Macro Notes from the Goldman Conference Call

Here are what we believe were money quotes from Goldie ‘s earnings call.  All about the lack of client conviction.

The take-away quote:

There is no question, having all of that liquidity is a drag on our return. As you heard me say, we think about everything in term of risk and reward. And we think right now, the risk of having too much cash and having somewhat lower returns versus not having enough is very skewed towards having too much.

Other  money quotes:

…the trajectory of the global economy was heavily debated, and there were growing fears about the potential for inflation in growth markets. The ultimate consequences of these concerns lead to greater risk conversions, a deterioration and conviction among institutional investors and thus, a steady decline in client activity.

This reduction of client activity occurred across a broad set of businesses within Investment Banking and FICC and equities client execution.

Commodity net revenues were up amidst more favorable market conditions. For the full year, FICC client execution net revenues were $13.7 billion. We’re down 37% from 2009 as macro uncertainty throughout the year drove lower client activity and led to tighter bid-offer spreads.

Turning to Risk. Average daily value at Risk in the fourth quarter was $120 million, roughly flat with the third quarter.

The firm is investing in lending activity to across various asset classes, primarily including debt securities and loans and equity securities, including private equity and real estate, are included in this segment. These activities include both direct investing and investing through fund as well as lending activities. Our investment in ICBC produced a $55 million gain in the quarter. Other equity investments generated net revenues of $1.1 billion across both public and private equity investments, and benefited from the significant increase in the equity markets.

Net revenues from our debt, investing and lending businesses were $537 million from interest income and tightening credit spreads throughout the quarter…

In Investment Management, we reported fourth quarter net revenues of $1.5 billion, up 18% from the third quarter due to higher Assets Under Management and $310 million in incentive fees generated across the firm’s alternative asset products.

While economic activity has improved in recent weeks, the seasonal nature of the fourth quarter, combined with the continued uncertainty surrounding the outlook, makes future activity levels difficult to predict.

….you know we mark everything to market. We mark our loans to market. So if we lend to someone and their spreads widen, we mark them down. If their spreads narrowed, we mark them up, because we mark everything we have to market, loans, loan commitments. Everything is mark-to-market in Goldman Sachs. So that mark-to-market is in there, and interest income is in there as well. So we lend to people. They pay us interest, and that revenue is in there as well. So those two things are broken in there in the debt securities side.

Across the full year, the competitive landscape got much tougher. And this is not a surprise, and we talked about it in the past. Certainly, in the early part of 2009, our competitors were hurt probably more than we were financially. We’re much less willing to commit risk capital on behalf of clients than we were. We picked up quite a lot of market share. I think we’ve told you too last year, we did not expect that market share would stay. I think we’ve kept the small amount of it, but our competitors are stronger financially.

Most of investing we have done over time has been through funds. We’ve done some on our balance sheet but most of it has been through funds. I think one thing we know the rules do, it limits the percentage we can have in the funds to 3%. We have traditionally had more than that in the funds. We’re going to have to have smaller percentages than we’ve had in the past. We’ll still have some money, so our clients will know that we’re there.

I think that there is more focus on cash products than derivative products right now partially because of the concern of uncertainty around regulation.

I think what we need, really, is conviction on the part of our customers and clients, some more level of conviction and therefore, wanting to really be active in the markets.

[on risk appetite of clients]   It’s anybody’s guess. You know I don’t like to look forward. And two and a half weeks don’t tell you a whole lot. And I wouldn’t say it’s the best period we’ve ever seen, but it’s sure a lot more active than December.

I think that there was so much uncertainty. Traditionally, things gets lower at the year. There was so much uncertainty in the microenvironment, that it got even slower than usual. And I guess you get to the new year, people come back, are wanting to be more active.

Clearly, there have been some structural changes in certain parts of the market. The real question is are they permanent? Are they temporary? I don’t happen to believe most things are permanent. When you look overtime at financial markets, things get created. Sometimes they stay, sometimes they get out of fashion and other things get created to replace them. There’s going to be a housing market in the United States. Housing market in the United States, you need mortgages and unique financing for those mortgages. That’s not going to go away. Is it going to be the same type of securitizations that we saw in 2006 and 2007? Probably not for some period of time. I wouldn’t say not forever but certainly, not for some period of time. But is there going to be something to replace them to allow that market to go on? Yes, there’s going to be something. I don’t know what’s going to be yet. So it’s a really tough question to answer. Some products that were in favor are now out of favor, and are likely to stay out of favor for at least some period of time, but other products will be developed to replace them

I think there are still a lot of concerns about what the ultimate resolution is going to be in Europe. I think that’s one of the things that’s weighing on people’s conviction. I think it’s one of the things that weighed on activity throughout the entire 2010.

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