貝萊德 (BLK) 2008 Q1 法說會逐字稿

Good morning.

My name is LuAnn and I will be your conference facilitator today.

At this time I would like to welcome everyone to the BlackRock Inc.

first quarter 2008 earnings teleconference.

Our host for today's call will be Chairman and Chief Executive Officer, Lawrence D.

Fink, Chief Financial Officer, Paul L.

Audet and general counsel, Robert P.

Connolly.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS).

Mr.

Connolly, you may begin your conference.

Good morning, everyone.

This is Bob Connolly.

I'm the general counsel at BlackRock; before Larry and Paul make their remarks, I want to point out that during the course of this conference call we may make a number of forward-looking statements.

We call to your attention the fact that BlackRock's actual results may differ from these statements.

As you know, BlackRock has filed with the SEC reports which lists some of the factors which may cause our results to differ materially from these statements.

Finally, BlackRock assumes no duty to and does not undertake to update any of these forward-looking statements.

With that I will turn over to Paul Audet, our Chief Financial Officer.

Good morning.

Our first quarter results clearly reflect two different stories.

One, very strong core business operating fundamentals, but also the impact of adverse financial markets on nonoperating income where we saw earnings decline by $0.12 associated with nonoperating income, as opposed to a contribution of $0.16 for the first quarter of 2007, and $0.10 for the fourth quarter of 2007.

First let's discuss core business.

Operating income as adjusted totaled $417 million for the first quarter.

This represented an increase of 34% compared to the prior first quarter, prior year first quarter.

On a per-share basis operating earnings increased 41% to $2.02 compared with a $1.43 earned in the first quarter of 2007.

Adjusted operating margin also rose in the first quarter to 37.6% compared to 36.7% in the first quarter of '07.

These results were driven by organic AUM growth over the past twelve months which totaled $158 billion, including $35 billion of organic flows in the first quarter of 2008.

Long dated organic asset growth over the last year totaled $56 billion or approximately 6%.

Cash management assets increased over $102 billion to $349 billion at March 31, 2008.

First quarter organic growth of $35 billion was largely concentrated in cash management flows as new long dated fundings were offset by client withdrawals aimed at generating either liquidity or changed investment strategies.

Overall AUM finished the quarter at $1.364 trillion, up 1% from December 31, to $35 billion of organic AUM growth was largely offset by the impact of declining equity markets as equity asset depreciation; net of FX totaled $32 billion or 7% of beginning AUM for equities.

Fixed income assets depreciated approximately 1% for the quarter while alternative products depreciated 1%.

Larry is going to talk about pipeline, so I'm going to leave that for him to discuss.

One thing that we would like to note with respect to the first quarter we incurred no additional charges in the first quarter on enhanced cash funds and have returned over 50% of invested capital to date.

BlackRock has not recorded, nor has ever recorded any charges with respect to our money market mutual funds.

Our remaining SIV exposure comprise only top tier financial institutions, all of which have been restructured or guaranteed by their sponsors.

Total SIV assets will approximate $800 million by June 30t, or 0.2% of overall cash management AUM and we have no remaining SIVs in our 2a7 money market mutual funds.

For the quarter investment advisory fees were $1.13 billion, up 30% from 2007 but down 2% from the fourth quarter.

Obviously respecting the strong year-over-year asset growth but also declining asset equity markets since year-end.

Performance fees of $41.5 million for the first quarter were largely due to positive results in international institutional separate accounts, which overcame our reduced forecast for fund of hedge fund performance fees.

A significant percentage of the Company's performance fee products have contractual periods which conclude in the third and the fourth quarters.

Last year in 2007, 86% of our performance fees were earned in the third and fourth quarter of the year.

This represents a primary factor driving the $111 million decline in performance fees from the fourth quarter of 2007.

BlackRock Solutions continues to generate significant growth and new business volumes both on the Aladdin system, as well as risk advisory assignments.

First quarter revenues totaled $60 million and was up 41% year-over-year.

Compensation costs for the first quarter were $469 million, representing 36.1% of total revenue and included a reduction in our forecasted and expected bonus accrual rates as we generated lower than expected nonoperating income.

During the quarter we also saw good management of the expenses, especially on general and administrative.

We were only up $10 million year-over-year in general administrative expense, and all of that represents FX for measurement changes.

For the first quarter we actually incurred FX for measurement cost of $8 million as compared to a $2 million income; in the first quarter of last year a $10 million differential and we actually had $5 million of FX for measurement gains in the fourth quarter.

This measurement is largely due to obviously the escalation of the euro as it relates to both the Sterling and the US dollar.

For the first quarter our effective tax rate was 35%.

That was 36% in the first quarter of 2007 and 35.4% for full-year 2007.

With respect to the nonoperating side we have provided in our release a breakdown of where that resided, but largely reflected mark-to-markets in our investment portfolio.

We right now run economic investments of about $1.4 billion.

The $24 million loss largely reflects the fact that -- and it was a $57 million change year-over-year with respect to declining net investment income associated with higher interest expense as we raised $700 million of debt last year.

Approximately $13 million of net changes year-over-year with respect to our real estate valuations, a little less than $25 million change year-over-year with respect to hedge fund and fund-to-fund coinvestment valuations, approximately $10 million of which was associated with the write-off of one investment, with respect to a fund in liquidation.

The balance of the changes were largely comprised in CDO and CDS impairments, as well as other mark-to-markets on equity balances.

Clearly this is a change from prior periods but I would note that for the fourth quarter our nonoperating income reflected about 2% of our overall investment portfolio on a positive basis and in the [first] quarter we are showing a 2% decline as against very significant market declines across the board.

With that, I will turn it over to Larry to discuss the business.

Good morning, everyone.

Thank you for chiming in.

As Paul discussed, the quarter clearly reflected two stories; try to give color on both.

Let me start off with all this market turmoil, with all the tremendous changes in values in the fixed income market and the equity markets and many of the alternative markets, it was very clear to the management team of BlackRock that our model is working and working extremely well.

Having a diversified global business model has allowed us to work with clients worldwide and allowed us to work in terms of clients who are seeking solutions to balance sheet issues.

And it will also -- this global model is helping us explain why our pipeline is so robust, which I will discuss in a minute.

Our pipeline as discussed in our release is about $106 billion; $20 billion of cash of which about $15 billion of it has been funded already.

So as of this moment our cash management, which is very volatile, is back to almost the March average of about $50 billion.

We ended the quarter about $35 billion, and we just saw some preparation for tax.

And we saw just quarter rebalancing in cash, we saw outflows the last few days, so nothing disturbing and this is very customary I think in the first quarter in terms of what we saw.

Impressively also we have $23 billion in terms of long dated pipeline wins in our core franchise.

And what we are trying to explain -- I will put a little more emphasis a little later in my talk -- a new category called advisory asset management.

And this is our position, our business in which BlackRock Solutions are working with our clients.

In terms of long-term distributions and dispositions of positions held by different institutions, that total is now $62 billion.

Our asset mix in my mind has really differentiated us, showing that despite a 7% decline in our equity business, that we still have net asset growth.

It once again proves to me, and hopefully to all of you, that having a strong cash, strong fixed (inaudible) strong equity and strong alternative business allows us to migrate alongside with our clients.

And I will describe some of the migration we saw in the first quarter a little later.

And also importantly is having the strength of two distribution channels, a very strong retail channel where we at BlackRock are seeing growth in our equity retail channels in the US.

We saw some outflows in our global equity platform, so netting basically zero.

But our US open end platform we saw growth in our equity platform, which is in the backdrop of mutual fund outflows and equities we had a very good quarter.

And then the institutional side we are working alongside with some very, very large clients.

I should also add our RFP pipeline has never been stronger.

We have some RFPs right now that are in the tens of billions of dollars.

I'm not here to suggest we're going to win those but there are some very large reallocations that we are seeing from clients that we are participating in, and I will describe that a little later.

As Paul described, our operating income was 202, which in my mind is a very indicative -- indication of how strong the core franchise was in the first quarter and the momentum we have going into the second quarter.

This, as Paul suggested, represented about a 41% increase from a year-to-year change.

So our core business is very strong, and we are responding to these global markets that are experiencing some severe strains and difficulty.

Let me go over the flows, which are very unusual.

For the first time we are seeing some strong outflows in fixed income going into cash.

About 50% of the outflows in fixed income were clients who are saying, I am very uncertain about the market.

Many clients are saying I cannot make the appropriate return owning fixed income or certainly treasuries at a 350 where the tenure is approximately plus or minus a few basis points.

So more and more clients are saying I can't make enough return on some of the fixed income products for the moment until I feel more comfortable, let me be in cash.

We see some of those clients are going out of traditional fixed income into alternatives.

Much of our alternatives growth, which we had nice growth in the first quarter was in the special situations.

A mortgage, distressed mortgage fund we created, the distressed debt fund that we created, that was more an alternative basis.

But if you look at the makeup of those alternative wins, they were very fixed income oriented.

So a lot of that alternative win is how we define alternatives.

But the preponderance of those alternative wins are fixed income, and they are more alternative in terms of fee structure also I should and.

And so we saw some very unusual flows, and I think that will persist.

I am not here to suggest that we are not going to see flows that are not going out of fixed income.

I think flows will go out of fixed income with the liquidity into alternatives.

What we are now trying to say to clients, it is time to take on more risk, and we are suggesting many clients to start looking to move away from treasury-oriented strategies to more credit-oriented and mortgage-oriented strategies.

So we are recommending, and this is why I think our pipeline RFP is so strong for clients to start relooking at how they look at fixed income.

In one of our pipeline wins was a $1.3 billion win in high yield, so some of our work with our clients are starting to take hold and which clients are agreeing with us but that it is very hard to make any real return on owning treasury securities, or being even in a core fixed income strategy.

And so we are looking at working with clients to try to really look at either reorienting their positions to more credit, to more mortgage strategies and in many cases, some of our clients are still looking to do long dated liability types of strategies, too.

So they are -- irrespective of the low-interest rate environment many of our clients are just saying I don't want to have a volatility, and I am locking in long duration strategies where we still see some real opportunities.

So our clients are confused.

Our clients have put more than -- huge sums of money in our liquidity business.

I don't think we are unusual in this.

The liquidity business is very robust right now.

As Paul suggested, it is important for us to note again that we are not experiencing any real credit issues that we are putting onto our balance sheet, unlike so many other institutions.

And I think so many other institutions will be reporting in the next few weeks.

We've had a very strong credit story in our liquidity business.

Our team has done a very good job in navigating this.

And as Paul suggested, we are very happy in which -- how we are trying to rapidly reduce the exposure we have with our clients in those two cash strategy funds where we froze those positions last year.

And we are now, as Paul suggested, 50% of the monies have been returned at par to our clients.

And over the course and balance of this year we believe our clients all will receive all their money back at par.

And so this is what we are working towards.

As Paul discussed, our nonoperating income, obviously this is the other side of the story.

With global assets impaired and as we invest in global assets, working alongside with our clients some of our positions have been impaired.

It is a 2% loss in the overall portfolio, as Paul suggested.

It is the mirror side of the gain we had in the fourth quarter.

I will tell you very loud and clear we continue to do, expect to be investing in alternatives, in real estate alongside with our customers as we roll out more strategies in the alternative space, we will be investing alongside with our clients.

And so much of that, this is our philosophy.

This is what we are going to do.

I will also say, though, there is not a dollar of our assets that we employ for proprietary trading.

There is not a dollar of our market capitalization that we use for anything but fiduciary business with our clients.

And so the impairment that we have here in our nonoperating income is all related to investing alongside with our clients and strategies.

I should also add some other issues of where we had on a mark-to-market basis some impairment.

We are a strong believer that investing in credit and mortgages is a great opportunity.

Obviously we have not hit the bottom yet, and so we actually are experiencing some modest impairment in some of those strategies that we are investing in, in the first quarter.

We will continue to invest in those strategies because we believe over the course of the next two years, these are going to be great opportunities to invest in, in the bank loan markets, great strategy to invest in mortgages and other distressed areas.

So unfortunately, we are not going to be able to call bottoms; we are not going to be immediately investing and making huge gains, but we believe as we need to start adding those positions now and we are working very carefully with our clients.

And unfortunately in the first reporting period some of those have short-term losses and are -- in fact our clients are calling us and asking can they put more money in these strategies.

And then some of these strategies were closed.

So even this week we had a client saying, can we actually put more money in these strategies?

And we said no, we have closed.

Obviously we are going to announce and roll out some other products and we're pretty excited about one or two of them right now.

But I think this is just part of our long-term strategy that we believe we are being paid to take on some of these risks in these product areas.

So it is important to understand the nonoperating income area.

It is a disappointment for me, and however, it is our strategy to continue to build our investments alongside with our clients.

And if the marketplace does turn itself around, obviously we are going to show some vast improvements in those areas.

Let me talk about BlackRock Solutions and the BlackRock advisory business.

We are in a unique position.

We are one of a handful -- and I don't know who the other handful are, but it is fair to say we are one of a handful of organizations that have a fiduciary business in this advisory side, whereby we have a total separation from our investment management team in terms of understanding and working on this risk.

BlackRock Solutions now has over $7 trillion in assets that we do analytics for, and so we have a broad base of assets that we evaluate on a third party basis working with our clients.

We have this advisory team that is working with our clients in helping our clients understand their embedded risk, and we're trying to work out strategies.

This is a business that has been heavily in the news with some substantial assignments.

And so we are trying to create more transparency to all of you of where these assignments are and what they are.

It is fair to say these are temporary assignments.

But it is also fair for me to say in many of these cases, these contracts are five to ten years long.

These are not temporary assignments in the terms of being a three-month assignment.

These are going to be assignments that are going to take whatever it takes up to ten years in many cases, in some cases to work out a long-term solution.

Now it is our hope that the market rebounds.

It is our hope that we are going to be able to work with our clients and that the portfolios are reduced in a much shorter period of time.

But we have no ability to predict what is going to have been in the capital markets in this time.

Obviously by our views that I discussed about our coinvestments with our clients in mortgage and credit, we do believe there will be a turnaround, and we believe during that turnaround we will be in a liquidation with some of our clients in these portfolios.

There are many more assignments like that, that are percolating around right now.

We believe this is not going to be just a short term business.

I believe this business will be at least intermediate type of business.

We see and are talking to many other clients who are sitting with impaired assets, are sitting with assets that they don't have the full capacity to understand and to manage.

And so we are actively engaged with many other institutions right now in terms of working with them and trying to assess what they should do in this area.

We are also working with many new institutions who are saying okay, I can't afford to not have a better risk management system.

And so unfortunately for our clients who are experiencing these problems, this is -- we are working with our clients to help them put on better risk systems.

In some cases there are the Aladdin system at BlackRock; in some cases they are using other investment systems.

But I do believe the business of our solutions business will continue to grow at very fast -- at a very fast rate.

As I said in the past, this is a business that is very hard in terms of staffing.

We are aggressively recruiting and hiring, aggressively growing our people.

But I must tell everyone that in the first quarter working on these very cumbersome, very visible assignments I saw as a CEO, some extraordinary work done on behalf of the team.

We saw examples of work done that I've never seen in our twenty-year history at BlackRock.

We are able to work with these clients who our very visible in terms of their issues, and we've been able to work very closely with them and help them array and assessment of the risk and are working with them with a long-term plan in terms of reducing the exposure in these asset categories.

So we are quite constructive on this business.

We believe this business is going to be extremely robust for the coming months, quarters and years to come.

New business mix.

We continue to see, as I said earlier, very large RFPs.

In two of the cases they are more than $10 billion in terms of assignments.

These are all long dated assignments.

These are both in fixed income.

We are very involved with many other institutions right now who are looking for opportunities to invest in credit, in mortgages and other types of distress products.

And so we believe once there is a little more stability, and I'm not sure when that will be but once there is a little more stability we believe there will be some large, large flows into the long dated fixed income products that were in distress.

And we believe we will be one of the firms that will be able to take advantage of those flows in those businesses.

Our cash management business continues to be very strong, as I said earlier, we have been able to avoid the good majority of credit issues.

We are very well-positioned.

We continue to staff that area, too, and we continue to differentiate ourselves due to the fact that we are not sitting here with any large exposures that we had in our 2a7 products and our other cash management strategies.

Our equity business continues to grow.

We continue to grow in terms of the knowledge base in the world.

That BlackRock is a lot more than bonds.

As I said in our domestic retail open and fund business; we have had some very good flows in our equity business.

Our global opportunities fund is going from strength to strength worldwide.

It is one of the most noted mutual funds in the world right now in terms of growth.

Dennis Stattman and his team have shown extraordinary abilities to navigate these global markets and outperform in these volatile markets.

And we are continuing to see some substantial flows in that product area.

We are continuing to build out our equity products.

We are thrilled with the new European equity team that we have in place in the first quarter, and we expect to see flows with them.

We continue to see some great opportunities in our agricultural equity funds; in our mineral and mining funds, our natural resource funds.

Our UK equity teams have had extraordinary performance, and we continue to be one of the dominant equity firms in that area.

So we have more and more opportunities in the equity business, and we think this will continue to build more momentum in the balance of the year.

So overall I would say the platform is well-positioned to handle the inquiries and solutions.

We are very well-positioned in the fixed income area to take advantage when the market goes from fear and when we see a rebalancing out of treasury-oriented products into more mortgage- and credit-oriented products.

I think I said in a speech earlier this year that I think the next bubble is US Treasuries.

US Treasuries just represent a fear security.

And so we are pretty loud in terms of telling clients to try to rebalance as much as possible out of treasuries and to go into CMBS, MBS and other credit products.

We continue to -- so we continue to see those opportunities in fixed income.

We can see those opportunities in equities.

And on the alternative space, we are working on some very, very large ideas in terms of working out large scale opportunities in terms of in the distressed mortgage, the distressed credit areas that we are actively working on right now.

We hope to have something very large in the second quarter in terms of working with our clients and investing in these distressed opportunities.

We also would like to just tell everyone we did have our 20th anniversary in the first quarter.

It was an extraordinary event in terms of the recognition of where this firm came from and where we are today.

And I will say to everyone the momentum in the firm, the culture, the enthusiasm on a global basis has never been greater.

Our teams are one.

We talk all the time about one BlackRock, one team representing our platform.

I could tell you very loud and clear we have achieved mass in terms of the opportunities we have representing our clients globally as a one BlackRock organization.

We also will be very proud on May first of this year when we formally become BlackRock worldwide in terms of our mutual fund retail platform.

We will drop the hyphenated name on April 29, this month, with the hyphenated BlackRock Merrill Lynch advisers in Europe and Asia, and in terms of our mutual funds.

And so the branding has been very successful.

We have achieved scale in terms of the knowledge base of BlackRock, and we have achieved the ability to be very comfortable and excited about representing ourselves globally worldwide on May first as one BlackRock.

I would like to thank all the employees for all the hard work in the first quarter; I know it has been quite stressful.

And with that, I will open it up for questions.

(OPERATOR INSTRUCTIONS) Craig Siegenthaler, Credit Suisse.

Thanks a lot.

Just two questions here.

The first question was on the fee rate and the alternative and fixed income businesses which declined sequentially.

Has new business wins been the driver of fee production here, or is there anything kind of unusual in the numbers?

Craig, what I would like to do is probably deal with that [online]-- what I can tell you is there is two issues at work.

Fixed income, we did announce in the release a reclassification.

We did have a balance product that got reclassified on its revenues in the fourth quarter, between equity and fixed income incorrectly from what you would have seen in the prior release.

And that is implicating the fixed income decline in rates, a good amount.

The other part of that is just so everyone knows, two different factors in fixed income, a large CDO issuance, Tourmaline II in the fourth quarter which added $2 million of onetime origination fees in the fourth quarter.

And also if you remember we did reduce a lot of our ownership and through impairments of some of our CDOs in the fourth quarter.

As soon as we did that we also turned off fee arrangements on a lot of the subordinated tranches of those.

And that implicated fixed income revenues about $6 million.

So that is the appropriate decline, but it is not necessarily anything other than those.

Alternatives is merely a factor of timing.

And so I think the quarter rate that you saw in the first quarter is appropriate.

Okay, so that is appropriate for (inaudible) right?

Yes.

Second question was on the auction [rate] preferreds and the closing of the fine.

I was wondering if you could provide a little more color because I'm wondering it looks like you just refinanced about 20% of your ARP paper that is outstanding.

When I look at what current needs are to refinance them in the muni paper it is something like yields under 4% and you need maybe perpetual liquidity from a third party.

I am wondering if you think with the current liquidity situation if that is maybe realistic or if there is some other type of solutions.

Because I know you have been mentioning in your press release yesterday the dependent option bonds and also the credit put solution.

So I am wondering maybe you think those type of solutions would work over the next few --

We are working very closely right now with institutions like your institution and a few other institutions in terms of trying to work out a solution.

We have been engaged working with the Federal Reserve and the SEC and different in creating different structures.

We are very sensitive to our clients in terms of who are sitting with these option rate preferreds, we will know if we have a solution for the entire option rate market in the next probably week or two.

But we've been working very closely with a lot of the selling agents and the distribution agents.

We believe -- this is a very difficult process.

We have two classes of shareholders, and we have to be very sensitive without -- in helping the preferred shareholders, if we do something that harms the equity shareholders, we are in trouble.

The SEC doesn't like that.

And so what we are trying to work on as you suggested, different financing techniques in which we could help the preferred holders without impairing the equity holders.

And as you suggested, the yield spreads between the option rate preferreds and where 2a7 money market funds for munis are trading, there is a huge yield spread.

And so if we could work on put strategies to make the products 2a7 eligible and working with the regulators, we could find a solution in which both parties could win.

Got it.

Because (multiple speakers).

So the answer is we will know in a week or so whether there is going to be enough liquidity to do that and enough opportunity.

Got it.

And the fact that you are registered and I guess regulated as under the bank holding company act of the P&C ownership, does that at all impact the solutions you're looking at here or is that not really affected?

No, by no means.

Not at all.

I don't think we have any -- from the BlackRock -- we don't have anything that would inhibit or impair our opportunities.

The real opportunity inhibitor would be, will banks even put a LC behind this at this time, do they even have the capital to put on more LC or capital to offset this.

So we are not the inhibitor.

The banking system might be.

Thanks a lot.

Marc Irizarry, Goldman Sachs.

Actually Paul, this might be a question to start off with you.

The $1.4 billion in balance sheet investments that you have, can you just break out by type of investment what is in there?

And also if you can just talk about the end of the quarter, your CDO max loss exposure?

Thanks.

Remaining CDO investment exposure is approximately $8 million, but $5 million of that is a cash flow CDO, which I would not anticipate adding any further impairment adjustments on.

So for all intents and purposes we are pretty much down to nothing on our remaining CDO coinvestments.

With respect to the $1.4 billion, I think it would be better to go through that off-line with you because that really is our economic value.

Essentially our total investment portfolio as you know runs over $2 billion but we take out the noncontrolling interest pieces and it gets into a pretty detailed discussion, which I think is better for off-line.

But and certainly I can go over that with you later on.

Okay, great.

But just following onto that, if you look at private equity it looks like some of those investments were actually written up while real estate and hedge funds were written down during the quarter.

Could you just characterize performance between those two, was any one particular partnership and private equity that drove the write-up?

I don't know if BMI is in there.

The most I can give you at this point is that you had some negative performance of private equity domestic US versus some positive performance internationally.

I think that for all intents and purposes, as you well know most private equity is a mark to model process.

So ultimately it is not necessarily moving with the market movements in pricing, it is moving with whether or not the cash flows for the underlying portfolio investments are moving.

That would be the -- that was the one area where we didn't have quite as much movement and the other assets is where obviously you have a lot more mark-to-market exposure because of level 1 and level 2 assets.

And that is why I say we should really talk about that more off-line.

Perfect.

And then Larry, in terms of timing I know it is hard to predict exactly when this rerisking or the reversal of the safety trade will happen.

But what do you think it is going to take or what milestones or mileposts are you looking for to sort of say there is more rerisking happening, and just what do you expect on a go forward basis?

We are actually seeing that now albeit small, we're seeing more and more institutions are raising the questions.

I think almost a good part of the RFPs who we are looking at now are more risk oriented into the fixed income area.

We are working on a couple substantial assignments right now in terms of taking down large blocks of some of the distressed products, working with our clients right now in terms of the valuation of this.

So we are beginning to see it.

There is two milestones that I would look for.

One is as the financial institutions end their first quarter as a -- with their new marks we believe we are at -- as I said before at the capitulation stage where we believe now where the markets are occurring are closer to clearing prices now.

And so we are actually seeing more movement.

I think I saw today that Deutsche just sold a big block of their bank loans on the tape today at a dollar price of 90.

This is -- so we are starting to see the clearing institutions who are marking are starting to mark in our mind closer to market or at market.

And we are starting to see clearing prices occur.

And so as more and more institutions starting to, I guess capitulate and now reduce their balance sheets, I believe there is quite a bit of equity out there to invest in these products.

And so we believe we are at the beginning of the capitulation stage; we believe we are at the beginning of the stage in which investors are willing to have a strong appetite to put money in these areas.

And then I think the third thing that I am looking for to really create a more stable economic environment in the United States, I believe we as a country need to find a solution to low income housing.

The Republicans and Democrats continue to battle on what is the appropriate policy; but we need to create a new FHA housing program in which we stabilize low income housing.

I think what the administration did in raising the loan limits for Fannie and Freddie will stabilize; the jumbo mortgage is up to $775,000.

And so we are beginning the healing process in a lot of areas.

I think monetary policy is a healing process certainly what the Federal Reserve did in terms of opening the discount window was a healing process.

Now we need to see something in terms of really helping the lower income housing market and creating that stability there.

If we could do that and stabilize housing in America we will then stabilize consumer confidence.

And then I think we will see obviously a big upswing in credit, probably a bigger upswing in the equity markets and we would see a great outflow in liquidity.

But we are beginning that process now, Mark.

Great, great.

And then just one question on your distress, your bank loan and your mortgage distress securities funds.

Can you tell me how much dry powder you have left if any in those funds and how much did you invest during the quarter?

They are private placement, so I do not want to get into two much detail.

I see my general counsel shaking my head I can't talk about it that much.

We still have a lot more powder and we are in the process of raising some more funds in those areas right now.

Okay, great.

Thanks.

Michael Hecht, Banc of America.

Good morning, guys.

I was wondering if you can give any more detail on the economics or fee rates, I guess on the $62.5 billion of advisory assets.

And then talk a little bit more about where we will see those show up optically in the P&L, whether it is core fees or more other income.

It will be core fees.

It will be -- I don't think we have decided are we going to show that up in the solution box or the -- I assume we're going to show it in our solution box because it is the advisory side of it, so that is where it is going to show up.

So our fees are very competitive.

And that is all I really can say.

As you know, in one of our assignments there may be -- it may be much more visible if there are congressional hearings on it, but our fees are very competitive in our mind, and I believe they are competitive in terms of the work we are doing.

And it is obviously a lot of work.

I understand it is kind of a sensitive subject.

As far as the assets go, will those show up as actual flows in the different buckets; fixed income versus whatever or no?

No, keep them separate.

We are going to keep them separate just to give that more transparency because if indeed the marketplace does improve a lot, we are going to show you with clarity where those positions are.

Okay, that is helpful.

And can you talk a little bit about I guess aggregate investment performance metrics?

I think last quarter you said something like 58% of fixed income funds were performing their comparable Lipper Average is over 1, 3 and 5 years or more.

And then 84% for equity funds.

Do you have those kind of broad --

I don't have them in front of me.

I think equities I think was 70%, something like that -- excuse me -- how much was assumed?

Over 80% in equities again.

In fixed income in the first quarter they are actually mediocre.

They are probably right -- 50%-ish -- that is lower than we want.

A lot of it is because we are starting to put on more risk in some of these credit areas, and the market -- the only thing that did really well in the first quarter was treasuries and especially in the short ended treasuries.

So we are -- we did not have any real massive exposure there.

I could say with some of our largest competitors we did very well.

I would also identify PIMCO did a spectacular job in the first quarter.

But most of our large competitors had inferior returns to us in the first quarter.

Okay, that is helpful.

I was hoping to get a little bit more color on the types of cash management products that are getting the flows or I guess in other words, the mix of prime funds versus government funds.

I think from the release I was able to infer that about $7 billion of the $35 billion in money fund flows were retail but was hoping to get a little more color by fund type.

Most of it is prime institutional, and I would say of that breakage probably about one-third or two-thirds, one-third between government related and what I would call your prime institutional -- basically your taxable incurred.

So I think somewhere around there.

Okay and then the $7 billion retail, is that about right?

Yes.

Okay, and then any areas I think you alluded to one or two in your prepared remarks where you are experiencing capacity problems, such as BlackRock Solutions or otherwise.

Actually we are not in solutions; we are just very mindful of where we are in solutions.

As I said, we have done a lot of hiring, we continue to do a lot more hiring.

I don't want to give any indication that we are at our max in this area.

I can tell you we're working very hard in this area and I know we have a lot of people working endless hours and a real attribute to the entire team.

But there is really no areas right now where we are really maxed out or capacity constrained.

Okay, that's great.

Last question, can you talk a little bit about the balance sheet, I guess where cash and cash equivalents ended the quarter versus the $1.65 billion at year end.

And then I guess also the outlook for capital management and share repurchase and as part of that, can you also talk about the capacity and appetite for additional acquisitions and maybe just outlook for consolidation in the industry broadly?

Let me do that first and I will let Paul go into the mix on the balance sheet.

I expect to see a dramatic consolidation in the investment management business.

I believe you are going to see institutions who are struggling with low PEs, or struggling with asset quality problems, who are going to look to embellish the capital through either sales of their asset management business or contributions of their asset management business.

So I believe the M&A market for asset management is going to be very strong.

I think in terms of the alternative space, people are starting to witness obviously some setbacks.

And I think people -- and I would say very clearly we are seeing from our global clients more and more brand names becoming more and more important, and having a financial strength is going to become more and more important.

So we are -- we believe we will have at BlackRock many M&A opportunities.

I will also caution you we have always had very many M&A opportunities, and we've been very judicious in terms of making sure that they work culturally with our firm, working with our distribution platform, working with our strategic views and where growth will be in the future.

So I don't want to suggest that we will be doing a transaction at anytime soon.

I can suggest that we've seen -- we've had many inquiries from many institutions about opportunities in working alongside or doing something with BlackRock.

As to the other side of the equation, as you know, we don't publish a balance sheet, but what I can tell you at this point in time is traditionally in the first quarter, our cash and cash equivalents usually show some element of decline because we pay bonuses in the first quarter, which are usually much more substantial than our cash flow, but I don't think it should be a material amount.

Okay, great.

Thanks a lot, guys.

Douglas Sipkin, Wachovia.

Just two follow-ups.

Most of my stuff has been answered.

I know it's early first quarter, Paul, but can you give us any sense of how the performance fee outlook is going to trend throughout the quarter?

Obviously, the back-half is stronger.

Any early read, though, how should we be thinking about it relative to last year or is it just too early for that?

You answered your own question; it really is early.

The best I can say is, obviously, you know second quarter we will see a fall down, which we normally do.

It is our lowest product lock that we have.

We did see, and I think that one can assume that we are going to be probably a little bit less than you would have otherwise expected, because I don't -- we are seeing a little bit of a southward movement in our expectations on fund to funds related performance fees.

And that is, as you probably well the most of the fund to fund businesses were having some declines in the first quarter.

And that is to be expected.

As to the second half, it is so much a characteristic of where the markets move over the balance part of the year.

I couldn't give you a total; if you were to ask me I would probably say it will be hard for us to overcome last year based on where we see markets today.

But at this point in time I can't do any better than that.

Fair point and then a question for Larry.

How important is confidence in the US currency going to be for potential rerisking?

Because I see today the euro setting a new high on the back, I guess, of their inflation news.

I'm just wondering do you view that as one and the same as belief in the US will trigger more risk taking, or that doesn't necessarily have to go hand-in-hand via the stronger currency.

There is no question we are seeing from our global clients a greater interest in investing in nondollar assets.

So we are seeing that everywhere.

And we also understand in many countries outside the United States are experiencing extraordinary inflation.

The inflation rates in China are 8%.

The inflation rates in the Middle East are above 8%.

And so because basically there are more pegged to the dollar and so they are obviously a lot more -- they have to be a lot more confident in the type of investment they do in dollar-based assets.

I can tell you in many areas in the world now there is a great appetite or a great interest -- let me restate that -- in terms of investing in the distressed area in the United States.

We did see in the tick flow yesterday that foreigners bought $72 billion of dollar-based assets last month.

So there is clearly still a lot of investing going on, but you are absolutely right, the deterioration of the dollar is creating a lot of consternation.

Investing in dollar-based assets have really underperformed terribly for our global investors.

And yet we are still seeing huge interest in some of these special situations.

Okay, and then any broader concern around fund to funds or any fear in regards to potential increased hedge fund regulation?

Just in light of what has transpired with the broker-dealer industry?

Or do you feel like the strong will survive and the weak would fall off anyway?

I am a big believer that we have that Secretary Paulsen's proposal is something that everyone should look at.

We believe there is need for global, a global regulator in the capital markets.

We believe the capital markets have grown a lot faster than regulation.

We believe there should be a review of how one regulates -- everybody who is a big participant in the global capital markets, and that includes private equity firms and that includes hedge funds.

So there should be a systematic review on a global basis on that.

I think your point about the good are going to get better and the weak are going to get weaker, I think that is going to be the case.

We are irrespective of the setbacks in many hedge fund strategies there are still some hedge fund strategies that did quite well.

And we still see a very good pipeline in clients who are looking for fund to fund strategies.

There is a view and I think it is proven to be the right case, that you have less event risk in a fund to fund strategy than you do in investing in one or two hedge funds.

Obviously if you pick the right one or two hedge funds you have no event risk, but systematically if you have a more diversified or systematic approach to investing in hedge funds like a fund to funds product should, then one would expect to see increased flows.

And indeed, we are seeing in our pipeline and in terms of our RFPs, quite a bit of interest in our fund to fund strategies.

Great.

Thanks for answering all my questions.

(OPERATOR INSTRUCTIONS) Robert Lee, KBW.

Good morning, everyone.

Just a couple quick questions; most of them have been asked, but I just noticed that in the reconciliation for to get to operating income you had some closed-end fund origination fees.

I was a little surprised to see that.

Was that for some products outside the US, or --

No.

We actually closed one fund in the first quarter, and so therefore it was not a large fund indicative of the origination cost.

It was only about $3.5 million or so.

But we did close a new fund.

Okay, great.

Then I had a follow-up question on talking a little bit about the competitive environment.

You know, Larry, you talked a little bit about relative performance recently.

But are you seeing any kind of shift in the landscape?

I assume that with some competitors having some weak numbers the past year or so there is in addition to yourselves there is and PIMCO, there is plenty of others out there clamoring to break into the oligopoly.

Are you seeing a shift in the landscape in any way?

First of all, I don't think there is an oligopoly anymore.

I think it is more of a myth.

What we are seeing now in the fixed income area is very akin to how the equity business became, and we are seeing more specialized mandates in fixed income than ever before.

I think the old times when you had just core strategies that were the prominent mandates, that is when the oligopoly truly was representative of the business.

Today we are seeing more and more clients who are looking more for more of a diversified portfolio approach in fixed income with much more credit strategies, tip strategies, global fixed income strategies.

And so they are certainly room for a lot of specialty managers in those product areas, but I would say our large competitors and peers are benefiting also because they can go to these clients and discuss with them not just a core strategy, but all these specialized strategies, too.

So we are seeing more and more diversity and demand from clients in terms of fixed income strategies.

And I believe the giant bond managers are all benefiting from that.

We are seeing certainly a much greater interest in long duration strategies.

So there is certainly ample room for more investment managers in the fixed income area, but I would still say the top five or six, whoever they may be, are winning a good shot, a good percentage of those mandates.

The areas where we continue to see real dominance at BlackRock versus other firms is in our insurance business.

Our number one competitor there is not a PIMCO or a WAMCO, but it is Deutsche Bank.

So there are different, depending on the strategies or the business product, there are different competitors.

Right, great.

That was it.

Thank you.

Bill Katz, Buckingham Research.

Thank you very much.

Just sort of a couple technical questions and some bigger picture ones.

Larry, you said you had sort of angling for two sizable fixed income RFPs.

Are those in the $23 billion long-term RFPs (multiple speakers) --

No, they are not.

These are RFPs.

These are not pipelines.

Okay, that's helpful.

From a rotation perspective I guess where I am struggling a little bit is you had a pretty big fixed income pipeline coming into the quarter, and then you had outflows coming out of the quarter.

It seems to be more decisive shift back to risk.

Are we going to be in a situation where your legacy business could attrite that would offset the incremental shift to more of a credit centric backdrop so that at the end of the day you're really not able to grow that business significantly?

I think that is certainly a legitimate question, and we certainly saw that in the first quarter.

I actually believe that it will ultimately be the opposite.

I believe once there is greater comfort we are going to see huge flows out of cash.

Cash management.

Into these longer dated strategies.

But in the first quarter we had that rotation, we had continual client outflows out of longer dated fixed income strategies to cash strategies.

We did have some rotations out of fixed income into equities, as equities fell and bonds basically were stable.

So we did see that, too.

So the first quarter was certainly what you describe, Bill.

I don't believe that will remain -- that will be the case in the third or fourth quarter.

It might be the same in the second quarter.

I believe it is very hard for clients with their liabilities to make any real return with a 350 tenure.

And so if we persist with these lower treasury rates for a long time, you could be right.

If that is the -- but because of credit spreads so wide I think that will not be the case.

We are just going to see a much greater migration into these credit-oriented strategies or other types of strategies.

They may be recategorized as alternatives, too, Bill.

And because a lot of these strategies that we are working on are fixed income oriented but they are alternative products.

You talked about that before so from a pricing perspective -- and that is my third question.

The $62.5 billion, which I presume one from a recently taken over broker-dealer, are these things priced closer to what you gave up in the state of Florida, or more typical of the institutional fixed income legacy pricing?

I really can't talk about it.

What I will say the Florida situation was entirely different.

To give you some color without describing what it is.

Okay, and just a couple bigger picture questions.

If you look at the valuation of some of these alternative managers out there, they are trading at a fraction of where they went public and in sharp discount to the typical asset manager including your own multiple.

Are you worried in any way about the implications for the valuation of BlackRock to the extent the alternative business gets significantly bigger?

No, not really because what we are -- our alternative business is going to be, is not in private equity.

Where most of the ones went public.

It is going to be special situations in distressed debt where we are working on a strategy with our clients.

Our core business is continuing to grow.

The solution business is -- as long dated a business as any business you could ever have.

So I think it is a legitimate question, but I think if anything, our first quarter is a great example of how we differentiated ourselves versus some of these other alternative-only platforms.

Two final questions.

One is given all the capacity being taken out of some of the de facto competition of the broker-dealers and on the banks and structure products and other fixed income businesses, do you anticipate any compensation relief, if you will, as you look out in the second half of this year into '09?

Given that I think that was a pressure point in the last few years given the height of the bubble on structure product at all?

Are you talking about compensation?

Yes.

Oh, I have too many employees here are listening to me.

The answer is clearly yes.

Compensation, compensation will be moderating quite a bit in terms of the growth rates.

I think that is not just a New York phenomenon.

I think that is a financial industry phenomenon.

So there is no question we have -- we are part of the financial system and when the marketplaces pay up for a lot for talent we have to be part of that.

When it is moderated like I think it will be moderated this year and the next year, I think you could see some moderation in our compensation expense.

The one thing I can say, Bill, in terms of opportunities for us is it has been rumored in the marketplace in terms of downsizing at some of these institutions in terms of headcount, we have a great ability in terms of hiring people as we continue to build out our businesses.

And so I am pretty excited about some of the people we are interviewing right now.

It is a real positive indication of the type of people we can be attracting to BlackRock.

And the final question, last quarter you had mentioned that you were studying the ETF business in some regard.

I'm curious maybe it was more from an institutional angle than a retail angle, where do you stand in that in terms of what do you think the implications are for the industry?

We are studying the ETF business.

Obviously our market is stalled quite a bit which I am quite surprised.

I thought that market would continue to grow.

It is a market that we are studying.

We are studying and actually with one large player who is in the ETF business right now to see if we can do things together.

And we are studying it with a large distributor who we are working together in trying to create a different ETF types of ideas.

It is a great product.

It is a product that obviously we don't have any on our shelf.

And on the other hand, like I said, we are surprised at how much it stalled in terms of the growth in the first quarter.

Which gives us an opportunity to study it and really assess it, does it make sense for us to be part of that platform or that product.

Thanks for entertaining all my questions.

There are no further questions at this time.

I would now like to turn the call back to management for any closing remarks.

I would like to thank everybody.

It has obviously been a quarter that we could all remember.

And for good and for bad.

I think we are as, as I said earlier, really well positioned for the remaining nine months of this year.

I am pretty excited about where BlackRock has grown and the opportunities we see on a global basis.

And hopefully we could transform all those opportunities into robust earnings for the remaining nine months.

Everyone have a good quarter, and I will be talking to you soon.

Thank you.

Thank you for participating in today's conference call.

You may now disconnect.