The Goldman Sachs Group's Management Presents at Sanford C. Bernstein's Strategic Decisions Conference 2013 (Transcript)

| About: Goldman Sachs (GS)

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

Sanford C. Bernstein's Strategic Decisions Conference 2013

May 30, 2013; 08:00 a.m. ET


Gary Cohn - President & Chief Operating Officer

Harvey Schwartz - Chief Financial Officer


Brad Hintz - Sanford Bernstein

Brad Hintz

Well, good morning. I’m Brad Hintz. Thank you for coming out this early. I know this is the second day of the conference and all of you were out last night.

Today we’re pleased to welcome Goldman Sachs. Well, representing the firm are two Goldman Sachs partners who really are well known to the institutional community, Gary Cohn, President and Chief Operating Officer; and Harvey Schwartz, who is the Chief Financial Officer of the firm.

From the point of view of an equity analyst, these are happy days for my sector. We guys have been out of favor for two years and my stocks in general and Goldman in particular are working now.

The regulatory uncertainty that really made investors so cautious after the crisis is slowly lifting. The European crisis seems to be ring fast at least and investors are beginning to consider the very real possibility that we are going to have an old fashioned cyclical rebound of Wall Street’s institutional businesses.

Well, what does this mean? Well, Goldman is the leading global investment bank and of course it’s the one that’s most leveraged to a rebounding global economy. Growing GDP, improving investor confidence, cross border flows of capital, should drive M&A and equity capital markets activity and support some level of rebounding trading volumes.

Last year Goldman posted solid performance, given the macro economic background of the year. Full year revenues for 2012 were $34.2 billion, revenues were up 19% year-over-year, but perhaps most impressive for Goldman was the improvement in operating leverage that occurred at the company.

Goldman’s compensation ratio fell to 37.9% in 2012 from 42%, 42.4% actually in 2011. As a result, when revenues expanded 19% the firm delivered an 82% increase in pre tax earnings. For the year earnings were $7.5 billion and return on capital was $10.7 billion.

Well, you didn’t come here to hear a Bernstein analyst drilling on, so let me turn the podium over to Gary, who’s got a brief presentation and then we’ll have questions.

Gary Cohn

Well, thanks Brad and you must have had a pre copy of my speech, because I’m just going to elaborate on some of the topics that you talked about. Good morning everyone and thank you for being here.

The operating environment following the financial crisis had clearly created challenges to profitability for our industry. Post crisis returns are down by more than 10 percentage points, naturally leading investors to question normalized return potential.

As an organization we share our investors keen focus on returns. Throughout the cycle our goal is to outperform the peer group returns and grow book value per share. We look to achieve these goals, while maintaining a conservative financial profile. There are two key components to achieving this.

First, if we cannot find good opportunities to generate strong, risk-adjusted returns, we are committed to returning excess capital to shareholders over time. Secondly, we will continue our long-standing policy of paying for performance, as it strong aligns the interest of our employees with those of our shareholders.

We believe that adhering to these principals has been an important driver of our performance. However we all know that the financial services is a cyclical industry and priorities need to be adjusted, depending on the stage of the operating cycle. At the top of the cycle we look to capture revenue upside in the market place, deliver operating leverage to our shareholders and invest in our business to expand the client franchise.

In the more challenging environment as we remain in today, we look to protect the client franchise and be diligent about our resource allocation with respect to both capital and expense. As a result, we were able to achieve a 10.7% ROE in 2012. We are focused on positioning the firm to further expand our ROE and to be well placed to generate operating leverage and industry leading return as the operating environment improves.

While we don’t have visibility into the timing or velocity of an improved environment, we do want to elaborate on opportunities we see to drive returns higher over the medium term.

As we discussed together last year, we are focused on three primary drivers of our returns; revenue, expenses and capital management. More recently we have spent a lot of time talking about our capital management and expense discipline. Before we delve into the revenue opportunities, lets briefly review our approach to capital and expenses.

On capital we’ve been able to balance return in capital to the shareholders, while maintaining a conservative credit profile. During 2010 to 2012 we were able to return $14.8 billion of capital, representing 85% of our earnings. Our share buyback also helped lower our shares outstanding by roughly 10% or 50 million shares. Nevertheless maintaining the conservative financial position is our primary focus.

We believe that does not only provide protection against market disruptions and unforeseen events, but also positions the firm to serve clients when they need us most. One example of our continued effort to enhance our financial position is the increase in our estimated Basel III Tier 1 common ratio. It is up about 100 basis points from the end of 2011 to approximately 9% in the first quarter of 2013.

During a recent conference presentation, Harvey spent a lot of time explaining our capital efficiency efforts and the tools we are building to manage the balance sheet under Basel III. Those efforts continue and we feel very good about the progress we’ve made and the benefits these efforts will provide.

On the expense side, following a solid first quarter in 2011, we announced a $1.2 billion

expense savings initiative. We ultimately increased the size of that to $1.9 billion in 2012. Our focus on operational efficiency allowed us to deliver our second lowest compensation ratio as a public company in 2012. In addition, our comp ratio over the past three years is nearly 850 basis points lower than pre-crisis levels and has benefited return by almost 300 basis points.

We will continue to be focused on responsibly managing both financial and human resources. And clearly, if the operating environment remains sluggish, we will take additional steps to protect shareholders long-term returns.

Today I want to focus on four broad areas. We expect to drive revenue opportunities over the next few years. These include client confidence, risk appetite, market and business development and competitive dynamics. Before we discuss these opportunities, I would be remiss not to reiterate that GDP growth as the most fundamental driver of our long-term opportunity set.

History would indicate that as GDP grows, client confidence and activity levels improve,

investment levels and asset prices tend to rise, and we experience a multiplier effect within our business.

The power of that multiplier effect is important to remember. Over the past 10 years, our regional revenue has grown by approximately 1.5 times, the region’s corresponding economic growth rate. Although we have seen recent improvements in the U.S. economy, growth is relatively light and confidence remains fragile. In addition, while the market generally feels better about the tail risk in Europe, the economy is challenged.

Given the continued uncertainty in the market, we are not managing the firm with the hope that the macro backdrop will improve. We are focused on managing through a continued difficult operating environment. These opportunities are discussed today and reflect the trends that do not necessarily require significant rebound in the broader economic environment.

Given the macro concerns discussed, the confidence of our corporate clients remains

low and this has weighed on activity. Global M&A volumes in 2013 represent approximately 4% of global market cap, relative to the 20-year average, but closer to 7%.

A similar dynamic is evident in equity capital markets. IPOs currently represent 20 basis points of global market cap, which is 50% lower than the 20-year average. Activity has varied across the globe and we have started to see a meaningful pick up in the U.S. new issue market.

To the extent the operating environment stabilizes and our clients feel more confident,

we believe activity could revert to more normalized levels. If half of the gap was closed

relative to 20-year average activity levels, M&A volumes could increase by approximately $700 billion, and IPOs could increase by roughly $50 billion.

Importantly, these M&A and underwriting deals tend to drive interesting opportunities to

further serve our clients, including risk management and hedging solutions. On the M&A side, we would also expect to see increased deal-related financing.

One of the dynamics that will continue to impact client behavior globally is the low interest rate environment. This has been driven by significant central bank activity and

unprecedented levels of quantitative easing. These efforts have injected significant amounts of cash into the system and yields have declined substantially across asset classes.

As yields have compressed, investors have found it more difficult to generate desired returns. We believe this dynamic could continue to drive our investing client search for higher returning assets and increase their risk appetite.

Immediately following the financial crisis, we saw reduced leverage and people cut their risk profile. Equity mutual funds in the United States saw 5 years of outflows totaling more than $0.5 trillion through the end of 2012. Over that same timeframe, U.S. bond funds experienced over $1 trillion of inflows. As market participants have gotten comfortable taking more risk, U.S. equity funds have seen more inflows for the first time since 2007, with roughly $75 billion year-to-date.

To the extent risk appetite continues to improve, this could translate into higher levels of activity and a more profitable mix of business across both our institutional client service and our investment management businesses.

Continuing on the subject of business mix, we have started to see growth in structured products in response to an improving macro environment and our clients demand for higher returns. U.S. asset-backed securities issuance grew by 127% from 2010 to 2012. In addition, 2013 has gotten off to a strong start.

Year-to-date, CMBS and CLO issuance represent nearly 70% and 60% of 2012 levels, respectively. While we currently have a leading position in CMBS origination. Our position in CLOs is still developing. Nevertheless, we view both as meaningful opportunities for our franchise.

We would point out that the increase in structured products has been focused on plain

vanilla securitization, and not the more complex and leveraged structures that we have

seen in the past year.

Aside from the improvement in client confidence and risk appetite, we see a clear opportunity for new market development to drive longer-term growth. Markets like China and Brazil have a significant portion of investable assets dedicated to deposit products. In China, more than 70% of investable assets are in deposits, while the figure is closer to 60% in Brazil. This compares to the United States where deposits represent less than 20% of investable assets.

If China and Brazil end up evolving similar to the United States, we could see more than a $12 trillion transition over time to other asset classes, providing opportunities to serve our global client franchise and support economic growth. Given our expectation for healthy levels of economic growth, we anticipate that existing and new companies will continue to depend on capital markets to finance their growth.

As a leader in equity capital markets, we believe we are well positioned for these opportunities. In 2012, our franchise was ranked number one in Global Equity and equity related offerings and we’ve retained that leadership position so far in 2013. We also see the development of the debt capital market in China, Brazil and other high growth markets as an important long-term opportunity for the firm.

We’ve made investments in these and other regions with a long-term orientation. Today,

we have the right people in place, and continue to secure the necessary licenses. We feel very good about our ability to benefit as these capital markets develop.

The European bond market remains a compelling long-term opportunity. We spoke last year about the shift we have started to see in European debt markets from loans to bonds. This shift happened in the United States over many years. Loans contributed only 7% of U.S. financing in 2012, down from 30% almost 50 years ago.

In Europe we have seen bonds increase modestly over the past 13 years, with the mix of issuance in 2012 up approximately 300 basis points compared to 1999. We expect this trend to continue given the general contraction of European banks’ balance sheet. This coupled with our leading position in European high yields in 2012, leaves us well positioned to benefit from growth in this market.

Moving to another longer-term opportunity, the U.S. housing market. Housing has been

a critical component of the U.S. economy for decades, contributing nearly 9% of GDP

over the past 10 and 20 years. The supply of credit has been somewhat constrained post crisis and capital markets issuance has been hampered. However, we remain confident that the issues will ultimately be addressed, given the important role that housing plays in the U.S. economy.

One of the challenges facing the housing market is the level of issuance being guaranteed by the government is at record levels. Currently, nearly 90% of issuance is backed by the government, compared to historic levels in the 50% range. In order for government support to revert back to normalized levels, a significant financing and distribution opportunity exists for private label mortgages.

Second, the Federal Reserve currently owns $1 trillion of mortgage assets on its balance sheet or roughly 10% of the market. As the fed changes its approach to monetary policy, private capital will need to fill the void and banks can help intermediate these flows.

On the Commercial side of the market, large maturities are coming in 2015, 2016 and

2017. We believe that financial institutions can support this market, by lending or securitizing the mortgages and distributing them to investors.

Finally, we continue to see European bank deleverage, particularly mortgage assets.

We see an intermediation opportunity as we help our bank clients de-risk, while providing our investing clients with longer-term yielding products.

Our Investment Management business, which includes GSAM and private wealth management is ranked among the top 10-asset management firms globally and has record assets under supervision of nearly $1 trillion. Goldman Sachs is committed to grow and developing our business, and we continue to invest in talent, risk management, and technology. We also continue to pursue select strategic acquisitions and develop new products that strengthen our offering to clients and respond to their changing needs.

Serving clients well begins with delivering consistent and strong relative investment performance, which is always our top priority. Through continuous refinement of our investment process, we have delivered a substantial improvement in our client’s return. This has translated into six consecutive quarters of strong investment performance.

For our Mutual Funds globally, 81% of our client assets are in funds ranked in the top 2

quartiles over one year, 72% over three years and 56% over five years. We also have 178 global mutual fund share classes rated four or five stars.

We still believe that the competitive landscape provides an interesting opportunity for our franchise. We have seen headcount reductions of more than 80,000 across our global peer group in 2011 and 2012. Five out of our eight key global competitors have also made significant restructuring announcements, driven by increased regulation, higher capital requirements, and the challenging macro backdrop.

Given this group has collectively averaged almost $60 billion of core trading revenue over the past two years, you don’t need a significant amount of retrenchment to create

an important revenue opportunity for us.

While none of our global peers have announced plans to entirely exit key businesses, many are referencing a relatively significant degree of retrenchment in businesses like

commodities and less liquid parts of Credit and Rates.

In addition, we are seeing some competitors strengthen their native country presence,

while pulling out of more global businesses. As a result, we will likely see more cross

border or cross European opportunities for our franchise.

And finally, given that returns for many have not exceeded their cost of capital, many

market participants believe that some level of capacity is being removed on a more

secular basis.

At the end of the day, the onus is on the firm, to take advantage of the opportunity set over the next few years. To do this, we have to leverage our leading client franchise businesses, and the diversity of opportunities that it provides.

Over the past three years, no one-business activity has contributed more than 12% of

net revenues, while FICC has been the most significant driver. I comprise of five major

global businesses. Each has contributed between 5% and 11% of firm wide net revenue

on average over the past three years.

We have maintained our number one ranking in M&A’s and equity and equity related offerings and have seen improvement in our debt underwriting business. We continue to be one of the most active market makers in fixed income, currency and commodity and equity products globally, in cash and derivative form. In our investing and lending segment, we have a strong track record of making long-term credit and equity investments and often co-invest with our clients.

Finally, we have a top 10 asset manager that has been benefiting from improved investment performance. Serving our clients in the most value-added fashion, and maximizing the flexibility embedded in other diverse operations is central to maintaining our track record of superior return.

In conclusion, we are not running the firm under the assumption that the market environment will improve. While we do see many potential opportunities that could increase revenues and returns, we remain focused on managing the firm efficiently from both an expense and capital standpoint.

Our expense discipline and capital return have allowed us to generate meaningful operating leverage through the cycle, while growing book value per share. As an example, revenues in 2012 were up 19% and pre-tax income was up 82%. In addition, book value per share grew 11%.

As a shareholder, you should expect that we will continue to be intensely focused on cost and returning capital to shareholders given the challenging environment. We will continue to adjust and re-allocate resources to maximize efficiency as necessary. We have a culture of adaptability. We have a set of businesses supported by our mark-to-market philosophy, that provide the flexibility to adjust to a changing opportunity set; and we will rely on all of these principles to provide shareholders with superior returns.

Thank you very much. With that we’re prepared to take questions.

Question-and-Answer Session

Brad Hintz

Well, each one you should get cards. So fill out any questions, send them off to the ends and we’ll pick it up. We got a number of questions here, and actually given the fact that you’ve gone through your business portfolio, there’s two that I’d like to start with.

Goldman’s made it clear to investors that the investment business is a core strength to the firm. You’ve been in merchant banking for a very long time. This business sees a 6% of your assets and about 10% of your equity base on our estimate here. Can you give us some color on the firm’s plan for merchant banking and its mezzanine lending business. How this fits in under Volcker?

Gary Cohn

Harvey you want to talk about it?

Harvey Schwartz

Sure. So when we think about investing in lending, Brad obviously there is the equity component of the business, there is a lending component of the business and so its diversified geographically and obviously across products.

What we know about Volcker obviously, is that there is a 3% constraint in terms of the amount of capital that we can contribute to our funds and is a proportion of our equity and that’s very transparent to us and so we’ve begun to make plans to adjust to that.

We don’t have the balance of the Volcker rule. We haven’t obviously seen in front of the Volcker rule, but from what we can tell, we don’t think there will be anything that will impact our ability to do things on balance sheets and the Volcker doesn’t want to discourage lending and other activities of that like. So we’ll have to see when we get the final rule.

Brad Hintz

So does that mean you move to equity returns on mezzanine lending, so jacked with an equity kicker versus direct equity investing.

Harvey Schwartz

I don’t know necessarily how it will transform itself in terms of the solution set in the way of that you’re kind of defining it. I think the important takeaway is that we don’t as I said, believe that the Volcker rule wants to discourage lending activities with the bidding of capital and to the extent that we can do that as a core competency, we want to continue to do that and provide that to our clients.

Brad Hintz

Now, if we’re thinking of it as 10% of your equity base, if the business, if you can’t redeploy your capital, then that’s another form of surplus capital that you’re going to have to address or do you see this actually going, being able to continue to use a certain, that portion of your equity base.

Harvey Schwartz

Again, given the transparency we have, we think we are going to be able to deploy the capital in a way that has more than satisfactory returns.

If we come across a business line of course Brad, where we feel like a new rule set emerges and puts the business in a place where its no longer for example best held inside Goldman Sachs, like our reinsurance business, good business, we like the business, but with the new Basel Rules, it was clear that business was better held outside of Goldman Sachs, then we’ll make adjustments.

We are not going to be in the business of denying reality. So when we get clarity on rules, if something is better outside of Goldman Sachs, we’ll make an adjustment.

Brad Hintz

Hey Alan, the commodities, you’d had a long history in commodities. Does commodities fit in the commercial bank. Can Goldman be a physical trader or are you doomed to become a paper trader going forward and what’s the impact of the changing dynamics of the energy market in the United States on the performance of J.M. Is that a permanent issue or is that a temporary issue.

Gary Cohn

You’re talking in two guys who both started in J.M. This one is pretty easy for us. We strongly believe that being in the commodities business is important to our clients and our client friends.

Many more of our clients, so they have commodity exposure than they ever had before or they ever realized they had and when you’re sitting in the client corporate treasury office, you’re sitting with the CFO, you know historically they thought about interest rate risk first, then they thought about currency risk second. That has now clearly evolved in the thinking about raw material price risk as well.

So having the ability to integrate risk management teams for our corporate clients across all the various classes is very important to our overall client franchise, its important to our business. We have the ability to do whatever our clients needs. Some of our clients actually need us to deliver physical to them.

If you’re a large airline and you want to secure fixed price jet fuel, you need to go to someone that can sell you fixed price jet fuel, if you’re an actual aluminum smelter and you want to make sure your selling your aluminum at a price that is high enough to cover your debt server cost and all of your other expenses, you want to be able to physically deliver that and we have been able to provide that service to our clients and we think that is a uniquely differentiating skill that our corporate clients really enjoy the ability to have the option to be able to deliver physical to us and it is an important core business of our ours, one that we had been since the early 80s and we continue to build.

Brad Hintz

So it is, from your point of view, its synergistic with investment banking.

Alan Cohen

Completely synergistic. It is part of the risk management world today.

Brad Hintz

Very good, very good, okay. We got a number of questions about rates, which is there seems to be – lets go to one. The fixed income business did not, well particularly favorable numbers on Wall Street over the last two years, despite declining rates and narrowing credit spreads, essentially the volatility of the business was constrained in terms of the upside in those days. Does that mean that investors should be less concerned about negative performance in Q-8, if Q-8 3 goes away or do you have the risk of a reply of 1994.

And from the audience we got a number of questions that were very similar, which is what happens to fixed income in a risking rate environment, what happens to fixed income in a flat yield cure as rates rise.

Alan Cohen

One of the great fallacies that’s out there and in the world and this goes back many, many decades, prior to the evolution of many of the products that are very liquidly traded today, is there’s this whole historic urban legend that you could only make money in the fixed income business when rates are going down, because therefore the invert relationship between bonds and rates, your bond value goes up as rates go down.

That was probably true in the 20s and 30s and the 40s and maybe the 50s. By the 60s we were already getting to the futures markets, we were getting in the bond features, we are getting in the euro dollar features. That evolved beyond euro dollars and bond features in the CVS, in the swaps and all different types of vehicles.

So as a market maker the financial intermediary trying to provide liquidity and capital to the market for our clients, we have the ability to in any interest rate environment to structure our book as neutral as we wanted, as positively effective to lower interest rates or as positively effective to higher interest rates as we like.

We tend as a market maker to run a relatively neutral book on rates, we tend to try and earn a bit off the spread, we try and facilitate flows, so that the old urban legend of you can only make money in fixed income as rates go down, I think it is just that, an urban legend. So if we end up in an environment for the next 30 years, and by the way we’ve been in a 32 year bull market in bonds since the (inaudible), we end up in another 30 year bear market in bonds, I could foresee our business just growing naturally over time as more and more people tend to need to get involved in the market.

There is also an initial flurry of activity over some period of years as rates start to tend to go higher, people tend to want to do more and get more funding locked in and they start thinking more about taking on interest rate protection, they think more about swapping, fixed for floating. So there is always business activity no matter what the rate cycle is.

Brad Hintz

But as the curve rises and flattens, don’t institutional trade volumes move to the short end of the curve and you can’t do flow trading against them.

Alan Cohen

There is a robust curve; there is always a robust curve. There is many people that need the asset liability match. So when you’re an insurance company you got a 30 year, 40 year, 50 years duration liability and you want to match it.

When you got a overnight business and overnight repo and by the way 30 year bonds become two year bonds 28 years later, I know that phenomenon works, there is always a opportunity in all of those segments in the market. And so as long as our clients are going to asset liability manage, which they do, and that’s their business, a lot of our clients, we’re going to have a robust business across the curve.

Brad Hintz

So we have a number of questions about capital. Basel III raised your capital requirements. There is a SIFI buffer. You have your own buffer that you’ve added above the SIFI buffer. The regulators are testing you with unforecastable stress test.

Is there any limit to the amount of the capital that you’re going to have to maintain and this is sort of from the point of view of an analyst. What do we use as the minimum target with the capital for Goldman Sachs and when will you be able to actually operate as a minimum? When will the fed become confined with their own Basil Rules.

Harvey Schwartz

So it just gets a little bit cloudy around that question. So as you indicated Brad, so the 7% plus the indicated SIFI buffer, not finalized, but 150 basis points and then we had indicated that we could expect to run give or take with a 100 basis point increment above that. And we have at about, that thinking particularly differently or recently, I think that’s a reasonable indication in terms of how people should expect, although obviously that will get finalized and we reserve the right to adjust that strategy.

In terms of capital management, the most important thing for Gary, myself and the firm is that we run the firm with the appropriate amount of capital. What I mean by that Brad is that we want to be positioned defensively, because the market still remains somewhat uncertain, but at the same time we really want to be positioned with capital offensively. So we are in a position to commit capital for our clients, particularly as significant transaction opportunities come up.

Gary mentioned mortgage portfolios coming out of Europe and those are important transactions where we can facilitate as a market maker, committing fairly significant amount of capital; sometimes over short periods of times, it could be measured in days, sometimes its weeks and months and so as an offensive tool capital obviously is quite important for us.

In terms of how we untimely adapt, a lot of it is really cultural for us. In terms of – Gary mentioned earlier at a conference this year where I walked people through the tools that we use and deploy to our businesses, to make sure that we are using the balance sheet most efficiently and so again, we’ll return capital to shareholders when we feel like we have excess capital and we’ll deploy in the business when the opportunities arise.

Brad Hintz

And then that leads to follow-up questions that came from the audience which says, given the change in capital, what kind of ROEs do you see going forward for the firm and for some of the business as you re-entered. So there we are talking about the capital-intensive business units, what kind of ROE can a FIG produce?

Harvey Schwartz

So over the long run, the most important thing about the FIG businesses and obviously Gary should jump in here too in terms of the drivers. But for us the way we look at is in this part of the cycle Brad, where obviously capital to some extent to the industry is becoming a bit of a binding constraint for many of our competitors, when we think about the fixed income business, particularly the more capital intensive businesses, what we want to make sure is that we have a leading position in any of those businesses.

To try and prove those business now Brad, you know for example you mentioned the commodity business earlier. If we hadn’t been in the commodity business, which we purchased in 1981, I think that would be an incredibly difficult business from Gary and I to sit here and explain to you that we just decided we are going to build that now. I think it will make the comments maybe interesting, but a little more complex discussion.

And so if you are in a leading position for fixed income, you really what to protect that position and over time, in terms of what we see in our ability to deploy capital, we feel confident about the ROE profile.

Gary Cohn

Brad, I would add that on the ROE question, as I pointed out in my prepared remarks, the biggest determined of that ROE question is going to our client franchise and what do our clients need to do and what is client activity going to look like.

If you look at the statistics I used in the M&A markets, I used in the IPO markets, you don’t need a big up-tick in those businesses for our revenue to increase. I’m not saying its happening today, but you don’t need a big up-tick.

In the first quarter we had say an approximately 9% Basel Capital, 12.4% ROE if you start adding a little bit of more client activity, because client confidence increases, you will see commensurate returns in ROE.

Harvey Schwartz

Rightie that. In terms of the FIG business, if you look through it from the advantage point of our clients, it really is critical, where you in the full suite of businesses, leading position, your diverse and you’re globally placed property.

So if there are people who want to trade commodities or interest rates in Asia, they can do it easily there, they can in New York and of course, you really had to bundle that in with obviously the full suite of activity that you can also do in the equity side of your business, whether its paying brokers. Then you could really start to get scale and efficiencies out of the business and environment like that I just described.

Brad Hintz

Somebody is asking you to do their valuation work for you. They are saying that you are buying back stock at a 12% ROE, what is your peak book value, price book that you are willing to buyback stock at.

Gary Cohn

Sounds like a CFO question.

Harvey Schwartz

To me it started like a President, CFO question.

Gary Cohn

Just that we face this all the time.

Harvey Schwartz

We’ll continue to be prudent about how we think about share repurchase Brad, how is that.

Brad Hintz

Okay, thanks for the question.

Harvey Schwartz

What do you think we (Multiple Speakers). The public finance is more in your wheelhouse, isn’t it?

Gary Cohn

I think you can get 15 day and then sort of buying back at 12 or so.

Brad Hintz

Buying back at 12 is okay.

Gary Cohn

Thanks Brad.

Brad Hintz

You rolled out those elegant models for pricing trades under post Basel III. Some of your competitors aren’t there yet. Are you leaving money on the table by pricing at this point.

Gary Cohn

Look, Harvey and I can both just on this, but we are not leaving money of the table if we are trying to increase our ROE. The models that we have allow us or allow our traders to real time understand the amount of capital that’s been tied up in the transaction, what’s the return on Basel III capital, what the return on CCAR, what’s the return on all those issues are and if we are trying to increase our ROE, we need to give them those tools.

Brad Hintz

We’re not a Canadian bank, we are not operating under Basel III yet.

Gary Cohn

We are not a Canadian bank, but we understand where the world is going and we know it’s a long evolutionary process. So if you’re looking at that trade as a three-month trade or an overnight trade, you have a different set of mentalities looking at those tools. If its a five year trade, you look at those tools and you look at the return on capital.

We are not turning down short-term business, because it doesn’t hot the long term Basel III threshold, but we are turning down long-term business that doesn’t get over this Basel III threshold. We have given our traders the tools. The tools are just tools, they are not the answer book.

They are the tools to evaluate what you need to do and then they interpreter from there, how to implement. And you are right, if we are doing intra day trades and liquidity trades and over night trades, you got one set of criteria. If you are doing a five or 10 year, long dated derivative, you’ve got a completely different set of tools.

Harvey Schwartz

I understand the nature of the question, but there’s a little bit of – our people are pilots; they are flying their plan. Its almost like saying would you rather than fly without radar or with radar and so for us ultimately the market will adjust, but it will be much more concerning to Gary and I, if we thought people were miss pricing things and putting them on the balance sheet, thinking they had a certain economic return, when they actually don’t. That would be much more concerning than having the visibility.

So its really, really critically important to us that we give our people the tools, so they have a proper transparency, but our clients understand all that.

Gary Cohn

You got to take away the three dangerous words from the trader, I didn’t know.

Brad Hintz

We have a bunch of questions that are related to count, which is lower comp ratio, is it sustainable for long periods of time, so that’s the economics for us looking forward. But its also, does it hurt you in terms of attracting talent. And then there is also the series of questions that really relate to sort of business school, which is are the best and the brightest in business school now turning away from Wall Street, going elsewhere, looking at the Silicon Valley.

Gary Cohn

I’ll start. We are having no problem attracting people. If you look at – I’ll give you some real antidotal evidence. This year in investment banking only, not the firm, in investment banking we did hire for starting next week. Lets round it up, 350 kids to come in just from random. That was out of an applicant pool of 17,000-plus, so we saw 17,000.

I won’t say they were all highly qualified, but the vast majority were high qualified kids that wanted to come to work in Goldman Sachs for the summer and do the internship program. The amount of résumés we get for full time is in the 50,000, 60,000, 70,000 range. So as far as quantity, we are having no problem getting quantity.

As far as quality, we still do get very, very high quantity people, and we’ve been able to hire some great people. The other area where we’ve had very good success recently is our lateral hiring program that has been very good. We’ve been able to hire many very talented people from different competitors out there in the world, in the last six months and we’ve been very encouraged by people we’ve been able to find there.

So as far as creating a backlog, creating an infrastructure of young people, we still have great opportunity that we are not having trouble. We also have just as another anecdote, we have been 80%-plus acceptance rate for people that we make the job offers to, both in the summer and in the full time. It’s even high 80s to be honest with you.

So we are getting the résumés, we are getting the people interviewed, we are making job offers, we are getting 80%-plus acceptance rate. That’s pretty typical to where we have been as a firm over the entire cycle.

Brad Hintz

Now, on that comp ratio, well I understated volatility, understand changing economics. But in a normal environment, is this a number that investors can look towards as a target going forward.

Harvey Schwartz

See, I wouldn’t hatch any specific accuracy to any one given number. Gary talked about it in his prepared remarks. The culture around compensation is one where first and foremost we are going to pay for performance.

When you show up at Goldman Sachs and when I walked into the door in 1997, one of the first things that really communicated to you is that you are personal compensation is a result of how the firm does and within the firm how your division does, and in the division how your business does and then your personal performance. And so the number that we used last year reflected a couple of things; one certainly was the cost efficiency that we built into the business and you yourself commented on the operating leverage, so it gave us more flexibility.

And of course Brad, we are cognizant that the firm now is running with 75% more capital now than it was before the crisis and so we want to make sure that we do our best to get the balance right for our shareholders, but the culture around compensation is really making sure that we continue to attract and retain all the best people.

Brad Hintz

Well, thank you. Thank you very much.

Gary Cohn

Thank you.

Harvey Schwartz

Thank you.

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