate amount, investments that you hold on your balance sheet in debt and equity assets are going to be down. And that's what we saw across FICC, as well.

Glenn Schorr - UBS

And last quarter and this quarter end, would you be willing - I know the answer's no, but I'll ask anyway  would you be willing to size it? Because I'm a believer in what that franchise means towards Goldman's earning power over time. I'm just curious on sizing.

David Viniar

Well, thank you, because we're believers, too, obviously. While we don't disclose the size of any particular business within FICC or any other business line, we disclose a lot about this. I'll help. If you go back to our last 10-Q and you look at Page 108, just to give you the page to make it easier for you -

Glenn Schorr - UBS

The 10% [change]?

David Viniar

Yes, exactly. That kind of tells you how big the assets are that are investments because it tells you what happens if 10% of them go down. And so that's a very good proxy.

Glenn Schorr - UBS

Another clarification, reconciling PIA on Page 13, if you look at just the private corporate piece, the 10.7, optically it looks like a small change from last quarter; however, you obviously noted that you had $2 billion in net losses across both the private and public, so that would lead you to believe there's marks in there, but also investments.

David Viniar

Correct.

Glenn Schorr - UBS

So fair enough until there's a reasonable hit in there, but can you tell us any color about the portfolio itself?

David Viniar

Yes. Let me give you some help on those numbers. If you look at where it was at the beginning of the quarter and you look at the net change, it's down about 15% round numbers. Obviously, markets around the world were down more than that. We think that's a good thing. And basically  and I hope this is because of our quality of investing; part of it might be luck  where we have very minimal to no exposure in some of the sectors that were hit the hardest, like financials, retail, autos, so places like that, were not where our investments were.

And so the biggest drivers of the declines in the indices were places we were not invested. We had some investments that actually were profitable for us, that did well. And so the net down 15% is actually, when you think it through, probably makes some sense.

We're not happy about it, but we're not going to get through a quarter like this without losses in principal investments.

Glenn Schorr - UBS

And some banks are moving some assets that they like longer term into the hold to maturity portfolios. It's a little bit against what's in Goldman's blood, I know that, but any thoughts on, like, especially those assets that you identified, the $150 billion?

David Viniar

Well, that's a very interesting way to describe it, Glenn, because in effect those are our equivalent of hold to maturity assets. I mean, we invest in our principal investments, we invest in the real estate, we invest in some of the things within FICC. There's no plan to sell those this quarter. Most of those are assets that we're going to hold, the fruition being either a sale of the company or a public offering or something like that, and they generally intend it to be three to five to seven year holds.

So they are our equivalent of hold of maturity, but there is no concept of hold to maturity for investments like that as far as our financial statements go. They have to be marked at fair value. We believe in marking things at fair value because it tells you what's really going on in the world and it keeps our balance sheet and our capital completely clean.

But, you know, if you think about them the way that a hold to maturity account would work, then they would be at original cost right now. We don't believe in that, but that's exactly the way we think of those assets. We know that they're going to have sometimes when they go down, but we think in the long term they're going to be very profitable.

Again, that's not to say every one. We're going to make mistakes and we'll lose money on some of them. But for the most part we think they're going to be good investments.

Operator

Your next question comes from Meredith Whitney - Oppenheimer & Co.

Meredith Whitney - Oppenheimer & Co.

I have a couple of questions. The first is related to the downgrade this morning insofar as if, in fact, the holding company - not the bank holding - the holding company debt is - I guess their concern was the subordinated to the FDIC debt. How do you resolve that if the FDIC doesn't expend their sort of wrap guarantee beyond June or do you in fact expect them to extend that?

David Viniar

Let me try to answer, and I'm not sure I'm really going to be answering your question.

The FDIC guaranteed debt is kind of in a separate category. It's pari passu to other debt. It, of course, has the government guarantee, so it's rated AAA. It's not that the other debt is subordinate. It's just that, although we are very confident in our credit, we're not as good a credit as the U.S. government and we know that. And so it is a better credit and so it prices a lot better.

But the rest of our debt will be at our credit and our senior debt will be our senior debt.

And we are hopeful that we will start issuing our senior debt on an unguaranteed basis as soon as the markets open. We don't believe the debt markets will be closed forever, and so we hope to start issuing as soon as it's open.

Meredith Whitney - Oppenheimer & Co.

Is there any suggestion of a bias one way or the other on - this is sort of tea leaves - that, if need be, the FDIC would be receptive or do you know as well as we know?

David Viniar

We've had no discussions with them about that.

Meredith Whitney - Oppenheimer & Co.

And then the follow up is related. I just want to clear something up because I know there are a lot of questions about this related to - I know your stated exposure to AIG has been immaterial, but did last night's purchase of AIG securities by the Fed have any impact on your exposure positively or negatively?

David Viniar

Our exposure has been immaterial. It is still immaterial. So there's been no change.

Operator

Your next question comes from Mike Mayo - Deutsche Bank.

Mike Mayo - Deutsche Bank

Is your deleveraging done and, if not, how much more do you have?

David Viniar

You know me well enough to know that I will not say anything is done forever or that we're finished. As we sit here today, our expectation and our hope is that we'll grow, not shrink. We think that we put ourselves in a position with the balance sheet reductions, with the capital increases, with the cash increases, to take advantage of opportunities as we see them. And so, if we see some good opportunities, we will take advantage of them, and we would hope to grow.

Now, I'm a little hesitant, Mike, because a month and a half from now, if the world takes a really, really big leg down, we might change our mind and decide the prudent thing is to shrink. But as we sit here right now, that's not our anticipation.

Mike Mayo - Deutsche Bank

And is your rightsizing done or do you have more to go? It looks like your headcount is kind of like 2007 levels and your noncomp expense are above 2007, and I don't imagine you expect revenues like 2007, so how do I reconcile those thoughts?

David Viniar

The answer to that is really the same answer as I gave you on the balance sheet, which is we've done what we think we need to do right now, but we have to wait and see what happens over the course of the next few months or the next year, and so I can't promise you that nothing else will happen, either to the downside or the upside.

As far as noncomp expenses go, there's a couple of things in there. Some of those things are volume related, like brokerage and clearance. So are really directly tied to business growth in certain areas, like our reinsurance business. And other noncomp expenses will lag what happens with headcount. And so there are a lot of expenses in things like technology and travel and things like that which are very much directly tied to headcount, but they lag. And so I think we might see some effect of that next year.

Mike Mayo - Deutsche Bank

And in rightsizing, either for the balance sheet or for expenses, how do you think about nonU.S. versus the U.S.? And the reason I ask the question, it seems like nonU.S. is a little bit behind the U.S. in going through the cycle.

David Viniar

That's a very fair question. I think you're right in that. I think the U.S. probably led the downturn and might lead coming out of it at some point as well. So you're right.

Our rightsizing has pretty much been level across regions, and our strategy of thinking that over the long term there's likely to be more growth outside the U.S. than in the U.S., although still growth in the U.S., still hasn't changed.

Mike Mayo - Deutsche Bank

And last question, the CEO on the recent conference said he didn't expect any real big change in the business model, and I was a little surprised given everything that's taken place. If you could just elaborate on that a little bit.

David Viniar

Well, one thing I can tell you is that the CFO will never say something different than the CEO says. But I actually - look, obviously, Lloyd and I completely agree on that. We think that our business model, if you think about it - which is largely to be an adviser, a financier, a coinvestor, and a financial intermediary for our clients around the world  we think is a very good business model. We think that as the world gets better and when the world gets better, our clients are going to want advice, they're going to want financing, they're going to want people to coinvest with them, and they're going to want people to help them make markets and do hedges in various markets around the world.

That's what our strategy is, and we don't see why that should change. And we think it's going to be as, if not more, needed going forward.

Operator

Your next question comes from Patrick Pinschmidt - Merrill Lynch.

Patrick Pinschmidt - Merrill Lynch

I was hoping you could give us maybe a little bit more color on the FICC investment losses. For example, is it possible to maybe bucket your five largest positions in that portfolio in terms of their contribution to the loss this quarter? I mean, just any sort of ballpark for kind of the breadth of the writedowns and their relative sizes?

David Viniar

No. You should not think this was one or two or three large investments. This was really across the investment portfolio of equity assets and credit assets. It was very widespread. It was not like you could pick out three or four and say if we didn't have those it wouldn't have been a problem. That was not the case. It was much more widespread. It was really caused by widespread asset price declines across the world.

Patrick Pinschmidt - Merrill Lynch

And one more strategy question. I guess you've been fairly vocal about talking about distressed equity investment opportunities. Are you comfortable taking incremental risk with your capital to pursue those opportunities or do you think going forward there might be more of a balance from sourcing some of the capital from third-party funds?

David Viniar

The answer is both. We are comfortable but careful about taking those risks today because we think there will be great opportunities, but we have to be very cautious because the world is still a very dangerous place. So we are, as I said, comfortable but careful. But we also think that it is prudent for us to use some of our capital as well as sourcing other capital.

We also think it's important because we think these opportunities are really good to offer them to our clients as well as our ourselves. That's what we do. When we raise these funds, we are both in some ways diversifying our risk, but in some ways giving opportunities that we think are very good opportunities to our clients.

And so it's really for all of those reasons that we think we will take some with our own capital and some with funds that we will raise.

Patrick Pinschmidt - Merrill Lynch

And could you disclose the risk weighted assets, the sequential change there in the fourth quarter?

David Viniar

It's not in the release. We're going to get back to you with the answer to that. We have the numbers; I just don't have those right in front of me.

Patrick Pinschmidt - Merrill Lynch

And then finally in terms of the compensation to net revenue outlook, I guess generally your guidance has been 50% plus or minus a few percentage points. Is that what we should use going forward?

David Viniar

I'm going to answer your last question first. Our risk weight assets were about $400 billion at the end of the quarter, which was up a little bit from the prior quarter, and that's because the credit risk within the risk weighted assets went up and more than offset the decline in the market risk.

And as far as comp to net revenue, no change from our guidance - 50% plus or minus a couple of percent.

Operator

(Operator Instructions) Your next question comes from James Mitchell - Buckingham Research.

James Mitchell - Buckingham Research

Can you just maybe talk about the resi side on the mortgage book, if there were any significant net writedowns this quarter and what the remaining exposures are?

David Viniar

Sure. The reason we didn't mention it is because it wasn't significant. We had net losses that were pretty immaterial in that book, and part of that is because we've gotten those positions down to almost what I would call a trading portfolio, kind of our normal portfolio. We have a little bit over $5 billion of long resi assets. Obviously, we have some shorts, too, but of long resi assets. And that's $1.5 billion of prime - round numbers, $1.5 billion of prime, $1.8 of Alt-A, and $1.8 of subprime.

And if you look from last quarter, you see that prime is down some, Alt-A is down a fair amount, and subprime's actually up a little bit because we bought a portfolio, we sold some, and even within the prime and Alt-A, there were purchases and sales.

So there's probably some assets in there that we'd still like to sell and we will, but it's really, as I said, a trading portfolio largely at this point.

James Mitchell - Buckingham Research

Just a flow book right now and you're not turning over pretty rapidly reducing the risk there?

David Viniar

Not that rapidly because the market's still not all that liquid. And I said, there's some assets in there that we'd like to sell and others that we're making markets in.

James Mitchell - Buckingham Research

And then maybe just bigger picture, any thoughts on what the Fed's been doing in terms of adding liquidity to the market? It seems like it's helped the short-term money markets to some extent, but we're really not seeing much of a move on the longer-term credit side. Do you think that that will have an impact over time or is it just too early to tell?

David Viniar

No, I think the only thing that's too early to tell is when it's going to have an impact. It is absolutely going to have an impact. I think between what the Fed is doing, what the Treasury is doing, what Congress is doing, and what governments around the world are doing, they're throwing so many resources at the economies around the world and at the credit markets around the world that it unquestionably is going to have a positive effect. The thing that's unknown is when.

Right now there's still so much fear and negative sentiment in the market that that has overwhelmed the liquidity that's been put in and the opportunities that are there, and at some point that's going to turn around.

James Mitchell - Buckingham Research

And maybe just one last question. On the comp side you're down 46% year-over-year, but obviously there's a decent amount of fixed comp. Can you disclose how much the bonus pool was down and what the morale is like?

David Viniar

We don't disclose that number, but suffice it to say that we pay our people for the performance of Goldman Sachs. And when Goldman Sachs does very well, we think our employees should share in it with our shareholders, and when Goldman Sachs has a year where our results are down significantly, our compensation will be down significantly. And that's always been the philosophy of Goldman Sachs, and I think people who have been here for awhile understand that and understand that there will be upside, but there will be years when results are down, comp will be down a lot.

Operator

Your next question comes from Ron Mandel - GIC.

Ron Mandel - GIC

I'm still not sure I understand the part about in the prime brokerage you have this phrase changes in the composition of securities lending customer balances. I'm still not sure what that means and how that is positive.

David Viniar

It means that the services we're providing and the securities we're able to source for our customers. They need different things. When they have balances, they need different services and they need different types of securities. If they're short things, we have to find them for them; the higher margin services. And so that's really what we're trying to say

Ron Mandel - GIC

So you're charging more for people who want to short, in other words?

David Viniar

Or we're finding assets that traditionally have higher margins in them, because not all shorts are created equal.

Ron Mandel - GIC

So it's not necessarily limited to equities, in other words?

David Viniar

Our prime brokerage business is largely an equity business.

Ron Mandel - GIC

And then my other question was in regard to the comp ratio. I know you made the comment about 50%, but the two years before this you were closer to 44%, the year before that, 47%. And I guess I was wondering whether - and 48% this year, you know, excluding the severance  so I guess I was wondering whether this might have been an opportunity to readjust the business in light of the new realities that we're seeing across Wall Street and have lower comp going forward.

David Viniar

I think it's always hard to say what's going to happen going forward. I think almost by definition you would find with us and almost everyone, the higher the revenues, the lower the compensation percent, and the lower the revenues, the higher the compensation percent, even though comp goes up and down with performance. I think that would just be a normal thing.

I also think you'd find that we have one of the lowest comp-to-net revenue ratios around, certainly within the industry. And I'm not sure that's a good thing or a bad thing; it's just factual. And, as I said, our people will share when we do well, and I think if you asked our people this year they would say that they're being treated appropriately and fairly; given that the performance of the firm was down significantly, so was the compensation.

Ron Mandel - GIC

And in regard to headcount going forward, I think you're more or less implying that if market conditions are more or less like they are well into '09, then headcount would not change significantly in that environment?

David Viniar

That's right.

Operator

Your next question comes from Guy Moszkowski - Merrill Lynch.

Guy Moszkowski - Merrill Lynch

Just a follow up on the comp. Was there any change in the composition between stock and cash this year?

David Viniar

Yes. More equity, less cash.

Guy Moszkowski - Merrill Lynch

Despite the fact that you're issuing at a level well below book, that's still the appropriate thing to do?

David Viniar

We felt it was appropriate to tie people in even more to the firm this year.

Guy Moszkowski - Merrill Lynch

Can you give us a sense of how much it shifted?

David Viniar

No.

Guy Moszkowski - Merrill Lynch

And maybe this is asking the same question, but if you had kept the ratio the same versus last year, would there have been a material impact on the comp to revenue ratio?

David Viniar

It is asking the same question, but that was a good try.

Guy Moszkowski - Merrill Lynch

Just one more, then, on some of the losses in the quarter and where they may have come from. If I go back to your 10-Q and I look at your exposures, your disclosed max loss exposure to VIE assets, there's a few billion dollars of max exposure to synthetic CDOs and CLOs and several billion dollars more in written protection on mortgage CDO collateral. Did marks on those exposures filter meaningfully into your FICC losses this quarter?

David Viniar

No, very immaterial. As you know, whether things are on our balance sheet or not, we treat them as fair value. So whether things are on or not, there's no difference in our financial statements. But that had virtually no bearing.

Operator

Your next question comes from Richard Staite - Atlantic Equities.

Richard Staite - Atlantic Equities

Just going back to the prime brokerage, could you just give us some indication on your market share there and how that's changed over the quarter? And then more broadly across the firm's other businesses, what you're seeing in terms of market share, where you're seeing a big pickup or, indeed, where you're losing share?

David Viniar

That's a very fair question, but it's actually really hard to answer because there's no statistics on prime brokerage market share. We did lose some balances. We got a lot back that we wanted to get back. I'm struggling because it's not that I actually don't want to answer that question; I actually don't know the answer because, as I said, there's really no statistics on market share in prime brokerage.

I would say that we might have lost a little share in that business, but not very much. And we still have, if not the highest market share, one of the highest market shares in prime brokerage. That's the best I could answer there.

In many of our other businesses, our market share has kind of stayed the same or increased. Our mortgage business, we continue to have the highest market share. We're the leader in M&A. In many of the equities businesses, our share continues to go up. It's one of the reasons why you see our commissions continue to go up, even though clearly the cents per share people are paying is not going up. And so if anything I would say our market share in some of those businesses is going up.

Richard Staite - Atlantic Equities

Anywhere where you're losing?

David Viniar

Not that comes to mind.

Operator

I would now like to turn the conference back to Mr. Holmes.

Dane Holmes

Thank you, everyone, for dialing into our fourth quarter conference call. If you have any additional questions, please feel free to reach out to me. Otherwise, have a happy holiday. Bye.

Operator

Ladies and gentlemen, this does conclude the Goldman Sachs fourth quarter 2008 earnings conference call. You may now all disconnect.

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