摩根士丹利 (MS) 2001 Q4 法說會逐字稿

Good day. Welcome to the Morgan Stanley quarterly earnings release conference call. The follow is a live broadcast of a presentation by Stephen Crawford of Morgan Stanley and provided as a courtesy. Note that the call is being broadcast on the internet through the website morgan stanley.com. The play back of the call will be available through the web site and by phone until January 2nd, 2002. Morgan stanley has asked me to remind you that information conveyed in the call may contain forward looking statements. These statements reflect and are subject to mifk risks that calls that affect it materially. For discussions of the risks that may affect the future results see certain factors affecting results of operations in management's discussion and analysis of financial continue and results of operations and competition regulation under each of securities, asset management and credit services and part one, item one in the company's 2000 annual report on form 10K. And management's discussions and analysis of financial condition and results of operations in the company's quarterly reports on form 10Q for fiscal 2001. Any recording, rebroadcast of this conference is prohibited without prior written consent of Morgan Stanley. This is copy righted to Morgan Stanley. I would like to turn the program over to the moderator Mr. Stephen Crawford.

Good morning and welcome to our fourth quarter year end conference call. Let me start with highlights for the year. We're proud to announce a 19% return on equity despite on a fiscal year basis almost 30% declines in equity underwriting and completed m and a transactions. 80% decline in equity mutual fund flows. 27% decline in the nasdaq an over the s&p 500. We made investments to realign selected businesses had obviously a very difficult year in private equity and then experienced the indirect and direct impact of September 11th. I think the returns can be attributed to a few factors- first, the diversity of our business t was an excellent year for fixed income, there was stability added from discover and to a lesser degree investment management. Second, we reduced compensation to reflect the decline in revenues. And finally, we have reduced ongoing non-compensation expenses that provide profit leverage going into next year. We have improved our market position in key areas we talked with you about across the company. Sales and trading in Europe; credit derivatives and securityisation, otc market making, fee assets and merchant and internet penetration at discover.

From a revenue point of view, as most of you anticipated the fourth quarter was the weakest quarter we have seen in quite some time. The same trends we saw in the fourth quarter have been in evidence throughout the year. institutionally, the 21% decline from last year's fourth quarter can be attributed to lower underwriting and m&a and higher secondary revenues offsetting lower secondary revenues and equity. in the iig business 26% lower revenues driven primarily by lower transaction fees into a lesser degree margin balances. And investment management, revenues declined 20% in the fourth quarter the large component with fees down 13% driven by lower asset levels. And finally, discover revenues were up slightly as higher spreads and increased fee revenues more than offset the significant increase in charge-offs. Turning to business by business and starting with institutional securities on the revenue front. it is on the two areas. Underwriting revenues were down 29%. However equity underwriting dropped about 50%, reflecting a 60% drop in ipos and a 30% in issuance overall. They were reflecting record levels of fixed income issuance. 18% overall. On the market share equity market share did not change from year end we mtded our 13% share in our number three ranking. On the ipo side, we went out from a 14 percent percent share to 23% and achieved a number one ranking with significantly lower volume. in investment grade, our share was up slightly from 7% to 7% where we were ranked the same number four as last year. Looking ahead, the global equity backlog has decreased 27% since the third quarter. if you look at our file backlog is up from the third quarter but down dram at click from the prior year. However the file backlog fails to sell the entire story. it feels to us like there is more light in the equity markets. in the fourth quarter, we completed very successful transactions for frans telecommunication , swiss re and aig, none of which would have been in any backlog. On the debt side, there is less objective information but our pipeline is up from the third quarter, we expect securitized products to be a real source of strength next year, we don't feel, given the record level of issuance, that we -- that we sensed this year that it will be up significantly going into next year. The sales and trading business parallels what occurred on the primary side with very strong results offsetting sofness in equitys. Look at secondary revenues overall they are down 22% versus the third quarter, reflecting primarily a seasonal decline investors, will they change and in what direction. While all of these things are difficult to forecast, looking out to next year, we don't believe secondary revenues will be dramatically different than they were this year. Finishing up in the institutional businesses, i would like to talk for a second about m and a, our revenues were down 34% year over year consistent with the 34% decline in completed m and a.

The 2001 markets -- market share completed M&A was 34% down from 37% still ranked number two. As we have talked about in prior quarters the business was significantly more lumpy this year so one or two transactions either way makes a difference. Our M&A business is much broader this year with our PMP concentration being done from 50% last year to around 20 percent this year. Looking forward on the M&A market, global announced activity is down 54% year over, maybe more importantly there has been a 27% decline in announced activity between the first and second half of this year. Our pipeline is down roughly 40% from the fourth quarter of last year and about 28% from mid year. The trends in the market, the trends in our own backlog, which suggests that announced activity has to pick up significantly in the first half of 2000 in order to have the same type of year in the first half of 2002 in order to have the same type of year we had in 2001. And thirdly, we would say the quality and number of client dialogues in M&A is in creasing. On the individual investors group side, this is a first time in over ten years we have had straight declines where they were down over 20%. It ties back to significant decline in retail investors activity reflected in lower mutual fund flows, IPO activity and stock prices. Going into next year, we feel like we have a much more stable revenue base. Margin and commission revenues are down from approximately 40% from 2000 levels, asset management revenues are up 30% from approximately 30% of revenues to 37%. In addition, we spent considerable time in 2001 restructuring to achieve greater cynergies with our investment management business. We now have shared marketing, sales and product infrastructure, we have the performance brand and product strength and distribution to capture a disproportionate share of mutual funds and separate account flows. Our predictions are no better than anyone else's when the retail investors returns to the marketplace but when it occurs we feel we are well positioned.

Looking at the compensation line and securities we have stressed all year long that we would attempt to reduce compensation to deliver shareholder returns. Well this was our objective the determinance of compensation are very unclear until year end. Our ability to control compensation really explains the difference between actual performance and what many of you forecasted for the year. Despite a significant decline in revenues, we were able to keep our compensation as a percent of revenues relatively constant. When you adjust for the increase the relatively fixed nature of compensation at IIG that explains the incremental change in comp to net revenues in the securities segment. For those of you wondering about the quality of reported comp expense, I would say two things- first, aggregate options issued the benefit of those options declined year over year. if you look at the options benefit as a percent of comp expense it did not change. In summary, we worked very hard particularly in 1999 and 2000 to maintain flexibility in our compensation structure. This discipline paid off in 2001. On non-compensation levels and securities, the fourth quarter expense levels are about the same as they were last year. However, excluding our aircraft business we have reduced the run rate of expenses of non-comp approximately 10% from the end of last year. And even more significantly if you looked at our original plan for 2001. In relatively stable revenue environment next year we would expect additional investments in our European sales and trading business to largely off-set savings and elsewhere in the securities business. On the

negative side, other expenses were up approximately $120 million. This reflects impairment and repossession expenses in our leasing business, airplane leasing business. I'll come back to this he is end. Investment management revenues were down 11% year over year and 7% from the third quarter driven by lower asset lifts and a mixed shift out of equitys. It has been the same story all year. Compensation is down with revenues. If you adjust for severance we had in the area, the comp to revenues ratio is flat. This reflecting efficiencies that have been gained in consolidating the platforms, work that started two years ago. Non-comp investment management are $45 million lower than last year if you look at performance , there has been a decline in our number of four and five-star rated funds from 65 to 56, we're number three in terms of four and five-star rated funds. Looking at lipper, statistics for performance if you look at one year or three year, the statistics really haven't changed with 59% of our funds performing in the top half and 70% of our funds performing in the top half over a three-year period. Over the year in what was obviously a very difficult enenvironment. Redemptions off-set quota sales. The restructuring and realignment -- realignment efforts have laid the foundation to accelerate growth in retail assets and capitalize on the relationship I talked about earlier with our retail brokerage service. Finally in credit cards, I need to warn all of you that the results are restated to reflect the new accounting requirements in net cash back bonus against revenues. All prior periods have been restated. In the business, revenues before provisions are up 15% year over year. Three reasons for that -- we had a 14% increase in average receivables, about a 60 basis point increase in interest spread, and 7% increase in fees, reflecting higher sales in merchant and card member fees. However, if you look at net revenues, they are up 2% and that reflect as 39% increase in provisions. We have managed to the main profit margin despite an additional vext in selections.

if you look at non-interest expense as a percent of receiveables they are down 11% to around 3.37% of average receivables. Looking ahead, our crystal ball for next year is not any better. The issues have not changed as we talked about this over the past six months. Consumer debt levels are high relative to income, but household balance sheets are relatively stable. Unemployment is increasing but have lower interest rates and energy prices off setting the impact of this. Our current forecast for the business expects modest sales in portfolio growth, slightly higher interest spreads driven by a cost of funds decline. if you look at our cost of funds in 2001 on average it was 5.57 for the year it was 4.67 in the fourth quarter. Looking in the next year, higher charge-off could more than offset the benefits we expect from higher spreads. If you look unemployment is up from 4.5% to 5.7% currently. Bankruptcys are moderated they are above levels from years ago and our our 90+ delinquencys have increased. Given this environment we added $50 million in reserves in the fourth quarter above and beyond charge-off levels. From a market perspective, we continue to strengthen our position, we added over 700,000 new merchants and extended our internet leadership. Now 23% of our customers are registered users. Look the risks for 2002, number one and the most uncertain is what happens to revenues. In addition, one one of the things we need to point out is despite all predictions, loan commitments have trended down throughout the year. They were at $18.8 billion at -- - at the beginning of the year they are currently at $10.1 billion. The credit quality within that portfolio has been consistent throughout the year with three quarters of it being an investment grade. We didn't expect this through 2001 the decline that we had and we would not predict a similar decline in 2002. I want to come back to the aircraft leasing business which looks to be a challenge throughout 2002. The fourth quarter reflects about $120 million in expenses roughly $90 million in asset impairment charges and about $30 million in repossession expenses. Again, this is an early, a very difficult area to forecast but it is reasonable to believe that expenses in this business could remain at these levels through 2002. As you know, we were on our way out of the business consistent with our strategy to be an intermediary when September 11th happened. Currently our plan is to be the best operator in the business. We are number three in this business after AIG and GE, we have a young, cost effective fleet as we talked about last quarter, we have a global diversified group of customers, we have an experienced management team, and we have been number one in the securityisation business for aircraft for a long period of time.

The final risk I would point out for 2002 which we talked about for a second on already is the discover charge off results. in summary, we have tried to use this year to position the firm for real operating leverage in the recovery, we have had what we believe to be meaningful cost reductions or efficiency gains across the firm's businesses. At discover we made real investments in collections in capturing more share from existing companies. We have kept expenses flat despite the resource increase by managing marketing expenses. At iig we have reduced head count from peak levels. Our private wealth group is now run globally, we have revamped our training program to train fewer and retain more. We have realigned incentives to promote fee based accounts. We have restructured to capture greater synergys are management. We believe these actions will produce additional savings next year. in investment management we have taken out between comp and non-comp $100 million in the cost structure.

At the same time if you look back over the last couple of year, we have improved the product mix and brand perception within product management. As we leverage the business with IIG we think there is real up side as the equity market returns. Ininvestment banking and research we have reduced head count over 10% and restructured the sources to allow for greater contact and higher value added advice. Most competitors have followed in the same path they started later and a lot of them are doing it under new management. Despite the restructuring and realignment efforts we have maintained market and mine share in research. In sales -- sales and trading business which drives more than anything else the expense structure of the firm we have had significant progress. Since 1999, if you look at our internal volumes process they are up 300%. At the same time over the same period, our cost portrayed have declined over 50%. We have increased market share across the board and particularly in Europe. We believe that these investments have and will continue to pay real dividends.

In summary we made progress against all of our primary strategic objectives , we have aligned resources to drive more client contact, we are capturing more share of global capital flows, we have developed a processing plant in securities which is relatively insensitive to volume and capturing more data. We are increasingly shifting our retail business model to a fee-based asset gathering concept, we have increased the ubiquity and utility of the Discover card. Finally if you look across market share we have maintained or improved our client positions. Finally, before opening up to questions in the midst of a severe down turn we have discovered what is excellent returns on capital, while importantly investing for the future. The 19% return on equity on top of the 10% increased in book value we think represents excellent results for the year. With that I will open it up to questions.

At this time we'll open up the call for questions. if you want to ask a question push 1 on your touch tone phone. if you need to remove the question press the pound key. We'll take our first question for Judah krauscharr from Merrill Lynch:

How are you.

I guess I have two questions. Apart from the airline leasing write-offs that you referred to, I was curious were there any other -- discretionary asset write downs that might have been reflected in the trading line. What you might have had some liquid. How the old securities, loans those sorts of things?

I would not use the word discretionary but the marketdowns that we had, as you know were mark to market in the loan portfolio anywhere else would be netted against revenues, yes. What was the first question?

Whether you give some quantification for what may have been more -- any way to compartmentalize that balance sheet scrushing that may be unusual to give om feel for the magnitude.

I wouldn't characterize it was unusual. Balance sheet -- that's important when you look at the results for the quarter one of the things we started doing a couple of quarters ago was give you a sense for how the overall sales and trading business is doing. There are three ways to make money in sales and trading. if you look at that revenue line item it was down 20% versus the third quarter. That really reflects a lot of the things that are obvious that happen whether it be September 11th decline in volatility, more difficult energy markets and the like.

Would you be willing to talk at all about exposure to Enron?

On Enron side what i would say is that you know we have a significant presence in energy markets, our exposure to that name is immaterial and I think it is a testament to credit skills and documentation and counter party management.

And possible -- and commodities training-type companies.

As we look at the -- the fallout from enron that the primary exposure to us would not be counter party but how the overall market adjusts to enron not being in it.

okay. If I could the other issue i want to get into. You played up the integration of asset and in the short time we have in a snap back on the equity side and when you look at the asset management balances, it doesn't reflect that. it seems like to suggest there were outflows in the asset management, particularly -- both on the particularly on the retail side. I'm curious are you talking about things improving from a performance point of view and more integration, why don't we see more sort of immediate signs on the side of flows.

We -- one of the things that drove that and maybe makes it the results look strange is we sold about $6 billion of assets out of our van campden complex which drove the declines.) (inaudible).

What do you mean the nature.

When you say you sold assets.

yes we sold them to the manager they are not in the complex.

Okay.

So we -- we sold them to the two or three managers and they were in our third quarter numbers, they're not in the fourth quarter numbers.

Finally, one other point in the risk section you said revenues being a risk then you went into the loan discussion how loans came down this year. I was curious. Why did you single out the loan portfolio as the risk from the ref now point of view.

It has been a -- I think, a source of conversation on every one of the calls and people are focused on you know what is going to happen to the lending product and the merger of the commercial banking world or the investment banking world. I think it is interesting to everybody that our balances fell as dramatically as they did this year. But we're not going to predict as we did this year that it will be that way going into next year. And I may be characterizing it as a risk wasn't appropriate but in terms of trends want to make sure people are focused on that.

thank you.

We'll go to another call.

Good morning, Steve.

Good morning. A question, first of all, on underwriting revenues I notice that your reported revenues were up sequentially versus the third quarter about 15%. And yet when I look at the public data on your underwriting position in the third quarter and how volumes shifted or appear to have shifted, product by product, I'm looking at global equity underwriting declining by 75% from the third quarter to the fourth. investment grade up about 23% but obviously that -- that doesn't necessarily have the kind of revenue impact on overall that we're seeing in the 15% sequential improvement. High yield was flat. Can you give us a sense for what I'm looking at wrong there?

well I -- you know there is a little bit, first of all you have to look at fiscal months.

Yes.

And if you look broadly at the -- at the strength, I think fixed income, you know had a very good fourth quarter and the equity revenues were up as well. We also a significant in a number of convertible transactions if you look at the market share, we had a very good fourth quarter. I mentioned that in my comments. I don't know whether you put that in there as well, Guy.

We'll follow up on that off line maybe it is a bean counting exercise. Let me follow-up on the question on the trading side about sort of year end balance sheet clean up, I know you objected to the term "discretionary" but there are certainly elements which are not as liquid and not as easily marked to a daily market price as others. And when I -- and those would be things like maybe the bank loan portfolio, the aircraft lease portfolio that you alluded to. When I take a look at your -- your trading revenues as disclosed for the quarter on an ROA basis, it seems like it was lower than it has been at any time since the third quarter of 1998 which, obviously, was a very, very difficult time in the markets, especially fixed income, and the only way that I can reconcile that to the reality is that you -- you did take a harder look maybe at a number of your less liquid portfolios s that a completely inappropriate characterization of what we're seeing here?

I think so. We have really tried to discourage people from looking at just the trading line, our sales and trading business can be paid in a number of different ways. Commissions, principal trading and net interest. if you look at the combined total, year over year decline of 7% or quarter consecutive quarter decline of 23%, it is really the majority of that reflects the market being shutdown for several days this past quarter, a significant decline across most product areas and volatility, we had much less favorable markets in the energy area, there were markdowns on the portfolio side as there always are. And you know you had credit spreads widened significantly. So, you can't really look at the trading line in isolation with respect to figuring out how the overall sales and trading business did.

Okay. if I could on the -- (inaudible). You made a comment which I'm not sure I know how to interpret about the non-personnel expenses which were down if you exclude the impact of the aircraft lease business. I would like to understand better what that meant and how those -- how those non-personnel expenses flowing from the air croft lease business would have distorted that calculation.

I said non-comp you look at the non-comp expense the increase is all in other-- if you compare fourth quarter to fourth quarter of last year. The other category is up around $120 million, and that's really a function of the -- the expenses I mentioned in the aircraft leasing business, since our overall expenses are flat, our other expenses are up $120 million, I'm saying on a run rate basis, excluding the airline business, our expense levels are down 10% from where they were last year. is that more clear?

What would characterize the increase in expenses for the aircraft lease business?

There are two things- one, repossession of planes, which is a roughly $30 million number and roughly $90 million associated with taking impairment charges on the planes that we have. Which I said in the comments.

And the impairment charges you have flown those through the expense line as opposed to principal transactions for example.

Yes. They will always be -- that needs to be in the "other" expense line.

Okay.

Not a mark to market outfit.

Okay. I understand. Finally a separate question which is, you talked about changes on the investment management side and you talked about being well positioned for growth in separate accounts businesses which brings to mind the thought that for a firm that's always been very focused on increasingly focused on high net worth individuals and also on asset management revenues, your position in the rapidly growing separate accounts business where Morgan Stanley would actually be managing separate account portfolios for wealthy people doesn't seem to be where it should be. Any comments on what you are doing in that area?

I guess we would agree and we feel like it is a significant area of opportunity for the next couple of years, and we have had an opportunity this year to really look at our products and the marketing of that product and feel like as the market returns we'll bring our share in that business up to where it rightfully should be. You are right in pointing out the weakness and you should address it.) (inaudible).

You are cutting in and out. Sorry.

wondering if there are any specifics about what you would be doing in implementing that in the next year or two?

I tried to give you a sense for that and you know what we have done is really integrated a lot of the infrastructure between investment management and IIG to make sure that we are very coordinated on a sales basis, on a product basis and a marketing basis and, you know, the two focuss in term of bringing that area together to expand the mutual fund sales, expand our separate account products.

Great, thanks, Steve. We'll go to Richard Strauss with Goldman Sachs.

Steve, just a couple of questions here. in terms of the outlook for next year you mentioned you know fixed income will be hard to beat. You mentioned the pipelines still under pressure you feel equitys is getting better but M&A is, who knows when this that will come back. Let me ask you, you brought down compensation I mean you obviously showed a whole lot of discipline on the compensation front this quarter -- given the outlook that you painted here, how much longer can you use this as a means of kind of controlling things and at what point do you really have to take a look at really broader reductions with respect to head count.

Richard, that's -- you know I think the best answer for that question is really to look backwards -- instead of ahead. if you look back at the track record really since 1990, which is involved a number of different and sometimes long-lasting down turns, the firms, manage on average to produce a 21% return on equity if you throw out '99 and 2000 as being abberant years the number declined to 19%. if you look at what our plan is for 2001 in terms of revenues and expense levels, when we formulated it, it was dramatically different than what we are actually dealt in terms of the hand to play during the year. I think we have managed that. So, there are -- there are opportunities, there are always opportunities in the firm to realign businesses to realign cost structures and make sure we're producing what we believe to be better than most if not better than all returns on capital for our shareholders. We'll have to respond to the environment. So if it gets, if it gets worse from here we'll deal with it. There are no plans to do anything more. We have spent all of this year leverages our position so that when the market returns we'll do, we'll do well and in general we're not expecting a big upkick next year versus this year in terms of revenue.) we have to adjust to respond to it.

I mean you mentioned that you had been growing your market share in the business but you said you have just maintained your market share in the investment banking businesses and if this playing into your decision to really kindch hold on as much as possible in terms of investment banking head count?

When you say -- well...

I know there are reductions to investment banking but you could -- you know give us in terms of how they were skewed in terms of lower end people, I guess.

we reduced head count in investment banking over 10%. And you know that we have significant commitments every year to hire people out of the undergraduate schools and out of business schools so I think that tells you a little bit about the mix. But on market share I think it is really hard to look at this year and draw a lot in the way of conclusions. As I said, our market share went up from 14% to 23% in IPOs, but I don't feel that that's necessarily reflective that we have dramatically outdistanced everyone else. It was a more spotty IPO market. The same is true in M&A. If you happen not to be in one or two transactions that happened to push the market share, very significantly. So, you know we don't think there is anything systemic or significant to be concerned about in terms of where the market share is going on the investment banking side.

Shifting gears final question here- in private equity you told us to take our lead from nasdaq, and nasdaq was up high single digits this quarter. It looks like 100 million negative mark and maybe you can just give us a sense, was this, you know as to the dynamics was it realized losses just a mark? What is going on here and maybe give us guidance on this as you gave with the aircraft leasing how we should think about this going forward.

The -- the mark is essentially all private positions, what I can tell you about the private equity business, if you looked at the start of the year and this goes back to, you know, risk content, if you look back to the beginning of the year our portfolio is $1.2 billion in size it is $800 million now. if you look back over the beginning of the year 60% TMT now it is less 40%. Our outlook for next year is that we'll do better than losing $311 million which is what we did in terms of revenues this year versus $150 million positive the year before. But how much better than that, I really don't know.

okay, great, thank you.

Next caller please.

Hello, Steve.

Hello.

I'm trying to keep this going, I understand the philosophy at Morgan Stanley is to produce higher returns although it seems like we're going to say some risk out in the tradeoff will be that the volatility of those returns may come down so it may not be from 15% to 35% over time maybe we're talking a smaller range with reduced risk. My question is- if I look at some of the ratios used by rating agents, such as net leverage, I'm seeing them going up. For example, according to my calculations '98 you ended the year at 15.3 times and as of the end of the third quarter was 21.5. Can you help me understand the relationship between the smaller band of returns yet what seems to be more leverage on the balance sheet?

Let's back up and talk about risk, you know and all the forms and one of the things I tried to say in the past unfortunately assets even net assets don't really, they're not great reflection for risk. And I think it is an industry we have to find a better way of calibrating that from a balance sheet standpoint. But if you look at the other aspects of risk on the balance sheet, over the year our bar has not changed. if you look at private equity as I just mentioned, the portfolio is down and TMT concentration is down f you look at the loan portfolio it is $18 billion to $10 billion, our high yield inventories are down significantly. One of the things that -- that is happening is increasingly accounting conventions a requiring to us gross up the balance sheet and it is an area that -- they don't get quukted in the net leverage calculation that are you talking about. One of the best examples of that would be, our prime brokerage business as you know we're the number one provider in that marketplace. We have had a significant expansion in customer activity there interestingly it's more and more gone into cash. And than it was even a couple of years ago and that has increased our reported leverage either on a gross or on a net basis so. A lot of the important monitors we have internally for risk suggests we're doing what we said is our strategy which is going to the intermediary side not the warehousing business but through the third quarter on some of the reported -- statistic there's were increases. That number will again trend down ward consistent with the decline that you see on the F schedules on the balance sheet.

Can you put back into context of what happened when you had the big spike in the long bond at the end of November? Meaning, talking about trading strategies, we when came out of 1998 we learned that Morgan Stanley traded volatility rather than direction. Maybe can you put into context what you are talking about on the balance sheet how Morgan Stanley made money, lost money, what the strategys were for the firm at the end of November.

At the end of November of this year?

yes.

well, you know you can see in terms of risk content you know if you want to talk about what happened as a result of the fourth quarter you will see that our bar didn't change. That is a better indication particularly in some of the quit wid markets of the risk profile that we have underwritten. So I don't think you will see any -- see anything different in the fourth quarter than what you have seen in prior quarters.

And a follow-up with market making it seems like are you making a big push there, can you give us a sense of what your market share expectations are where are you looking to gain share and what is the driver of that?

Yes. We would like to build share across the board and we have in post of the equity markets where it is easier to measure. There are objective sources of matters as well as a lot of third party sources. I think that the area of emphasis in the equity side has not changed. it's in Europe and it's in and over the year we talked a lot about our electronic trading which is really an automated way of making markets in nasdaq stocks. At the start of the year we were doing that 650 names it is up to 1500 currently. And we'll add stocks throughout next year. Part of our game plan next year is to continue to invest in Europe to expand our market share there. And there has been a steady uptick in market share in Europe and I think it was up year over year by our measure around 13%. So that really has not changed. The same is true in fixed income, but domestically and abroad but there it is all over the counter and there is really no objective information I can report except for saying that the -- that the feed back we're getting from clients in monitoring our share of business versus the street overall, that's headed north as well.

I apologize for one more question- It seems that Morgan Stanley has been slower than others to reduce head count materially, perhaps an expectation of more activity to come in the future. Can you talk about your plans if we get to the middle of the first quarter and activity is not picking up the outlook is not any better, how should we gauge what would be a turning point for you to act again in the area of non-comp expense or head count?

It it is important to look at the base from which people are starting and we feel like it is across the board our operating margins and businesss are higher than just about anybody else. One thing we're in the going to do and we tried not to do is stamp the business for the next quarter's revenues. There are a number of competitors that did that and it is a whip saw for your clind and whip saw for the franchise, you never build a brand. You know what -- all i can point to is i tried to earlier is that i think over a long period, over a lot of different cycles we found a way to manage the expense level such that the returns we provide are differentiated and we're going to have to look at the environment if it changes and we'll do the same thing.

Thank you very much. Have a great holiday.

You, too.

Next caller.

a few follow-up questions. Can you detail a little bit greater in terms of the operating levels that you are seeing, how much of the trades are now electronic. it seems like a dramatic drop in the expense portrayed and in Europe when you talk about expansion, is that all on the distribution side?

On the first question. it is the first time we have given any information on increases in order flow and declines in costs portrayed. And everyone warned me once I gave back there would be a flow of incremental information required.

of course.

one step at a time. But i would say that, you know, that that is a very good trend i wantive of whether it is electronic or -- none electronic. The other thing is that more and more of our flows have moved to Europe and that's a much less efficient environment in processing trades. So the increase that talked about and the declines and costs portrayed incorporate, you know doing more business in a higher cost environment specifically in Europe.) and the second -- what was the other question?

the other was in terms of the increase in expense expected in Europe is that mostly coming in sales? in adding distribution?

sales and trading, yes, they are across the board, yes. Not on the banking side.

okay. And in terms of the lending portfolio I know it was down. Was that just a function of activity out there or are you doing something more deliberate?

No, I mean, we -- we are in the business to serve clients that the lending capability facility is there to serve clients and it is really no more complicated than that, and it really is an outcome of the business as opposed to something we're driving towards. We have said consist len aand maintain that we will have all used our balance sheet to support important client objectives. It turns out we didn't need to do that on the loan side throughout the year.

Is there any change in the thought process in terms of benefit or not of a bank post Enron and some of the other credit difficulties out there?

I think that one of the more interesting things coming out of -- out of situations like that and maybe that's not the only one is -- is you know, people are looking at service providers when are you talking about complicated transactions or transactions where the institution is in transition, you know, do you want your advisor also to be a significant principal? What issues does that create, if any, in the -- in the advice that an institution gets? My guess is that there are a lot of CFO he's thinking about that in light of developments of enron and other situations.

One which is a follow-up to Amy's question and it relates to being long volatility on the equity side. is that -- it seems like many firms were not particularly long in volatilely post or going into September 11th. And but you typically are and is that the case.

well it's -- it is a little bit more, there is probably more detail there, there is really two aspects of volatility- short data and long data volatility. Generally they were more active in the second part of that and cha wanged is a result of the September 11th was a short data volatility. That spiked up for a while and came down significantly. But. The across the board it has reduced the exposure to volatility because they have not seen the opportunity starting at the end of the second quarter of this year.

Great. Thank you very much.

Next caller please.

good morning a couple of question. Fourth quarter and full year severance charges included in comp and also you mentioned that the option benefit was flat but can you talk about the proportional use of other forms of accounting deferred compensation?

In terms of percentage there were no changes in terms of the compensation structure year over year with respect to the options or deferred compensation. The percentages remain the same as related to overall comp. What was the first question? Severance was about $120 million across the firm. included in compensation.

okay. And book value went up more than -- fairly significantly more than i would have expected for retained earnings t didn't look like it was repurchases . is there something that pushed that?

I'm sorry?

The increase in book value in the quarter was fairly notably more than what retained earnings would have suggested given repurchase activity. I was wondering if there was an unrealized gain?

Most is explained by retained earnings.

Okay. And how -- you talk add lot about aberrational levels of, you know, activity in 2000 and '98, et cetera, how would you characterize fixed income, would you consider that aberrational or a return to people carrying.

I think the only thing I said was the equity markets and if you looked at fixed income it was a solid environment across the board, much better than '99 but the revenues were not dramatically different than where they were -- fixed income was much better than 2000 but not dramatically different from where it was in '99. Whereas in equities you had a significant increase '99 to 2000.

And lastly, you also talked about your concerns relating to enron and the energy business really being concerned with market response than counter party. How does the ice exchange sort of play into that -- your outlook for the market response and the opportunity in that line of business.

As you know we have an investment in that and the share is up . I didn't talk about it but the outlook is positive.

And we'll see that in terms of equity and ICE? Equity ICE as opposed through the other line items?

Yes. One more question.

This is from another call. The commission based pricing and agency transactions for OTC stocks per Morgan Stanley. I guess with that, how are you positioned relative to your peers for it to take change?

I think what will drive the profitability is the cost position. And as you know as a result of not doing acquisitions but building the business and doing it in an automated way, we feel like we have you know a unique and a positive cost position relative to the rest of the industry. Don't know when the market will change from its current status but when it does I feel like there will be good benefits for us as a result of that.

Great, thank you.

Thank you everyone have a nice holiday, talk to you in the new year.