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Asset Management and Security Services reported net revenues of $1.7 billion, down 15% from the third quarter.
- Asset Management produced net revenues of $945 million, down 16% from the third quarter, due to lower assets under management and the corresponding impact on management fees.
- Assets under management declined 10%, to $779 billion, driven by $90 billion in market depreciation, largely in equity assets, partially offset by $6 billion in net inflows.
- Security Services produced net revenues of $799 million, down 13% sequentially due to lower customer balances, partially offset by a more favorable mix of securities lending customer balances.
Key questions and answers from the fourth quarter earnings call conducted by The Goldman Sachs Group Inc. (GS) on December 16, 2008.
Guy Moszkowski (Merrill Lynch):
Could you quantify the extent to which hedging helped you or hurt you during the quarter?
David Viniar: It is very hard to quantify that. One of the difficulties in trading in credit during the quarter and really across many asset classes was the significant divergence between the performance of more liquid and less liquid assets.
The less liquid an asset was, the worse it performed; the more liquid an asset was, you can either say the better it performed or the less bad it performed.
And that took many, many forms in many asset classes, and one way to think about it is indices tend to be more liquid than any single names. Any single name you had that was hedged with an index, there was a divergence in performance.
Cash assets tend to be less liquid than derivatives, especially in a credit crisis, and so there was a divergence there, and that was across many categories, but especially in credit you saw that divergence. And anytime you hedge something, while you reduce certain risks, you increase other risks, and we know that going in.
And so it made it a very difficult operating environment, especially across credit products.
Guy Moszkowski (Merrill Lynch):
How much of the $5 billion negative swing in FICC came from positions held essentially as longer-term investments?
David Viniar: A reasonably large part of that swing was caused by marked-to-market on investments within our credit business. There were some offsets because some of our franchise businesses did quite well.
Guy Moszkowski (Merrill Lynch):
What''s your strategy at this point for raising those deposits and at this point how would you quantify the total dollars worth of deposit-eligible assets in terms of funding?
David Viniar: Our strategy is to build that through third-party distribution, like brokered CDs; to build it through our internal network of private wealth management, where we have a lot of cash in the system; to find other, maybe less traditional ways, of building it internally, considering Internet banking and other things; and to look at, if anything made sense, acquisitions as well.
And we have about $150 billion in the bank right now. That could be largely funded with deposits.
Roger Freeman (Barclays Capital):
Can you elaborate a little bit on the decline in the balance sheet total?
David Viniar: It came from a whole lot of categories across the balance sheet. There''s no one individual category. It came down from a fair number of places. Most of the assets were more liquid rather than less liquid because there wasn''t much of a market for the less liquid, although we did sell some of our leveraged loans.
We did sell some of our commercial real estate, which seemed big in the context of how much of those we have but small in the context of $200 billion. So more of it was more liquid, interest rate or credit or other types of assets; our prime brokerage balances were down as well, so that contributed to it. So it was really across all of those asset classes.
Roger Freeman (Barclays Capital):
On your total equity position, particularly with the TARP funds and Buffet and the equity raise he did, where are you on the spectrum at this point with respect to deploying any of that capital?
David Viniar: We know that we are not smart enough to call the bottom of the market, so we''re likely to invest in things either a little bit before or a little bit after the market turns. We hope a little bit after, but we don''t know for sure.
And there''s no good answer other than we evaluate every opportunity when it comes up, looking in this environment only for what we think are very good investments. We do have a lot of capital. We do have a lot of cash.
And so if we see good investment opportunities, we''re going to take advantage of them with full knowledge that if the world continues to get worse, we''re going to have to, because we mark them at fair value, mark them down and take losses.
