The Goldman Sachs Group, Inc. (GS)

Q2 2010 Earnings Call Transcript

July 20, 2010 11:00 am ET


David Viniar – EVP and CFO

Dane Holmes – Director, IR


Guy Moszkowski – BoA Merrill Lynch

Howard Chen – Credit Suisse

Chris Kotowski – Oppenheimer & Co.

Michael Carrier – Deutsche Bank

Roger Freeman – Barclays Capital

Mike Mayo – CLSA

Matt Burnell – Wells Fargo Securities

Jeff Harte – Sandler O'Neill

Carole Berger – Soleil

Steve Stelmach – FBR Capital Markets

Ron Mandel – GIC

Douglas Sipkin – Ticonderoga



Good morning. My name is Gerald and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs second quarter 2010 earnings conference call. After the speakers’ remarks, there will be a question-and-answer period. (Operator instructions). Also, this call is being recorded today, Tuesday, July 20, 2010.

Thank you. Mr. Holmes, you may begin your conference.

Dane Holmes

Good morning. This is Dane Holmes, Director of Investor Relations at Goldman Sachs. Welcome to our second quarter earnings conference call. Today’s call may include forward-looking statements. These statements represent the firm’s belief regarding future events that by their nature are uncertain and outside of the firm’s control. The firm’s actual results and financial condition may differ, possibly materially from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect the firm’s future results, please see the description of risk factors in our current Annual Report on Form 10-K for our fiscal year ended December 2009.

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 capital ratios. 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 Web site at This audio cast is copyrighted material of the Goldman Sachs Group, Inc. and may not be duplicated, reproduced or rebroadcast without our consent.

Our Chief Financial Officer, David Viniar will now review the firm’s results. David?

David Viniar

Thanks, Dane. I’d like to thank all of you for listening today. As most of you are aware, last Thursday we announced the settlement for $550 million of the civil enforcement action brought by the SEC in April 2010 concerning the ABACUS CDO offering.

We entered into the settlement without admitting or denying the SEC’s allegations, but acknowledged that we made a mistake in including incomplete information in the marketing materials. We firmly believe this settlement is the right outcome for the firm, our shareholders and our clients.

In addition, at our annual shareholders’ meeting on May 7, the firm announced the creation of the Business Standards Committee. The Committee is tasked with reviewing our business standards, and making recommendations to the Board of Directors and Senior Management to reinforce the firm’s client focus and improve upon the transparency of our activities.

A Committee of the Board was established to oversee its work, which is well underway. We expect the finding and recommendations will be meaningful to our constituents. I’ll now give an overview of our second quarter results and then take your questions.

Second quarter net revenues were $8.8 billion, net earnings were $613 million, and earnings per diluted share were $0.78. Excluding the $600 million U.K. bank payroll tax and the $550 million SEC settlement, earnings per diluted share were $2.75, and our annualized return on common equity was 9.5%.

Our performance in the second quarter resulted in a year-to-date annualized return on common equity of nearly 15% excluding the impact of the U.K. bank payroll tax and SEC settlement.

The operating environment in the second quarter of 2010 was characterized by broad market concern regarding several issues principally European sovereign risk, slowdown in China’s growth trajectory, and uncertainty regarding financial regulatory reform especially in the U.S.

These concerns resulted in a significant focus on the prospects for the macroeconomic environment, and the risk of a double dip recession. Not surprisingly, these concerns negatively impacted asset prices, market volumes and accessibility of certain markets.

Global equity markets posted significant declines during the second quarter, with the S&P 500 declining by 12%, the MSCI down by 13%, and the Shanghai Composite falling by 23%. In addition, volatility reached its highest levels in a year, with the VIX ranging from the mid-teens to as high as the mid-40s.

Corporate credit spreads also deteriorated significantly during the quarter with the CDX index wider by almost 40%. The accumulation of these concerns led to greater risk aversion and significantly lower client activity particularly during the last two months of the quarter.

This reduction of client activity occurred across a broad set of business within Investment Banking, FICC and Equities. For example, industry volumes for global announced M&A and investment grade debt issuance were down 5% and 42% respectively.

The uncertainties surrounding the macro environment led to significantly less conviction and low risk appetite among many of our institutional investing clients. As we’ve said to you in the past, economic growth is the key driver of our operating performance. A strong and growing global economic environment usually translates into greater activities among our client base which in turn ultimately drives our opportunity set.

In light of the difficult macro environment, we continue to conservatively manage our risk, capital and liquidity levels. At the end of the second quarter, we had a Basel I Tier 1 ratio of 15.2% and a Tier 1 common ratio of 12.5%.

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