貝萊德 (BLK) 2008 Q3 法說會逐字稿

I will be your conference facilitator today.

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

third quarter 2008 earnings teleconference.

The host for today's call will be Chairman and Chief Executive Officer Laurence D.

Fink; Chief Financial Officer, Ann Marie Petach; and General Counsel, Robert P.

Connolly.

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

After the speakers remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Connolly, you may begin your conference.

Good morning, everyone.

This is Bob Connolly, I'm the 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 list 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 forward- looking statements.

And with that, I'll turn it over to Ann Marie.

Good morning, everyone.

I'm going to start out just mentioning that our third quarter reported GAAP reports are $1.62 per share, but from here forward, I'm going to focus on as adjusted results.

I would note that in our press release was included an as adjusted measure for both operating and non- operating results.

We previously have not shown an as adjusted measure for non-operating.

We thought it was helpful to adjust for the same deferred compensation related movement but we have been adjusting for an operating.

As one effectively hedges the other.

The investment income and non-operating exactly offsets the compensation related expense in operating.

Third quarter as adjusted earnings are $229 million, or $1.71 per share.

The as adjusted results reflect as adjusted operating income of $431 million, or $2.09 per share, and as adjusted non-operating losses of $79 million, or $0.38 per share.

Going to first discuss operating results.

I'll come back to non-operating in a minute.

As adjusted operating results are up 2% compared to the third quarter of 2007, and down 3.5% compared to the second quarter.

Year to date operating earnings $1.3 billion, are up 25% compared to 2007.

Revenues of $1.3 billion are down 5% compared to the second quarter and up about 1% compared to the third quarter of 2007.

Third quarter revenues reflect -- FX are being driven by three primary factors.

First, the effects of markets on foreign exchange, particularly on our international equity and alternative products, which include large investments in funds related to energy and natural resources.

Markets effect both base fees and performance fees, which are often dependent on absolute performance.

A difficult threshold in this market.

Second, for the months of September, flows out of our prime money funds which are reflective of a general market retraction from these products.

Note that cash assets are about flat compared to a year ago, and average cash assets are up materially from a year ago.

And third, strong growth in our BlackRock Solutions revenues driven by the advisory business and growth in (inaudible).

Compared to a year ago, base fees are up about 6% driven by alternatives including the addition of the former Quellos assets, and higher average cash management assets.

Offset partially by lower base fees on equity.

The lower equity base fees reflect market and foreign exchange factors more than offsetting net new equity and balanced assets of $14 billion.

Compared to the second quarter, base fees are down 7%, 6 percentage points of the 7% decrease is explained by base fees on equity products.

Particularly on our international mutual funds.

Operating margins as adjusted in the third quarter is 38.4%, an improvement compared to prior periods.

GAAP compensation expense of $468 million in third quarter including the markets on deferred compensation and the compensation to be funded by PNC and Merrill.

Adjusting for these factors, compensation expense of $490 million, is down about 4% from as adjusted second quarter compensation expense of $510 million.

Primarily explained by lower incentive counts.

Compared to a year ago, comp expense is up 1% reflecting growth in people, and expense recognition of historic stock awards.

Offset by lower incentive comps.

The third quarter compensations revenue ratio as adjusted for these factors is 37.3%.

Third quarter general and administrative expense of $171 million is down $35 million from the second quarter and $29 million from the third quarter of 2007, explained primarily by foreign exchange effects without $32 million compared to the second quarter and of about $27 million compared to a year ago.

The balance sheet related foreign exchange adjustments had a positive effect on third quarter operating margins.

The absence of closed end fund launch costs in the third quarter also improved G&A compared to prior periods.

Portfolio and administration costs are reflective of assets sales primarily into our liquidity product and other mutual funds.

Now, moving to non-operating earnings.

As adjusted non-operating losses of $79 million in the third quarter reflect marks on BlackRock's capital invested side by side with our clients and seed in new products.

These investments are not proprietary in nature.

To put this number into perspective, the $79 million represents about a 6% decline on our $1.3 billion portfolio, and when I talk about the portfolio right now, I'm excluding the deferred comp assets, and this is relative to markets which were down substantially more than 6%.

As a reminder, our portfolio is comprised primarily of five asset categories, hedge funds and fund to fund, distressed credit funds, private equity fund to funds, real estate and marketable securities which we hedge as appropriate.

Each asset category represents between 15 and 25% of the total portfolio.

Many of these investments are long-term in nature, while the marks represent market valuation of the portfolio at a point in time.

These marks did not reflect BlackRock's expectation of holding the investments for a long period of time or in the case of some of the distressed credit until maturity.

The $79 million loss is explained primarily by marks on distressed credit funds totaling $48 million, hedge funds totaling 18, real estate totaling 14, and private equity totaling $4 million.

Offset partially by net interest and other.

The marks on the distressed credit funds are reflective of the severely depressed marks on this asset class, and leverage in these funds.

Again, these are long-term funds.

The cash flows on these investments continue to perform in line with our expectations when we launched the product.

I would also note that year to date non-operating losses on Peter Cooper Village totaled $31 million, and that 2007 non-operating gains on Peter Cooper Village totaled $31 million.

Beta has affected the entire market, including our business results.

Our business has grown and our operating results have improved compared to a year ago.

We have a diversified business by asset type, client time and region.

We expect this will continue to provide balance for our results and growth opportunities over time.

Our solutions and advisory businesses are growing, and we are seeing incremental opportunity in an adverse market.

Our pipeline remains strong at $62 billion.

With that, I'll turn it over to Larry

Good morning, everyone.

The best way to start the discussion the quarter, I neat to quote Dickens when he said these are the best of times and the worst of times, and I would say the third quarter for BlackRock and our industry, it was the best of times and the worst of times.

The macro environment has been very hostile to the investment management business, and hostile also to BlackRock.

As I said in the press release, we are not immune to this.

Like all in the industry, we are affected by the markets.

We've lost assets as investors have withdrawn in markets such as money market funds, as there has been a flight to quality and everybody is rushing to bills, NAVs are down significantly in equities, in fixed income, and in hedge funds.

I've never seen in my 32 years of business, seeing all markets deteriorating all at the same period of time.

So all this means is revenues are down.

In our -- in our non- operating earnings, obviously, we took some significant losses, albeit only a 6% loss, I'll discuss that a little bit later.

But this is, there's another indication of what has happened in the marketplace.

In other words, it's very hard for us to control these macro elements that are in the marketplace, like everyone else in the industry, we are facing these wins.

But let me talk about the differentiation of BlackRock.

So we are facing some very tough headwinds but I am, I can sit here today and say we are in a better position today in building BlackRock into a global financial investment firm with a global platform, a global brand, we are in a better position today than we've ever been before.

We are differentiating ourselves more than anyone else in the world right now in terms of being in front of this, being in front of our clients, which I'll discuss a little later.

Working on situations that are very public and being a very good advisor to some institutions that are looking for advice and are trying to mitigate some of the troubled problems within their Company.

We are being asked globally now to work with companies, we are being asked globally as to what should be solutions in terms of how do we manage our portfolio's going forward.

So I believe we -- our longstanding approach in working with clients to solve problems whether they are inflicted problems or just macro issues, we are in a very good position, especially when the market turns around to really benefit from the increased visibility and positioning BlackRock has.

I believe more than ever our one BlackRock model bringing all our capabilities together to provide the best thinking, independent advice and timely products to our clients is more important than ever before.

Because of all products that have correlated from money markets, to fixed income to equities to hedge funds, to real estate, our clients are looking for more advice that interconnects all the different products.

I don't believe advice with one product will solve any problems in this marketplace today.

And a more connected integrated approach like our one BlackRock approach is the approach that clients are looking for, and I believe is an approach that will allow us to grow above industry trends in the future.

So we continue to work with pension funds.

Pension funds are worried about now their mismatch between assets and liabilities, because of the incredible decay in their assets.

More and more clients are looking for liability driven solutions.

Clients are looking for more holistic solutions like fiduciary outsourcing where we are involved with more and more clients, especially in Europe, it in terms of trying to help them navigate their entire balance sheet issues.

And all of these conversations require us to provide more global solutions, products that are worldwide, and across all multiple asset categories.

So since this crisis has began, and I would say started probably March of last year, March of this year, it started to get much worse last summer, we've actually raised over $18 billion of products, in terms of trying to help clients solve solutions and taking advantage of the market volatility and the market imbalances.

We have been very visible in terms of the wider range of services we're providing our clients in terms of our BlackRock Solutions platform, working with clients with long-term portfolio liquidations, balance sheet valuations, complex risk management, monitoring assignments, and operational risk management solutions so we're involved more than ever, I'll talk about that in a little more detail later on.

So our One BlackRock model has helped us even in these troubled times, our one BlackRock model is giving us the position to continue to build, even with these hostile wins.

I just would like to say very loudly though, so with all these new wins and with all these new opportunities that we see, it is very hard to mitigate those wins versus the extreme market decline that we've witnessed.

The Beta in the world, the macro issues are far more overwhelming than some of the incremental changes we are making, but in terms of how BlackRock navigates and how BlackRock is positioned, I believe it's the little transactions, they may be some little invisible, but those little transactions relative to Beta is what is differentiating us, is what is making us a better firm, and will provide us a bigger opportunity in the future to continue to grow.

So, I can't be proud of our firm, times are very hard, BlackRock is not immune, but I think our operating results in terms of operating income is a good example of how we've been able to navigate opportunistically in this marketplace.

Before I discuss some of the specifics of our quarter, let me talk about how BlackRock is positioned for the future.

With a transformation that's going on in our banking industry, the nationalization of banks, capital infusion by government at the banks, consolidation of the banking industry worldwide, and most importantly, with banks being required to have a much higher capital position in Europe, some of the countries are demanding a capital, tier one capital position of 12%, some countries at 10.

If the market continues to demand these high capital ratios for, more than ever, for the commerce to survive globally, we need a vibrant global capital market, so as banks require more capital, obviously, it means A, they're going to have less leverage, they are going to have less assets on their balance sheet, and one of the outgrowths of this will be a larger, more integrated capital market.

The capital market will need to be larger for our world to continue to grow and it will only grow as we grow our global capital markets.

I believe firms like BlackRock are as well positioned for those outcomes than any firm, and I believe the role of the independent asset manager as global capital markets need to grow, these global capital markets, these investment management firms should thrive in this environment.

I'm not here to say we are around the corner yet, but it is very clear to me that we need to have a vibrant global capital market so as the world starts healing itself and I believe we will play a much larger role in these global capital markets.

I'm not here to suggest it's going to happen in a week, it may be a year from now, may be two years from now, but it's very obvious to me with the transformation of our large national lenders, our banks, they're going to have to be a bigger role for global investment firms in the global capital markets.

Because of that, as I said publicly in the past, I do believe all investment firms should be regulated, too.

Because the role of global capital markets is only going to be more important and all participants in these global capital markets should be regulated, and I look forward to the time when we have regulators who are working together on a global basis to making sure we have a better market, a safer market, and a market that can allow capitalism globally to survive.

Good indications how we are beginning to see some thawing as a result of the global transformation from national, from the central banks and the monetary authorities to recapitalize our banking systems globally, we are beginning to see some thaws.

LIBOR from last week is down 100 basis points.

We still have about another 125 basis points of reduction in LIBOR to get it more normalized, but we've accomplished a good 40%, 45%, of the renormalization of LIBOR and that's only just a beginning.

We need to continue to grow and see yield spreads in bonds narrowing.

Without citing names, two of our largest banks in the United States, one of them is trading 500 over the five year treasury.

In other words, they are funding 5-year liabilities at 7.75.

Another large bank, one of our top five banks in the United States are at 5 year debt at 6.75.

If you added a normalized return on assets, you add another 125 basis points, so you're seeing to lend any money up in the five-year, whether it's a nonconforming mortgage, whether it's a student loan, whether it's a small business loan, we need to have, they need to get above 8 or 9% to make it profitable.

And this is what's causing the stress in Main Street, so we are seeing this breakage finally in LIBOR.

We have not begun to see breakage in the credit markets beyond five years.

The reason I'm saying five years, as you know, the FDIC is insuring new bank paper three years or less.

So the five year are which is very critical for small business loans, for the mortgage industry, we are still seeing very high interest rates and I would recommend that everybody pays attention to the funding rates of these large national banks in the U.S.

and other players as to what their funding rate is to see if there is a true thawing in our capital markets to allow us to have a better Main Street market.

The last thing I would like to just alert everyone is that is in the high yield area.

High yield area BBB index as of this morning is 950 basis points over comparable treasuries.

So we're talking about, we are talking close to 13% for BBs, and we are talking a spread of 14.25 for the high yield index over treasuries.

So we are talking about interest rates that are obscenely wide, they represent in many cases some very good value, but this is just an indication of the stresses in the marketplace and we all have to just take note of that, and when these markets start unthawing, I believe we will start seeing a better economy, and hopefully with that, unthawing, we are going to see better flows and a better equity market going forward.

Let me get into the specifics without talking about the world.

I do believe we needed to talk about where BlackRock is positioned in the world.

As Ann Marie suggested, our AUMs fell about 12%.

We fell far to be exact, we fell by $169 billion which is a awful painful number.

$109 billion of that was market, between market and FX, which is another way, market in my mind, and then $53 billion was liquidity, which I'll get into in a minute.

And $6 billion was long dated assets, which was in my mind a very large surprise for us, but if you look into the details, about a $9 billion client terminated us because of a merger.

They merged into another insurance company, and they managed the assets internally.

This is something that we were aware of for 6 to 9 months, we were hoping to have a portion of it being managed internally and they decided to keep it all the internally, so away from that one problem, overall, we were fine.

And I'll go into some of the other outflows, some of it was international equities, where the retail business in Europe has been very, very hostile, and we've actually done very well in a very hostile environment.

The one thing I am particularly proud of and haven't really discussed is our operating income of 209, it was very strong, and it is an indication of, despite the hostile market environment, BlackRock has been able to incrementally add revenues, be it BlackRock solutions or other types of assignment to be additive to our operating platform, and obviously we were very, that's been offset by a $0.58 loss in our non-operating income.

Let me talk about the liquidity business at BlackRock.

First of all, while we were on this conference call, the Federal Reserve has announced a new facility for the liquidity funds, this is something that the industry has been working on diligently now for the last three weeks.

This is a very big event, in my mind, this is negotiate to help commercial paper.

This is the first thawing that I really see in terms of helping the commercial paper market unravel itself, this is creating a conduit facility in which we will be able to, if necessary, sell commercial paper into the conduit, the conduit will repackage the commercial paper into ABCP which is a legal asset that the Federal Reserve can acquire and buy, and then, but it provides liquidity, if necessary, to the liquidity funds.

Why this is so important?

Because of the fears of illiquidity, because of the fears of outflows that we witnessed last quarter, which we're starting to see a reverse this quarter, money market funds have refused to extend any commercial paper beyond a day or a few days.

This has put enormous, enormous stress on the commercial paper market, enormous stress on corporation funding, their liquidity needs, and this facility in our mind is going to be one of the, a great event in terms of creating the unthawing of the commercial paper market.

It will allow people like BlackRock and other money market funds to start extending our purchases of CP, if we think that's appropriate investment to do, if we believe that duration of the appropriate duration to have for our commercial, for our money market funds, it gives us the flexibility.

We are not reliant on illiquidity in the marketplace, we can now take on more responsibility of trying to unglue the marketplace, we can take on commercial paper way beyond one day if we want 180 day or whatever, we can buy that paper now.

Knowing that we will ultimately have some form of liquidity at the back end.

So we look at this, we look at this as a very big facility.

As I said, we've been working on it very strongly, and I just wanted to emphasize that because it is, it just broke while we were on this call.

So, having the large outflows all the large outflows was in the prime rate funds, as Ann Marie suggested, our average assets are much higher than our spot assets.

Most of the outflows occurred in the last three weeks, certainly right after the reserve fund broke the dollar, and after the Lehman Brothers bankruptcy which caused tremendous disruptions in the industry.

The industry lost over $400 billion net, that's after the runup in government funds.

BlackRock and a few other firms had about similar outflows without getting to the other names, our, if you asked me why we had the significant outflows, we were one of the biggest winners in terms of growth in the money market industry.

We had opened up many new portals working on institutional portals with different platforms, and I would say because of the fears in the marketplaces it was these portals that experienced the greatest amount of outflows so we were particularly harmed working with some of these portals in our direct access to our clients, we probably had more stability than through these portal platforms where we are participating in.

If we had more retail platforms assets, we would have probably had less outflows.

A good majority of the outflows were in the institutional side.

As Ann Marie suggested, we have had now witness over $12 billion of inflows, in the first three weeks of October.

So there is certainly is growing stability in the money market business.

I believe there's a great future for firms like BlackRock in the money market business, we were very responsive to clients, there was not one day in which we delayed payments to our clients, there was not one day that we were frightened of any issue, of having any one of our clients fearful of breaking the dollar, our credit team in the liquidity side performed brilliantly.

And so we believe we will be a larger player in the liquidity management business in the future, and we are starting to, and we believe we can position ourself in that way.

I do believe the one lesson to be learned, especially with the reserve fund, is I believe the small little orphan money market funds will be vulnerable, I believe that larger platforms are going to be the net beneficiaries, the well capitalized firms are going to be the biggest beneficiaries, so I believe there is still much to be changed in the liquidity business.

And I believe we will see a consolidation in the very large scale in the liquidity business.

In fixed income, it's fair to say performance has been mixed in some product areas, very strong in some product areas, very weak, what I can say though, across almost all platforms, we've done better than most of our competitors in terms of this, and we are winning.

Some large assignments.

Most recently, we made a presentation, little sheepishly, where in one of the product we were 300 under the benchmark.

We one, because the terminated manager was 1200 under.

And so I'm not here to suggest we're proud of what we've done, I'm not here to suggest we don't have much room to improve, we do, but I believe our risk management platform, our ability to minimize and mitigate and fixed income has proven to be successful, albeit not successful enough, and this is something we can't be proud of, but it's something that we are on a net-net-net versus our competitors, we've done fairly well in terms of that.

In equities, we had some great opportunities and great disappointments.

The opportunities we continue to differentiate ourself in our global allocation fund, and we continue to be one of the largest net inflows in that product area globally, it has been a very large win.

Our team has done exceedingly well in the ups and down markets, and calming investors as this has been a very large growth fund for us.

Dennis Stattman and team have navigated quite successfully in terms of trying to minimize exposures.

As we see meltdowns globally, if you look at the emerging markets have melted much more than the U.S.

markets in some cases down as much as 70%.

India down 50%, China down 50%, so when you think about the market, this allocations globally, and having the allocation fund, mine is really doing much better than some of the giant pitfalls and keeping our clients calm, it's been a very strong positioning for us, and I believe it will position us well for the future.

The second area where we are just beginning to see some real nice inflows, and that is our European equity team.

This is a team that came over to us a year ago.

We've had great relative performance.

This is actually the single category, the greatest outflows in Europe, and yet we are now, because of our performance, we're starting to see some real inflows, and I believe as the markets start unthawing in Europe, and as equity flows begin to turn positive in Europe, this will be one of the large, large products that we will grow in the future.

Some of our large NAV declines though, which are obviously disappointing are in the areas that we did so well for the last year and a half.

I think as I suggested in many other conference calls, we've always had a very strong positioning in our natural resource funds, our energy, mineral and mining funds.

If you haven't noticed, these are the products that have probably gone down as much as financial institution products.

Metals and minings, and products are down in some cases 50, 60%.

This is some of the reasons why we had larger NAV declines in the last quarter, because of the breakdown in these product areas.

It is not because of bad performance, it is not, it is just a function of how we're positioned and we have large exposures in the energy and mining area, and we continue to believe having a large platform in these products in the long run will prove to be a good business strategy, but this is some of the areas that are offsetting some of the great strengths that we are building upon in equities.

In alternatives, I think it's fair to say there's not one product that alternatives has done well.

Unless you can call treasury bills an alternative.

Hedge funds, private equity, real estate all were under extreme pressure.

Our funds were under pressure.

We continue to believe in the alternative space.

We believe there will be a huge wash out in hedge funds, we believe there is going to be a very large washout in private equity, and this is where our clients are asking so many questions, so many of our clients rushed into alternatives, in many cases, some of our clients, these pension funds or endowments have 30 to 50% of their assets in alternatives, I don't think any of them expected to have these type of set backs in terms of declines in NAV, but I think more certainly no one ever expected to see such illiquidity.

So I think one of the lessons to be learned will be a greater appreciation for liquid assets, and I believe a lesson to be learned will be clients are going to be, are going to have a more conservative portfolio.

I'm still a believer in alternatives, I believe there will be great opportunities for successful hedge fund strategies.

I'm actually very bullish on real estate strategies, as I believe in some of the real estate platforms, especially multifamily, will be a product that will be able to provide coupon and some price appreciation.

Albeit, it's going to be much lower than historical returns for these product areas.

But I do believe real estate will provide a very safe platform for a lot of investors.

Let me break out retail and institutional businesses.

As I said earlier in terms of what's going on in Europe, we did see outflows in our equity platform of $4.4 billion in our international retail platform.

This is not something we're proud of, but I can give you some statistics as of August.

Unfortunately, the European industries have not provided us with the September numbers now, but as of the end of August, year to date outflows in equities, in Europe, and I'm not talking about European equities, I'm talking about the mutual fund platforms in Europe, outflows as an industry, not at BlackRock, were $68 billion in equity outflows.

As of August, we had $2.5 billion.

We actually have gone up in the rankings in terms of the largest mutual fund platforms in Europe.

As of August, I don't know what September is because I haven't seen the numbers, as of August, we are now ranked the second largest mutual fund platform in Europe.

This is up from like sixth when we did our merger two years ago.

So, we continue to build, we continue to enjoy greater presence, we continue to drive more and more business albeit in a much more hostile environment.

In the U.S.

I'm pleased to say despite much outflows, we had $1.4 billion in net inflows in Europe in U.S.

retail.

Our team continues to build our strength in third party distribution, and some of the large third party distributors where we were ranked as low as 18th place, we are not ranged as high at third place with external managers, and so we continue to build a very strong presence with third party, with a third party platforms, for those who were following us when we announced our merger with MLIM two years ago, we said this is going to be one of the larger opportunities for BlackRock, and I can say fairly we are achieving those opportunities and we are differentiating ourselves.

Our goals in the next year to continue to build out this area, even with the hostile equity markets.

We hope to be expanding our footprint in the independent channels in the retail space.

We believe this is a very important point for us to continue to build out, so overall, retail flows are negative, but overall, we believe we're well positioned and we're looking forward to continuing to build out that platform.

On the institutional side, we are clearly differentiating ourselves.

We have had conference calls, sometimes twice a week conference calls globally with our clients.

Our clients are looking for BlackRock more than ever before to help them understand what does this all mean.

And we've, as I said, we've had these weekly because every week has been transformational changes in our business environment, transformational changes in how we should be looking at the future, and our clients are looking to BlackRock to provide more and more leadership for them, and I believe we we are doing this.

We are very well positioned to continue to build out our platform, we are involved, as you saw, in our pipeline, which I'll discuss a little later, very involved in some very large searches and wins.

So I'm not here, this is just institutional clients have not frozen, I am not here to suggest in the month of September and actually in the first few weeks of October, many clients from sovereign wealth funds to insurance companies, globally clients were frozen and asking what does this all mean?

Clients globally were reassessing what does it mean for them and how should they be looking at the environment.

I can't tell you now, we are starting to see the clients asking more proactive questions as to how to better utilize their cash, how to better utilize their investment strategy, and most importantly, what should BlackRock be doing for them?

So I look -- I do believe we are very well positioned globally with our institution client base.

BlackRock Solutions, obviously in the news a lot, we continue to differentiate ourselves in a very large way.

We are involved with so many large visible assignments, this is an area that we could not be more proud of.

They have risen to the occasion every time, the team, I don't believe has had a weekend now for 6 months.

There's no such thing as weekends.

I feel sorry for some of them, I apologize publicly to them, and their families, because they have missed a lot of weekends with their family to get the jobs done, but most importantly, our clients are respecting us, our clients are looking for us to do more.

We are involved in some very sensitive discussions with our clients.

We are involved in very large advisory assignments and how to rebalance clients balance sheets.

And potentially we will be involved in some very large assignments that require either forms of liquidation of assets would be restructuring of assets and liabilities.

We are very proud of year to date, winning 52 new assignments in this space, and 60 new assignments in the last quarter.

We have been a beneficiary of some of our, some of the downsizing of Wall Street because we've been able to hire some people to be very additive to our existing team.

So whereby in the last few quarters I've said we were being stretched, I'm here to say we are still being stretched, but we have so much more capacity today than we did last quarter.

And we're taking on these assignments even as of today.

I'm aware of another new assignment in evaluating another $20 billion balance sheet of another institution that is sitting with some, some problems.

I would also like to just announce which we announced earlier, it is the addition of Impact to our BlackRock Solutions space, it is going to give us far better functionality in the equity risk management space.

Hopefully by early next year.

As we integrate that technology onto the Aladdin system we will be able to provide functionality in off credit areas and in equity areas.

And I believe it will give us much more opportunities to build larger, more comprehensive relationships.

I also believe with some of our clients who already have the Aladdin platform on their platform, they are going to be looking to add possibly the equity component to it, and impact did bring some very large clients globally to us, and hopefully we'll be able to add some functionality in the fixed income space for those clients.

So we continue to play a large role.

We're involved in some very important discussions right now.

I believe we, this will continue to differentiate us for the coming year, and I believe we will continue to build a more important platform in this space.

Last few things I just want to add, pipeline, pipeline remains to be very strong.

We mentioned earlier $12.5 billion of new cash mandates, $14 billion in new fixed income mandates, $3.2 billion of equity mandates.

I will say though we have, we have about $1.5 billion in outflows in alternatives though.

We are seeing some of our fund to funds spaces outflow, we are seeing in some of our single strategy funds, some outflows, and this is an industry-wide issue.

I think our outflows are actually fractionally smaller than the industry itself.

So and then we have one more big BlackRock Solutions advisory assignment that should fund sometime, from last quarter, should fund sometime this quarter for about $32 billion.

On the non-operating side, Ann Marie spoke about this very loudly.

Loss of $0.58, or 6% of NAV and $1.3 billion.

I think I can say very clearly, about 90% of those losses should come back to at least break even.

Ann Marie did suggest, and many of those products we have term lot assets, term liabilities, and term equity.

We have no mismatch, but because we are a GP, we do mark to market everything, and in the three cases where we've had some extreme market to market changes, I can tell you the cash flows that we projected in terms of the payment stream to ourselves and to our clients are actually better.

The default and delinquencies on these big pools and mortgages are actually less than what we forecasted and yet, the marketplace is continuing to drive down some of the prices, obviously in the market calamities with the Lehman failure, and with the, with the now, the deleveraging of hedge funds who were big buyers of these products only four months ago have become huge sellers of these products now as they are deleveraging.

We believe these, this impairment is temporary and we believe we will get most of this back.

Out of the entire losses in our non-operating platform, I believe there's less than $9 billion of what I would define as probably real losses that may be permanently, in terms of real losses, so we do have some losses.

I'm not here to suggest we don't have some but the majority is purely a market to market issue, and I'm very comfortable with the assets and our strategies within our platform, and I can tell you very clearly, our clients who are investing in these products are fine, too.

They understand the vagaries of mark to market, and they see the cash flow characteristics and are meeting, they're exactly what we've forecasted and what they forecasted.

So in conclusion, I think BlackRock is differentiating ourselves more than ever.

I think we are differentiating, I should say we are differentiating in a positive way more than ever.

I believe we have some great opportunities to build a better future.

I believe we are, we should take a lot of pride in all of the calamities in the marketplace, we are doing a very good job in risk avoidance.

We have navigated very tight, a very tight procedures in terms of risk mitigation.

Our risk management teams, or risk, under Ben Golub has done a very unbelievable job in terms of helping us minimize our exposures, maximizing our knowledge where we have exposures and helping us navigate and mitigate any problems in these hostile times.

I believe much of the hostile times in terms of, in terms of insolvency is behind us.

I believe what the national banks have done globally in terms of putting capital into the banking systems of their various nations, and to, by guaranteeing their debts for a period of time have really minimized, minimized the insolvency risk that we just had, very loud in the first, in the month of August and September, and certainly the first part of October.

I believe the credit markets are going to stabilize because we don't have that fear in the bond market of insolvency today, and I believe that now, we just have to get back to lending and hopefully the actions of the Federal Reserve today and commercial paper will get us back to lending to corporations on a CP level where the declines in LIBOR we will start seeing inter back lendings starting to pick up and we will see a unlocking of the credit markets and through that unlocking of the credit markets, despite a recession that we are going to be facing with, the equity markets can stabilize too.

So with that I want to thank all the employees of BlackRock.

I know this has been a tough quarter, I would like to thank all our shareholders.

This was a tough quarter for you, too.

But I can tell you very clearly we are in a very good position to take advantage of the opportunities that the new global capital markets will give us and we're well positioned to take that position and run with it.

Thank you very much.

We'll open up for questions questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Hojoon Lee of Morgan Stanley

Good morning.

Good morning.

I have a question on Quellos and your outlook on hedge funds more broadly.

I think the industry had something like $31 billion in outflows in the third quarter?

So about 5% annualized rate.

Could you give us a sense of how flows were at Quellos maybe in terms of sales and redemption behavior?

I don't know if I have that here.

We could do that offline.

I know we had some good inflows and we had some outflows as I told you in our, I have somebody looking at it.

The net across the products was $65 million

So we were flat net in the third quarter.

Okay.

How did that, does that compare to the first half of the year?

First half, we had inflows probably.

Hold on, I'll get it.

So year to date, we were positive 1.3.

And one question on BlackRock Solutions.

I think a quarter ago, you commented around some of the human power or potential capacity issues there, given you're very busy with new mandates.

Could you give us a sense of where you stand there and how much growth you think you could support with the current infrastructure?

As I said earlier we have hired a number of people.

We've added a lot more depth in our Solutions space.

We have more capacity today than we've ever had before.

That is not to say that we're not working weekends and week nights and, but we are we are in a good position to take on more business.

And you don't see any slowdown in the momentum you've had over the last several quarters there?

On the contrary, I think we've seen a rapid speedup.

Just my last question, with respect to TARP, from the perspective of acquiring assets for your clients, could you discuss some of the types of products or opportunities you are focusing on, and maybe help us bracket how much business it could potentially generate on the asset management side?

I don't think, first of all, the treasury has not finalized who are the selected managers.

Hopefully that will be done shortly.

Hopefully BlackRock is one of the participants of the plan, we certainly have submitted many different submissions, RFPs.

So until I know more about it, and until we know if we are one of the selected firms, it's very hard for me to describe what it means.

Do you have a sense of timing in terms of when you should be hearing about that?

It is my expectation, and only mine, I would say it stays away, listening to the Secretary of the Treasury from his public statements, is he wants to do things quickly, and in our conversations with treasury, I believe it is fair to say they do want to do some things quickly, so it should be days, maybe a week until we'll know as to the game plan of the TARP.

Thanks, Larry.

Your next question comes from the line of William Katz of Buckingham Research.

Thank you.

Good morning.

Everyone, thanks for the broad based comments.

Just following up on the TARP.

There's certainly a lot of speculation around the economics of the business, I was wondering if you could help frame how we should be thinking about the earnings impact from any mandates that you might win?

They will be good.

I really don't want to get into it.

I don't like talking about businesses that we may or may not win.

Clearly, if we do win, I believe, I think it's fair to say we're going to -- margins are going to be lower for TARP business and other products.

Without getting into too much detail, in our submission, which I'm not here to suggest we're going to win, but our estimation we did assume that margins are going to be much smaller than other product areas, but also we did assume that the size that each manager will have to manage will be quite large.

So it should turn into a good business but I think it's appropriate that the managers work for a very tight spread in these markets to help the economy unlock itself.

Does that include any type of performance fees so they can work at?

You're assuming they are going to do performance fees and I don't know if anyone knows what the type of -- how the treasury will design the advisory management fees.

I don't think we know that yet.

Maybe somebody does, now if they want to we get it, I don't know.

Maybe we'll find out.

My second question is on performance fees.

Given all your commentary both leading into the quarter and on today's conference call I'm surprised there's any sizeable performance fees.

Maybe just a little description on where these fees came from?

And then just as we look forward, approximate the outflow accelerating a little bit into a new quarter, how should we think about high watermarks and go forward performance fees?

All good questions.

Performance fees, and some performance fees, some of them were struck at the end of September and that's why we had some performance fees going forward in the third quarter.

Going forward, the high watermark depending on the product area could be -- it could be -- there's going to be some areas, some funds, we have a 5 to 7% high watermark hurdle.

In some of them there could be 20 or 30% depending on some of the energy funds.

I would imagine that's what -- I don't have it specifically but I know what has happened the last few months so they can be significant.

Okay.

Last question, just sort of follows-up on your commentary about consolidation of the money market business.

Just sort of wondering given what seems to be like a utility and financial services globally now, based on the nationalization of the banks, et cetera, would you envision broader based consolidation among asset managers, and if so would you be thinking about roll-ups now in addition to any other product-specific things going on?

I think up until last week, everybody was worried about solvency and stability.

I don't think there is a moment in which anyone was focused on mergers other than quick defensive ones.

But I think, as we restabilize our markets, which I believe will be happening, I believe there are going to be huge opportunities in the investment management business for consolidation.

So let's think about this Bill.

Step back in equities, with global equities down about 40% and US equities around 33%, companies are going to -- small companies are not going to be able to survive this.

They are not going to be able to afford, be it the credit research or the equity research or the risk management, with the idea that we are all going to have more regulation and more costs associated with the regulation going forward, and I think that's a certainty within six months of the new year, I believe there's going to be a great need for consolidation in the investment management business.

I believe more than ever before brand name global platform multiproducts are going to be more important than ever.

So boutiques, whether they're just a boutique in money market, boutiques in bonds, boutiques just in equities, I believe it's going to be a hard model to build a platform.

So I believe we will have at BlackRock as much opportunity to do consolidation and roll-ups than we've ever had in the past, and I would tell you we have had more inquiries recently about merger opportunities than we've ever had, albeit I would say we have -- we have not really begun any of the conversations because I think it was inappropriate to focus on those things until we felt more stable.

But I do believe once the stability is back in our marketplace a higher degree of confidence in the executive and Board levels of the various firms we are going to see a huge consolidation.

Thanks very much, Larry.

Your next question comes from the line of Roger Smith of FPK.

Thanks so much for taking the question.

I guess really what I want to understand is how flexible really is the expense model on a go-forward basis, because it sounds like what you guys really want to do is continue to build out the business quite a bit, and we have seen AUMs come down again so far in the third quarter so how should we think about those expenses going forward?

Very good question.

I think it's fair for me to tell you we are looking at all expenses right now.

We are actually looking at our business model.

There are going to be areas that we are going to be emphasize and growing, and quite frankly there are some businesses that we are going to down size, and there may be a business that we may get out of.

There are going to be -- on Thursday I have my operating committees and executive committee meeting.

We've had many meetings already looking and addressing all those issues, and I believe we have to be in front of all that.

We have to be, from a top downward look, looking at areas that we need to grow and we are going to continue to build out those areas.

I can think about our BlackRock solutions base we've got to continue to grow, our independent advisory push and our retail space will have to continue to grow.

Those areas that would be foolish not to continue to invest.

There's other areas, without naming them right now, we are going to have to reduce.

And we will.

And, we are looking at all ways of minimizing and reducing our expenses going into the next year.

And I think that's the only appropriate thing to do.

I can tell you we are very much in front of it, Roger.

Okay, great, thanks.

Then on the performance fees, I know that Bill just talked about them a little bit more.

Is there any performance fees that would be tied to relative performance, or are there any longer term performance fees that would have sort of been accumulating over some period of time that we should be thinking about coming into?

We had some long dated performance fees in real estate that up until probably the last six months we've had some growing NAV, but real estate has fallen, too, but that's more of an absolute -- that's relative to the (inaudible) index.

So there are a few of them with you most of them are absolute.

But some of them are a three-year rolling fee, so a three-year review, how we perform.

So some of them are not just month to month.

They're longer dated in terms of how we are performing, and so some of those we may have still growing performance fees.

Ann Marie.

Yes, just to say, in the third quarter really the bulk of our performance fees came from hedge funds out of our EMEA region, and then on a going basis we do get some performance fees on separate account that do take into account relative performance measures.

Okay, great.

Then just on the alternative business or the fund to funds business at Quellos, it does seem like there's a lot of discussion in the marketplace about potential outflows and seems like the high net worth client base I guess is getting somewhat nervous and the institution allocations are kind of moving higher.

How does a fund to funds business like Quellos really prepare itself for redemption levels that might be coming in the fourth quarter?

I know you're identifying it as Quellos.

We call it BAA now.

Yes.

There's no Quellos.

No different than how we prepare ourselves in money market liquidations.

We talk to our managers who we're working with.

We identify that we -- you try to stay in front of it.

We try to give notifications to our managers in advance with the idea that we may have excess cash but you've got to stay in front of it.

I think this is why we had such a tremendous market decline the last part of September and early October where a lot of fund to funds and a lot of managers were giving excess notice in anticipation of outflows.

And so that's what you are seeing.

It's just knowing your clients, talking to your clients as to what are their needs, finding out what their expectations are, then going back and managing your cash and liquidity with your managers accordingly.

And as you know, on the institutional side, most of it is 60 plus days notice for redemption so you have time to plan.

Right.

Fair enough.

I guess the last question--.

And then it's reflective in my pipeline when we talked about our outflows some of the outflows were there.

As we said earlier in our BAA platform we basically are flat for the year for the quarter and up for the year, but we are forecasting, as I said, in the entire alternative space, about 1.5 billion of outflows.

So that's in our pipeline number.

Fair enough.

Then just lastly, on the redemptions of the money market prime assets, where did that money really go?

Because I would have assumed that you guys could have kept some of that.

Well, it went to our government funds and if you go, if you ask Jaime Dimond and other banks how much deposits they received, keep in mind, bank deposits are guaranteed, so the giant banks were the biggest beneficiary in this flood outside the money market industry.

I mean this was an industry outflow, and keep in mind a lot of the money that we manage is for other financial institutions.

So they actually pulled their money back, too.

Fair enough.

So when you manage portal money, some of the portal money is for other small banks.

Fair enough.

And they're pulling all their liquidity to keep it there, too.

So much of it was fear.

I do believe the Fed action today is going to cause more stability in the prime rate funds and will give the prime rate funds actually the ability now to invest longer, which in my mind will give more opportunities for the prime funds because the yield spread between government funds and prime funds are so enormous, but they were not as enormous because everyone was keeping their money so close to overnight money.

With this new platform it allows us to extend our maturities and really reap the benefits of the spread in commercial paper versus governments.

Great.

Thanks very much.

You are welcome.

Next question is from the line of Craig Siegenthaler of Credit Suisse.

Hi, Craig.

Good morning.

Just a question on counterparty risks and how it relates to the industry.

Specifically with liability driven investing and also SAC lending.

With the dislocation in the lending markets, has the ability for LDH guys to hedge future liabilities impacted, I guess, your investment process at all?

And then on SAC lending I'm just wondering if traditional fixed income strategies actually lend out the securities enhanced yield and is there any risk of selling these assets at distressed prices that (inaudible) just brought in here?

I think given, to answer your last question, I think we've seen so much hedge fund liquidations and unwinding on the leverage platform is as one of the big reasons why we've had such a tremendous decline in some of these asset categories.

In terms of SAC lending, we continue to see, as we said, $12 billion of our outflows in liquidity was SAC lending.

We're a very small player in SAC lending.

I think our balances today is about $6 billion in SAC lending.

It is not a major portion of our business, we are doing it as an adjunct of our equity platform but it is a very small component of our business and it will remain to be a very small component of our business.

It only pays us about a basis point anyway so in terms of seeds it's very de minimus.

And in terms of counterparty risks for LDI, obviously, we pay attention to that.

Our risk team, our Chief Risk Officer Ben Golub and team, they spent a lot of time looking at our entire counterparty risk, and that's is counterparty risk on behalf of our clients.

So we look at every swap, we look at everything, we analyze every type of risk we have, and there's no question, during the last three weeks of September, after the bankruptcy of Lehman, the first couple of weeks of October, we were very frightened of some large exposures we had with some institutions that were stumbling, and we were doing a lot to mitigate that during that time.

As I said, everybody over the course of the four week tsunami, many people were spending a lot of time trying to mitigate risk and manage risk downward.

Instead of trying to look for investment opportunities.

We did a great job in navigating that, as I said, we've don't have, we did not have any issues with our money market funds, we did not have any issues with counter party risks, with any of our swap parties, and so we actually are well positioned in that and we stayed in front of all those issues

Larry, with your money market business, I know your fee rates are, or your profitability process has actually improved over the last year.

When I look at the product one year forward with increased regulation, potential premiums to a US government or third party, possible rating agency regulation, maybe even capital charges, because there is kind of, for some asset managers there is a embedded capital charge to support these funds for the funds that have broken the book, but I'm just wondering, do you see profitability decline off these products going forward?

Yes, but regulatory issues are, is a relative for everybody in the world, and I don't think we're going to be adversely harmed in it.

Actually, I think we will be on a relative basis, we are going to look much better, I think we're much better prepared for that.

In terms of -- well, with my general -- fees are paid by the funds any way on that.

The insurance.

But let me -- in terms of capital charges.

We are the first to believe, to have reserves for losses in money market funds.

We have been citing our auditors, and this is now a public admonishment of my auditors who have done a very fine job, they are listening, so I can tell them again, for the last ten years, we always believed we should have had reserves for money market funds, because it is the firm's responsibility, and we don't indeed want to break the dollar.

So we've always been, we've always been very much in favor of a, of having some form of capital that is reserved for money market funds.

Quite frankly, we were not allowed to ever put a reserve down because BlackRock never had a credit loss up until in our (inaudible) last year where we had I think a $35 million charge in our cash strategy fund, so I guess definitionally, that means it's a higher cost of doing business if we did reserve something for our capital charges for money market funds, we would welcome it, we believe it's another reason why you're going to see consolidation, it is another reason why you need to have large scale assets for liquidity to make the appropriate returns, so all those issues do not frighten me.

In fact, they give us greater, gives me a greater comfort that we will be one of the leaders

Thanks for taking my questions.

Your next question comes from the line of Prashant Bhatia of Citi.

Larry, you talked about the washout you think that's coming on the alternative asset side.

One, do you have a feel for just the quantity, the amount of AUM that can move out of this space?

And two, once the fear subsides, where do you think that AUM actually flows to?

I don't.

I believe it's just going to be very hard for small hedge funds to survive.

I think it's going to be hard even for some large hedge funds to survive.

I think you are going to have a washout.

I think monoline firms, I know everybody, especially hedge funds were railing on monoline finance companies, but nobody was reeling on monoline hedge funds and I believe there's going to be a greater need for institutions that have broad based products to survive.

Where the money will go, actually, I think more and more money will go into traditional products, back in equities.

As you saw in the first 6 months, Prashant, the greatest outflows in global equities were in large kept space in the US area.

And I do believe there are just massive opportunities in the credit markets.

We've never seen yield spreads like this, so once there is a stability, the returns, the opportunities you have from corporate credits, how about, divide five year bank paper at 9%, and another bank at 8%, to me the opportunities are quite extraordinary now for those who are trying to reduce risk in some of the alternative space to move into more traditional products that are, that we have yields and returns that are, something that we dreamed about over the last ten years.

So I believe it spells, it's going to be a very large opportunity for -- once again, for those boring non -- boring traditional asset managers, but those asset managers that are, that are, that are positioned in a global setting to take advantage of it.

Okay.

And then based on that, the investment portfolio that you have about 1 billion, 1.9 billion-ish, I think, is that a portfolio?

Is that the right size based on the environment here?

Or would you consider shrinking that portfolio or can you actually grow it here?

What is the right size?

I think the portfolio size you were talking about is growth of minority.

We like to think of about it, are you talking about the -- you're talking about our co investments, right?

Yes, I'm talking about the 1.9 billion total investment.

Net of minority interest at the end of the second quarter, that was about a 1.4 billion, and so we tend to think of it net.

I guess the question you're asking is, we hope we have as much opportunity in the future as the co-invest with our investors and our clients, and so if we, to me, that is a, despite the setbacks we've had in NAVs in the last quarter, to me, that is a major component of our engine of growth for the future.

To co-invest with our investors in these alternative products, especially with the opportunities we have in bank loans, in distressed debt, in preferred stock, and in bank credit.

Bank credit today is ridiculously cheap.

There's just going to be some great opportunities that if our investors are looking for BlackRock to co-invest with them, we will.

Okay.

On one of those, I think the UBS portfolio that you are managing, could you just give us an update on how that's performing versus plan maybe?

According to our forecast of default and delinquencies, we expected a cash flow return in the 18%-ish.

The cash flow returns are actually 18.4

Okay

And so the default in delinquencies are approximately what we thought they were, so the cash flows are very strong, and so obviously, it's only 5 or 6 months, however, because the fund is levered, and there has been a decay in the mark to market of these assets, there's been about, a 30% decay in NAV in those types of products, just because of leverage and they're done on a mark to market, the assets are down about, 9%-ish.

Okay, but if the default continues to track--?

We're going to get all the money back, yes.

You get it back, right.

But here is an example of accounting questions.

We have term equity in this and term liability.

There's no mismatch.

Right

And yet, we have to mark to market.

I hope my auditors are still listening to that one, too.

Okay.

And then do you have a view on whether Banc of America will keep the investment in BlackRock or is that too early at this point?

Yes, I have had numerous conversations with Ken Lewis, the CEO of Banc of America, I think he's very excited about working alongside with BlackRock.

But we have not had any conversations yet.

I can tell you in the next few weeks, we will begin our conversations with Banc of America, and I'm sure they are going to be very positive.

As I said, our positioning within Banc of America is going to be strong as you know, with Merrill Lynch on a change of control.

Our global distribution agreement extends by five years at the date of closing.

So we have this very strong position within the Banc of America platform, I think we are well positioned.

We're working very closely with the entire Merrill Lynch system.

And we look forward to working very closely with the entire Banc of America system to help their shareholders and to continue to nurture BlackRock shareholders

And then just on the investment portfolios, you get called into evaluate a lot of different portfolios across the industry, can you just give some color on are there still areas or asset classes that are being mismarked?

And what types of classes there are?

I wouldn't say mismarked.

Actually, in the most recent sets of appraisals we're looking at, I would say people are getting closer and closer to the fair value marking than ever before.

I think where you're going to have greater, greater, well, let me state it two ways.

In the subprime area, you're seeing marks approximate now throughout the market, I think in areas like the option arms, there's a huge disparity between one evaluator and another evaluator -- we've seen, some people believe they're worth in the 60s and some people believe they're worth in the 40s, so there is still some large disagreements in terms of evaluation of option arms.

We are beginning to see more stress and more consumer- like products and HELOC loans, more stress obviously coming from credit cards, so we are not, so some of the more visible problems are probably more -- are probably -- are in the healing process.

But I think in some of the more consumer oriented products, there's probably still more pain to come.

Okay.

Thanks, Larry.

Ladies and gentlemen, we have reached the allotted time for questions.

I will turn the conference back over to Mr.

Fink for any closing remarks.

Thank you everyone.

This is a long conference call.

Obviously.

As I said, this is the best of times and worst of times.

It doesn't feel good to see the NAV erosions that we've seen, it doesn't feel good to see the outflows in liquidity, but nevertheless, I actually believe the entire BlackRock platform was very severely tested and we won.

It doesn't feel like a big win today, but I do believe the organization, all our employees, have done a great job in mitigating problems, have done a very good job in hand-holding our clients who are ultimate -- who is, that is the life blood of our future, hand-holding our clients, and I believe we are positioned to build stronger relationships with our clients globally.

Thank you everyone, I'll talk to you in the quarter.

Bye-bye.

This concludes today's conference call.

You may disconnect.