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Goldman Sachs Group, Inc. (NYSE:GS)

Fixed Income Investor Conference Call

January 23, 2013 12:00 pm ET

Executives

Dane E. Holmes – Investor Relations

Harvey M. Schwartz – Chief Financial Officer

Elizabeth Beshel Robinson – Treasurer

Analysts

Ryan O’Connell – Morgan Stanley Investment Management

Robert Smalley – UBS Securities LLC

Satish Pulle – ECM Asset Management

James Campbell – CalPERS Investments

Larry Vitale – Moore Capital Management LP

Operator

Good afternoon. My name is Jennifer and I will be your conference facilitator today. I would like to welcome you to the Goldman Sachs’ Fixed Income Investor Call. This call is being recorded today, Wednesday, January 23, 2013. Thank you.

Mr. Holmes, you may begin your conference.

Dane E. Holmes

Good morning, this is Dane Holmes, Head of Investor Relations at Goldman Sachs. Welcome to our fixed income investor conference call.

Today, we’ll take you through our fixed income investor presentation, which is available on the Investor Relations section of our website at www.gs.com. 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 ended December 2011.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our Investment Banking transaction backlog, capital ratios, risk-weighted assets, and global core excess. And you should also read the information on the calculation of non-GAAP financial measures that is posted on the Investor Relations portion of our website, once again 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 incoming Chief Financial Officer, Harvey Schwartz will give a brief overview of the Firm’s 2012 operating results, balance sheet, risk profile and capital management strategy and our Treasurer, Liz Robinson will review the Firm’s liquidity position and funding strategy.

Following the prepared comments, Harvey and Liz would be happy to take your questions. Harvey?

Harvey M. Schwartz

Thanks Dane. Appreciate all of you dialing in today. Liz and I will walk you through the presentation.

Turning to the first slide, and you can see reported 2012 net revenues of $34.2 billion, net earnings of $7.5 billion, earnings per diluted share of $14.13 and our return on common equity of 10.7%. A few major trends define the operating environment in 2012, substantial Central Bank activity, improved economic data in the United States and continued political uncertainty.

For example, actions and commentary by the European Central Bank played a significant role in moderating concerns about a European link-tail event. At the end of 2011, the ECB announced that it would enhance its long-term refinancing operations to provide term liquidity. The ECB further demonstrated its commitment during 2012 by affirming its support for the euro and its willingness to make outright purchases in the secondary bond market.

In United States, the Federal Reserve also took steps to support markets and economic growth announcing further increases in monetary stimulus during the year. In 2012, the U.S. economy posted stable to improving economic data particularly with developments in unemployment and housing. Over the course of the year, U.S. economy added nearly 2 million jobs and the housing price index increased by 4% over the past 12 months.

Despite the systemic benefits of Central Bank activity and improved U.S. economic data, our clients continue to struggle with a complex set of issues facing the global economy and the political backdrop. The most obvious recent example was the debate in the United States surrounding the fiscal cliff. These factors translated into mixed activity levels for our corporate client base.

For example, global debt issuance increased by 11% year-over-year with high yield issuance increasing 38%.

In contrast, global equity underwriting volumes were only up 1% and completed global M&A volumes actually decreased 18% in 2012 and remained very low as a percentage of market capitalization. We experienced lower activity levels in most of our businesses and general risk aversion by our investing clients. This was offset by improving asset prices and lower volatility which created a more favorable market making environment.

Although equity and fixed income asset prices trended up over the course of the year, volumes generally declined given the previously mentioned factors. For example, U.S. listed equity volumes declined 18% in 2012 and as we all know, the S&P 500 climbed by 13%. While macro-economic challenges persist, our leadership teams remain focused on enhancing our returns. Drivers of our long-term success include focusing on our clients, prudently managing our risk profile and being disciplined about capital and expenses.

Turing to slide two, you can see that we ended the year with our balance sheet at $939 billion relatively consistent over the past few years. There’s been less demand for balance sheet given lower client activity levels and reduced risk appetite. In terms of the compensation of the balance sheet, 91% remains fairly liquid. Excess liquidity and other cash represent 19% of total assets. Secured client financing which captures lower risk collateralized activities like margin loans and match book activities represents 26%.

Turning to slide three, you can see the evolution of our balance sheet, selected risk metrics, liquidity and capital. Since 2007, the balance sheet is down 16% and both level 3 assets and VaR have come down meaningfully. This reflects both an active risk management approach and changes in the broader market. An important lesson from the 2008 crisis, we got the firm ended up with more in liquid risks than we were comparable within retrospect.

As a result, Level 3 assets are down roughly one-third, and represent only 5% of our assets. VaR has also come down significantly over the last few years, and is currently at levels we have not seen since 2005. The decline has been driven by the previously mentioned balance sheet reductions and lower levels of market volatility.

You should not expect our levels to remain this low in the future, as the macro- environment normalizes and client risk appetite improves, or VaR may increase. In addition to balance sheet and risk, our GCE has grown three folds since 2007. Common equity has increased 75%, while leverage has been more than cut in half. We remain committed to extending this capital to meet client needs, and at the same time making sure that we generate strong risk adjusted returns and mange our risk prudently.

On slide four, let’s discuss how we’re approaching capital targets under Basel 3. In addition to increased capital charges under the new requirements, global regulators have introduced a series of surcharges reflecting size and complexity. These charges effectively raise the barriers to entry for scale players in the industry. Based on the FSPs proposed capital charges, we would need to manage our Tier 1 common ratio to a 7% minimum level and add a SIFI buffer of 1.5%.

We intend to mange our Basel 3 Tier 1 common ratio with an additional management imposed both buffer, which will proximate a 100 basis points making our target roughly 9.5%. Well, Basel 3 capital rules are not final and will not be fully phased in until 2019. Our Tier 1 common ratio estimate at the end of 2012, is nearly 9%.

With that I’ll turn it Liz, who will provide an update on our liquidity and funding strategy.

Elizabeth Beshel Robinson

Thanks, Harvey. On slide 5, liquidity remains the single most important risk management discipline for the firm. As we discussed during our previous calls, we hope cash and cash equivalents to pre-fund the potential distressed liquidity needs and also structure our balance sheet with high liquidity, high velocity liquid assets that are also funded by term liabilities.

Our liquidity pool continues to be a significant portion of the balance sheet at $175 billion at the end of the year. On average for last year, more than 40% of our liquidity was made up of U.S. government obligations and more than 25% was UK, German, French or Japanese government bonds.

High grade collateral is largely managed through reverse repurchase agreements or unencumbered inventory. Approximately 30% of our average Global Core Excess was in the form of deposits that are largely held at the Federal Reserve. In addition to maintaining a conservative liquidity composition, we ensure that our Global Core Excess is appropriately distributed on a global basis, and we also manage it at the entity level to meet internal and external liquidity risk requirements. On average for 2012, our global broker dealers held 45% of our liquidity pool, our major bank subsidiaries had 33%, and the holding company and all other subsidiaries had 22%.

While the firm will continue to measure and monitor contingent and contractual liquidity outflows based on our internal risk model called the modeled liquidity outflow, regulators in the market are focusing on the liquidity coverage ratio. In concept, the LCR is a similar approach to our internal framework, although the definition of the asset (inaudible) and calibration for individual risk factors are different. Based on recent (inaudible) guidance, we believe that our current GCE level leaves us well positioned for the new (inaudible).

Moving to slide 6, let’s turn to secured funding. Our total secured funding of approximately $218 billion is primarily driven by liquid governments and federal agency obligations in our interest rate business. The funding portion of our book is approximately $90 billion of non-GCE eligible assets in our principal broker-dealer entities. We apply the same conservative liquidity risk management approach to our collateralized financing and we focus on asset liability management and excess liquidity capacity.

From an asset liability perspective, we raised secured funding with a term that is appropriate for the liquidity risk associated with the type of assets that are being financed. For example, we aim to achieve a maturity target of at least three months for highly liquid equities. For less liquid assets like high-yield corporate, we believe that longer term one year target is more prudent when considering the potential lower liquidity and price transparency of that collateral in a market stress scenario.

Given the current mix of our inventory and our conservative approach, 75% of our secured financing for non-global core excess assets is executed for tenures of three months or greater and more than 30% is funded with an initial term of one year and longer. If you look at the mix of our secured funding book and the target [spinners] for the assets that we have, we are comfortable running with a weighted average maturity of our non-GCE secured funding that is greater than 100 days at the end of 2012 as it has been since 2008.

In addition to terming out our books, we have incremental protection against maturing trade or increased funding requirements through our secured funding excess or SFE. We raised secured funding capacity in an amount that exceeds our existing inventory requirements. That funding is deployed in GCE eligible asset classes like U.S. Treasury, but is available to finance non-GCE inventory, if our balance sheet grows or if other funding rolls off. Over the past three years, our SFE has doubled as a proportion of our secured funding book.

Turning to slide 7, given the importance of an effective asset liability management strategy, we have spent a lot of time assessing and measuring the risks associated with our secured funding book. To analyze secured funding risk, many market participants tend to focus solely on individual considerations, including tenure, maturity diversification, counter-party diversification, or inventory composition relative to repo capacity.

These metrics are all important by themselves, but looking at each one in insolation does have shortcoming. Therefore, we developed the concept of funding at risk, or FaR, which is a measure of liquidity risk for secured funding that comprehensively aggregates each of the previously mentioned risk measures.

The FaR metric is capable of stressing multiple factors, including counterparty rollover behavior, balance sheet, financing haircut, time period, and the resulting forward liquidity changes. The calculations take into account trade centers, counterparty concentrations before collateral schedules and role probabilities. In addition to the extent, we buy excess funding capacity or SFE relative to our current balance sheet need, the FaR calculation will show this funding benefit on a forward basis.

We mitigate our FaR by trimming out trades with staggered maturities, pre-rolling and negotiating tenure expansions with clients, raising excess secured funding and accounting for one-month stress funding at risk in our MLO to capture that risk in our GCE.

Due to our conservative secured funding profile and the excess funding capacity that we hold, we’re comfortable with the estimates of funding that we could lose under various stress scenarios.

Moving on to deposits on slide 8, we have continued to grow and ended 2012 with $70 billion. Much of this growth originated from GS Bank USA, which held $66 billion of deposits at year-end, and has been actively increasing its deposit base with a focus on longer-term CDs and deposits we contract.

In aggregate, these deposits are being used to fund a significant portion of the roughly $120 billion of assets in our U.S. Bank, just comprised of loans, securities and interest-rate derivative, and also supporting the liquidity needs of those activities as well as our unfunded corporate commitment portfolio totaling $64 billion.

Since 2009, GS Bank USA’s balance sheet has been growing and evolving in terms of its composition, with a focus on growing lending to private and corporate clients and deposit taking, while asset associated with interest rate derivative product have stayed relatively flat. The growth in deposits has enabled us to fund the U.S. Bank’s balance sheet more efficiently and at a lower cost than the group.

As with most of our bank peers in the U.S. deposit growth has outpaced asset growth in the past 12 months allowing us to grow our liquidity pool to ensure that we’re well positioned for growth in the economy, and ready for higher liquidity requirements under Basel 3. Substantially all of our excess cash is held on deposit of the Federal Reserve Bank of New York.

Slide 9, presents our long-term unsecured funding, where we continue to focus on ensuring stability and reducing refinancing requirements through appropriately long dated and phased maturities. Given our focus on term, our long-term unsecured debt currently has a weighted average maturity of eight years and our weighted average maturity has been in excess of seven years since 2004.

In 2012, we executed $20.3 billion of long-term vanilla unsecured funding, which included our $2.25 billion re-marketing of APEX, and $850 million of perpetual preferred that compared to approximately $24.5 billion of vanilla long-term unsecured funding that came due during the year. Throughout the year, we saw three things, a continued focus on the international diversification, increased retail issuance, and a greater share of transaction driven by reverse inquiry from our clients.

Of the $20.3 billion of issuance, $15.6 billion was issued in U.S. dollars, $3.8 billion in Japanese Yen and just under $1 billion in other currencies like Aussie dollars and Swiss franc.

During the year, we conducted our first MRI offering since January of 2008, and our inaugural Swiss franc benchmark offering. We also noted a significant return of international investors to our U.S. dollar funding program, which is valuable to the firm as our functional currency as U.S. dollar.

On the retail side, we continue to seek diversified holders for our debt and issued $3.5 billion of funding globally to retail purchasers, which was up nearly 50% relative to 2011 level.

Finally, we risk funded the institutional demand for our debt with $3.9 billion of reverse inquiry issuances.

As we think about issuance for 2013, we will look to remain opportunistic in our issuance strategy and continue focusing on the diversification of our funding program by utilizing domestic and foreign markets, as well as a range of distribution channels. Like 2012, we look to take advantage of reverse inquiry deals and retail issuance as well.

In 2013, we have $17.4 billion of vanilla debt maturing and we recently issued a multi-tranche $6 billion deal that was significantly oversubscribed, as well as a $225 million Swiss franc offering.

Depending on markets, the environment and the size of our balance sheet, we may or may not choose to match new issuance with maturities. We are comfortable that we have a number of levers to pull beyond incremental unsecured issuance, including raising more deposits, reducing the GCE, or shrinking funding intensive parts of the balance sheet if that trade-off is appropriate.

Finally, let me briefly discuss our current thoughts related to resolution authority. There has been much discussion about orderly liquidation authority and its potential impact on financial institutions and creditors in particular. We’re in dialog with our key regulators regarding how all it might work in practice, and know that the regulatory community has also been in contact with investors to help explain the process. Some have suggested that there would be minimum liability requirement, so as to better facilitate an orderly resolution. Should regulators decide this is necessary, we are well-positioned to meet any such requirements given our strong capital base and significant portfolio of long-dated funding.

We share our regulators goal of ensuring that the resolution of any significant financial institution would not protect further risk. We are investing significant time and effort into resolution planning to provide for an orderly process in the unlikely event of our failure. We believe this is good for Goldman Sachs and our investors, as well as the system as a whole.

In closing, we continue to be well-positioned with a liquid balance sheet that is protected by strong capitals, a high level of liquidity, a conservative funding profile, and a strong risk management infrastructure. Our economic conditions remain challenging, the strength of our business model and client franchise coupled with a focus on disciplined resource management position the firm to grow and generate strong returns.

Dane E. Holmes

With that Harvey and Liz I want to thank you for participating. As you know, all of you will get an opportunity to get to know Harvey more as the incoming CFO, and have had a lot of exposure already to Liz. So we all look forward to doing that, and we’ll be happy to take your questions now if anyone has any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ryan O'Connell with Morgan Stanley Investment.

Ryan O’Connell – Morgan Stanley Investment Management

Well, maybe some follow-up questions on GS Bank. One, I guess on slide five, you showed that about a third of the GCE is in various bank subsidiaries. Is it fair to assume that most of that is GS bank, USA?

Elizabeth Beshel Robinson

Yeah, Ryan. That is correct. The bulk of that is with GS bank, USA. I think we have about $70 billion in total deposits, at the moment $66 billion of that is at the bank.

Ryan O’Connell – Morgan Stanley Investment Management

Okay, great. And then just to drill down a little bit more into the bank and maybe on the asset side, the trading assets you’ve got there, could you provide some more color about that, how much is derivatives, how much is securities? And then I guess that my other question is just in terms of the lending that you’re pursuing at GS bank, what sort of loans are you targeting there?

Elizabeth Beshel Robinson

Sure. Ryan, in terms of the securities business, the bulk of that is derivatives, largely our interest rate derivative business. In terms of the lending book, it’s a combination of things that includes both private banks for our private wealth management clients. It also includes a book of corporate lending which would include our unfunded commitments. So (inaudible) commitments are in there as well for the most part.

Ryan O’Connell – Morgan Stanley Investment Management

And so on the private banking side, is that providing loans to people for margin loans or is it more sort of mortgages?

Elizabeth Beshel Robinson

It’s more of mortgages and then private loans, some of which are collateral. It’s is not our traditional mortgage – sorry, not our traditional margin lending business which is still conducted at GS & Co. in U.S.

Ryan O’Connell – Morgan Stanley Investment Management

Okay. So that’s how it comes out of the broker dealer. Okay, great. Thanks a lot.

Elizabeth Beshel Robinson

Thank you, Ryan.

Harvey M. Schwartz

Thanks, Ryan

Operator

Your next question comes from David [Mccallen], Morgan Stanley.

Unidentified Analyst

I appreciate the comments on OLA and a follow up to that maybe, do you have any sense yet either from your conversations with regulators or have you started to hear from folks who provide your funding whether either the regulators or debt investors will express a preference around the composition of your funding program away from senior to more subordinated instruments, what color do you have there?

Harvey M. Schwartz

We haven't heard anything specifically as you describe. In the context of all the dialog with the regulators, I think it has been pretty constructive. And on the services you would imagine, we are very supportive of something that reduces systemic risk and in the long run it’s a strategy that could mitigate panic, if you will and just take that out of the system, but the specifics as you are asking about really haven't been determined yet.

Unidentified Analyst

Understood. On a related note, we're starting to – I should say starting, we are still hearing some comments from certain of the rating agencies around the way they think about some of the support that is still embedded in the ratings of the G-SIFIs and how there is still potential for some of that support to change at different levels of the cap structure in the organization. How much of that have you given around that and could you give us a little color on where you think either you are – you might be most impacted if the agencies do decide to continue to rethink support in the rating structure.

Elizabeth Beshel Robinson

Sure, we think that if they were to act it would certainly have a manageable liquidity impact given the strong position that we are all in today. As you can imagine, we prepare for ratings downgrades all the time as part of our normal liquidity stress scenarios or normal liquidity planning. And we think in that sense about both the contractual outflows, which we do disclose in terms of the impact in our derivatives book of having to post additional collateral, but we also think about potential client behavioral impact that might occur as a result of a downgrade as well. And when we think about those potential funding and franchise implications, I think it will very much depend on the nature of the downgrade. So clearly, an industry wide with a re-rating would be easier to absorb than a GS specific change. similarly I think my view would be a change that would be based on the agency’s view of government support would be easier than a change that came as a result of weakening in credit fundamentals, as you might imagine. But we obviously think about it and prepare for all of those scenarios, and are very comfortable with where we’re positioned today.

Unidentified Analyst

So no one business really more impacted than the other in response?

Elizabeth Beshel Robinson

I don’t think so now.

Unidentified Analyst

Okay. I appreciate the color folks. Thank you.

Elizabeth Beshel Robinson

Thanks.

Harvey M. Schwartz

Thanks.

Operator

Your next question comes from Robert Smalley with UBS.

Harvey M. Schwartz

Hi, Robert.

Robert Smalley – UBS Securities LLC

Two; first, a follow-up on Dave’s question on OLA. In the discussions that you’ve had with regulators so far, have they talked about the idea of uniformly applying metrics across the large bank peers, because if you look at you and Morgan Stanley most and for talking about a minimum amount of debt required coming from the holding company, you do the overwhelming majority of your issuance from there. So, you’ve got a leg up on the competition. So I’m just wondering if they want to apply the rules uniformly and if you’ve heard anything about that?

Harvey M. Schwartz

It’s too early to tell, it’s really been all conceptual at this point.

Robert Smalley – UBS Securities LLC

Okay. Secondly, in terms, we’ve also seen discussions about foreign banks in the United States having to be separately capitalized, have their own liquidity. projecting in the future, I could envision, I’m sure you can envision similar type of response out of the UK. Are you preparing to do some issuance out of European operations, or could you do that out of Goldman Sachs International? How could you fit that bill with if something like that should transpire?

Elizabeth Beshel Robinson

Look, I think we obviously are watching those rules evolve. And as Harvey said in the earlier comment, I think it’s really too soon to tell and all whose regulations and where they will come out for us as well. Again, I guess I’d just say, we believe we’re in a very conservative position today to deal with these rules, whatever they obviously become implemented in terms of our ability to utilize the capital we have across a range of legal entities, and I think the same with liquidity. But I think it would be too early for us to be making decisions about changing our capital structure or issuance vehicle given, we would be uncertainty in that profit still.

Robert Smalley – UBS Securities LLC

Okay. And one last one if I could, just looking at excess liquidity, listening to the equity call. The view of the equity community maybe that you’re carrying too much excess liquidity at this point, and it’s a drag on earnings for those of us in fixed income, we greatly appreciate the size and how that’s managed? As the environment changes or as your thinking changes, is there a sweet spot that you are looking at numerically, or is there a formula where you think you can make both the equity community and your fixed income investors happy at the same time?

Elizabeth Beshel Robinson

Look, let me start, I would say first, we would all argue here that liquidity along with our clients is really the lifeblood of the firm. And so our first priority is always to make sure that we have enough liquidity to keep us comfortable that in the event that there is an issue, we would be prepared for that. And again, we size that based on a model that takes into account a range of potential factors, contractual potential behavioral impact, market-driven impact, any number of factors and on top of that there is a cushion that takes into account our view of the environment, and we think that that can serve both an offensive requirement, so if we need to start to grow the business. It can also be very defensive.

So we are very comfortable with where we are today. We're also very carefully watching the changes in regulation including the LCR, and so I think our inclination for the near term is to remain very conservatively positioned again both given that the primary use of that liquidity buffer to keep ourselves both offensively and defensively position, but also as we watch the LCR rules become finalized to make sure we are very well-positioned for that.

And I think on the back of that we will continue to think about the optimal levels, but again I think we feel comfortable today given the liquidity we are running as we move into that LCR world, if you can add a bit.

Harvey M. Schwartz

The only thing I would add is I guess, I would say we are cognizant of all the constituents but the equity investors, they care a lot about the liquidity we’re holding as well both from an offensive perspective and a defensive perspective. So I heard the same questions you did on the call, I wouldn't be viewing liquidity as the low hanging fruit for operating leverage in the business, and certainly as Liz said, we have a long history of managing the firm with a conservative profile, and with respect to being conservative, liquidity management is at the top of the list.

Robert Smalley – UBS Securities LLC

Great. Thanks very much.

Elizabeth Beshel Robinson

Thank you.

Operator

Your next question comes from the line from Satish Pulle with ECM Asset Management.

Satish Pulle – ECM Asset Management

Hi, good afternoon. Just a quick question please about deposits, have you seen any outflows this year after the expiry of the FDIC's tax program? Thank you.

Elizabeth Beshel Robinson

Thanks. No, we did not have any deposits, so we are subject to that program so that has not been an issue for us.

Satish Pulle – ECM Asset Management

All right, thank you.

Elizabeth Beshel Robinson

Thank you.

Operator

Your next question comes from the line of James Campbell with CalPERS.

James Campbell – CalPERS Investments

I was in the call just get information, really just two questions. The first is, you’ve discussed, I know Liz that you’re going through your plans now for resolution authority or the liquidation authority however it’s called. And given, I think what Harvey said is right, and obviously these things are conceptual at this point. But given what’s been discussed today, I mean do you see that any major, I see major changes but really any changes in your funding profile going forward as a result of, what’s been discussed. I understand that we have to wait it final risk about but, just trying to understand if you feel, where you’re at today is sufficient or really, isn’t anything that really needs to change or do you really do anticipate this kind of recent changes being driven by this rule.

Harvey M. Schwartz

It’s very, very difficult to say how these will evolve. By the way, you could extend that answer to lots of issues around regulatory reform. So is there anything specific that we can plan for at this stage, I think that the market broadly should take comfort from the fact that, both I think as a respect to something like OLA and really for all the rules. The regulators are trying to be very thoughtful about how they implement the rules. And so, they are very cognizant of giving people enough runway to respond. Now, having said that, we don’t want to take too much comfort from that, so you see us continue to manage the balance sheet and liquidity quite conservatively.

James Campbell – CalPERS Investments

Okay, and the second question I have was just regarding this planning that Liz had mentioned. Are you planning to discuss these plans at any point in the future with investors? It sounds kind of like sort of material that it’s great to hear about an investor day, but I was curious if you’re planning to discuss this resolution framework in any point in the future?

Elizabeth Beshel Robinson

I think we probably will at some point in the future. We’re still in the process of working with our regulators. It’s a very iterative process I’d say and we have a lot of ongoing dialog with our supervisors about the strategies in our regional sets of plans and the assumptions that we’ve made in those plans, I think we’ve learned a lot from creating our inaugural plan and we’re working already on what we need to do this year.

So again, I’d say we believe, not surprisingly that the risk management processes we have in place are mark-to-market discipline, liquidity of our balance sheet, our strong funding and liquidity position, our capital strength,. All of those things that we keep talking about position us very well in a revolutionary recovery type of scenario planning process. I think it’s probably too soon to start to discuss that publicly, but I think it’s the right time that we would be comfortable doing so.

James Campbell – CalPERS Investments

Great.

Harvey M. Schwartz

We certainly consider it in the context of what, the regulators allow us to do.

James Campbell – CalPERS Investments

Okay, thanks.

Operator

(Operator Instructions) Your next question comes from the line of Larry Vitale with Moore Capital.

Larry Vitale – Moore Capital Management LP

Hi, Liz.

Elizabeth Beshel Robinson

Hi, Larry.

Harvey M. Schwartz

Hi, Larry.

Larry Vitale – Moore Capital Management LP

I wanted to ask you if you had anymore clarity on the collateral grab that may result from mandatory clearing of OTC derivatives that day is coming ever closer, and you’ve been very specific in the past that the CFTC and ultimately the regulators are going to implement anything that disrupts the markets, but I’m just wondering if you add any more clarity on a) operationally, how this is going to go, and b) the quantity of collaterals that may be called upon?

Harvey M. Schwartz

So we don’t have any specifics on the quantity of collateral. We’ve all seen the same estimates, which vary pretty significantly depending on the various local and international proposals, but I would say again, what the risk is kind of redundant, when you saw the CFTC due in terms of no action letters in December. It seemed like a very thoughtful way to approach implementation, given the scope of what they’re trying to achieve. And even though, over time, I think we would all feel great if we have a completed rule set, because you can act against the completed rule set. the reality is their judgment seemed quite thoughtful and delaying the rule implementation across the first half of this year. So we’ll have to see as it evolves.

Larry Vitale – Moore Capital Management LP

Okay. And as the rules stand now or as you expect them to evolve and there is a little bit of art involved in that I guess. Do you foresee any changes in either the way Goldman Sachs funds or, and the amount of collateral that you are going to have to post against your counterparties?

Harvey M. Schwartz

We don’t see anything today, but I wouldn’t take that as a forward-looking statement, the reality is the key to how we adopt is really seeing what the rules, how they impact the markets and really, most importantly, how they impact our clients, because at the end of the day, we have to adapt locally and globally to fulfill our client needs. And the history as shown we’ve been good adapters, but we’ll have to execute well.

Larry Vitale – Moore Capital Management LP

Of course, and then last thing on this, do you guys – does Goldman Sachs expect to actually lose any funding as a result of having to post declaring houses on a gross basis as opposed to netting down client positions before you post.

Elizabeth Beshel Robinson

I mean, I think it’s the same answer. I think we’re certainly looking at that as it evolves and I think there’s more to come on that.

Larry Vitale – Moore Capital Management LP

Okay. All right, thanks very much.

Elizabeth Beshel Robinson

Thanks Larry.

Harvey M. Schwartz

Thanks. I think that’s our last question. And so on behalf of Liz and myself, we just wanted to say thanks for dialing in and me personally as I assume the role of CFO and I’ve been working for the transition, I certainly have another chance to me with all of you. But I do look forward to spending more time with you in my new role and certainly as the year progresses. So again, thanks everyone for dialing and we really appreciate it.

Operator

Thank you for joining today’s Goldman Sachs’ Fixed Income Investor Call. You may now disconnect.

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Source: Goldman Sachs Group's Management Presents at Fixed Income Investor Conference (Transcript)
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