美國銀行 (BAC) 2010 Q4 法說會逐字稿

Welcome to today's teleconference.

At this time all participants are in listen-only mode.

(Operator Instructions).

Please note, today's call is being recorded.

It's now my pleasure to turn the program over to Kevin Stitt.

Please begin, sir.

Good morning.

Before Brian Moynihan and Chuck Noski begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations.

These factors include, among other things, changes in economic conditions, changes in interest rates, competitive pressures within the financial services industry, and legislative or regulatory requirements that may affect our businesses.

For additional factors please see our press release and SEC documents.

Also joining us this morning will be Neil Cotty, our Chief Accounting Officer.

And with that let me turn it over to Brian.

Thanks, all of you, and good morning.

We know this has been a busy week for all of you and thank you for joining us on a Friday.

Before Chuck takes you through the quarter, I was going to give you some perspectives and provide some thoughts about the economy and the priorities we have for 2011.

I'll stay mostly with the key take-away slide on slide 4 and touch on a couple other slides and then turn it over to Chuck to begin on slide 9.

As we think about 2010, we came into the year with a focus on continuing to clean up the issues left over from the crisis while continuing to driving the franchise forward, finishing the integration work at Merrill Lynch and Countrywide and continuing to simplify our business model.

During the year we made progress on many of these items.

In the area of credit our improvement has been strong; charge-offs have now improved for seven consecutive quarters and yet there's still room to improve here.

We continue to see improvements in delinquencies this quarter and over the last few quarters.

The underwriting changes we made in 2008 across all our products, whether it was credit card, home equity or first mortgage, are performing better than we would have expected when we made those changes in those years.

This ought to hold us in good stead as we move towards 2011 in terms of credit.

On the credit side we released reserves this year of $7 billion during 2010.

And while we know this is not core earnings, it helped offset some of the cost of representation and warranties, about $7 billion, and other litigation costs in other matters during the year.

But even with that leaves our reserve coverage ratio at 1.6 times annualized charge-offs is the highest this Company's had in many, many years.

We also identified the non-core loan portfolios and began to work those off out of the Company.

As we showed you, that was about $130 billion at the start of the year and now it's down around $100 billion.

Now the good news on the loan side as the franchise has driven forward is we're starting to see stability in the core loan balances that we want to carry forward for this Company.

We're even seeing some modest growth in some of the areas.

Our utilization rates, for example, on our commercial area were stable in the fourth quarter from quarter three and that bodes well for 2011.

As we think about capital, we ended the year with questions around it, especially given the fact that the new Basel rules are starting to emerge along with the other changes [involved] in adopting Basel II and the Fed market risk rules, etc.

We told you at the beginning of the year we needed to hit targets of 5.5% to 6% tangible common equity ratios and 8.5% to 9% Tier 1 common ratios under Basel I by year-end in order to have the capital to run this Company.

This represents the view that we have that the risk capital we need to run the Company.

We achieved both of those schools this year.

We also started early and make good progress to mitigating the changes that are going to come about in both capital and risk weighted asset managers that will come with the new Basel rules.

This gives us strong confidence that we have a clear path to meeting all these rules as they're adopted and staying above the regulatory minimums during the next couple years as they come through.

And even during that period we'll have the ability to pay dividends and do stock buybacks over time as approved by our regulators.

During the year we also focused on our franchise.

And what we mean by focused, we sold non-core positions in businesses, 20 some units overall, netting $19 billion proceeds at the same time fulfilling the commitments of our TARP repayment and streamlining the franchise and focusing on its three core customer groups and the core products for them.

In addition to that work, we redesigned our consumer account strategy to deal with the new regulations that came in 2009 and 2010.

As you've read in the press, we piloted our new account structure to mitigate the revenue loss from these regulations and still provide strong customer choice.

By providing that choice and the changes we made we've seen dramatically lower attrition and complaints in account closures in our consumer businesses.

From the shareholder side our stock did underperform.

And our returns on equity and returns on assets are not where we want them and continue to be affected by one-time events.

But during the year we did successfully grow our tangible book value per share by 15% and we look forward to driving that forward in the future.

By far the biggest legacy issue we continue to deal with is on the mortgage side.

On pages 7 and 8 we highlight some of the changes and Chuck will talk about some of the rep and warrantee and put-back issues later, but let me summarize some of the key elements.

As we entered the year 2010, a lot of the operational work was around the modification area and building up the teams to do the foreclosures.

As we moved through the year the discussions around representations and warranties started dominating the discussions.

This year we took a total of $7 billion of representation and warranty costs as offsets to revenue.

A significant portion of our litigation expense this year was also due to mortgage issues.

We are pleased to put the GSEs behind us this quarter, as we announced on January 3.

We'll continue to focus our efforts in protecting our shareholders in regard to these matters as we deal with the other counterparties involved in representation and warranty and put-back issues.

When we think about modifications, our efforts continue to build.

We did 285,000 modifications during 2010, including 76,000 during the fourth quarter alone, the most in the industry.

We completed a review of the foreclosure practices, the process is working and we restarted the efforts cautiously.

We'll continue to face regulatory and other scrutiny here, but the work is proceeding and we are very focused on doing this right for all the parties involved.

During 2010 we also completed a milestone of $2 billion in merger and integration work.

And next quarter we'll actually complete the final touches of the Merrill Lynch integration.

And for the first time in many years we'll have no integration work to do in this Company.

What that gives us the ability to do is turn that energy and focus to managing our efficiency in the Company through simplification.

Included in that will be taking our four deposit systems during 2011 and 2012 to one deposit system and many other like activities.

Our expense levels are not where we want them right now.

They're higher because of the debt collection and other costs related to the legacy issues.

But if you think about what we've been doing in managing expenses, we continue to invest in the franchise while managing through the post crisis issues.

To help you think about that, think of the headcount in the Company.

During the year we raised about -- our headcount has gone up by about 3,000 people.

We've dedicated almost 13,000 additional people to the mortgage issues and foreclosure modifications and collection areas.

We've invested 2,000 people in growth areas, about half in the Wealth Management and other areas in the United States, about half outside the United States.

That means the rest of the franchise is effectively down about 10,000 to 12,000 people.

So we continue to manage cost while we deal with the legacy issues and invest for growth and that's how we'll continue to run the franchise during 2011.

While all the work was going on in sort of repositioning the balance sheet capital in the franchise the core business continued to progress.

First, our job is to drive the integration of this franchise to bring the combination which can do better than any one of our businesses as a stand-alone business could do.

If you look at the appendix slides 33 and 34 you can see some of the evidence of that.

Our card business turned to an operating profit this year from a $5 billion loss last year.

Our deposit performance, while challenged by the lowest rate environment and regulatory changes, has improving customer scores and our share in deposits continues to grow on the retail side even giving effect to our disciplined pricing strategies.

Our deposits now cross $1 trillion at Bank of America for the first time.

Our wealth management business has seen strong growth, both in assets under management flows, assets under management, deposits and we're seeing loans stabilize in that business.

We've made good progress in hiring financial advisors, Wealth Management bankers and other client facing teammates.

The group has produced a solid profit including record revenue in the fourth quarter of 2010 and still has lots of great opportunity ahead.

Our global commercial banking business, our middle market and small business banking business, recovered strong earnings and returns this year as credit normalized and our market leading positions showed their strength.

In our global banking and markets area, which would be large corporate investment banking and the trading and capital markets activity, we maintained our number two position in our investment banking business throughout the year.

Our investment banking fees from third parties are the highest this quarter they've been since we merged with Merrill.

Our sales and trading revenue team had a solid year, but we had varied results by quarter, going from a high of $7 billion in revenue to a low of around $3 billion.

We're satisfied with the year in total, but we need to work on the ups and downs, and Chuck will take you through some of the details on that later on.

As we think about 2010, we made progress, we stabilized the balance sheet in capital and you can see that on slide 6 in some of the statistics on that balance sheet statistics given there.

We did lose $2 billion for the year 2010 and $1 billion in the fourth quarter; both of those numbers were not -- we are disappointed with.

But with the year came large ins and outs and they're all [merely] driven by legacy issues which we continue to put behind us -- $12 billion in after-tax goodwill impairments; $7 billion in representation and warranty and put-back costs as a [contra] to revenue; $3 billion in litigation expense nearly; $2 billion in merger and restructuring charges and other charges like that and those of course were offset in part by the $7 billion in reserve releases and $3 billion in assets sales.

We clearly need to continue to reduce the inns and outs and let the core franchise performance come through for you, our investors.

As we look to 2011 the priorities are clear -- we're going to make progress in putting the mortgage operational issues behind us, meaning modifications, foreclosures and related process improvements.

In the representation and warranty and put-back area we're going to continue to make progress, only if we can do it on a basis consistent with our shareholder interest.

But our best guess is this will take a longer period of time, perhaps a few years.

We're going to drive the core customer business, integrating this powerful franchise and delivering to each customer.

We're going to drive our expense management during the year, ensuring that we get the expenses out of here as we continue to recover in mortgage and other credit-related costs.

And importantly, we're going to deliver on the growth opportunities in our franchise, be at Wealth Management, the affluent customer base in the consumer area, the investment banking area all in the United States and abroad and we'll continue to invest in those businesses as we did in 2010.

As we look to 2011 we see the economy continuing to recover.

All the key metrics we see in our customer base that we monitor externally like you do, including the credit demand, consumer spending and specialty spending among middle-class and affluent clients, the debt burdens the households are carrying, the asset quality of our portfolios -- all of those are pushing ahead.

We still face, however, the realities of high-end sticky unemployment in this country and a slow and stagnant recovery in housing and modest overall US growth.

In this context we'll continue to drive towards delivering shareholder returns by continuing to grow our tangible book value per share as we materialize a recovery in the franchise.

We continue to believe we're in a position to modestly increase our common dividend in the back half of 2011, but of course we need our regulator's approval to do so.

So we still have a lot to do.

But at the same time we have the best franchise in the industry with number one or two positions in every product area and the largest customer/client base and the history.

We can't and will not lose our focus on levering these franchises as the economy improves for you, our shareholders.

We have a clear strategy, to serve three customer groups with their core financial needs in the best way a provider can do.

We have a well defined operating principle which we've laid out for you that enables us to meet that strategy and we continue to execute against them.

2010 was the year to repair the balance sheet, rebuild some of the capital ratios and reserve ratios and also tough but necessary decisions as we focused on cleaning up our legacy issues.

But as the economy continues to improve and we continue to execute, I have every confidence the franchise will keep moving to the performance that it's capable of.

Finally, I want to thank our 290,000 associates for the tireless efforts they made during 2010 and I'll turn it over to Chuck starting on slide 9.

Thanks, Brian, and good morning, everyone.

As you can see on slide 9, we reported a net loss of $0.16 per share for the quarter.

Our results reflected the non-cash non-tax deductible write-down of $2 billion or $0.20 per share of goodwill associated with our home loans and insurance business that we discussed on January 3.

Excluding this goodwill impairment charge, earnings were approximately $750 million or $0.04 per share after preferred dividends.

Results for the fourth quarter reflected the positive and negative impact of several items which makes for a difficult comparison this quarter.

If you turn to slide 10 we've listed some of the larger items.

Representations and warranties expense in the fourth quarter was $4.1 billion of which $3 billion was associated with the GSE settlements we have previously described.

A credit mark on structured liabilities under the fair value option resulted in a negative adjustment of $1.2 billion reflecting a tightening of our credit spreads compared to a negative adjustment of $190 million in the third quarter and is reported in other income.

Asset sales during the quarter included our partial ownership in Blackrock reducing our ownership from 34% to 7%, the sale of our rights to participate in CCB's secondary offering, and the sale of the majority of the global security solutions business.

We had $872 million in security gains during the quarter.

We already touched on the goodwill impairment charge.

Excluding fees paid to external legal service providers litigation expense for the quarter was $1.5 billion, primarily related to our consumer businesses including the mortgage business.

Merger-related and restructuring charges were $370 million.

Loan loss reserves were reduced by $1.7 billion in the quarter versus $1.8 billion in the third quarter.

And finally, we had a tax benefit of $2.4 billion primarily reflecting the pre-tax loss before the goodwill impairment charges, the release of a capital loss carryover valuation allowance of about $1.2 billion and normal tax preference items.

Turning to slide 11, you can see that four of our business segments made money in the fourth quarter.

Deposits lost money due to increased litigation costs this quarter and were also affected by the full impact of Reg E and continued low interest rates.

Global card services benefited from improving credit quality and reported $1.5 billion in net income.

Global wealth and investment management had a very good quarter earning $332 million due primarily to near record quarterly revenue levels driven by market activity, strong long-term client flows and a shift in the mix of assets towards higher margin products.

Home loans and insurance was significantly impacted by legacy costs including the goodwill impairment charge, reps and warranties expense and litigation costs.

Our First Mortgage Banking business, however, excluding these costs was profitable in the quarter.

Global Commercial Banking earned more than $1 billion this quarter as credit quality continued to improve and has delivered stable revenue through the cycle reflecting strong client retention.

Global Banking and Markets showed continued solid results in Investment and Corporate Banking offset by a difficult trading environment in Global Markets.

Let's turn to net interest income on slide 12.

Net interest income on an FTE basis was $12.7 billion, essentially flat with the third quarter.

The impact of low rates and lower consumer balances, excluding residential mortgages, were offset by positive hedge income of $250 million, increased balances in the discretionary portfolio, and a reduction in long-term debt.

Our average earning assets for the quarter were up $20 billion, mainly due to growth in consumer loans and securities.

Cash declined due to a shift in liquidity mix from cash to liquid securities in addition to a net reduction in our outstanding debt.

Consumer loans increased due to retained mortgage originations.

Commercial loan demand stabilized in the quarter and, as we said earlier, average commercial loans excluding real estate were up 1% from the prior quarter.

Although we were flat with the third quarter, we expect net interest income to decline over the next couple of quarters.

In the first quarter of 2011 in particular, we expect net interest income to drop from fourth-quarter levels due to fewer days in the quarter, continued declines from our loan run-off portfolios, and an anticipated reduction in hedge results.

We expect to see stabilization in net interest income sometime in the second half of the year.

We're also on track to lower our long-term debt footprint by 15% to 20% by the end of 2011 relative to third-quarter 2010 levels.

Slide 13 shows you that both average loans and deposits were up for the quarter.

Deposits remains a good story of growth as Wealth Management clients continue to do more business with us and commercial customers continue to prefer to hold rather than invest cash.

On slide 14 you can see that period-end loans from the end of September were up approximately $6.5 billion due to growth of almost $17 billion, partially offset by net charge-offs and decreases in our run-off portfolios.

We have a slide in the appendix that details our run-off portfolios for you.

The $17 billion increase in total loans was driven by residential mortgages, primarily FHA insured originations, as we used some excess liquidity, and C&I loans offset by a slight decrease in commercial real estate.

Turning to slide 15, card revenue was up 7% from third-quarter results due to a 12% increase in interchange income.

Increases in retail spending were 4% versus the prior quarter and 5% versus the prior year.

These increases helped drive the increase in interchange income.

And on a managed basis card revenue was relatively flat from a year ago despite the impact of the CARD Act.

On slide 16 we show service charges were down $176 million from third-quarter levels to $2 billion, which is the number we targeted for you two quarters ago.

The decrease was due to the approximately $275 million impact of Reg E this quarter after becoming effective midway through the third quarter.

So now that the full impact of Reg E is embedded in our results you can use this quarter's results as a base going forward.

Remember though that the full impact from both Reg E and the CARD Act wasn't reflected in quarterly results in service charges and card revenue for the first three quarters of 2010.

Other regulatory impacts that will affect service charges in 2011 are the Durbin amendment which is scheduled to occur in the last half of the year.

We expect this would cost is approximately $1 billion in revenue.

We won't know the expected impact on debit card and interchange though until late April, so we hope to update you on that during our first-quarter earnings call.

While we expect to mitigate some of the impact over time, we do expect the impact of mitigation efforts will be modest in 2011.

Mortgage banking revenue, on slide 17, decreased from the third quarter as a result of higher reps and warranties expense which includes the impact of the GSE agreements and additional accrued liabilities.

MSR performance net of hedges was $257 million this quarter, an increase of $347 million compared to the loss last quarter.

Although production volume in First Mortgage at $85 billion was up from the third quarter, production revenue was down due to lower lock volumes in production margins.

The capitalization rate for the consumer mortgage MSR asset ended the quarter at 92 basis points versus 73 basis points in the third quarter.

Given the direction of interest rates since Thanksgiving, and the redeployment of some of our sales force to assist with our distressed customers, we forecast production levels will be lower over the near term.

Turning to slide 18, you can see that total reps and warranties expense in the quarter was $4.1 billion, up $3.3 billion from the prior quarter.

Much of the increase was the result of our recent agreements with the GSEs.

The liability we have accrued on the balance sheet increased approximately $1 billion to $5.4 billion as the $4.1 billion representations and warranties expense was partially offset by approximately $3 billion in charge-offs and other activities.

As you can see, our unresolved repurchase requests totaled approximately $10.7 billion at year end.

This amount includes $1.7 billion of demands contained in the communication from private label securitization investors.

We believe these investors do not have the contractual right to demand the repurchase of loans directly or the right to access loan files.

The inclusion of these claims and the amounts reflected in the chart does not mean that we believe these claims have satisfied the contractual requirements that would permit them to direct the securitization trustee to take action or that they are otherwise procedurally or substantively valid.

Outstanding claims were reduced by $2.3 billion driven by the resolution of $8 billion of claims during the quarter including $4.9 billion as part of the GSE agreements.

Monoline claims outstanding continue to grow as the monoline's continue to submit claims and are generally unwilling to withdraw these claims even when they've been given evidence refuting the claims.

The increase in rescissions and approvals in the fourth quarter was substantially impacted by the agreements with the GSEs.

We've included slides in the appendix that update the information we presented early this year on our GSE experience.

On slide 19 we provided additional information around our experience with non-GSE counterparties which would encompass whole loan sales and private label securitizations, including those where monolines have insured some or all of the debt.

On slide 37 in the appendix we break down our non-GSE experience much as we did for the GSEs.

As you can see on slide 19, from 2004 through 2008, $963 billion of loans were sold into private label securitizations or through whole loan sales where we believe we have originated reps and warranties exposure.

We broke out the originations for you by both legacy entity as well as product to give you a bit more clarity on the portfolio.

Through December 31 repurchase claims received on the 2004 to 2008 vintages totaled $13.7 billion.

$6 billion in those claims have been resolved and, as you can see, resolution success and rescission rates are much higher with private investors versus the monolines.

The losses on the resolved claims were approximately $1.7 billion.

Of the remaining outstanding claims $5.8 billion have been reviewed and declined for repurchase.

Moving to slide 20, of the $963 billion of original principle balance 22% have defaulted or are severely delinquent.

58% of defaulted or severely delinquent loans made at least 24 payments prior to default or delinquency.

As we have indicated previously, in those instances where we have had meaningful and consistent repurchase experience with counterparties, such as the GSEs and certain monoline insurers, a liability for reps and warranties has been established for asserted and unasserted request to repurchase current and future defaulted loans.

With the exception of certain monoline insurers we have not had meaningful and consistent repurchase experience with other non-GSE counterparties.

We do evaluate all asserted claims received from all parties in establishing our liability.

However, as we and others in our industry have noted, analysts and other market participants have developed their own estimates of possible exposure for Bank of America and other institutions.

Although the non-GSE claims experience remains limited, we expect additional activity in this area going forward and it is possible that further losses may occur.

We received a number of investor inquiries following our GSE announcement earlier this month regarding the extent of such possible non-GSE exposure.

In addition, in connection with our planning process, we evaluated various possible alternative scenarios.

We've developed a preliminary estimate of a possible loss range using a variety of judgmental options.

That estimate suggests a possible upper range of loss that could be up to $7 billion to $10 billion over existing accruals.

As a reminder, there are significant legal and procedural hurdles that counterparties would need to overcome before we believe any of these amounts could become probable.

We would expect resolution of these matters to be a protracted process which could take years to conclude.

As you can see on slide 21, for example, there are substantial differences between the reps and warranties provided to GSEs and those provided in private-label transactions.

Until we have meaningful repurchase liability with these counterparties, we do not believe it is possible to determine that a loss is probable and, accordingly, to accrue for any such loss.

As we have previously described to you, where we conclude that a valid breach of reps and warranties has occurred we will act in a responsible manner.

On the other hand, where we've concluded that a valid basis for repurchase does not exist we will vigorously contest such claims and defend the interest of Bank of America and its shareholders.

Okay, it now back to earnings on slide 22.

As I said earlier, our activity with Wealth Management clients resulted in revenue approaching record quarterly levels which is where we generate the bulk of the investment in brokerage revenues.

Investment in brokerage revenue was up $155 million or 6% from the third quarter due to both higher asset management fees and brokerage income.

Asset management fees were a record $1.4 billion and brokerage revenue was approximately $1.5 billion.

Total client balances grew $69 billion to more than $2.2 trillion during the quarter as a result of market activity and strong flows into deposits and long-term asset management products.

Sales and trading revenue, on slide 23, of $2.6 billion, which includes both net interest income and non-interest income, decreased approximately 43% from the third quarter, but was higher than last year by 17%.

The decrease in sales and trading was partially from seasonal declines but a few other factors stand out.

We had a softer trading environment as rates backed up, negatively impacting some of our risk positions.

This also caused clients to exit bond funds with money flowing into cash or equity funds putting pressure on prices.

We've expressed a significant tightening of credit spreads during the year and, to a lesser extent, during the fourth quarter.

Certain sectors such as European debt experienced spread widening.

We've also been focused on the impact of the new Basel capital rules and the impact to the amount of capital attracted to our markets business.

Over the last couple of quarters we've been focused on reducing the higher capital-intensive assets and as well our exposure to shorter-term funding agreements.

FIC was impacted the most from these items, decreasing 49% to $1.8 billion with lower results in credit, rates and commodities products.

Equity revenue was down 19% to $789 million from the third quarter as an increase in cash business commission revenue from inflows was more than offset by a decline in market volatility and client flows impacting equity derivatives.

We didn't have any major impact from legacy assets in the quarter while we continue to reduce our exposure to auction rate securities, CMBS and monolines.

In investment banking, on slide 24, our overall fee ranking remains solid as we were ranked at a strong number two globally and number one in the US.

Investment banking revenue increased 16% from the third quarter and was on par with a great fourth quarter from a year ago.

Results were driven by increases in all areas, namely M&A, debt and equity capital markets.

Let me say a couple of things about expense levels on slide 25.

Total expense, excluding the goodwill impairment charges in the last two quarters, increased $2 billion from the third quarter.

Expenses this quarter included higher litigation expenses, as I said earlier.

Personnel expense compared to the third quarter is up approximately $400 million reflecting the build-out of strategic hires in certain businesses including international as well as certain severance and benefit-related expenses.

Higher levels of headcount and expense in home loans and insurance were related to default management staff and other loss mitigation activities in that business.

Reiterating what Brian said earlier, our expense levels, excluding goodwill charges, are up from 2009 novels for several reasons including additional headcount to address legacy mortgage issues.

For 2011 we expect our expense levels to remain elevated as we work through these issues and continue to invest in the franchise.

Moving to asset quality trends on slide 26.

As they did throughout most of the year, delinquencies, excluding FHA loans, net charge-offs and non-performing assets, continue to improve.

On slide 27, improving credit performance in almost all portfolios drove the decrease in net charge-offs.

Net charge-offs of $6.8 billion decreased $414 million compared to the third quarter.

Consumer net charge-offs were down $252 million, even with a $330 million valuation adjustment on certain mortgage loans, reflecting improvement in card and home equity.

Commercial asset quality also improved as net charge-offs dropped 15% from the prior quarter with the biggest drivers being small business and commercial real estate.

Reserve reductions included $1.1 billion on US card along with releases in commercial real estate, small business, direct/indirect consumer and commercial.

On our $36 billion purchased credit impaired consumer book, which is comprised of discontinued real estate, residential mortgages and home equity, we increased the reserve $828 million to reflect an adjusted outlook for home prices.

Even with the decline in reserve levels, the ratio of allowance for loan losses to annualized net charge-off was essentially flat compared to the third quarter at roughly 1.6 times and is up from roughly 1.1 times a year ago.

In thinking about credit costs in 2011, we think provision expense should continue to edge down through the year as charge-offs continue to move lower primarily in the consumer businesses.

We expect loan-loss reserve reductions will continue as long as portfolio performance and the economy continue to improve and our other credit metrics warrant lower reserves.

That concludes my prepared remarks for this morning.

As you may know, we've scheduled March 8 to have our Investor Day in New York, so I look forward to seeing all of you there.

And with that, let's open it up for questions.

(Operator Instructions).

Betsy Graseck, Morgan Stanley.

Hi, good morning.

I wanted to talk a little bit about the tail risk on the mortgage and the clean up that you mention, Brian, at the beginning of the call.

You'd indicated that you could range private label $7 billion to $10 billion based on your assumptions.

Why not take a large reserve against that and kind of be done with it in the next quarter or two?

Betsy, I want to be very clear for you and everyone on the line as to what that -- the ranges that we gave today.

This is a possible range, not a probable range.

It could be as low as zero theoretically up to a high end of the range that we think could be $7 billion to $10 billion based upon an array of different assumptions and judgments, none of which we've seen in evidence through current behavior either in the portfolios or by the counterparties.

So we really, as I said, we really don't have a basis to make an accrual.

We had a lot of interest from investors asking us to help understand what we thought about a possible exposure in the future.

And until we can meet the accounting criteria to judge this as probable we really don't have a basis to make an accrual.

And certainly we expect there will be additional provisions in future quarters; we don't think they're going to fall to zero.

But we really don't have a basis.

This is an array of alternative scenarios we did during our year-end planning process coming into the new year to try to size under various kinds of scenarios what might happen.

But it doesn't even begin to rise to the level of probability that would allow us to do any accounting, nor do we frankly expect that we would lose that amount.

You do have some private-label experience though, right, that you have paid out on?

What's the reason for why that experience that you have had so far isn't sufficient?

Actually, Betsy, most of that other repurchase experience was with whole loan investors, and that's rather episodic.

As it relates to private-label investors and securitizations, that has been extremely modest.

Okay.

And the litigation reserve or the litigation costs that you had in the quarter, should we take that as a run rate for the foreseeable future, or is there any color you can give us as to expected volatility in that line?

I think you should probably expect that we'll have some provisions there.

They were both -- as I mentioned, the provision in the quarter was in our consumer businesses, so it was more than just mortgage.

So there will be -- you saw in the deposits business for the quarter that we reported a loss.

Without the litigation provision associated with deposits, that business would have been profitable in the quarter.

But I think it is hard to think about a run rate for litigation expenses.

Again, those will be based on the facts and circumstances and the judgments of our attorneys each quarter about the status of our overall litigation portfolio, although certainly a disproportionate part of our litigation portfolio is in the form of Countrywide space.

And then last on FIC, in broad strokes could you give us a sense as to how much of the FIC decline was due to either actively managing down due to Basel III, passively allowing things to roll off because of Basel III in DBA, or just the market being difficult?

I would say it would be largely the market being difficult and client -- and the lack of clients flows.

But certainly as we look to manage our balance sheet more effectively and think about the new capital rules that has also had an impact.

Is there any DDA in there?

No, I think that's in other income.

Okay.

And you outlined how much that is?

Yes, maybe a small amount, but most -- the big adjustment is the fair value option adjustment on the Merrill Lynch structured notes.

Okay.

Thank you.

Paul Miller, FBR Capital Markets.

Yes, I know -- you guys have been giving out guidance on core pre-tax pre-provision numbers?

Because that's one of the numbers that we really like to look at and I think numbers have tended to be all over the street.

Can you help us out a little bit on how we should be looking at those numbers?

We have not given guidance on [PPNR] and there are a couple of reasons.

But the main one is that with a credit card business you can lead yourself to -- and we talked about this a few earnings calls ago -- you can lead yourself to a number.

When we had $30 billion, $40 billion of credit card charge-offs that the PPNR is fine, but you're always going to have a charge-off rate of some magnitude in there and that then could lead you to the conclusion that it will go to zero and it won't, because the cost of goods sold in credit card is apart to credit card costs.

So I think Chuck gave you various -- as he went through his presentation various points of view about net interest income, and it would sort of continue down as the interest rate environment and we had a good hedged quarter on that and that helped this quarter as it flattens and comes down and will flatten in the middle of next year and come back up.

Expenses, I think we gave you some guidance, but in terms of PPNR, we struggle a little bit.

I know that that's a number you track closely, but we struggle a little bit as to how you guide people on it overall, but also importantly how it really plays into the context of a company that has a large credit card portfolio.

And just one quick follow-up on Betsy's question.

How much exposure do you have to the whole loan sales in the private-label?

In other words, how much -- do you ever disclose how much you've sold out there?

Because I know -- and I think you disclosed last quarter what you've paid out on private-label.

I didn't see that disclosure this time around; I might have missed it.

Let's see, I think if you went looking in the appendix, probably your best sense of the non-GSE portfolio would be back on page 38, Paul.

But I don't -- I don't think we've cut back at all on the disclosure we've given you with respect to the performance of these individual portfolios and the actions with counterparties.

But I was just wondering, do you actually disclose how much you sold in whole loans to private-label?

Because I know if we get some insight on mortgage finance we can get the overall private-label exposure.

But what's the exposure on the whole loan side?

Because that's what you've been paying out at this point, am I correct?

We'll get to that.

It's disclosed, Kevin and [Lee] can get you that.

Yes, we'll get you that, Paul, I don't think it's here in our slides today.

Okay.

Thanks a lot, gentlemen.

John McDonald, Sanford Bernstein.

Hi.

Another clarification on the private-label.

Chuck, in the illustrative scenario of the $7 billion to $10 million, when you say "over existing accruals", I just want to clarify.

Which existing accruals are you referring to?

Is that litigation reserves or the rep and warranty reserve?

It's both the rep and warranty reserves and the associated litigation reserves.

Okay.

So there's some contemplation of private-label losses in both of those?

We really -- frankly it's the entire portfolio.

So if you look back on slide -- let's see, 38, which shows the original principal balance I talked about earlier of $963 billion, how much remains unpaid.

And what we do is as potentially at risk, our estimate contemplates that entire population, because we believe we pretty well have taken care of GSEs already.

But it's -- primarily it's monolines, it's private-label, it's whole loan sales, it's all of that.

Okay, and where did the litigation reserves stand at year end?

John, we don't disclose the amount of our litigation reserves -- the balances.

We'll talk to you about provisions, but we're not going to share that.

In terms of the SCAP test, do you know if this upper range illustration that you gave today is what the Fed will accept as the adverse scenario outcome for that component of the SCAP?

John, certainly as one of the 19 banks that participated in the process, we provided a whole array of information to our regulator.

But I think that's viewed as supervisory information, I don't think we can really comment.

Okay.

Can you give any more color on what kind of magnitude of a drop in NII we might look for in the first half of 2011 or how much the hedge results helped in the fourth quarter?

Yes, I think I mentioned the hedge result in the fourth quarter was a benefit of about $250 million.

We'd love to continue that, but anticipating that we don't have that level of help in the first quarter of 2011 is probably a good guess.

Then all of that goes away?

I think certainly a substantial part of it.

Okay.

And then also just on the expense that you talked about -- what adjustment should we make to the fourth-quarter expense level to get to a sense of what the run rate is going into 2011?

Could you help us with that, just kind of think about the expense run rate?

I think, John, I'd give a perspective and Chuck can give you a perspective.

I think there's -- as you think about the expense run rate and if you look at page 25 you can sort of see -- you've got two broad concepts.

One is sort of some of the one-time expenses, the extra litigation, higher-level litigation in the quarter and things like that, year-end cleanup, professional fees and things that typically happen in the fourth quarter.

So that's sort of one thing that you can neutralize, you can look over the quarters and smooth some of that out and think about that as a run rate question.

But the second is that the intention of personnel to work on the bad credit and the mortgage -- and that's what I tried to shape for you a little bit.

So during 2010 we added 13,000 people dedicated that we otherwise wouldn't need, but they're working to help -- dictated to the task of helping on the mortgage cleanup.

That's going to be elevated all through 2011.

It will take us 2011 into probably halfway through 2012 before we sort of really get on the downward side of being able to get through all that work.

So those costs will stay in.

So as I think Chuck said overall, we don't think expenses are going to stay at these levels.

And if they go up on comp or something like that, that's going to be revenue related which will be good news.

But the core expense run rate is sort of there.

And then as we work through this year we'll be able to start to take it out as the mortgage activity in particular and other activities like that start to subside.

And, John, remember there's a spike in the first quarter from FAS 123 which is when we pay equity compensation and some of that has to get recognized up front because of some of (technical difficulty).

Okay.

And last thing here just back on the private-label.

Can you give an update on the status of discussions with the group that had a letter in October, the PIMCO Blackrock Group?

Is there a late January deadline for resolving that and will we know when that's over?

There's no real news on the discussions and there was an extension that was filed that -- the end of January and we continue to work to talk to people, but we haven't changed our posture.

We're not doing anything, it's not going to be in our shareholders' best interest.

But we always want to talk to everybody in the world to make sure we understand where they stand.

Okay, thank you.

Matt O'Connor, Deutsche Bank.

Hi, guys.

If I could circle back on the FIC revenues and I guess just bigger picture as we think about implementing all the changes for Basel III, what do you think the longer-term impact is versus a more normal run rate?

And maybe I'll just throw out there, maybe an annual level of FIC revenues are in the $10 billion to $12 billion range, Basel III would reduce that by 10%, 20% or do you think you can offset it over time.

Just any thoughts on what the near- and longer-term impact could be.

I would say that we have been taking out what we would -- think of Basel III and Volker and other things.

We've been downsizing our -- we took our prop business down and it's actually almost done, it will be done early this year.

But overall the rest of the impact is relatively modest.

And I would not put the fourth quarter into Basel III, those types of things.

I think it just was a tougher quarter in terms of client activity, and a tougher quarter in terms of market.

And it's not any one area, across the board we just had lower revenues and in the latter part of December nothing happened.

So I wouldn't be focused on that.

I think we're still comfortable with the average type of run rates we talked about, $4.5 billion, $5 billion in total revenue from the sales trading platform that you can see if you look back.

And we continue to size the business appropriately that way, Tom has made the changes there.

So I wouldn't say that Basel III is going to affect us.

We're going to run it tightly, we're going to run the balance sheet tightly.

It's more because of the economics involved than anything else.

In this quarter I'd really chalk it up to sort of a malaise and a tougher market quarter.

Okay.

And sorry, the $4.5 billion to $5 billion of sales and trading, that's a quarterly level including both equities and fixed income?

Yes, that's total revenue in there and the capital markets activity.

And it's going to balance around.

I mean just look at the last four quarters -- you can see a wide range.

And so -- I think ins and outs were a little more pronounced this year, especially because the one quarter was so high.

But I think if you look at it over time, if we don't get that kind of run rate we're going to have to resize the business because that's what's needed to produce the right returns.

Okay, that's helpful.

And then just separately, I guess on the whole kind of broader foreclosure issue for the industry, I'm personally surprised that it's kind of lasted this long.

It feels like there's a lot of incentive for everyone to figure out some sort of settlement and move on.

I know when you're in discussions it's hard to talk about these things publicly, but any color you can give on maybe timing of putting this issue behind the industry or maybe what needs to happen to get people at the table to hammer out an agreement here?

I think it's hard to reflect on that, there are a lot of groups involved and you've seen them talking to press about what's going on and we won't do that.

What I will tell you though is we did a thorough review.

We identified what we need to do to make sure that we could erase from anybody's memory that there was any lack of precision, integrity, discipline in the process.

And we've restarted the process based on that and we've dedicated lots of people, lots of work to make sure that there will be no question about it.

Resolving the types of things you're talking about will take some time, but the reality is -- the key is that we've actually done the work, completed it, brought in the outside review, brought in the inside review and are back working on it and working through this very difficult situation for the borrower.

So I'd separate sort of the regulatory and other issues away from is the activity starting to progress?

And the answer on that is, yes.

And then just lastly on the debit card.

You're starting to have more banks come out publicly and say there are offsets or -- I think one bank said they think they can offset it 50%, one bank said 100%, one bank is claiming it's illegal.

Just any updated thoughts you have on that in terms of how this plays out when all is said and done?

I think what we have said in the past still stands.

Over time we have to mitigate all of it because we have to get the returns in the business back to what we need.

But in the short term the transition, and as Chuck said in his comments, it will be slower just because you lose the revenue instantaneously and it takes a while.

Now the key things we've done, and you've seen and the press reported, is that we have restructured our account structure.

And during the course of 2011 that is out in a pilot state, it will ultimately roll through the entire customer base over the next three, four quarters.

And that allows us to, we think in the right way, recover the revenue that will [end] in 2012 and 2013 as that account structure goes through.

And so I think that would be our statement sort of -- that would be our clarity on timing.

2011 is the transition year, 2012 we start to recover and it will take a little time.

And as interest rates rise, we have to remember that interest rates are a multitude of effect on that business, the low interest rate environment, the value of deposits then the fee side over time.

So as interest rates rise we're going to have a have disciplined pricing in our structure and the team has done that to gather back some of it there too.

Yes, particularly with our scale.

Okay.

All right, thank you very much.

Ed Najarian, ISI Group.

Good morning, guys.

My first question has to do with credit.

I guess we saw obviously improvement in the charge-off ratio and in [NPAs], but 90-day delinquencies were flat and we saw only pretty modest improvement in 30-plus day delinquencies.

So I'm wondering if you have any comments sort of on your outlook for the pace of credit quality improvement going forward.

Looking at the delinquency trends it seems like it's likely to slow down relative to prior quarters.

Any comments there?

Well, I think the pace has slowed in prior quarters only because in the grand scheme we've gone from I think $12 billion is at the high point down to $6 billion in pure charge-offs now.

But we continue to see the delinquencies improve.

The entry levels -- what's gone in, the roll rates are solid, what's come in the card business -- and especially if you look at the core portfolios that you've got the runoff portfolios and the non-runoff portfolios in some of these businesses, even -- you look at them, it's very solid.

So we're encouraged on the consumer side in what we've seen in early stage delinquencies in all the portfolios.

But the pace of improvement will slow only because we had -- quite honestly, had a long way to come from.

And if you looked in the commercial, you could look at our criticized assets, you're seeing them start to come down, you're not only seeing charge-offs, and that bodes well for future credit costs, obviously.

So it's slower, but it's relentless and it will continue to improve.

And if you look at the vintages, what I was saying earlier -- if you look at the vintages of the underwriting we did in 2008, especially like halfway through 2008 and out, we had a prediction for unemployment, things like that in card and mortgage and stuff.

It has been worse than that as nobody would have predicted it right at the time.

But our vintages are actually performing better than they would have been predicted in a worse economic scenario.

And so our confidence is as we move each quarter this will continue to improve, but the pace will be slower just because we had a long way to come from.

Okay, thanks for that.

And then secondarily, just going back to page 10 with all the one-timers, we add that all back and get sort of a $0.17 core EPS level this quarter excluding all those one timers, it annualizes to $0.68.

I guess the question would be given that annualized core earnings run rate and knowing that we've got some revenue headwinds on the way, you talked about lower NII and we know Durbin is on the way.

Is there any thought to launching somewhat of a more broad-based efficiency improvement initiative over -- at least at some point over the next 12 months?

I know you talked about the idea that credit-related operating costs and those 13,000 people would come out over time.

But is there -- is there a desire to try to launch something more substantial in terms of efficiency enhancement or would you say there's just too much going on within the Company right now to get into some kind of a plan like that?

Let me -- a couple things.

One is, so in all our businesses we continue to manage this and reposition.

So if you take our global banking markets business, the headcount for the year is sort of flattish, but we have 1,000 more -- 800 to 1,000 more people working outside the United States and reduced inside the United States and in Europe to fund that Asia growing, Latin American places.

So we continue to reposition people even within the context of headcount being fairly flat.

I'd say that absolutely something we will continue to focus on is expenses, we'll continue to focus on it across the Company broadly.

And as we shape the Company more normally, I gave you the one group in mortgage, but it's actually broader, that's just the additional people we put on in 2010.

And then so you've got mortgage, you've got card business, we continue to get the dividend as you see the delinquencies and costs come down there.

And then you've got -- even in the commercial area as we continue to collect and bring criticized assets down.

And then overall we've got to bring the overhead in this Company down and the team -- we're working on that and we'll continue to embed that as we go through the next several quarters.

You are exactly right, we are still settling this Company in, we've got to make sure that we've got all the things settled in.

And so the timing of that is as we move through this year we'll get more and more aggressive on that.

But right now we have to be careful to make sure that we don't have any backwards movement in terms of some of the improvements in risk and controls and getting the mortgage foreclosure.

So we're trying to balance that, but we know how to take out cost, we've done it many times before and we'll continue to do that.

And so what we really ought to do is get strong operating leverage as revenues do improve.

And there are still some headwinds, we agree with you, but trading revenue this quarter is down and it will come back up and if it doesn't we'll adjust the size of that platform to make up for it.

But as revenues improve the key is to continue to get the expenses to sort of stay in the flattish category even as revenues are coming back up and that's what the team is working on.

And someplace like the retail area and the consumer branch system, we continue to downsize, I think we're down 250 branches.

We'll continue to work on that as customer change takes place.

So this is all over the area.

But we are doing more broad-based work and we'll continue to do that.

But there is a balance here of just making sure that we keep the stability and the strength moving forward and the reality of where we are in the cycle and some of these collection and other issues.

So maybe a more formal plan is more like a 2012 event than a 2011 event?

Yes, Ed, I wouldn't -- maybe not clear out there.

But we have a formal plan every month when we do our business reviews, so it's not as mysterious as letting it happen, we drive it.

Okay.

And then finally, you've eluded a couple of times on this -- once on this call and then in a prior call to potentially raising the dividend at some point in 2011.

And I guess I'm wondering, A, like some other banks are willing to, are you willing to disclose what you think your Basel III based Tier 1 common ratio is?

We'd be interested in that.

And given that and your discussions with the regulators, what gives you confidence that you can raise the dividend this year?

We -- on the Basel what we have said is as each of the rules becomes effective at the end of this year, two in market-based risk rules and the end of next year at three.

The day it becomes effective with no implementation timeframe we would have 8% or better in Tier 1 common under the then current rules.

And so as you think about what we submit in these plans, you're submitting -- the standards of the current Basel I and the levels you have are in the things and we exceed those and then as we implement we exceed it.

And so we have confidence that what we've done with the balance sheet and how we manage the balance sheet has produced a lot of capital improvement for the year, and you can see on this slide earlier I mentioned in terms of Tier 1 improvement and things like that.

So we put in the plans, the regulators are looking at them, as you know, with everybody else.

We did not contemplate something early this year, it's in the back half of the year, it would be very modest.

But the idea is that it is consistent with the balance sheet, the operating earnings, the work we've done this year to build Tier 1 common and -- the Tier 1 common ratio from up 8.5 -- 8.6 this quarter.

We feel confident we've got it.

Now we've still got to get through the approval and this was a bigger issue for us three, four, five quarters ago, but we cleaned up the balance sheet and restored the capital ratios to a point where it's pretty sizable.

And embedded in all that is all the operating statistics and adverse scenarios and everything you've heard about.

So we feel confident that we've asked for it, we'll see what happens with the regulators, but it's because we've done a lot of hard work in 2010, selling businesses, repositioning the franchise to get us there.

And just can you tell me one more time, the 8% by the end of 2011, can you just -- what was that again?

The idea -- what we said is that as each of the rules becomes effective, remember there's more than just Basel III, there is Basel II (inaudible) the Basel II rules, the market-based risk rules and then the Basel III.

As each of them becomes effective our Tier 1 common ratio under the rules as they become effective with no phase-in period would be above 800 basis points.

Oh, I see.

Thank you, that's helpful.

Chris Kotowski, Oppenheimer.

Yes, hi, I'm trying to navigate between page 20 and page 38.

And when you put a number like $7 billion to $10 billion out there it's just kind of natural to ask how did you come up with that?

And so I'm wondering is the concept behind it that your risk is primarily in the bucket that's less than 13 payments?

And I mean that $7 billion to $10 billion would be like about a quarter to one-third of that amount there?

Is that the guiding operating assumption behind that $7 billion to $10 billion.

Chris, unfortunately the math is a bit more complex than that.

So I don't know if we have an answer.

Certainly it would be reasonable to think that the fewer payments that get made before a loan goes into default would suggest a higher level of risk.

I'd also refer you to page 21 because, as we did our array of different scenarios and looked at a set of assumptions -- and again, these were guesses because we don't have any experience.

But if you look at some of these significant differences between GSE and private label reps and warranty rights, we tried to make different judgments around some of the criteria that you see on page 21 to try to get a sense of what -- because those are important leverage points, materiality, causation, disclosure, the rights to actually make claim presentations and the like.

These are all pretty significant hurdles in our view and you've got to make some judgments about whether or not private label investors can aggregate and actually achieve and overcome those hurdles.

And then you have to think about the performance and the characteristics of the portfolio on page 38.

Okay.

And then going back to page 18, if you look at the new claim trends in the lower left, I noticed that there's an uptick in the pre-2005 claims and then the 2005 claims and the 2006 claims.

And so it's early kind of pre-crisis vintages that seem to be ticking up.

And is that -- A, is that a trend?

And B, is that driven by the private label and monoline claims -- I assume?

Yes, it's the private label claims that we have mentioned here.

I'm not sure one quarter drives a trend, Chris.

I think you need to appreciate, certainly we've seen this with both the monolines and the GSEs, is that they don't follow -- they don't tend to follow a chronological order.

So you and I might think first they'll do pre-2005, then they do 2005, then 2006 and 2007.

That hasn't been our experience.

We've had new claim submissions kind of all over the map.

And so it's certainly something we're watching, but it's -- this is certainly impacted in the quarter by the claims that are described in footnote 1 at the bottom of page 18.

Yes, Chris, and in the commentary too, [1.9], that gives you some color as well.

Okay.

And then just a little net -- or a question.

I noticed in the supplement, page 25, mortgage production revenue is up from $70 billion to $81 billion, but production income was down.

Is there a story behind that?

Yes, Chris, we book it when we lock the loan and the production is driven by the funding and that's just the difference.

So production without the actual locked loans were down.

And margins as well, as rates came up and we thought about how to be competitive.

And frankly, Chris, we're not driving for market share in this business, we're driving for solid risk management and good profitable performance.

Okay, thank you.

Glenn Schorr, Nomura.

Thanks very much.

So I hear you on the production revenue being booked when you lock the loan.

Can you give us an idea of how much of the pipeline you got through between late third quarter and early fourth quarter?

I guess the industry in general is down to about 40% looking for first quarter, is that in the ballpark of right?

We'll get back with you, Glenn, I don't -- we don't have the number.

Okay, no worries.

And then I noticed that there's high resi mortgages held on the balance sheet.

Is that a trend we expect to continue or is that just a temporary -- securitization marks aren't great, a little balance sheet growth, a little room as capital grows?

I would say, Glenn, it's driven more by liquidity and the balance sheet management interest-rate risk management activities in our discretionary portfolio.

So I -- not necessarily view that as a trend.

I mean we do look at liquidity and rates and the like.

And if you look at core (inaudible) just in terms of the core activity, Glenn, that $18 billion, which includes the resi which is on the balance sheet, would be a $3.4 billion net increase if you just took the residentials out of the whole discussion in the corner.

So the core portfolio of consumers stabilizes, as we said, and continues to move forward.

And residential is more discretionary as to what we do on a given day holding it.

Except in our private banking and other areas where we hold those clients' loans because -- and we've always done it.

Okay, that makes sense.

One more nitty-gritty.

On the average balance sheet on 9 in the supplement.

The yield on debt securities, first of all the book went up and the yield went up a lot, all things considered given the environment, it's up 36 basis points.

I'm just curious, is that just taking a little duration risk as you had a spike up in the 10-year?

We can get back to you, but we're not taking any different duration risk than we've done all year.

So I think it's probably just we'll get back to you with the exact answer.

Okay, and I'm not sure if you disclosed it, but have you ever disclosed the average duration on the securities portfolio?

I think we gave you a pretty broad description in the 10-K, Glenn, but I think from quarter to quarter -- or quarter to quarter we don't.

Okay.

Our strategy during the year is to keep it relatively -- it's four and a half years.

Yes, I think it's four to five years.

Okay, appreciate that.

And last one is just a follow up on your comments on the repricing efforts across the deposit franchise.

You had mentioned a couple of states up-front and then over the next three to four quarters roll throughout the rest of the platform.

What things, I mean this might be a simple question, but what things will you monitor to know if it's working.

Or is this charging ahead and plan being put in place or do you watch for leakage and things like that?

We monitor the customer reactions to the price points and the various things.

I would say that the philosophy of the account structure, the five or six core accounts I don't think will change.

It will be what the account balanced minimums or the price point on a particular element.

So as you think about it, think about it as a relentless push to get through and redo everything.

The question of whether you pay $9 a month if you want paper statements or $8 a month is the kind of thing we'll test in that.

So it's just more the price points around the structure than the acceptance.

Now, remember one of those accounts in the structure is the [fee] account which is 35% to 40% of the sales today has been in the market fully in all the states now for six months or eight months and is very well received.

Especially among the obvious people you'd point to, Glenn, the younger people, people who are particularly happy to use the stellar online platform we have, chat, text, the whole 90 yards.

Great, I appreciate all the answers.

Thanks.

Mike Mayo, CLSA.

Good morning.

The possible upper range of $7 billion to $10 billion, is that before or after tax?

Before.

So, after tax would be maybe $0.45 to $0.65 hit to book value?

Well, our statutory tax rate including state taxes is say 37%.

Okay, no, what I was referring to -- that's helpful, but -- so if we think about it on a book value basis, I mean this might hurt -- give 10 billion shares.

Just take 37% of the $7 billion to $10 billion, divided by 10 billion shares would be a hit of around $0.45 to $0.65 to book value to clean up the issue.

I just want to make sure I understand what you're saying.

Yes, I think the thing to think about, Glenn, again, we think this is a possible range.

We're trying to respond to some investor concerns about given the broad range of estimates that are out there, we tried to bring some color to that.

Again, we think this happens over a number of years in terms of the resolution of this.

But that's -- I mean, I'm not going to dispute your math given that it's a pre-tax number, it's after our accruals, we think it's going to occur over a number of years.

We don't have a view as to where we will fall in that range.

As I said, it's probably more than zero, that's why we expect that some level of future provisions, we'll have to see.

And we just don't have enough experience in the portfolio to try to estimate any more precisely than that.

Yes.

No, it's Mike, by the way.

And can you confirm that this is tax-deductible?

Excuse me?

Are these costs tax deductible?

Yes.

Okay.

And then if you could elaborate on the statement, "the fewer payments made before default the higher level of risk".

So in other words you said 58% of the non-GSE loans that defaulted made at least 25 payments.

I just would like to understand the significance of that a little more.

The only comment is, I mean this is a very rough assessment, is that you would imagine, to the extent that there are fewer and fewer payments between origination and default, might suggest that those are -- those might be areas of particular risk when it comes to reps and warranties.

I wouldn't read anything more into the statement than that, Mike.

And then sticking to the same topic, Bank of York, on their conference call, they said that this is likely to be resolved in the next few weeks.

Either it's settled, there's increased oversight over you I suppose, or that, an extreme scenario, the servicer would be replaced.

Do you agree with those scenarios and what's the timeline?

We don't have any idea what they said.

Okay.

And then separate topic.

Compensation was up 5% linked-quarter and you didn't highlight any one-time items on page 10.

Is there anything unusual there, seasonal?

It seemed like a big comp quarter given the revenues.

Well remember, there was fourth-quarter severance and some benefits adjustments across the whole associate population just from an accounting standpoint.

In terms of -- in terms of the comp to revenue statistic for the investment banks that people like to focus on, we ended the year kind of in the mid-30s, I think probably 37%.

And then also the [GUM] revenues were up quarter to quarter and that drives it too.

Yes.

And of course remember with GUM, those are our financial advisors, they operate and get paid on a grid basis.

And so as they have a more and more successful year during the year, they move to different measures in that grid that will reward them for volume.

And then last question.

What was the actual loan utilization numbers third quarter to fourth quarter?

And how much did the increase in loan syndications linked-quarter contribute to your loan growth?

And just a little more color behind your comment, Brian, that you thought things were kind of picking up some.

In the middle -- I gave you the number for the middle-market book, Mike, and it was around 31% in a stable third quarter and fourth quarter.

That's not -- in the large corporate book you have of things that you could hold a loan and then sell it down and things like that, the middle-market book just doesn't have that.

This is loans that (inaudible) the Company from $2 million of revenue was up to $1 billion.

So it's more core activity.

But if you separate all that out, what we're really seeing is for the -- in the November -- October/November/December time frame versus the last eight quarters you are starting to see activity start to move forward and get -- grow a little bit here and there and we have real estate coming out of some of these books and stuff.

So the activity is 31% stable, the activity in the core middle-market I don't think is affected by that.

That would be more in our large corporate book than would be in the -- than would be in the GCIB segment under [GBAM].

And so this is sort of -- this is just core activity, Mike, it's not -- and believe me, it's not robust and growing at ex-percent, it's stable and moving forward a little bit which is better than it has been in a while.

All right, thank you.

Meredith Whitney, Meredith Whitney Advisory Group.

Good morning.

If you'd indulge me in a few questions, please.

My first is to Brian.

As there is so much movement and so much really structural change in so many of your businesses, could you talk about your budgeting of talent and head count?

So the last couple of years you've moved people into the collection efforts and the foreclosure restructuring modification efforts.

As credit quality starts to improve where do you move those people?

As it looks like US FIC is under a structural change and so much of European FIC is under structural change, where do you move those people?

Can you talk about that on a one to three year outlook, please?

So taking the basic businesses we operate outside of the United States first which would be the global wealth management business and the global corporate investment banking and the global markets business.

In Asia, Latin America and Africa and EMEA we have grown headcount by 1,000 and overall headcount is flat in our GCIB and our GBAM, the global banking market space, to give you a sense.

So I'd expect those trends to continue.

So we're always adding new talent out of the business schools and we hired a robust class of business schools and undergraduates that we always do, Meredith.

But what we're doing is shifting the talent to where the bigger growth opportunity is while still maintaining our leading presence in the United States in a lot of those categories.

So, that is a trend I think would continue.

And in the context that Tom has in the third quarter, late fourth quarter went through a round -- a series of headcount reductions overall and then we're adding people back.

If you think about our risk management organization for example, we've had also to grow that outside the United States to help make sure we monitor the risk and manage that business well.

When you go into GWIM, the answer is pretty clear that we want to grow our financial advisor account and our Wealth Management banker account and our private banker account and we've done that by 500 to 600 people this year.

And you should expect that to continue.

And I honestly would say that that growth rate this year was somewhat disappointing to me.

Not from an expense budget, but from the growth of the franchise we'd expect that number to be stronger and we've seen attrition is at an all-time low and our recruiting efforts are picking up, but we need to grow that because our biggest opportunity inside the United States is around the Wealth Management space, even though we've got $4.3 billion of revenues, the next nearest competitor might be $1 billion below that.

If you look at commercial banking, stable, you look at the consumer business generally, we continue to manage down the headcount in the card business as the credit has gotten better.

In the deposits business I'd expect it to continue to come down going to the question earlier about sort of structural change.

And then at the mortgage, you're running 55,000 people and I think the business -- three years out assume this is all behind us type of thing -- is a 30,000, 35,000 person business.

And maybe very robust production higher than that.

But it's a different side.

And it's just going to take us time to get through it.

I think that covered each of the businesses.

Okay, great.

Thank you.

And then just a couple of cleanup questions.

On the put-back risk, which you've well detailed, what about the underwriter risk?

So we have the GSE risk, we have the private-label risk, the monoline risk, what about the underwriter risk?

Can you comment on that and how you would reserve towards that?

Yes, we really don't see that as a significant risk, Meredith.

Okay.

And then two more clarifications.

On the -- moving from a four deposit base system to a one deposit base system, what's the timetable there?

And then I assume you need to run redundant systems so it's more expensive to become ultimately less expensive?

That would be the goal is to be more expensive and less expensive.

But also we have products that frankly aren't available in parts of our franchise just because of all the things that have been going on, we're now at the point we can actually do this.

The planning is it's part of the expenses in the latter part of the year and the deposits business has been to start the work.

It takes -- it's an 18-month process, so it would occur in 2011 and then in 2012.

But there is absolutely an expense and a simplification value to this, but the real value is one of the four systems is a system we operate in a lot of franchises and it works and that's been going on for about two or three years.

But the real value of all of this is to actually give 100% of our customers 100% of our product capabilities with absolute flow.

And that simplifies both our associate's life, our customer's life and also really unifies our franchise.

So, there is both the cost takeout value, but there's really an enhanced value in terms of each time we develop a consumer change we have to do it four times.

Okay, got it.

And the last question is, Chuck, you went through a comment on your reserves and you mentioned that you adjusted your home price assumptions.

From what to what, please?

I think we'll have to get back to you on that one, Meredith.

It was kind of a year-end assessment as it related to certain of our real estate portfolios.

But we (multiple speakers).

Oh, I meant overall on the price assumption.

(multiple speakers).

Yes, and the [03-03] adjustments and those types of adjustments are based on the same statistics you look at.

We objectively tie them to Case-Shiller and other metrics and then adjust.

And as those came out a little less than was expected in the last couple months we've adjusted them down.

So it's not some internal forecast, these are adjusting based on the outside forecast.

I mean, we can get you the numbers.

Oh, I've got them.

All right, thanks.

See you soon.

One more question, thanks.

David Hilder, Susquehanna.

Good morning.

Thanks very much, just a question.

You mentioned that there was some litigation expense in the deposits business.

And I was just kind of wondering what would give rise to that in that business.

The usual cases and stuff like that.

So I think there's nothing in particular that we talk about externally.

But we have a series of cases around all -- that everybody has around activities in there and this quarter we accrued for part of it.

Okay.

Thanks very much.

Thanks, everyone.

And this concludes today's teleconference.

Have a great day.

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