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

F1Q08 Earnings Call

March 18, 2008 11:00 am ET

Executives

Dane Holmes – Director Investor Relations

David Viniar – Executive Vice President & CFO

Analysts

Glen Schorr – UBS

Guy Moszkowski - Merrill Lynch

Roger Freeman - Lehman Brothers

Prashant Bhatia – Citigroup

Michael Hecht - Banc of America Securities

Mike Mayo - Deutsche Bank

Meredith Whitney - Oppenheimer

Operator

Good morning, 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, everyone. This is Dane Holmes, from Investor Relations and 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, but 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 these forward-looking statements.

For a discussion of some of the risks and factors that would affect the firm’s future results, please see the description of risk factors in our current annual report on Form 10-K for the fiscal year ended November 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 of non-GAAP financial measures that is posted on the investor relations portion of our website at www.gs.com.

This audio telecast is copyrighted material of the Goldman Sachs Group, Inc. and may not be duplicated, reproduced, or rebroadcast without our consent. Let me now ask David Viniar, our Chief Financial Officer to review the firm’s first quarter results.

David Viniar

Thanks Dane. Good morning, I’d like to thank all of your for listening. I’ll give a brief review of our results and then I’d be happy to take your questions.

Our first quarter results reflected a more challenging operating environment than we’ve experienced in recent quarters. While a broad based asset repricing across credit and equity markets negatively effected our performance in certain businesses, our core franchise remains strong.

For the first quarter of 2008 net revenues were $8.3 billion, net earnings were $1.5 billion and earnings per diluted share were $3.23. Annualized return on common equity was 15%. Now I’m going to review each of our major businesses.

Investment Banking produced net revenues of $1.2 billion in the quarter. First quarter Advisory revenues were $663 million, down 47% sequentially as the pace of closed M&A transactions slowed meaningfully. Investment banking activity has clearly been influenced by broader market disruptions and the unclear economic outlook. That being said, the strength of our client franchise in investment banking remains undiminished as we rank first in global announced M&A for the fiscal year to date.

Our Investment Banking backlog declined from the fourth quarter but it’s still comparable to 2006 levels. We advised on a number of important transactions that closed during the quarter including Siemans Automotive’s € 11.4 billion euro sale for Continental, Abu Dhabi National Energy’s $4.6 billion acquisition of PrimeWest Energy Trust and [inaudible] $4.4 billion sale to [inaudible].

We’re also advising on a number of significant announced transactions including Ingersoll-Rand’s $11.5 billion acquisition of Train, the Vivendi Universal Games $6.5 billion merger with Activision and Ranstad Holdings € 3.4 billion euro acquisition of [inaudible].

Underwriting revenues were $509 million, 31% below the fourth quarter. Equity underwriting revenues were $172 million, down 57% sequentially while debt Underwriting revenues were up 2% from the fourth quarter to $337 million.

Equity financing activity declined during the quarter due to sharp price reductions, higher volatility and increased uncertainty in global equity markets. Debt underwriting activity was relatively flat sequentially as broader credit market disruption continued to weigh on new issue markets. During the quarter we participated in a number of significant underwriting transactions including the $6.6 billion three part convertible notes offering by TransOcean, the $4.2 billion convertible bond offering by [Signopak], and the £ 318 million IPL by Hanson Transmissions.

Let me turn to Trading and Principal Investments which includes FICC, equities and principal investments. Net revenues in this segment were $5.1 billion in the first quarter, down 26% from the fourth quarter. FICC net revenues were $3.1 billion, down 5% from the fourth quarter. We posted excellent results across our macro businesses, with record quarters in currencies and rates and while not a record very strong revenues in commodities.

Currencies rates and commodities all benefited from higher volatility and increased customer activity during the quarter. Credit revenues were down from the fourth quarter as considerable client trading flow was more than offset by a broad decline in asset values. Credit results included at $1 billion loss, $1.4 billion before hedges, related to leverage lending activities.

Mortgages revenues declined significantly during the quarter. Market dislocation that began in the sub-prime asset class migrated to various assets including prime, Alt-A and commercial real estate. Much of the pricing pressure we have seen is related to technical contagion and many assets are being priced by the market at levels which are significantly below the levels that would stem from a fundamental valuation approach. However, we firmly believe in the mark-to-market philosophy and continue to mark our positions to market clearing levels. As a result we had losses of approximately $1 billion on our resident mortgage positions during the quarter, largely in Alt-A and prime. As it relates to commercial real estate, our net losses were not material.

Turning now to Equities, net revenues for the first quarter were $2.5 billion, down 3% from the fourth quarter. Equities trading net revenues declined 5% to $1.3 billion. Our derivatives business was up sequentially driven by higher customer activity and increased equity market volatility. Revenues from our cash equities business were solid but down from the fourth quarter which principal strategies results were down significantly.

Equities Commissions were $1.2 billion in the quarter relatively flat on a sequential basis. The continued strength in this business reflects both robust customer flows and our increasing market share in the electronic trading business.

Turning to risk, average daily evaluate risk in the first quarter was $157 million compare to $151 million for the fourth quarter. Interest rate category VAR remained high due to elevated volatility in the mortgage market. VAR declined in the equity category as we reduced position sizes during the quarter. The decrease was more than offset by an increase in our commodity category VAR driven by higher volatility and an increase in positions as well as reduction in diversification benefit.

Let me now review Principal Investments where we recorded a first quarter net loss of $532 million. This reflected a $135 million loss on our ICBC investment as well as losses from other corporate principal investments. We produced very strong results in Asset Management and Securities Services with record first quarter net revenues of $2 billion, up 11% from the fourth quarter.

Asset Management produced net revenues of $1.3 billion, up 13% on $1.1 billion of management fees and $194 million in incentive fees. Assets under management increased to a record $873 billion at the end of the first quarter. During the quarter, assets under management increased $5 billion reflecting $29 billion inflows partially offset by $24 billion of market depreciation. Net inflows primarily reflected inflows in money market assets partially offset by outflows in equity assets and market depreciation within equity assets.

Securities Services produced strong net revenues of $722 million, up 7% from the fourth quarter. This business benefits from higher customer balances. Now let me turn to Expenses.

Compensation and benefits expense in the first quarter was $4 billion accrued at 48% of net revenues. First quarter non-compensation expenses were $2.2 billion, a 9% decrease from the fourth quarter. The sequential decrease was largely driven by lower market development, depreciation and amortization and occupancy expenses. Occupancy expenses declined as the fourth quarter included $128 million of exit costs related to the firm’s office space.

Headcount at the end of the first quarter was approximately 31,900, up 4% from the fourth quarter. This sequential increase was principally driven by our acquisition of Litton Loan Servicing. Our effective tax rate was 29.5% for the first quarter. The decrease in the effective tax rate was largely due to the geographic mix of earnings.

During the quarter the firm repurchased 7.9 million shares for approximately $1.6 billion. We currently have approximately 64 million shares remaining under the firm’s existing stock repurchase authorization.

To conclude the current environment is clearly challenging, however given the significant weakness in the broader market environment during the first quarter we believe our results clearly demonstrate the value of the Goldman Sachs client franchise and business model as well as our culture of team work and risk management. We will continue to execute on our strategic initiatives, conscious of the evolving market dynamics and focused on remaining nimble in this environment. We believe this approach, coupled with global economic growth will allow us to continue to create significant value for our clients and shareholders over the longer term.

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

Question-and-Answer Session

Operator

Your first question comes from Glen Schorr – UBS

Glen Schorr – UBS

Hi Dave, maybe you could talk towards, it’s a two parter, one is get it out of the way and talk toward how comfortable you are with your liquidity position and then maybe follow it up with how you’re thinking the distressed opportunities in the market place and how willing you are to take on, I’ll just call it for lack of a better term, Level 3 assets and beef up those positions even though you’re getting them at what you think is a great price.

David Viniar

Okay, I’ll answer both of them Glen. Liquidity, you know, you’ve heard me talk over the years about liquidity being the single most important thing at Goldman Sachs, that’s the case for us all the time. It’s even more the case in times of market turmoil. I would tell you that our liquidity position now is stronger than it has ever been before. And you know in my, I guess its nine years of being the CFO now; we have never had a stronger liquidity position than we have right now. Our global core excess which is really our pool of cash and cash equivalents, which average in the $60 billion range in the fourth quarter has been significantly higher than that for the entire first quarter and is significantly higher than that now. Our…most of our short term financing is actually turned out. We have little rollover risk; it’s not zero, but it’s little and so we do finance most of our repos for term. We pay for that but we think it’s worth it. Our commercial paper is less than $5 billion so it’s very, very minimal. And so we do everything we can to put our liquidity in very good shape and it’s, as I said, in as good a shape as we ever seen.

I’ll add to that even though you didn’t ask it, I’ll just make a point of this question. I think that the liquidity facility that the Fed has provided, the ability to access the discount window directly for broker dealers, I think is a very good thing and will help both our liquidity as well as liquidity in the market. One of the important parts of financing is to have diversification of financing sources. That is another source of diversification. It is another way of financing assets and while we have not used it yet since it’s affectively a day old, I would expect that I see no reason we would use it in the future. We wouldn’t use in the future. I think we will because it’s another source of financing and it’s a good source of financing. So as I said, with all of those things I think our liquidity position is probably stronger than it has ever been before.

So let me move on now to your other question, times of distress are times of question but it’s also times of opportunity. Purchasing distressed assets has actually been a business that has been a good business for Goldman Sachs over the years in various places. Our expectation is that we will see opportunities and we look at everything on a risk reward basis. And if we see an asset, we do our best to value it. We do our best to decide what we think the risk is of holding it and what the returns are going to be and if we see good opportunities we would absolutely take advantage of them.

Glen Schorr – UBS

Can you talk about, you had a billion in the write-downs on the resi mortgage side, I think it’s more than some expected, I’m assuming it’s Alt-A related, can you talk about you got and how you have it marked and hedged in Alt-A.

David Viniar

Sure, it’s mostly Alt-A, some prime, basically all mortgage assets declined in value. Right up to the very top of the quality so anything you were loaned went down in value. And so as I said, mostly all Alt-A, some prime. To give you a sense of what we have, I’ll just run though it, at the end of the quarter we had $12 billion of prime, $5 billion of Alt-A and $2 billion of sub-prime. Now that’s long assets only so it doesn’t take into consideration what hedges we have in place, what [inaudible] we’re short, what single [inaudible] we’re short against them. As I said, most of it was in Alt-A. Alt-A is probably of all of those the hardest to hedge. There is not direct index. You can hedge sub-prime with ABX, you can hedge prime with agencies so there’s better hedges for all of them, very little for Alt-A. But you have to hedge Alt-A with a combination of the other industries and as with all hedges, there’s basis risk that’s introduced and there’s probably more basis risk with Alt-A than anything and clearly with those losses over the course of the quarter we were not hedged enough.

Glen Schorr – UBS

Great, I ended on an annoying one, sorry. Any interest in the Bear franchise?

David Viniar

That has never been on our radar screen.

Glen Schorr – UBS

Okay. Thanks so much Dave.

Operator

Your next question comes from Guy Moszkowski - Merrill Lynch

Guy Moszkowski - Merrill Lynch

Good morning David. Forgive me if you went over some of this, the Lehman call went over a little bit, on the leverage finance side, I saw that you I guess spoke to some reporters about a reduction over the course of the quarter, and it would seem that you had some fairly significant sales. We know what the price movement was like in the quarter, essentially I guess the question is can you help us reconcile what you sold, what you might have actually put on at very low prices and how the marks reconciled to sort of actual realized losses.

David Viniar

Let me give you some numbers and tell me if this helps. Beginning of the quarter, we had $26 billion of unfunded; $17 billion of funded; $43 billion total. Over the course of the quarter, we sold or reduced through cancellations about $20 billion. We put on $4 billion of new commitments, obviously put on at the current terms and conditions, leaving us at the end of the quarter $9 billion unfunded; $18 billion funded; $27 billion total.

And so the billion dollars of losses, it was $1.4 billion gross, $1 billion net, is really a combination of where things were sold and anytime something was sold, anything we had if it was sold below the marks, was marked down to there. And so we have our positions marked now where we think we can sell them.

Guy Moszkowski - Merrill Lynch

That helps thanks. Can you give us a sense for total assets and leverage ratios at the end of the quarter?

David Viniar

Yes, round numbers, if you want just gross leverages, assets to equity, round numbers, our assets were about $1.2 trillion and our equity is about $40 billion. Just give you the round numbers.

Guy Moszkowski - Merrill Lynch

Okay and can you help us with the net on that?

David Viniar

You say net, what do you mean?

Guy Moszkowski - Merrill Lynch

Well net of matchbook assets as you would look at it, the calculated net leverage ratio.

David Viniar

I actually don’t have those numbers in front of me so let me come back to you.

Guy Moszkowski - Merrill Lynch

Okay, that would be great. I didn’t see any mention in the release of marks on commercial real estate finance assets and obviously there was pretty significant negative variability in the quarter there. Can you give us a sense when your $19 billion or so portfolio at the beginning of the quarter, what kind of…you know how you thought about the marking process given it doesn’t seem like it was very material in the end?

David Viniar

You know those marks are done with the same level of diligence and vigilance as everything else is marked and as things moved it was marked down. What I mentioned in my script was that the net losses on commercial were not material and that’s because we had offsetting gain on hedges. As you know, as I said before to Glen and it’s surely the case with commercial as much, when you hedge commercial real estate loans which are largely single-name loans with induscies which is really the best way to hedge it, you’re introducing basis risk which we did. We had basis risk but over the course of the quarter, really the inducies and the single-names kind of moved in tandem and so they largely offset…we had some losses but they were small. But it’s something that we watch very carefully and I can’t tell you that we will always get it right but on that basis we did in the course of the first quarter.

Guy Moszkowski - Merrill Lynch

Lehman mentioned in terms of Alt-A hedging, sort of a natural hedge from servicing. You’ve obviously added servicing capabilities during the quarter. Do you see that as a way of hedging your exposures?

David Viniar

First of all we really have just gotten that servicing platform so we’re looking at it. I think it’s a, it’s a tough way to hedge it. I think the Alt-A is the hardest section to hedge.

Guy Moszkowski - Merrill Lynch

Right. Can you just comment in the prime brokerage and clearance business, first of all are you seeing growth there that you can really tie directly to what happened to Bear, to what extent are you able to accommodate incremental financing needs that are going to come to you at this point from clients who are sort of displaced. And then separately but also on prime brokerage, can you give us a sense for whether you’re seeing any significant securities inventory growth due to seizure of prime brokerage collateral or how quickly are you finding that you’re able to liquidate collateral when you seize it?

David Viniar

Our prime brokerage business has grown and continues to grow and I think that’s not necessarily related to what’s happening with our competitors. I think that’s more because our business is pretty good and I think our clients like the service we give them. We get balances both from new hedge funds and from current hedge funds all the time. So those balances have grown and continue to grow. And as they grow, we think that’s good for us and yes we can handle what our clients need. We’re careful on the financing terms. We have the appropriate margin in place and you know over the course of the years our losses there have been extremely small. And as far as large growth in inventory assets I would say it’s been pretty minimal. I’d say it’s not that often that we have to seize assets and when we do we’re generally able to liquidate them pretty quickly.

Guy Moszkowski - Merrill Lynch

Okay, that’s all very helpful, appreciate it David.

Operator

Your next question comes from Roger Freeman - Lehman Brothers

Roger Freeman - Lehman Brothers

Good morning David, I guess with respect to this PDCF facility which you talk about briefly, how significant of a benefit is this and specifically do you look at this more as a funding facility to help you in terms of your repo financing or in terms of helping finance, liquefy, how do you from a practical standpoint, how do you see this?

David Viniar

I would answer those two things as yes and yes. I think it’s a very good thing. I think the purpose of doing it was really to help the market get more liquid. We think it should have that benefit. As I mentioned before one of the benefits to us is diversification of financing. It gives us another source of financing for assets. We were okay without out. We were fine without it but with it it’s just that much better and it’s another source both for our own assets and if a client wants us to help fund them, it gives us another source of financing to turn around to. One of the things that had been going on in the market was that part of the lack of liquidity we think, and I think the Fed and the Treasury thought was because of a lack of funding that was available and this makes funding available to broker dealers like us to (a) buy assets and (b) fund others who want to buy assets. And so I think overall it’s a very good thing; I think it will be very helpful to the markets.

Roger Freeman - Lehman Brothers

So this facility helps us a great deal in terms of short term funding, what’s you sense in terms of longer term balance sheet risk, do you think that the Fed ultimately is going to have to essentially buy up the liquid assets off a broker and balance sheet?

David Viniar

I know that they are very, very hesitant to do that and I…we’ll see what they do. I think it’s going to depend on how the well unfolds.

Roger Freeman - Lehman Brothers

Well so I guess to that point, what else do you think gets, sort of facilitates or what is a catalyst for the transfer of some of these risky assets. I mean you’ve clearly, you’ve sold loans off to your part during the quarter, have you been buying some loans as well. Are there any of these assets causes, have you been committing capital. Do we potentially see any kind of a two-way flow; I think some of the other brokers have been buying where they see opportunities as well.

David Viniar

No, I told you we made $4 billion of new commitments in the loan markets so that’s a commitment of capital. We make markets in everything. Of course the mortgage industry, we have been buying and selling, you know if we see opportunities. I would tell you we haven’t seen that many opportunities yet and we’re going to wait for the ones that we think are the most appropriate and then we will try and take advantage of them.

Roger Freeman - Lehman Brothers

And how do you manage that relative to I guess the total size of your balance sheet and any focus you have on de levering. I think the numbers you gave us said on a gross basis you’re still at 30 x which I think is pretty consistent with where you’ve been. Is there a target leverage ratio that you’re shooting for and does that limit your ability to buy where you see opportunity?

David Viniar

We are always looking at risk and rewards. You’ve heard me say in the past that we think that looking at a gross leverage level doesn’t tell you very much. Because it depends on liquidity of the assets. It doesn’t tell you anything about the risk. It doesn’t tell you about what’s hedged on the other side. It doesn’t tell you about derivative exposure. And so we think that’s a very minimal benefit. One of the things that we look very carefully at is our capital ratios. Those are tied very much to risk and liquidity. And we make sure that those are always strong and in deciding in what we’re going to purchase, we look at what our capital ratios are. We look at our liquidity and we make our decisions based on that.

Roger Freeman - Lehman Brothers

Are you looking to strengthen the balance sheet going forward here?

David Viniar

We’re going…it depends on what the world unfolds to date. I think given where we are right now, our capital is very adequate. Our liquidity is very adequate. If there were things that we thought were not earning appropriate return we would sell them. If there were things that we thought that we could make a lot of money from, we would buy them. We have no need as we sit here right now to shrink our business.

Roger Freeman - Lehman Brothers

Okay, thank you.

Operator

Your next question comes from Prashant Bhatia – Citigroup

Prashant Bhatia – Citigroup

Just on the fixed income revenue, if we look at this pulling out the write-downs, it’s very strong. Can you just talk about some of the drivers there and I don’t know if you can quantify it, but how much was driven by just higher activity versus maybe the bid ask spreads being wider.

David Viniar

Prashant, the activity levels across our macro businesses and some of the core franchised businesses of the firm were very, very strong. And yes, we mentioned that we had records in our interest rate products business, in our currency business. We had near record results in our commodities business. So those businesses performed extremely well. I think that was part of what drove the success.

Prashant Bhatia – Citigroup

Okay, in terms of the Fed’s facility, is that something that you would like to see or could envision end up being something more permanent, considering maybe some positive and negative consequences of that?

David Viniar

Well I would…sure from our point of view, we would very much like to see it be permanent. I have no idea if the Fed or the Treasury has that in mind or not. But as I said before, it gives us another source of financing. It gives us diversification of financing. And that’s always a good thing for us and so certainly as I sit here now, I don’t see the negative; I only see the positive.

Prashant Bhatia – Citigroup

Okay, fantastic. And then just on the asset management side of the business, anything specific on the equity AUM that drove the flows in that business?

David Viniar

You mean the outflows?

Prashant Bhatia – Citigroup

The outflows, the $17 billion.

David Viniar

I would say there were two things, one our quantitative long equity business had what I would call challenged results over the course of last year so some of the outflow was that. And I think even more of it was a rotation of people’s assets from equities into money markets given the environment.

Prashant Bhatia – Citigroup

Okay and just maybe longer term, thinking of the competitive dynamic, just any comments on with Bear under a different entity, maybe the cost of leverage going forward, just a view on just the competitive environment change a little bit to your favor or not.

David Viniar

I don’t see it changing very much. JP Morgan is a very strong, has been a strong competitor. I think all of our competitors out there, and I could go through them, are quite strong. We think they’re all in very good shape and we think that they’re all going to be very, very good competitors going forward.

Prashant Bhatia – Citigroup

Okay and you don’t see any permanent implications on the cost of leverage or the amount of leverage being used industry-wide?

David Viniar

No I don’t.

Prashant Bhatia – Citigroup

Thanks David.

Operator

Your next question comes from Michael Hecht - Banc of America Securities

Michael Hecht – Banc of America Securities

I’m sorry if I missed this too, did you guys actually say, did you have any positive benefit of fair value marks on your own debt this quarter?

David Viniar

You know what, I did not and no one asked it yet so that’s fine. The net benefit to us was about $300 million.

Michael Hecht – Banc of America Securities

Would that be mostly in FICC or is that spread across equities and FICC, I mean it sounded like a big number.

David Viniar

It’s mostly in FICC; there’s some amount in equities but it’s mostly in FICC.

Michael Hecht – Banc of America Securities

Okay and then on the Level 3 assets, it sounds like there was a broad discussion but did you give the actual number versus the $69 billion you had last quarter?

David Viniar

It was about…I think the number is going to round to roughly 8% of our assets which is up a little bit. It was if you remember 7% at the end of the third quarter; 6% at the end of the fourth quarter, now it’s 8%. Its been running kind of in that range so it’s going to be up a little bit and most of it is stuff that went from Level 2 to Level 3 assets. Some of the commercial real estate loans became Level 3 and that’s really it.

Michael Hecht – Banc of America Securities

Okay and then did you talk at all about exposure to the mono lines?

David Viniar

No.

Michael Hecht – Banc of America Securities

Could you?

David Viniar

Look, all I would tell you is you know we manage our credit risks just like every other risk. We’re focused on companies that have had issues and you’ve all read about them as much as I have and we have mitigates in place where we think we need them and so our exposures to any of our counterparts including the mono lines is something that’s well within our comfort zone.

Michael Hecht – Banc of America Securities

Okay and then on headcount which I think you mentioned rose 4% mostly on the acquisitions quarter, any expectations for where we should expect that to trend the rest of the year and can we get some sense of areas where you might be looking to trim versus areas where you’re still looking to grow?

David Viniar

Without going through specifics in specific areas because I really don’t want to do that, our expectation as we sit here right now and it could certainly change if things get better or worse, is that leaving aside Litton, so leaving aside the acquisition, our headcount will grow slightly this year. I would say low to mid single-digits is where we expect it to grow and again as we’ve told you before, it will be greater growth outside the US than in the US, but very modest everywhere.

Michael Hecht – Banc of America Securities

Okay fair enough. And then just this last question, given your comments on liquidity and how good it is right now, you know appetite for share repurchases, given kind of what you did this quarter?

David Viniar

We will look as we start next quarter. We think there are opportunities for us to repurchase shares. You’ve kind of seen where we’ve been running and I would expect to see a thing that’s not terribly different from what you’ve seen in the past.

Michael Hecht – Banc of America Securities

Okay, fair enough, thanks a lot.

Operator

Your next question comes from Mike Mayo - Deutsche Bank

Mike Mayo - Deutsche Bank

How much is non-US revenues and what did that do during the quarter?

David Viniar

It’s running at roughly 50-50.

Mike Mayo - Deutsche Bank

And as is it faster outside the US or faster in Asia or is it about the same?

David Viniar

It’s growing faster outside the US. You didn’t see a meaningful change in the quarter. Its always hard to see a quarter over quarter because it depends on where a loss might be, where a trading book that has profits might be so its not terribly meaningful to go one quarter to the next and say 49, 51, 52 but the trend is definitely growing faster outside the US with Asia being even faster.

Mike Mayo - Deutsche Bank

And I’m going to ask an extremely simple question, you’ve kind of touched on the answer, but why what happened to Bear Sterns is unlikely to happen to you and I guess that refers to, well how would you respond to that question?

David Viniar

I don’t want to talk at all about what happened to Bear Sterns. What happened to Bear Sterns happened to Bear Sterns. And as I said, and I can go over it in as much detail as you want again Mike, we think out liquidity position is as strong as it has ever been.

Mike Mayo - Deutsche Bank

And what are the, what would be three key metrics, if you’re summing up your liquidity position, what measures do you look at that show that?

David Viniar

I look at the one that is the most visible to you, what we disclosed at the end of the quarter is the global core access which is really an amount of cash that’s sitting there and as I mentioned it was in the mid sixties on average in the first quarter and it’s been significantly higher than that over the last couple of weeks and it remains significantly higher than that right now. Another metric that we look at internally, is we look at the amount of our short term financing that is turned out so that we don’t have significant rollover risk over the next day or couple of days or a week and that is a very, very high number and the third thing we look at is within that global core access how much is commercial paper, because we think that’s probably the least good part of a global core access and it’s extremely small. It’s less than $5 billion of the $80, so those are just three metrics that we look at.

Mike Mayo - Deutsche Bank

And what kind of risk do repos pose?

David Viniar

Well look, the repo market has been a market that has been there for a very, very long time. Despite that, we still try to term out a lot of our repos and we pay for that so rather than having overnight repo, we’ll do one week, two weeks, a month, six month repos. And they cost more than doing overnight repos, but they’re less risky and we…one of the things I mentioned was looking at how we term out our repos. And we have a very, very high percentage for term.

Mike Mayo - Deutsche Bank

All right, thank you.

Operator

Your next question is a follow-up from Roger Freeman - Lehman Brothers

Roger Freeman - Lehman Brothers

Just a few follow-ups here, in terms of your commercial exposures, can you give us a sense for the geographic distribution and the fixed floating mix?

David Viniar

You know I could, but I don’t have those exact numbers. I would tell you much of it is in the US and much of it is floating. So the majority will be in the US and the majority will be floating. And if you want we can get back to you with the exact numbers.

Roger Freeman - Lehman Brothers

Okay, I guess I was just asking from a perspective of the, for the marks to be fairly insignificant for you not to disclose them, I’m just trying to get a sense for why that is relative to declines that we’ve seen in observable pricing metrics and I appreciate the CMBX is only relevant for parts of it, particularly fixed rate US, but…

David Viniar

Well no, it can be relevant for anything. There’s just more basis risk. So you can hedge something that’s fixed rate with floating rate. You can hedge something that’s floating rate with fixed rate. You’re just taking a basis risk in doing it and that’s why I said we’re very careful about that. We’re very cognizant. We have to be extremely nimble, but it worked pretty well last quarter.

Roger Freeman - Lehman Brothers

Okay, so it’s really, you chalk it up to the effectiveness of the hedging.

David Viniar

Yes.

Roger Freeman - Lehman Brothers

What about, same sort of question in terms of your principal investments private equity sort of distributions, geographically and by industry, it looks like there’s only a little over a 3% mark in the quarter despite stock markets down 10%, I would have thought there would have been a higher correlation of market declines.

David Viniar

It depends what you have. Our portfolio performed pretty well because we think we have some pretty good investments. It’s geographically distributed. It is industry distributed. And we think that it showed the strength of some of the investments that we made.

Roger Freeman - Lehman Brothers

Okay and just in terms of client trading activity, any comment on the contour of flows during the quarter. Did the quarter end as strong as it was during the quarter?

David Viniar

I wouldn’t…you know clearly as you know markets deteriorated over the course of the quarter but I don’t see the client flow really changing much over the course of the quarter and in some of our franchise trading businesses.

Roger Freeman - Lehman Brothers

Okay and then lastly just coming back to the repo market, can you talk to the mix of the assets that you finance in the repo market, how much of this is mortgage back, what are some of the other key asset classes in there?

David Viniar

We finance a lot of our assets in the repo market. There’s repo market…there are repos available for assets that range from certain mortgages to equities to obviously US governments. And the, what I would call, the less liquid the asset, the more we care about funding it for term. And that’s why it’s very, very important that we term out a lot of our repos.

Roger Freeman - Lehman Brothers

Do you finance any customer balances in the prime brokerage area in repo?

David Viniar

No.

Roger Freeman - Lehman Brothers

Okay so no prime brokerage assets are used to finance in any way the broker dealer.

David Viniar

No, it can’t be.

Roger Freeman - Lehman Brothers

Okay. Thank you.

Operator

Your next question comes from Meredith Whitney - Oppenheimer

Meredith Whitney - Oppenheimer

I want to congratulate you for betting your own record on the brevity of opening remarks. I going to take this to a just a different track if you would. I’m interested in what happened with the asset management and then what’s going on with asset management in terms of if you could geographically break down where the flows came from and if you could comment if there’s any way possible you guys could, you as Goldman Sachs, could compete with attracting flows from what has typically been offshore accounts. So comment specifically on emerging market flows and then any type of sort of classically off shores and then I have a follow-up after that.

David Viniar

When you, tell me when you say what’s going on with asset management, what do you actually mean?

Meredith Whitney – Oppenheimer

I mean that you guys have very strong flows. It seems as if you’re gaining market share from somewhere and I’m trying to figure out where.

David Viniar

I would tell you that in the quarter and again, it varies, most of our flows are still from the US although we still have some that are coming from Asia.

Meredith Whitney – Oppenheimer

Okay, there’s no larger story going on here.

David Viniar

No, not yet. Not yet although as you know we’ve talked about that say, big area of concentration for us is growing that business outside the United States.

Meredith Whitney – Oppenheimer

Okay so this is not my follow-up question, but this is an add-on to the last one but if you look at the disruption that’s been caused in the last eight plus months, I look at the ability to attract assets in emerging markets as really a jump ball issue more than it’s ever been. Would you agree with that?

David Viniar

I’m not it ever hasn’t been a jump ball. I don’t think there’s anyone who is entrenched enough in the emerging markets to have that advantage.

Meredith Whitney – Oppenheimer

Okay and then could you extend it then to what is classically offshore?

David Viniar

Well no, I think in…in Europe, someone like a UBS who’s been there for several hundred years has an advantage.

Meredith Whitney – Oppenheimer

Okay.

David Viniar

That would be different than some of the emerging markets where I think nobody is as firmly entrenched.

Meredith Whitney – Oppenheimer

Right, if the franchise is old its four years old, right? Okay and then my follow-up is on operating leverage in terms of how to look at the rest the remainder of the year and the difficult revenue environment, how you plan to deal with what could be protected negative operating leverage.

David Viniar

We’re very cognizant of what’s going on in the world. We need to be extremely nimble. But at the same time we are in this for the long term and we think it’s very important for us to make our strategic investments in places where we have to do that. Unfortunately I hate saying this, but the biggest lever we have in any given year is compensation. And as you know compensation is two thirds of our expenses and year end bonuses are two thirds of our compensation. And that is always tied to the firm’s performance and it’s the biggest lever we have for operating leverage.

Meredith Whitney – Oppenheimer

Okay, thanks David.

Operator

And at this time there are no further questions, Mr. Holmes please continue with any closing comments.

Dave Holmes

Thank you very much for joining us on our first quarter. If you have any additional calls, please feel free to contact me at Investor Relations and we look forward to taking those questions. Bye.

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Source: The Goldman Sachs Group, Inc., F1Q08 (Qtr End 2/29/08) Earnings Call Transcript
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