貝萊德 (BLK) 2009 Q1 法說會逐字稿

Good morning. My name is Regina and I will be your conference facilitator today. At this time I would like to welcome everyone to the BlackRock, Incorporated, first-quarter 2009 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, everyone. 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, our Chief Financial Officer.

Good morning, everyone. I will be discussing primarily as-adjusted results. As you have seen, first-quarter net income was $110 million or $0.81 per share, including $1.47 per share of operating earnings; $0.73 per share of non-operating losses; and $0.07 positive associated with favorable resolution of a tax matter. Excluding the resolution, the tax rate was 35%.

I thought it would be beneficial to begin by reflecting on the dramatic changes in the external environment over the past year. The Dow was down 38% from March of 2008 to March of 2009. Mining and energy were off between 35% and 55%. And sterling weakened 29% relative to the dollar. During the first quarter, the Dow was off 13%; US public real estate debt was off 20%; and commercial real estate was off 15%. And that is before considering the effect of leverage.

Equity markets hit a trough in mid-March. Since March 9, the Dow is up about 20%.

BlackRock's results reflect a strong and diversified business model, cost discipline, and business reengineering, as well as the market-driven pressures on the business. As a result, we have maintained strong operating margins.

The as-adjusted margin of 37.3% compares to a full-year 2008 margin of 38.7%. The comp-to-revenue ratio of 34.2% compares to a full-year 2008 ratio of 35.2%.

Even with strong margin, a robust business model, and many new opportunities, the market environment has put pressure on AUM, revenues, and balance sheet investments. Revenues declined due to market effects on base fees. In the face of the 13% decline in equity markets, first-quarter revenues were $987 million, down 7% compared to the fourth quarter. Base fees represented 70% of the revenue decline.

Compared to the first quarter of 2008, revenue was down $313 million or 24%. That's more than explained by a 29% decline in base fees, primarily on equity and balanced products. This is in the context of the 38% equity market decline.

BlackRock's solutions and advisory revenues remain strong and have more than doubled compared to the first quarter of 2008. BRS continues to have a robust pipeline of financial market advisory and risk reporting opportunities.

As-adjusted operating income of $307 million was down $64 million or 17% compared to the fourth quarter of 2008, and down $106 million or 26% compared to the first quarter of 2008.

Compensation costs are being driven by two key factors. Incentive compensation is being driven by the alignment of employee compensation to corporate results. Base compensation is being driven by reengineering and cost management initiatives, including the 9% personnel reduction in the fourth quarter of 2008.

There was a $22 million restructuring charge in the first quarter reflecting primarily an incremental personnel reduction facilitated by reengineering of the business. The benefits of this action will be seen beginning in the second quarter.

Excluding tax-deferred comp changes, total compensation expense was up $25 million or 2% from the fourth quarter. This is more than explained by low fourth-quarter 2008 incentive comp. Base comp was down 12% compared to the fourth quarter. Compensation expense was down $118 million or 25% compared to the first quarter of 2008; that includes a 30% decline in incentive comp and an 18% decrease in base comp.

G&A expense is being driven by strong cost discipline, particularly in marketing and promotions, including T&E and professional services. G&A expense was down 19% compared to the fourth quarter of 2008, excluding a favorable $29 million balance sheet related foreign exchange remeasurement in the fourth quarter of 2008 and excluding $2 million of 2009 fund launch costs. G&A expense was down $61 million or 29% compared to the first quarter of 2008, with marketing and promotion down over 50%.

As we have discussed before, BlackRock utilizes its balance sheet to coinvest capital alongside our clients and to seed new products. Most of these investments are long-term. Despite the long-term holding period, the vast majority of these investments are marked to market through the income statement, not through equity.

Our valuation accounting methods have been consistent and have not changed as a result of the new FASB accounting clarification. The balance sheet value of the assets is not necessarily indicative of the long-term economic value of the investment. As an example, one investment will generate 2009 cash flows of over $10 million, while the book value of the investment is $2 million.

As we know, the first quarter was negative across many markets, including the dramatic negative movement in the commercial real estate market. BlackRock's portfolio and clients were affected by these market movements. As-adjusted non-operating losses totaled $153 million in the first quarter.

Real estate related losses represented $93 million or about two-thirds of the portfolio mark. An additional $53 million of losses related primarily to private equity, distressed credit, and hedge funds and fund of funds. Net interest expense of $7 million also is included in non-operating results.

Our balance sheet exposure has been reduced greatly. The total value of the investment portfolio now stands at about $750 million, or less than $700 million including investments which represent [cagya]. At these levels and given the present mix of the portfolio, I feel a lot more comfortable with the balance sheet associated risk.

With respect to the mix of the portfolio, throughout 2008 assets have been invested 15% to 25% in each of the following five categories. Private equity; distressed credit; hedge funds and fund of funds; real estate; and other, which is generally more liquid assets. Including the most recent market movements and net redemption, real estate now represents less than 10% of the portfolio. Private equity represents more than a quarter of the portfolio. And each of the remaining three investment categories continued to represent 15% to 25% of the portfolio.

We remain committed to coinvesting with our clients, which facilitates us being a full platform provider.

In closing, while we continue to reengineer the business, we're also investing in the business. Through the mid-March equity trough, we have a large cumulative negative market behind us. Over time as markets stabilize and begin to improve, our clients, our AUM, our revenue, and our balance sheet will benefit. With that I'll turn it over to Larry.

Thanks, Ann Marie. Good morning, everyone. Let me try to give a perspective of the environment that we were facing in the first quarter, and let me later on in my presentation give a perspective of where I think our environment is going in terms of how we are positioned at BlackRock.

I think it's fair to say during the fourth quarter clients globally, from retail to institutional, from our insurance company clients to our pension fund clients to our corporate clients, they were pretty shocked at the dramatic decline in their asset valuations. More importantly, they were shocked at the absence in many cases of risk management. And three, I think the greatest surprise to so many clients was the absence of liquidity within their portfolios.

As a result of this market setback and the extreme uncertainty surrounding the market declines and their shock, clients were frozen at the beginning of the quarter. Clients needed to reassess their assumptions on risk, reassess their assumptions on liquidity. And then they needed to start looking forward in terms of how best to allocate their assets.

In many cases, our assets had deterioration and yet their liabilities did not change that much. As a result, there needed to be a full reassessment of their portfolios. This is where I believe the BlackRock model really came in very strongly.

The BlackRock team worked tirelessly, working alongside our clients and helping our clients, A, to calm down; B, to give them a platform in which they could think holistically about their overall portfolio; and in cases where there was extreme uncertainty, recommend to our clients the things that may or may not have been a bad result for BlackRock, in some cases recommending or working with clients to go into index as they try to reassess some of their risk.

I believe we are in a better position with almost all our clients in terms of our positioning with our clients, in terms of helping them reassess where they are in terms of their assets and their outlook as to how best to manage their assets.

As the market began to stabilize in the second week of March, and as our clients began to understand what they needed to do going forward, we saw very quickly strong interest from our clients in terms of asset selections and, more importantly, in terms of RFPs. Our pipeline reflects that; I will go into that a little later. The amount of RFPs we are seeing now suggests that clients are now looking prospectively on how best to position themselves.

This is a far -- a big difference from what we saw at the beginning of the quarter in terms of the outlook of our clients and where they want to take their portfolios.

So let me now review our quarter and talk about the positives and negatives; and then let me talk about some of the opportunities for us.

As our report suggests, we had assets about of $1.283 trillion. We are very pleased to announce it is only down 2%, a very strong showing despite the severity of the markets. And I'm not talking about the severities of markets, just equities, but as Ann Marie suggested, the severities of some of the credit markets and, more importantly, the severity that hit a lot of the alternative markets, which hurt NAVs, hurt our balance sheet, and obviously hurt some of our clients' balance sheets as I suggested.

Also importantly if you go back and look at our position from a year ago, our assets are only down 6%. Once again in our mind, really proving to ourselves and hopefully to all of you that our business model is unique, and we are picking up more of our clients' wallet in terms of new business.

Importantly in our first quarter, despite all this turmoil, we did see net flows. Net flows was $5.6 billion, which is very low, our historical rates. However, our long-dated flows were up $21.3 billion.

And I do believe this is because of our business model. We have five different businesses, very different than most firms. Obviously, we do have our equity business. We have our fiduciary outsourcing business. We have our fixed-income platform. We have all our alternative platforms. We have our cash management platform. And we have BlackRock Solutions. So it is really six. The fiduciary outsourcing really rotates around all these different products.

But we've had a unique position to talk to our clients because of our risk management platform, in which we are working with clients. In many cases our success in the first quarter -- and we believe our continuing success in 2009 -- is very directly related to having this risk orientation platform in giving advice to our clients.

Our pipeline as a suggestion that our clients are finally moving is $34.4 billion, which we are pleased to note $27.4 billion is long-dated, of which $17 billion is fixed-income, $11 billion is equity; and we have outflows that we already know in our alternative space of $1.5 billion.

Once again a reflection that clients -- because their extreme issues surrounding their liquidity in their portfolios, clients are still wishing to reduce their alternatives, and they persist throughout the year. We don't have a strong view on which way it's going; but the trends in the alternative space is still more negative than what we see in the traditional spaces of equities and fixed income and in risk management and in our solutions space.

Let me specifically talk about fixed income, which I am very pleased to report that we had very improved performance, top quartile. Almost all our businesses within our fixed-income platform.

Also importantly we announced to our clients last week the addition of 26 professionals including Rick Rieder, with our R3 inclusion of our platform. We are very excited in building out the expertise of our credit platform. Now with the addition of the R3 professionals from credit and distress we believe we are going to be very well positioned to take advantage of distressed credits globally, of opportunistic investing in credit globally.

I believe this is a great investment that BlackRock has made, that we repeatedly make. Even in these hostile markets where in some parts of our business we are reengineering, as Ann Marie talked about, we are still investing in the future.

A good example of that investment in the future was a year and a half, two years ago, when we brought in a team to be additional to our European equity team. Now, a year and a half, two years later, we have now grown by $1 billion in our European equity platform already. This is the type of investing we are doing that we believe will position ourselves quite well in the future.

So having Rick Rieder on our team with our present credit team is going to be a huge additive opportunity for us in working alongside with our clients. It really is a -- our clients who we discussed this with last week were extremely pleased and believe this is another statement of a positive towards BlackRock in terms of that we are investing in an opportunistic way to take advantage of future opportunities that the market is going to allow us to have.

We've been telling clients worldwide that we believe distressed credit will be the big opportunities. We believe until you see credit opportunities or credit markets improve dramatically, we are not going to see a very large rally in equities. We need the credit markets to vastly improve before we see equities improve. And we are making that investment now to prove our point that we believe these credit opportunities are going to be large. We are going to be very opportunistic in seizing that.

So we also did a lot of reengineering our fixed-income platform over the last six, eight months. I think we are starting to see the real returns and the real process of these -- in terms of returns and our performance.

In cash management it was clearly a mixed quarter for us. Average assets for the quarter were up 4%. However, spot assets were down $16 billion. A good part of that was outflows at the end of the month.

But there were two very large facts that really directed our business. One, we saw large outflows in our government funds. I think this is industrywide. The government funds are trading at 10 to 30 basis points, depending on where the market is. But the returns are just so low that investors are now looking for other things. Clearly this is what the Federal Reserve is trying to do. They're looking for clients now to start taking money out of cash and start putting it into other items.

So I believe that trend will persist. Clients are going to start moving some money outside of cash. This is what we are recommending, and we are beginning to see that.

The other trend that is I believe more specific to BlackRock, less to the industry -- we positioned our portfolios very conservatively in our cash management in the first quarter. We took a very hostile review of all credits. We had a conservative positioning, and our returns were 1 or 2 basis points lower than a lot of other competitors during this quarter because we were looking out for all our clients. We thought it would be imprudent to take more credit risk during the quarter. And so we were positioned more conservatively than our competitors.

We believe that was the right thing for our clients, and we did lose some fast money. Some of the money we lost was some very large hedge funds that had money with us; and they just moved to a higher yield provider.

So this is how almost the entire outflows at the end of the quarter happened, because of the government funds and our positioning in credit and cash management.

In our alternative space it really went from bad to worse for the fourth quarter, which was bad and worse than the first quarter. Ann Marie talked about the real estate market. The real estate market -- and as you know, we are a big participant in it. We are a long-term believer in real estate as an asset allocation. But it's seeing some very hostile winds. It impacted our balance sheet; it impacted our clients.

Our high water in terms of managing real estate on behalf of our clients -- and this is multifamily and commercial -- it was over $30 billion and it's now down to about $21 billion. At the end of the fourth quarter it was around $26 billion, and now it's down to $21 billion.

So this is a good indication of NAV decline, as Ann Marie discussed the NAV decline, and outflows from clients. So this is not a BlackRock-specific problem. This is an industry issue, and we are working with our clients on it.

Many clients are starting to look at now real estate as real estate is starting to fall. I don't think we are going to see any positive momentum, though, until probably the latter part of this year or early 2010.

In our fund of funds area, many clients are reassessing fund of funds. Obviously end of the fourth quarter was the Madoff blow-up, with a lot of feeder funds that were involved in it. I think as I said at the end of our fourth quarter and our earnings announcement, we are not involved in anything like that. We don't have any frauds within our fund of funds platform.

But clients worldwide are reassessing fund of funds. I believe we are going to be a net beneficiary. I believe clients are looking to go to fund of funds with large-scale platforms. So I believe systematically we will be a net winner in this. It is all a relative game; but in the course of the next few quarters we could still see some outflows in this product area. However I believe we are -- to our surprise we are seeing less outflows in this business than we originally had budgeted when we went into the beginning of this year.

I can't say enough about BlackRock Solutions and our team. They have worked endlessly, tirelessly, weekends, days. If there's 30-hour days, they would be working 32-hour days. The business is as robust as we've ever seen it. The pipeline opportunities are robust as we have ever seen it.

Clients worldwide are looking for assistance. They're looking for spot evaluations many times; but they are also looking for a systematic review of their whole process in terms of risk. And then many clients are looking to take on the BlackRock Aladdin platform as a risk management platform.

In addition, we created last year our advisory platform to take advantage of the opportunities with some of our institutions. I would like to just also say we are the only investment firm that has a separation between our asset management platform and our advisory and risk management platform.

This is what differentiates us more than any other firm. We created this fiduciary separation in 1994, and we built upon that to create two separate platforms so we can make sure that there is a difference between the asset management platform and the pure advice-driven platform that we give to our clients.

We now have $9 trillion of assets that we work on behalf of clients. About $7 billion that we have we reanalyze risk for our clients, and about $2 billion in terms of -- $2 trillion, I'm getting the words wrong. I knew the B was wrong. $2 trillion of assets that we are advising with clients.

So it is robust, it is growing. And more importantly, having all these assets on our platform gives us a unique ability to work in a very short time frame to help our clients analyze their risk -- another strong reason why we have been hired repeatedly worldwide.

On that note, on that worldwide note, we see huge opportunities outside the United States for our BlackRock Solutions platform. We have added a team in London. We continue to hire to build out the resources of this platform. I'm pleased to say that we have now $169 billion of assets that we're managing in our advice business, separate from our asset management business, but it is no different in terms of the asset management process.

As Ann Marie suggested, our revenues were up considerably in the first quarter. We had revenues of $140 million in the first quarter with our solutions base, compared to $60 million in the first quarter in '08. And as I said we have a very strong pipeline of new assignments working with our clients.

In this financial turmoil with so many institutions having extreme difficulties and as some institution's brands have been so marred because of the problems associated with the financial condition, BlackRock's branding has grown precipitously globally. Our opportunities worldwide institutionally in retail is growing in a large scale.

A good example of our retail powers overseas. In the first quarter in the Luxembourg mutual fund platform, which is the cross-border platforms that people have their mutual fund platforms, we represented 23% of the Luxembourg mutual fund platform net retail sales. 23%. In the UK we had 9.5% market share of net sales in the UK.

It is powered by, obviously, our success in our portfolio management teams. It's powered by the success of our performance. But just as importantly it's powered by the growing brand of our platform, and I believe this is going to have continued momentum.

In addition we are making very large headways to continue to build out our third-party branding initiatives in the United States. We continue to build our effort in third-party marketing in the United States with our retail platform.

And we are very, very encouraged with the most recent growth in our relationship with the Bank of America, BofA, platform. We see some very large opportunities in that. In a very short period of time we have enjoyed a very strong working relationship with our new partners at Bank of America and a very strong continued relationship with our partners at Merrill Lynch.

Let me just personally talk about the balance sheet losses. Obviously, extreme disappointment. Frustration. I did not anticipate the severe decline in some of the alternative spaces where we invested side-by-side with our investors.

As Ann Marie suggested we did not take any accounting changes. We took a very harsh review of our assets. As Ann Marie suggested, one pool of assets we marked down to $2 million and we're making $10 million a year in earnings as a base. So that is an example of the extreme marks we've taken. But we have followed the proper procedures in terms of just marking to market.

We did not change our marks. We did not change our behavior in terms of how we account. And we want to make sure that we are differentiating ourselves versus so many other institutions who have announced earnings earlier who did make some accounting adjustments to better their balance sheet and their earnings.

As Ann Marie said, we believe the majority of losses within that portfolio are behind us. I should say we do have a large fund of funds platform in private equity. We did take some very harsh marks on that. But I don't want to anticipate -- if we continue to get further erosion from the third-party fund of fund private equity providers, we will take those hits.

But we took much greater extreme hits already than what was given to us by our managers, because we believe the managers have a three- to six-month lag in terms of how they report their performance. We just used what we expected from them by looking at public markets.

In terms of our investments in some of the real estate areas with our real estate funds, there are still some at-risk portfolios; but very, very, very modest. So I just wanted to be very clear on that. I'm sure if there's questions later on Ann Marie could talk about them or we could do that later on, on a one-on-one.

Let me talk about our industry and our business model very quickly, then we can open it up for questions. I believe the asset management business is experiencing probably the worst headwinds that they have ever experienced in modern times, I guess, in the last 25 years.

This is going to make -- this is going to change to dramatically the industry. The industry had enjoyed some very modest to very strong tailwinds with rising equities. And now with the collapse of the equity markets, the collapse of some of the credit markets and alternative markets, there is nowhere to hide.

In addition we believe our industry is going to be more regulated. We actually welcome that. We believe in Secretary Geithner's plan there is going to be more scrutiny with all investors. There is going to be added cost.

We believe we are a beneficiary of that, because we believe firms that are subscale are going to be harmed by obviously the headwinds of the marketplace, the added cost of regulation.

And then the third point is unquestionably every investor is going to be audited for their risk management. Whether it is just a one-on-one audit by a client or a more overhauling audit, I believe risk management and the tools around risk management are going to be very important. Way too many firms talk about risk management and have very little in terms of capabilities. And this is one area once again where we shine and where we are very well positioned.

So we believe the industry is going to continue to have headwinds. We believe it's going to change the landscape. And we believe our business model of having this well-rounded platform that is global, that is retail and institutional, equities and fixed income and alternatives, and our BlackRock risk management solutions platform is going to continue to differentiate us and allow us to continue to do well.

I believe this atmosphere with these headwinds are going to force huge amount of consolidation in our business. Indeed our strategy team is overwhelmed with the amount of institutions that are approaching us in terms of opportunities and in terms of acquisitions for BlackRock or some form of mergers. We believe we are going to have a unique ability to look at many institutions and determine whether any of them will fit.

I'm not here to suggest we are going to do anything, and I don't want to make any suggestion that we will. But I will make a claim that we are looking at many institutions at this moment. We have great opportunities to do an acquisition, and we will do what is right for the long term of our platform, what is right for our clients, and what is right for our employees.

One last thing that I would like to put a little editorial that I think is very important. The markets are very fragile. Government is playing a more and more important role in terms of the overall direction of the marketplace. It is very important as we navigate through these markets and as government's involvement becomes more pronounced, we need to make sure that in all cases, in all the changes that government looks at in terms of re-regulation, in terms of restructuring the banking system, in terms of restructuring our markets -- we need to make sure that we preserve our global capital markets. And we need to make sure that we preserve our position in the global capital markets.

There is a great need in the future with our deficits in our country to be more dependent than ever before on the global capital markets. As our government and as society believes that leverage should be reduced and the levels of acceptable leverage with financial institutions are going to being more manageable, and when we resolve our recession and started moving towards a more positive economic environment, to finance our economic growth with these more manageable leverage ratios it is going to be a requirement for us to finance our future.

We are going to need a stronger, a more robust capital market. These monies will come from foreigners, global institutions. And so we need to make sure that as we expand our markets that we have a market that can flow freely, a market that we are an example of fiduciary responsibility; but importantly, that we are mindful that we are more dependent than ever before on a global capital markets.

I believe because the markets are going to be more global this is another reason why BlackRock is well positioned. We are going to be in need of working with clients worldwide. We are going to be working with more clients in looking at dollar-denominated assets. I think clients are going to be looking at not only dollar-denominated assets but much more in terms of local assets. And we have to be there for those clients too.

So importantly, we preserve our capital markets, we enrich our capital markets. And if we do that we will as a nation, as a financial center, be stronger than ever; and I think BlackRock will be a large participant in that global expansion.

With that, I would like to thank everybody. I spoke way too much today, much longer than I intended to, and I am looking at the clock. Why don't we open it up for questions?

(Operator Instructions) William Katz, Buckingham Research.

Thank you. Good morning. Larry, a question for you on -- you didn't really talk too much about some of these public-private investment that's out there. You have been sort of quoted in a couple different --

Oh, the PPIP, yes.

Right, sources. Just sort of wondering, a major bank has opted not to participate in that given, I guess, further political risk concerns. How confident are you that you wouldn't have any kind of conflict with the government if you got involved?

Secondarily, I was wondering if you could talk a little bit about how you see the economics of that opportunity playing out?

Well, let me start out first and foremost. BlackRock has not been selected. They have not selected their managers at the moment. So hopefully we are one of the selected managers, so let me start off with that.

We have filed our RFP. I guess it is due later this week. I think they delayed it by a few weeks, so it may be this week when it's due.

So I think -- I'm not sure what bank you were talking about, Bill. But I think the PPIP is going to be a huge opportunity. It's going to be a huge opportunity for investors, for mutual fund investors, for foreign investors, for pension plans to participate in this plan.

Obviously, the PPIP is only a good investment if you believe the Federal Reserve, the Treasury's actions will slow down and moderate the decline in housing prices in America.

I would argue if you don't believe the government will be successful in moderating the decline in housing prices in America, then we have a real bad recession that is only going to get worse. So I believe the key to our economy, the key to our financial markets is going to be the stability in housing in America.

I think the PPIP is only one step in the assistance of that. We believe the Federal Reserve's actions with low interest rates, with a huge amount of refinancing, with the TALF and all the other Federal Reserve plans, and with the Treasury plans, we believe the government will be successful in beginning to moderate the declines in housing prices in America.

We're starting to see that in California with prices down about 40%. You're seeing many houses are successfully auctioned for the first time. Now, that is a one-month view; it's not a trend; and we need to see that if it's persisting over the course of the next few quarters.

If you believe that housing prices are going to finally moderate and stabilize, there is a big opportunity for investors to make 20-plus-% returns with the leverage that the government has offered to provide.

So I've just come back from Asia. We are working alongside with a retail platform here in the States, with our pension plans and institutional clients here in the States; and we're seeing some very large interest from investors.

The big question that still remains -- who will be the sellers of this? I believe there are going to be more selling into this plan than the market expects. I believe banks are going to be in need of reducing some of their stressed assets.

I was very impressed -- I know the marketplace didn't like it -- but I was very impressed with the earnings momentum of a BofA yesterday, with $19 billion of earnings pretax, pre-provision. I think the marketplace was surprised at the largeness of their provision. But the reality is, as those provisions are being created by these banks -- and I'm not suggesting BofA is going to do anything about it, because I wouldn't know. The banks have the ability to sell now. And I believe the banks that do sell into the TARP and tell their investors they are reducing their risk -- they already have the provisions -- I believe that is a positive for the individual bank.

I believe this is what is going to be encouraged by our regulators in terms of what to do in the banks. So I actually think there is going to be more supply in the downsizing of these balance sheets. And I certainly believe there is going to be enough demand from investors.

I don't see why this is a conflict, Bill. So I need to ask the question -- what do you mean, why would we be precluded for potential conflict?

Well I just (inaudible) seen one of the banks, I don't want to get into names, suggested that they were still concerned about some of the political risk of investing side by side with the government.

I believe strongly that as long as we are investing side by side with the government I think I have no -- I don't want to say no political risk; that is being naive. I think we have little political risk.

I believe it's important to though that we can show our government, our taxpayers, that this is good for the economy. That it's offered to mutual -- to individual investors; it's offered to pension plans, so the schoolteachers and firemen, whoever participates in the pension plans can participate.

And importantly I think it's important that foreigners have the ability to participate. They are the largest buyers of our Treasury debt at low interest rates.

So I believe this is good. In all my conversations with anyone who will listen to me in Washington -- and sometimes there is no one, but sometimes there's a few -- I believe there is an agreement on the opportunities for investors and that this is a positive, not a negative.

Right, understood. Just in terms of the economics of these things, when you mention that, are these a typical retail institutional type fee structure? Or could you participate (multiple speakers)?

No, I would think -- we haven't finalized this, because first of all, A, we have not been selected. I need to reiterate that. And B, I believe as a statement to everyone, our fees are going to be systematically lower than they would be otherwise. I think to make this happen we are going to be looking for everyone to take a lower fee schedule in these type of platforms in terms of if we had a retail fund, lower commissions, lower everything, I think this is beholden on everyone to try to make this work.

Okay. Then a quick question for Ann Marie if I might. You mentioned the reengineering. So I was wondering if you could quantify the benefit into the second quarter.

Then I apologize for the naivete of this part of the question; but could you reconcile the share count difference between your P&L up front and then toward the back of some of the supplemental tables, the 131 million versus the 135 million?

Yes, we can spend some more time on it. I will start with the last, the share count. But you know when we get in the back, really what we are doing now with the new FASB is bifurcating shares into two classes of shares and likewise bifurcating the income.

The way you do measure shares is a little different than it was a year ago, really with this more representing spot shares. But if you want to spend some more time on that we can.

As far as the reduction, what I can't give you is it exactly. But what you saw was really -- I think you can sort of estimate. We had a $35 million charge in the fourth quarter. We've got a $22 million charge now. So you can see what kind of dimension that represents as a reduction of the workforce.

Then I guess we would point out that we have seen a little more than that decline really in the first quarter, because we also really disposed of the Metric business as well as had some favorable foreign exchange with respect to cost; that is [growing moves].

So hopefully that helps get you there. We can spend some more time off-line as well.

Okay. I'd like that. Thank you.

Roger Freeman, Barclays Capital.

Hey, good morning. So I just wanted to come back a little bit on the government programs. So Larry, as you look at maybe the initial uptake on the TALF being as light as it's been, as a precursor to PPIP getting rolled out, I mean, are you concerned?

I'm really not. Look, it's going to require an enormous effort. I don't want to dismiss -- selling big blocks of loans and securities in an auction process in the Treasury is going to require a huge structure and a huge process working with Treasury and the FDIC on this.

So it's going to require a big effort and I'm not trying to suggest that I'm not mindful of that. I think the Treasury is pretty mindful of what the huge responsibilities are in terms of making this happen.

All I can say, Roger, we are seeing a very large interest from investors. I may be mistaken, but I think you are going to see some very large sellers into this if they can. I think it's going to be encouraged by our regulators.

I think if you link this to the stress testing of banks, whatever that may turn out to be, institutions are going to either have to raise equity or reduce some balance sheet risk. I think this is going to be a good mechanism to do that.

So this is why I remain to be optimistic. I just think it's going to take time. I'm very constructive on the TALF. It just takes time and it takes a process to be built.

It can't -- these are very large, monstrous programs that require a lot of structure and a lot of detail. I think it would be incorrect of the marketplace to assume magically the government can do large-scale asset purchases, large-scale restructurings, working alongside with the public in a very short order. I just think these are giant efforts that is going to require a great deal of business structure buildout.

Are you confident that the government is going to lay off the various restrictions that could be imposed? The Washington Post is running an article this morning saying the Treasury Department lawyers are basically saying that they are going to have to put executive comp restrictions on the PPIP, which makes that dead on arrival, I assume.

Yes, that would -- I don't know what they mean by that. If they mean that to the sellers, it may do it. I don't know. I think I read it doesn't impact the investment manager, because we are just an agent to the investors.

Right.

I think that's all going to be linked to -- I don't know what I think. I read that too. If that was a serious view -- and I read that too -- it is going to -- I could be incorrect. Then it doesn't -- it's not going to -- it's going to fail.

The CEOs and the management team should be encouraged to take the appropriate steps to derisk and either reducing systemic risk through equity raise, conversion of preferreds to common -- which is another form of equity raise -- and/or de-risking by downsizing assets. I think this platform can do that. We should -- hopefully Washington doesn't discourage sellers to do that.

Right, okay. Just one more round. As you look at the opportunities, you said there is a lot of interest here. Can you size what you think you can raise? There are some reports about sort of $5 billion to $7 billion in toxic funds you are looking to raise. I don't know if that is tied to this.

Do you think it is multiple funds, some of which have incentive fee structures, some of which don't, some of which are more retail oriented (multiple speakers)?

I don't think -- we haven't thought about it. As I said with Bill, we haven't worked this out with Treasury. First of all, we haven't been selected.

But I do believe once again, I think we are going to have to do this -- our fee structure is going to be much smaller, much lower on this than other products. I think we have to do that.

I think that's a very important statement to our government, to our taxpayers. That if we are going to be a participant in this, we have to do this, I would say, with lower market rate, lower than market rates. It should be done across retail platform and our institutional platform domestically and globally.

Okay. Thanks, and just a couple --

But we have not finalized that yet, Roger. I mean, unfortunately I'm talking about it as this all unravels.

Fair enough. Just a couple quick ones on the Company. Solutions revenues came in up sequentially. I guess that was a little counter to some of the body language that had come out comments at conferences, et cetera, earlier in the quarter.

Is this due to late-quarter strength and new business wins? Or are there one-time setup fees in there? The run rate just seems higher than we would have thought.

Yes, I think some of them were one-time setup fees, so I would probably cite that. I don't know what body language was. My body language or someone else's?

I thought the revenues were going to be down sequentially, but maybe I misread.

We probably thought that. That's true. Because we had such a good fourth quarter. We won -- going into -- we just saw more activity, Roger.

Okay. Lastly, just on bond outflows in the quarter, not including the advisory. I understand the whole sort of rebalancing issue; that makes sense. If you look industry volumes, bond funds had inflows for the quarter.

I'm just curious. What's different about your business? Is it because it's more institutionally oriented?

Well, most certainly we are more institutionally oriented. We actually had strong inflows in our retail platform in our bonds for the first time. We actually saw it.

If I had to cite -- and I think I've done this in many quarterly calls. If I had to cite one extreme disappointment and one where I criticized myself, it is that we did not aggressively build our bond retail platform fast enough. And it shows.

So flows in the industry were strong, and we didn't participate as a percentage of our overall business.

Got it. Okay. Thanks a lot.

Robert Lee, KBW.

Morning. Two questions. First, Larry, maybe like your view. I guess about a month ago the ICI came out with its recommendations for the money fund business in terms of that down the road. One of the things that strikes me, it seems like it is in a way going to further commoditize the business even more. Because it will be more difficult differentiate yourself based on your credit and other capabilities.

What's your view on that? And how do you think you kind of benefit from that?

I'm not personally -- I don't know exactly what the outcome of the ICI proposal is. I don't know it with a total granularity. What I do believe is -- and what I said in the past is -- I do believe there is going to be a need for capital to be held back in our money market fund business.

Right now the industry is very dependent on having the government guarantee at 4 basis points on our money market funds as a backstop. I think that cannot -- as a money market industry we should not think this is going to last forever.

We need to self regulate and self build up our own capital. I would argue, though, if we are going to have to impose a capital charge to our own platform, it's going to raise the cost of money market business. I believe not only it may commoditize it but it also will make it much more of a scale business. The smaller parties are going to have to be weeded out.

Because it's just -- between the risk of taking all the liability on yourself, but more importantly building up that capital base, it just reduces your overall profitability in that business.

We have been very much willing to accept some form of capital charge to build up the resources to withstand any credit losses on behalf of our clients,

So, I look at it as in some form of a commoditization as you suggested. I would also argue though it would make it even more of a scale business and there are going to be fewer players.

Even in a commoditization business then, you are going to be differentiated by your full client service. And if you have an overall client relationship it may be a commodity business, but you are going to be a net winner in that.

So I believed we're extremely well positioned in the future money market business.

Okay. Maybe a question on the M&A environment. You talked about it at some length and obviously looking at a lot of things.

Given the breadth of your platform, your ability to -- as demonstrated with R3 -- to find teams of people and lift them out, when you look at potential acquisitions, are you really more focused on -- are there that many large enough niche businesses that you see?

Or are you thinking that gee, there is an opportunity to use our integration skills and buy something on the cheap and really just consolidate a lot of assets? Or is it maybe both?

Well I would say, A, because our brand name is growing we have some real opportunities if we found the right opportunity in the retail business globally -- be it domestically or outside the United States -- to build our platform in mutual funds. So we would be very interested in that space to build more scale. And it would allow us to build even a more robust retail business.

I just believe we have a real opportunity with our brand and a growing brand to further build that. This is one area where I think in terms of retail business if we had more scale we could provide even a more robust business to our global clients in that area.

That's one of the big areas that we are looking at right now and where we have had some reviews. But we're also looking at some -- just like in the R3 lift-out. There are other businesses where we could add -- we can do some incremental small mergers to really fill out some of our other institutional spaces.

So there are a few things we are looking at that could be very additive in a product or a business. And then we could look at some of these overall large opportunities in terms of the mutual fund space.

Okay. Maybe one last question on Solutions. Clearly that business has had explosive growth and a pretty robust pipeline. Is it at all possible to get some type of relative breakdown of -- if we look at the revenue there, kind of size; what's coming from the one-time advisory mandates versus say the ongoing Aladdin business? Just trying to think of how the dynamics of that (multiple speakers).

You can talk to Ann Marie on the side and she could give you a little more granularity thee. I'm not sure how we break it out, so that is why I don't want to discuss it here.

I would say, though, one should look at the advisory business as a long base business too. These are long-term advisory solution based businesses. So it's not like a quick fix; it could be multi-years. So you should look at it that way.

Aladdin could be more than multiyears. But the advisory business is very, very sticky business.

But we do have a lot of one-times where we're asked to come in, evaluate risk, and thank you very much. And so we probably could give you some of that too.

All right, great. Thank you very much.

Keith Walsh, Citi.

Good morning, everybody. Larry, just following up on M&A, just want to get your thoughts. How has your view really shifted here in the last year? Are you looking specifically at banks and insurance companies that are distressed, that have asset management operations? And then I have a follow-up.

Well, I think the biggest change -- I am confident if you go back to the transcripts a year ago I spoke about M&A opportunities to expand our platform globally more than I spoke about domestic opportunities.

I would say today the opportunities are just as great domestically as they are globally. Because I do believe in the retail space we have great opportunities with our brand growth that we could add a more robust platform. So I'm looking at -- we're looking at probably platforms that have a retail orientation to it, just as much as a global institutional orientation.

So that is probably the change as a philosophy. We want to take advantage of the growing brand in the retail space. Our brand is growing dramatically in the institutional space worldwide. So on the institutional side, we're looking to grow maybe in a region specifically and/or in a product specifically. But on a more grand scale it would be more on the mutual fund side.

Okay. Then just on retail distribution, maybe you could specifically talk to investments you've made in your wholesaling force. How many do you have now? How has that grown year-over-year? And what number do you want to get that to, to build out that platform? Thanks.

We are adding wholesalers in the third-party distribution side. I don't have the number in front of me as to the amount of wholesalers, but I believe it's close to 100. I'm looking at -- it's more than that.

So you know what? We have to get back to you with that actual number. But we have a very large scale of external wholesalers and internal wholesalers, and that has grown in the last year.

In Europe, it's a very different concept than having quote-unquote wholesalers. Throughout the Luxembourg and UK markets, our contacts are with gatekeepers with all the local distributors. So it's not a wholesaling; it is almost like an institutional type of arrangement. Going, working with the gatekeepers at the various distribution platforms, country by country in some cases, or region by region in other cases. Trying to offer more products through their systems. As I said it's more of an institutional touch.

So we have these two platforms, the US one and the non-US platforms. We call them both retail, but the execution is very different.

Okay. Thanks a lot.

Craig Siegenthaler, Credit Suisse.

Hey, how's it going?

I guess okay. I'm getting tired of talking, but otherwise I'm good.

Well, I'll try to keep it short here. One question I would hit on was the fee waiver risk for money market funds.

I know your business is heavily weighted to the institutional front. But maybe you could discuss the risk on the institutional side and maybe for some of your peers in the retail side for fee waivers.

Well, the biggest area where we had fee waivers was in the government side, the government funds. This is where we saw the outflows, and that is the biggest risk where we have continued issues and just because of the low interest rates flows in that area.

On the nongovernment 2a-7 funds where now you have the government insurance backing you, we haven't -- because we're not as big at retail -- we're not making fee waivers in those businesses yet.

Is that -- ? I'm looking, and my staff is telling me that's correct. So I am correct in saying that.

Obviously, if we continue to see very low interest rates and if rates go down and investors' appetites begin to be a little more upbeat, we are going to see outflows in everything whether we have fee waivers or non-fee waivers.

This is what the Federal Reserve wants people to do. That is why they have low interest rates. They want investors when they feel comfortable they will aggressively get out of the liquidity funds into more risk-based assets.

Ultimately that is going to happen and that is going to work out. Our challenge is in making sure that in some of that transfer out of money market funds that we get some of the slice when they go into long-dated assets.

This is why I believe the money market platforms that are only -- that are singular, they have greater risk. Because we will see, whether it's in six weeks or two years, some large-scale outflows out of money market funds into longer-dated assets as clients begin to feel more comfortable about the future.

Thank you. That was helpful. Then just a little deeper on the M&A comment. You really compared outside the US to inside the US.

How do you look at emerging markets? Because I believe, and I could go be wrong here, BlackRock is a little more underweight in some emerging market economies than some of your big US peers. I don't know if you saw, but UBS just freed up Pactual down in South America. So you have some opportunities in those regions to maybe build up.

Then you also in the US have some bigger opportunities, like Columbia possibly getting freed up. So I'm just wondering how you compare the two.

We took note about the UBS sale of Pactual. It's a great institution, it's a great country. We have no presence in Brazil, so it is an obvious that we -- and I think I mentioned this maybe a year ago. We would be very interested in doing something in South America and specifically Brazil.

We've had no conversations with any institution in Brazil, so I don't want to even suggest and have anyone talk about that. But there is a great example of the dismantling of either wealth management or asset management platforms from banks. I think you're going to continue to see that.

I'm not going to talk specifically about any institution, whether it's Columbia or anything else on this call. But I think Columbia is a great institution. It has a very good presence and we respect them as a competitor.

But as I said earlier, we are mindful that we need to grow our retail platform in the United States. And if we have opportunities to grow here and continue to grow as you suggested in emerging markets, where we are indeed weaker.

We have a growing platform I should mention, though, in India. We are very happy with our partnership in India. We believe we are going to have some real growth in our India joint venture.

So there are areas in the emerging world where we have a presence and a presence that is growing.

Great, Larry. Thank you for the color.

Marc Irizarry, Goldman Sachs.

Hey, Larry. Thanks. On the Fed agency MBS program, was that in the AUM numbers for this quarter?

No, no. No, we will not put any open market transactions that we do. In fact, I don't even know what we are doing there. Nor should I know. It is not included in our asset management numbers at all.

The Federal Reserve monthly reports how much they buy -- or weekly how much they buy, and it's aggregated. So there are five managers and that is all -- that is how I get the information.

Okay, that's helpful. Then just on the PPIP, just to beat the dead horse a little more. You mentioned that there is definitely foreign investor appetite to participate in the program. Can you give a little bit of color around that in terms of whether or not foreign investors are viewing what is happening in the US with a little bit of a discerning eye, given some of what they've seen out of Washington?

Well, I think everybody is worried about the role of Washington. In my conversation with our foreign investors, everyone asks that question. Do you think it will be good if we invest? Do you think -- will government abrogate contract?

I answer -- my answer is I think investors worldwide will be encouraged, especially investors who have been big supporters of our credit or bond -- of our Treasury market. That is my view. I'm not espousing any official view, but that is my view.

And two, I believe government understands a contract is a contract. Obviously before we put any investors -- provided we are selected -- any investors in these platforms we are going to have -- we will have confidence in the role of government in terms of these investments.

So it's my belief that government will encourage all form of investors to be a part of it. I think they are thrilled about having retail investors and pension plans.

So I'm not sure; I think it's a good diversified investment profile of -- investor profile would be good. But we have to make sure as everyone has suggested -- should we be mindful or careful of a government? And I have concluded, albeit sometimes it's stressful, sometimes it's annoying, but I think government will do the right thing.

Okay, great. Then just getting back to the unfreezing of the institutional investors, can you comment a little bit on where you are seeing investors beginning to rerisk and sort of some color I guess around the RFP activity?

Well, I think R3 acquisition, we are seeing huge interest in credit. We're seeing huge interest in some of our equity strategies. We had $1 billion of growth in our natural resources this year already. We are seeing growth in our European equity platform. So specialized products.

So investors are looking to take on more risk. One of the areas where we are seeing huge interest from investors, I should also say, are TIPs. Investors worldwide are a little more frightened of future inflation, and so we see systematically clients worldwide are asking more questions about investing in global TIPs.

So we are -- it really depends on the nature of the client. Some clients who did not have the extreme illiquidity because of overcommitment in alternatives and private equity are looking to be much more opportunistic.

Clients that are overly committed in the alternatives, that have more illiquidity, are looking to be -- and they're more challenged as a result of it -- they are looking for more liquid types of investments.

So there is no one rhyme or reason. It really is dependent on the circumstance of the investor.

Okay. Just to get a little more granular. For insurance oriented clients or insurance companies, we're hearing a lot about movement towards passive from active, given some of the underlying basis risk in their portfolios. Are you seeing that as well?

For the general account, none. Where you are seeing -- and that is where we had it. One of our big outflows in fixed income was an insurance account in the annuities side. This is where you are seeing going from active to passive. So in annuities, that's correct.

So for client accounts, we are seeing that, and I think that's a good point. That's where we actually saw the outflows in fixed income, out of active into passive, in the annuity business.

But in the general account we are not seeing any of that.

Okay, great. Thanks, Larry.

Roger Smith, Fox-Pitt Kelton.

Thanks and let me just stay on that RFP. When you see the flows out of the money market businesses, can you capture that directly through that relationship there onto the RFP platform, on the fixed income or equity? Is there any benefit there?

If you see -- the type of clients that left us in the first quarter, no; because it was fast money where every quarter you're going to have a lot of -- depending on where you are in terms of the added 1 or 2 basis points. Because the difference between top quartile and middle quartile is like 2 basis points.

When you have fast money going in and out for 1 or 2 basis points, no, I cannot capture that.

Okay.

I don't think I can capture a dollar of it.

Okay, and then are you suggesting in this sort of RFP pipeline that the institutional business is really much more robust than the retail business here right now? And that that's where we will start to see a lot more activity?

Yes, I mean across the board we are seeing more RFP process. Our institutional client service team is much more encouraged both domestically and internationally in terms of the outlook. They have come away saying we are finally seeing some real opportunities and our clients are unfreezing and they are looking for suggestions. So the answer is clearly, yes.

Okay. Then just on that pipeline, on the $27 billion that is in advisory and I guess --?

No, the $27 billion pipeline is long-dated funds.

Right, Long-dated. But could you tell us how much would be advisory in there?

I think none of -- $1 billion of it. $1 billion of the $27 billion.

Okay, so for the most it's actively managed or the asset management business (multiple speakers).

It's the asset management side of our platform, yes.

Okay. Then just a more accounting question. On the tax benefit that you mentioned in the quarter, where on the income statement is that actually coming? Is that coming in your income tax expense line?

Then what should we really be thinking then in terms of where that rate goes in the next couple quarters?

Yes, you know, it does come on the income tax line is where you see it. If you excluded that item from the income tax, you would see that the first-quarter rate was 35%.

Okay, great.

Let's open up for one more question, please.

Hojoon Lee, Morgan Stanley.

Larry, as you mentioned, fixed-income mutual funds account for quite a small portion of your entire business. Could you just give us some color on the initiatives you guys are pursuing to get larger on this side?

Yes, we made a whole restructuring where our mutual fund fixed-income team under Curtis Arledge. Curtis is running the platform now and we are aggressively now interacting with our distributing partners.

We've had -- in some of our mutual fund platforms, we've really reached out. We've had some good successes in our intermediate fund, our Ginnie Mae fund, and our TIPs fund. So we've seen some real opportunities there.

We are rebuilding what I would call our core fund. Our core-plus fund is actually doing quite well this year, too.

So we had been woefully inadequate in our fixed-income mutual fund business. As I suggested earlier it was a mistake, and mid last year we made some big changes in organization with Curtis; and we are seeing some real positive momentum finally.

And I would blame myself on that for not really identifying that as a real opportunity two years ago. We are paying for it today, but we are slowly getting back.

Right, but as we've seen, fixed-income flows on the retail side have been very strong. Do you see this as sustainable? Or do you think the retail investors are going to move back into equity products one day?

I would think a good part of that will migrate back into equities. We saw that in Europe, actually. Europe, if you look at European flows, huge outflows in fixed income in Europe. We were not large in fixed income in Europe; this is why we have such a great market share in Europe. So it was not just because we were great in branding; it is we were so weak in mutual fund fixed-income sales in Europe and that was the biggest growth area for the last two years in Europe.

That's where firms were seeing huge outflows in Europe as interest rates shot down there, and we are a beneficiary by having a much larger equity rollout in Europe. So that's the reasons why we've had such success relative to our peers in Europe and the UK.

Just one final follow-up question. On the institutional side in fixed income, could you provide any color in terms of which products you were seeing outflows from?

Well, the biggest one -- there was a $3 billion rebalancing. So that is generally with pension plans as they systematically rebalance, and so it could have been any. It could've been a core equity, a core fixed-income strategy. It could've been any other type of strategy.

Generally it is with the core multiproduct strategy that they go out of. But I don't have it with any granularity. But I assume most of it's there, into more the -- into other strategies.

I said earlier the other big outflow was more of a core-plus strategy in annuities. The client throughout its whole business went from active strategies to passive.

Thank you very much.

Thank you, everyone. We are going to call it a day and Ann Marie and I will be free for calls if anyone needs to get further enlightenment.

Once again, thank you very much. Let's hope the trends in the equity markets continue so we can continue this positive momentum. Thank you again. Bye-bye.

This concludes today's teleconference. You may now disconnect.