貝萊德 (BLK) 2009 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the BlackRock Incorporated second quarter 2009 earnings teleconference.

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

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 the conference.

Good morning.

This is Bob Connolly, I'm General Counsel, BlackRock.

Before Larry and Ann Marie make their remarks, I want to point out that during the course of this conference call we may make a number of forward-looking statements.

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

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

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

With that, I will turn it over to Ann Marie, our chief financial officer.

Good morning, everyone.

I will be discussing primarily as-adjusted results.

Second quarter net income was $239 million.

That is $1.75 per share and includes $1.44 per share of operating earnings, $0.20 of non-operating income and $0.11 favorable associated with resolution of tax matters.

Excluding the resolution of tax matters, the tax rate was 35%.

During the second quarter we saw substantial improvements in equity and fixed income markets compared to the first quarter.

These improvements and market tone positively affected long-dated asset flows as investors began to pull out of cash and seek higher returns.

While markets are still well below year-ago levels, market improvements positively affect of the revenue, operating income and non-operating income trends.

At the same time we maintained cost discipline and continued to benefit from our diversified business model.

Our strong pipeline, including over $45 billion in long-dated assets combined with positive markets in July are a good start to continuing the positive momentum we experienced in the second quarter.

AUM levels have done well over the past year.

Despite market and foreign exchange-driven declines on equity-balanced and alternative assets of about 25%, AUM declined only about 4% compared to a year ago driven by over $90 billion of net new business.

The net new business was supported by our strong advisory capability which attracted new clients and assets, though admittedly at lower fee levels.

Net income improved 117% compared to first quarter and was down 16% compared to a year ago.

We have moved from non-operating losses to non-operating gains as the balance sheet value of our co- and seed investments are recovering from the trough values in the first quarter.

Revenues of $1.029 billion improved by 4% compared to the first quarter, reversing a negative trend which began in the third quarter of 2008.

The improvement in revenues reflects both positive long-dated asset flows and positive market movement.

Revenue declines compared to a year ago were driven by the decline in equity markets over the same period.

BlackRock Solutions and Advisory revenues remained strong at $116 million, albeit below the exceptional levels of the last two quarters as stabilizing markets have dampened the peak level of demand for short-term valuation and advisory work.

BRS continues to have a strong pipeline of financial market advisory, Aladdin and risk reporting opportunity.

As-adjusted operating income of $302 million included $18 million of balance sheet-related foreign currency effects.

Excluding these effects and supported by expense initiatives, period-over-period operating income changed in line with revenue.

Specifically, as compared to the first quarter, operating income improved $15 million or 5% excluding balance sheet-related FX effects.

Given the balance sheet effects or a spot measure, it is helpful to isolate them when assessing the operating trend, a trend which is clearly positive.

We have maintained strong operating margin.

The operating margin as adjusted of 34.4% and included a 2-point drive related to the FX effects I just mentioned, and also was affected by an increased incentive compensation driven by higher net income.

Excluding hedge changes in deferred comp, compensation costs changes were driven by changes in incentive compensation and by reduced staffing levels.

As I mentioned, we have increased the bonus accruals to reflect improvements in net income.

G&A expense reflected continued cost discipline and was about equal to the first quarter when you exclude the balance sheet-related FX.

Also, GAAP G&A expense included $15 million of costs related to the BGI transaction.

We estimate total BGI integration costs in a range of $300 million to $350 million, a range we'll be continuing to refine over the next several months.

The key cost drivers will include transaction costs, professional fees, restructuring costs, technology synchronization, rebranding and marketing expense.

I would also remind you that with the new accounting standards, more costs are expensed than would have been historically when they would have been capitalized.

Like our co-invest with our clients, the majority of these co- and seed investments are mark-to-market through non-operating income.

As-adjusted non-operating income -- and it feels good to be saying income instead of losses -- were $42 million in the second quarter, reflecting primarily improving spreads under stressed-out debt and positive movements in equity.

We're still seeing a little bit of negative movement on the real estate front.

This is a clear change in direction compared to recent quarters.

Our balance sheet and exposure remains at levels greatly reduced from a year ago.

Total value of investment portfolio is about $775 million; or, excluding items which really are acting as hedges of deferred comp or which are hedged themselves, this number is $675 million.

Also of note -- towards the end of the quarter, we issued a little more than 2 million of shares of common stock associated with the equity raised to fund the BGI transaction.

We expect the other share issuances to be concurrent with the close of the transaction.

We've got the cash invested in really high-quality, short-term instruments and we'll keep it that way until close.

So in summary, second-quarter results reflect positive business momentum, improved market and market tone, as well as our disciplined approach.

This positive momentum is continuing as we begin the third quarter and we can see it both in the market as well is in our very strong pipeline.

With that, I will turn it over to Larry.

Good morning, everyone.

Let me begin by stating the BlackRock business model is clearly working.

As our clients worldwide began to accept that the global economies were not falling into the abyss, fear has dissipated and questions about asset allocation began.

Clients asked -- should they keep as large of asset allocation and cash, earnings close to zero?

In the fourth quarter and the first quarter of this year, earning close to zero was better than losing capital in longer-dated or higher-earning assets.

As we closed the second quarter, clients began to ask, do they have too much cash.

These questions are exactly what the Federal Reserve and other central bankers are looking for.

They're looking for clients to start unlocking markets and starting to invest out long-term, reinvesting back in the equity markets, and importantly looking for balance sheet lenders to begin to lend.

I can't speak about balance sheet lenders beginning to lend, but I can clearly tell you, globally clients worldwide are asking the question -- can they take more risk in the future.

And so, importantly, these questions are being asked by BlackRock.

Having a global, a fiduciary and independent platform with global clients both institutionally and retail are asking BlackRock this question.

Our comprehensive platform of risk analytics through BlackRock Solutions and our product range allows us to work with clients more than ever before.

In these uncertain times, our dialogue with our clients has never been more robust.

The conversations in retail and institutional are really, really strong at this time.

Let me review some of our results that I think speak loudly about our quarter and I believe our momentum going into the third quarter and into the end of the year.

AUM for the quarter was up 7%, almost to a record level, which actually even surprised me.

Our asset level was up to $1.373 trillion, and so if that is not an indication of the type of comprehensiveness we're having with clients and how our business model is working.

Most importantly, unlike some of the trends of last year where so much clients left long-dated products into cash as fear was so enlarged, we saw in the second quarter $28.5 billion of long-dated inflows, of which it was basically split basically through equities and fixed income, which I will talk about.

As a result of this restructuring, we did witness some outflows in cash, and our objective now is to try to get as much of that cash and try to find opportunities for those clients as they look to redeploy cash into longer-dated or more risk-earning assets.

But, clearly, we saw long-dated flows strong and we had about $7.5 billion of outflows in our cash management side.

I think this reflects mostly industry trends.

I don't think we are that unusual in that, but we did see unusually large outflows in cash in our retail platform.

Much of that has to do with -- because of the fees and the essentially zero-earning type of returns on cash, which is an industry issue.

In addition, we had about $2.6 billion of net outflows in our Alternative space.

We did have, through the acquisition of R3, had added assets in our alternative area, but I can say at the end of the second quarter rolling into the third quarter we're now seeing a more robust outlook towards our fund of funds product.

We had closed a fund of funds of private equity in the second quarter and we are starting to see new RFPs, new requests in our fund of funds of hedge funds.

And so, for the first time clearly in about nine months, we are seeing clients are looking at again in the space of hedge funds for the first time in some time.

And so overall with the changes in liquidity and the Alternative, our net flows for the quarter was approximately $15.2 billion.

Let me break it out by product for a moment.

In our fixed income area, we had a very strong quarter.

We had $15.5 billion of net inflows in the quarter.

This has to do with performance, which has been very strong year to date.

Our performance is very strong, certainly with the reversal of some of the credit markets, and we have stood by some of those positions.

And as a result of that, we are seeing some very good returns this year, very competitive returns, and that's indicative in our flows.

And, we completed the integration of R3 in our fixed income unit, and I'm quite proud of the integration and the retooling of our fixed income platform.

The enthusiasm, the momentum that we see in our fixed income platform, is very robust.

Equity assets, because much of it to do with market was up $64 billion.

However, we also saw a little over $15.6 billion of net inflows in our equity products.

This is driven by some of our high-yielding equity products, high-return equity products.

So we saw great growth in our world mining funds, our emerging market products and equities, our global allocation products and very large flows in our European equity products.

Much of this has to do with some strong performance, especially with some of our European products, and this is -- and our global allocation products, and this is why we are seeing continued strong flows.

On the cash management side, I discussed earlier the near-zero returns in cash.

We are seeing clients questioning the amount of assets they have in cash and we are having dialogues with our clients as they are looking to redeploy assets.

We had outflows, as I discussed before, but we -- our job in the future is to try to recapture some of this movement from cash into other alternative space.

I think this will be a trend in the cash management side for some time, especially if we start feeling even more comfortable after the summer months.

I think it's important, if we continue to have strength in the equity markets, and importantly, if we have just global stability, I think you're going to see more movement from cash into longer-dated items in the fourth quarter of this year.

And so, I am a believer that the markets are stabilizing and we are seeing that evidenced by our clients worldwide.

On BlackRock Solutions, we had 12 new assignments in the quarter.

We had six completed short-term assignments, engagements to help clients understand the risk in their balance sheets.

We completed one new Aladdin relationship and we have a very strong pipeline in new short-term assignments.

And importantly, we're working on some very large Aladdin business.

I would say, in the latter part of the second quarter as markets stabilize, the emergency room atmosphere in Solutions calmed down.

Clients were not in weakened mode of trying to stabilize a balance sheet.

But more importantly now, as clients are feeling more relaxed about the future, not necessarily constructive, but less of an emergency room atmosphere, they are now asking more questions about how do we employee more substantive risk management tools so we don't have this problem again.

And so we are involved with many conversations with more and more clients on our Aladdin system.

And I would say and other major trend for BlackRock in the with the Aladdin space, last year we did acquire an equity platform called Impact and we've rolled into the Aladdin space.

And hopefully now in the coming months we're going to be rolling out an equity component of our Aladdin space, and we are now talking to some of our existing Aladdin clients to add their equity platform onto this space.

This could be a very large movement for our Aladdin business.

And I will talk about how BGI fits into Solutions in a little bit.

But clearly, with its positioning in equities and client equity, this will really embrace our platform in the Aladdin space for equities.

Our pipeline is very strong.

We had about $46 billion of wins unfunded.

Most of this is long-dated.

I think this is a record amount in our history of long-dated wins on funded.

Much of these wins are more comprehensive relationships that are multi-asset strategy wins.

By winning these large assignments, it confirms to me that scale is important, being global is important, and I am more confident than ever before clients are looking for fewer relationships.

They're looking for more substantive relationships with a few.

This is a real change in our business, in the business of asset management.

Historically people were frightened of scale.

Historically people were frightened of having too large of a relationship, and we are clearly seeing this change where clients are very appreciative of all of the products, insights, global views, product views that we can offer to our clients.

Let me just go over a few issues related to retail and institutional.

Our retail platform is growing nicely.

Our brand recognition globally is growing very powerfully.

Our international retail products are up to $87 billion.

On a rolling 12-month from May to May -- that is the most recent data that we have -- our net sales in international retail, we are ranked number three worldwide.

And, we have very large momentum in -- with our clients in terms of working on a distribution platform.

More and more of our partners, distribution partners, are looking, again, for fewer relationships and we have seen quite a bit of interest in having us talk to our clients related to our product range.

And now with a pending BGI transaction, our clients are asking for more meetings with us ever before in the retail space domestically and internationally.

In the US retail, we had very strong long-dated flows and equities in fixed income and very big outflows as I discussed earlier in the cash management side.

And -- but with the BGI product range and the iShare product range, we believe, which I will discuss shortly, some very large synergies between our platforms.

Let me just bring up one other point related to institutional; very strong momentum in institutional, and much of this has to do with our strength in our fiduciary multi-asset class strategy and our taxable institution business.

As I said, this is a good part of our wins that we have in the pipeline and it has to do with the comprehensiveness of what we can bring, bringing a black box Solutions risk management solution alongside our full product range, and this is why we are seeing actually more solid RFPs and more multi-asset class strategy wins.

We are in the process of two very large RFPs, greater than $10 billion.

And once again, these are clients that are looking to have fewer relationships and a more exhaustive relationship.

So, the trend institutionally continues, and I think some of the pundits out there who talk about scale and how scale is bad, I think they're going to be proven wrong.

I think scale, full range of products, is going to be key for the successful model of asset management in the future.

Let me briefly discuss the BGI integration.

Mr.

Connolly here who is going to tie me up if I say anything to exhaustive as we are in a process of going through the integration, which in terms of closing, we expect closing to be some time at the very, very late fourth quarter or at the very, very early part of the first quarter.

We are in the process of working on all of the regulatory sign-ups and we have gotten some already.

And the big issue is getting all the approvals for our mutual fund platform, making sure that we get all of the necessary shareholder approvals through a proxy solicitation, which takes some time.

This is actually consistent with our (inaudible) integration and timetable too.

So there is nothing inconsistent about the timing of this integration.

But in a very short time we have traveled now to the majority of the large BGI offices.

We have had teams of people from BGI here in New York and our London office.

We have had teams of people from BlackRock in BGI's main office in San Francisco.

We've been to London, we have been to their Australian platform, their Hong Kong platform, their Tokyo platform and it is very clear to all of us the opportunities of the combined firm are greater than we believed when we did the transaction.

We see more revenue synergies today than we did when we announced the transaction.

Obviously, we have a lot to do making sure that we achieve those, but the opportunities are even more thrilling to us than when we announced the transaction.

We believe we are fully involved in the integration, which is going to take time.

We have teams from BGI and teams from BlackRock working together business by business, product by product, working on integration plans as we speak.

And so in a very short period of time of our integration with BGI, it's going as well as we have ever dreamed it could.

We've visited many clients who wanted to talk to us related to our proposed transaction, and these are clients who have had either money with BlackRock, have money with BGI or have money with both.

And I believe, I can say with probably 99% certainty, our clients are very excited about the combination.

Even yesterday, I was with one of the largest clients of our combined firm at a board meeting in which the board and the staff enthusiastically approved the transaction and saw great merits for them.

This is happening more and more, where clients are seeing the opportunities, the synergistic opportunities, of having the indexed products alongside the active products and with -- in between with our quantitative products that we can both bring together, that we offer even a fuller range of products to our clients.

Retail and institutional -- on the retail side, I am particularly surprised at how some of our large distribution platforms have come to us and talk about, how can we engage even a more fulsome relationship, offering not just our active mutual fund products but also now the ETF products onto their platform?

Clients are looking for -- are asking in asset allocation, how do they blend passive or index product with active products?

I think we are seeing, as a result of the class in the equity markets and the class of credit, we're seeing more clients taking a more conservative approach as they think about rebalancing.

Clients are going to have, probably overall, a little less exposure than they did in alternatives and equities.

So many clients had an underallocation in fixed income.

And so what we think we're going to see, and we're seeing evidence of that, clients are looking possibly to rebalance a little more into fixed income as an overall asset allocation.

Now some of them because of the collapse of equity markets, are already there as a percent and they're not just doing the rebalancing.

But, clearly, we're seeing clients looking towards a more conservative approach over the next few years in their asset allocation.

In addition, clients are looking at passive strategies probably a little more than they did before; not that active strategies are a problem.

In fact, I think as an industry active strategies are doing quite well.

But I think clients are looking to stay closer to home.

And then on top of that, clients are looking to barbell this more conservative foundation of their platform and are looking for more -- I would say more robust active strategies and alternative strategies.

The days when clients are looking for equity managers to manage 200, 300 stocks is probably over.

Clients are going to be looking for -- portfolio managers are going to be managing probably under 100 stocks, are looking for more concentrated active strategies.

And if they have the ability to actively outperform, there going to be big winners.

And so, we're seeing a total change in how our clients are looking at asset allocation, but also we're looking at how they think about how they should allocate in the equity space between active and passive.

And we are seeing clients starting to re-look at some of the alternative strategies as they feel more comfortable with their foundation platform of a little more index, more fixed income and are looking for more of a barbell approach of looking more, as I said, more fundamentally active approaches.

The ETF space, I think as you all know as an industry, continues to grow and we believe there's going to be great application and great opportunities for the combined BlackRock mutual fund platform, working alongside the ETF platform that we will have at the new BlackRock Global Investors.

I believe the dialogues with our clients, retail and institutional, will be quite expansive as a result of this whole product mix.

So, overall in a very short period of time since we have announced this transaction, integration is going great, clients' response are overwhelmingly positive, revenue synergy opportunities are greater and we are very excited about the opportunity and we're looking forward to closing this transaction as quickly as we feasibly can.

Let me just bring up one other point that really speaks loudly about our proposed BGI transaction.

This morning I received an e-mail from our London office.

We won an $800 million mandate this morning.

This is from an existing client.

This is a client who, when we announced our [Malin] transaction 3.5 years ago they put us in the penalty box for a period of time.

They were worried.

They were worried about what does this mean for them and at that time they actually questioned scale.

Obviously how they awarded us, the fact that they awarded us this business today and through our (inaudible) with the client, they believe this transaction has great merit.

They believe scale is more important for them in working alongside with BlackRock.

And what they said to us, what is more important to them, which speaks loudly to everyone at BlackRock, the number one objective is client service and performance.

And BlackRock has delivered client service and performance to this client, and I think that's going to be clear for all our clients.

As we continue to work on this integration, as we continue to build on the opportunities ahead of us with BGI and merging our two platforms into BlackRock Global Investors, we have to pay attention to performance and client service.

And if we continue to do that, the merits of the transaction speak for itself.

And this is a message to all the BlackRock employees, and this is a message from all of our clients.

They're very excited about this transaction, but that does not mean we can stop.

We need to be on top of our clients, working with our clients, being engaged with our clients and we need to continue to perform as we have so far this year to date.

So to sum it all up, I think the one BlackRock business model is proving to be successful.

One global technology platform is proving to be the right business model.

That is our expectations with BlackRock global investors -- one global platform, one technology platform, and one unified organization worldwide.

I believe we'll be able to achieve that.

I am very excited with our new partners.

The intellectual capital of the team is terrific.

The opportunities we have with our new partners, with BlackRock are enormous, and the opportunity for our clients are going to be very large.

So, with that, thank you everyone.

Let me open it up for questions.

(Operator Instructions).

William Katz, Buckingham.

I'm just wondering -- it's a little technical, I apologize -- but in terms of the guidance you provided now in terms of the integration costs fort of ahead of maybe during the early part of the acquisition.

That, plus what you sort of said is the revenue synergies are running a little bit better than what you had thought at the time of the announcement, which may be than not that surprising to me.

But maybe update your thinking on the ultimate synergies as we look out to 2010 and the combined Company relative to what you initially announced, and then I have a follow-up.

I think we're going to continue to do quite a bit of work over the next several months, Bill.

So, I mean we're really going to work on those.

I don't have a specific update to give you on the synergy numbers at this point in time, other than to say, as Larry said, we are very excited and looking forward to getting down and really materializing those things as soon as possible.

Okay.

All of being equal though, Larry, your comments that you feel better about the revenue synergies today than a few weeks ago when the deal was formally announced.

If I was to overlay that to your initial guidance, then, everything else, the numbers would be higher, even as we think about these integration charges up front?

Yes.

Second question I have is, you swore off acquisitions during the conference call to discuss the BGI transaction.

Yet, interestingly, the media is linking you with a particularly sizable transaction on the cash management side which sort of may be a little bit counter to how you're thinking about maybe the industry in the short term.

I was wondering if you could reiterate your views on acquisitions right here, right now, beyond the BGI deal, obviously.

I really can't speak about any deal specifically, but I will reiterate my statement related to -- we are not interested in doing acquisitions.

We have a great opportunity in terms of our relationship -- let me just.

You know, I'm getting my general counsel telling me not to say anything, other than what has been reported, and I'm not going to confirm or deny anything that -- what is reported.

We are not interested in working on any large-scale mergers.

Just one last one; I apologize.

As you think about the merger itself, you mentioned that the client feedback has been quite positive, and you sort of gave a lot of statistics this morning, which was helpful.

What about the consultant community itself?

Are they the pundits that are more worried about scale?

I was sort of wondering if you could answer that.

You know, it was very interesting.

Some of our consultants have merged themselves into a behemoth.

The answer is, I would say of the consulting community, generally has nothing to gain generally to be effusive about any merger.

They have to be cautious.

But I would say to a consultant, they all are -- they have respected how we did our past integrations.

They understand how we worked out in the past and they were enthusiastic with the results for them and their clients.

And I think there is a high level of interest in terms of their belief that we can get this done, too.

But to date, I don't think we have been put into the penalty box with any consultant.

I think consultants have a wait-and-see attitude.

I think that is the best way to frame it, but I don't believe we have been stopped with any type of client RFP because of consultant.

Okay, thank you very much.

Mike Carrier, Deutsche Bank.

I think, when we look at the flows and even the pipeline, particularly on the fixed income side but also on the equity side, we can see clients taking more risk.

I think it's a little surprising I guess on the fixed income side when we look at the relative performance, yet the flows still seem like they're holding up extreme well and the pipeline looks extremely robust.

So I guess just based on the client conversations, performance is one thing, and if the short-term performance is starting to improve then maybe clients are still confident in BlackRock's strategy and their process, that they know that things will eventually turn around.

But besides the long-term performance, what are clients asking, or what are their priorities when you're competing with other firms where they allocate the money to BlackRock relative to someone else who has better performance?

Well, A, not all of our competitors have better performance, so let's start off with that.

B, some of the largest wins that we have won in fixed income are associated with more than just the fixed income platform.

They may be associated with both fixed income and a BlackRock Solutions assignment, maybe our risk management assignment working along side with them providing some form of green package or Aladdin platform.

And so it is the uniqueness that we can bring to the table to clients related to risk management and asset management, that I think we have a distinct advantage over many of our competitors.

And so I think what it confirms, Mike, more and more clients are looking for more fiduciary type of relationships that are more than just an asset management relationship.

They're looking for multi-products, they're looking for risk management, they're looking for an expanded relationship.

Okay, makes sense.

And then, for Ann Marie, just on the expenses.

Ex some of the noise with the FX and the BGI integration and even the comp related to the deferred compensation, when we look at kind of stripping all that out, are we at a fairly good run rate when you look at cost initiatives that are put in place; and then, going forward, we are back to, depending on how the business is and how the market is, expenses can go up from here?

Yes.

I would say that's a pretty good assessment of where we are.

Okay, thanks a lot.

Roger Freeman, Barclays Capital.

I guess, first on the [P-pay] program, Larry, can you just comment on sort of what your expectations are around that?

You had talked about $5 billion to $7 billion you were looking to raise a quarter ago.

I think that number has come down, I can't remember what you said lately.

(multiple speakers)

Well, I think -- first of all, I still think we could have raised that much money.

The program -- obviously this is all public information -- the Treasury appointed nine managers.

Each manager was given $1.1 billion, and so we're going to raise $1.1 billion on top of the $1.1 billion the Treasury will give us in terms of equity, and then we will have leverage to play.

And so if you think about that in terms of assets with 3-to-1 leverage, that does come up to about $6 billion.

But equity raise is about $1.1 billion that we're going to be looking for.

And that's going to be true with all of the nine managers.

Is your sense that it's going to be -- that you're actually going to be able to raise that amount?

Is the fundamental demand there now, particularly with institutions having raised a lot of equity this quarter (multiple speakers)?

Yes.

I think, Roger, we're not including in that in the pipeline or anything.

But the reality is, if the program was larger, we think we would raise the equity.

Got it.

Okay.

In your money markets business, you kind of talked about the retail outflows.

On the institutional side, was there any elevation at the end of the quarter as institutions were trying to move money out of cash accounts?

Yes, if you look at a spot and all that stuff, it's not down as much.

You had a lot of -- you're seeing more and more rebalancing here at quarter end and things like that.

We did get some outflows in.

Particularly, some of it was stock repurchase and other programs like that.

So we are -- institutionally, there is some industry outflows, but not as much as retail.

And so -- and we saw it in both cases.

I think we saw probably a little more retail outflows in industry in our retail space.

Okay.

And if I heard you correctly, the catalyst really to get a more significant outflow from money market funds, because we really haven't seen significant outflows, is just going to be continued stability in your view?

And then, you think that's going to go more to fixed income than equity?

No, I actually think as an industry, we're going to see outflows over the course of the next year.

That's a function of the psychology of the market.

As I said earlier, if you believe you're going to earn less than zero, you're going to lose money, you're going to keep more money in your money market funds.

If you believe there's going to be greater opportunity at some return, depending on your risk assessment, you're going to be moving more cash -- more money out of cash.

Chairman Bernanke had an op-ed piece today, talking about their plans.

Clearly, there was no timing, but most certainly there is talk in the future that there's going to be rising rates.

And so that's either -- and there's no time frame, as I said.

I don't believe that's going to happen for at least another year, but -- or, you know, some time around there.

But we see -- we are in more dialogue with clients asking what should they do with the cash, and that's just not the US.

I was in Asia this past week and I think almost every client was asking me -- why should they be doing that, how should they be looking at reinvesting?

So more and more clients who have been frightened and put a lot of money back into cash are now looking for other strategies.

Okay.

Lastly, advisory; AUM was down slightly sequentially.

Are we sort of done seeing this line go up now that we are past the worst of the financial crisis?

And then, just in terms of the revenues from Solutions, are we seeing a little bit of a lull here?

Some of the short-term assignments have come off, and now people are looking at Aladdin and maybe that starts to build?

Yes, I think that is fair.

The outflows, as we said, in the press release, the outflows was really a principal payment.

Some of these are scheduled amortization, and so some of that was that.

But the answer is, we're actually talking to a couple of non-US entities for assignments.

And so, in fact we are talking to one institution right now that is exceedingly large.

I don't believe -- as I said, we're out of the emergency room.

So I don't think we're going to have the same type of flows in the advisory platform.

Nevertheless, we're working on one very large one as we speak.

Our hope is to take those assignments and move them more into Aladdin, and that was always our long-term plan.

(multiple speakers) more sticky business and a more robust business.

Thank you.

Roger Smith, Fox-Pitt Kelton.

Just staying on that BlackRock Solutions, it came down I guess to $116 million this quarter.

If I look or listen to what you are saying, is the difference between the two revenue numbers really the amount in the short-term valuation products, or mandates that that's how much really that went away?

That's exactly it.

Okay, perfect.

And then, really, on the retail money market funds, it sounds like you're seeing greater outflows there than you would on the institutional side.

Is that -- and I am assuming based on your comments that that money really is going back into the markets, that that's not going into some other type of cash management product like a bank deposit.

I would say, let's -- I don't want to be -- I don't want to say 100% of the retail money is going into longer-dated items.

I think some of the retail items probably are going to bank deposits, and I think you hit the point.

So I think it's a combination of both.

(multiple speakers) but, if you look at our retail long-dated flows in mutual funds, they were pretty strong.

So there is some of both.

Do you think that the retail investors are really kind of coming back here faster than the institutional investor?

No, I think the institutional are coming back faster.

Okay.

And then in the alternative space, can you just kind of maybe give us a little bit more information of what might be happening there from an institutional client versus sort of a high net-worth client or in the fund of funds business?

The great, great, great majority of our alternative base business is institutional, and it's institutional in the fund of funds or in the direct account.

So, as I said, we did close a fund of funds in private equity in the second quarter.

Where we saw big outflows in the first quarter, the early part of the second quarter, was our fund if funds of hedge funds, and that has really stabilized in the last few weeks.

And actually, we have just won a very competitive assignment from one of the more important clients worldwide.

And so we are beginning to see a turnaround there.

Our performance there has also turned around.

And so, I don't want to say we're out of the woods yet in the alternative space, but we are starting to see a real turnaround in performance and a real beginning of a turnaround in flows in the fund of funds space.

On the real estate side, we're still going to have another period of time of indigestion.

I think it's very clear that the real estate market, the commercial real estate market and the multi-family real estate market, is the last market to really find a bottom and it has not found a bottom yet.

And I think that's true if you look at all the bank earnings and other company earnings that have any commercial real estate exposure.

Gotcha.

We are not seeing any flows in that business at all.

That has flatlined for the moment, and I think that is industry-wide.

Okay, great.

And then just lastly so I understand the BGI, when you're out talking to clients, is that more really on a high-level basis, or are the sales folks starting to really be integrated at this point where they are going (multiple speakers)?

Only when clients ask us to meet with them.

We are not permitted.

We are two separate entities.

We're operating -- they belong to Barclays, okay?

And so when clients request a meeting, we are there together, and it has to come from clients or we are not -- we cannot be there in front of clients.

And this is no different than what happened with any transaction, with the (inaudible) transaction.

But there are more and more clients who are requesting meetings with both firms together.

As I suggested yesterday, we did meet with one of the largest clients with the combined organizations, and it was a very positive meeting.

When I was in Asia last week, I did have a number of meetings with clients who are -- who have strong relationships with both organizations, who equally said they are very excited about the combination and the opportunities.

So I have to be very clear in the roads of the map and how we can navigate.

So, if clients request meetings, we are there.

Next week, I will see two other very large clients.

Again, clients have asked to see us.

Great.

Thanks very much.

Craig Seigenthaler, Credit Suisse.

Maybe Larry, or if Paul is around, one of you could help me with a question on the money market funds.

Paul is not here, so I guess I've got to do it, or Ann Marie is going to do it, or somebody else here.

That works.

Maybe you guys can help me with the risk of fee waivers here, kind of where we stand, or maybe an update on the prospects for regulatory reserves or capital charges in light of the Treasury insurance wrapper going away.

Sure.

Yes, we did announce a fee waiver, and to be honest, our fee waivers have stayed very steady.

So we haven't seen any real change in fee waivers compared to where we were in the first quarter.

So, I think there is not much of a story there when you're looking at our results.

In terms of the capital charges, if the federal -- if the insurance program goes away; I think as I said in the past, we are in favor of having more self-regulation and more reserves of capital within the firm.

We believe it is the right thing to -- and it's a sign of strength of any organization.

Again, I think you're going to see a consolidation of the money market business as capital is going to be required.

I believe there's going to be some form of replacement of the fees that we're being charged by the Fed.

We could use those fees to build up capital in place of the Federal Reserve to stand by to our clients.

So, we are working with the industry.

We have been in dialogues in the proposed regulatory reforms, and this is something we are in favor of.

We think it's (multiple speakers) -- we need to make sure that the money market industry is competitive with deposits.

And, if you don't have capital behind it, deposits are more capital -- are a safer investment because of the FDIC insurance, up until a point.

Yeah, we agree with that one.

But sort of also on a follow-up to Mike's question on credit, bond flows are very strong now, but given that the secular trend seems to be a shift to DB plans to DC plans, and now a lot of these DB plans are also overweight fixed income assets just based on what happened in the market in the last few years.

I'm wondering, how do you see the demand -- and not endowments, foundations, other sovereign wealth funds -- but kind of the core US defined benefit plan, how do you see that demand and that organic growth trend over the next year or two?

You know, you're right on the DB plans.

We're not going to see that much in fixed because they are overallocated in fixed because of the decline in equities.

But we are seeing on the taxable institution space more and more outsourcing.

We are seeing in Europe with the DB plans outsourcing.

Similar to our [Phillips] transaction, or when we announced I think in the first quarter the Henkel assignment, and these are outsourcing their DB plans to external managers.

So we're seeing that fiduciary outsourcing trend continue in Europe.

We're seeing more outsourcing of asset management services with a taxable institution platform, chiefly insurance companies.

But in the US defined benefit plans, nothing rings loudly.

I could look at our flows of any large trends in DB.

We have won some, and those were as a result of clients moving from underperforming managers to BlackRock.

But aside from the reallocation of managers, I don't think the flows are that strong right now.

But we are meeting with more and more DB plans than ever before, and they are looking for topical conversations.

My two big meetings next week are two DB plans that I am having relating to the merger and other things, and they are large DB plans.

Great.

Thanks for taking my questions.

Douglas Sipkin, Pali.

Just two questions here; a couple have been answered.

Can you guys provide a little bit of color on the outlook for performance fees, potentially some of them coming off of the good performance or fixed income?

I know the performance fees are generally seasonal, stronger in the second half of the year.

And then just the second question -- just trying to get a little bit more color about how -- are we to assume you guys are going to start running through BGI integration expenses pretty much every quarter now through the close and then thereafter?

Thanks.

First of all with respect to performance fees, clearly, there is seasonality in our performance fees, and that has to do when the locks are, and we do have more locks in the third and the fourth quarter.

We have tried to provide you some data in the Q's and the K's.

So I think if you look back, you will see where probably we're going to be generating more performance fees are in our separate accounts when it's about really relative performance.

Where we have absolute performance thresholds, we still do on the pre-existing products have a little ways to climb out before we're earning those again.

But as we introduce new products, again, those become an opportunity to earn performance fees.

With respect to integration costs, you're totally right.

These are expenses we have begun incurring already, will incur some prior to close, and then of course there will be a chunk that comes in the months and short quarters after close.

Great.

And then just one follow-up.

I know you guys have talked about bringing more passive strategy into the 401(k) market subsequent to the close of BGI and iShare, and you had indicated that there were still some back-office challenges getting ETS and 401(k)'s.

Can Larry or someone else maybe provide an update on how that's progressing?

Thanks.

This is all part of our integration process.

There is no question, we have had dialogues with some of the large distribution platforms for 401(k), and most certainly they are very interested in talking to us about some type of association or trends or ability to work together in terms of offering ETS onto their distribution platforms for 401(k)s and other retirement.

But, Doug, it's too early for me to be really specific.

But the dialogues have begun.

It is clear to me that so many 401(k)s are in need for lower fee products, more transparency.

And I believe the whole dialogue around ETS with 401(k)'s are going to be an industry conversation over the next year or so, and we will be a large participant in that discussion.

Great, thank you for answering the question.

Marc Irizarry, Goldman Sachs.

Could we just hit on the trend of clients doing more with fewer managers?

And if you think about I guess the multi-asset portfolio group that you have, maybe you can help size that group now versus what it was.

And then also, I think you mentioned the $10 billion RFP that is on the table.

Is that in the pipeline?

And, if you could just give some color on the MAPS group and how big that is now and how fast that has grown?

Let me clarify two things.

One, one of the larger wins in the $46 billion is a fiduciary outsourcing type of assignment.

The two $10 billion-plus assignments -- that's not an assignment -- RFPs or opportunities are not in the pipeline, and we are in dialogue and we are competing with some of our major competitors on that right now.

In fact, one of the big assignment of clients coming in and doing it I think in-house due diligence with BlackRock and some of our large wins in the last quarter have been these type of assignments.

BGI has a very large -- they call it solutions-based business, and we have something called the MAPS business -- multi-asset product strategies.

So, we both have these businesses.

I don't know what the combined platform is going to look like in terms of personnel -- and I see Sue rapidly opening a book and trying to come up with that number -- but it's going to be extensive.

And what is impressive, where BlackRock historically has been strong in the multi-asset strategy really on -- in some of these fiduciary outsourcing, the BGI platform is actually stronger in the LDI.

And so, if you look at the styles in which they and us have pushed this business, it is very complementary.

This is another thing we saw some real opportunities together.

But the combined multi-asset stress combinations of products -- can I say the number?

Yes.

Okay, I'm just making sure it's public and I can talk about it, and so I've got my general counsel -- the combined multi-asset strategy platform is approximately $301 billion.

This is before these wins of this quarter.

So this is really at the end of the first quarter, these numbers that I'm discussing with you.

So a very large platform and a very large platform that's growing both at BGI and at BlackRock.

And then, hopefully, obviously as we put these units onto one common platform, I think we're going to have an exceptional business in this area.

Okay, great.

And then, just to clarify -- as you have been meeting with some of the clients, where potentially there's some overlap between yourselves and BGI, are you walking away feeling that the likelihood of retaining some of that business is now greater than it was when you originally set forth the deal?

Absolutely.

But, now let me put the caveat on it.

So, the meetings are going great, the enthusiasm is going great.

We have a long time between now and closing.

So at this moment, it feels great.

The client meetings are very strong.

But, you know, we have a lot to do between now and closing and we have got to make sure that we continue with this momentum and we have to continue with the dialogue with our clients.

If we continue at the pace that we have done in this most recent, whatever, five weeks, yes.

I think it's fair to say that we are more comfortable with the, as I said, revenue synergies.

Okay, great.

Thanks.

Chris Spahr, CLSA.

I was just wondering, you've talked in the past about some of the regulatory legislative initiatives that kind of might be -- hurt the market longer-term, such as the contract law, changes [in] the rating agencies and so forth.

Can you just expand upon that (multiple speakers) where you see things stand today?

I'm very worried about the whole issue of loan modification, and that's the whole issue on contract law whereby there are proposals in the Congress to allow the modification of a first mortgage without the extinguishment of the second mortgage.

I was happy to see last week, Senator Dodd and Senator Frank actually wrote a letter stating the reason why so much mortgage modifications aren't being done is because banks are refusing to write down their second liens.

So that was a step in the right direction.

But the proposal in this loan modification is allowing the existence of a second lien with a modification of a first lien.

And, as I said, I finished an Asia trip.

There was not one client who has invested in some form of the securitization market that asked me, where does that stand.

And it would put a real pressure in the securitization market in the future if we don't have as first lien holders an understanding of our legal rights.

And so this is a big issue that's in my mind slowing down the rebuilding of the securitization market, and I have been very vocal about it.

In fact, I've been, in some cases, too vocal about it.

But I do believe there is -- if somebody has to stand up and speak, and this is another example of the transformation of the investment management industry.

Historically, we as investment managers relied on Wall Street to be the safety guards to the capital markets.

And in many cases, the securities firms have dropped that responsibility.

And it's now falling on some of the large investment management firms.

Actually, we're trying to do this on behalf of our clients.

This is not our balance sheet.

We are doing this on behalf of clients, or our motives are to protect our clients and we are now working with lobbyists and all of that stuff on behalf of our clients and we're not getting paid to do this work to try to make sure that the securitization market is being protected.

And so I'm probably getting too much on my soapbox now, but I do believe this is an important issue.

It will be an important issue as we try to navigate out of this recession and as we start rebuilding our capital markets and the securitization market.

On a related note, there's been a lot of talk about normalization of fund fee levels between institutional clients and retail clients; at least some of them have reached the courts.

And I'm just wondering if you guys have thought about that and if there would be any potential impact on BlackRock.

I'm looking at my general counsel on that question.

I know that it has moved up in the courts.

As a business matter, I have not truly addressed it, so I'm really -- I can't speak about it.

But Bob, do you have any comments on it?

No, I think we just let the court process play out.

I don't know if you heard him, but he says, let the court process play out.

Okay, thank you.

Roger Freeman, Barclays Capital.

Just a couple of follow-ups here.

So, just back on the performance, and I think you answered much of this, but the improvement sequentially this quarter, how much of that is because of relative benchmark funds versus absolute funds?

I assume it's all relative, right, because your absolute funds are all below (multiple speakers).

(multiple speakers) relative, I think there was one absolute in there as well.

I can get you the details (inaudible - microphone inaccessible) set out.

How far on average would you say your alternative funds are below high water marks at this point?

Well, I think (multiple speakers) absolute --.

I would still say, on the fund of funds, I would still say 10%-plus, I think.

I'm not -- we could have that off-line for you.

Okay, no problem.

And then, in looking at some of the principal gains in the seed investments, the distressed hedge fund returns.

If I'm doing the math right, it looks like you had something like a 23% markup in the quarter.

Is that fair?

And (multiple speakers) I'm sorry.

That's true.

So my question is, do you -- how much of the easy returns have been achieved here as we sort of bounce off the bottom and some of the distressed assets?

Do you think these returns are, we could still see the --?

You know, it really depends on asset category.

A lot of those returns were in the bank loan market where you had a tremendous rebound from the freefall of the first quarter.

You have not seen a remarkable increase in some of the residential mortgage securities.

You have seen some -- much of -- some of these markets have not rebounded like others.

A lot of it has to do with, what is your right as a first-lien lender?

And so, it gets back to this whole issue of loan modification.

If -- the values of these securities can change dramatically if they allow in a modification the second liens to be preserved.

And so, in some of those products we have not seen as significant a rebound.

Now maybe with the [P-PIP], through those, that facility, maybe you're going to see more (technical difficulty) and a stronger rebound.

But to date, we're not -- in some of the asset categories, we have not seen a remarkable improvement.

But in some areas we saw a really big improvement, and that's probably it.

So if there is a rotation in some of the asset categories, we could continue to have some upticks.

But I would say in some of the bank loan products, maybe modest growth but not much more.

The market went too far down and it has rebounded closer to fair value.

Got it.

And actually just had a thought.

In terms of -- you're a large buyer or trader of fixed income assets, credit assets.

As you look at some of the fixed income returns that some of the dealers have been putting up in recent quarters, can you comment from your side of the table how particularly the credit markets have been functioning with respect to bid-ask spread?

The commentary has been some very large revenues being generated from client flows, and you're obviously a big source of client flows.

Can you just talk to that side?

I think it's very fair to say, as evidenced by some of the returns from some of the securities firms, bid-asks are abnormally large.

It is a deep concern of ours.

As we get more scale, we're looking at other ways of trying to reduce the bid-ask spread.

But it is a good example how the markets are still normalized.

Despite the big rally, credit markets are still abnormal versus any historical standards.

There are fewer players.

There's very little capital being committed by these dealers.

They're just taking the spread between the bid and the ask, and they are making very luxurious returns.

Have you --.

And it is a big issue for us.

Have you seen bid-ask spreads come in sequentially from 1Q to 2Q?

And secondly, are there any dealers that were not active in terms of capital commitment, sort of stocking bond inventory in the first quarter, that were in the second?

Roger, I am not that close to the day-to-day trading.

And so, I am sure -- I can -- somehow, we could find out, but I can't answer those questions.

Fine, just curious.

Thank you.

Thank you.

At this time, there are no further questions.

Mr.

Fink, Ms.

Petach, are there any closing remarks?

No.

Thank you for spending so much time with us this morning.

We have a big objective in getting our BGI transaction completed and a lot of hard work in front of us and all the employees at BGI and BlackRock.

But I'm excited at this moment to say that our enthusiasm is very large and the opportunities ahead of us with a combined organization.

If we realize all our integration issues are going to be significant, then the opportunities for us working with our clients are going to be quite enlarged.

And so we will be able to tell you more as we finish up the third quarter.

Please, maybe this summer everyone could have a vacation.

That's probably one of the last things I could say to everyone.

The last two summers, July and August were terrible going into September, and hopefully we could have some stability in the markets so we could enjoy some form of summer vacation.

So have a good one.

Thank you.

This concludes today's teleconference.

You may all disconnect.