貝萊德 (BLK) 2008 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the BlackRock, Incorporated fourth-quarter 2008 earnings teleconference.

Our hosts 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 prevent any background noise.

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

(Operator Instructions)

Thank you.

Mr.

Connolly, you may begin your conference.

Good morning, this is Bob Connolly.

I'm General Counsel at BlackRock.

Before Larry and Ann Marie -- and Sue Wagner, our Chief Operating Officer, is here with us this morning as well -- 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, and 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.

My comments are going to be on an as adjusted basis, unless I note otherwise.

Starting with the facts.

Full-year operating income was $1.662 billion or $8.37 per share.

That's up about 9.5% from a year ago.

Nonoperating losses net of minority interest were $381 million or $1.92 per share.

Net income was $858 million or $6.45 per share.

That's down 21% compared to a year ago.

Full-year revenues were up 5% year-over-year, including a 6% increase in base fees.

While we are proud of our relative performance, we are disappointed in the market effects and our absolute results.

The 9.5% improvement in full-year operating results and the 5% revenue increase reflect very strong net new business flows in the first half, exceptional growth in the Advisory business, a balanced business model, and strong cost management discipline, dampened by extremely negative market effects in the second half, particularly in the fourth quarter.

As mentioned, the results reflect proactive cost management.

Our GAAP results include a $38 million restructuring charge associated with the reduction of about 500 people, or about 9% of the workforce.

This action was taken to align our workforce for present market conditions.

The full year as adjusted comp to revenue ratio was about 35%.

That's equal to a year ago, despite market effects on revenues and full-year effects of employees added in the second half of 2007.

In addition, full-year G&A improved over $100 million compared to 2007.

Half of the improvement is explained by balance sheet-related foreign exchange effects of almost $50 million; that includes about $30 million in the fourth quarter.

$26 million of the improvement relates to lower expense related to 2007 support of cash funds, and $26 million relates to lower closed ends fund launch costs.

We also managed to lower marketing and T&E expense, despite a major rebranding in Europe.

This was offset by higher occupancy costs related to the Quellos transaction.

Full-year operating margin as adjusted was 38.7%, an improvement compared to 37.5% a year ago, driven by revenue growth combined with aggressive expense management.

As we've discussed before, BlackRock utilizes its balance sheet to co-invest capital alongside our clients and to seed new product.

The majority of these commitments are invested in alternative products, and are invested along the side with clients for the duration of the product.

These co-investments are generally long-term commitments in real estate, distressed product, hedge funds and private equity.

BlackRock also seeds new product.

These investments are a much smaller portion of the portfolio, are shorter term in nature, and are hedged as appropriate.

Almost all of the balance sheet investments are mark-to-market.

The extremely negative markets in 2008 have affected our clients' and BlackRock's results.

This alignment is important to our clients.

2008 markets, particularly the fourth quarter, were not kind to anyone.

The full-year nonoperating loss of $381 million represents about a 25% decline from the peak investment portfolio of about $1.4 billion in June, and is in line with market movements on underlying assets.

This brings the portfolio to about $1 billion, distributed as discussed previously.

The hardest hit asset classes included distressed credit, which represented about $140 million of the loss; real estate which represented over $120 million, and that was across multiple investments; hedge funds, which represented over $50 million of the loss; and private equity, which represented about $30 million.

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

The majority of the marks do not reflect BlackRock's expectation of holding these investments for a long period, nor in our opinion the true economic value of many of these investments.

As a result of the magnitude of the US-based nonoperating losses recorded in the fourth quarter, the mix of our pretax income shifted such that a greater percent of our income than originally anticipated was realized overseas in lower tax jurisdictions.

This resulted in us making a fourth-quarter adjustment to our full-year tax rate, bringing it down from 35% to 33%.

I want to share with you a few other thoughts regarding the fourth quarter.

This period most clearly reflected the headwinds of adverse markets affecting our results.

Fourth quarter as adjusted operating income was $371 million or $1.81 per share.

The as-adjusted nonoperating results were a loss of $270 million or $1.32 per share.

The change in full-year tax rate from 35% to 33% contributed $0.19 per share.

As a result, net income for the quarter was $91 million or $0.68 per share.

As-adjusted operating results were down 15% compared to the third quarter, and down 24% compared to the fourth quarter of 2007.

Revenues of $1.1 billion were down 19% compared to the third quarter, and down 26% compared to the fourth quarter of 2007.

Fourth-quarter market and foreign exchange movements drove revenue declines, compared to the third quarter and compared to a year ago.

The most material and important effect was on base fees, particularly on equity products.

Base fees, which represent 80% of total revenue, were down over 20% compared to prior periods, and equity of balance declines represented 80% to 90% of that total.

In addition, we earned lower performance fees, which are often dependent on absolute performance, a difficult threshold in this market.

Finally, we saw a decline in other revenue, explained by a decline in securities lending and the disposition of our Metric Property Management business, basically a zero margin business.

These factors overwhelmed the strong growth in our Advisory revenues.

Aggressive expense management in the fourth quarter explains the as-adjusted operating margin of 41.6%, and the 30% decline in compensation expense compared to prior periods.

Fourth-quarter G&A expense of $154 million is down $16 million from the third quarter, again reflecting the effects of our cost control efforts, particularly in the areas of marketing, promotion, T&E and technology.

We plan to continue to aggressively manage costs as appropriate for the environment, and for strong long-term business results.

In summary, hostile markets have affected all segments, including our business results.

The fourth quarter showed the headwinds on revenues.

We begin 2009 with market-affected assets under management.

We are proactively managing our cost base, and will continue to do so.

Still, the overwhelming market influence on revenue will affect our operating margins.

We remain committed to co-investing in alternative products with our clients, which facilitates us being a full platform provider, though it has introduced earnings volatility.

At the same time, we are pleased with our relative position.

Our business has grown and our operating results improved compared to 2007.

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

We believe this will continue to provide balance to our results, and growth opportunities over time.

Our Solutions and Advisory business have grown, we are seeing continued opportunity in an adverse market.

Our risk management and diversified asset skills are bringing in significant new opportunities.

Our pipeline remains strong at $59.5 billion.

I believe our 2008 operating results are reflective of our business platform and approach.

This approach puts us in a position to do relatively well in adverse markets, and exceptionally well when markets turn around.

With that, I will turn it over to Larry.

Thank you, Ann Marie.

Good morning, everyone.

I said recently in an article in one of the newspapers that 2008 was the best and worst of times.

So obviously we're in the worst of times because of asset value destruction, collapse of liquidity and outright fear.

We have seen all this create a paralyzed global market, and we expect that to continue, as I said in the article, for the next three to six months, until we see some stability from - essentially from our global central banks providing liquidity and buying troubled assets.

These are the best of times in terms of BlackRock's position.

I believe more than ever before our business model has proven to be - on an absolute basis, and most certainly on a relative basis, to be resilient and responsive to our client needs, globally, domestically, institutionally and retail.

I believe we are in a better position to work with our clients than ever before.

Our clients worldwide are struggling; not just our small retail investors but our sovereign wealth funds, our pension plans, our insurance companies.

Everybody is asking questions, looking for help, looking for a complete analysis of what should be done with our portfolios; and I believe our platform, our unified platform, is as well positioned to help our clients navigate this than many, if not most, of our peers.

And most importantly, I believe we are being asked questions by our clients more today than ever before as to how we can help them navigate these turbulent markets.

So these are the best of times for us on a relative basis.

These are the worst of times in terms of the relativity in the marketplace, and the results of the marketplace and destruction of asset values.

Let me review the fourth quarter in a little more detail, and I should note that I believe our fourth-quarter release is pretty exhaustive in terms of information we are providing to all of you.

We took a lot of time in trying to explain everything by asset category, and I believe it's more transparent than ever before, and we are trying to give more information on a timely basis, obviously there's going to be a lot more information provided as we issue our 8-K and our other financial reporting.

So let me go over some important points about BlackRock.

We are very thrilled about where we earned up in terms of AUM.

We had growth in AUM.

Most firms exhibited massive destruction in AUM in the fourth quarter.

Because of the resiliency of our business and the diversity of our business products, we exhibited about a $49 billion net increase in assets.

So we have crossed over again to the $1.3 trillion asset base.

Now, obviously, we saw a very large swing in assets.

We saw large outflows at times in long-dated funds.

We saw large inflows in liquidity, and I am going to go into those in a little more detail.

But importantly, our BlackRock Solutions and Advisory business has really transformed our asset growth, and helps us continue to grow.

And I believe, once again, our business platform of having a complete product profile of alternatives, equities, fixed income and advisory is going to allow us to continue to drive new business growth.

So $49 billion of net new growth, that was on top of an $80 billion market decline in just our portfolios.

$80 billion is pretty shocking, but it also exhibits how hard the markets fell in the fourth quarter.

That is entirely beta, and actually in most of our equity accounts in the fourth quarter we outperformed.

So if we did not have positive alpha in our equity accounts in the fourth quarter, we would have had even more price destruction.

And so I know these numbers are shockingly large, and yet it just exhibits the pain and suffering that the capital markets had in the fourth quarter.

But we've been able to navigate through that, we've been able to build business, and as an overall platform we have been able to transform ourselves and build more relationships.

I would like to also say we have more clients today than we did at the end of '07, and we have more clients today than we had at the end of the third quarter of '08.

So we are winning business, we are picking up clients and we are picking up multiple client activities for our - with our clients.

As Ann Marie noted our pipeline remains robust, with close to $60 billion in new pipeline, of which $21 billion are long-dated mandates.

I'd like to note that in the last week or so we are starting to see more clients' activity, and this is one of the reasons why we've seen an increase in these long-dated mandates in the first quarter.

We are still seeing clients restructure.

We expect to see clients restructure in a great way.

Some clients are going to be moving more and more out of alternatives, as they are short liquidity, which I'll talk about in awhile.

They just have too much illiquidity in their portfolios, so they are trying to simplify their portfolios.

Some clients are taking a more active approach to try to buy more, I would say, riskier assets now, and some clients are looking to immunize portfolios by buying long-dated credit.

Some clients are looking to now sell bonds and fixed income and to go into equity.

So we are seeing, depending on the clients' needs, depending on the nature of their liabilities, we are seeing tremendous changes in client behavior.

Let me just talk -- before I get into the details of our different businesses, let me just personally hit on nonoperating.

Ann Marie told you really where all the hits were, and I think our release does explain it pretty carefully, down 25% from the high level of our assets that we achieved in '08.

It is reflective of the market.

Most of these investments are investments with our clients.

I would like to also just note, and very strongly note, we do not have portfolios that are held to maturity.

Everything we have on our balance sheet we flow through income.

And so, as Ann Marie said, it does put some earnings volatility, and yet I would tell you our strong position with our clients necessitates sometimes to co-invest with our clients, and we are going to continue to do it.

We believe it is the right business model.

In the long run, obviously if I knew we were going to have price destruction like we've had, we were bearish but not that bearish, we would have probably thought a little differently.

I would also say we do not hedge any of our exposure in these products.

We do hedge at times the beta of equity markets, when we are seeing equity-like products.

But in the alternative space like real estate, like co-investing in our fund to funds of hedge funds, and the fund to funds of private equity and real estate, we do not hedge.

We are going along with our investors on these products.

And at times when we had great returns on the upside, we benefited, and obviously a 25% decline in these assets are quite startling.

But we believe we have been very aggressive in terms of marking these assets.

If there's still more price destruction in '09, we will probably see some destruction in those asset categories.

So I'm not here to tell you that it's going to be upside forever after this, but I will say we have been very aggressive in terms of the marks.

We actually like the cash flows that are being thrown off from these investments.

Certainly some of the investments are throwing off huge cash flows now.

And as Ann Marie said, we do not belief the majority of these assets will have permanent impairment.

We do believe, once markets will normalize, that these assets will come back, and we will have some gains that we will be able to recognize as we mark-to-market the assets upward when the world stabilizes, which, unfortunately, I don't believe we are going to see that much stability at least in the first six months of this year.

As Ann Marie discussed, and it is in our offering, of the losses $124 billion -- $124 million was losses in our seed investments, a $91 million loss was in our various real estate products.

I should state we do have about $30 billion-odd invested on behalf of clients in real estate, so these are just small components of the seed, so they are across many portfolios.

And we were very aggressive in terms of marking our fund to fund business, especially the private equity area.

We don't have the returns back for most of the advisors who we have our fund to funds products that we co-invest with, we don't have their results back.

But we are taking strong estimates as to what we thought would happen in the private equity area.

As Ann Marie also stated, we will continue to co-invest with our clients in this business, and we believe this will be an important component of our future growth.

Let me spend some time now on our business -- on our core businesses in the fourth quarter.

Let me start out with equities.

We had a great relative year.

59% of our products were above the benchmark above peers.

In a chaos market like it is, like it was in '08, I believe the returns are tremendous.

Our three-year returns, 81% of our products are above our peers in benchmarks.

Our large cap series, under Bob Doll, ended up the year with very positive performance.

Our UK equity team, our European equity teams, had very strong performance.

And I do believe when equities become the product of choice again in both mutual fund and institutional channels, we are going to be one of the beneficiaries of that.

I would like to also note, once again, the outstanding performance with our global allocation team.

I would like to also just identify, this is the sixth largest net funds product in the US in 2008.

We are very well-positioned.

We believe this is a product that is going to continue to grow and continue to be one of the large new products that are going to be sold, when equities become back in vogue.

Obviously, this is a product that has an allocation of 40% in fixed products, too, so it's not just equity.

So for clients who are looking for a global allocation product, this is one of the best-in-class.

It is recognized -- it is in the first quartile of performance now for many different quarters and years.

So we are just very well-positioned in the equity product areas.

We also did a very good job in terms of selling our products overseas.

We were one of the top net product -- mutual fund sellers of product in our Luxembourg channel; that's where we domicile our European equities.

So we are just very well positioned in equities.

And I believe once the market stabilizes this will represent a very positive growth product for BlackRock.

Now, obviously, in the fourth quarter we saw large outflows in equities, as people felt frightened of equities and equity performance.

A lot of that money went into liquidity products.

But we believe over the course of a long cycle, as long as we have the proper teams, the risk management tools and the performance, we will be a huge beneficiary of this.

On the fixed income side, we had mixed performance.

We had actually very strong performance in our specialized fixed income products, in corporate products and TIPS.

In emerging market products and our UK equity products, we are very strong.

We had poor performance in our multi-product sector portfolios, but -- on a relative basis versus the index, but we actually did much better than a lot of our peers, and surprisingly we are winning a lot of assignments even in the multi-product area because of our relative performance versus some of our peers.

This is something that we are focused on.

Obviously we would like to have a complete story about all our fixed income products doing well, but in some of the areas we did not have as great a performance.

In alternatives we are seeing sea changes, we are seeing business changes dramatically in the alternative space.

As I suggested earlier, clients - many clients were just overly committed into the alternative space.

Clients in many cases did not appreciate the nature of liquidity, and so many clients today are facing real issues surrounding liquidity.

Many clients are challenged with their overcommitment in some of the alternative areas, and so we are working with some of our clients and trying to help them, obviously, in their liquidity issues.

This is an industry problem.

This is not a BlackRock problem, but an industry problem that we are a part of.

We have no Madoff exposure in our funds, in our products, in our firm.

We are well-positioned relative to most of our competitors.

I do believe the Madoff scandal, I do believe the turmoil with a lot of -- many other financial institutions will put BlackRock in a very good position in the alternative space.

We believe as clients reconcile their liquidity issues in alternatives, and I'm talking fund to funds, I'm talking real estate, I'm talking about specialized product, clients will look to firms like BlackRock to have investments in these products areas.

So I actually believe the turmoil is a long-term positive for us, and we are going to be very aggressive, making sure we are well positioned in alternatives with our clients, because some clients are continuing to make large investments in alternatives.

I think it was announced in the latter part of December that we won a $1 billion assignment for the PBGC, and this is all in the alternative space, in real estate and fund to funds of private equity.

So we are seeing some large scale clients who are still looking to be additive in this space, and we believe clients worldwide will do that, and we want to be one of the vendors that are working with our clients.

And touching on the PBGC assignment, I think it is another good example that clients are looking for complete overall relationships.

Clients are looking for partners, they are not looking for product specialists.

Clients are looking for partners to help them navigate in different products, whether they are alternatives, fixed income liquidity, equity.

But most importantly, clients are looking for a firm that can provide risk management assessments of all the products, and they are looking for a complete relationship.

And I think the strong vote of confidence by the PBGC is a very good indication, though in a hostile environment in alternatives, we are winning some large-scale assignments.

Let me just touch on the retail platform.

We had positive flows as a retail platform overall in 2008.

I think we are going to be one of the only platforms that can say that.

Obviously, the fourth quarter was very hostile.

We saw over $7 billion of outflows in our global retail platform.

But obviously we had great growth in the first half, some growth in the third quarter, and we were able to be in the positive side.

I think that speaks volumes about our products, but more importantly it does identify to the management team of BlackRock, to our Board, of our success in branding our platform, continuing to build our retail brand globally, and importantly to continue to build our third party channels of distribution.

We are very proud of the work we are doing with our distributors.

We are spending a great deal of time with our distributors.

And as a result of that we believe we are well-positioned.

I just have a note of caution about our distributors.

As we know, there's been some seismic changes with our distributors.

Merrill Lynch is now part of the BofA platform, and then we've seen now the Smith Barney platform merging with the Morgan Stanley platform.

Our job is to work with all our distributors in making sure that their platforms, and BlackRock's relationships with those platforms, are strong.

We look forward to working with every one of them.

But with these changes in these distribution platforms, it's going to put a lot more pressure in making sure and proving to the world and to our clients that BlackRock has the skill sets to be working with our clients, and we look forward to working with them.

Institutional business continues to be a prime driver of our business.

Fiduciary outsourcing, liability-driven investments, multi-asset strategy, these are the key terms.

This is what clients are looking for.

Clients are looking for very much of a complete relationship.

They are looking for portfolio advice.

They are not looking to be just an equity wonk or just a bond wonk; they are looking for an understanding, they are looking for a partnership to work together, and this is how we are positioned.

This is how we are continuing to make sure we are well-positioned to handle our clients' needs.

And I believe having the one BlackRock platform, the one culture on a global basis, positions us well to handle those clients' needs.

So I believe having that platform will allow to us continue to help our clients navigate these hostile markets.

And so I look forward to building out our client relationships globally and domestically, institutionally.

On our cash and liquidity, we are very proud of our team in the liquidity business.

I think 2008 clearly tested every liquidities firm.

There are huge survivors and huge losers in 2008.

Many firms have announced large either purchases of assets taken out of their funds, huge losses associated with some of their portfolio decisions that they tried to make their clients whole.

I would say very loudly BlackRock navigated our positions very well.

I think our performance in the fourth quarter, with asset growth in the fourth quarter, with our liquidity business, truly indicated our clients' willingness to work with us.

I think the strength of the overall BlackRock platform continued to shine.

In terms of market share, the data that we just received on 2a-7 funds, our market share -- our business was up 20.7%.

The industry was up 17.5%.

So we were able to pick up market share in 2a-7 funds.

If you separate out sect lending in the third and fourth quarter, you could really see the asset growth in our mutual fund liquidity business, and that was a very strong indication of our growth.

We are very excited about the continuation of our liquidity business.

We believe it's going to continue to be a large driver of our business.

We are continuing to build our third-party distribution channels and liquidity in the United States, and we are looking to continue to build our international liquidity business.

We believe there's great growth opportunities internationally.

On the other hand, let's be honest, the liquidity business in 2009 is going to be challenged because of low interest rates, and low interest rates are going to put pressure on the liquidity business, at least in the retail business.

Institutional business, we are not seeing any pressures to date.

On the positive side, we hope one day clients will start moving money out of the liquidity business and go back into long-dated assets, go back into alternatives, and hopefully as BlackRock's platform allows us to work with our clients, to be that navigator of the asset allocation, that we will be a part of their reallocation, whether it's in equities or fixed income, if there is a greater stability in our marketplaces.

BlackRock Solutions and Advisory.

I think everyone somewhat understood our business, but I think people really did not understand how important this business has become to the BlackRock platform.

In 2007, our revenues were about $195 million.

In 2008, the revenues crossed over $400 million.

This is a portion of our Advisory business that we are doing and the Aladdin business that we are doing.

We are proud to say that we had 72 new assignments in 2008, 20 new assignments in the fourth quarter.

We completed 46 short-term mandates in helping clients during 2008.

We've had equity -- expanded Aladdin assignments.

We won a new Aladdin assignment already this year, and we are working on a number of other large-scale Aladdin assignments going forward in 2009.

We hope to be rolling out -- a part of our Aladdin product is our equity platform.

Mid last year we did buy Impact, which was more of an equity analytics that we are now going to be attaching to the strong analytics we have in terms of fixed income and alternative assets.

And so we look forward to building out our platform with -- our risk management platforms with our client to provide a more complete service with our clients.

We believe our Advisory platform, it's been very visible in the United States working for some official institutions, we have just as much opportunity internationally.

As official institutions are going to be looking to ring fence, assets ring fence banks, and we intend to continue to expand our Aladdin and Advisory BlackRock Solution platform overseas in 2009.

So we look forward to continue to building that out, and we are quite constructive on that platform.

Let me just go into three or four more other points.

I know I've been speaking a long time.

We had a lot to say.

I believe BlackRock's business model is positioned very well for 2009.

We will be able to navigate ourselves quite successfully, I believe, in 2009 working with clients.

I'm not here to predict what will happen in 2009.

Obviously, it started very hostilely.

So much of our business is a window of the market.

So if beta continues to be hostile, it will be a hostile environment for financial institutions, including BlackRock.

If beta stabilizes and BlackRock continues to build our presence retail institutionally, internationally and here domestically, we will be very well-positioned this year.

I am very proud of the branding initiatives we did in 2008.

I believe we are very well-positioned to pick up more share globally.

I believe our branding will continue to grow dramatically here domestically in the United States.

I do believe there are going to be huge opportunities in the United States.

I think historically you've heard me talk about more opportunities domestically, but I believe the opportunities will be just as large here, as we are seeing a transformation of the financial markets, as we are seeing a transformation in our -- in the financial institution arena, I believe we will be a large survivor in this, albeit the marketplace may force us to be smaller, but we will be a large survivor and a big winner in this.

There are very large M&A opportunities for BlackRock in 2009.

I promise you if we do anything, it will be for strategic and product expansion opportunities.

But we do see large opportunities in front of us.

We've had initial discussions with many different institutions.

Obviously the sea change is so dramatic that conversations come and go, because of the problems associated with different firms.

But I do believe ultimately we will find something that will be quite additive to this platform.

But we are going to be very selective, if we end up doing anything.

I would like to just also say two welcomes.

We are very excited about the build out of our relationship with Bank of America, as they are now a very large strategic partner of BlackRock.

We believe this will be a very big business opportunity for BlackRock and Bank of America.

We see huge opportunities already.

We have been working with the management teams of the old Merrill, and the new management teams of Bank of America, to try to build products and revenues together.

And we see -- and we believe during the course of the year we will continue to build those opportunities.

It would be wrong for me not to talk about our new administration, with President Obama and his economic team.

We believe the challenges that confront our economy are severe.

We believe there is going to be a great need to firewall assets.

I publicly stated in the past that I believe the TARP should have been used to ring fence and firewall troubled assets.

I don't believe putting equity in institutions is the first order of business.

You need to stabilize balance sheets before equity has any virtue.

If you don't stabilize assets, that money that goes into equities doesn't help.

You can't leverage that equity.

So once you stabilize assets, and then you infuse equity, that equity then can be used with 10-to-1 leverage, and lending will occur.

So I know Congress will be spending a great deal of time asking questions, why aren't people lending?

Well, the main reason people aren't lending, we've seen, as we witnessed in different fourth-quarter announcements, extreme destruction in asset quality; you saw that in our nonoperating earnings.

And so we believe there is a great need for some form of aggregator bank.

We believe there is going to be a great need to stabilize balance sheets.

And once we stabilize balance sheets, private equity and public equity will be very available to invest in financial institutions.

And with that, that new equity will then be used to leverage and to lend.

So with that, we welcome everyone to 2009.

Hopefully the first few weeks are not an indicator what we are going to look forward to for the next 50-odd weeks.

With that, we will open it up for questions.

(Operator Instructions).

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

Thank you, good morning.

Appreciate the comprehensive update.

I do have a couple of questions, though, big picture in nature for the most part.

Larry, I was wondering if you could talk a little bit about the distribution.

I thought you were going to down this, and you didn't sort of flush it out as far as I thought.

There's been some significant consolidation, obviously, you highlighted Bank of America and Merrill, but we are also seeing it elsewhere, the new joint venture that is about to be unfolded with Morgan Stanley and Salomon, Wachovia, Wells Fargo, et cetera.

What do you think the implications are for the industry from this historic consolidation?

Good, bad or indifferent?

I think one other point that I think we - before we just talk about the consolidation, if anything we've seen expansion of distributing channels because we've seen the rise of the independent distributor.

We're seeing more and more platforms pop up in the independent -- FA is now a very viable business and platform.

And so I would say that, obviously, dynamics are changing.

I would say as an industry, I think you are going to see a need to have stronger relationships with fewer distributors - with fewer manufacturers.

So I believe this type of consolidation is a very big positive for a firm like BlackRock and other large-scale platforms.

I think it's a very negative for the specialist or small mutual fund platforms.

I think they are going to be choked in terms of providing -- in terms of the distribution channels.

The distribution channels will probably extract more leverage.

They are going to probably try to extract more fees, you know, but I believe the large-scale platforms will -- the manufacturers are going to be the net beneficiaries of that.

With some of the names, without getting into details, we saw in one of the cases, one of those third-party distribution channels away from the Merrill/BofA, we went to I believe the number one net sales with one of those third-party distributors, and I think we are now ranked third, maybe even second, in terms of net sales of one of those aggregators -- or one of those firms that are combining.

So we see this as a real positive.

We see these firms are going to be looking for a more complete relationship, and are looking -- they are looking for more partnership relationships.

They are going to become more institutional with the gatekeepers, and so I think we will be a beneficiary of that consolidation.

As I said, I think, in the third quarter, and I didn't mention it this time, we have -- despite our downsizing in personnel, we have -- one of our big growth areas is to continue to expand our distribution platform with third party distributors.

So we are planning to do hiring there despite, obviously, the consolidation of these three platforms.

But we believe the role of the independent distribution platform is going to grow, and we need to be spending more time with those platforms.

Terrific.

Second question I have is just coming back to the cash management business for a moment.

It seems like this is an industry -- probably an industry that's poised for significant consolidation.

There's some recent press out there suggesting that -- I think a study by the G-30 that the cash management business should have some kind of capital allocation against it.

I was wondering what your view is on that, and how that might influence your participating in that part of the business?

We are a loud and large believer that capital should be -- capital charges or the ability to reserve is a very important component.

So we are probably louder than most of the players in this business on that.

I don't believe the ICI has that position; I believe they are against that position.

We are very much in favor of that position.

We have been asking our auditors, can we reserve 1 or 2 basis points on our money management business -- liquidity business for years, and we were not allowed to because, obviously, auditors don't allow you to do any reserving.

But we believe by having some type of government oversight, with the idea that we are having capital reserves is a very, very important component for the future of money market funds.

I believe as your investors know that there is capital behind those funds, it gives more stability to the business.

I believe the challenges in '08 were, why should I have money with money market funds when I could go to a bank and the bank is FDIC guaranteed?

To me that is a bigger challenge for the long-term survival of money market business.

And so we believe the money market business, which is essentially a shadow banking business, should be treated like a banking business, with capital charges associated with it or reserves associated with it.

We believe it's going to force, Bill, even a greater consolidation in the money market business.

It obviously -- for the small firms that do not have the scale, the added capital charges or the reserving for capital, is going to force down profitability even more, and is going to make it a more of a scale business than ever before.

So we are in favor of it.

And so two other final questions.

I wonder if you could quantify the savings from the headcount reduction and where those reductions came from?

And then Ann Marie, if you could just sort of flush out the FX impact on both revenues and expenses in this quarter one more level, if you don't mind?

On the headcount, I think you can estimate it fairly easily by just taking 500 people times a fully comped personnel person that would be an average rate for a full-size firm.

So that, I think, you can get at very easily.

As far as the FX, I would just differentiate between two things.

One, the FX that I mentioned with respect to G&A is the balance sheet-related FX.

I think what you're asking about is the FX related to revenues and related to expenses, where we do have some balance, in that we do have Euro and sterling revenues but we also have very significant sterling-based costs.

So we do have a positive margin business but on the other hand we do have costs, very material costs, in the same places where we have very material revenue.

Okay.

Thank you.

Your next question comes from the line of Roger Freeman with Barclays Capital.

Hi, good morning.

Hi, Roger.

Hi.

I guess I have a question on the advisory base fees.

They take down a fair amount sequentially, and it looks like equity and balance was hit the hardest.

Is that a function of mix?

Is it less equities inside of equities and balance and how -- is there anything unusual there or is that sort of the run rate to think about going forward?

When you talk about advisory you are not talking about the BlackRock Solutions Advisory.

No, I'm talking about across your --

Yes, that was predominantly just driven by the fact that markets hit equity and balance the most.

So really what I said in my comments was really base fees represents the bulk of the equity decline, and within that 80% to 90% of it, in one case over 90% depending on the period you're comparing to, is related to equities and balance.

And as I said, in the fourth quarter we did see in the retail platforms outflows in equities, but --

I was just --

The market was so dominant.

And I would also say we did have positive alpha.

So it was just dominated by beta.

Right.

But I guess I was asking in terms of the basis points, right, the 33.4 basis points in aggregate from 3Q going to 28.7.

I think you answered it, it does sounds like it's mix, it's less equities in there, which means --

Oh, yes.

That's all it is, yes, you answered it.

Okay.

Then on comp, and just to sort of come back, I think you partially answered the question previously, but if we were to look at -- I'm assuming part of the downtick in the comp to revenues was a reversal of prior accruals, maybe bonus accruals?

How would you think about a fair comp to revenue ratio for the 4Q, adjusting from any reversals previously?

I looked at the data, and I think one thing you can do is look at the full-year comp to revenue ratio and think about that.

So that was actually good, it was actually down sequentially, which is sort of surprising given the decline in AUM.

About 5%, about flat to a year ago.

And rather than look just at the fourth quarter, I'd look at the full year.

But -- as a guide post.

But there's no question the first half, Roger, we had some large performance fees that were (inaudible).

So it's being skewed a lot in terms of the destruction of assets, especially in some of the areas where there's some large performance fees in the first half that were totally wiped out in the second half.

You adjusted your human resource base in the 4Q, markets are down another 10% here.

Going into the year, I mean you said you were going to proactively continue to cut costs.

Are you staffed appropriately for where we are at right now?

We analyze that all the time.

At the moment, there are no plans.

But I don't want to mislead anybody to say this is not a dynamic situation that we all have to look at, and I will say we also have strategic opportunities from the BlackRock Solutions area, our retail distribution area, and we are going to continue to grow.

But I would not suggest that we would not do staff reduction if we needed to if the market continues to erode, but I will say loud and clear we are not anticipating any at this moment.

And there's no plans for it at this moment.

Got it, okay.

And on the Advisory inflows, that $100 billion or so in the fourth quarter, I mean I know you've been hesitant to talk about fee structures tied to that but now it's obviously getting to be more significant.

And so if we think about comments you have made, which is they are large assignments, they're fixed income in nature, they are complex, does that mean that they are around -- when you bake that all in, around what a fixed income cash flow rate is or a little bit higher?

No, they are actually lower.

They are lower, lower than the sort of 17, 18 basis points?

I won't go into that because some of the assignments are official institutions where we cannot discuss it, and yet they are lower but I will say they are profitable, you know, and they are very important for this platform.

And obviously by looking at the delta of growth of revenues, it's significant in the solutions space, and so it's a significant component of our growth and it will be a significant component of our growth in '09.

Last thing, Larry, just macro, do you think - I don't know if you have made public comments on this.

Do you think cram-down legislation is an appropriate course of action?

Will it be effective?

Wilbur Ross actually is on the tape while we are on this call saying that he thinks mortgages should just be reset at 100% of current home prices.

Does that make sense to you?

Here's the situation.

There is a lot to be said about in the sub-prime space that we need to keep people in their homes, and there needs to be a reappraisal of the valuations.

In some of the mortgage space you have assets trading at $0.20 and $0.30, and yet the defaults at the moment are only running at 20%, and so you have a huge difference.

So you have a lot of room to revalue the asset.

So maybe the mortgage is now worth $0.50, there is still a gain in the sub-prime space.

So there are many areas where resetting the principal amount of a mortgage is very, is very doable and it will -- and no -- there's not a real loser in the whole situation.

The situation that we are saying loudly to our government, loudly to the our new economic team, is that if we force cram-down with assets that are trading more closely to par, and we harm the security holders, the foreigners who own tens of billions of dollars of our mortgages, who believe they are going to get par back, and the mortgages are crammed down, we will disrupt capital demand for our mortgage business for a long time.

So what we are telling our government, do not, in the sake of helping homeowners, harm our investors.

You are going to have to change security law in the grantor trusts in many ways.

And so this has to be done cooperatively with the security industry, with government, with the mortgage industry.

But cram-down overall, if we are talking about cramming down everything, that would have some severe impact in our global capital markets, and I would hasten to say that we will have a hard time finding buyers of our mortgage credit in the future.

So this is a very delicate situation.

It should be done cooperatively with the security industry, with the groups that are representing security holders, to do it properly.

So it is not a clear and cut answer.

But overall, if we are talking about cram down in the entire mortgage industry, I would say that would cause much greater long-term havoc and damage than what we are experiencing now.

Thanks for your thoughts.

Your next question comes from the line of Michael Carrier with UBS.

Hello, Michael.

Hi, thanks.

Just first one question on a follow-up on the fee rate.

I understand the negative mix in assets pressuring on the overall fee rate.

But if I just look at the equity assets and the equity fees, the rate on the equity assets seemed to come down significantly in the quarter sequentially.

So I was just wondering if there was some sort of shift in there in terms of more equity versus balance, retail versus institutional, or if there were any fee cuts in there?

Well, no.

A, there was no fee cuts, it was the mix.

We saw more outflows and more beta declines in some of our European equity products, especially our energy products, which were much higher fees.

And that's just, as you know, what has happened to the energy sector, so that was probably some of the highest fee products, and that was where we saw in the third and fourth quarter the greatest declines in NAVs.

So it's really a mix within equities.

There are no fee changes or fee waivers; It is just the mix going into -- going out of some of the more specialized equity products into the more core equity products, and that's all you're seeing.

There is -- the dynamics are nothing but that.

Okay.

And then just on the nonoperating income, in terms of the investment portfolio and the losses, can you give any more color, and I think this is more just looking forward to try to gauge the portfolio and the losses, in whether the first quarter or throughout '09, just in terms of the relative buckets of the assets?

I know you guys give the breakdown in terms of the hits during the quarter.

And then I guess just overall if the portfolio is down about 25%, and granted depending on the market, markets can be down anywhere from 10% to all the way up to 50%, but just trying to get a sense of some of the relative levels of where these valuations are, whether it is in private equity or real estate or distressed.

And then the final one is, when you do look at valuing all these assets, for any of them that you are getting from say fund to funds or third party providers, is there any way to kind of do evaluation check on what they are giving you?

Just so it's in the -

I'll let Ann Marie answer the core question, but we have third-party providers go in, in all our fund to funds advisory assignments.

So we are not taking -- there is no question, we are not taking the manager valuations.

We are going in and getting a third party appraiser, and I think that's probably industry standard.

That's not unusual.

Yes, I would say on the first one, the first question with the distribution of the portfolio, the last time we talked about this we said -- we mentioned five asset classes being the more public markets, distressed credit, hedge funds and fund to funds, and private equity and real estate, and that each of those represented between 15% and 25% of the total portfolio.

That distribution of our investments remains the same, even with the mark.

So the portfolio in proportion.

Now it may have moved within those ranges, but still remains about there.

As far as the marks go, we don't rely solely on broker quotes or anything.

We look through to the assets, we look through to the cash flows, we make sure we understand.

We do have the duty to make sure we are looking at those as appropriate, hiring outside managers and -- I'm sorry, what was the middle one?

You should talk off-line with Mike.

We only have a few more -- about ten more minutes, and we have many more questions.

Okay, that's good.

Thanks a lot, guys.

Your next question comes from the line of Roger Smith with Fox-Pitt Kelton.

Hi, Roger.

How are you doing?

Thanks a lot.

I just want to talk more about on the institutional side, and I know you talked about your clients looking for one provider.

I just want to try and understand, when you are out there talking to them, what should we be thinking about in terms of their target allocations?

I know you said they are rebalancing.

And then, really, how does the role that you guys are going to play kind of change with the consultants, and what would the consultants' role sort of be on a go-forward basis?

Let me go over allocations.

As I said, it really depends on the (audio dropout) and the clients, their liabilities.

If the client has assets that are substantially lower than their liabilities, they are probably going to be reallocating out of fixed income more into equities.

If clients are imbalanced because of liquidity issues, they are probably allocating out of alternatives as best they can into more liquid assets.

If clients are just totally frightened, they are allocating out of all long-dated assets into cash.

We are trying to recommend clients to shy away from cash as much as possible, to start reinvesting.

So really, we take an asset and liability approach to all our clients.

There is not one formula; it really depends on the clients' needs, their cash flow needs, their timing needs.

And so -- but I think it's fair to say, clients overall are looking for more stable returns.

They are willing to accept much lower returns now for more stable returns.

So I think that's a generalized theme.

So there's not one formula.

And in terms of our relationship with consultants, and consultants are still a large driver of our business, consultants are actually also getting into the asset management business as they play a role as an asset allocator, and we are too.

So in a lot of ways we are playing some role as a consultant with some clients, and some clients we are working alongside with consultants in terms of working on asset allocation.

There is not one right model, but our service, the opportunities are being blurred between the BlackRock platform and some consultants.

But we -- the clients are very -- I mean the consultants are a very large component of our client business.

We work with them, we try to make their business better.

We are not trying to take away business from consultants, but we are just trying to be a larger partner with our clients, our direct clients, and in those cases when they are looking for more of a fiduciary relationship we are taking on those responsibilities.

Fiduciary outsourcing is growing much larger in Europe, and this is where we've won a lot of large amount of fiduciary mandates in Europe.

In Europe, this is where the consultant community had less of a historical role.

Then you have, I would say, the partnership-type of relationships we have such as the PBGC, which I mentioned.

A consultant played a role in that.

A consultant was very active working with the client, and we acted as a partner working alongside with the consultant and the client.

So once again, there's not a real model.

Okay.

Great.

Then really on the Advisory business, I know with these assets that you are getting, and I know you don't want to talk too much about the fee pressure, but what are the expectations of the client in terms of the duration of some of these mandates?

Is this something that a lot of them are thinking might be a 12 to 18-month deal, or is this something that we can end up seeing stay for five years or ten years or more?

It's probably more appropriate to think five to ten years.

I think if the assignment is done with some official institution, the main purpose is to stabilize the assets, work out the assets, but most importantly not disrupt the marketplace.

And so if you told me in two years the market is going to be totally fine, and it's going to be able to handle more supply and more opportunities, then it's a shorter-term assignment.

I think our expectation is that it is much longer than two years or 18 months.

I think our expectation is north of five years.

But it really depends on the global economy and the global capital markets.

That's good.

And then just the last questions on Quellos, with the pressure in the fund to funds business, how is that really playing in this total product that you are offering?

And do you see fee pressures, and even with -- you are seeing a lot of funds cutting their fees.

Is that pressuring the other managers, or do you not see as much of that happening?

No, once again I mean I think the Quellos product, which we don't call it Quellos anymore, the BAA products, that was part of -- like the PBGC.

So there is a good example of a cross-selling products; it was a real estate product, then a fund to funds product.

And so it really depends on the product, but we are not seeing fee pressure.

We are seeing people question the whole alternative space, as I suggested, and I think this is an industry problem, and yet I do believe there is a greater role for high-quality fund to funds platforms that do the due diligence, that have the systems of risk monitoring.

Unfortunately, there are many fund to funds platforms that were a big allocator of Madoff, and so it puts a black eye on the entire industry.

You know, where were their risk management tools?

Where were their alarms when the institution played every role from custodian and everything else in terms of assets?

To me, there were just some big open questions that really throw the whole question of the virtue and value of fund to funds with some people.

I believe overall it's going to play much -- there is an active role for fund to funds.

I believe a platform like BlackRock with the risk technology, and having the BAA space a part of the overall platform, will play well for those who are still believers of the fund to funds space.

Great, thanks a lot.

Your next question comes from the line of Robert Lee with KBW.

Hey, Rob.

Sounds like he dropped off.

Robert, your line is open, please go ahead.

Let's move on, please, because it's getting late.

Okay.

The next question will come from the line of Craig Siegenthaler with Credit Suisse.

Hey, Craig.

There's been a lot of discussion in this industry to how it's really going to evolve and, you know, I guess one demand, seeing your results, is stronger demand for advisory businesses.

But, you know, I guess history would tell us that there should be some decent pent-up demand for some institutional equity products, too.

I'm just wondering in your view, is it that advisory asset liability, other fixed income, cash management should continue to take share here, even in the case of a rebounding market?

Or is this really just a function of high risk premiums?

Is that really why we are still seeing large demand for fixed income products?

I don't have a complete answer to that.

I believe at this moment there is a view that until fixed income credit stabilizes and narrows, it's very difficult to think equity products can go that far.

So I believe the first order of business, we need to see a big rally in a lot of the credit products.

We need to see stability in a lot of the credit products, and then we will see equity products rebound very strongly.

It is argued that we are going to see sometime in the future that stability, but we do believe the equity markets will respond much quicker than people -- than most people believe in, by just looking at how much money is in cash, and that money will rush into equities much faster than people think once we see the stability in the credit markets.

And so we are recommending to clients to add to their equity allocations, but pay attention to liquidity this time.

I actually think if you look at the mutual fund flows, we saw huge historical outflows in the large cap series of products industry-wide, as people started to navigate into different specialized products and navigate into alternative products.

I actually believe we can see for the first time in maybe a ten-year cycle a large flow back into large cap series types of products, be it value or growth or core, as people are going to value liquidity a lot greater and value large cap products, which provides probably the most complete liquidity of all the alternative and equity products., so -- and products like global allocation.

So we believe you are going to see that.

As I noted, we are starting to see more and more inquiry, and we've had in our pipeline a couple of large wins in the last few days, so we are starting to see client activities pick up.

But on the other hand, I think clients are going through their whole asset and liability review now over the next four to ten weeks, and I think you are going to see some real large allocations and we would recommend to clients that go heavily into credit and go into equities.

We believe, unless you're frightened of the world, you should not be in Treasuries.

Got it.

What my question is really trying to get at is the potential persistency of your Advisory and your cash management business, should the markets rebound here?

Would you benefit from the equity -

Cash management, I expect cash management to follow.

If markets rebound dramatically, I believe the whole industry assets will fall.

Hopefully, we will continue to pick up share but we expect -- yes, we certainly expect -- we certainly expect that assets will fall in liquidity.

On the Advisory business, actually I believe '09, maybe 2010, is going to be a very large opportunity for us.

You know, I believe there are going to be large-scale needs to stabilize financial institutions globally.

I believe we will have some great opportunities to work with these institutions.

I believe there is a global appreciation to risk management, and I believe our Aladdin platform will be a very large growth part of our future business.

And as I said I believe that the Advisory -- part of our Advisory business will be -- will grow dramatically, even if there is stability in assets, as you've suggested there may be.

Got it.

And just a quick one for Ann Marie.

When you look at comp expense, there is kind of -- my view is two large unusuals in the quarter, one from deferred comp and one from the severance.

If you take them out and think about how comps should trend in the next year, is that a core number or is there additional expense reductions that we haven't seen really play out in the fourth quarter yet?

I think when you think about the fourth quarter, you're correctly adjusting for the comp, and we have given you that detail.

The comp related to the hedge stuff, so you take that out.

I think that you think about the full-year comped revenue ratio, which you need to factor in.

And then really as far as the headcount reduction, that really didn't come into play until probably, you know, the beginning of December.

So it's a partial quarter effect of that.

Got it.

Great.

Thanks a lot for the color.

Operator, one more question, please, and then we are going to call it.

Okay.

The next question should come from the line of Robert Lee with KBW.

Thanks, hopefully it works now.

How are you?

Good, how are you doing?

Really two quick questions.

The first relates to the MBS purchase program, understanding your reluctance to talk about the fee structure, but assuming the program hits its targets of upwards of $500 billion of purchases in the first half of the year, should we expect that it's going to be about $100 billion or thereabouts of flows from that program?

We did not include that in our flows, that program, and I don't believe we will, because I don't believe it's proper for us to describe what's going on.

We'll let the client announce that specific program.

So we are trying to be as opaque on that as we feasibly can.

I can't even talk about it.

That's a program that -- I will let the client through their official releases discuss it.

Maybe just from a geography on the financials perspective, is that going to show up in fixed income assets or Advisory assets?

As I said, we're not certain whether we are going to show those as assets.

The revenues will show -- we will show the revenues in Advisory, but I don't believe that specific program, we have not determined whether we will show that even in the assets.

Okay.

And --

Because it's so skewing, it's so large - it could be so large.

Okay.

Just a quick question on the balance sheet.

Ann Marie, maybe just get a quick update on -- maybe a snapshot of what it looks like now in terms of, I will put it free cash, if there was any kind of debt reduction in the quarter, just trying to get a sense from kind of the -- what the net cash position looks like?

We continue to be a positive cash flow business.

We of course haven't published the balance sheet yet, but there were no, really, changes in our debt position.

We neither took on more debt nor did we prepay any debt, so you are going to see a pretty stable balance sheet.

The one thing I would remind you of, which is an annual event, is that year-end cash does tend to be higher than the end of first quarter cash because of incentive comps, and the timing of that payment.

Okay, that was it.

Thank you very much.

Ladies and gentlemen, we have reached the end of the allotted time for question.

Mr.

Fink, Ms.

Petach, are there any closing remarks?

Thank you for taking the time.

It's been a long conference call.

We look forward to talking to everybody at the end of the first quarter.

Thank you.

Have a good day.

This concludes today's teleconference.

You may now disconnect.