摩根大通 (JPM) 0 Q0 法說會逐字稿

Today's meeting may contain forward-looking statements within the meaning of the private securities litigation reformat of 1995.

Such statements are based upon the current beliefs and expectations of J.P.

Morgan Chase management and are subject to risks and uncertainties.

Actual results could differ materially from those set forth.

The following factors among others could cause actual results to differ from those set forth in the forward-looking statements.

The risk that following consummation of the merger the businesses will not be integrated successfully, the risk that the cost savings and any revenue synergies from the merger may not be fully realized or may take longer to realize than expected, the risk that excess capital is not generated from the merger as anticipated or not utilized if an assertive manner, and the risk that disruption from the merger may make it more difficult to maintain relationships with our clients, employees or suppliers.

Additional risks and uncertainties are described in our 2003 annual report on Form 10(K) and in our quarterly report on Form 10(Q) for the quarter ended March 21, 2004, each filed with the Securities and Exchange Commission and available at the Securities and Exchange Commission Internet website.

To which reference is hereby made.

At this point, all participants have been placed on a listen-only mode and the floor will be opened for questions following today's presentation.

To queue up for a question at any time, please press star 1.

Your conference will begin momentarily.

I would now like to turn the call over to your host for today, William Harrison, Chairman and CEO of J.P.

Morgan Chase.

[No audio].

Were made way down in the company. 100% of the technology decisions have been taken.

Which by the way is very unusual and I think can be very politicized and is a very good mood.

And then we've got to execute it.

Brand new decisions have been made.

The most important financial decisions have been made, the financial architecture.

So in summary we made really all the major decisions that you would expect one to make if things are going well in a merger integration environment at this stage.

And the good news is that there are really no big issues left.

And that's very important.

In every merger I've been through there's always been 2 or 3 issues that sort of simmer for about a year or a year and a half that seem to sort of corrode the organization efforts that you're making.

Not to say this year - - We've made all the major decisions and I feel very good about that.

Cultures are coming together very nicely.

That was a concern by some.

That will not be an issue here.

It will be a great place.

Without question.

It's happening very nicely.

And the other thing that's very encouraging and expected, by the way is that there's been very little disruption from a business perspective.

Because you don't have a lot of overlap .

We don't have a lot of overlap in retail and we don't much overlap in wholesale.

And in most mergers you do.

I've had some mergers in wholesale a lot of overlapping and it was disruptive.

That's not happened this time and I don't see that changing.

So why is all this going well?

Very simply, the strategic rationale.

All constituents very quickly they understood it.

Little overlap, good feelings in terms of not only business perceptions but the culture challenges you'll have.

Really serious management experience here on both sides.

Very important as you go through these mergers.

And as I've said, cultures meshing very well.

Starting the office of the Chairman, with me, from Jamie and David. [No audio] But all the other management teams coming together very nicely.

With a lot of experience.

It's been a very very satisfactory process so far.

And I'm very pleased with it.

Key challenges, going forward.

It's all around [Inaudible] We have a scale, operating efficiencies which we've managed well.

We have the leadership positions in all of our businesses across the board.

So the challenge is execution to make all of it come alive to really create the value.

And I have told- - I've asked Jamie as President and Chief Operating Officer, maybe David Coulter, ODC, and all the senior management teams to leave no stone unturned to look at everything we're doing, how we do things, to review it, take the best system the best people, and get on with it.

And if you can do that in a merger environment quickly and efficiently you will create a lot more value, without question.

We I think are doing that very well.

We're looking at everything and we're making very quick decisions.

And if you do that you're going to end up with a better culture, a better system, better people, better strategy across the board.

So, all that's going well.

So in summary we're off to a great start.

I don't see that changing.

I think we have a shot at really pulling off the best merger integration that's been done in the industry.

That's our goal.

And I don't really see anything at this point that should derail that streamline that we're on which is I think quite positive.

Let me talk about a few other significant issues.

And one that I'm not happy about at all.

And that's the $2.3 billion after tax charge that we took to increase litigation reserves,

This brings our total J.P.

Morgan Chase and loans, total litigation reserves to $4.7 billion.

We don't plan to break out each case.

But a significant amount of this increase will come from - - would be from Enron and the other securities underwriting our cases that we can.

The regulatory and legal environment continues to be very challenging, and as we reviewed our reserves at this time, we believe that this reserve represents our best judgment with the information we have as to the appropriate reserve for all the cases that we look at.

We'll vigorously defend our rights and we'll settle or we'll litigate depending on management's judgment on what is in the best interest of the shareholders.

After the charges on J.P.

Morgan Chase Savings and Loan basis we still have a very strong capital position of approximately 8% Tier 1.

Quick comment on earnings.

JP&C had a solid quarter.

On an operating basis at 85 cents.

Which is without litigation charges of course.

At 1.8(PH) billion Bank One had a very good quarter.

At $1.1 billion and 99 center per share.

So very good quarter by Bank One.

Our Board approved a $6 billion stock buyback plan.

And we anticipate the new firm to generate significant excess capital going forward.

With that, let me turn it over to Dina, who is going to talk about second quarter earnings and Jamie on a merger update.

Thank you very much, Bill.

Good morning to all of you here in the room as well as on the phone.

I will take you through the second quarter financial results for us and for Bank One.

Jamie will give you an update on the merger, and then we will take questions.

Okay.

Starting with J.P.

Morgan second quarter financial results, Bill has commented on the litigation, the charge more than offsets operating earnings for us.

We have 1.8 billion return of equity of 15%.

Very strong investment banking fees in private equity gain partially offset by weak trading revenues in the quarter.

Mortgage rebounded from the first quarter.

I emphasize a short-term rebound following the rate decline in the first quarter.

We continue to benefit from improved commercial credit.

And as of June 30 the Tier 1 ratio was 8.2% obviously following the litigation charge.

Bill gave you the perspective on the litigation charge.

Those are some general statements.

I will go straight into the operating earnings.

We - - Or actually, first, the total earnings; we reported net income of a loss of $550 million, 27 cents a share loss.

The nonoperating charges were $2.4 billion after tax.

That excludes as well a small amount of merger costs.

Operating earnings per share of 85.

And from here on, or 85 cents, l will stay with the operating numbers.

For those of you on the phone, I'm on slide 7.

Earnings for the quarter.

The $1.2 billion, I referenced was about flat to last year.

It is $20 million lower than where we were last year and down 6% from the first quarter.

Revenues of 9 billion were down 5% year on year.

Driven by declines in trading, treasury and mortgage revenues.

Incentives were down a well, they were down 3% mostly from reduction in incentives, lower commercial credit costs, tax.

The bottom line is flat.

Compared to the first quarter, revenues were down 4%.

But expenses were down 6%.

That's correcting to some extent for our performance in the first quarter.

Credit costs increased since the first quarter, in the first quarter we had a larger reduction in the allowance for credit losses than we have in this quarter.

Earnings for the first half, 3.7 billion, up 16%.

Revenues are flat from strong results last year.

And credit costs about half the level of the prior year.

Earnings per share, $1.77, 20 cents higher than last year.

And return of equity of 16%.

A moment here on the Investment Bank, I'm on slide 8, earnings of $700 million.

They were down over 30% from both prior periods.

Return on equity was 19%.

Compared to last year, revenues and income declined, driven by trading and treasury results compared to the first quarter, the decline was in trading.

Expenses were down from both prior periods, mostly in incentives.

The overhead ratio at 68% for the quarter is too high.

Most of the deterioration from last year is the result from lower treasury and funding profits.

Excluding Global Treasury; the overhead ratio for the investment banks should be between 65 and 70% depending on obviously the revenues in any 1 quarter.

Trading results were disappointing in the quarter.

They were down about 40% from a very exceptional first quarter and pretty good second quarter last year.

We had lower revenues in almost all businesses across fixed income and equities.

Portfolio management revenues were much lower.

We were not well positioned for the moves this past quarter.

Client trading revenues on the other hand were down from the record first quarter, but were up from last year.

They were up about 10% from last year.

Value at risk is about $100 million for quarter , it is about the same as we were in the first quarter.

Investment banking fees, $880 million, were the highest since 2001.

Strong advisory and equity underwriting.

We gained share in M&A and loan syndications but lost share in equity and equity related.

Our momentum is really very strong in the U.S.

IPO side.

Significant deals this quarter included our role as advisor to National Commerce on its sale to Sun Trust joined BookRunner on it's Accenture $1.2 billion secondary offering and many others.

The pipeline is up significantly from last year.

But remains flat to the left we were in March and April of this year.

Credit contributed to income again this quarter, though at a much lower benefit than we had in the first quarter.

Credit costs should increase from here going forward.

Chase Financial Services earnings were 600 million, or over 600 million.

They were up 45% from the first quarter and down almost 30% from the record second quarter last year.

Home finance accounted for all of the decline from last year.

And half of the increase from the first quarter.

Return on equity for the quarter was 27%.

Home finance revenues and expense trends kind of dominate the overall Chase Financial Services Group.

Home finance revenues were down 370 million from the record we had last year.

Excluding home finance, the revenue in Chase Financial Services as a group were up, driven primarily by performance in the card business.

Half the decline in home finance revenues is from lower mortgage originations and tighter spreads on those originations and half from MSR hedging revenue, which was very strong in the second quarter of last year.

It is still a positive number, $40 million for this quarter.

Compared to the first quarter this year, Chase Financial Services revenues were up 8% and expenses were down 7% or about 150 million they were down across all businesses.

Card earnings increased from both prior periods.

We had double-digit growth in purchase volume.

But no growth in outstanding.

The chargeoff ratio, bankruptcies and delinquency ratios were better than last year.

Also earnings increased from prior periods.

But we are seeing originations and margins decline as competition increases with the rising rates.

The business is focused on expense management, maintaining credit quality as well as reducing overall the level of auto leasing activity.

Regional banking and middle markets had double-digit growth in deposits from last year, offset by continuing spread compression in deposits.

We had higher investment products revenues and strong net new checking account growth.

Middle market loans were up very modestly for the quarter.

I'm on slide 10.

Treasury and security services, earnings of 120 million.

They were about flat to the first quarter and up 9% from last year.

Return on equity was 15%.

Revenue and expense growth rate from last year are impacted by acquisitions.

We have the Bank One Trust business and electronic financial services.

Which are incremental businesses this year.

In the most recent quarter, revenue growth was driven by investor services which benefited from higher equity market values and increased cross border volumes.

Kind of contributing to custody securities lending foreign exchange revenues.

Expenses were up from the first quarter 9% reflecting mostly some write-offs we took in the business this quarter.

Looking for the underlying business trends, excluding acquisitions and the write-offs, revenues were up 11%.

Expenses were up 7.

And the bottom line, about 20% up from last year.

Briefly, investment management and private banking earnings, they were $90 million.

Pre-tax margin was 17% for the quarter and 20% for the first half.

The 60% increasing earnings from last year reflect positive operating leverage.

You see revenues were up 19% and expenses were up 13%.

Assets under supervision were almost $800 billion.

Up almost $100 billion, 14% from last year.

We had strong retail inflows.

Retail inflows were up about $20 billion for the year.

I guess relative to last year.

Assets under supervision declined slightly from March, due to institutional outflows, mostly cash assets.

J.P.

Morgan Partners made money this quarter again.

Private equity gains of $390 million, the highest we have had in 4 years.

We had one large sale this quarter.

That's [Sealy] for which we had 100 million gain.

Similar to the first quarter where we had one large gain from Kinko's, about 150 million.

We expect the second-half gains to be less concentrated and potentially lower.

We continue to harvest from the portfolio more than we invest.

And to sell down our third party funding investments.

We have at this point on the books over $200 million of third-party fund contrasted to be sold or in advanced marketing stages.

And we have sold about 1.3 billion in third party funds since 2003.

Book value at quarter end was down to 6.4 billion.

Credit costs 690 million.

Increased 200 million from the first quarter.

But declined about 200 million from last year.

Net chargeoffs were similar to the first quarter.

But the reduction in the allowance of 190 million was much smaller.

You can see here the reduction of 190 million versus 430 million reduction in the first quarter.

Improvements in the quality of the commercial portfolio have significantly slowed down.

Loan demand remains subdued.

And chargeoffs are low.

This should lead to very low commercial costs, but still a negative swing from the current quarter results.

Card chargeoff ratio was 5.8, 5.83 actually, down almost 20 basis points from last year and up 5 basis points from the first quarter.

Relative to last year, consumer has lower bankruptcies and lower delinquency rates as well.

Non-performing assets 2.5 billion they were down 40%.

Commercial credit quality exposure is also down more than 50% from last year.

It is under $6 billion at the end of the quarter.

Moving now to Bank One earnings, second quarter net income income of 1.1 billion.

Another strong quarter.

Return on equity of 19%.

Every business grew.

And in the bottom line with very strong momentum from last year.

Credit continued to improve.

And for the quarter, One's Tier 1 ratio was 10%.

Among the industry's best.

For those on the phone, I'm on slide 14.

The results here are on a reported basis and not on a managed basis.

We are following each Company's practices in reporting this quarter.

Earnings for the quarter of 1.1 billion were up 30% from last year.

Revenues were up 8.

Expense growth of 14% reflects merger costs of about 50 million as well as various investment programs in retail banking.

Increase in the marketing in cards, in costs associated obviously with the Zurich acquisition which was not there last year.

The provision for credit losses of 50 million reflect a negative provision or actually a benefit of 180 million in commercial banking.

Earnings for the first half, 2.3 billion up 40%.

With growth across all businesses.

Significantly helped by improvement in credit.

Earnings per share for the quarter were 99 cents for the first half $2.08.

And return on equity was 19% for the quarter and 20% for the first half.

The significant items that contributed 6 cents to earnings per share, bringing the core earnings per share to 93 cents.

Those items include the reduction in commercial banking reserves, loss realized on sale of investment securities of close to $90 million. $74 million of gains from the sale and valuation of noncore home equity loans that Bank One has put for this position late last year.

And again 54 million of merger costs, in total 6 cents a share.

Retail earnings of 485 million were up 30% from last year.

Showing very positive operating leverage.

You can see here, revenues are up 11%.

And expenses up only 2%.

Credit improvement helping the bottom line as well.

Return on equity was 41%.

And the overhead ratio was down to 50%.

Core deposits, up 9%.

Home equity loans, up 24%.

Investment sales are up.

And it was a record quarter for net new checking accounts.

Strong expense management.

Total head count in retail was down 2%, about 750 people.

That's despite very significant investments in One's infrastructure during the last 12 months.

We have 63 net new branches. 21 of those this quarter. 535 new ATM's and 1,000 additional sales force in these numbers.

The net chargeoff ratio as the percentage of loans was 58 basis points this quarter, down 27 basis points from the prior year, as well as down from the prior quarter.

Card earnings, 390 million, were up almost 40% from last year and 22% from the first quarter.

Return on equity was 25%.

And return on average managed outstanding was 330 basis points, up from 250 basis points last year.

Those are pre-tax numbers.

During the quarter, we closed on the purchase of Circuit City.

Net interest margin was up almost $150 basis points over last year, 20 basis points or so from the first quarter.

Both from lower funding costs as well as also from higher yields from repricing the portfolio.

Managed outstandings were up about 4%.

And charge volume was up 16%.

And year-over-year.

It is actually up 12% from the first quarter alone.

Provisions for credit losses increased.

They were up 8%, driven by loan growth.

Net chargeoff ratio was 5.4, up 9 basis points from the first quarter and 23 basis points from last year.

The delinquency ratio declined for both periods.

I'm on slide 18, commercial banking.

Earnings of 420 million, up significantly from last year, driven by credit.

We have no chargeoffs.

Actually, we have recoveries, loan recoveries for the quarter.

We have a larger reduction in the allowance.

And we have no loss on credit delinquencies which is obviously expressed as higher revenues.

Return on equity was 23% for the quarter.

Capital market revenues declined as anticipated.

Middle market again had modest loan growth versus the prior quarter, although loans are still quite a bit lower than they were last year.

Corporate banking loan balance continues to shrink.

Nonperforming assets declined over 60% actually.

Investment Management Group earnings of 110 million were up 45% from last year.

Two thirds of this growth is driven by Zurich.

The acquisition was closed in September.

Zurich is doing better than planned.

Return on equity for the group is 28%.

Assets under management of $180 billion were up 7%, or 12 billion from last year. 9 billion of that increase is from acquisitions.

I am referring to Zurich and Security Capital.

Net inflows of long-term assets, that excluding acquisitions.

That's net inflows into the business were almost 11 billion.

That's long-term assets, cash assets were down, which is why you don't see a higher increase in the total.

Loans and deposits in private client services were also up significantly from last year. 16% loan growth and almost 30% growth in deposits.

In summary repeating here what Bill said, good operating results for J.P.

Morgan ROE of 15% more than offset by litigation.

The charge, however, does help us reduce the financial uncertainty related to those issues.

One delivered very good second quarter performance with return on equity of 19%.

We are focused on executing the merger well and making the right choices for the long-term benefit of shareholders.

Jamie will now brief you on the merger.

Thank you.

Dina, thank you very much.

Bill, thank you.

Good morning, everybody.

I am going to focus a little bit on the merger and some of the execution stuff.

I have some very detailed slides for you.

Let me start by looking at cost saves.

And I want to make 2 points here.

Number one, the number is down from 2.2 billion to 3 billion.

The 2.2 billion is kind of top down.

The 3 billion is bottoms up.

You should not expect that to change [Lucci].

That's the number. [Laughter] There are a lot of ins and outs.

We know it is going to move a little bit.

But that is really a pretty solid estimate at this point.

We do have - - we have made a lot of policies that also affect us, like expense policies from accounts payable to consultants and yes to cell phones.

I want to point out almost everything we're doing is to reduce waste and reduce costs.

It has nothing to do with investing in the future.

And we are making substantial investments in the future in systems, marketing and people.

So I'll show you that in a little bit.

In fact one of the numbers you see there, the investment banking commercial bank, the regional estimate was 600 million is now 400.

Most of that relates to a decision that Bill and I made.

Was when we looked at the Company, we have all the products and services and we decided we had more coverage than we needed in investment bankers and commercial bankers.

So I think that was the right decision to make and a good investment for the future.

The head count number will go down something like 12,000 from 10,000.

We don't expect that to change a lot either.

Think of that a little but by the way is it will come down.

It is also offset - - you know Dina mentioned we added 1,000 sales people in retail we'll still be gaining people.

So it will be coming down over time.

And we'll try to break out for you for what's coming down for the merger and what is going up because we're investing in the future.

We hope to hit the run rate of 2.2 billion by the fourth quarter.

So we look at this as starting at the lower end and hopefully moving up to 2.2 billion.

And if we're lucky, what we really want to do is not mention this at all in '06.

It will be business as usual.

We won't have to be reporting merger saves and merger costs in '06.

The merger costs obviously have also changed a little bit.

This is probably the roughest number.

Still will probably change over time.

It has gone from 3 billion to 4 billion.

Remember 1 billion of it approximately will be purchase accounted.

You will not see a run for the interest statement.

That's because the new accounting rules are that we as we close the Bank One operating center it gets purchase accounted.

If we close a J.P.

Morgan operating center it gets expensed.

And so we've estimated how much we purchase account how much we expense.

We look at it as the same.

It is an economic cost.

The 4 billion can go up or down.

In some ways, I think the more the merrier.

Because we're saving money.

It is approximately, I may be up a little bit here, but a third a third a third between real estate, technology processing, which includes a lot of operating centers, services and people related costs.

We estimate about 1.5 billion will be in the second half of this year.

Again we don't really know.

You should expect these to be really lumpy by quarter.

Again, until we know what exact real estate, for example we're exiting, and we think we have approximately 10 million vacant square feet, we can't take the write-off.

So we're going to make these decisions on a timely basis and hopefully make the right ones.

This slide shows purchased accounting.

I'm not going to go through this, except for 1 thing.

But we do want to be completely transparent.

We want all of your questions answered.

You don't have to ask them here.

Because Dina and Ann [Warwick] will run a seminar and take you line by line, AK and all of that so that no one thinks there is anything going on here.

So, the only thing I want to point out that is substantially different than what you saw before is the Tier value adjustments.

And you've got to look at that net;

It's about $2 billion negative.

That also means mark to market could be a little bit higher.

That's about half.

From the fact that interest rates went up in the meantime.

All of our loans, all of Bank One's loans, Bank One's deposits, Bank One's assets and liabilities get mark to market.

That's about half of what it is.

The other half relates to tax oriented investing, tax shelter releasing which we just didn't guess the first time around.

The good new there's, is that $2 billion comes back in income over time.

Which I'm going to show you on the next slide.

This slide breaks apart.

I'm just going to focus on '05.

You can look at '04 and '06 on your own.

We estimated the average expense savings of 1.875 billion.

Again, it starts low and ends at close to 2.2.

We shown the exact timing will move as we move around conversions.

We have to make those decisions based on what's best for the clients.

It is about $300 million higher in '05 than you last saw.

The other number - - tangibles are about the same, give or take $50- $100 million when you last saw.

The other number which we almost, I think as 0 last time is fair value adjustments is up 550.

It is real income.

It's going to go to the income statement.

So you can see the 1.3 billion in '05 is substantially better.

Almost $800 million over what you last saw.

That's a good piece of news.

The timing would be a little bit different.

I want to focus a little bit on next quarter.

We're going to report a whole new Company.

I'm going to take you through what you can expect to see a little bit on that.

So you know what it is.

In addition to the merger costs, there are certain items which we have to expense in the third and fourth quarter.

Again these are accounting rules.

You can argue them anyway you want.

The fact is, that we're going to have to expense them.

So we've had to conform a lot of policies.

We looked at Bank One's policies.

We looked at J.P.

Morgan's policies.

I would say we erred own the conservative side.

Where the policies we feel really comfortable that we think are the most accurate economic kind of accounting policies going forward.

One of the things we are going to do, that we decided to do, is to decertificate Bank One's credit card loans, which are held as investments to the balance sheet.

So, there's about $34 billion which we hold as investments, with no loan loss reserves.

And we're going to put up loan loss reserves.

That's probably the one weak spot on Bank One's balance sheet.

That will have to be expensed as these credit card loans run through the trust.

So it happen over the next 2 quarters.

Approximately that's 1.2 billion to something.

There are other loan loss reserve adjustments which we'll make those details when we get there.

So you can expect conforming policies to be approximately 1.3 -1.5 billion.

The next category down, policy from change, is going to run through the income statement about 2-400.

We don't know this number.

We're telling you, is there might be other stuff.

Don't be surprised.

Because this is all perspective.

As we put these businesses together, as we finalize certain things we're doing, we do think there will be some things additional run through the income statement over time.

And so you shouldn't be surprised if you see it.

We've also made a bunch of business decisions which will have some impact on earnings going forward.

Again we're just trying to make all the right decisions.

I'll highlight a few.

As we stop originated manufactured housing lending.

Obviously the reserve we'll be every quarter making sure we've got accurate reserves in that.

We don't expect an issue.

But if we think so hopefully we'll deal with it by the end of the year.

And auto leases, again, I think it is a very tough and difficult business.

What we've done is we've already cut back dramatically on the origination of auto leases to a much smaller number.

Again, we think we're fine there.

We have some insurance.

But we're going to be watching it very closely over time.

Whatever we do in any of this, we would love to finish this all in '05.

I mean, '04, so that '05 is a rather clean year.

For the next page, there are a couple of other - - we've made a lot of other changes you're going to see.

We're going to try to make your life very simple.

This is not GAAP.

This is how management is going to look at it, which we're entitled to do.

Okay.

We're going to restate the past for how we changed transfer pricing, capital, expense allocation, revenue sharing and purchase accounting.

So we're going to try to give you as best we can, which we need for ourself, kind of the apples to apples.

It will the not be in the GAAP statements.

But we're going to try to share with you.

To give you a quick feel, the capital allocations are going to change.

They will probably be a little bit higher than what J.P.

Morgan had by line and business.

A little bit lower than what Bank One had.

And we obviously do that in some areas product by product.

And we'll give you more details as we go through.

What we're doing in this next quarter will be very rough.

We want to kind of fine tune it by the end of the year.

Expense allocation will change.

The big difference here, there will be a lot more retained at the parent Company.

We're going to charge the business units for expenses and value provided on an efficient basis.

I can tell you that Bill Harrison or the Board Directors or me, they are not going to pay for inefficient data centers or inefficient things we do.

They are going to pay for stuff they use.

They're going to pay at a kind of a third-market price, whatever the price is.

So we can look at the true efficiencies in the business.

And what will happened is there will be a lot of expenses.

I think we estimate there there be around 1 billion to 2 billion.

Starting to come down over time.

Don't overcount, there's some cost saves that will end up in that too.

And it also makes us look at the efficiency of our corporate operations.

The theory is we can't do it cheaper than on the outside, we shouldn't be doing it.

So revenue share will change a little bit based on economics.

Purchase accounting I've already spoken a little bit about.

And obviously we'll do all the GAAP reporting and try to make all these differences as simple as possible to understand.

I should point out by the way we have already consolidated a lot of risk reporting for management purposes.

So we have made a lot of progress.

Just a few ways we're going to look at it, the first one - - I'm going to keep this simple.

Is obviously GAAP net income over book equity, including goodwill.

That's what we're required to do.

I personally don't think that's a relevant measure of performance.

Cause goodwill to me doesn't mean that much.

Operating earnings we're going to break out merger costs and some other items.

We'll give you a real clear what we think the run rate earnings of the company are.

And we're looking at equity ex-goodwill.

So we're going to treat all of the businesses in essence all the intangibles and tangibles equity will down there.

But goodwill out so we can look at the return on the capital that we invested.

And the business unit, same thing.

Because obviously there is a lot more internal allocation of how we look at capital.

We will be making additional disclosures down the road about what that allocated capital is.

We will end up with 6 new lines of business.

I want to take a minute on the slide.

These are the 6 lines of business.

I think we have some great management team.

Obviously from a management standpoint there are thousands of P&Ls below this.

So what we're trying to do is get capital, expenses, management, accountability and comps not at this levels, levels down: by branch, by region, by desk, by the most relevant way.

And obviously we're doing capital in a more detailed way.

We're going to budget that way.

We're going to track it that way.

We're going to get milestones that way.

And so, for example, internally - - we're not going to disclose all of this to you.

But home equity for example, will be subprime, the portfolio, the MSR servicing the MSR separate, production profits by channel.

So we can actually start to really look at some of those businesses.

This will be - -I'm not going to talk about the names here.

But each of these businesses you can compare.

And we'll probably be comparing internally because we consider the best competitors in the business.

The same thing a lot of you will end up doing.

I will point out that private equity is in corporate.

I'm going to talk a little bit later about private equity and what maybe you can expect to see there.

There will be about a little over $8 billion $8.5 billion consolidated when we put the businesses together.

And Treasure - -Global Treasury which is the investment bank will also be in corporate and will be disclosing some of the same information so you get did.

And in corporate you also have those retained expenses.

So J.P.

Morgan had I think it was just about 0.

Bank One, I think we retained less than $1 billion of corporate expenses a year.

So you're going to see expenses are going to see expenses retained in corporate.

We'll be fine tuning this over time.

Next quarter will be the first time to actually show you this and have to describe how we look at all of these businesses.

The balance sheet, we're on our way to building capital for the balance sheet.

And Bill and I have agreed that this is kind of a critical element for the company.

We're going to end - -J.P.

Morgan is about 8% Tier 1.

We should expect to see we'll probably work our way up to approximately 8.5, give or take 10 or 20 basis points.

The important thing here - - And I think this is important is that J.P.

Morgan on its own is at 8%.

And that's you have the litigation charges.

We're going to increase this after putting up all the recertification reserves, After having what I consider very strong loan loss reserves, consumer and commercial.

So I look at the quality of capital as being an important factor.

And I think if you have litigation reserves that you didn't have before, loan reserves are strong, really conservative accounting, low IOs etc I think you can say that the quality of capital is very good.

And it's pretty good I think that while we're going to reduce the stock buyback in the short run, that we might have done, that we can still build capital.

It tells you a little bit about the capital generation of the company.

Private equity will continue to get to approximately 10% of equity minus goodwill.

That's the new way we kind of look at it.

We should be there approximately year-end '05.

It could be a little bit after that or a little bit before that depending on a whole bunch of circumstances.

I do want to point out, cause people say "what happens if there's a big gain?".

If we have an enormous gain of billions of dollars and that number goes way up.

That's good news.

We're not going to include that.

We're just talking about new stuff.

Obviously there's gains in marketable securities.

We're not going to worry about that.

Cause that's a very positive thing.

We think these are very healthy ratios and a very healthy balance sheet.

You see the dividend payout ratios target, this is tentative.

It is subject obviously to the Board.

The Board has seen this and they can change this as they see fit.

About 30%- 40%.

We have a lot of excess capital in '05 and beyond.

The Board authorized a $6 billion stock buyback that allows us to begin, increases flexibility to buy back stock.

I think as a discipline we would like to always buy back what we issue.

I'm not sure we're going to do that in the next 2 quarters.

That would be a good discipline.

What I think the important thing is that we allocate and not abdicate the capital decisions which we decide.

Now we've got the tools.

We've got capital generation.

We can buy back stocks.

We can invest in new business and acquisitions.

Or we can just let it there.

And those decisions will be made quarterly, by management, by the Board, saying what we think is in the best interest of the Company.

And Bill and I also agree, by the way, just that having a really strong balance sheet is a strategic imperative because it let's us survive good times and bad times.

And in fact thrive in bad times.

I'm on the slide Technology and operations.

First I'll start with a statement that we believe we have to build some of the best technology and operations of any financial services company in America.

It is critical to our success our customer service our innovation our R & D, our ability to market, our ability to service customers.

So we will pretty much do whatever it takes to do that.

I think Bill mentioned, the good news, we have virtually decided on 100% of the platforms.

From using [T-Sys] for the car business we've decided pretty much all ledger, credit and risk infrastructure.

HDHY are deposits and loans, imaging systems.

What that does, is enables us to go to the job of getting done.

So we're deploying thousands of people as we speak to go start working on our future.

We will have a war room.

There will be a massive calendar which will have about 2,000 events on it eventually.

We haven't exactly scheduled the major conversions.

The major ones will be [T-Sys] which starts this quarter, late in this quarter.

A portion of the the Bank One card portfolio.

The Texas conversion which will be some time 12, 15 months away from now And the New York conversion.

But we're going to try to put them both together.

And hopefully by '05 we'll report on some substantial progress there.

We have some very talented people working for this Company, whether they are employees of J.P.

Morgan Chase or IBM.

We are going to fill the business with some of the best systems. and we think it will be a great place to work.

Obviously we're working on the sourcing strategy.

We're working hard at IBM in a very collaborative way to figure out what makes the most sense for J.P.

Morgan Chase.

We don't know.

Those decisions will be made by service or help desk, data center, network were distributed.

So it could go either way at this point.

We'll work hard to do the right thing.

I think either way, we'll deliver and the risk is the same.

Whether we insource or outsource.

The risk will be approximately the same and we intend to deliver it.

I should say these are very complex and a lot of work.

So some of the cost saves you saw will obviously be changes, because we have to make the right decisions in this category.

I just gave you a lot of detail on financial stuff.

I don't want you to walk away thinking that we don't think we have one of the great opportunities of all time here.

And so we put this on 1 slide, the positive stuff.

Because we don't want to hype capabilities.

And some of this will be - - will take a while to deliver.

But we really feel we that we put together - - and I think the J.P.

Morgan Chase, Chemical [Manny Annie] and now Bank One have put together a staggering position in most of the businesses we're in and created these opportunities.

We just made a list of examples.

A bunch of us just sat down and talked about, what do we really think we can accomplish?

We owe you more on this but figure as we get onto '05 sometime and we finish our budgets and we have the details.

But each one of these is real.

And I don't like the word cross-selling because it sounds like it is an unnatural act of some sort.

Selling first mortgages retail, we didn't have the capability.

J.P.

Morgan has a fabulous capability.

So sent all the [prox] retail.

That doesn't just help first mortgage sales it helps checking accounts sales.

And so Bank One is doing great in checking account sales.

We added cash management's asset base custody and trust to our commercial bank and investment bank.

If you are a commercial banker, you now have the full product set that can compete with anybody out there.

And we didn't have all of that before.

Advisory, capital rating, investment banking to the commercial bank, take the Bank One bankers, who are covering midcorporate clients, we didn't have equities, we didn't have all fixed income, we didn't have all authorers, we didn't have all advisories.

Now we do.

So it's our job to deliver some of those for the clients.

And there are some good examples - - it's already happening.

So we're working collaboratively.

Mutual funds and investment blocks.

We now have the full set of mutual funds and investment blocks.

PTS didn't have all of them.

But J.P. Morgan.

And we're gaining from that the platform.

We now cover almost all segments.

So we really think we'll bring more to the client.

Securities product, this is where - - I think it was investor sales.

Bank One was pretty successful selling money management and certain investment products to midcorporate clients.

It opens up a whole new door, thousands of clients for the sales people on the fixed income and equity desk in money management areas at J.P.

Morgan Chase.

Credit pricing capabilities, the card.

I just want to give you an example.

I think you saw about a year and a half ago if you remember, that Bank One did a particularly bad job about repricing and depricing the portfolio.

Had a lot of margin squeeze.

We kind of got very good at it.

We rolled up our sleeves and learned a lot more.

How to reprice and deprice properly.

You want to deprice to save your best clients.

You actually want to price some people up who aren't great clients.

Not only do you make more money, but you stop adverse selection, you reduce attrition.

We got pretty good at it.

We think bringing some of that to the card capability and Chase will add to their profits not a minor amount.

We also think that Chase had superior capabilities in certain credit categories, like the near prime, young families.

And bringing that to our face and our - - the Disney partnership and the Star Trek partnership and the miles partnership we think will enhance our ability to create a lot more parts.

So we don't think these are small things to share intelligence like that.

Enhanced buying power.

Read that is, for one example is Mastercard, Visa, we're going to do better.

But there are probably 5 or 6 like that, with vendors, et cetera.

Competitors pricing, most business - - I'm going to give you 1 example.

Bank One had a fabulous U.S. cash management product. lock box etc.

And J.P.

Morgan while it wasn't all over the country didn't have the same capability.

J.P.

Morgan has a fabulous global cash management capability.

We lost business because we didn't have the global.

They probably lost some business because they didn't have all the U.S.

Put them together, it's a much better position: same product, same sales force.

And obviously I've already mentioned we'll be covering a lot more clients.

I think the investment bank in the United States will have 300 more clients.

We're fully covered.

The commercial bank will cover something like 1,000 clients across the United States and we're probably going to beef up a little bit of client coverage in Europe etc.

We think it is very important.

We've got a full platform here.

We want to make that sure we're servicing our customers properly.

Obviously this will take course over time.

We can't do this overnight.

And the management team's going to work on some of these things as we speak.

Last but not least and we'll open the floor to questions.

The outlook for the future.

The credit cost comments we're about to make are really the outlook for the next couple of quarters.

We do have some visibility in that.

After that it is your job is forecast the future.

Retail looks to be pretty stable on credit card.

Flat to improving.

You might have noticed the bankruptcies in the United States stopped going up for the first time a year.

About August of last year.

That continues in fact, you see improvement.

Driving some credit improvement.

Credit card delinquencies are down.

So we look at the cards improving.

Again next 2 quarters.

After that it depends on a whole bunch of other factors.

Commercial, Dina mentioned that the combined companies I think I have the numbers right had negative reserving of $700 million in the first 2 quarters.

Well obviously that's not going to happen forever it will go to 0.

And eventually it will go to something like $1 billion a year plus.

What I would consider a more normal run rate.

You can come to your own normal run rate.

That billion is approximately 70 basis points for something.

We don't know exactly when it is going to happen.

But I would urge you not to be irrationally exuberant about what you have seen in the last 18 months.

Obviously costs will have a more normal costs.

We should build that into how we run the business.

The march to link businesses the training environment was very tough.

Particularly in the last month this quarter.

Continued that way this month.

We're not going to report that every month, but it could be a slow summer.

We just don't know.

Again I think we show a forecast which you see.

Investment banking pipeline is stable and strong.

Private equity lower expectations means we had a pretty good first quarter through J.P. Morgan.

We'll have $8.5 billion combined invested in it.

The way you should look at it you are entitled - - you should stack they're entitled to share all of 15 (PH)% after-tax return.

I would not put down my earnings forecast.

We don't have a crystal ball about the markets the trading etc.

We think the outlook in the immediate next couple quarters is probably less than you've seen.

So you should also know that they outside gains will probably take bond losses and other stuff against it.

So they will not go through the income statement.

We'll have other opportunities to take bond losses, both tax efficient.

I think they]re is a smart way to run the balance sheet.

Consumer businesses we do expect some continued growth in retail.

Retail proved an outstanding job.

The mortgage business is moderating.

I would read that is obviously if rates go up, you were in an inflection and it could dramatically change profits a little bit.

Card, mark as receivable growth.

It does depend a lot on the economy.

You've had enormous spend growth.

And we saw Bank One's card at 16%.

And I forgot Chase's number.

Litigation, I just want to point out, I this think we did disclose in the press release.

We did disclose the total number right? 4.7 total litigation reserves.

That includes everything.

It does not include Bank One.

We do not intend -- so do not ask by case.

We're not going to disclose it.

It is confidential and private information.

That is all cases.

We will defend these things absolutely vigorously.

We're big enough and tough enough to make the right economic decisions.

But now we've got the strong balance sheet.

Obviously if we're required to disclose things, for material changes we will do that.

We're not going to get into the business of disclosing litigation reserves going forward.

I think it would be a mistake for the company.

I just want to give you - - I did look with Ann and Dina a bunch of the analysts' estimates and forecasts.

I'm just going to comment a little bit on that.

We're not going to be forecasting numbers for you.

And I think you all have your own economics in areas of growth and credit.

It's your job.

So, I'm not going to comment on that.

You can obviously do that yourself.

Come up with your own scenarios.

But I would make these comments.

Private equity: You deserve it.

I wouldn't count on a lot of it, because I think you would be making a mistake in your own estimates.

I think some of you are low on commercial credit.

We're down here low at -700.

It is going to go up.

You can pick the timing yourself.

But I think that you should look at your numbers there a little bit.

The savings number is clearly better and real and real margin.

The timing will be a little uncertain by quarter.

But I think we can look at that.

We have a lot of work to do.

So there will be changes.

We will give reports every quarter.

And so there will be over time.

We're going to work hard to deliver.

I think some of the assets are high.

We're going to work hard to deliver the numbers.

We are extremely optimistic about the future of this Company and our expectations and pressure upon ourselves, as Bill said, to deliver and execute are really high.

And so I think I will stop there and open the floor for questions.

Thank you.

The floor is now open for questions.

To ask a question, please press star and then 1 on your touch-tone phone at this time.

If at anytime- -

I was wondering if you could elaborate on the share repurchases?

You said don't expect a lot in short-term.

What pattern should we expect for the $6 billion?

Specifically, even if there's not a lot a short-term will you be buying back employees shares in the short-term?

We're not going to tell you what we're going to do.

I think that is ultimately a mistake to, tell the whole world.

What we're going to do, in the next 2 quarters, we're going to be highly moderated, that means from zero to something.

But The first thing will to be replenish the balance sheet.

We'll post 8.5 Q1.

I think '05, '06, '07 completely depends upon what we feel like doing, stock price, other opportunies etc.

We do expect to have a pretty healthy stock repurchase plan.

All right.

At Bank One you reduced the risk profile quite a bit.

Are there intentions to reduce the risk profile of J.P. Morgan?

I think if you listened to me - - the risk profile is diminshed already by just the size of the company and the fact that there's a much higher potentially stable and recurring earnings.

Obviously trading will be volatile over time.

I think they do a pretty if I good job managing risk.

Our goal is to make the right profit for the risk you take.

So you know we'll be reporting to you more of this in our quarterly report.

Thanks.

Jamie made a comment about tweaking the way capital is allocated out for the business unit.

This is a little bit outdated question already.

But at the investment bank, I think there is 1 billion less capital allocated this quarter, down 5 billion from last year.

Just directionally, what to expect there and why such a big drop.

Was it purely credit?

I think most of the reduction in capital in the investment bank is related to the reduction in both the size of credit portfolio and the improving underlying credits.

Both of which drive capital down.

I think you should expect to see a number like $20 billion in the investment bank next quarter.

And so what will happen is some of those actual numbers now in case will be changing. $20 billion kind of puts in a footing with third parties out there.

Obviously there's a lot more detail that goes into that.

Yeah, Jamie, just a couple of quick questions. 8.5%, I'm just kind of wondering, why so high?

You've kind of added stability to J.P.

Morgan earnings stream and it was 8.2% 3 weeks ago?

What I said, I was going to work the way up to 8.5.

And it's the concept of having a very strong balance sheet.

And we're a big financial company we like our range to go up.

I mean credit is very important.

And we should earn a very good return in spite of it. we don't want to earn great returns for the leverage we want to earn great returns for the great businesses.

Okay, 1 other follow-up question.

Just wondering how long it might take you to kind of assess the combined business.

And with that either spin out or sell nonstrategic business.

I don't think you should expect to see anything spun off or sold at all, other than the things I just mentioned, auto leasing and manufactured.

And those are not being spun off.

Those just being originations in one stop and originations in the other greatly reduced.

There may be some very small things we're thinking about doing, but I don't think they'd be material at all.

These businesses we're in, we think are all very good businesses.

And they fit very closely together.

They're not unrelated businesses.

Oh guys, Yeah I'll take the phone in just a second here.

A couple of questions on the credit card side.

First one, maybe this is a macro issue.

But I was just wondering what is your comment on the strength of the volume you're seeing relative to the fact that the loan book is not increasing?

The loan book at Bank One was 4% I think year-over-year.

What I'm saying is we separate the 2.

If you look at the portfolio - - this is roughly.

The volume portfolio and the lend portfolio - - I mean the lend portfolio and the spend portfolio.

I mean if you want to look at the best estimate, there obviously everyone comes across that.

A part of the Company had grown dramatically from our first year to about 2 years ago the lend portfolio.

The average balance was $3,000.

The average spend was 2,000.

But you take things United Mileage Card and a whole bunch of finity groups, spending groups.

Where it's mostly spned.

There's very little borrowing.

So we were independently trying to grow both.

And so we believe in the spend business.

We want people spending our cards.

And Chase has exactly the same breakout.

Some heavily borrowing portfolios, and some heavily spent portfolios.

On the spend side, I thought I heard you say something about Visa and Mastercard.

What is the key to what you're going to try to do to in terms of trying to improve the economics of the transaction volume?

We call them once a week and have conversations with them about what we expect.

And they call us up and have conversations with us about what they expect.

When you're that big, you obviously should negotiate the best deals you can possible get from most ofthe people you do business with.

Would it make sense to try to put some pressure on that by exploring a third party network, ala Discover, American Express?

Yeah, maybe.

Okay.

That's helpful.

I wouldn't tell you.

We're obviously going to do what is in the best interest of J.P.

Morgan Chase.

So anyone who calls up, we'll take their phone calls and figure out what makes sense.

We're very strong supporters of both Visa and Mastercard.

And again even a lot of those networks, by the way, may apply to a portion of your business and not the whole business.

So you actually have to divide it up into its component pieces again.

And the Circuit City thing, is that the beginning of a much push you think in the private label?

How do you like that?

Bank One had sold it's private label business years ago.

I think over time we realized the private labels business is a very important generator of relationships, credit card accounts, young family accounts etc.

So that was our way to go back in.

It gives us the platform the capability a very good account.

So yes, we do want to grow that over time.

While I was listening, you said plug in our own interest rate economic scenario.

What I'm continuing to look in terms of the company is that net interest income component .

We seen to be having some problems in that area.

And while, you know, we do know we kind of have an idea of where the economy is going, where interest rates are going.

Could you maybe talk about how you're looking at things from the perspective of Chase, and what are the opportunities that you might see out there in terms of improving of the net interest spread?

You have to completely separate consumer and middle market and TSS and private bank.

We want more balance sheet, more loans, more net interest income and growth.

That's great.

On the commercial, the large corporate side.

The NI is not a good thing unless you get paid for it.

It is very large, very risky.

Both companies were managing that aggressively and properly.

Doing great business with clients but not at the exclusion of doing a bad job for the Company.

I don't fully agree that that number - - a lot of it was deliberately managed down.

We have seen better returns, better credit etc.

So that may grow the economy.

It may not.

It depends on how corporations finance, et cetera.

Eventually corporations, a healthy environment will finance more.

And there will probably be some more loans.

And it was also [Inaudible -microphone inaccessible] to a large extent because we have repositioned for the rising rates.

So we have a much smaller securities portfolio that we had as we shortened duration.

So that's part of the story.

Bank One, I think, a quarter ago had like $35-$40 billion in investment portfolios.

And by the time, by today, I think it is about $12 billion.

So that obviously squeezes it.

Like Dina said part of that was completely deliberate and could be added back whenever we want.

I call that earnings in store.

And it is protecting the balance sheet against rising rates.

Other questions on the phone?

Go ahead.

Sir, are you ready for your first question?

We are.

Thank you our first question is coming from James Mitchell of Buckingham Research.

Please go ahead.

A couple of nit picky questions.

Could you talk about what the card revenue and Bank One and expense growth was at Circuit City?

And secondly on the J.P.

Morgan side, other revenue was double first quarter levels.

Was there anything unusual in that line?

Thanks.

Are you talking about credit card or are you talking about other consolidated?

I'm looking at other consolidated J.P. Morgan.

Sorry.

I'll let Dina answer that if she knows offhand.

Bank One's credit card portfolio, what we did, is we spent a lot more money on marketing this quarter.

And we're not going to break out that detail for you.

Obviously the earnings were up substantially.

We did Circuit City.

We also spent a lot more on marketing because we had more opportunities.

And also on your about J.P. Morgan.

The private label business did add to net interest income.

But it's a relatively small addition in the context of the picture you see for Bank One.

What was your question on J.P. Morgan?

The other revenue on the consolidated basis went from 126 million in the first quarter to 253 in the second.

What was driving that?

Other revenues is your question.

Not credit cards.

Correct.

Not credit cards.

You are looking at the income statement by line items, I presume.

I'm thinking of the income statement by line of business.

I can't help you of off the top of my head.

We'll call you.

If you please call Investor Relations we'll definitely follow up on your questions.

Okay.

Thank you.

Thank you.

Our next question is coming from Don Jones of Credit Suisse First Boston.

Please go ahead.

Good morning.

Thank you.

My question revolves trading revenues.

And first I wanted to find out happened to VAR, levels of VAR over the quarter?

And while trading revenues fell quarter over quarter and year over year, is it more fair to say that those 2 quarters were outstanding and not normalized?

And what might be expected going forward considering that at the other independent investment banks over the second quarter, those banksthat didn't report higher levels of VAR reported lower total trading revenues?

Thanks.

I think our VAR level was up - -

The VAR level was $100 million. 101, it is about the same as we had in the first quarter.

It is substantially higher than what we had last year.

The increasing VAR is in interest rates as well in equities.

The interest rates in part is driven by correlations between different parts of the business and VAR have to do with this specific position.

Trading in general this quarter was what we would call unusually low.

That is why I had attached to the description a disappointing quarter in describing the overall results for trading its particularly in our portfolio management.

This quarter that did not work out well.

Which is the positioning against market move.

Great.

Thank you.

Second question, if I may, regarding securities gain of $39 million for the quarter.

Year over year that's obviously a large decline.

But it looks more normalized on a recent historical basis.

What can you say about that?

Well, you know will hindsight, I think securities gains as rates were declining was by definition the right thing to do.

As rates are rising you have less opportunity to take securities gains.

That's what you're seeing at this point in time flowing through the income statement totally anticipated.

We had securities gains last year in - - about 1.4 billion or so.

So very high securities gains last year.

We are not expecting it this year.

Great.

Thank you.

Thank you.

Our next question is coming from David Stumpf of A.G. Edwards.

Please go ahead.

Good morning.

Just a little bit more specifically on trading with regard to the equity line, Dina.

Can you just give a little color in the decline in equities?

Was that proprietary or is that customer activity or both?

I'm going to ask David.

We'll call the Vice Chairman of the Company who will answer that question.

I'll just add a couple of comments on the trading side.

It was a brief period.

That was particularly in equity, currencies, merging markets.

We didn't benefit from the energy market uptake in the second quarter.

Or the big mortgage uptick in the second quarter.

In our trading businesses we're just not bit in energy or mortgages.

We're big in mortgages in the mortgage bank and Global Treasury side.

Equities actually trading revenue was about 0 in the second quarter.

That worries us.

We will do better.

For the last 14 quarters we've averaged about $450 million in trading.

The point I want to make to you, there is a positive side to this story.

Client flows in the trading business, which to us are the quality flows in trading were about 1.2 billion.

That's the second highest quarter we've had in the last 14 quarters.

Highest was first quarter at 1.4 billion.

That client line has grown at a 7% compounded annual growth rate since the merger with Morgan and it's had about a 15% volatility to it.

So very attractive.

We don't like what happened to us on the trading side.

We think we underperformed and we will have to do better going forward.

Okay.

Thanks a lot.

Thank you.

There are no more questions on the phone.

Any left in the room?

We'd be happy to take them here.

Why don't you go to the mike.

I'm a little surprised by the timing of the Texas conversion.

I thought that might be a little earlier.

You said 12 to 15 months out.

Why the delay?

There is no delay.

And actually we just haven't set the time yet.

We have a lot of work to come up with the detailed calendar.

For the conversions, there's some that are important to do fast and some that are more important to do right.

These are more important we do right.

And what we want to do is get to where we're going with the minimal client disruption.

They will be large complex conversions.

And can you update us with your thoughts about new acquisitions?

Of what you might be willing to do now?

And when you might be willing to do more?

There's a lot of articles, speculation about what you'll buy in Europe or Asia or something else in the U.S.

I don't think you should see this Company doing large acquisitions now.

And I think smaller ones, portfolio ones we continue to look at if they make sense.

And they don't divert or force us from what we have to get done.

We'll continue to look at businesses and grow.

And we'll comment on any specifics.

David?

On the litigation reserve, could you talk at all about the impact of Citigroup's actions on the one hand obviously the timing and the size suggest you were certainly looking at what Citigroup did.

On the other hand not taking the settlement terms that were offered in the Worldcom litigation.

Which presumabably is reflecting on your view about your case versus the CitiGroup case.

What I will say, is that we look at our own facts, own circumstances, our own environment, our own assessment, our own probabilities, the facts on our case.

That's what we did.

Obviously one of the facts we looked at is what Citi did.

But Citi and the Worldcom case, there are a completely different set of facts.

Totally, absolutely positively.

And I personally think that it was wrong, okay to allocate so much of the problem to the bonds when clearly so much should have been allocated to the equity side.

To me, that will be fought out in the courts.

I just think that was a terrible form of trying to force other people to do in effect what was wrong.

I will make one other stand by the litigation.

This guilt by association will eventually have to end.

It is not fair to say, you are large.

You know crooked parties.

You did business with them.

You are guilty.

It is not sufficient.

It will destroy this country if we don't eventually fix some of that.

That's not to say some people didn't do bad stuff and didn't help some things happen.

There is a big difference of committing a fraud and knowing a committer of fraud.

And they are acting like the fact that you knew and you're guilty.

Thanks.

Back to credit cards.

In the press release, you make a settlement with respect to Bank One's business that rising rates might pressure the market in future accounts.

On the one hand obviously funding costs have been pretty low.

But if rates turned up, shouldn't you be able to raise the rates you charge customers?

You , obviously we say a lot of things.

We're just trying to make sure you don't sue us if we're wrong or everything.

Not you.

But.

The structural interest rate exposure of the Company are pretty much managed in Global Treasury.

There are what we call nonstructural.

What you're talking about, what happens if rates go up.

How can you replace your portfolio?

And I would tell you that some companies assume you can.

Some assume you can't.

And some assume you can partially.

So all of these numbers are subject to a whole other round of questions.

All we're saying we are not going to make the assumption we can totally.

And we make our own assumptions.

We generally try to run the businesses where they are fairly matched.

Knowing that there's some of these imbedded interest rate risks which we try to match closely.

So rising rates could squeeze the business.

It really depends on what competitors do and how you react to it.

I would also as someone mentioned about VAR.

The person from CSFB.

We're going to grow by taking share from CSFB. [Laughter] But VAR also, I would urge you all to dig a lot deeper.

It is just a statistical measure, not commonly applied to all businesses, all products,. all services, all trading desks.

So you've really got to look a little deeper.

It is 1 kind of measure.

It is not the end all be all.

Jamie, first to comment, I'm glad to hear you say corporations should fight it out in the courts when they're right rather than just settle.

I didn't say anything like that.

Bill did say we will fight or sell depending on what is the best interest for the Company.

We're perfectly prepared to fight.

2 related questions, both in the same area.

When you talk about the returns framework, you differentiated between hourly and operating hourly.

And whil I agree with you about operating hourly as a basis for the run rates of the business.

To the extent corporations and this corporation have done continuing acquisitions in fact.

Hourly as itself tells the shareholders how much they are benefiting from the acquisitions as well as the underlying businesses.

So it does seem to me important in understanding the framework for the management compensation going forward, in weighing both of those factors and any factors.

And why the compensation committe and the Board has already settled on that post merger or not.

No, we're not saying that's not true when you make an acquisition.

We're just trying to put a look at the capital in the business and look at returns on it.

Listen folks, all accounting is just numbers on paper, ink.

If I have a money management business, I have very little capital and like 80% ROE and I'm growing.

And I buy it at 10 times earnings.

I have to amortize the premium over time.

All of the sudden I have business now with an 80% but with a 10% ROE.

It is still the same great business.

You know?

So all I'm saying is, looking at what you earn on deployed capital.

What you earn in you investment are 2 different things.

It doesn't mean you're bad.

We're not walking away from we should earn on investments.

In fact, in the numbers in the P&Ls, every investment people make absolutely will be judged on how it did.

But not just as ROE.

And I will add to that, that as we're looking at total returns on tangible equity.

We will be looking at totals that are significantly higher so that we can provide a return over all for shareholders on the equity that we have in the Firm.

On page 27 here, interesting footnote.

It says "allocated capital is based on economic risk limits, regulatory capital requirements and stand alone pure comparables."

What does that mean?

It means that when you look at a business okay?

Against a credit or loan or trading position you apply market risk capital or credit capital.

There is where we apply operating risk capital.

Where you can have losses, funding your payables and stuff like that.

And there is regulatory capital.

And we look at all of it when we come up with what we're going to allocate to a business.

That's all it means.

And that the businessed should look at a little bit of what they need to be required to run on a stand alone basis.

Okay?

So that if they were a separate stand alone company how much capital do they need to survive?

One is theoretical.

One is kind of range number.

But we look at them all.

We will give you any detail you want.

You want to talk about how that allocation is done?

If is done at a very detailed product level and trading level.

Our credit loan and AAA.

It might be one thing, a credit loan of a double V. It is our own economic analysis for trading positions, credit, et cetera.

We would be happy to go through that stuff.

I'll add 1 comment.

I don't know if that will help you understand it.

But let me take just one example.

So in doing repurchases, you might decide the economic risk wouldn't require more than - - it doesn't matter 1% equity.

You could leverage 100 times if you're doing a match book.

You couldn't run the whole company just on the basis of risk management.

We are adjusting the allocation of capital for the businesses to take into account that they wouldn't be able to leverage it 100 or 200 times.

So there is some element that goes beyond just measurement of risk into real life strength.

That's all we're trying to address.

And there is obviously a judgment call that is made when we are looking at just economic risk as well as what it takes to operate in the market.

That's what we are trying to convey.

Bottom up when it all comes down?

It's bottom up and then we also look at top down and figure out what we think is the right thing to do.

We are planning to put all of these numbers out some time in September prior to the third quarter so that you have the whole segment disclosure restated, recalculated in the way in which Jamie just described.

Prior to getting engaged with actual third quarter earnings.

Thanks.

Any final questions?

In terms of branding and corporate identity, I think you did make some comments on that.

Could you kind of give us - - elaborate on where we are in terms of let's say corporate identity, branding?

Particularly how we're looking at the Midwest in terms of just what we're going to be looking at going forward?

I think the investment bank, the private bank are going to be called J.P.

Morgan Globally.

The credit card business, the retail bank, small business, mortgage business and U.S. commercial regional banking all will be called Chase.

And we still have some product level stuff we're still working on.

And we still have some product level stuff we're still working on.

But we've got 2 wonderful grants.

We did extensive work on what made the most sense over a long period of time.

Including things that having a sign called Chase with 5 letters is a much bigger sign in a building in Indianapolis than with 8 letters called Bank One.

Including what is the reputation globally and in the domestic world.

Including the fact that Chase you can use with or without the bank name as we think is appropriate for marketing.

So we're going to build 2 great names.

So it was a little hard for the Bank One people to shed Bank One.

I do say that 4 years ago it would have been very easy.

But our people worked long and hard - - right.

Our people worked long and hard to build a Company that we're respectful of.

And we're earning our way and very happy with it.

It is a little hard for the Bank One team.

They pretty much said, let's go build this brand.

And the brands ultimately will be what a good job we do building them.

How well we run the company and how well we build it over time.

But I think it is rare that you have companies with 2 absolutely authentic brands like that.

And in fact 1 of the things I particularly like and this is maybe more of a management thing.

Is that the parent Company J.P.

Morgan Chase, so you have some of the business called J.P.

Morgan and some of it will be called Chase.

Will be all pulled together top.

We may not advertise J.P.

Morgan Chase.

But you'll never have the second-class citizen problem.

All of these businesses are great businesses.

And we want our management team to go in and out of several of them and learn both over time so.

And Bill Harrison was telling that story J.P.

Morgan Chase is a lot better than Chemical manufacturing in Hanover.

Listen, we appreciate you all coming today.

And we will deliver and make this a great company for you.

Thank you.

Thank you.

That does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.