Total stockholders equity was $21.7 billion, while long-term capital position rose to over $141 billion.
- The company repurchased 9.6 million shares at an average price of $66.58 per share, bringing year-to-date stock buy-backs to a total of 37.8 million shares.
- Book value per share increased to $38.29, up about 3% and approximately 13% year-to-date. - The company ended the quarter with a net leverage ratio of approximately 16 times, and average historical simulation value at risk increased to 96 million in the current period, reflecting a combination of higher levels of volatility across a range of products for the period, and a higher level of risk associated with an increase in fixed income related assets.
Holding company liquidity pool, which has invested in cash and liquid assets, was a record $36 billion at the end of the quarter, up from $26 billion at the end of the second quarter.
This does not include the significant additional liquidity pool at regulated banks and broker dealers.
This corresponds to a record cash capital surplus at holding company, which is the excess of long-term funding sources over long-term funding requirements. In addition, these measures all exclude unencumbered collateral of over $50 billion available to the holding company and over $50 billion of additional unencumbered collateral in regulated banks and broker dealers.
Conservative liquidity framework is based on the following principles: no reliance on short-term, unsecured funding, including asset-back commercial paper; illiquid assets are funded with long-term capital, with the remaining life of 12 months or longer; short-term secured funding is only used where there are deep, liquid, repo markets; long-term sustainable funding sources are developed to diversify funding, including at three deposit-taking bank entities, two in the U.S. and one in Germany.
The company has seen no reduction in access to secured funding in the repo markets, and it faces little refinancing pressure, with only small amounts of debt maturing the near-term, which is a consequence of efforts to extend the average life of long-term debt over the past several years and to limit the amount of debt that is maturing in any three, six, or twelve-month timeframe.
At the end of the quarter, approximately 90% of inventory positions are classified as either level one or level two under the new FAS-157 GAAP hierarchy.
At quarter end, the company had non-investment grade contingent acquisition facilities of approximately $27 billion, down from $44 billion at the end of the second quarter.
Many commitments in place at the end of the second quarter have since come off. Of the $44 billion of commitments in place at the end of the second quarter, only $17 billion of these commitments were still in place at the end of the third quarter. Most of the $10 billion of new deals, to get to $27 billion, so the company went from $44 billion down to $17 billion, and then add $10 billion of new deals since the end of the second quarter, most of those $10 billion of new deals the company is committed to in the third quarter had more favorable terms for investors, in sync with the current market environment with respect to rates, flex, and covenants, which should enable syndicating them more easily.
Of the second quarter period end commitments, about $4 billion was funded in inventory at the end of the third quarter, spread across 15 transactions.
The company makes no assumptions with respect to the probability that deals may not happen, i.e. it marks the entire commitment 100%. The company does not assume that the terms may be restructured prior to funding. It marks the commitments in their component pieces, be they senior loans or bonds or pick notes, etc. The company marks them to the current fair value yields, which is the best estimate of where these assets trade in the marketplace currently.
Although some of the specific high-yield acquisition commitments have not traded in the market, others actually have traded, which gives current, new issue valuation information.
The biggest LBO deals have not built full order books from investors in this distressed liquidity market, but there is price discovery of real world trades to provide information about where the prices need to be to get the trades done in an orderly manner.
On mortgage positions, the company saw spread widening in all products. Given the nature of the asset class, many of mortgage positions are mark-to-market using valuation models. The underlying inputs of these models are based on market activity and there has been a number of real world trades executed in the market which are used to validate marks. Although many of these assets don’t appear to be trading at their fundamental values, the company has marked book to the actual prices being transacted in the market.
Year-to-Date Financial Highlights
- Net income was $3.3 billion, or $5.71 per common share, up 10% and 12%, respectively, from net income of $3 billion, or $5.09 per common share for the first nine months of fiscal 2006. The 2006 results include an after-tax gain of $47 million, or 8 cents per common share, from the cumulative effect of a change in accounting principle associated with the Firm''s adoption of SFAS 123R on December 1, 2005.
- Net revenues were $14.9 billion, an increase of 14% from $13.1 billion for the first nine months of fiscal 2006.
Fiscal 2007 Outlook
- Credit spreads had moved to all time heights and have now reverted to their historical means, so a more balanced risk/reward dynamic exists in the market today. In the aftermath of the recent sell-off, the company anticipates that there will be some intermediate term effects in the broader marketplace. Lower leverage will be employed and higher subordination will be applied to a number of financial products. The company expects investors to rely less on historical realized risk and return as a gauge for future returns and instead use more fundamental research analysis for their investment decisions.
- Hedge funds will focus less on leverage and more on capital protection. Loan only investors will face higher volatility and higher risk but should earn higher returns over the long run, and demand for highly structured product will moderate for some time.
- The global economy has been hit by two shocks: a U.S. housing recession and a capital markets liquidity squeeze. As a result, the company has made some downward revisions to projections on global economic growth. However, these figures remain generally constructive.
- Outlook is for global GDP to grow 3.2% in 2007, a slower rate than was realized in 2006 but still a level that remains high enough to provide a favorable underpinning for the sector.
- The company expects growth rates to remain higher outside the U.S., and this is where expanded global footprint aligns the firm with broader opportunities going forward.
- The company expects central banks to be supportive in sustaining positive economic growth, either through rate cuts or a cessation of hikes during this period of financial market stress. Corporate profitability remains healthy, balance sheets are strong and liquid, and all of this bodes well for continued growth under the assumptions the fed is successful in navigating the U.S. economy away from a recession.
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