Goldman Sachs Group (NYSE:GS) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.
Client Risk Appetite
Howard Chen – Credit Suisse: The more challenging conditions that you spoke to in the back half of the quarter with respect to client risk appetite and inventory management. I was hoping you just could comment how those difficult conditions persisted as we freebased it at new higher levels of U.S. benchmark rates or have they abated a bit?
Harvey M. Schwartz – CFO: So, I’d say we thus feel like they’ve abated a bit. I mean you see it in the day-to-day volatility and that merely is about I think the adjustments to people basically recalibrating to both somewhat wider credit spread environment, and obviously higher absolute interest rates, and you can see that obviously it’s quite visible for example a movements in the 10 year. So, I think people are adjusting. What I would say is that it’s now a very information centric environment and what I mean by that is people all of our clients going to be very keenly watching data, economic data, whether it’s non-farm payrolls in the United States, GDP growth in Europe, Japan, China really trying to form their view because for a very long period of time, I think there was an expectation that if this unusual low rate environment would persist and to some extent people could build expectations around that and now that we might be entering a different regime, you’ll see people probably respond more to data, but again it’s hard – but I would say answer to your question the short way, which is it does feel like people have recalibrated at this stage. By the way some of it how it is, returning to kind of normal interest rate levels, it feels good in some respects, in some respect economic activity.
Howard Chen – Credit Suisse: That’s where I was hoping to go next. It feels like we’ve been talking for a couple of years now about this world of client liquidity that’s out there and the near zero interest rates creating more of a one way market in certain clusters like credit and mortgages. Have we seen enough of a move in your mind to see more two-way flow in some of these businesses that we’ve been hoping for?
Harvey M. Schwartz – CFO: I think it’s too early to tell, which is why I highlighted the sensitivity to economic data. People are going to form their impressions over the next several months and certainly everybody would be watching. Clients are basically sitting on the edge of their seat for every (indiscernible) out of the Federal Reserve, so there will be sensitivity. But it feels like we’re tracking more back to a period of normal say…
Howard Chen – Credit Suisse: Then I was hoping you could just update us on all of what the firm experienced as we progressed through Phase 2 of U.S. mandatory clearing, not only in all of what you’re doing with respect to centralized clearing efforts, but also maybe just broad health, liquidity, bid out spreads of the over the counter markets as we went through that transition?
Harvey M. Schwartz – CFO: Obviously from a Goldman Sachs perspective and just as an industry participant, we’re thrilled to see clearing really coming now. As we talked about in the last call, while it’s taken a while and people could be frustrating at the pace of things, the reality is that I think the regulators and market participants have done really an excellent job of the progression of Phase 1 and Phase 2. As you saw, there were lots of concerns in the marketplace and for instances and purposes it went through without any hiccups. I think as it relates to sort of any material moves in bid/ask spreads or volumes there are no material change there and it is too early for that. I think to the extent of which clearing has a long-term impact to market structure, it will happen over many months and years like we’ve seen in other marketplaces.
Howard Chen – Credit Suisse: And then just finally from me. Thanks for the color on Basel 3 preparation, but just given the proactive steps you took with reinsurance business and ICBC stakes I was hoping you could just update us on your current Basel 3 RWA breakdown and just where you are on passive and active mitigation?
Harvey M. Schwartz – CFO: It has been a while since we updated this audience on risk-weighted assets so I just want to walk through this a little bit carefully. The last time we talked to you last year we gave you a number of 728 billion in terms of risk-weighted assets that number is now 600 billion. I am going to break it down and then I am going to come back and reference the 728 I just mentioned. So, the 600 billion our best estimate given the final rule is a 180 billion for market risk weighted assets, 340 billion for credits, 80 billion for operation. Now you can obviously do the math, but that translate into 56 billion of Tier 1 common. The reason why I wanted to (indiscernible) attention to the comparison of the 600 to the 728 is because the way the final rules came out there were certain deductions that we were previously assuming would be risk-weighted assets which actually became deduction to capital. And so the 600 versus the 728 is not really apples-to-apples. The best way to think about our current position under the final rules is the 9.3%, which obviously as I said during my prepared remarks is 20 basis points within range of the buffer. In terms of passive you should be thinking about roughly $35 billion in risk-weighted assets that will roll-off between now and the end of 2015.
Interest Rate Movements
Roger Freeman – Barclays: I guess just maybe bouncing-off couple of things Howard was asking. So, the market quality in rates and credit, would you characterize that as more normalized now in July? It sounds like in June that lack of sort of dealer liquidity provision and it may be contributed somewhat to the gapping and spreads and I am just wondering if that’s kind of part of the new world we live in now with the new regulatory environment where asset prices move and moves and dealers are less to sort of take positional risk?
Harvey M. Schwartz – CFO: So, I think I would describe it more as things are episodic, in other words, I don’t think there is a massive transition that’s occurred in terms of four weeks ago to today. Clearly, when you get big moves in interest rates, all market participants are going to adjust their risk profiles and you will see flows, for example, out of fixed income asset into other assets. I think that – as I said I think it’s quite normal for us to see this and people are really in a position of reassessing their risk profile. But in terms of Goldman Sachs, I can’t speak for the rest of the street Goldman Sachs is we feel quite well positioned in terms of our ability to make capital for our clients.
Roger Freeman – Barclays: In I&L, just wondering if you can – you’ve talked a lot about this in the past, but just help us think about maybe the average age of maybe buckets within them. I’m trying to – you‘ve been coming in ahead of expectations, obviously it’s the tough one to forecast, but I think you a lot of the public private firms probably have aged portfolios and there is a realization process going on, and wondering if you can kind of help us think about, kind of really where you’re at in that cycle?
Harvey M. Schwartz – CFO: As we’ve guided everyone in the past, generally speaking for the equity portfolio, reasonable guide could be the MSCI. Obviously there is divergence in this period. As we’ve always told people, it’s really just a guide. There are going to be periods where idiosyncratically there is elements of the portfolio where we underperform, there is going to be periods where we over perform, obviously relative to that kind of benchmark in this quarter we outperformed, and it really is a combination of things like debt repayments and adjustments, obviously interest income is in there, again idiosyncratic components of the portfolio. In terms of aging I didn’t bring specific numbers with me Roger, but the private equity portfolio obviously tend to have the longer turn frame on it relative to the debt portfolio, but we can follow up with you and give you more details, if that’s helpful.
Roger Freeman – Barclays: Just maybe lastly just, liquidity levels need to run high and again, it’s kind of early days and thinking about leverage ratios and how some of those liquidity assets yet sort of calculate into that. Does that change your thinking about how much liquidity you want to run with?
Harvey M. Schwartz – CFO: We’re always going to run with an amount of liquidity, which is really designed to protect the Firm and at the same time put us in a position so we can provide capital and liquidity to our clients. With respect to sort of metrics out there things like the liquidity coverage ratio and we feel fairly comfortable with respect to things like that. I don’t know if you are going there but in terms of because you mentioned leverage ratio the only comment I’d say is that we are not going to modulate our liquidity down because of a given metric that’s in the marketplace even if an incentive exist for that.