Goldman Sachs 2Q15 Earnings Call Notes

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Opportunities in 2Q15

“The second quarter of 2015 provided its share of opportunities and challenges. On one hand, our results reflect a continuation of some positive macro trends. Our Investment Banking clients remain focused on their strategic alternatives. There is also a strong demand for financing solutions. We see solid client activity in equity products, particularly outside of the United States, and there was a growing need for active investment management options.”

Challenges in 2Q15

“On the other hand, the operating environment for our FICC clients was more challenged in the second quarter. The combination of current concern surrounding Greece’s widening credit spreads and the reversal of certain macro trends led to lower client activity and a more difficult operating environment. More recently, market participants have been focused on the Chinese economy. This follows the more than 30% decline in the Shanghai Index during the early part of July from peak levels in June.”

Focus on clients, people on long term trends

“our management team isn’t overly focused on any one quarter or, for that matter, any six month period. Our focus is on the strength of our global client franchise, the quality of our people, and the long term trends driving our businesses.”

The world changed in 2008

“The world changed after 2008. We began to adapt to this new world immediately, and particularly to comply with new regulations. As part of this process we also scrutinized each of our businesses with the goal of both improving the client experience and our ability to generate appropriate shareholder returns.”

Greece certainly weighed on spread sensitive parts of the business

“Greece in the headlines continuously. And that certainly weighed on spread sensitive parts of the business like credit and mortgages.”

Hopefully the trends are behind us

“Too early to tell in terms of where we are in this quarter, Glenn, but obviously, the news around Greece has been obviously very positive in the last couple of days. And so hopefully some of these trends are behind us.”

Equity market trading environment has been good

“Environmentally, for the first half of the year, the environment has clearly been better, both from a activity level and also from a market-making perspective, and so you’re seeing that.”

Headcount growth driven by investment management and compliance

” the 1% increase in the quarter and the longer term increase it’s really happening in two places. Part of it is driven by our growth in the Investment Management business and people that we’ve been adding there as that business continues to grow and our ongoing investment there. And really the other large portion of it relates to resources that we needed to deploy as we come into the more significant part of regulatory compliance. ”

Regulation has actually been good for the industry, it’s made capital more expensive

“capital, while obviously very good for the system and significant improvement for all firms. For example, Goldman Sachs was carrying 85% more capital than we did prior to the crisis.

As we said, they have leveled the playing field a bit, but even without the leveling of the playing field, it makes balance sheet at one point, depending on the metric, and capital itself more expensive. And so, I don’t know if it’s an intended or unintended consequence in terms of the regulation, but the regulation does reprice things. And the vast majority of the industry is really a handful of us that are earning above the cost of capital, whatever you want to call it – 8%, 9%, 10%.”

Businesses that require the balance sheet are being repriced

“And so we’re starting to see repricing come through now. We saw it mostly in balance sheet. Came a little slower than we would’ve liked, but it’s starting to come through in balance sheet. By balance sheet I mean things like those businesses that were maybe most mispriced relative to the new requirements. Things like the repo business, it’s extended into the prime brokerage business. Again, that’s a regulatory heavy business. We’re world-class in that business, but it is regulatory heavy business. And you have seen it in parts of the derivative business particularly in things like those transactions requiring or not requiring collateral. So I’d say it’s slow. These are not huge needle movers, but this feels like a trend that’s in place for a number of years.”

Over time there will be repricing and potentially firms that can’t deliver will have to go away

“what we think will happen over time is potentially repricing, but also the competitive dynamic looks like one where those firms that can’t deliver or can’t respond or don’t have the same quality franchise, they get removed. But anyway, this is going to be a – this will be a long process.”

We don’t think what’s happening in China has a long term effect on liberalization policies

“I think longer term, what we’re really focused on is the extent to which the recent events, do they really have a significant negative impact from an economic perspective or in terms of the liberalization policies, because obviously we have a very big focus on China, a big commitment there.

And our early read of all this is that it’s not going to have a big – when we talk to our research folks, it’s not going to have a big impact on the local economy, and we don’t expect a major change in sort of the focus on liberalization.”

FICC liquidity was challenging in Europe

“it was most challenging in Europe. The credit market in particular, and let’s just say the spread sensitive product, the markets aren’t as deep there, obviously, as they are in the United States. And then, with all the issues with Greece, liquidity was quite challenging for all of our clients, and quite challenging for market makers.”

M&A business strong

“when we talk to our M&A bankers, the momentum in the advisor side of the business feels very strong. The CEOs and boards are obviously going to incorporate all the relevant news and so not surprising to me that when you see Greece dominating the headlines and lots of volatility in the markets that you might see some dip in confidence. But in terms of the degree of conversations we’re having in the activity levels, it feels quite good. ”

More questions than answers on the state of liquidity in markets

“obviously, there has been a whole host of discussion around liquidity in the markets. And I think in the end, I think it leaves us quite frankly all with more questions more than answers.’