Goldman Sachs Earnings Call Insights: Threshold ROEs and Future RWAs
Howard Chen – Credit Suisse: I think everyone would acknowledge 2012 was a pretty tough year for the industry, but yes when all said and done the Firm posted a nearly 11% return on equity. Just given where revenues and where you decided accrue comps, can you just discuss the significance of that 11%? Is that a threshold ROE that we should think about that you don’t want to fall below in a challenging environment?
Harvey M. Schwartz – CFO: So, what I would say about 2012 obviously as you mentioned, some of the elements of the marketplace were particularly challenging. What put us in a position to achieve the ROE really were the steps we took over the last two years in terms of managing expenses and being quite disciplined. But in terms of what we were able to achieve in the future, we’re going to have to see what the market opportunity brings to us, but this was the year where, like all years, we took everything into account; performance, the competitive dynamic and as I said, we benefited from the steps that we took over the past two years. But quite frankly I don’t think we’re pleased with the performance of the environment. It’s not particularly aspirational. We’d like to do better.
Howard Chen – Credit Suisse: Then switching gears Harvey, with respect to Investing & Lending, you noted the improved realization environment and mix. As many of your investments have been in the ground for a few years now, I was hoping you could provide us some thoughts on how you think about the realization pipeline, give us a little bit more detail on that appetite to sell today if markets were cooperative?
Harvey M. Schwartz – CFO: So, the ability to monetize as you know is really driven by two factors, obviously its market performance, but it’s also the idiosyncratic nature of your own portfolio. So, in the past year, obviously there were opportunities. You could argue that our performance exceeded that of the market place in terms of what you have expected, but that was this past year and our portfolio performed well. I think in some quarters it will perform well and in some quarters it won’t perform as well relative to the market place, but the market will drive that. Certainly, over time, what I mentioned around the world, we feel like we’ll see a track of investment opportunities, but in terms of scheduled monetization, typical to predict.
Howard Chen – Credit Suisse: Just finally from me, I realized we’re now 10 trading days into the new year, but just given all that happened at the end of 2012, with the fiscal cliff and so forth, just curious how the year has begun?
Harvey M. Schwartz – CFO: Too early to tell. We’ve only 10 business days into the quarter. You could paint a picture of concern given events in Europe and certainly events in Washington, it could be disruptive. If you talk to our economist, our economist would say that we’ll see pretty modest growth for the first half of the year in the developed economies and it will exceed that in the growth economies and maybe the second half of the year, but difficult to anticipate that. We do feel pretty well positioned from a business point of view whether it’s in our Investment Banking franchise and certainly across the Firm to capitalize on opportunities, but too early to tell.
Glenn Schorr – Nomura Securities International: I think risk weighted assets were down 8% quarter-on-quarter, but GAAP was down only about 1%. I know those were different animals, so just curious what drove the RWA in the quarter, and then if you had any thoughts on as we look forward obviously just on what’s the passive path going forward for RWA.
Harvey M. Schwartz – CFO: I wouldn’t focus so much on quarter-over-quarter move more so, really on the end of last year to the end of this year. So that’s roughly 100 basis points 8% to nearly 9%. And as we’ve said before as we get visibility into the rules. We will deploy our teams with tools and we’ll be able to react. So what we are really seeing over the course of the year is the effort to be more efficient with capital and of course the earnings performance. So we will continue to react as we get more visibility into all the rules.
Glenn Schorr – Nomura Securities International: So is that a way of saying as the rules come out I think this quarter, many companies have been pushing through getting other model approval, this was a little more driven by that versus actual assets going out the door?
Harvey M. Schwartz – CFO: We are not in a position to comment on any model approvals.
Glenn Schorr – Nomura Securities International: How about in a different way and I understand the sensitivity, as the rules come out. I think Goldman’s historically been very good at pushing out whatever the new rules are to the trading desk on the technology on the desktop and it makes the company more efficient in that manner. Can you just maybe comment where are we in that process and am I correct to say that, that is how we can envision higher ROEs going forward?
Harvey M. Schwartz – CFO: The way I would think about it is, performance is going to drive the ROEs and that will be about our competitive position and ability to deliver our franchise to our clients relative to others in the context of what the market provides. With respect to managing our capital, I think you should expect us to continue to be disciplined and when we get visibility around rules, we will look to be particularly responsive. We want to be very careful of not to overreact before we have a rule and we don’t want to underreact after we have a rule. So, we hope to do more.
Glenn Schorr – Nomura Securities International: On the positive side, the competitive landscape definitely has shifted a little bit. I think there’s a lot of pressure under some of the European investment banks to do some form of shrinkage, small or large. Do you view that as big opportunity? I know that over the past year or so or two, during the European crisis, you guys have commented that it might be your best near-term opportunity. Is that still in motion and how are you going about positioning for it?
Harvey M. Schwartz – CFO: I wouldn’t say that it’s the best near-term opportunity. I think those things are always difficult to weigh, but I think if you think about sort of longer-term strategy across multiple years, certainly capacity leaving industry broadly and specifically opportunities in Europe we think we’re well positioned and they look attractive to us, but we’ll have to see what materializes. I think the reason why I focused on near-term is it’s very difficult to be too precise about how these things unfold and certainly when.
Glenn Schorr – Nomura Securities International: Last one is a quickie. If you schooled and David Viniar answers, I know it’s going to be a quick answer too, but this year revs were up 19%, comp dollars were up 6% and non-comp was down 4%, that’s a fantastic mix for shareholders. I know we can’t predict the future, so let’s just make believe for a second that revenues will be flat on the go-forward basis. In a flat revenue world does comp ratio stay and non-comp expense keep trending lower?
Harvey M. Schwartz – CFO: So, I think you have to go back again to how we manage the Company and how we think about compensation specifically. So, there are whole host of factors that go into that. One is going to be how our performance is, and certainly that’s going to be reflected in compensation. The competitive dynamic is certainly in there and then of course this is a balance issue obviously in terms of providing returns to shareholders. And look, this year, we hope we got the balance right. As I said, we are not satisfied. We’d like to do better, but again, it will be determined by what the market opportunities provides us in the future.
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