紐約梅隆銀行 (BK) 2008 Q3 法說會逐字稿

Welcome to the third quarter 2008 earnings conference call hosted by the Bank of New York Mellon Corporation.

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

Later we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Mr.

Steve Lackey.

Mr.

Lackey, you may begin.

Good morning and thank you very much.

Good morning, everyone, and thanks for joining us to review the third quarter financial results for the Bank of New York Mellon Corporation.

Before we begin, let me remind you that our remarks may include statements about future expectations, plans and prospects which are forward-looking statements.

The actual results may differ materially from those indicated or implied by the forward-looking statements as a result of various important factors, including those identified in our 2007 10-K, our most recent 10-Q and other documents filed with the SEC that are available on our website at bnymellon.com.

Forward-looking statements in this call speak only as of today October 16th, 2008.

We will not update forward-looking statements to reflect facts, assumptions, circumstances or events which have changed after they were made.

This morning's press release focuses on the consolidated results for the Bank of New York Mellon.

We also have a supplemental document, the quarterly earnings summary, available on our home page which provides a five-quarter view of the Company in our six business sectors.

Most of our commentary this morning will be from the quarterly earnings summary.

This morning's call will include formal comments from Bob Kelly, Chief Executive Officer, and Todd Gibbons, Chief Financial Officer.

In addition, several members of our executive management, including Gerald Hassell, are here to address your questions about the performance of our businesses during this past quarter.

Now I'd like to turn the call over to Bob.

Thanks, Steve and good morning everyone.

Thank you very much for joining us.

We have as usual the management team here, Ron O'Hanley is in Europe but he's dialed in and the sound quality is pretty good.

So when we get to Q&A I think we should be fine.

Our operating performance exceeded expectations.

It was driven by the diversity of our six securities servicing and asset management businesses plus the impact of market volatility.

Frankly, our diversity in our business lines versus some of our peers really helps in times of stress.

Our operating earnings were $834 million or $0.72 excluding LILO, SILO and support charges and the normal M&I and was actually up 7% year-over-year.

Underlying revenue growth was 8% year-over-year.

We had amazing deposit growth in late September from our security servicing clients around the world.

We now have $82 billion in non-interest bearing deposits, up $50 billion this year.

Clearly that would help NII as well.

Market volatility resulted in record levels of foreign exchange and trading revenue based upon client volumes and activity.

Credit quality remains strong.

Non-performing loans actually declined this quarter.

Our earnings were impacted by capital support agreements.

However, it is highly unlikely we will create new ones going forward.

Security losses were only modestly higher than in Q2.

We put SILOs and the LILOs behind us.

Operating expenses excluding the support agreements were very well-controlled.

Our expenses were only up 1% year-over-year and down 5% sequentially, generating significant positive operating leverage during the quarter.

I should mention, too, a little bit about the TARP program.

We were honored to win that, that mandate, and I expect we were probably the only firm that could deliver everything Treasury needed end-to-end and it's a terrific reinforcement of why we actually did our merger.

So at this point I want to focus on the remainder of my comments on our balance sheet, the general environment, and our outlook.

Firstly, liquidity is extraordinarily strong in our Company.

Our balance sheet includes $116 billion that is effectively overnight cash.

Liquid assets are over 40% of total assets and we had $50 billion of zero risk weighted assets with the Fed.

OCI impacted our tangible equity.

Frankly, our actual losses in our investment portfolio have been a fraction of the unrealized losses and reflect stratospheric discount rates on the expected cash flows due to the current market distress, dislocation, illiquidity, et cetera.

Let's remember that these portfolios, that these assets are in portfolios where we have the ability and the intent to hold those securities until maturity and that's relevant here.

Our capital ratios show we're well capitalized.

Our Tier 1 was 9.33%, which is unchanged from the prior quarter.

In fact with the $3 billion preferred equity from Treasury, our pro forma Tier 1 should be around 12% in the fourth quarter.

We don't need more capital.

So these are challenging times.

We like our underlying revenue growth, expense control, earnings power, liquidity, and our capital position.

We're responding and adjusting to the environment.

I really appreciate the support of our employees around the world.

And I'm going to ask Todd to provide more detail now on our financials.

Todd?

Thanks, Bob.

As Bob indicated, the diversity of our businesses helped us deliver solid underlying growing during a particularly challenging period.

Let me take you through the highlights of the quarter and please note that for comparative purposes, I will exclude the impact of security losses from fee revenue, I'll exclude the final settlement on SILOs and LILOs from our net interest revenue and I'll exclude the charge for support agreements on non-interest expense.

However, our earnings per share includes the impact of the securities losses.

Fee revenue was strong in security servicing and even more so in foreign exchange and other trading.

Fee revenue was negatively impacted by the decline in equity values, principally in our asset and wealth management fees.

Net interest revenue benefited from a large inflow of non-interest bearing deposits late in the quarter and I think the ability of our security servicing businesses to attract deposits reflects a very positive view of BK during turbulent market periods.

We also continued to win new business during this quarter.

We had $400 billion in asset servicing wins, record levels of new business in wealth management and clearing and we're off to a good start in the fourth quarter, as Bob said, with Tuesday's announcements that Treasury has chosen our corporate trust and asset servicing business to administer the TARP program.

Operating expenses remained very well controlled and we continued to benefit from the synergies associated from the merger resulting in excellent levels of operating leverage.

We have strong capital ratios and note that the primary regulatory ratio of Tier 1, which focuses on risk weighted assets was 933, unchanged from the prior quarter and we expect that to go to 12% given the capital infusion.

Now let's get into the numbers.

My comments will follow the earnings summary report beginning on page three.

Our continuing earnings per share was $0.72.

This excludes the charge for support agreements of $0.37 plus an additional $0.09 for the SILO LILO charges and M&I.

That's growth of 7% compared to the third quarter of 2007.

Our net interest revenue in the third quarter was reduced $112 million by the SILO LILO charges and our fee revenue was reduced by $162 million by the securities write-downs.

In a very difficult environment, our total Company revenue increased by 8%.

The proportion of non-U.S.

revenue increased to 34% from 30% in the third quarter of 2007.

Factoring out the support agreements, we kept expense growth relatively flat versus the year-ago quarter and it was actually down 5% sequentially.

This strong expense control resulted in approximately 700 basis points of positive operating leverage year-over-year and approximately 400 basis points sequentially.

Turning to page five of the earnings summary, you can see that assets under management decreased 4% over the year-ago and prior quarters, despite much steeper declines in the global equity markets and a stronger U.S.

dollar.

During the third quarter we had $14 billion of positive money market flows and $6 billion of negative long-term flows.

Assets under custody and administration decreased 1% compared to the prior year and 3% sequentially.

The decline reflects lower market values and the impact of a stronger U.S.

dollar, partially offset by $260 billion in new client conversions.

Turning to page six of the earnings summaries which details fee growth, you can see that security servicing fees were up 6% year-over-year, reflecting strength in our volume and volatility sensitive activities.

If you adjust for the sale of B&G trade in the first quarter, fees actually increased 10%.

Sequentially fees were down 2%, primarily reflecting normal seasonality in securities lending.

Now let's look at the components of securities servicing.

Asset Servicing had a strong quarter, with fees up 12% driven by net new business, good cross-sell and organic growth, higher securities lending revenue and the impact of the buyout of the joint venture with ABN AMRO, which we completed late in the fourth quarter.

Securities lending fees were up $45 million year-over-year, primarily reflecting favorable spreads in the short-term credit markets.

Sequentially, asset servicing fees were down 7% due to lower securities lending revenue, reflecting normal seasonality and lower market levels which neutralized organic growth.

We saw the usual pattern of seasonality until mid-September, when volatility spiked to record levels.

Issuer service fees grew 9% year-over-year, reflecting the diversity of the revenue stream as we enjoyed the growth in depositary receipts, corporate trust and share owner services.

Growth also benefited from increased revenue sharing related to the distribution of Dreyfus products.

Clearing fees decreased 14% over the prior year.

However, if you adjust for the sale of B&G trade execution businesses, fees actually increased 6%, principally due to strong growth in trading along with continued growth in money market and mutual fund fees, and we continue to benefit from the market conditions with new clients migrating to (inaudible) platform.

Turning to asset management, despite the U.S.

equity market declining 24%, and global markets by over 30%, asset and wealth management fees fell only 7% compared to the prior year as we continued to benefit from net new business.

Performance fees were $3 million.

This is up from a negative $3 million in the prior year period and down from $16 million in the second quarter.

The sequential decline was primarily due to a lower level of fees generated from certain equity and alternative strategies.

FX and other trading revenue generated extremely strong growth of 62% year-over-year and 25% sequentially.

We benefited from higher levels of currency volatility and client volumes relative to both periods, as well as the higher value of our portfolio credit default swaps, which we used to hedge certain loan exposures.

Investment income was off $5 million compared to the third quarter of '07 and $28 million sequentially.

The sequential decrease resulted primarily from the decline in the market value of seed capital investments.

Turning to NIR, which is detailed on page seven of the earnings summary, net interest revenue increased 22% year-over-year and 4% sequentially.

The performance compared to the year ago quarter reflects both wider spreads and a higher level of average interest earning assets.

I'd like to point out here that, as always, the size of our balance sheet is driven by client deposits.

In mid-September we saw a dramatic increase in non-interest bearing deposits across our securities servicing business.

Our net interest margin if you exclude the SILO LILO charges came in at 227, up 25 basis points from the year-ago quarter and up 6 basis points from the second quarter.

Turning to page eight, you'll be pleased to see how well we have controlled operating expenses.

Excluding M&I cost, the amortization of intangibles and the charge related to the support agreements, non-interest expenses were up 1% year-over-year and down 5% sequentially.

The 1% year-over-year increase was driven by a 5% decline in total staff expense, which reflects the ongoing benefit of merger related expense synergies and lower incentives, partially offset by the second quarter merit increase.

Expenses were also down due the impact of the sale of B&G Trade and lower software expense and lower business development expense.

Offsetting these declines were the impact of the fourth quarter of '07 acquisition of the remaining 50% of the custody joint venture with ABN AMRO, higher professional legal fees, professional and legal fees.

Net occupancy was also higher by approximately $15 million than our normal run rate and that was due to the impact of a one-time adjustment to level certain leases.

There was an additional $24 million associated with the lost tapes and $38 million for operational errors in the third quarter.

All told, we would expect about $50 million of third quarter expenses should not recur in the fourth quarter.

Page nine of the earnings summary shows the investment securities in our portfolio.

We have detailed the asset categories, ratings and fair values for each of the investment categories as well as the other than temporary impairment write-downs during the quarter.

We have always purchased high grade, primarily short duration mortgage-backed and asset-backed securities.

Our core asset and mortgage backed securities portfolio continued to remain highly rated with 91% either AAA or AA.

We continue to have the ability and intent to hold these securities until the prices recover or until maturity.

The unrealized net of tax loss of our total securities for sale portfolio was $2.8 billion at September 30th, an increase of approximately $1 billion compared to the prior quarters.

As Bob mentioned, this primarily reflects significantly widening credit spreads.

We routinely test our investment securities for other than temporary impairment using realistic assumptions based on independent research.

In the third quarter, we assumed up to an additional 15% decline in national home prices over the next two years, and we estimated the impact it would have on the cash flows underlying the individual securities.

As a result, we recorded an impairment charge and wrote down to current market value certain securities resulting in $162 million pretax loss.

Let me review with you the list of securities that are garnering the most attention, have had the greatest impact on our OCI and impairment charges.

First, Alt-A securities.

At origination, 100% of our Alt-A portfolio is rated AAA.

It is now migrated to 74% AAA, 10% AA, and 16% below that.

At origination, the portfolio's weighted average FICO score was 711 and its weighted average loan-to-value was 74%.

Approximately 50% of the portfolio is supported by the much better performing fixed rate collateral.

The portfolio's weighted average current credit enhancement is over 13%.

This means that losses on the underlying loans would have to exceed 13% before our principal would be at risk.

Second, asset-backed CDOs.

At September 30th, the amortized cost net of charges was $0.11 on the dollar and we had only $38 million of asset-backed CDOs remaining in the portfolio.

Third, subprime mortgage securities.

81% of our portfolios are rated AA or higher -- of our assets are rated AA or higher.

The weighted average current credit enhancement on these assets was approximately 35% at September 30th.

Fourth, we had write-downs of $10 million related to securities backed by HELOCs, where specific securities deteriorated and there was questionable credit support due to below investment grade ratings of certain bond insurance.

The HELOC securities are tested for impairment based on the quality of the underlying security and the condition of the monoline insurer providing credit support.

Securities were deemed impaired if we expected they would not be repaid in full without the support of the insurer and the insurer was rated below investment grade.

During the second quarter, we were pleased to -- excuse me, the third quarter, we were pleased to reach an agreement with multiple tax authorities that settled the SILOs and LILOs as well as various federal, state and local audits.

The combined impact of the after tax charge for these settlements was about $30 million.

As previously disclosed, we provided support to clients invested in certain funds impacted by the Lehman bankruptcy, the support agreements relate to five co-mingled cash funds used primarily for overnight custody cash sweeps, four Dreyfus money market funds and various securities lending clients.

These are in addition to support agreements that existed at the time and the total expense associated with these agreements amounted to $708 million.

We also offered support to wealth management and treasury service clients holding auction rate securities, the total cost of which was $18 million.

The credit quality of our loan portfolio remains stable.

The provision for credit losses was $30 million.

That compares to a provision of $25 million in the second quarter.

Charge-offs were less than the provision at $22 million, and non-performing assets actually decreased by $12 million to $269 million.

The effective tax rate for the quarter was negative 15.5%.

This reflects the absolute level of charges associated with the support agreements, the securities losses, and the SILO LILO settlement as well as the settlement of prior tax audit cycles.

Excluding these items as well as M&I expenses, the effective tax rate was 32.4%.

We are well capitalized and this will be further enhanced by the $3 billion investment from the Treasury.

We mentioned the key regulatory capital ratio Tier 1 being at 933.

And with $3 billion in new capital we expect that to increase on a pro forma basis to about 12%.

As I have already noted, our balance sheet grew significantly in the last half of September.

And it included $37 billion in deposits that we placed at the Federal Reserve and $11 billion of asset backed commercial paper, which was financed with a non-recourse loan with the Federal Reserve Bank of Boston.

These assets carry a zero risk weighting and so we have excluded them from our calculation of tangible common equity.

On an average balance sheet, our TCE for the quarter was 441.

And on a spot basis at period end, it was 388.

Now let's turn to the integration.

We remain in excellent shape on all key milestones.

Revenue synergies of $175 million have been achieved compared to our full-year target of $180 million.

We reached $144 million in expense synergies during the quarter, which is $13 million higher than the second quarter and on track to exceed our cumulative targets for 2008.

Note that without these expense synergies, our operating leverage would have been 100 basis points rather than the 700 we achieved year-over-year.

Over Labor Day weekend, wealth management successfully completed its client conversion onto the targeted platforms and we continue to exceed our service quality and client retention goals for asset servicing.

I'm going to conclude my remarks by offering a few observations about the fourth quarter.

Given the ongoing volatility in the markets, we may continue to see better than historical trend performance in foreign exchange, net interest revenue, and securities lending.

Weak equity markets will continue to impact asset management and performance fees.

We will continue to manage expense growth especially carefully.

We expect the credit provision to be at similar levels with Q3.

The tax rate should be around 31 to 32%.

The new capital should cost us about $0.01 to $0.02 in the quarter.

And we are continuing to focus on delivering our synergies.

As market sentiment improves, we would expect our balance sheet to come back to more normal historical levels, negatively impacting net interest revenue but positively impacting asset and wealth management.

Overall, we are pleased with our operating performance in a difficult market and our ability to continue to control costs.

With that, I'll turn it back to Bob.

Thanks, Todd.

And why don't we open it up for questions now.

Thank you.

We'll now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

One moment, please, for the first question.

Our first question comes from Brian Foran with Goldman Sachs.

Please go ahead.

Hi, guys, how are you?

Hey, Brian, good.

I know you covered this, but I just want to ask very explicitly on tangible common because I think the fact that State Street and Wells both came out yesterday and said they may both raise common equity left a lot of confusion over what the rule book actually is here.

Is there any explicit minimum tangible common equity ratio that you're managing to or are we in a situation where the government capital injections coupled with your comments about the market's economic value of the securities book should remove the focus on tangible common?

Our view has migrated over the past six months quite frankly, Brian.

We had said previously that we wanted a 5% TCE ratio, but the more we thought about it for a whole bunch of reasons, that it doesn't risk weight the assets and it doesn't really reflect the nature of the businesses we're in as a result, it's problematic.

And when you think about the extraordinarily high discounts rates being placed on securities that we have the ability and intent to hold them to maturity and the incredibly illiquid prices that are going against it, it just seems to make a lot more sense to move to Tier 1.

And we're going to continue -- we're going to focus on that going forward.

We're not under any pressure for any particular TCE ratio at all.

I'm not getting that feedback from anyone.

And in fact, if you look around the world and what the various regulators are looking at, they're really looking at Tier 1 and that's what I would certainly encourage people to think about as well.

And then as we think about this capital injection you're getting from the government, is that capital that you view as capital to be deployed or is that just capital you view as to be sat on in terms of bolstering the current capital ratios?

I think the latter.

This is an environment where we have a lot of uncertainty and it's really good to have some revenue growth and good expense control in this environment to help our earnings and, obviously, we're not going to be raising dividends in this -- because of this new injection, but this will just be something that just in essence strengthens our balance sheet and I don't intend to be using it.

If you think about it, are there any acquisitions on the front burner, no.

Are there any on the back burner, probably not either.

And I just have this fundamental belief that if there is anything on the horizon, they will be cheaper in future quarters versus now.

So this is just one of those strengthening things and I'm supportive and I think the country is doing the right thing.

And then lastly, if I could, State Street came out yesterday with a potential charge for a Stable Value fund.

I'm not -- I don't really know the product well.

I know Mellon has some Stable Value funds.

I don't know if the collateral or the provider is structurally different.

Is there any risk of a charge similar to that and then I guess more broadly, there's been this trend of contractual risk that clients bear not matching up with the actual risk, i.e.

ultimately the provider takes the charge rather than the clients.

Is there any point where that kind of stops and you kind of say, okay, we're just going to pass this onto the client or should we expect as these things come up that you will continue to protect the clients, essentially?

No, as I said in my comments, Brian, we did support Lehman and I think that was the right thing to do.

But we're in an extraordinary environment and certainly the most difficult in any of our working careers.

We did not support the -- our clients on Sigma.

It just didn't make sense.

And as I said in my comments, I think it's highly unlikely that we'll create new ones going forward.

When I said highly unlikely that means there could be some immaterial things going through.

We do have to bear in mind that we do have to support our 287 funds.

I'm going to ask Ron to talk to that a bit.

But even in this environment, given all of the government supports that's been provided, I would think that break the buck issues in our money market mutual funds have probably declined materially because of the credit quality of the instruments being held in those portfolios has improved.

What I'm trying to signal here is I view further material changes to support agreements as being unlikely.

Ron, what would you add to that?

Well, I'd echo that, although the liquidity situation in prime money markets hasn't improved much, because we were so short, maturities are more than matching any kind of liquidity demand we have.

So right now, from where we sit, the money market funds are in very good shape.

Brian, your question on the Stable Value fund, we do have a Stable Value fund.

We do not see any kind of issues like you're describing.

The only issue that we see out there is will the product in general be cost effective for clients, because the cost of the (inaudible) is going up.

But we don't see any need to support the product.

Great.

Thank you.

Thanks, Brian.

Good questions.

Thank you.

Our next question comes from Betsy Graseck with Morgan Stanley.

Please go ahead.

Thanks, hi.

Good morning, Bob.

Hi, Betsy.

A couple of things on the government preferreds that you were talking about earlier, how do you think about the time frame for holding it and repaying it.

I mean, what's going through your head with regard to what you want to do to be in a position to repay this and then what kind of time frame are you looking to do that?

Well, you know, Todd and I have talked about this a couple of times.

Obviously it's the first week of the discussion of that so it's a little early to say, but clearly by the fact that the coupon is going up to 9% at the end of five years, that's a pretty strong signal that we want to get out by then and it's my understanding, without having really studied the document or gone through any real detailed analysis of it, is you can get rid of this instrument if you raise perpetual preferreds to replace it or common equity.

So my impression is we have flexibility here going forward, but I view this pretty frankly as pretty cheap capital when you look at a 5% coupon and the warrants are very, very, very small in terms of dilution.

It's probably only about 1% on our share base.

So this is pretty attractive capital.

So I like what the country did, this is a -- what the Treasury did.

This is a vote of confidence in the financial system and we didn't have to have it.

But I think it's a good thing for us to participate.

I'm just thinking that you have the opportunity to leverage what you're indicating you're not going to do.

You have the opportunity to acquire.

You have the opportunity to mark down more quickly the assets that might be troubled on your own book and as a result, be in a position where you could create an opportunity for people to expect either more sustainable or higher earnings going forward.

I mean, I'm assuming you're triangulating through those different opportunities or potential outcomes and wondering at this stage where you kind of lay, especially given some of the comments that came across the tape yesterday.

I think it does clearly provide us with more flexibility.

Good quality capital always does.

But Todd, what would you say?

I would add to that, Betsy, with our earnings generation, we're going to be generating capital through this cycle as well.

So the discussions that we're going to have with the regulators on taking this out is something we're going to have to look at after a little bit of time.

But clearly it puts us in a much stronger position to do something if we think it makes sense for the shareholders.

And then on securities lending, could you just give us your current view on how you're thinking about that business over the next two years or so and what you're doing to potentially improve your opportunities to increase your profitability there?

Sure.

Sure.

Betsy, it's Jim.

First off, if you take a look at the current environment, we and our clients are enjoying very strong earnings and our securities lending as Todd mentioned was up 43% year-on-year.

We've clearly seen wider spreads.

It's difficult to project out two years, so maybe if we --

Give me six months.

That's fine.

(LAUGHTER).

Or next week.

What we can clearly see at this point in the fourth quarter is spreads are widening as we speak.

In fact, the Treasury portfolio and government spreads are much wider than they were just in the middle of September.

We would expect that to probably decline modestly over time and probably over that six-month period that you're talking about, Betsy, it's difficult to determine beyond that.

The equity portfolios on loan activity has remained strong despite the lowering market values.

So we would expect to see I would say overall in the next six-month period a modest decline in the securities lending environment.

Clients are clearly taking a look at the portfolio, their portfolios and their participation in the programs.

We're working very closely with our clients and in constant discussion with them as we always are and helping them through this period.

Do you give a number on what percentage has exited the product.

Just about 2% of our client base have exited the securities lending program.

And in terms of dollars, what that is, like what percentage of dollars have exited?

Is it roughly the same?

I'd say probably just slightly higher than that.

Okay.

You know, Betsy, the way I think about it simplistically is that everyone is in the risk reduction mode right now around the world and the deleveraging mode and reintermediation mode onto balance sheets.

My expectation is -- I think Jim is right on on that.

But at some point again, things will turn from that to making money again and this is a pretty attractive way for the street to work more efficiently and for holders of valuable assets to have an enhanced return.

The type of products that we may invest in may change and the pools may change somewhat in terms of how we invest and how we market them but it's too early to say right now.

Okay.

Just maybe just last question on that, then, is do you give us a duration of the assets that you're investing in, the cash component, what you're investing that in and what the longest duration is?

Generally -- Betsy, it's Gerald.

The current investing pattern is very short to continue to provide liquidity for the portfolio.

We're being very conservative on the reinvestment portfolio.

And we've been in that mode for a year, Betsy.

We've made it a more and more liquid portfolio.

The other thing I would adhere is that we are the largest lender of government securities and those are -- those continue to be in demand and those are what's really driving the spreads.

So I think we're fortunate in the asset mix that we have in our lending book.

Okay.

If it's possible to get a duration at some point, that would be great.

It's very clear too, Betsy that the government actions announced this week plus the ones announced after the past couple of weeks I think make investors feel more comfortable, in fact a lot more comfortable with not just money market funds but also some of the lending, underlying securities as well.

Absolutely.

And the government has really -- we're just at the beginning stages, right.

So as it gets stepped up it should improve from here, but --

Yes, yes, good point.

Thank you.

Our next question comes from Glenn Schorr with UBS.

Please go ahead.

Hi, thanks very much.

Quickie on balance sheet.

Seems to be a reasonable move from out of interest bearing deposit into non-interest bearing deposit.

I didn't know if something actually prompted such a big swing.

Yes, I would say, Glen, that really came with the -- frankly, with the Lehman bankruptcy when there was a big flight to quality and what ended up happening, you saw a lot of money come out of the prime funds, prime money market funds, trying to get into the Treasury funds.

There was limited availability to get in there and rather than even putting it anywhere else, they were happy to just leave it with us and let us almost customize cash and that's what you can think of that.

You think that persists still and the government actions push the swing back because I haven't seen it yet.

We have not actually -- we would think that it would start to flow back to a more normal environment but we have yet to see it.

Shouldn't you -- the table on page eight is helpful on the investment securities portfolio.

I want to make sure I'm reading it right before I even ask the question.

The third column that says fair value as a percentage of amortized costs, should we be reading that as -- is that the average mark on the portfolio?

You can look at it that way, yes.

So I think the thing that jumps off the page is the 72% mark on Alt-A and subprime.

I don't -- there's a lot of companies I can quote, but average marks across the board in a lot of companies, and I know these are generic terms, Alt-A and subprime, are literally 1/3 to 1/4 of those average marks.

And I see your quality ratings on the right, but anything you could help us with on why we shouldn't expect more realized losses going forward, given where those marks are relative to what we've seen around the Street.

Sure.

Where do we get those marks, let me answer those first.

We use an independent pricing service to calculate them on a CUSIP by CUSIP basis, Glen.

No two securities are alike.

Remember, everything that we did here was originated as 100% AAA.

They're not mez AAAs.

And what really drives the value on the underlying securities.

There are some pretty low marks on a number of these securities, as you might expect, but the blended comes to what you see there.

But you've got to look at the vintage.

You've got to look at whether it's -- the underlying collateral is fixed rate.

Fixed rate is performing far better than anything else, whether it's ARMs or whether it's option ARMs.

And obviously option ARMs are where the real trouble assets are and we don't have much of those to speak of at all.

Finally, because of where you are, the subordination on this makes a significant impact.

So all of ours were purchased as AAA.

Many are fixed.

Almost no are option ARMs and we have significant subordination.

And frankly, it makes a very big difference if you're on the top of the waterfall and don't have option ARMs here.

This pricing service, is this a service that a number of the other competitors would be using?

Yes, yes.

Okay.

Because there's just so many instruments out there.

Yes, I hear you.

I agree with everything you said.

With maybe some further detail will help increase the comfort level.

Yesterday we saw a company put up Alt-A in the 20s so it's a big range so any further detail would be super, super helpful.

If you have an idea on what we could provide you additionally --

I promise I will email you a list for your consideration.

Because I suspect you're probably using the same source of information.

No doubt.

Last thing is good to hear the comment on the future support agreements in terms of materiality, not to expect any big ones.

But I think I asked this question yesterday too.

It feels like the industry in general is making clients whole on just about anything that happens and I know this is a tough balance between supporting your clients, but how do you walk that line, because it certainly feels like a different risk reward for lots of parts of what we thought were safe businesses.

Glen, this is Gerald.

We thought about this an awful lot before putting in place the support agreement around the Lehman Brothers paper.

About the trade-off between doing the right thing for the clients, protecting the franchise, providing financial stability to the marketplace and in our thinking, we essentially said we should support the Lehman Brothers paper across all the different portfolios and to some degree as well within the separate accounts in the securities lending portfolio.

But we also said to ourselves, at the time we did it, this is as far as we can go.

We're making a very positive statement to our franchises and to our clients.

They were very appreciative of that.

They said you're doing the right thing in terms of supporting us.

But at some point we can only go so far.

And that was as far as we thought we could go.

So when the next piece of paper further deteriorated, in this case, Sigma, we just said we can't go any further.

And that's the way we thought about it.

And we got very positive reaction about the support we provided on Lehman, even though we were not contractually obligated to do so.

But we felt it was the right thing to do for the client and it was the right thing to do to protect our franchise.

But there are limits to everything.

I hear you.

It's a tough balance.

I appreciate your comments, thanks.

Our clients are realistic about what this environment is and that these are long-term relationships that we've had and we stepped up pretty materially on one name and I have personally spoken to some of the clients as well and they're not always easy conversations, but I think they're very rational conversations too and I did hear a lot of positive comments as well during those sessions.

All right.

Thanks very much.

I'm done.

Thank you.

Our next question comes from Mike Mayo with Deutsche Bank.

Please go ahead.

Good morning.

Hey, Mike.

Hi, Mike.

I guess the first question, did you sell off any loans or problem loans?

No, we didn't, Mike.

Okay.

And then as far as incentive compensation, I guess that was down 1/3 linked quarter, despite some good revenues.

Is that partly because that $60 billion of deposits just came to you and you're not going to pay people for stuff like that?

We ran the $727 million through -- that's included in our incentive comp calculations.

So the support charges, which is about $726 million pretax, the decision to support our clients, we took that through our earnings calculations for incentives.

And we -- Mike, this is Bob.

We're pretty shareholder friendly when it comes to incentive compensation.

It's at the top of the house, almost everything is driven from one key metric and that is EPS growth year-over-year.

And not to beat a dead horse, but it's the issue of the moment.

Tangible common equity versus Tier 1, which wins and I think you've been consistent, Bob, all along, about Tier 1 and that's what the regulators look at.

But I guess one question, for the end of life security losses went from $1.8 billion to $2.8 billion.

Where is it as of right now?

What's it done this month?

It's probably down a little bit more, maybe in the order pretax of about $100 million, Mike.

And we are starting to see even the rating agencies think more toward a Tier 1 ratio.

And you know, do remember, too, that our average TCA is still over 4%.

It's 432 or whatever it was.

441.

441, I should say.

And -- but no one tool tells the whole story and it sure feels like Tier 1 makes an awful lot more sense.

We don't -- we should not be in an environment where we have too many pro-cyclical things working against us here as a country and Tier 1 I think is absolutely the right way to look at it and that's certainly the way our regulators think about it.

I might add, Mike, it's the ratio that the world looks at.

When all the other governments around the world thought about t injecting capital into the other financial institutions, it was with an eye on the Tier 1 ratio and we are in very good shape relative to global institutions as well as U.S.-based institutions.

We're still on I think Basel 1, aren't we Todd?

Yes.

So that it's not really apples-to-apples, U.S.

versus the rest of the world.

Ours is a little more conservative than other countries.

I guess one last follow-up.

What I'm really trying to get to is under what circumstance would you feel a need to raise additional common equity?

The whole key to capital is the first line of defense and that's earnings.

And we have a model where we're growing earnings and we're watching our expenses like hawks.

And as long as we can continue to grow our Company and be profitable, I just don't see it as an issue.

Even if these unrealized securities losses on page eight of the release, right now the fair value of $41 billion, if that were to drop significantly?

What you've got to think about here, Mike, is that we're valuing things at 20 to 25% discounts for very, very minor trades out in the market and against stuff that has 6% coupons.

Everyone agrees on cash flows, I think, or roughly agrees on all the cash flows, the whole issue is the discount rate behind the cash flow.

I just think on held to maturity portfolios, these discounts aren't a reflection of the economics of what's really going on in our Company.

Do you have a little bit more --

Mike, let me add too.

We did take $162 million of charges through the quarter associated with the portfolio.

So we're not -- it's not as if we're not recognizing some level of losses.

And still grow earnings.

And still grow earnings.

So we have in fact taken charges where we thought it was appropriate to take charges.

Do you have a little bit more wiggle room not to take some of the extreme distressed sale prices when you mark to market your portfolio.

Will there be any valuation changes in how you look at the securities portfolio?

We have stuck to the same approach that we have taken all along, Mike.

And that is we use third-party independent prices, which we do check to make sure that there's a reasonableness to them and they do appear to be reasonable.

The accountants are talking.

There's a lot of noise coming out of Washington and even out of FASB.

But at this point --

And out of Europe.

And then out of Europe.

We have not made any adjustments for that.

Thank you.

Our next question comes from Brian Bedell with Merrill Lynch.

Please go ahead.

Good morning, guys.

Good morning, Brian.

Can you talk about the TARP program mandate a little bit in more detail.

I know you can't talk about the economics of it contractually with the Fed.

If you could give us a sense of what type of things you'll be performing for them and what type of areas this will hit the P&L.

Really I'm looking for sort of between asset servicing, corporate trust and the net interest revenue.

Brian, it's [Karen Peetz].

You actually already hit it.

It's global corporate trust and asset servicing and we're doing things like custody, accounting and reporting, auction management, pricing valuation, even whole loans, mortgage custody.

And you're running the auction, right?

Yes, we'll be running the auction.

It's basically an end-to-end process.

Exactly.

It's the whole operational platform for the TARP program.

If you think about it, Brian, it's the ultimate outsourcing because the Federal Reserve and the treasury do not have the mechanics to run the entire program and we're essentially the general contractor across the entire program and so it's going to cross our entire Company in terms of the services being offered from treasury services to asset servicing to corporate trust.

We run auctions today.

We can run these auctions in the future.

We have pricing services in valuations.

We're doing asset tagging.

We're doing document custody.

We're doing lots of different things around this entire program.

That sounds extremely comprehensive.

But just also in thinking about the revenue impact, are you also gathering essentially or holding overnight deposits as these securities pay off, so similar to your corporate trust business you'll have the overnight balances, either non-interest bearing or low interest bearing.

Yes, actually, Brian, that part of it should be pretty insignificant.

The Treasury would like to manage that themselves, primarily, okay?

Okay, that's very helpful.

Then just if you could talk a little bit more -- Todd, you gave us a lot of color on the deposit, the excess deposits that you've got in the quarter.

But from that $81 billion of non-interest bearing deposits at quarter end, do you have a sense of -- it's very difficult to predict, but just directionally, if you think that will normalize by the end of the fourth quarter or do you think we'll keep a big chunk of that still?

That's a good question.

I don't have a real good sense of that, because you're really asking me to make some market predictions which are pretty hard to make in this volatile environment.

I think probably the best indicator that things have started to thaw a bit, if you just start to follow LIBORs.

If you see those starting to come in, that means money is flowing back into the banking system.

That's probably where you would see us contract.

Okay.

That's great.

And then just one last question, on the -- maybe Bob and Gerald, if you just want to comment on your conversations with your clients on new business, I mean, obviously there's been a lot of hand holding with this environment, but if you want to talk a little bit about your pipeline in asset servicing and asset management, are people thinking about outsourcing more or are they kind of a little bit frozen right now with their decision making?

Well, I'll take a part of that question, Brian, and then I'll ask [Tim Keene] to comment on the asset servicing side.

What's sort of gone under the covers you throughout this quarter and particularly this month, in our broker dealer clearance area we've actually taken on quite a bit of new business.

All the programs that the Fed has put in place, we're part of the infrastructure to make it happen.

Secondly, when Barclay's for example took over the Lehman book, the Lehman book used to be cleared through JPMorgan.

We converted that over onto our system in two nights.

We provided the support around AIG, the Fed program put in place for AIG.

So there's a lot of new business going on even the in this chaotic marketplace.

And so some of those things have been very positive to us.

As it relates to asset servicing, maybe I'll turn it over to Tim Keene.

Thanks, Gerald.

I would say overall, the pipeline's as strong as it's been.

It's about where it was last year and I think at this time last year we talked about the fact that the pipeline was uncharacteristically strong.

It remains so.

We continue to enjoy a terrific win rate.

We're still winning about 70% of all new business.

We've only converted about 2/3 of the $1.3 trillion in assets that we've won, so we're still busy converting new business and I think you're seeing that pull through the P&L.

And I'm also kind of delighted to report just in the last two weeks, we've won four of five significant mandates in addition to the TARP program.

So all in all, I think it's very much a good news story.

The one thing I would say is we're certainly expecting and maybe seeing a little bit of clients being distracted and that might turn into some slower decisions, but overall pipeline, quite strong.

And you're still seeing pretty good foreign exchange, success in foreign exchange as well, in terms of cross-sell.

Yes, we saw the volatility index up, Brian, about 53% year-over-year, volume's up 37% and our sense is that kind of momentum's still ahead of us here.

We see strong FX volatility and volumes.

Great.

Thank you very much.

Hey, Brian, it's [Rich Bruckner].

I would like to also add, Pershing's been a beneficiary of the flight to quality as well, as customers move from more highly leveraged organizations to the less leveraged firms.

So we've seen that in terms of new relationships and also we've seen that just in terms of the assets coming over from those firms to the existing customers of Pershing.

And we have a very strong pipeline as well.

And when you think that will build into the fourth quarter revenue rate or is it conversion more of a 2009 in terms of impact to revenues?

I hate to predict but so far, so good in October.

We're halfway through it and it's been a strong revenue so far for -- as a result of the volume and the volatility and again, the continued strong pipeline.

Great.

Great.

Thanks very much, guys.

Thank you.

Thank you.

Our next question comes from Ken Usdin with Banc of America Securities.

Please go ahead.

Thanks.

Just one question on the issuer services business.

Looks like real strength across the board.

I'm just wondering if you can just give us a little more color on the individual business lines, what of it is environmentally based and what of it is kind of core business?

Right.

And Ken, it's Karen Peetz again.

We had particularly strong performance in the depository receipts business for the quarter and a lot of that has to do with dividends and issue and cancellation activity, so still lots of activity in DRs, both stock transfer or shareowner services and surprising good in global corporate trust as well.

So we think it's a combination of our market share and our ability, frankly, in the latter case, to take away clients from some of our competitors.

And also feel quite positive about the future.

So when we think about that business going forward, DRs are particularly even stronger in the fourth versus the third, right, seasonally?

Well, it's evening out more, Ken, from quarter-to-quarter.

Used to be the case.

Fourth quarter is usually a bit stronger.

But it's not quite the peak and valley that we've seen from quarter to quarter that you saw in the past.

And actually one more question, if I may.

Bob, you had mentioned the hawkish focus on expenses.

I guess can you just give us some color on what you're doing across the franchise, in addition to the merger, to prepare for potentially tough markets going through the next year or so and the need to try to maintain that balance on positive operating leverage?

How much flexibility do you have outside of the merger to rein in expenses and what are you doing specifically to get ahead of that.

That's a good question.

We've been -- as a team we've been working on this for a number of months.

Basically, anything that's a variable expense we're looking at very closely, everything from -- to travel to incentives to absolute headcount levels to various other expense lines as well.

We've had a number of special programs in place where people are not only looking at the rest of the year, but we're also working hard on our '09 budget and frankly we had our Board meeting on Monday and Tuesday.

The Board's been terrific and the timing of our Board meeting was excellent given the preferreds and which we were able to get approval for within a few minutes which was nice, given that the Board was together.

And as I told the Board, we're working for -- working very hard on our '09 business plan right now, but we're clearly in the most uncertain environment we've ever seen ourselves in for certainly many, many years.

The one thing that is certain is we have lots of expenses and there's lots of ways in which we can work those down.

So what I told our Board is we're looking at two or three scenarios and this will be kind of new for our Board.

And say business as usual, when things are weaker and what if things are stronger.

I think there's a scenario where we could be looking a little stronger by the second half of next year, but who knows.

In this economic environment I'm anticipating that GDP will continue to weaken through the year.

We might have another quarter or two of issues before things begin to strengthen.

So what we have said is we're going to work really hard on our expense base, not just for the rest of this year but also for next year.

Todd, what would you add?

I would add to that, Ken, that we're also looking hard at our capital plan.

There are a lot of projects we're prioritizing.

There are a lot of things that would be nice to have but we don't really need to have.

And I think there's a lot of things we can do to improve operating efficiencies around the Company, so we're also taking a hard look at that as well.

Just on that point, any other potential businesses on the margin?

You had moved that other business bank to the other line last quarter.

Any potential that we see some more smaller businesses or non-core businesses be sold or shuttered as far as that capital thought and planning is concerned?

I'll let Bob take that one.

I think it would be fair to say yes, that's true.

There are a few businesses at the margin, where strategically they may not make sense for us longer term.

As you know, we continue to work through that mix and we've talked about criteria before.

Many of these businesses have not been hit by any downturn at all and that's what's been kind of interesting about this and valuations are quite high.

But it's a very uncertain market and we're certainly not ignoring this issue.

We're going to continue to reshape our Company over the next couple of years.

Thanks.

Sorry for throwing the extra ones in there.

Appreciate it.

Our pleasure.

Our next question comes from Vivek Juneja with JPMorgan.

Please go ahead.

Just wanted to follow up with [Jim Palermo] on sec lending, response to the answer you gave.

You talked about (inaudible) two customers leaving, lending collateral values came down quite a bit, so was the rest of it all due to market value declines?

Vivek, actually I would characterize it as three things.

You had the seasonality from the international dividend season, you had the market values themselves coming down and then also what we're experiencing is the deleveraging of financial institutions, so that's having an impact of the overall assets that we have on loan.

So the deleveraging is over and above client participation that is going on.

Yes.

Thanks for that color.

Thanks, Vivek.

Thank you.

Our next question comes from Gerard Cassidy with RBC.

Please go ahead.

Good morning, Bob.

Good morning, Todd.

On the securities lending business, you guys are a bit different than your competitors on the government side.

Can you tell us what percentage of the securities lending business has to do with government treasuries, which differentiates you from the others?

Yes, we do about 1/3 of all the government lending in the industry today.

And we're overweighted in our government lending vis-a-vis our equity program as well.

It's about a 2/3 government, 1/3 equity split.

Great.

And then Bob, you touched on the economy there.

You put up really good numbers on the credit side.

Can you give us any view of where you guys see your credit numbers shaping up as we go into 2009, assuming the economy does go into a traditional recession?

I'll let -- [Brian Rogan] our Chief Risk Officer is here.

We can blame anything on Brian here.

Both legacy banks did a lot of work in our credit portfolio over the last few years and really structuring it as an investment grade portfolio to our securities lending clients.

But without a doubt as the economy goes into a weaker period, we don't see this dramatic increase, just a continuing small increase or increases similar to what you've seen over the 2008 from quarter to quarter.

We've been working through scenarios on that as well and it may be modestly higher next year.

We'll see.

It's a little early to tell yet.

Just finally, obviously with all the disruptions going on in the marketplaces, especially over in the U.K.

and Europe, are you guys seeing more opportunities to grow the business in Europe and the U.K.

because of the concern everybody has on the financial institutions in those marketplaces?

And if so, any particular area that you're focusing on?

Jim or Tim?

Tim, why don't you start?

Maybe we can go to Ron Hanley.

See if he has any views on this.

Sure.

Overall I would say from an asset servicing point of view, about 50% of our new business and I would say our pipelines coming from outside the U.S., it's a pretty emphasis on Asia and Middle East.

But I would say in the first kind of quarter, we saw a bit more in Europe.

We do see an uptick, though, just a general point, and it's Europe and it's in the U.S.

outsourcing and a lot of the financial institutions, banks, insurance companies and fund managers that are providing services inside, we see a big uptick in the amount of outsourcing opportunities and that's Europe and in the U.S.

Ron, anything you would add?

Yes, it's Ron O'Hanley here.

What I would add to that, thinking about an asset management perspective, on the one hand you've got retail investors that are very wary right now and you're seeing a flight out of mutual -- flight out of equities and money markets, flight out of money markets into deposits.

It's a (inaudible) which is unattractive for all of us.

But at the same time, there's also been a flight to quality in terms of provider.

There's a much more significant shakeout in terms of the providers going on in Europe, and to a lesser extent Asia, so we see the environment as one that will be tough but one that the benefits ought to come to us disproportionately, simply because of our breadth of skills and our perceived strength.

Thank you.

Our next question comes from James Mitchell with Buckingham Research.

Please go ahead.

Hey, good morning.

Can we talk a little bit -- I think a lot of the issue with you guys and your peers has been money market risk.

Can you dive a little bit more into that and talk about I guess in the near term, the commercial paper funding facility is creating some distortions related to asset-backed CP versus unsecured CP and how you guys are handling that, I guess, in your investment portfolios.

And then I guess longer term, with deposits guarantees going up, do you see any long-term risk to flows for money markets in favor of retail deposits or institutional deposits at banks and that would be helpful to kind of go through that.

Good question, Jim.

Ron, would you be prepared to take that one too.

Yes.

I think you've hit a lot of the factors that are going on.

In general, there has been a flight away from prime funds towards either treasury funds or to deposits.

And I think that's loosened up a little bit in that there's not quite the same -- there's not the same outflow, but on the other hand there aren't a lot of inflows.

There's a lot of programs that are put in place.

There's the guarantee on money market funds.

There's the ABC piece facility, there's the commercial paper funding facility that's underway.

In each one of these does pose a bit of distortion, but I think in general is starting to instill confidence back in there.

I think the real question is what is the long-term future of the money market business and I think that's not clear.

Because it's not just an investor demand kind of thing, but issuers themselves are starting to question whether or not we the issuer want to be beholden to something that it turns out can get shut off virtually overnight.

I really think the jury is out on that one.

I think it's stabilizing, but it may very well stabilize at a much lower level than it was in the past.

Are you seeing at least, as a large provider and perceived safety provider, are you seeing any kind of market share gains?

It looks like we have seen money market flows start to come back.

Do you think you guys are capturing a good portion of that?

Yes, we would tend to capture a good portion.

What you're seeing, though, is a lot of flows into the treasury funds.

Like I said just a moment ago, we see outflows from the prime funds have stemmed but you're not seeing any inflows.

Okay.

That's helpful.

One follow-up question generally, not from money markets, but I did notice that loan balances at period end jumped a little bit or a decent amount.

Any explanation for what was driving that?

Brian, you want to take that?

Sure.

We had a small increase in our broker dealer secured loan portfolio.

We also had actually two overdrafts associated with some operational issues that were cleared up the following day.

We have had about $1 billion to $1.6 billion of what I recall liquidity draws around in our portfolio, but the big spike was primarily the overdrafts.

I would say the actual growth in the loan portfolio is very modest.

We've seen some in our private wealth area and then we have seen -- you probably heard a lot of the noise around drawings from investment grade companies.

We've seen about $1.5 billion of that.

So the spike from the overdraft should come down?

It's gone.

It's gone.

Yes, that's gone.

It's gone.

Just expanding on that a little bit, just on flows and stuff, [Dave Lamere], wealth management had a nice third quarter.

It's more client driven.

What sort of color could you provide about what clients you're thinking right now and where you're picking up clients from.

Dave?

As Todd mentioned, we had our best quarter ever in terms of asset flows, Bob.

And I think it was a combination of two things.

One it was the investment we put in place over the last year in growing the sales force.

But the second piece of it was definitely market related.

We've seen a good increase in flows that are quality driven.

I'd say they've come probably, as we talked about last quarter on this call, probably at the expense of the brokerage model a little bit in this environment.

And I would expect that to continue in the fourth quarter.

The only difference is I would say clients are moving assets pretty readily.

I think just like the institutional comments we talked about before, ultimate asset allocation is being rethought and I think people are right in the middle of that right now so we'll be active in there.

Well, thanks, guys.

Thank you .

Probably have time for two more questions, maybe.

Next question comes from Thomas McCrohan with Janney Montgomery Scott.

Please go ahead.

Hi.

Good morning, everyone.

Had two questions, one quick one on -- just a clarification on the support agreement and securities lending, and just had a hopefully final question on capital levels.

For the securities lending support agreements, the $381 million that was included this quarter, is that charge reflective of anticipated recoveries, not recoveries, anticipated payouts to customers or is it already determined what you're paying out to help customers make whole or are you kind of in negotiation process.

Just wonder how much of that is completely finalized versus kind of in negotiations.

Yes, that is -- Tom, that is an estimate of what we think the charges, in a number of instances we're talking to clients and we're offering them support and we're projecting, given the value of the underlying Lehman paper and the probability of their accepting the support, what that's going to be.

So even though we try to put a fair value estimate on it, you can almost think of it as a reserve.

And would that covers -- how much -- what percent of the losses does that cover, of client losses?

That's probably about half of it.

About half of it.

Great.

Okay.

And is that kind of in line with what the other industry providers are providing?

I'm not aware.

Can't comment on that.

You don't know.

I'm not aware.

Okay.

On the capital side, many of the capital related concerns today relate to the investment securities portfolio, my opinion at least, as opposed to operational risk where kind of was the framework I thought the regulators were using to determine what kind of the appropriate capital ratio should be going forward, so I'm wondering if you're anticipating any stricter requirements coming down the pike regarding the type of securities you can hold on your balance sheet?

I am not aware of that.

Right now, we have not heard anything, Tom.

I think it would be -- I think it would be a surprise to us if they said you can't hold AAA Fanny Mays and Freddie Macs and agencies.

And basically hat's the only alternative that you have in the mortgage space right now.

So I think I would be very shocked if they came back with suggested changes there.

Clearly, as a result of the Monday's announcement by the Treasury, the government is interested in eventually when housing prices bottom here, they want people (inaudible).

Obviously we're doing that in wealth management space, we're doing that with some of our best clients on reallocating some of our deposits to some of our best clients around the world, but it's -- we want to make sure that our model is different.

We're not a traditional lender.

So we're going to keep investing in very high quality securities and where we think about mortgage product and things like that and personal loans, it will just be essentially in the wealth space, which we're very supportive of because we like the granularity of it and we like the profitability of it.

I think the thing that's unique here is the difference between accounting for securities versus the accounting for loans.

Frankly, the securities valuations today are reflecting a very draconian future market which is what it appears will play out.

So it's already embedding the losses, the expected losses.

The loan books have not done that yet.

So you've probably only recognized 5 or 10% of the actual loan losses.

For our balance sheet, we're getting tagged with one side of it and we don't have the other side of it.

Yes, I guess there's a reason I was asking it, Todd, was that -- two observations, one, there are private custodians out there that don't invest in anything but treasury securities.

So arguably to be a custodian, you don't have to buy mortgage backed, even though they're AAA rated and arguably the reason you'll do it is to get additional yield for shareholders.

And two, this quarter you had a $36 million operational loss.

That's a loss for running a business compared to $160 million loss on some securities you own.

So arguably, $36 million should be what the capital is covering.

In my opinion.

That's 160.

Just curious how you guys are thinking about that.

I'll be happy to answer.

There's no question that this portfolio has more risk in it than we're going to have going forward.

We don't think that the potential for the volatility of earnings makes sense and we will continue to derisk this balance sheet.

I said a few times, Tom, that some places at the margin over the last two or three years, we've stretched for yield and we have a different strategy going forward and I think it will show up with more moderate NII but a much more stable, less volatile earnings stream and we've been executing on that for over a year.

That's great.

Thanks for your comments.

Thank you.

One last question.

Thank you.

Our last question comes from Robert Lee with KBW.

Please go ahead.

Thank you and I appreciate you squeezing me in at the end here and just when you feel you couldn't get another question on balance sheet I will ask one more.

Sure.

I did notice that there was an increase in the securities held for maturity and clearly that's in keeping with, Bob, your comments about your willingness and ability to hold.

But can you maybe go through a little bit of which securities you did move and maybe the thought process behind kind of those and why now?

Rob, that's a good question.

What we did, we do think there's going to be some volatility in prices, just given the nature of this market.

So what we did is we took some of our higher quality portfolio that we thought could get dragged down in price, even though there's no issues associated with it and we put it into held to maturity, because it really didn't make sense for us to be tapping or hitting our capital due to a lack of liquidity and irrational pricing in the market.

Okay.

Great.

That was it.

I appreciate it.

Thank you everyone.

I appreciate it.

Lots of questions this time for us so we tried to make sure we got almost everyone in that we possibly could but I realize you have other pressures, so we'll keep working hard for you and we -- if you have further questions of course, the investor relations team looks forward to discussing them with you.

Have a good day.

Thank you.

If there are any additional questions or comments you may contact Mr.

Steve Lackey at 212-635-1578.

Thank you ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.