Prashant Bhatia (Citigroup): Suppose you were to merge with a commercial bank, would you be allowed to use those deposits in the trading businesses?

David Viniar: Our banking competitors also need to fund the capital markets, bank deposits can basically be used to fund the business of the bank; what a bank does, largely not the capital markets businesses that we are in. The answer is there would be some small portion of our business that would probably be able to be funded by bank deposits but most of the business that we’re in could not be funded by banks.
It is one of the reasons why if you look at—take five big financial, four of the biggest, best banks in the world—Citi, JP Morgan, UBS, Banc America, and add Goldman Sachs to that list and which one do you think has the lowest amount of long-term unsecured debt sourced in the capital markets? It’s Goldman, Sachs because while we have big non-bank businesses to fund, so do our competitors. They’re very good competitors. They’re very good companies. They can access the capital markets as can we.

Prashant Bhatia (Citigroup): Could you help investors understand what kind of exposures you have with Lehman and AIG?

David Viniar: AIG and Lehman are big important financial institution counterparties to Goldman Sachs. We did and we do a lot of business with both of them as we do with all other major financial institutions. The way we do business with financial institutions is by having appropriate daily margin terms. That’s how we’re able to do the volume of business with each other.
That goes for AIG, Lehman and also Morgan Stanley, JP Morgan, Citigroup, UBS and Credit Suisse. That’s how we manage our risk. In addition to the margin terms we augment our risk management with appropriate hedging strategies. You heard at the beginning of my remarks that we believe one of the biggest challenges we have is to avoid large concentrated exposures and we took that very much into account in managing our credit exposures to Lehman and to AIG as well as we do with any other financial institution. Given the outcome at Lehman and whatever the outcome at AIG, I would expect the direct impact of our credit exposure to both of them to be immaterial to our results.

Glen Schorr (UBS): How have your thoughts changed on the risk management side related to counterparty exposure?

David Viniar: To say we’re not affected by what’s happening would be disingenuous. Clearly we’re going to be more cautious in our counterparty risk either through different margin terms or through more hedging ourselves. However, we’re still going to be doing business in the markets and we still think there are a lot of good counterparties out there.
We’ve been concerned about large concentrated exposures no matter how good the counterparty is and so that’s why we do things with margin triggers. We’ll take some exposure. We’ll try and limit the amount. We’ll hedge where we have exposures that we think are too big.
It’s something that we’ve always done and of course we’re focused even more on now. It is likely that there will be an industry wide solution and some industry wide utility over the coming months.

Glen Schorr (UBS): Any liquidation of a portfolio or a company doesn’t necessarily create a mark to market but does something like what seemed to be reasonably aggressive third quarter mark on Lehman’s residential assets. Does that create a mark and as companies get a little squeeze on collateral and certain portfolios get liquidated, what are you expecting the follow-on impact into the credit markets to be?

David Viniar: We mark things based on where we believe we can sell them at the time. Quite often it is based on where things have actually been sold regardless of where other people mark their assets. That’s how we mark our books. Lehman announced filing over the weekend and the credit markets declined, spreads widened, mortgage assets went down in values and if we own an asset, it goes down in value, we’ll lower our mark.
It was well signaled that Lehman was trying to sell their assets so that overhang was very largely in the market. It is not going to be a surprise to anyone. That overhang was in the market. In some ways it might be the case that after a couple of months if that asset gets sold, you actually take some overhang out and things actually improve.
Thus I don’t think it is going to have any meaningful impact other than the initial impact on the values of assets.

Meredith Whitney (Oppenheimer): You can’t fund capital markets activity with deposits but your overall credit ratings as seen by the rating agencies would improve because of diversification and so there would be a benefit. Is that right?

David Viniar: I didn’t say we wouldn’t get any benefit, I said that most of the assets that we have can’t be funded by a bank. Some could be. There are not many banks that are rated higher than we are at this point. I think there is some benefit to being a bank but I think more importantly is a question of performance and there are several banks that are quite good and quite strong and deserve a strong rating. However, it is based on their performance more than anything else.

Meredith Whitney (Oppenheimer): Given these extreme market conditions, if the industry was forced to adopt bank holding company structures, what conceptually would you imagine that would cost you in terms of profitability?

David Viniar: That’s a complicated question to answer because it depends on exactly what the rules were. There are parts of the bank holding company regulations that include things like how many of your assets, what percentage you have to lend into your local community and so if it totally changed our business model then it might change things a lot. If it didn’t and it was just a question of having deposits using some of it to do certain things but largely operating the business the way we operate it today, I don’t think it would change things very much.

Meredith Whitney (Oppenheimer): When you look at the company’s ability to raise capital in the equity market significantly diminished and now more assets being put on the market to raise capital, does that change what you had anticipated in terms of capitulation sales?

David Viniar: Not really. They’ve still been slower than we thought. We thought that we would have seen more troubled assets for sale than we have seen. I don’t think anything has changed there.

Guy Moszkowski (Merrill Lynch): How has the CMBS exposure evolved in the quarter?

David Viniar: Our total commercial real estate exposure was $16.6 billion at the end of the second quarter, $14.7 billion at the end of the third quarter. If you take out CMBS which are more trading assets, you were $15.2 billion at the end of the second quarter and $12.4 billion at the end of the third quarter and the great majority of those reductions were sales. You heard what the losses were; now those were net, there were some gains on some of the hedges but the majority of those reductions were sales.

Guy Moszkowski (Merrill Lynch): There was a comment in the press release about how in credit products you had weak negative investment results. Can you comment on that?

David Viniar: It was not in the principal investments; we will do a variety of things including sometimes buying distressed debt for which you get equity when companies recover. Sometimes we’ll actually make small equity investments because given the size of companies, you’ll invest all across a capital structure but quite often sometimes these distressed investments or these small investments will turn into equity and then its still within our credit business because that’s how its managed given the size of the companies and sometimes whether they’re private or public, sometimes they’ll go public after you make that investment and you get equity and then we just mark it to market and sometimes even in private form we mark them to market.
Hence it’s those investments within the credit business that start off smaller and sometimes get big and that’s a good thing that didn’t do well as asset values declined and it’s all within the credit business.

Guy Moszkowski (Merrill Lynch): The level three assets came down by $9 billion or $10 billion depending on which particular measure you used. Confirm that most of that is just a reduction in leverage finance?

David Viniar: That was part of it and it was other types of leverage—level three assets as well but the leverage finance assets were the biggest driver of that.