Cowen Inc (COWN) 2010 Q2 法說會逐字稿

Good morning ladies and gentlemen and thank you for joining the Cowen Group, Inc. conference to discuss the financial results for 2010 second quarter. By now you should have received a copy of the company's earnings release that can be accessed at the Cowen Group, Inc. website at www.cowen.com. If you do not have Internet access and would like a copy of the press release, please call Cowen Group Incorporated investor relations at (646)562-1880. Before we begin, the Company has asked me to remind you that some of the comments made on today's call as some of the responses to your questions may contain forward looking statements. These statements are subject to risks and uncertainties described in the Company's earnings release and other filings with the SEC. Cowen Group Incorporated has no obligation to update the information presented on the call. A more complete description of these and other risks and uncertainties and assumptions is included in the Company's filings with the SEC which are available on the Company's website on the SEC website at www.SEC.gov. Also on today's call our speaker will reference certain nonGAAP financial measures which the Company believes will provide useful information for investors. Reconciliation of those measures to GAAP is consistent with the Company's reconciliation as presented in today's earnings release. Now, I would like to turn the call over to Mr. Peter Cohen, Chairman and Chief Executive Officer, please proceed.

Operator, thank you very much. And good morning everyone. Welcome to our second quarter earnings call. Sitting here today with Jeff Solomon, our Chief Operating Officer and Chris White our Chief of Staff who will be talking a little bit later in the call. Jeff will discuss each operating business and Chris will take you through the financials.

At first, though, I want to give you a little perspective on our view of the global markets and the resulting opportunities for Cowen and the actions we're taking to strengthen the firm and some of our recent successes. Second quarter represented a strike reversal in investor sentiment towards risk assets from aggressive pursuit in the first quarter to avoidance in the most recent period. After an initial strong start in the April, global equity markets lost significant ground. Short term volatility was elevated including the technically driven flash crash of May 6 which has had profound effects on investor attitudes towards the markets. Credit markets are also volatile with a loss of liquidity and the flight to quality which elevated US treasuries and high grade corporate debt prices.

Commodity markets were beset by a sell off in both crude oil and industrial commodities. And concerns which played out in the market including -- included sovereign debt risk with threats of an economic slow down, double dip and questionable government policy responses, including actions in China. In turn, these concerns drove correlation ratios higher with the equity markets and more importantly across major asset classes. In the last quarter's comments, we noted the value of holding appropriate hedging positions and are mindful of the amount of credit spread compression and equity appreciation that already occurred. This approach proved to be prudent during the second quarter which presented extremely challenging investment and trading conditions.

Both the direct managed and hedge funds portfolio were only marginal negative for the quarter, a fraction of the over 10% losses experienced in most global equity markets. There were also some positive outcomes in credit driven and customized separate account portfolios. Our portfolio managed every (inaudible) cautionary view as we enter the third quarter. In part here, what I'm saying is our performance on the investor management side in the second quarter and the first half were quite acceptable. The environment across all of our business units were challenging. As a result of performance, very disappointing. Shortfall in revenues was a result of the decline in banking revenues and a slight decline in commission income combined with the lack of investment income from the balance sheet, which we had done very well with in the first quarter.

We are not counting on the general environment to improve in order to make progress on our goal to return to profitability. As a result, we are reducing staffing and investment banking verticals that are showing a consistent lack of progress in generating revenue and have started accelerating cost savings action in our business operation which will be implemented over the next few quarters. It is our stated goal to upgrade our origination efforts at Cowen and Company. To that end, at the end of June, we announced the formation of credit fixed income group with the hiring of Kevin Reynolds and Lynn Sheer who have collectively about 30 years of experience in debt origination. The group's responsible for fixed income and credit product origination and execution including public and private debt placements, exchange offers, consent solicitations and vendor offers and I just want to remind everybody, this is a capability that never existed in Cowen.

In addition, we have made significant progress in bolstering our more traditional investment banking products. We recently announced the addition of Mike Costa as head of our Merger and Acquisition team. Mike immediately raised our profile on the M & A area and we believe his advanced experience and contacts will benefit all of our investment banking team and the reception Mike's gotten from our bankers and the number of policies already gone out and made is very encouraging.

We also previously indicated that we wanted to increase and refocus our presence in the pipe on the direct market. In this vane, we appointed Kevin Rady as the Head of Private Equity Capital Markets in June. As with the debt capital markets Kevin hit the ground running and he and his team have already received mandates. We are also strengthening our distribution efforts in sales and training as we recently hired Tom O'Meara to increase our presence in the options convertible and equity derivatives markets. We also announced two significant hires in the middle market equity sales group.

In research we're beginning to see the positive impact from the analyst that we have added to the firm over the past six months. During this period our research coverage expanded by nearly 20% as we continue to take steps to return our footprint to pre-2008 levels.

On the Alternative Asset Management side of the business, we continue to pursue new mandates and develop new products as an example of the latter is the recent launch of our replication mutual fund. This will be gone into in more detail by Jeff.

Through key changes and additions to teams are beginning to take shape and look forward both counter Rameous units have made tremendous strides in adopting of the current market in launching new and differentiated products and services and we believe offer significant value to our corporate and investing clients. There is much more to be done but we are executing on the plans we have discussed on prior calls and with many of you when we were on the rode in December. I would emphasize that we believe our results are lagging, the efforts we're making and the pipelines we're growing in both asset management at the broker dealer.

Jeff and Chris will take you the operational and financial details respectively to show that we have begun to turn around our performance and set a positive course forward. It is nacent but it is happening. Now I will turn the call over to Jeff Solomon who will talk in detail about the alternative investments and broker dealer businesses. Jeff?

Thank you, Peter. As Peter mentioned we begun, to take steps to address the operating performance that we experienced in the first half of the year. On July 1, we began to implement a new firm wide program called Cowen 2011. Over the past nine months as a combined Company, we've been evaluating various business units in the firm and discussing how best to lay the foundation for future years. The Cowen 2011 plan is the result of this effort and as Peter touched on, we have just recently begun to implement some of the many strategies outlined in this road map.

Ultimately, we view Cowen 2011 as a refocused and reoriented business model that streamlines parts of the organization while broadening other areas. In both cases with the goal to drive the firm towards consistent profitability. The first color of Cowen 2011 plan is a committment to the reduction of noncompensation expenses across the firm. While we have just begun to execute on this leg of the plan, I believe our recent albeit slight decline in the second quarter noncomp expenses is evidence of our efforts in the beginning of a trend. We have already identified opportunities to reduce expenses further by streamlining business processes, eliminating nonessential services and products and renegotiating certain contracts.

Additionally, we will achieve savings from the elimination of cost associated with closed or reoriented business. These savings will manifest themselves in third and fourth quarters of 2010. A significant portion of run rate expense savings will come from the consolidation of our space in New York, which will result in savings of about $3 million per year starting in 2011.

Another goal to program is to exit businesses that were not integral to the future growth of the firm. On our last call we announced the decision to close Rameous Multistrategy and Rameous Enterprise Funds. Since this announcement we've been winding down the funds and focusing our efforts on marketing our liquid investment strategy. This is an initiative that began in 2009 and is now fully implemented. Our product array on the alternatives business is now fully established and we are focused on converting our pipeline into investment mandates.

As the broker dealer, we've gone through an intensive valuation process that involves both eliminating unproductive front office staff, primarily in investment banking, upgrading talent and broadening our product offerings. The cost savings from these eliminations are going to be reinvested in the key areas Peter discussed as we rebuild the organization to compete aggressively in business lines that our clients require and where our specific expertise can deliver superior results.

Our final objective of Cowen 2011, is to refine our core business model to focus on obvious revenuing generating opportunities in the second half of 2010 and into 2011, some of which I will mention in a few moments.

With that I'd like to move the discussion to specific elements of the operating units in the second quarter along with our alternative investment group. We're starting with our alternative investment management group.

I am pleased to report that at the center management increased slightly for the second straight quarter to $7.89 billion as of July 1, 2010 compared with $7.87 billion as of April 1, 2010. The increase resulted from a net subscriptions of about $110 million during the quarter which was partially offset by performance related depreciation and assets under management of $82 million. It's also important to note that the increase in assets under management is net of approximately $300 million in hedge fund distributions related to liquidation of the Rameous Multistrategy and Rameous Enterprise funds.

Through the end of the second quarter we have converted $11 million from the multi strategy to other products and returned about $240 million from these funds to investors. We will continue to work with investors to reinvest or to return the remaining capital. The remainder represents assets returned to the firm 's balance sheet from our investment in the enterprise fund. Additionally, the increase in assets also included distributions of about $266 million across our fund to fund products during the quarter.

During the second quarter we reported negative incentive fee income of $450,000 compared to incentive fee income of $2 million in the second quarter -- in the first quarter of 2010. This decline was largely due to a reduction in the incentive income that the company had accrued in the first quarter for certain funds and funds products as a result of performance in the second quarter. This decrease is partially offset by an increase in incentive fees for our credit fund.

While we have strong performance across nearly all of our funds in April, these gains were reduced in equity market declines in May and to a lesser extent in June. To highlight a couple of largest funds, our value and opportunity fund declined 50 basis points in the second quarter but was still up 7.2% for the first half of 2010. In addition, we had a very strong July.

Our activist fund to fund portfolio was hedging overlay product was down also 50 basis points in the second quarter but is up 2.4% over the six-month period. To give you a benchmark, this compares to nearly 12% and 7% decline in the S&P 500 over the second quarter and in first half of 2010 perspectively.

During the second quarter we focused our efforts on marketing our liquid strategy including value and opportunity and global long shore credits. We believe that we have compelling performance records and meaningful pipelines. Our fund to funds alternative solutions business is also maintained a strong pipeline that we are converting into AUM. That recently created Rameous Dynamic Replication Fund commenced operations earlier this month with $120 million in initial capital.

We were awarded a $200 million mandate for fund to fund managed account for large foreign financial institution which funded in July. And we were awarded a $40 million mandate for our 40 AC registered insurance dedicated fund which is still subject to documentation. As Peter mentioned, we recently announced the creation of our first mutual fund, the Rameous Dynamic Replication Fund which began trading and which we're receiving management fees of about 115 basis points.

Traditionally, retail and smaller investors have been underserved by the alternative investment industry. And they have been left to invest primarily in stocks, bonds and real estate with little access to high quality alternative investment products. There are broad poles of retail capital that are out there, so meeting their needs is a significant opportunity for our industry. The Rameous Dynamic Replication Fund is available to this broad investor base which includes retail and high network individuals, smaller pension funds and endowments.

We also believe it will appeal to those who are compared to give up a little bit of alpha for the want of the daily liquidity of a mutual fund. And what differentiates this product and that instead of tracking passive hedge fund industries, our fund actually tracks and actively manage composite that we believe better represents hedge fund assets -- hedge fund as an asset class. We estimate that hedge fund replication is currently only about 1% of the $1.5 trillion in the hedge funds globally. We believe it's poised to grow significantly over the coming years.

In our real estate business, we continue to market our new real estate fund and have seen broad interest on a part of wide range of institutional investors. We are encouraged by the recent pay to our real estate lending activities in the RCG Longview Ford debt fund. As many of our borrowers and lenders alike has concluded that now is a good time to deal with our over leveraged assets. Many of them are entering into some sort of recapitalization and are providing -- we're able to provide new capital with our group. The pipeline for the RCG Longview debt origination team is healthy, stands at about $76 million. There are no guarantees as these deals will close.

Finally, we continue to market our Calan Healthcare Royalty Partners fund. We're making some significant progress there. We hope to have a second closing on that fund some time in this quarter.

I'd now like to highlight some of our recent developments in the broker dealer. Despite continued weakness in the revenues for investment banking, we are seeing some positive trends in our capital raising backlog for the second straight quarter. Even though -- and we're actually seeing some rising execution levels even though the marketplace has been difficult. In terms of number of transactions, our investment banking backlog -- or our underwriting backlog has increased 5% since our last earnings call and about 80% since the beginning of the year.

As it stands today, our capital raising backlog consists 23 transactions including 11 filed transactions. We are a lead manager on about a quarter of these transactions most of which are IPO's. And while we saw decline in the equity markets as a whole in the second quarter, on a year over year basis, there was actually nearly 10% increase in equity offering levels in the sectors that we cover. As such, our revenues from underwriting activities increased by $3.3 million in the second quarter on a year over year basis. About 25% of this underwriting backlog consists of transactions emanating out of China which is a trend that we're continuing to see in the third quarter as well.

On the advisory side of our business, we currently have 22 transactions in backlog and executed on three of those -- three transactions in the second quarter. It is important to note that while our adviser revenues declined by approximately $4 million in the second quarter, on a year over year basis, our execution levels were consistent during the two periods. The decline was result of single large transaction that occurred in the second quarter of 2009. These numbers do not include activity from some of our most recent additions, personnel additions.

And despite these positive levels, we're well aware that in order for us to compete effectively and profitably in the banking business, the changes to which we alluded to earlier must be implemented. As we stated, our intent is to be a full service mid-tier investment bank, we're building out revenue areas that leverage our core franchise in equity research and equity sales and trading as well as our core verticals in investment banking. In particular our efforts are threefold, building out our capital market origination efforts, bolstering our merger advisory platform and adding the equity derivative capabilities that leverage our sales in trading relationships.

In our capital market area, we're focused on key individuals that know how to originate transactions on a mid-tier platform. We have brought in leadership and additional personnel into pipe and register direct business, to reaffirm our traditional strength in this area. This is an area where Cowen has historically competed very well and we believe we can once again be a dominant player as we bring to bear our origination, distribution and research platforms into better alignment.

We are also excited about the formation of the credit fixed income group which Peter alluded to earlier, which will not only support our existing banking clientele by providing better ability to focus on the entire capital structure of an issuer, but it should expand our reach by increasing our client base through and active calling program. Indeed these teams have already run several mandates since they joined at the beginning of July. It's important to note that these origination efforts transcend into two verticals and will allow us to move more quickly to serve a more diverse client base with more financing alternatives than just equity offerings.

Our expansion into the equity derivatives will focus initially on the build out of a convertible securities sales and trading effort. This effort will expand upon our coverage universe by offering our traditional institutional clients more product breadth. In addition, we believe convertibles dovetail nicely with our new origination efforts in debt and equity capital markets enabling us to better serve issuers through increased distribution of equity link securities.

Finally, as Peter mentioned, we brought in a new head of mergers and acquisitions and have continued to invest in senior talent across our verticals. Even as we have let go other senior bankers. We expected the investments we're making will bear fruit in the near term as we look to close on the existing investment banking pipeline as well as initiate new mandates.

Turning to sales and trading, we did report a 13% year over year decline in brokerage revenues primarily associated with decreased customer activity in our facilitation business as cash equity volumes remained depressed compared to 2009. In the research group, we continue to make progress in returning our coverage footprint to its traditional levels by increasing our coverage universe by nearly 20%. We've made progress building coverage in new sectors including reach but we now cover 25 companies. Despite the challenging markets, we are pleased with the effort put forth by these groups and remain firmly committed to delivering top notch, high quality research and execution to our client base.

Finally, I'll turn to our balance sheet which remains conservatively invested. We ended the quarter with about $450 million in book value of which a significant portion is invested across a diverse array of strategies. As I mentioned on our previous, call these investments are not highly leveraged. On a blended basis, our liquid investments were only levered 1.3 times at the end of the quarter and our ill-liquid investments remained unleverred.

In terms of balance sheet performance, we reported negative investment income of $2.9 million as compared to investment income gain of $4.5 million in the second quarter of 2009 and $11.4 million in the first quarter of 2010. The decline in investment income was the result of adverse market conditions we faced during the second quarter and our primarily the function of adverse unrealized marks taken in our private investment portfolio. These are unrealized march to market. Given the volatility of the various markets, we intentionally remained under invested for a large portion of the quarter. During the latter half of the quarter we began to increase our exposure to corporate credit and to venture into strategy both of which prove timely at the beginning of the third quarter.

In summary, our path to profitability will not come without the occasional bump in the road, however with the Cowen 2011 plan in place, we believe that we are putting our business in a position to win over time. Looking back over the last few months, the second quarter should be thought of crucial period as we laid the groundwork for this plan. We now look forward to the second half of the year in 2011 to execute the strategies and capitalize on the full potential of the firm.

I will now turn the call over the Chris who will provide an overview of the results for the second quarter 2010.

Thanks a lot, Jeff. I'd like to first note that as a result of the Cowen/Rameous merger which closed last November second quarter 2009 GAAP financials reflect three and six months of stand alone radius only. The 2010 GAAP results reflect the performance of the combined companies. For the three months ended June 30, 2010, we reported a GAAP loss of $21.2 million or $0.29 per share compared to loss of $17.2 million in 2009 or $0.46 per share. For the six months ended June 30, 2010, we reported a GAAP loss of $34.2 million or $0.47 a share compared to a loss of $26 million in 2009 or $0.69 a share.

As expressed previously, management utilizes economic income when analyzing our business performance, as we believe that economic income provides a more complete view of how we generate revenue and where we incur expenses More specifically, economic income excludes the impact of consolidating any of our funds and it excludes expenses associated with one time equity awards made in connection with the transaction. Those equity awards totaled -- the expense associated with those awards total $2.7 million for the second quarter and $4.8 million for the first half of the year.

An effort to provide more details disclosure made pro forma adjustments to economic income for the 2009 period such as you see in our release and we will discuss today fully combined results for the 2009 and 2010 period. For the three months ended June 30, 2010, the Company reported economic loss of $17.9 million or $0.25 a share compared to a proforma loss of $15.9 million or $0.29 per share for prior year period. Excluding certain noncash items, economic loss for the second quarter was $12.8 million compared to $300,000 in the second quarter of 2009.

Noncash items include deferred compensation expense of $2.4 million and $7.7 million in 2010 and 2009 periods respectively. And depreciation and amortization expense of $2.4 million and $1.9 million in respective years. Also included are $350,000 and $5.9 million of noncash negative incentive deals in the 2010 to 2009 periods respectively.

Turning to our summary results of first half of 2010, the Company reported an economic loss $29.1 million or $0.40 per share compared to a proforma loss of $31.6 million or $0.57 per share in the prior year period. Excluding certain noncash items, the economic loss for the first half of 2010 was $19.2 million compared to $3.3 million in the prior year period.

We'd now like to run through the different components pro forma economic data starting with revenues. Our second quarter revenues were $48.6 million down 21% or $13.1 million compared to the second quarter of 2009. As mentioned earlier in the call the year over year decline of revenue was primarily due to negative investment income during the 2010 quarter versus a gain in the 2009 period. Lower brokerage revenue cash equity volumes are remained depress in the 2009 to 2010 period. Lower management fees due primarily lower (Inaudible) in 2010 period. And slightly lower investment banking revenues in the 2010 period partially offset by significantly lower negative incentive income in 2010 period relative to 2009.

Turning to specific revenue line items. Investment banking revenues were $9.9 million during the quarter, an increase of $1.9 million or 16% from the prior year period but an increase of $3.9 million or 65% over the first quarter. The year over year decline was driven by lower M&A revenues which was the result of revenues we receive in the second quarter of 2009 and the $1.6 billion sale of G markets (inaudible). In terms of the number of transactions or M&A activity was flat on year over year basis at three completed transactions. This compares with the over all M&A market in our sectors which was up approximately 40% based on the number of transactions. This increase in activity is represented in the backlog which was up nearly 30% from the end of the second quarter of 2009.

On the underwriting side of our business revenues were $3.5 million for the quarter, an increase of $3.2 million compared to the prior year period and an increase of $2.1 million compared to the first quarter of 2010. In terms of underwriting activities, we saw a slight increase in the marketplace on a year over year basis as the number of transactions in Cowen sectors increased by approximately 10%. On a quarter over quarter basis, underwriting activities increased by about 1% over sectors. Our underwriting activities measured by the number of transactions increased to eight in the second quarter compared to one transaction prior year period and four transactions in the first quarter. Thus far in the third quarter we've executed three underwriting transactions and we currently anticipate launching as many as six additional transactions throughout the remainder of the quarter subject to market conditions.

Thus far this year we've seen an increase in revenue eminating from our technology sector and during the second quarter we witnessed an uptick in revenue for both the health care and consumer sectors.

Moving to our sales and trading business, revenue decreased by $4.5 million or 13%, $29.8 million compared to $34.3 million in the second quarter of 2009. On a quarter over quarter basis, revenues were up slightly compared to the $29.6 million booked in the first quarter. As previously mentioned, we continue to face difficult cash equity environment the second -- in the second quarter relative to 2009. On a quarter over quarter basis our cash equity commissions were up as volumes increased slightly and our commissions per share levels remained unchanged.

Our listed options business improved in both the year over year and a quarter over quarter basis and as both Peter and Jeff mentioned, we believe that the expansion of our capabilities in this area, the addition of convertible trading activities and the expansion of our research footprint provide us with the opportunity to grow sales and trading revenue over time.

On the alternative investment management side of our business, we reported management fees of $12.2 million in the second quarter of 2010. A decrease of approximately $4 million or 25% as compared to the second quarter of 2009. The decrease in fees was primarily result of a net decline in assets under management on a year over year basis as well as the impact of lower fees charged to affiliate the unit credit in the 2010 period and mix of AUM between profit.

Management fees were down slightly on a quarter over quarter basis due largely to the timing of outflows and inflows as well as the mix of AUM. On a blended basis over the quarter our average management fee was 0.62% including lower fee paying products such as cash manager business and our mortgage advisory business we're not currently collecting now. This represents the slight decline from our average management fee in the first quarter of 0.65%.

The activity levels in our funds to funds business has accelerated as we continue to close on previously identified opportunities. Many of these mandates represented timing that we've been pursuing for the last year. We continue to believe that we will see activity in our similar single strategy hedge fund products over the coming quarters as our pipeline remains robust. During the quarter we reported negative incentive fee income of $450,000 compared to negative incentive fees to $5.9 million in the second quarter of 2009. Added incentive fee income of $2 million in the second and first quarter. The improvement on year over year basis was primarily due to improvement in our real estate business which was subject to fall back and subordination provisions in the 2009 period.

As Jeff mentioned,the decline in incentive income on a quarter over quarter basis was due largely to fund performance and reduction income as the company accrued in the first quarter of certain fund to fund products as a result of performance. The decrease was partially offset by an increase in incentive fees from our credit fund. As Jeff also noted on a relative basis performance in the first half is strong in our single strategy process as our credit and activist funds were up 9.3% and 7.2% respectively. This positive performance continues through the month of July.

Investment income declines negative levels of second quarter of 2010 as reported loss of $2.9 million compared to a gain of $4.5 million in the second quarter of 2009. Investment income results were driven by the adverse market conditions that peaked in May and continued in June. As mentioned on our last call, investment performance in the first quarter was aided by an increase in our mark on certain market -- (inaudible) liquidated at prices consistent with our remarks -- with our marks resulting in $5.3 million of proceeds to the firm. This return of capital represented nearly 60% of the firm's total claims related to LDIE and LDI. I would also note that we experienced positive investment performance in July.

On the expense side, compensation and benefits expense for the second quarter of 2010 was $35.9 million, a 21% decrease compared to $45.2 million in the second quarter of 2009. Our compensation to revenue ratio was 74% in the quarter compared to 67% in the first quarter as we brought the ratio for the first half of the year to 70%. The increase in the ratio is partially attributable to investments that we made in new businesses and some of the staff reductions made throughout the year as severance is included in compensation and benefits expenses. This ratio as well as economic income excludes one time equity award expense of $2.7 million (inaudible) in connection with the merger.

Included in our compensation expense for the quarter is $1.6 million of expenses associated with activities from which we get reimbursed. For the first half, $3.4 million of compensation expense was reimbursed. During the quarter we also incurred $1 million of severance expense as we decreased head count by approximately 2% to 563 employees. Severance expense for the first half of 2010 was $2 million. We expect to incur additional severance expense in the third quarter as we've already reduced head count further by and additional 2% in the quarter.

Excluding reimbursed compensation expense and severance expense, comps and beni's represented 68% of revenue in the quarter and 65% of revenue in the first half. Noncompensation expenses in the second quarter were $32.2 million, a 1% decrease from $32.6 million in the second quarter of 2009 and a 3% decrease from $33.3 million in the first quarter of 2010. During the second quarter our noncompensation expense included $28.7 million of fixed expenses and 35 -- and $3.5 million of variable expenses primarily related to quote brokerage and trade execution funds.

Year over year decrease was primarily due to the realization in noncompensation expense dating over the quarter as cost cutting measures taken in connection with the transaction began to take effect. As Jeff mentioned, the anticipated deal had some greater savings in the second half of the year based on actions taken. For example, we've recently renegotiated several vendor contracts which were the result of approximately $1.5 million in savings on an annual basis. Only a small portion of those savings were realized in the first half of the year. But a more significant portion will be realized in the second half of the year and you'll feel the full impact of the reduction in 2011.

Another example would be the savings we expect to realize from our new ITM construction contract. The transition from our existing service providers to our new partners will occur over the remainder of the year resulting in some savings this year but significant savings in 2011. As mentioned earlier, we continue to build out new businesses which we believe will result in increased revenue going forward. In these new businesses also result in additional non-compensation costs, however, we're certain that our cost saving initiatives will far outweigh the increase.

Additionally, as Jeff mentioned, we had the opportunity to consolidate most of our New York personnel into one location. As part of this process, we will significantly reduce our leased space in New York. And we expect to realize cost savings of approximately $3 million per annum over the next three years. Again, these savings will not hit 2010 noncompensation expense but they will be realized starting in 2011.

Although economic income is pretax measure, we wanted to briefly address taxes. In the second quarter we reported approximately $600,000 in tax expense which equates to an effective tax rate of approximately 3%.

Finally, turning the balance sheet, book value per share was $5.98 at the end of the quarter and tangible book value was $5.43. With that, I'll now turn the call back over to Peter for closing remarks.

Well as you heard it was a difficult quarter. Our big disappointment really came from the banking. We were way below our forecast in terms of revenue for the first half of the year and for the second quarter. On a commission generating side of the firm, our guys did a fantastic job in what was the lower volume environment in the investment management part of the firm is doing well. It's a tough environment as tough as I've ever seen. And what we're really doing is we're reconstructing the firm through be responsive to the kind of environment we're in. As we're competing now with the bulge firms who have come down into our space, we have to be much more of a capital market intensive and oriented firm and transactional. We've got some fantastic guys and women in our banking division who really are breaking their picks to generate business but we just don't have enough of them. So, we'll be going through a process of reducing and increasing at the same time year to date about 93 people have left the firm but about 85 people have come into the firm. So we're going through a massive reconfiguration of the firm and it's going to be on going and I think I said time of the merger and the time of the first quarter call, this is not an over night fix. It's going to take a while. We have the resources to do it and we are kind of happily seeing a lot of really good people approaching us about wanting to join the platform. So, with that let me open it up for questions and we'll get on with the day.

(Operator Instructions) Your first question comes from the line of Devin Ryan with Sandler O'Neil. Please proceed.

Good morning guys.

Hi Devin.

Wanted to grow some more color on the verticals the head could be reductions came from. And if I could get a current headcount for maybe Senior bankers currently?

Banking was probably the largest contributor to the head count reduction. I think today we have, depends on how you want to define senior bankers. But probably 19 down from 23, 24. This has been a reduction in staff below that commensurate with that reduction.

Got it.

And that means in the investment banking group and that's just MD.

Yes, I understand. Got it. And essentially what I'm trying to get at is, we're obviously not a normal operating environment that's pretty clear. Trying to get a sense of what type of revenues these senior bankers what you should expect they will be able to do call it in a normal part of the cycle or functioning market so I can get a sense of what may be the normal revenue run rate could before whom the markets are open.

A banker at the platform like ours with the research capabilities we have should -- senior guys should be able to do $7.5 million to $10 million a year once things are running smoothly. That would be the target. The areas that we've chosen to reduce, we didn't think those folks were likely to reach that kind of bogey. When you're in an environment like this you need to window it down to those who you think could contribute that way. I think if you were just take a broader look, our goal should try to be to be able to generate at least in the first pass $1 million per head in banking. I mean, I guess it's a pretty good metric. I grow we can do better than that if the environment were better. But I think you've got to make sure you size the banking effort to what you think you can achieve both in the conversion of existing backlog as well as bringing in folks that can increase your hit rate.

All good bankers are doing what they should be doing. We just don't have enough of them.

Also, as Peter just mentioned, a lot of the people that will bring capital market side are expected to both originate and execute transactions whether existing banking they're also calling on sectors that we may not that we can add cover from traditional banking.

In those numbers with the net decline, there is embedded in there an increase because we had debt capital marks group who already have prepared mandates signed up and we beefed up as I mentioned earlier in my remarks moving over, take over the pipes in our D area, which is business he's been in for 15 years. We've known him for 15 years and so we've added in places and we've taken away in places. We're going to recognize the nature of the way this business is now and, hope is not a strategy for us, not going to sit here and think everything is going to go back to normal. We're going to have to be scrappier than we've ever been and proactive in getting business. And that's what's going on. I can tell you, the guys that are working are working their butts off. All of us are.

Got it. Thanks. In terms of thinking about additional severance may be calm. Is that the number that's off in the area depending on the moods you make or are there numbers you can give us to help model that?

We're going through it. I don't think it's a specific number we can give you. It's going to be on a case-by-case basis.

I would expect it to be at or higher than the first half and the first half was $2 million as we move through the course of the year.

By the same token our accruals or compensation is going to go down, as severance goes up, so -- we will have to take it case by case.

Understood.

We definitely have -- we're definitely going to get on with shrinking.

Okay. Got you. On the Ramius side, can you give us the kind of follow the numbers you were given, the number of gross new assets that came during the quarter excluding the assets that left as a result of the multi stat and enterprise closing? I just want to make sure I'm understanding all the numbers.

Yes, I mean you can actually see it in the press release, Devin, there's a table that basically shows you the growth in AUM engross basis, you can see where it came from. We're -- where the increases were and where the reductions happened.

Okay.

And it just -- I can walk you through it. It's pretty well laid out. You should be able to see where they came from.

Okay. Okay. And then in terms of your comments flows this quarter sounds like you've closed on $200 million mandate. That's -- that's been funded this quarter and it sound like there may be more mandates closed upon this quarter as well as that fair to say I want to make sure I understood that as well?

Yes. These are things that we've been working on for a long tim. As we mentioned in the last call the lead time to closing these, they sit in the pipeline for a while, people are very deliberate about making commitments but when they do they stay for a while. We're happy to see them, people making commitments to us. So we have more in the flat form. There's more in the pipeline anything we can convert on, the timing is very difficult to predict. But I will tell you that the pipeline is increasing and the chances to win in the core products we've identified are greater. We don't know what the timing is on how those are going to close.

State of Florida example announced in I think it was March maybe February that they were awarding us $100 million separate account for the deep value fund. Right.

They announced publicly. Yes.

They are just now getting around to documentation. It's not because we want to drive the process, we'll send you one documents, so, everything is just moving slower. But I will say that I think our platform today which is simpler is very much in line with the mindset of investors. What we do is we focus each strategy. It's very transparent in each strategy. The outcomes are very controllable in each strategy. We're no so market dependent or deep value fund, which is up 7.5% or 11% through the end of the quarter. It was actually up higher -- at the end of July we were up 15.5%. That's the case in point. Where we can really impact the outcome of that investment. People like that.

Great. And then in terms of the magnitude of positive investment performance you guys things that mentioned were up in July, can anymore give any color on that?

We can't give you anymore color. Peter gave you indication in one of our funds but we've had positive performance in the funds across the board. We haven't gone to -- we haven't gone to doing monthly performance. It's been a across the board positive .

But if you want to become and investor of one of the funds you can find out.

Well you can just send me the letters right?

We'll send you the sub-docks. They're on their way.

Lastly here, you guys have been taking a lot of steps to reduce expenses but then obviously you're building out some new businesses an adding some new platforms just want -- how should be think about the absolute level of expenses? Maybe once some of those expense days have run through but the new businesses are up and running, absolute will number still potentially come down or does it go up because of the new build out? Or just trying to get some flavor there.

We do believe noncompensation expense do go down, the businesses that we're trying to build out are not ones that require significant amount of fixed noncomp expense -- expenditure. Obviously the biggest impact we're going to make through the rent reduction that's significant savings for us in terms of noncompensation expenses.

It's hard to say. I think the things that we're identifying, particularly where we've renegotiated vendor contracts and where we've gone through and combined our general ledger packages from two firms, these are things that we continue to roll out over time. We think we will make meaningful impact. The new adds that we're talking about here should be predominantly off the back of adding revenue and not adding significant amount of fixed expense.

So there's a lot -- there's substantial amount of noncomp savings to be realized as we work off some of these old contracts and penalty charges, cancellation charges we're letting them run out. We're renegotiating the space consolidation. It's going to have a meaningful impact. Hopefully it's going to more efficient.

It's not even close in what we're taking out in comparison to what we're adding. That you're going to see over the next course of the year and next year as that number comes out.

Thanks a lot, guys.

Good.

(Operator Instructions) Your next question comes from the line of Joel Jeffrey with KBW. Please proceed.

Good morning, guys.

Good morning.

Just to follow up on Devin's question. I'll try not to get too granular on this but is there a specific number on sort of the fixed noncomp side that you guys are trying to manage to from a break even standpoint?

Not specifically, we have a lot of work to do on these numbers. I think we sort of take the bottoms up approach in terms of making sure we have everything we need to make sure the business runs effectively. I think the propensity to want to try to drive through a specific number our cost structure has been really burdened by primarily rent expense. A very difficult number to bring down in significant portion. We have significant portion of the noncomp expenses depreciation and amortization.

So if you look at that, those are numbers that aren't going to go away unless we do something significant like rent consolidation. The other thing, we're in the noncomp number it's also a variable component to that. That variable component is a function of volumes and whether or not we're an liquidity buyer or liquidity taker in the equity market. So there's a variability that adds commission revenues go up invariably noncomp expenses go up. So these are largely [EPN] charges and clearing charges. So what we try to do is take a bottom up approach, what are the critical processes that we're not going to touch and what are the processes that we still have in place that both organizations had in place when they were larger and have gone through a very specifically and we reduced redundant IT infrastructure.

We've reduced certain, debt recovery site and redundant applications, and we consolidated Bloomberg in the data center, these are all things that I would consider to be relatively low hanging fruit. And then we'll get to a level where we can see what the new normal is and expense in making decisions about whether or not we think we need to go further. So it's not a specific target we have in mind. Know there's a lot that can be done.

Okay. Great.

That was percentage of revenue of too high. We've got to get revenue up and noncomp expenses down to get that percentage down. Part of problem that Jeff alluded to is Cowen had offered offices Boston, and San Francisco that was rented and built out at a different time in the business. Those offices are not cheap. Not terribly expensive. They're not full of people because we've reduced people. The real estate market -- if those markets were any better we'd get out of that space. But by the same token those leases are going to burn off. So we're very focused on consolidating all real estate expenses.

In London we have two offices, the Ramius office and the Cowen office. There's no reason to have both but the cost associated with for example closing the Ramius office in London, we've got a year left on the lease it doesn't make sense to break that contract. We'll consolidate the contract when the lease burns off. Those are the kind of things where I think we're going to make significant impact over time.

Great. That's actually transitions to my next question in terms of refer knew generation, you guys have been building out the brokerage rather handily recently. Is there a time frame you typically think about new people coming on, revenues being generated by them or are they being weighed down now just overall now by whats going on in the markets?

I think they are being weighed down by the markets but if you take the capital markets group that we brought in. They started three weeks ago and they've already got a substantial amount of revenue signed up. Now, they've got execute on it, but they've got, engagement letters that would produce handily the kind of revenue you would expect for them. Good guys hit the road running, some guys take a little longer and a lot of it is environment dependent.

I think it's sales and trading where we're adding, in particular, new account coverage. It takes some time to get some of those accounts open, but we're, we're -- the relative to what it would take to get a business up and running you're talking a matter of months, so I think, those are areas where we're clearly going to be expecting to see revenue in the near term. In terms of the equity derivatives effort. It's going -- it's taking us, a couple, a month to make sure we've got the right risk infrastructure and order management systems in place for the convertibles effort which is an effort that Cowen exited in 2006. We've got to turn those this lights back on and bring in a handful of sales traders to build out that capability. Bring Tom O'Mara on was the first step I'd say we start to see revenue opportunity there manifest itself towards the end of this quarter, beginning of the next quarter. I think it's important to note, though, that there's a healthy balance between identifying near term revenue opportunities and that's -- as well as making investments over the long haul, the kind that is sustainable. Right now our goal is to bring in people into the organization who can hit the ground running more quickly because we have a revenue challenge. And so we'll be focusing on those versus others.

Great. Lastly, can you just remind the current amount of deferred tax asset and the valuation against that.

There's a full valuation allowance set up against deferred tax asset which is currently $35 million.

Great. Terrific, thanks for taking my questions.

You're welcome. Thanks.

You have a follow-up question from the line of Devin Ryan with Sandler O'Neil, please proceed.

One other thing here, on the -- that $1.6 million in expense comp expense that gets reimbursed is that reimbursed through revenues and -- or is that something that may be reimbursed later in the year?

It's a contract expense. That's -- as we go. Doesn't come through revenues.

Okay.

So in terms of -- that expense -- we'll see reversal at some point? I get I'm trying to get some sense of how high that will play out.

Actually, we take it in the quarter as a contract expense to noncomps.

Oh, got you. Thanks that was it.

Okay. Thank you.

Your next question comes from the line of John McLaughlin with Sugar Mountain Capital, please proceed.

Thanks for taking my question. I guess you guys alluded to a little bit the balance sheet. It sounds like it hasn't maturely deteriorated from last quarter just trying to get a sense of you guys are okay with the cash burden of proof an don't think you would need to raise anything excess unless I guess an asset out there that was out most attractive.

You hit the nail on the head. The balance sheet -- Very liquid and don't need to do -- no need to be doing any equity raises.

The only thing I will say, I wouldn't say we're comfortable with the cash, we're not worried about our (inaudible).

Okay. And then I guess next question is, still trying to get through it, but the FIN Reg, Is there anything in there that you guys are pleasantly surprised? I know there's a lot of articles of prop traders, and hedge funds of the bigger guys how that's going to shake out. You guys looking at this?

Think for sure we have. Obviously we're in the marketplace. We sen a fair amount of time talking to smart people who want to join smart platforms. And I think FIN Reg will probably shake things up. We're in the market looking at people all the time an to presents an opportunity for us, we'll be all over it. I think hard to say exactly how with the impact it's going to be. Hard to say what the timing is going to be, a lot of these rules haven't been written yet and a lot are going to go into effect over a period of couple years. So I wasn't expecting this to be a cascade effect where you one day wake up and find, yourself buried in opportunities. I actually think it's going to be pretty controlled and you'll see people over the course of the next couple of years I'm trying to figure out how they're going to grow and accelerate their businesses and many cases figure out that the larger platforms are not the best place to do that. That's usually when we get those phone calls. Good news for us people know we're in the market, they know we're actively out looking for that talented people that can come in and make an impact pretty quickly and so we're screening effectively on a weekly basis.

So on that, new people that you're talking to, first the old kind of compensation rolling off -- are the new ties, new contracts, new people coming in, are they sort of -- how they're going to be compensated? Is it more eat what you kill sort of situation versus kind of previous what you were talking to people just given the situation in market?

I prefer to use the word paper performance. I think eat what you kill invokes some sort of all for one and one for one mentality. We're looking for primarily is people who come into the organization who know how to originate an know how to drive business themselves but who play very well in the sandbox with one another. The magic that we should be able to create is to be able to grow across all aspects of the firm and be able to really call the best ideas, either for origination or for investment and put them to work either for ourselves or for our clients. You want people who are communicative. Who are open, who are inclined to reach out to all parts of the organization to win business.

Some of the things we've done over the course of the past month, there's mandate that we've won, I've been in them, Peter has been in them. Tom Strauss has been in them. John O'Donoghue has been in them. These are opportunities for us -- Scott Ryles has been in them. These are people who are reaching out to all parts of the organization to bring in senior talent to win and so more than just specific compensation metrics, I think it's the type of person, and the culture we're trying to breed here that's going to be differentiator.

I guess final question going back to balance sheet given how you guys feel comfortable with it and this is getting ahead of itself. Is there a point where I guess the easiest and most accretive thing to do is buy back stock?

We haven't looked at that. We have, we think, an opportunity to spend and invest the money either on the balance sheet or in businesses that will drive more value than simply buying back stock at a discount to book.

Thank you.

Okay.

We have no more questions in queue at this time. I will like to turn the call over to management for closing remarks.

We appreciate everybody's time. It's a lot to go through. Obviously we're available to answer additional questions if you need. Thank you everybody for your participation.

Ladies and gentlemen thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.