- The Q3 compensation and benefits expenses were $2.90 billion, 51% softer than Q3 of 2007. This was commensurate with the lower net revenues.
- The ratio of compensation and benefits to net revenues was 48% for the first nine months of the year.
- This was consistent with the first nine months of 2007.
- The employment levels increased 3% during the quarter, a reflection of seasonal timing of school hires.
-The quarterly non-compensation expenses were $2.18 billion, 1% higher than the year ago quarter and 6% higher than Q2 of 2008.
- Excluding consolidated entities held for investment purposes, non-compensation expenses were 3% lower than Q3 of 2007, largely reflecting lower brokerage, clearing, exchange and distribution fees.
- The Q3 effective income tax rate for the first nine months was 25.1%.
- This is a decrease from 27.7% for the first half of the year and down from 34.1% for fiscal year 2007.
- The decreases in effective income tax rate were due to changes in geographic earnings mix and an increase in permanent benefits as a percentage of lower earnings.
As at end of the quarter, the total capital was $221.97 billion, consisting of $45.60 billion in total shareholders’ equity and $176.37 billion in unsecured long-term borrowings.
- The book value per common share was $99.30 and tangible book value per common share was $87.11.
- The management advised that both represent increases of 2% during the quarter.
- The company repurchased 1.5 million shares of its common stock.
- The buyback was at an average price per share of $180.07, for a total cost of $271 million during the quarter.
- The balance share authorization under the firm’s existing share repurchase program is 60.9 million shares.
The Board of Directors declared a dividend of 35 cents per common share on November 24, 2008.
-The dividend is payable to shareholders of record on October 27, 2008.
- The Board also declared dividends of $236.98, $387.50, $252.78 and $252.78 per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively.
- The dividend is to be paid on November 10, 2008 to preferred shareholders of record on October 26, 2008.
Key questions and answers from the third quarter fiscal 2008 earnings call conducted by Goldman Sachs Group Inc. on September 16, 2008.
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?
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