- Revenues were $2.4 billion, down 14% year over year and down 32% sequentially.
- Pretax income was approximately $715 million.
- In the equities component of capital market segment, the company posted revenues of approximately $1.4 billion, up considerably year over year and down 19% from last quarter’s record level.
- The company posted strong revenues in execution services business, as both global market activity and own client flow activity increased.
- Volatility in the global equity markets increased substantially. For example, the VIX nearly doubled.
- The company saw an explosion in derivatives volume, as both corporations and investors employed risk mitigation strategies. As a result, the company achieved record revenues in this business.
- Results in prime broker and financing businesses declined from last quarter’s record level, due largely to the seasonal activity seen in Europe last period. Although number of prime brokerage clients rose in the period, balances were lower due to client de-levering.
- Convertibles business was negatively impacted by the spread widening and fixed income asset classes generally and the company saw weaker results in merger arbitrage business, given general concerns over M&A completions and bid prices versus underlying stock values.
- Gains from private equity and principal investments declined from both comparable periods, with $40 million of losses for this period.
- In the fixed income component of capital market segment, the company posted revenues of approximately $1.1 billion, down both year over year and sequentially.
- Fixed income businesses were the most affected by the market dislocations, risk repricing and delivering that swept through the global capital markets this period.
- Consequently, the results reported in the fixed income component of capital market segment were impacted by some valuation movements.
- Relating to assets and lending commitments, the company recorded substantial valuation reductions, most significantly in leverage loan commitments and residential mortgage related positions. These losses were partly offset by large valuation gains on the other side, related to economic hedges, short positions, and liabilities. The company estimates that the result of these valuation items was a net reduction in revenues of approximately $700 million.
- Credit businesses were negatively impacted by the spread widening that occurred over the course of the quarter. From all-time tight spreads last quarter, credit spreads widened to multi-year wides.
- The global high yield index widened 181 basis points, while high grade spreads rose 45 basis points. This risk repricing affected virtually all asset classes, including CDOs and emerging markets, and across the credit rating spectrum.
- Like financial instruments, lending commitments are mark-to-market. Due to the adverse changes in the credit markets, the company registered negative marks on commitments, though partially offset by gains on the other side.
- Revenues in securitized products business were down versus both benchmark periods due to continued weakness in the mortgage industry, particularly in the U.S. Secondary trading activity remained active.
- The company saw credit spread widening across the capital structure, including double A and triple A rated tranches, resulting in negative marks, even after considering hedges.
- Volumes for residential origination and securitization declined. Global residential origination volumes were $12.5 billion, down 29% from the prior period, primarily driven by lower activity in the U.S.
- Overall residential securitization volumes were approximately $23 billion, down from last quarter, driven by lower investor appetite.
- Results in commercial real estate business were weaker, due to spread widening and lower asset sale activity during the period. On the other hand, liquid markets business, which includes interest rate products and foreign exchange, posted record results. Interest rate products reached an all-time high due to strong customer activity on the back of increased interest rate volatility, while the risk aversion rallying government securities also prompted strong levels of customer activity.
- Foreign exchange benefited from increased volatility, and the volume of FX activity was bolstered by the unwinding of carry trades.
- Results in commodities increased from both benchmark periods due to higher revenues generated from power and gas businesses, and the company has continued to expand commodities business with the acquisition of Eagle Energy Partners, which has increased presence in the physical markets for power and gas, and with the next phase of build-out of metals trading.
- The company saw strong volumes from client activity as the market dislocations prompted significant asset reallocation and portfolio restructuring by investors.
Investment Management Segment
- Revenues were $802 million, up 33% year over year.
- Pretax income was approximately $202 million.
- For the asset management component of this segment, the company reported revenues of $468 million, up 34% year over year and up 2% from last quarter.
- Assets under management was $275 billion, up 5% from last quarter, as the company had net in-flows of $15 billion, partially offset by market depreciation of $3 billion over the period.
- Four-billion of the $15 billion of net in-flows during the period was from business acquisitions.
- Alternative assets under management now total approximately $30 billion. Partially offsetting the increases in management fees were lower revenues from minority stakes in hedge fund managers compared to the sequential period.
- In private investment management, which encompasses high net worth client distribution business, revenues was $334 million, up 31% from a year ago and up 8% from last quarter’s level, as clients were active in both fixed income and equity-related products.
- The company ended the quarter with approximately 550 high net worth brokers with average annualized production of $2.5 million each for the period, both up versus the benchmark periods.
Non-U.S. revenues were approximately $2.3 billion, up year over year and down 13% sequentially.
This is second-strongest quarter ever from a regional standpoint. Non-U.S. revenues accounted for 53% of the firm-wide revenues.
In Europe, the company posted revenues of approximately $1.5 billion, up 29% year over year and down 18% from the record level set last quarter. At the nine-month mark, the company has surpassed full-year 2006 revenues in Europe.
- Revenues in investment banking in Europe were a record for the period, due to strength in all the major product categories. The company executed several large derivative transactions for banking clients.
- Despite the recent market turmoil, the company continues to believe there will be more rapid growth in the capital markets fee pool in Europe over time. The company has expanded footprint accordingly, including in the Middle East and in Eastern Europe.
In the Asia-Pacific region, revenues were $728 million, up 79% year over year, down 4% from the previous record set last quarter.
- In Asia capital markets, results were strong in interest rate products, equity derivatives, and prime services.
- The company led a successful, $550 million commercial mortgage-backed securitization transaction in August.
- The company continued to make progress in investment banking where, it acted as book runner on nine equity transactions, raising $4.5 billion, including offerings for three Indian companies.
- Footprint in Asia continues to grow, most notably in India, where over the course of the quarter, the company acquired Bricks Securities, a Mumbai-based brokerage house, purchased a minority stake in a local investment banking firm, and received non-banking finance company approval to expand operations in that country.
The company posted compensation to revenue ratio of 49.3%, a level consistent with the ratio realized in 2006 and in the first half of this year.
Over the period, headcount rose approximately 2% to approximately 28,800. This reflects the annual addition of analyst and associate classes and the incremental headcount from a number of small acquisitions, partly offset by a reduction in staff in U.S. mortgage origination business.
Non-personnel expenses totaled $979 million, up approximately 7% from last quarter’s level.
- Forty-four million of this increase is due to charges associated with restructuring mortgage platform, including the write-off of $27 million of good will from BNC mortgage, U.S. sub-prime originator. These costs are included in the other category, the other expense category on the income statement.
- Excluding costs related to the restructuring of mortgage platform, non-personnel expense rose 2% as brokerage and clearance expenses increased due to the heavy volumes in both fixed income and equity related products, and the company incurred additional occupancy costs in all regions.
- Pretax margin was 28%.
- Effective tax rate was 26.4%, reflecting the larger pretax contribution from outside the U.S., as well as the lower level of pretax income overall, and the lower level of pretax income that the company intends to make for the period.
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