Goldman Sachs Group, Inc. (The)

Good morning. My name is Dennis, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs fourth quarter 2018 earnings conference call. This call is being recorded today, January 16, 2019. Thank you. Ms. Miner, you may begin your conference.

Good morning. This is Heather Kennedy Miner, head of investor relations at Goldman Sachs. Welcome to our fourth quarter earnings conference call. Today we will use a new earnings presentation which can be found on the investor relations page of our website at www.gs.com. No information on forward-looking statements and non-GAAP measures appear on the earnings release and presentation. Reproduced or rebroadcast without our consent. Today on the call, I am joined by our Chairman and Chief Executive Officer, David Solomon, and our Chief Financial Officer, Stephen Scher. As noted on the agenda on page one of the presentation, David will provide introductory remarks about our strategic priorities, perspectives on the macro environment, and an update on 1MDB. Then Stephen will walk through our financial performance. He'll be happy to take your questions after that. I'll now pass the call over to David. David?

Thanks, Heather, and thanks to everyone for joining us this morning. I'm very happy to be here with you, and I look forward to joining this call on a more regular basis. I'm going to start off this morning by reiterating that I am fully committed to an active and ongoing dialogue with our shareholders and our broader stakeholders. I'm excited about our new call format and presentation, which is an initial step as we continue to enhance engagement and disclosure. As shown on page two, it is important to underscore that our overarching priority is to execute our core mission, serving our diverse client franchise, which includes corporations and governments, institutions, and individuals. Executing on our client-centric model will drive long-term sustainable value creation for our shareholders. We remain committed to delivering a full range of services to our clients, including advice, market liquidity, investment management, and financing. As many of you know, John, Steven, and I are conducting a comprehensive front-to-back review across each of our businesses, including three-year forward plans to identify opportunities to strengthen or expand our client footprint and to operate more efficiently. We are also pursuing new ways to deepen our existing relationships and expand our client footprint by developing new products and business platforms. As our strategic business reviews are progressing, let me highlight some early findings, which are shown on the right side of page two. Starting with our market-making business and FIC and equities, we've spent a significant amount of time evaluating all aspects of our businesses, including our delivery model with a focus on providing best-in-class client experience and execution. To achieve this, we will continue to invest in automation and platform enhancements. We are also actively engaged in pursuing opportunities to grow our addressable market by broadening client relationships and improving our mix of products, services, particularly to corporates. Specifically as it relates to FIC, we have a leading institutional market-making franchise. Clients tell me we have differentiated people and capabilities, particularly in the intermediation of large complex risks. But let me be direct. We're fully cognizant of the reduction in the industry wallet over the past decade, and as Stephen mentioned at the Bank America Merrill Conference, we will not be complacent waiting for the market to return. We are running the business with a clear perspective of its revenue potential. Over recent years, we've made significant progress on improving capital utilization and reallocated capital away from FIC commensurate with its potential in order to grow strategically important and higher returning businesses. We will continue to optimize capital in the business. We also see an opportunity to further reduce expenses. We're investing in automation as we expect many businesses within FIC to evolve similarly to equities. All of these efforts will position our franchise to remain a provider of choice while improving returns for our shareholders. Secondly, we have a world-class alternatives investing franchise which has generated strong returns over three decades. We have one of the most unique sourcing platforms given our global footprint and broad network. Our franchise presents us with extraordinary opportunities to partner with clients to invest their capital alongside our own. Based on our track record, there is an opportunity to raise additional third-party funds across equity, credit, and real estate, thereby augmenting fee income. Simultaneously, we can continue to monetize on-balance sheet investments and optimize capital consumption. Next, on cash management, as we evaluated opportunities to improve services to our clients and expand our franchise, Cash management presented a logical area for us given the breadth of our corporate relationships and the size of that wallet. In addition, the pace of technological change in the payment space gives us confidence that it is appropriate time for us to address this opportunity. We are now six months into a two-year build, and our firm will be first to use the cash management platform later in 2019. In addition to validating the product, Clearing our own operational payment flows will reduce costs and operational risk. Assuming all progresses as planned, we expect to launch the product to clients in 2020. Last three is we bring Marcus and the business of investment management closer. We will continue to evolve Marcus from a single product to a multi-product platform. We now serve 3 million customers through our lending and savings products and clarity money. We plan to further enhance the platform to include multi-tiered mass affluent digital wealth offering, which is currently in development. We are confident this collaboration will be a catalyst for successful execution of this strategy over time. Across these and other investments for growth, combined with a significant focus on operating efficiency, we are beginning to deliver on our commitment to enhance the durability of our revenues and our earnings. We continue to review our strategic priorities with our board, and plan to communicate a more comprehensive update to the market in the coming months. Additionally, later this year, we plan to share specific metrics and financial targets we will use to hold ourselves accountable. Ultimately, we will operate the firm to drive leading shareholder returns over the cycle. Before we discuss our results, I'll make a few observations on the operating environment, some of which are highlighted on page 3. Recently, there has been quite a disconnect between the weak market sentiment and the optimism we continue to see in corporate boardrooms. The fourth quarter, particularly December, was characterized by a decline in investor sentiment with respect to the global growth outlook. The concern that central banks would continue to tighten into a slowing growth environment caused weakness in equity and credit markets and resulted in an increase in volatility of many macro assets. While this has created challenges for many of our institutional investing clients, It is also driving potential future opportunities for active managers to add value. In addition, for now, the absolute level of activity in the real economy remains fairly robust, and this is reflected in broad CEO sentiment and our investment banking transaction backlog. Despite the global uncertainties, including U.S.-China trade policy, Brexit, the planned removal of monetary policy stimulus in Europe, and the recent yield curve flattening, Our economists still see global growth of 3.5% next year, including 2.4% in the U.S., 1.6% in the Eurozone, over 6% in China, and an acceleration to 2% in Latin America. Notwithstanding the mixed market and macro backdrop, we remain actively engaged with our clients across our franchise. Corporations continue to seek advice for strategic transactions, and there is a need for both equity and debt financing. Financial markets are open, and investors continue to need execution services, intellectual capital, hedging, and liquidity solutions. Clients continue to need comprehensive asset wealth management advice, and individuals need simple and transparent financial services that add value. Next, I'd like to take a moment to address the ongoing investigations related to matters with the Malaysian Sovereign Development Fund, 1MDB. I want to proactively address some of your questions that I know are on the minds of our stakeholders. First, we are cooperating with the Department of Justice and other regulators and are focused on a timely but deliberative process. We believe that we have established important facts in our own review of this matter over the last three years, and we of course would like to provide more information to you. But for now, this is still an open investigation, and we will naturally respect that process. It's very clear that the people of Malaysia were defrauded by many individuals, including the highest members of the prior government. Tim Leisner, who was a partner at our firm, by his own admission, was one of those people. For Leisner's role in that fraud, we apologize to the Malaysian people. As you would expect, we have looked back and continue to look back to see if there is anything that we as a firm could have done better. At the same time, I want you to know, before each transaction, considerable due diligence was conducted. When control functions and others in the firm asked if each transaction, whether any intermediaries were involved, they were told no. Tim Leisner himself said no intermediaries were involved in the transaction. As detailed in the government's charging documents, Leisner purposely concealed from the firm his scheme with Malaysian government officials, IPIC officials, 1MDB, and Jho Low. Significantly, and again as a part of our due diligence efforts at the time, we sought and received written assurances from both 1MDB and IPIC that no intermediaries were involved in the first two transactions. And in the final offering, the government of Malaysia itself and 1MDB represented that no intermediaries were involved in the offering. All of these representations to Goldman Sachs have proven to be false. Also during this period, one MDB's outside auditors, who had access to the books and records, issued clean audit opinions. In addition, I want to address the issue of Joe Lowe and how he was viewed during and after the transactions. We declined Joe Lowe's request to open a private wealth account in 2010 because because we could not verify the source of his wealth. Out of prudence, we also declined to advise or represent Lowe on other opportunities he presented to us between 2011 and 2014. That said, during the same period of time, Joe Lowe's involvement in a number of transactions unrelated to 1MDB was well known to a number of financial institutions, including us. In fact, before, during, and after the 1MDB transactions, Lowe engaged with major companies, investors, and other financial institutions in acquiring highly visible assets, from media to real estate. Clearly, a lot more is known about JOLO today than at that time. This has been a difficult time, but I'm proud of how our firm has remained focused on our clients. Our client franchise, including in Asia, remains extremely strong. There are always important lessons to be learned from difficult situations, and it is a priority for me that we are self-critical and reflective to ensure that our culture of integrity, collaboration, and escalation only improves from this experience. Please appreciate that I've tried to be as forthcoming as possible in my comments on 1MDB. I know that many of you will have additional questions, but I'm sure as you can understand, I can't say much more. With that, let's switch gears and review our performance as highlighted on page four. For 2018, full year, the firm reported solid results. We generated firm-wide net revenues of $36.6 billion, our highest in eight years. We delivered a return on equity of 13.3% and a return on tangible equity of 14.1%. Importantly, we are making significant investments to further expand our client franchise grow revenues, and enhance the long-term earnings profile of the firm, the cost of which is being funded by the embedded operating leverage in our businesses. In summary, I'm extremely pleased with our performance. We delivered a solid year, and our 2018 results leave us on strong footing to pursue our strategic objectives in 2019 and beyond. The team I have assembled to execute on our priorities, including John and Steven, have an increased sense of urgency and discipline to help move our business forward. With that, I'll turn the call over to Stephen, who will walk us through the details of our financial performance. Stephen.