貝萊德 (BLK) 2008 Q2 法說會逐字稿

Good morning.

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

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

second-quarter 2008 earnings teleconference.

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

Fink; Chief Financial Officer, Ann Marie Petach 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.

Thank you.

Good morning.

This is Bob Connolly.

I am general counsel of BlackRock.

Before Larry and Ann Marie 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.

And finally, BlackRock assumes no duty to and does not undertake to update any forward-looking statements.

With that, I will turn it over to Ann Marie, our Chief Financial Officer.

Hello.

I am just going to walk you through the highlights of our results for the quarter.

Second quarter reported results are $2.05 per share.

Second quarter as adjusted earnings are $285 million or $2.14 per share.

The as adjusted results are up 13% compared to $1.90 in the first quarter and up 19% compared to $1.80 in the second quarter of 2007 as adjusted earnings for the first half of $4.04 are up 19% compared to 2007.

The year-over-year improvement is more than explained by operating results.

Operating income is up 44% for the quarter and for the first half, offset partially by lower nonoperating income.

Nonoperating income includes marks on our cede and coinvestment investment portfolio, and I will provide some more details on that in a moment.

Second-quarter results are being driven by strong net new business flows, revenue balance across products, regions and client types, and continued success in the BlackRock Solutions business.

The $44 billion of new advisory assignments will generate ongoing revenue based on AUM.

Due to these factors, the top line grew.

Revenues of $1.4 billion are up 7% compared to the first quarter and up 26% compared to second quarter of 2008.

Base fees are up 22%, spread across all asset classes year over year.

The revenue growth since second quarter 2007 is driven by organic asset growth of $170 billion and the acquisition of $22 billion of assets from Quellos.

We have seen real balance in our business model as cash management revenues increased by almost 53% compared to a year ago and BlackRock Solutions revenue increased 115%.

BlackRock's capabilities in safeguarding assets and managing risk have contributed to revenue strength in a volatile market.

The 7% revenue growth compared to the first quarter is also being driven by assets.

While cash outflows were $4.6 billion at June 30 compared to the first quarter, average cash assets and revenues were actually up about 5%.

Almost $7 billion of cash assets have been funded since quarter end.

A trend toward duration target investing contributed over 5% growth in fixed income revenue and assets.

Strong relative performance and flows have contributed to equity revenue growth year over year, and revenue stability compared to the first quarter.

Operating margin as adjusted in the second quarter is 37.9%, an improvement compared to 37.6% in the first quarter and 36.1% in the second quarter of 2007.

Compensation expense of $552 million in the second quarter is up $83 million compared to the first quarter.

Compensation expense includes $25 million of mark to markets on deferred comp plans.

This portion of deferred compensation expense is offset largely in nonoperating income where the income on the assets is reported.

The expense is in operating results, and the income is in nonoperating.

Excluding this factor compensation expense is up about 12% compared to the first quarter, explained primarily by higher incentive comp.

This factor is also affecting the second-quarter comp to revenue ratio of 39.8%.

Second-quarter G&A costs are down $7 million from the first quarter and $9 million from a year ago, due in part to foreign exchange.

Nonoperating income in the second quarter added $0.08 per share.

Second-quarter nonoperating income of $17 million includes the gains on deferred comp assets I mentioned earlier, offset by interest expense of $3 million.

In addition, nonoperating losses on real estate and other investments were offset largely by gains on our new credit mortgage funds and certain hedge funds and fund of funds.

In the first half of 2007 net nonoperating income contributed $0.48 per share compared to a $0.04 loss in the first half of 2008.

Just to state again our investment portfolio is composed of investments to cede new products or invest side-by-side with our clients and some deferred comp related assets.

We are fiduciaries of these assets.

We do not use the balance sheet for proprietary investments or house trading.

The portfolio is comprised primarily of marketable securities, which we hedge as appropriate, hedge funds and fund of funds, some of the new distressed credit funds we've launched, private equity fund of funds and real estate.

Each of these asset categories represents about between 15% and 25% of the total portfolio.

Given the decline in nonoperating year-over-year, the 19% improvement in earnings in the first half compared to the same period of 2007 is more than explained by strong operating results.

This is my first earnings call as BlackRock's CFO.

It feels great to report earnings which are being driven by strong and balanced business fundamentals and which show improved revenue and margin trends compared to prior period.

With that, I will turn it over to Larry.

Good morning, everyone.

Despite the strong headwinds in the global financial markets, which we are not immune to, which we face the same headwinds as everyone else faces, our business model has truly differentiated ourselves with our clients and will continue to differentiate ourselves as we go forward.

Having a global connected firm, integrated global platform, has allowed us to manage risk accordingly, had appropriately helped us understand our positions globally, had allowed us to cross fertilize ideas from our manufacturing teams in Hong Kong and Tokyo and London and Boston and New York and Philadelphia and [anon] and Delaware -- I don't want to go to every place but has allowed us to minimize, as best as possible, the impacts from the marketplace.

But most importantly, it allowed us to work with our clients, prepare our clients for the issues around the marketplace, advise our clients and provide them what I would call a comprehensive business relationship.

Whereby our clients can come to us and think about BlackRock in terms of their needs in asset allocation, in their needs in equities, fixed income, liquidity, and the management of risk.

I don't believe there is any other organization that has that comprehensive platform in which we can navigate the markets more successfully than most.

But importantly, that we could provide I think the leadership and the confidence to our clients in helping them navigate in these really difficult global financial markets.

I believe having what we call the one BlackRock platform, the one organization to represent ourselves globally to our clients, clients who have relationships with us in Asia or in Europe or North America, they have the same understanding of what BlackRock can provide.

And we can then provide them with a unified, comprehensive relationship.

This model, we believe, will continue to be enhanced as we grow our organization and as we build out our global brand, which we launched in the third quarter on May 1.

We dropped the hyphenated BlackRock Merrill Lynch investment management name in our mutual fund platforms outside the United States, and in actuality our flows in mutual funds after that moment actually increased.

So we saw significant flows as clients worldwide came to appreciate the branded platform of BlackRock.

And we are making great headway in building that global brand.

And I must say we have years to work on that.

So we are just beginning that development and hopefully over the course of the next few years we become truly a global branded platform.

Let me review the numbers.

I think the numbers speak for themselves.

$1.427 trillion in assets, $63 billion in net inflows, which is really gratified by having over $24 billion in long dated flows, broken out by $17 billion in fixed income, $6 billion in equities and $1.5 billion in alternatives.

We did experience net outflows in liquidity.

However, our average assets were up substantially during the quarter; most of the outflows were quarter end outflows, and most of that money is back.

But we are seeing, as we said in some of our other statements throughout the quarter, we are seeing some clients of ours starting to look for other opportunities, whether it may be lending in their own business; some clients may be buying back more shares as the marketplace, equity markets have deteriorated.

So we are beginning to see clients start utilizing their cash, and some of our clients are actually now looking to invest in more risky assets, whether distressed debt, distressed mortgages and in many cases equity.

So we are seeing a slowdown in cash.

However, our flows are still very strong overall.

We look at that as a very strong positive.

We hope one day we could see larger outflows in cash one day, and that money is repositioned in longer dated assets.

I think for the global economies this would be a good thing if we start seeing fear reduced -- and I'm not suggesting fear is being reduced, but I am suggesting in some cases we are starting to see clients looking to reassess their overall cash positions and looking to reassess how they are going to utilize their cash, and it could be just for internally driven reasons, or they could be reasons in which they are going to redeploy into different asset categories and have BlackRock assist them.

So we see overall in the quarter very nice, consistent flows.

And what I am very gratified in the quarter once again getting back to the comprehensive relationship where we have a relationship with clients in liquidity and equities and fixed income, so we could have that overall relationship with our clients.

I would really like to highlight also our position in the retail mutual funds.

We had an extraordinary quarter globally.

One of the strong hopes of ours when we closed our Merrill Lynch investment management merger was the ability to build out a global retail platform under the BlackRock name.

Our hope was also to build out significantly our third party distribution partners.

And I think we are beginning to see the result of that expansion, both domestically and globally.

In the second quarter we had net inflows in retail of $3.6 billion in retail.

Internationally we had a $2.5 billion net inflow.

So for the quarter about $6.7 billion overall flows.

Year to date we are close to $15 billion in global retail flows net.

Let me talk about a little more granularity about the flows in both.

In the second quarter we saw more third-party sales than we've ever seen within our platform.

So it is true that we are building out that reputation and that platform to sell third-party products in the US.

What is truly remarkable is our accomplishments internationally.

As of the end of May, I don't have the June results in the European mutual fund platforms globally, not ours -- I'm talking about the industry -- there is close to $50 billion of outflows.

There was a re-intermediation of clients going from mutual funds back into deposits all throughout Europe.

I think we are the largest net inflow mutual fund platform in Europe, a real testimony to our team and to our positioning in Europe and in Asia.

So really an outstanding quarter and first six months for our team on the retail side.

I am emphasizing this because -- and I am just deemphasizing in my oral statements the success we had in institutional.

We did have an outstanding quarter institutionally as evidenced in the flows across all the products.

But I wanted to really just emphasize the success we had in retail.

In equities our performance has been very, very strong.

Over 73% of our funds are above the index, and I think this is one of the reasons why we truly have seen some strong flows in our mutual fund platform.

I would like to just highlight two of our big successes in the quarter in equities.

Our global opportunity funds crossed over $50 billion in the management, one of the fastest-growing mutual fund platforms and products in the world.

A real testimony to [Dennis Statman] and his team.

I would like to also give recognition to our global natural resource team who also as a team crossed over $50 billion in assets in the management of these products.

And in both cases with outstanding performance in the first six months of this year.

Our Solutions business has given us quite a bit of notoriety over the course of the quarter.

The visibility of our UBS transaction, the visibility of us working alongside the Federal Reserve and management of the Bear Stearns assets.

When it was less visible it was during the quarter.

We also won five new Aladdin assignments.

That is now nine year to date.

We are also in negotiation from other very substantial assignments in our Solutions space.

Historically I would tell you we are always at risk because of the sheer inflows of business, and we have to navigate and manage the business flows.

Our team has done an extraordinary great job in doing that, and we are open for business.

We have had a very successful period of time in hiring people who I would have said a year ago or two years ago would have been very difficult for BlackRock to hire.

The people are coming in here are real pros and are helping us really build the intellectual capital that we already had within this platform and we are building a position to have even greater strengths in the future.

One other point that I would like to highlight which is beyond our estimates in terms of where we thought we could take the business, we basically crossed $100 million revenue mark for Solutions in the second quarter, an extraordinary increase from any other quarter in the past.

Business momentum continues.

Our pipeline was $64 billion.

Investment management pipeline $31.5 billion, $23 billion of long dated mandates, about $8 odd billion in cash.

Our advisory products in which we were advising down positions very similar to the UBS and our Bear Stearns portfolio, is increased in the pipeline of $32.5 billion.

So another fine quarter, which indicates the continued momentum we have in our business platform.

Let me discuss all the noise about BlackRock and Merrill Lynch.

We are very pleased this morning to announce the reaffirmation of our business partnership with Merrill Lynch.

We have agreed to extend our global distribution agreement, which was up for review on September '09.

We agreed to expand that relationship out another four years; so the agreement now is five more years from now, 5.25 years, in terms of having that relationship.

It has been a powerful relationship for BlackRock and for Merrill Lynch, and I believe this reaffirmation of our strategic partnership, the success that we enjoy working alongside Merrill Lynch, the success we have in building products, building ideas together for the betterment of both organizations is a real statement in terms of the reaffirmation of our relationship.

I would like to personally thank John Thain and Greg Fleming.

There was obviously quite a bit of noise over the last three weeks in terms of Merrill Lynch's position within BlackRock, and I believe Merrill Lynch will also reaffirm their strong business cooperation and partnership that we have together.

So we look forward to be working even closer with Merrill Lynch and building a very strong platform together.

Let me just touch on the markets.

The markets are obviously very volatile.

Obviously yesterday it was very volatile in the upside.

And we've seen some tremendous declines in valuations in the equity markets and specifically financial institutions.

We believe we are at a point in time in the credit cycle in which we still have great uncertainty in the future.

I believe the credit crisis could be over if we could believe residential housing declines are behind us or near behind us.

However, if the residential markets in the United States continues to fall, we believe we have many more credit crises in front of us.

Needless to say, we believe the opportunities in investing in distressed debt, distressed mortgages are really great at this moment despite the uncertainty and the direction of residential real estate.

In many area the purchase of residential debt right now, the marketplace is pricing this debt at losses far exceeding the losses now.

The marketplace is predicting we will actually see more declines in residential real estate.

And so you are able to buy these assets today already anticipating these losses.

Therefore, we still believe there are opportunities.

We are not saying to our clients put all their cash in these opportunities.

We are recommending clients to put some of their cash into these opportunities to start utilizing their cash positions.

We are not here to suggest we have found the bottom, but we are suggesting you can make an adequate return, risk return investing in these products today.

So we are quite nervous about the future because we don't have the ability to truly predict the direction of residential real estate.

It is our opinion that to stabilize residential real estate we will need a change in governmental policy.

We will need more government involvement to stabilize residential real estate.

I don't believe it is just a private sector solution.

We believe it is going to be the cooperation between private sector and government in stabilizing residential real estate, which then will stabilize consumer confidence.

We also believe because of the big declines in residential real estate and if they decline more that the fear of inflation today will most certainly abate out six or nine months.

The TIPS market is saying that; if one looks at TIPS today out a year, the TIPS market is suggesting that we are not going to have the inflation fears today out nine months.

And, indeed, if you are a young couple trying to buy a house for the first time, this is a tremendous opportunity buying a house down, whatever it is depending on the region, 5% or 30% or whatever you can attain.

So much has been written about all the pain, but there is a whole part of the economy where this is a positive.

And we can't lose sight of that.

So overall we are concerned about the overall economy.

We believe we have risk ahead of us but those risks can be managed.

And if they are managed successfully, we can have a much brighter future.

So overall, the BlackRock position or strategic position with our clients, our comprehensive business model has proven to be very successful.

We believe we are in a very good position to take advantage of that.

I would like to close the same way Ann Marie closed.

I believe our platform, our business model, that 100% of our business is a fiduciary business.

We only use our balance sheet on behalf of clients.

We do not have any proprietary trading.

We don't employ any accounts that we manage on behalf of ourselves.

None of our risk capital, none of our capital in our balance sheet is used for the house.

It is all entirely used for fiduciary purposes.

The entire business model is based on a fiduciary platform.

And I believe that will continue, and I believe this is what is differentiating ourselves with our clients.

I would also state one of the strong reasons why we are a firm in which people are seeking our advice in terms of our advisory advice, in terms of balance sheet advice, we are only -- we are the only firm that has a separation of our investment management business and our investment advisory business.

Separate teams, Chinese walls and as a result of that, we can't offer strategic advice to our clients that is courting off with the rest of the business.

We have that separation for years.

We have now over $7 trillion of assets that I'll give advice -- investment advice to, and risk management advice to.

So it is that history of our BlackRock Solutions product, the separation of that position and that platform from the investment management platform to provide that totally advice that is separate from the overall platform that is purely for our clients' needs.

Once again, I would like to thank all our shareholders, especially Merrill Lynch and PNC.

And I would like to especially thank all the BlackRock employees for an incredible quarter, patience.

And last, I would like to thank all the BlackRock's citizens.

We've worked really hard.

We have seen many sleepy eyes over the course of the quarter.

But I will say to everyone I did not see one unhappy face.

People believe we are doing the right thing on behalf of clients, and people are motivated in building this platform.

I would like to thank everyone, and we will open it up for questions.

(OPERATOR INSTRUCTIONS) William Katz, Buckingham Research.

Thank you very much.

Just a couple questions, Larry.

Back to the new business pipeline and the allocation, are you starting to see where the clients are coming to you and saying we want to start to get out of cash?

Where are we in that process in light of the fact the markets have been so volatile particularly in the last six to eight weeks?

I would have thought because of all the volatility in the last six to eight weeks we would see more people putting in cash, so once again I would have been wrong.

And you saw industrywide cash balances were down in June.

So we didn't see that.

We are having more conversation with clients about opportunities out in the yield curve, credit, other products.

But I do believe away from their conversations I do believe clients, whether they are looking to finally build that new plant or purchase equipment, if they are an exporter and our clients are seeing their stock is down a lot, they may be looking to be buying in shares.

So I would have thought with all the volatility you would have seen incredible run to the sidelines, especially with all of the volatility.

We just did not see that.

The second question I have is in the advisory business; I guess the $32 billion pipeline might be the Canadian operation, the asset-backed paper.

Just curious beyond that, what is the prospect for the business, and was wondering if you can help us with some of the economics of these mandates as it relates to both the management fee, base management fee and to the extent there is any type of performance fees associated with that.

We see a very large pipeline of opportunities.

The financial stresses, as evidenced by stock prices, is not over; obviously within the last two days we've seen a huge rally in terms of equity prices in the financial institutions, which is very good.

I would have said before yesterday, Bill, the problem -- if financial institutions cannot raise capital, obviously for every dollar of capital they cannot raise, they are going to have to sell anywhere from $12 to $15 of debt.

And that was my fear a few days ago.

Obviously with the equity markets rallying maybe that fear can be mitigated a little bit, but we were quite worried that we were going to see a huge onslaught of asset sales because people could not raise capital.

But we are seeing many institutions who are still in a need to de-leverage, who are still looking for solutions with some problem products, and so we have as many conversations today than we've ever had in terms of working with clients.

We have never seen more interest in our Aladdin system going forward.

And so the pipeline has never been more robust.

But once again, these are binary decisions, so we could lose all of them or people could move away from it.

But at this moment it looks very strong.

In terms of how we are paid, in some of them we do have a lower base fee and a higher performance fee base.

In some of them we have a very high base fee and no performance fees.

And also in these assignments we do get a setup fee, too.

And so some of the earnings in the second quarter were associated with setup fees.

And we are or advice driven fees related to assets.

We already have done one other advice fee already this quarter.

And so there is once again no rhyme or reason.

We customize it to the needs of the client.

And just last question as it relates to the discussion on the Merrill Lynch relationship, you mentioned that you have extended out the relationship.

Just sort of wondering on the other side of things have you changed the lockup period in any way?

No.

Thank you very much, Larry.

Craig Siegenthaler, Credit Suisse.

Thanks a lot for taking my question.

First question, I'm just trying to think about the profitability of the $43 billion of advisory assets BlackRock gained in terms of a blended fee rate.

And I am also trying to think about the persistency versus other asset classes because I believe this is labeled as long duration.

And actually a second question, is the Bear Stearns UBS in Texas large mandate wins?

Are they in this $43 billion number?

The UBS transaction and the Bear Stearns transaction is in the numbers.

You mentioned Texas -- I didn't --.

I believe you won like a $15 billion mandate (multiple speakers)

No, no.

That is a fixed income assignment.

Okay.

Okay, so that is in the other number.

That is not an advisory assignment.

The persistency; the persistency of the assets are -- and we have the Canadian assignment, too, that Bill Katz mentioned that is going to be in the pipeline that closes any time soon, and we have one German assignment also.

It is in the pipeline.

These are probably -- it really depends on the needs of the client.

In the UBS transaction it really is a private equity investment by BlackRock's clients.

We are managing that to provide a total rate of return to our clients.

If we saw opportunities to have that liquidated in three or five years we could.

We will determine that with our advisory committees without a specific assignment about the persistency of that assignment.

But these are long dated assignments.

We are differentiating them for more transparency because in those assignments -- and this is how we have rationalized the segregation of these assets -- these assets are not growing in terms of assets.

Our job over a period of time is to liquidate these assets and achieve a high total rate of return.

And so this is why we segregate them differently and this is why we think of them differently.

Also importantly we also want to segregate this for transparency purposes to identify that these positions are actually managed differently, and they are part of the BlackRock Solutions platform.

Craig, did I answer your question?

You did, you did.

And I have actually one other question here.

You break out minority interests, non controlling interests as positions I believe in your proprietary funds, which you co manage with investors.

And when we look at the first quarter results I believe initially it was negative $9.6 million for this item, which is offset against your investment portfolio gains.

And I believe in the current press release it is positive $5.4 million.

I am just wondering if (multiple speakers)

It is $8 million, and are you talking about an operating income, nonoperating income?

I am talking about minority interests (multiple speakers) after-tax.

I'm going to let Ann Marie answer that one, or Paul, you --

The minority interest number, are you saying that we changed the number compared to what you recognize in the first quarter --

When I look at the first-quarter press release and then I look at the, for the first quarter 2008, I look at it is called noncontrolling interest right above net income in the P&L and then I look at the current press release for how you disclosed first quarter '08.

The ending results are the same -- the minority interest line or this noncontrolling interest line is different.

It went from negative 9.6 to 5.4, and it should be the same item.

Well, the net is the same.

There was just some sorting out of --.

Just so you know, Craig, what can happen to us is that we closed down earnings and then we sometimes do have adjustments on private equity-related aspects that come after the close.

We sometimes are required to go back and realign first-quarter results in that regard.

Remember, most of these are, a lot of this noncontrolling interest represents private equity related investments.

And we do close very early so you do get some changes in that, but that is all it is.

And that is --.

(multiple speakers)

It will be actually all identified and explained in the Q.

And once again these are cede investments in these funds alongside our investors and our fund of funds of private equity.

Got it.

And in this quarter it was very large add back to net income.

Your private equity returns look strong.

Hedge funds look strong.

Real estate was a little weak with the market but it looks like there was a big add back this quarter.

I am just wondering kind of rationally why was that?

I tried to call that out in my comments, and what we had was a very positive return on some deferred comp assets.

And so I mentioned that our deferred comp expense was really sort of grossed up by $25 million, because there is an offset in our nonoperating income because the assets had the return.

Great.

Thank you very much for taking my questions.

Doug Sipkin, Wachovia.

Good morning, Larry.

How are you?

I'm fine.

I've had a busy few weeks.

As has everyone for the last 12 months, I would imagine.

Or 14 months, I think.

At my age I can only think back two weeks.

I know.

Just most of my stuff has already been answered, but I just wanted to spend a little bit more time; talk a little bit about the expenses.

I was surprised to see looking at the non-comp coming in $5 million, $6 million or so.

Is that some sort of -- I know you guys hadn't talked about it in the past about potentially some benefits in the Merrill Lynch integration, which maybe you had pushed off because business was sort of robust and you had to focus on that before you would think about making some of those adjustments.

Is that what this reflects?

I was just surprised given the ramp-up in AUM business etc.

that the non-comp came in.

The non-comp came in -- let me just walk you through the pieces there.

First of all, we had lower effects of negative foreign exchange worth about $7 million, which could totally explain the difference.

Then in addition we had some offsets up and down.

We had some higher marketing expenses that were associated with the rebranding.

We did rebrand the second quarter.

So we had a lot of high expenses actually.

That were associated with the rebrand and some offsets in really more timing related than other, but we are seeing some lower consulting fees and some lower fees associated with outside advice.

Okay, and I wanted to dig in a little bit more.

I think it was the first question about the special adviser reassignments.

I guess sort of thinking about the incremental revenue for BlackRock Solutions this quarter and I appreciate you guys providing the color on the initial set-up cost, but it looked like I guess us not knowing the set-up cost about $40 million or so incremental.

Should we be thinking about this as generally speaking the $40 billion in new assignments that hit this quarter generated sort of roughly that incremental $25 million to $40 million?

Yes, I would say so.

You should not expect that to happen out in the future, so don't put that into your model.

I would say that's fair.

I would say, though, if we hit on some of these pipeline negotiations we have, we should see that again.

But once again, I would not monetize those type of set-up fees.

But can you give us some color stripping out set-up fees; what sort of reasonable Solutions numbers would look like, I guess pre any additional funding?

Obviously I know the number changes a lot.

I'm just trying to get a flavor for what sort of --.

It is so fluid now because we are in so many different assignments right now, I don't know what I could reasonably tell you -- I certainly don't want to give any -- my general counsel is looking at me -- I am not supposed to talk about forecasting.

So I think probably off-line Ann Marie could probably help you on that.

Okay, perfect.

Just to dig in on the fixed income flow, I know you had mentioned the Texas retirement win in there.

Is there anything else going on in fixed income this quarter?

Because I know you guys have had two quarters of outflows, maybe the competitive landscapes; I know you said it is always tough, but some of your competitors are really struggling.

Are you seeing the benefit of that at all, or is it really just sort of one of these one-offs where you've got a big mandate?

No.

Actually we are seeing actually more flows.

One would have thought people would be taking money out of fixed [income] and putting it -- reallocating it into equities.

I think people, I think we've seen more inquiry because there is more fear.

And we didn't see -- liquidity we saw it more in longer dated or intermediate flows.

Most of our wins were less than long dated but they were more in the lower duration area.

So it could be stated that people, instead of putting money in cash, were looking for some little excess return in the low duration area.

The final question, could you just talk a little bit about the initial benefits of the strategic relationship with Merrill Lynch and sort of pushing this out another four years, what that could potentially mean?

We have an ability to work alongside with the FAs of Merrill Lynch.

We have a unique position in that in terms of working with the FA's.

We have offices near or within the offices of Merrill Lynch in the global wealth management area.

And so we have this ability to work with them and help them with their clients in terms of idea generation.

And it has been a very powerful relationship for BlackRock and for Merrill Lynch.

It is one of the reasons why we have seen in terms of our relationship since the transaction closed, our market share of mutual fund sales within their system has actually increased.

Having the third-party brand name and yet having that ability to have that uniqueness in their platform.

Is there any sort of ownership requirement level that they need to maintain, or -- I know they are free to sell I guess at the end of next year.

Whether or not they do; how much they do, will that impact that strategic relationship one way or the other?

No, that relationship is separated now from many equity position that Merrill Lynch has.

Okay, and then after the lockup period, do you guys still have a right to be the first buyer of that or does that go away after the lockup period?

I think this is all in the documents that I believe we still have that right, and they can't sell all in one quarter anyway.

I don't have the exact formula, but there is an ability they have to sell a little -- you can only sell a little at a time after a certain point.

I would recommend working with Ann Marie or Sue Wagner in terms of helping you get more granularity, remind you where, in what document that is in.

I guess it is in our shareholder agreement.

That's really helpful.

Thanks a lot.

Prashant Bhatia, Citigroup.

Just on the bulk sale transaction that you did with UBS, if you can, can you just provide any update on that portfolio?

But more importantly, do you have capacity to do more of these types of transactions?

The answer is clearly yes, we are working on some right now, and we have on that transaction alone I think we had ability to raise three times the equity that we needed.

Okay.

So we saw huge demand for distressed assets.

In terms of how the portfolio is performing, it is performing exactly where we thought it would be performing in terms of cash flows.

And so far it is I believe we only have 1.5 months of experience.

So there is -- but in terms of the first month of cash flows and performance it did exactly what we modeled.

Okay, and is getting financing any sort of limiting factor?

I know in a lot of transactions it is sell or finance.

If it weren't seller finance would that be a limiting factor in doing these kind of these bulk asset sales?

Yes.

To get the returns that these equity holders are looking for, they need some formal leverage to take it on.

There are other investors of ours who would like to just buy an unlevered, but that will be just a single account relationship, a separate account.

But to do the type of transaction we did with UBS where it was structured as a single-purpose corporation, that the investors there were looking for a leveraged return.

It really depends on the desire of the investors.

I would tell you leverage returns in this asset category -- there's a lot of equity demand for that.

So, yes, a limiting factor of that type of product is leverage.

Okay.

I guess just broadly around the Fannie and Freddie situation, you being one of the biggest fixed income money managers in the world, how do you I guess think about this situation, and how do you think this plays out?

And does there need to be more extensive government involvement, and just any potential risks to your franchise from this?

I do not believe in any circumstance would the debt be impaired at all.

So we are a large holder of their debt in terms of mortgage backed securities.

So if the credit markets are an accurate representation of what the market feeling is, Freddie and Fannie securities have basically done fine.

In fact, a few days ago they have tightened a lot.

I think yesterday they widened because of the change in the marketplace.

But the credit markets are saying whatever is the outcome, the credit should be fine.

I think putting on my Mr.

Public hat on for a second, I believe there is no other choice but to make sure that the credit is fine, because a high percentage of this credit is held by foreigners, by sovereign wealth funds, by foreign central banks.

I think this is known within the administration, and I would see no -- I see no outcome in which if there was ever a need to do something, in which the debt would not be paid in full.

The equity is a bigger story, a bigger question.

I think there is stability in the two GSEs in the last two days.

I see them up today.

The raging debate in all financial markets is if there is a need to do something with the agencies and/or if there is a need by the FDIC to consolidate a bank, what would the regulators do to the preferred holders.

That is the big question that is in the capital markets now.

Obviously, preferred is definitional equity.

However, in a case if there was a need to close a bank, the raging debate is would they make the -- would the FDIC make the preferred holders hold, or would they get zero.

That would have pronounced ramifications to the whole capital structure of banks going forward, because I think if we determined that preferred is zero in a nationalization of a bank, closed out of a bank, one would think it would be very difficult in the future to ever raise preferred again because we're not paid that much difference versus common.

Therefore I think it would be very difficult for banks to raise preferred, and it would have a pronounced impact on leverage ratios because the only way of capital raise would be through equity or common equity.

And so this is something that I am watching.

We are paying attention to.

I don't have an answer, but I think it is going to be one of the definitive issues that we will have to watch.

Regarding Freddie and Fannie, as I said earlier this country needs a strong platform for mortgages.

Freddie and Fannie have provided the strength around the residential mortgage market.

And so whatever the outcome is and I don't have a crystal ball, I hope they are able to resolve it.

I think for everybody's -- for everyone it would be good to have a very strong Freddie and Fannie.

But I do believe whatever the outcome is, we have to have a strong secondary housing security market or the housing, residential housing market will be impaired for many, many years beyond anyone's dreams.

So I believe it is just an incredible necessary as we think to have a strong GSE, whether that is a GSE that is presently structured as is, and they are able to rebound and get the strength that the market hopes that they are going to get.

Or whether it needs other type of assistance in the form of what Secretary Paulson had suggested as backstops.

Okay, that is very helpful.

Just you've got a very active dialogue with the sovereign wealth funds.

Has that appetite changed over the past year or so?

It may be a shift from direct investment to outsourcing some of this to third parties, and is that something that could potentially benefit BlackRock as we think out over the next couple of years?

Most certainly our sovereign wealth fund business has grown dramatically.

I don't think we ever list that, but it has grown dramatically.

I see that continuing to grow dramatically, but I also see them and work with them that they are looking for direct investments.

The sovereign wealth funds have been very involved in some of our structured products.

They are looking for customized solutions.

We had sovereign wealth funds invest in our UBS portfolio.

And so whether that is direct or indirect I am not sure how that differentiates it.

But in our case our relationships are growing.

Our dialogue is constant.

We are working with them in things that we are ultimately not investing for them.

But we have that constant dialogue in which we are helping them as they have greater and greater needs, as their cash balances are exploding.

Okay, and would you care to size the business in terms of assets?

No.

Okay, and just one final one on just looking at your stock and the relative outperformance versus a lot of other asset management type entities, is this at all -- is this a time when you would think about acquisitions to fill in any kind of needs that you had, or would you tend to be more acquisitive here just based on your relative outperformance versus some of the peers?

You may not like this answer.

I don't look at our relative PE as a means in which we look at acquisitions.

That may be the 10th reason or 15th reason; we look at acquisitions purely if they enhance our manufacturing platform and/or our distribution platform.

I would say very clearly we are not interested in doing acquisitions for accretion.

That is a one-time gain; the market sees right through it.

It is too much hard work and displacement of time and people to do something because of solely accretion.

If we can do a transaction in which it totally transforms our manufacturing and/or our distribution platform and it is accretive, we would look at that type of transaction.

We are -- we have had numerous inquiries over the last quarter in which a client -- would we be interested in doing another strategic acquisition.

So there are many organizations worldwide who have had -- who has requested to have dialogue with us.

We are -- I would not tell you we are anywhere close in doing any.

But we are not walking away from any dialogue.

But we have a very high bar to do anything.

I love where we are.

We have incredible momentum.

We are transforming our business relationships with our clients in a very positive way.

I would have to have a very high bar to do a transaction because I would not want to disrupt the organic momentum we have.

That's helpful.

Just a final one on auction rates.

Larry, how far along are you in terms of refinancing what you need to get done?

And just curious on the appetite for the money funds on picking up some of these new securities.

I know there has been an effort to make them compliant so money funds can own them, but how much of an appetite are you seeing in terms of money funds actually wanting to own these, some of these new securities?

The new securities are not complete yet, so we are working towards it.

We have had the IRS come back, give us a ruling that make us believe that we are going to get the ability to make these 2a-7 eligible.

We are working with the banks because we do need standby commitments for banks.

Obviously the credit market is the issue.

That is why we are having such problems, but to do this properly we still need banks to sign up on this for standby commitments.

That ultimately the assets would be put back to the fund, but if there are any triggers and we are working alongside our banks at the moment to do that.

If we get that, I believe there will be a sound and large 2a-7 market for these products.

Okay, thanks, Larry.

That is very helpful.

Thank you.

Michael Hecht, Banc of America.

(inaudible)

Hello, Michael.

I thought that we didn't pay the bills.

Thanks for taking my questions.

I just wanted to come back on the backlog and I apologize if I missed this, but did you guys give the color for the long dated products?

I guess the $23 billion of backlog you guys talked about in the release there across kind of equities versus fixed income, and more US versus non-US centric?

Let me get it.

I have it here.

I don't think -- I think it is in the press release, but.

I thought it was just in long dated, but maybe I missed it.

14.6 and fixed, 6 in equities and 2.5 in alternatives.

I don't break out international versus US?

(inaudible)

10.8 in US, 20.7 international.

Okay, great.

And then on the money fund outflows I think you guys talked about in the release just kind of seeing towards quarter; any more color on that?

And I guess this gets back to an earlier question but does that suggest that you are seeing signs that clients are looking to take more risk and shifting out of cash or something else driving that?

And also in the money funds anything you are seeing across mix of institutional versus retail in the flows?

Clearly the industry saw a large outflow in June.

So I think it was $50 billion I saw.

(multiple speakers) According to Paul, that is almost all institutional outflows.

There is no question we are seeing some clients who are looking to extend into more risky assets.

But I do believe more clients or many clients are starting to see maybe it is time to relend, utilize the cash for their own internal needs.

G&A, plans and equipment purchases, which have been probably delayed.

One of the reasons why I think cash is so large; and obviously with declining stock prices I think some of the clients are using some of the cash for stock repurchases.

So I don't think there is any one reason.

But we did see all that, a big flow of cash back; when we look in the pipeline $8.5 billion is back into our platform.

Okay, that's helpful.

And then any more color on investment performance trends broadly?

And do you have any of the numbers in terms of where you guys rank in the Lipper rankings across equities and fixed income broadly?

I'm sure my team could give that to you off-line.

I don't have it in front of me.

That's fine.

Just last question, a quick housekeeping.

As I said, our equity numbers are very strong.

Okay, that's cool.

Just last housekeeping thing; any additional color on the outlook for performance fees in the second half?

I mean Q2 they were up a fair amount versus a year ago, so does that suggest strong year-over-year comps for the second half?

And how should we think about performance fees versus how we think about comp expense into the second half, too?

We have a lot of performance fee triggers in the third or fourth quarter.

That is where we get them.

I can't predict what the market is going to do and how well we outperform or underperform.

So in some of the areas we are in the right spaces.

In some of the areas we are in the wrong spaces right now.

We did have strong performance fees in the last few years in real estate.

We don't expect to see strong performance fees this year in real estate.

And so it really depends on the product.

Fortunately over the last few years we've really built out a more robust and diversified alternative space.

And so we are not -- we believe we will have flows, performance fees, but I don't want to -- I am not permitted to forecast them out.

That's fair enough.

That's all I had.

Thanks a lot.

Congratulations on a great quarter in some pretty rough markets, guys.

Marc Irizarry, Goldman Sachs.

Larry, a question actually it is a pipeline question again in fixed income, the $13-ish billion mandate that you won from Texas, did that fully fund in the second quarter?

That is not a pipeline.

That was in the second quarter.

Okay, so that is fully funded.

And around the edges if you take a step back and look at the quarter cash, mandates down, winning these big advisory mandates, if you will, can you talk about just those two businesses?

In terms of the fees and the stickiness and duration of the two different assets; which one, it seemed to me that the advisory business about winning that business over losing some of the cash mandates is a net positive for your fee mix and for your margins.

It is night and day difference, no question.

Let me go back to cash.

Our average cash assets were up a lot for the quarter, so we witnessed most of the outflows in the last week.

So we and we saw the back -- so I would say we are definitely seeing the de-celebration in cash.

So I would not -- I would say that, but once again, the question related to the different fee businesses, the advisory fee business is far stronger, far better, far more predictable and longer dated.

Great.

And then just on the performance fees, it looked like you are long only or your equity in balance performance fees were up about 4 times year-over-year; and obviously that would imply not only performance but that you are probably taking in some more assets on the institutional side that are performance fee based.

Can you help size the AUM base on the institutional side or separate account size that actually earns performance fees?

I don't think we do that, provide that regularity.

And if we do I don't have it in front of me, but I am sure off-line Ann Marie can work with you on that.

But your notion that, are we seeing more flows in those products, absolutely.

The other issue is I think, as you suggested, the performance is strong; I think that also suggested why we are seeing more institutional flows.

It is also suggesting why we had pretty robust retail flows in equities.

So it is both performance and flows driving the higher AUM?

Performance fee-based AUM?

Absolutely.

(multiple speakers) And like one product we launch and we launched an agriculture fund that fully ramped up very quickly and performance is strong obviously already so there is a good product that we launched.

It is doing well.

It has got a lot of notoriety and success and I don't know if we closed it yet or if we are near closing.

We did close it?

Okay, so the good example of a product that we had expertise in.

We ramped it up, and we fully got it ramped up in the second quarter.

And then on the $32 billion, can you just talk about, where you have those set up fees hitting in the advisory mandates?

Would you have those set up fees hitting in the third quarter?

Probably, yes.

In one of them, yes.

I don't know -- we are not certain when the second one will fund.

We don't have any definitiveness.

We are working with them, but I don't know; it requires some governmental sign offs and all that.

Okay, great.

Thanks.

I think we have time for one last question.

It is getting very late.

Hojoon Lee, Morgan Stanley.

Just two quick questions.

In terms of your alternative business, can you give us a sense of where you are seeing the stronger or weaker demand, whether it is in the fund of funds or your proprietary hedge funds or the real estate or private equity products?

It was -- our flows were even across both of them.

But which would signify, actually, a greater momentum in our own manufactured products because we never had this type of momentum in those products before.

Okay, and just in terms of the nonoperating income items, I noticed that you guys had a slight positive gain in private equity.

Was that due to a crystallization or just a mark to market gain?

That is mark to market.

Okay, and could you also just give me a sense of what drove the mark to market decline in real estate?

Yes, I mean, we appraise our properties every quarter, and from Peter Cooper Village, which is one to others where the market atmosphere, we have the third-party appraiser appraise them down.

And we mark those up and down with whatever the direction of the marketplace is.

And final question, I think last quarter you guys had slight mark to market declines on some of the recent credit and mortgage investments that you made.

Is that $15 million in gains and nonoperating income related to those assets?

Are you looking at the other there?

Yes, the other investments.

Included in the hedge funds, what is driving [eleven] there is in part those assets which I think you are right, we have seen positive marks on those assets.

If you are looking at the other what is driving that is what I described earlier as some deferred comp related assets.

Okay, thank you very much.

Thank you, everyone, and have a good quarter.

Hopefully we can have a summer and we can have some summer vacations this year versus last summer.

Hope to be talking to you during the quarter.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may now disconnect.