摩根士丹利 (MS) 2006 Q4 法說會逐字稿

Welcome to the Morgan Stanley conference call.

The following is a live broadcast by Morgan Stanley and is provided as a courtesy.

Please note that this call is being broadcast on the Internet through the Company's website at www.morganstanley.com.

A replay of the call and Webcast will be available through the Company's website and by phone until January 18th, 2007.

This presentation may contain forward-looking statements.

You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they are made, which reflect management's current estimates, projections, expectations, or beliefs, and which are subject to risks and uncertainties that may cause actual results to differ materially.

For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see "Forward-looking Statements" immediately preceding Part I, Item 1, Competition and Regulation, and Part I, Item 1, "Risk Factors," and Part 1, Item 1A, and "Certain Factors Affecting Results of Operation," and Part 2, Item 7 of the Company's annual report on Form 10-K for the fiscal year ended November 30th, 2005, management's discussion and analysis of financial condition and results of operations, and the Company's quarterly report on Form 10-Q for the quarterly periods ended February 28th, 2006, May 31st, 2006, and August 31st, 2006, and other items throughout the Form 10-K, Form 10-Q, and the Company's 2006 current reports on Form 8-K.

The information provided today may also include certain non-GAAP financial measures.

The reconciliations of such measures to the comparable GAAP figures are included in our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on 8-K, which are available on our website, www.morganstanley.com.

Any recording, rebroadcast, or other use of this presentation in whole or in part is strictly prohibited without prior written consent of Morgan Stanley.

This presentation is copyrighted and proprietary to Morgan Stanley.

At this time, I'd like to turn the program over to David Sidwell for today's call.

Good morning, everyone.

Thank you, operator.

Thanks for joining us today.

As you have seen from our press release, Morgan Stanley had a great fourth quarter and a record year in 2006.

I'm here today with John Mack, who is going to take a few minutes at the start of the call to share his thoughts on our results and our decision to spin-off Discover.

Then I will take you through the details on both our fourth quarter and full year.

And I will answer any questions you have.

Now let me turn it over to John.

Thanks, David, and good morning.

As David said, we have had record revenues, but we also had record net income and earnings.

In '06 we grew revenues 26% year-over-year and boosted net income from continuing operations by 44%.

We also had significantly closed the gap with our competitors in terms of return on equity, and this is the fifth quarter in a row that we have been over a 20% ROE.

We have strong momentum in all of our businesses.

Institutional Securities had an outstanding year and delivered its highest earnings ever, with PBT up 72%.

In the Global Wealth Management, James Gorman's business, we delivered our highest revenues in six years, saw record FA productivity during the fourth quarter, and I'm really pleased with the progress we are making there.

We have been in the press a fair amount with our Asset Management business.

We have made significant progress in executing its strategic plan.

In the fourth quarter, we made a number of investments to really build the foundation for future growth, especially in alternatives.

Discover had its best ever results this year, while also making substantial progress in executing critical growth initiatives.

But there's still room for improvement in many of our businesses.

But I couldn't be more pleased with the performance we delivered, or progress we have made this year.

And I thank all of the people at Morgan Stanley who worked very hard in their commitment to our firm.

Our Discover spin-off, which you have already heard about, let's talk about that.

For a number of quarters now, we have had record results and seen significant momentum in both our securities business and our cards and payments business.

Our most recent strategic review, we concluded that Morgan Stanley and Discover could best execute their growth strategies as two stand-alone, well capitalized companies, each with independent Boards of Directors focused on enhancing shareholder value.

This will allow Discover to continue building on its strong brand and significant scale, and we believe it will maximize value for Morgan Stanley shareholders.

Morgan Stanley is well positioned to build on the positive momentum across our securities business.

With Institutional Securities firing on all cylinders and with Global Wealth Management and Asset Management clearly on track for a turnaround, our securities business is more diversified and operating in a more integrated way than ever before.

Morgan Stanley's market cap, capital base, and earnings have grown significantly over the past 18 months.

This will help ensure the continued stable growth of securities business following the spin-off.

We're confident that Discover will be a strong, stable, stand-alone company.

It's generated strong pretax profits in recent years, and delivered record earnings in '06.

It has improved credit quality, with delinquencies and loan losses at a 10-year low in '06.

Both sales and loans have been growing in recent quarters.

Under its experienced management team, Discover has made significant progress in growing acceptance in its strong U.S. card business.

It has expanded its international presence.

It has laid a strong foundation for expanding payments and debit business, and this is a promising asset, given the market interest in payments companies.

Discover is a well capitalized business with strong cash flows.

This will enable it to pay a dividend.

The spin-off also should give Discover the flexibility to access capital markets directly, and use its stock as acquisition currency.

This will particularly be important as the marketplace continues to change, and Discover looks to realize the growth opportunities it sees ahead.

I also want to mention that we intend to maintain Morgan Stanley's annual dividend at the current level of $1.08; a high payout relative to peer average.

We plan to maintain that dividend even after the Discover spin-off.

This decision reflects our confidence in Morgan Stanley's business in the future.

We put strong numbers on the board this year, and I'm extremely proud of what our people accomplished.

As we head into '07 we are going to be intensely focused on accelerating growth and creating additional shareholder value.

I'm confident that the investments we made this year and the strategic steps we have taken, will position both Morgan Stanley and Discover for continued success.

With all that now, David, I'm going to give it back to you.

Thanks, John, very much.

The firm capped a tremendous share in 2006 with an impressive performance in the fourth quarter.

Pages 1 and 2 of the supplement provide firm-wide results.

Fourth quarter income from continuing operations was $2.210 billion, versus $1.85 billion in the third quarter.

Our highest quarter ever, both including and excluding a tax benefit of $280 million, or $0.27 a share related to the outcome of a federal tax audit.

Earnings per share was $2.08, $1.81, excluding the tax benefit.

This compares to $1.75 in the third quarter.

ROE from continuing operations was 26%.

By all measures, a very strong fourth quarter.

For the full year, net income from continuing operations was $7.5 billion, up 44% from 2005, and 38% higher than our previous record in 2000.

Earnings per share from continuing operations was $7.09, also an annual record.

And ROE was 23.6%.

Turning to the top line, net revenues for the quarter were $8.6 billion, up 8% from the third, and our second highest quarter ever.

For the full year, net revenues were a record $33.9 billion, up 26% from fiscal 2005, our previous record high.

Noninterest expenses were $22.9 billion, up only 18% for the year, producing considerable positive operating leverage.

Total noninterest expenses for the quarter were $5.8 billion, up 8%.

The largest component, compensation and benefits expense, was $3.4 billion, up from $3.1 billion in the third quarter, for a compensation to net revenue ratio of 39%, flat with the third quarter.

For the full year, compensation expense was $14.4 billion, up 27% from '05, representing a 43% compensation to net revenue ratio versus 42% last year.

In 2007, if revenues were flat to 2006, we'd expect a one to two point higher compensation to net revenue ratio, primarily because of amortization of prior year equity awards and the continued investment in Asset Management.

Non-compensation expense in the fourth quarter was $2.4 billion, up 11% from last quarter, driven by increased business activity levels, which more than offset a favorable variance in legal and regulatory matters expenses.

Our fiscal 2006 tax rate from continuing operations was finalized at 30.4% versus last year's 26.4%.

Excluding the tax benefit I mentioned earlier, 2006's rate was 33%.

We estimate that the 2007 full-year tax rate will be between 33% and 34%.

Now let me discuss business segment specifics.

Turning to Institutional Securities, detailed on page 5 of the supplement, we were very pleased with our results for the quarter.

Net revenues of $5.6 billion were up 11% from the third quarter.

This was our best quarter ever, ahead of our previous record in the second quarter.

Profit before tax of $2.3 billion, also a record, was up 15% sequentially, and the margin rose to 41% from 40%.

We achieved ROE of 36%.

Noninterest expenses of $3.3 billion increased 9%.

Compensation expense was up on higher revenues.

And non-compensation expenses were up slightly, in line with increased activity levels and more than offsetting the favorable variance in legal and regulatory matters costs.

For the year, net revenues were a record $21.6 billion, up 38% from our previous record in 2005.

Profit before tax increased 72% to a record $8.2 billion.

And return on equity, 31%.

Looking at page 6 of the supplement, investment banking revenues were $1.4 billion in the fourth quarter, up 34% from the third quarter.

Advisory revenues increased 39% to $642 million, our second best quarter ever, and the best since the fourth quarter of '99, driven by an increase in real-estate advisory revenues and a favorable M&A environment.

Equity underwriting revenues were up 7% to $254 million.

Fixed income underwriting revenues were up 46% to $455 million, our best quarter ever, and 30% better than our previous record.

Robust leveraged buyout financing, hybrid issues, increased M&A driven transactions, and refinancing opportunities due to record levels of maturing debt in 2006, together with a continued low interest environment, drove this record.

For the full year, advisory revenues were up 25%, debt underwriting 29%, and equity underwriting 17%.

We are pleased with our league table standings for the calendar year-to-date through November.

Our rankings were number three in global announced M&A, number two in completed M&A, number three in global equity underwriting, and number two in global IPOs.

In debt, number five in global debt underwriting, and number seven in high-yield.

Coming into the 2007 fiscal year, we continue to be optimistic about the prospects for investment banking.

Our equity backlog is up versus last quarter, and this time last year, with a strong pipeline of equity offerings across geographies expected in 2007.

Our debt backlog is up quarter-over-quarter and year-over-year, and our M&A backlog is up substantially from this time last year, and flat from the end of the third quarter.

Also on page 6 of the supplement, you can see that we had a strong showing in sales and trading for the quarter, with total revenues at $3.7 billion, off only slightly from an exceptionally strong third quarter.

Full year results rose substantially across both equity and fixed income product areas to a record of $15.9 billion, up 37% from 2005.

Equity sales and trading, while down 5% from the third quarter, achieved a fourth quarter record of $1.4 billion.

For the year, equity sales and trading revenues were up 32% to $6.3 billion, our best year ever.

Looking at the quarter, cash equities revenues were up about 4% from the third quarter with rising stock market indices, strong client volume and growth in Europe and Asia offsetting declines in the Americas.

Derivatives revenues showed a slight decline, driven by the typical seasonal decline in activity and the decline in market volatilities.

This was a record quarter in prime brokerage.

In fact, our prime brokerage business had its third consecutive record year, with revenues up substantially on both new accounts and growth in global client balances for the fifteenth consecutive quarter.

In fixed income sales and trading, $2.3 billion in revenues was a record fourth quarter, up 2% sequentially, and our third best quarter on record.

In fact, our four best quarters ever in fixed income trading came in 2006, and we finished the year with record sales and trading results of $9.6 billion, up 41% from last year's record, with all product areas setting records.

Looking at the product areas for the quarter, interest rate and currencies increased 29% to a new record.

Interest rate and other asset class positioning was favorable.

Emerging markets activity benefited from general spread tightening and currency strength, and we had increased revenues on structured transactions because of market visibility.

Credit products rose 8% driven by robust growth in our Global Structured Products group.

Commodities decreased 34% sequentially from our strong third quarter, with lower revenues in oil liquids and electricity and natural gas.

While volatilities were high in the quarter, our positioning revenues were lower than last, and we had less revenue from structured transactions.

Across the board, we have seen tightening credit spreads and favorable trading conditions continue as we enter 2007.

During the quarter we closed on the TransMontaigne and Heidmar transactions.

The synergies we obtain from these acquisitions will be reflected in our oil liquids and natural gas businesses within commodities.

We also closed on our acquisition of Saxon Capital in early December.

This provides us with both subprime origination and servicing capabilities, bolstering our mortgage business in step with our key strategic initiative to grow and vertically integrate the business.

Principal transactions investment revenues were $410 million, up 118% from the third quarter.

This quarter includes gains from our interest in certain real estate assets through our real estate business, as well as from the intercontinental exchange.

Turning to risk, we are pleased with our risk efficiency in the quarter.

With the increase in principal risk and less liquid risk in our securities business, we are committed to carefully managing our risk taking, capturing it to the fullest extent possible in our VaR calculations for liquid market risks, and using our stress-testing scenarios to help us manage less liquid risks.

Looking at VaR for the quarter, aggregate average trading and non-trading VaR is up $1 million to $67 million, with a decrease in commodities more than offset by increases in interest rate and credit spread, equity, and foreign exchange.

Period end aggregate trading and non-trading VaR is up to $89 million, as we increased risk exposure during the latter part of the quarter, primarily in our equities business.

In the quarter, total loans and commitments rose by $1.6 billion.

Compared to where we were last year at this time, total loans and commitments net of hedges have increased by $6 billion, or 23%.

Noninvestment grade has increased by $5 billion, or 32%.

We're seeing considerable opportunities for event lending as we grow our leveraged finance business, building off our strong client relationships, structuring capabilities and distribution.

Now turning to page 8 of the financial supplement and our Global Wealth Management business.

This business has had its fair share of challenges coming into 2006.

But I believe you can see from our results, that James Gorman and his team are making considerable progress.

One of the key priorities is to grow our international business, with a focus on the high net worth and ultra-high net worth segments.

As a result, we announced last week that we had agreed to sell our UK stand-alone mass affluent brokerage business, Quilter, to Citigroup.

We expect the sale to be finalized in the first quarter of '07, and proceeds from the sale will be used to further our wealth management strategy.

For Global Wealth Management, the fourth quarter was our best quarter in the last six years.

Revenues were up 6% sequentially to $1.4 billion, driven by stronger transaction revenues.

Expenses of $1.3 billion were up 5% in line with our business activity levels and an increase in our marketing spend.

We continue to see a reduction in costs related to overall legal and regulatory matters, and the frequency of new cases is declining.

Profit before tax for the quarter was $171 million, and the margin 12%, with an ROE of 16%.

For the full year, net revenues of $5.5 billion were up 10%, and expenses of $5 billion increased 13%.

PBT totaled $509 million, down 13% from '05 without normalizing for the World Trade Center settlement and the lease accounting adjustment last year, and the margin 9%.

Excluding the World Trade Center settlement, and the lease adjustment profit before tax actually increased 22% from last year.

ROE for 2006 was 11%.

Global Wealth Management is clearly reenergized under the new management team and showing measured improvement in many areas.

Net new assets of $700 million represented our third consecutive quarter of client inflows.

We have brought in $8.5 billion of net new client assets during 2006.

Average FA production grew 7% sequentially, and is at a new high of $720,000.

Assets in the $1 million-plus household sector increased $38 billion in the fourth quarter, and are now 69% of our total client asset base versus 64% at this point last year.

Total client assets increased 5% sequentially to $686 billion.

Fee-based assets up 7%, that's 30% of the total.

Our bank deposit program continued to grow, ending the quarter at $13.3 billion.

We're targeting between $18 billion and $20 billion in bank deposits by the end of '07.

We also launched two successful closed-end funds during the quarter;

Dreman, a value fund, and our China A-Share product.

We believe that our FA headcount, excluding the Quilter sale, will be slightly higher at the end of 2007 than we have today as a result of new trainees, as well as new FA recruits.

Clearly, three consecutive quarters of progress without a drag from significant one-time items is a positive outcome.

And we're building momentum as James Gorman and his team work [to get this business turned around.

Let me turn to our Asset Management business.

Owen Thomas and his team are making good progress against key initiatives.

We continue to add to our existing product offering, with a particular focus on alternatives.

During the quarter, we announced our acquisition of FrontPoint Partners, a key step to building the management team in this business and expanding our alternatives capabilities.

We have taken minority stakes in Avenue Capital and Lansdowne Partners, two best-in-class investment managers, adding breadth to our product offerings.

Additionally, we announced at the beginning of December our acquisition of Brookville Capital Management, a hedge fund focusing on credit arbitrage.

And have also completed a European equity team lift-out that will help gain coverage in this area.

We believe that these investments, along with internal transfers and targeted external hires, will allow us to grow the business according to our strategic plan.

As you see on page 10 of the supplement, net revenues of $780 million were up 13% from the third quarter.

Management and administration fees increased 5% to $638 million on higher average assets under management.

We also recorded net private equity gains of $15 million, compared with a small loss in the third quarter.

The balance of the principal investments line not related to private equity reflects gains on the business's investments in alternatives.

Income before taxes was $190 million, up 52% from the third quarter, driven by the higher revenues, which offset a small increase in expenses.

The margin was 27% in the fourth quarter.

For the year, revenues were $2.8 billion.

Profit before tax, $711 million.

The margin, 26%.

And ROE, 19%.

While the conscious investment in building out our core business, alternatives, and private equity will produce margin pressure in the short-term, it's critical to our three to five-year plan for making this a best-in-class business.

As we look into 2007, we expect margin to be lower, closer to the 20% level.

Turning to page 11 of the supplement, you can see assets under management or supervision increased by $26 billion, to end the quarter at $474 billion, primarily due to market appreciation.

In addition, our share of assets under management as our new investment stakes totaled $4 billion.

We had $2.6 billion in total net inflows, which marks our first quarter of net asset inflows in two years.

Institutional liquidity inflows of $7.7 billion, and inflows in both the non-U.S. and Americas intermediary channels of $1.7 billion and $1.3 billion respectively, drove this positive change.

However, our Morgan Stanley branded retail channel continued to sustain outflows, $2.4 billion in the quarter and $3.3 billion in retail money market outflows, primarily as a result of building out the deposit program in Global Wealth Management.

We're well aware that performance is the largest driver of inflows, and are intensely focused on improving performance to be a competitive player in the industry.

We launched and incubated 15 new products during the quarter, seven in alternative, seven in equities, and one in fixed income.

For the year, we've launched a total of 58 new products.

Many of these new funds are targeted at institutional and international clients, two client areas that we're keenly focused on growing.

New products typically take anywhere from one year to several to establish a track record and attract meaningful client assets.

So we feel we're laying the groundwork for future growth.

We are also making progress on our private equity and infrastructure initiatives, with new hires made both internally and externally, and new products in the planning stages.

Turning our asset management business around will take time, and we are very committed to allocating the appropriate management focus, capital, and resources to making Asset Management a long-term success.

Results for our Discover business are detailed on pages 13 and 14 of the supplement.

Financial information and statistical data follow on page 15.

The current quarter has zero provision for taxes because of tax benefits, including a portion of the federal tax audit I mentioned earlier.

Net revenues for the quarter were $963 million, down 8% sequentially, and profit before tax decreased to $199 million.

Receivables grew again this quarter, with record fourth quarter net sales volume and lower payment rates.

Fees were down 6% on a managed basis, primarily as a result of lower sequential sales volume due to normal seasonal trends, and lower late, over limit and other fees.

Interest income decreased 2%, as interest spread compressed in the quarter, primarily due to increases in interest charge-offs.

The provision for losses was $527 million, up 6%, reflecting the trend in credit quality, including UK credit deterioration, modestly higher reserve rates to reflect our view, and the timing of securitization deals.

Delinquencies and charge-off rates increased again this quarter, but remain significantly below prior year levels.

For example, at 4.15%, the charge-off rate is 161 basis points lower than a year ago.

Discover has benefited a great deal from the hard work they have put into improving credit quality, as well as continued low bankruptcy levels following last fall's bankruptcy reform.

Turning to expenses, noninterest expenses increased 13%.

The largest increase was seen in marketing and business development expense, which rose 37%.

We launched a new advertising campaign in August, and as we discussed last quarter, the bulk of our planned second-half increase in marketing and promotional expenses hit in this fourth quarter.

Next year we expect our marketing and business development spend to be at, or slightly up from the 2006 level.

Professional services expenses also increased, due to higher legal fees relating to our Visa and MasterCard litigation, as well as investments in infrastructure and technology.

Looking at the full year, pretax income was a record, at just under $1.6 billion, up 72% from 2005, and up 30% from our previous annual record.

Net revenues of $4.3 billion was a record, up 24% from 2005, driven by the decrease in bankruptcy filings and a very favorable credit environment.

Expenses for the full year were up 7% from the inclusion of operating expenses related to Goldfish, as well as higher legal and compensation expenses.

Pretax margin, 37%, and the return on equity, 22%.

We also made progress on advancing our network strategy.

We signed merchant acquirer processor contracts with TSYS, [Transferas], and NOVA during the quarter.

With these new contracts and our existing partnerships with First Data, Global Payments, and RBS link, we have agreements in place with merchant acquirers representing a significant portion of bank card market share as measured by processing volume.

Additionally, we recorded our first transaction on the China UnionPay network in China.

Looking forward into 2007, consistent with the industry, our bankruptcies have not returned to higher levels as quickly as we had expected.

While there is still some uncertainty, we expected bankruptcies to continue to rise in 2007, and we project our charge-off rate will reach between 4.5% and 5% by the end of next year.

Let me add a few details to comments John made about our planned spin-off.

In fact, we have put a Discover overview on our website.

Page 3 of the overview highlights some structural and timing aspects of this transaction.

Subject to regulatory approvals and a likely IRS ruling on certain aspects of the transaction, there will be a 100% tax-free dividend to shareholders, with no ongoing ownership retained by Morgan Stanley.

We expect this will occur in the third quarter of 2007.

Discover has $5.2 billion in economic capital as of the end of November.

And we expect the capital at the time of the spin to be consistent with this level, which is based on managed receivables.

We also aim to confirm the current investment grade rating at Discover Bank.

In terms of P&L impact, as a result of the separation, our preliminary estimate, based on today's market conditions, is that Discover will incur approximately $85 million to $90 million of incremental funding cost, but expect to realize approximately $40 million of savings in net overhead.

There will also be some one-time charges which will impact 2007.

As you heard from John, Morgan Stanley intends to maintain its dividend at its current level of $1.08 per share, up to the time and following the spin-off of Discover.

This will translate into an effective pro rata dividend increase post spin-off for Morgan Stanley.

It's anticipated that Discover should be in a position to pay a dividend following the spin.

To update you on our share repurchase program, we have repurchased $3.4 billion in 2006.

Looking to 2007, our Board has authorized a stock repurchase program of up to $6 billion.

We expect capital generation from the businesses to provide us flexibility in our growth and capital management needs.

Our goal is to balance the needs of our business for additional capital to reinvest in organic growth and make attractive acquisitions, with our objective over time of offsetting the dilutive impact of equity compensation to employees.

We will actively manage our share repurchase to achieve these objectives over the next 12 to 18 months.

In terms of outlook, the first quarter of '07 is starting on a strong footing.

While global economic growth has slowed, particularly in the U.S., equity markets continue to rally, concerns about interest rates have lessened, credit spreads have tightened, including in the emerging markets, and commodity markets remain volatile.

I mentioned earlier that investment banking pipelines remain strong.

In Discover, 2007 will see a higher level of marketing spend, and we expect pressure on net interest income to continue.

Credit costs are expected to continue to rise as the consumer is under increasing pressure, though charge-off rates will remain relatively low.

We believe there are good growth conditions for Wealth Management and Asset Management.

In sum, we continue to invest in the long-term growth of our businesses, and feel that we're well positioned to deliver value to shareholders.

So with that, in terms of prepared remarks, let me now ask you what questions you may have.

[OPERATOR INSTRUCTIONS] Mike Mayo, Prudential Equity Group.

First, you had almost a $300 million increase in expenses between professional services and marketing and business development.

Are these one-time or ongoing?

Well, I think as I mentioned, some of that is the increase that you saw in marketing, which is the usual seasonal pattern that we see at Discover.

And that is -- tends to be seasonal.

We have, as I mentioned, seen continued high levels of business activity which drove the increases in all of the costs that you'd expect to see in business development.

People are traveling, people are getting out there doing business.

We continue to use consultants to further our technology agenda, and also in certain of our businesses to replace us actually hiring people.

So the increase quarter-on-quarter very much reflected that.

I would say, just to provide some context, if you look year-over-year, and you strip out of 2005 things like the litigation costs, the large items last year, and non-compensation expenses are up 10%.

And I think that reflects the effort that we have put into making sure that we are efficient in the way we spend the firm's resources.

We, as you know, have had an active productivity agenda underway.

And I think that's the trend line that's probably most important to focus on.

And within Institutional Securities, can you give us a split between U.S. and non-U.S., and what the growth rates were this quarter?

Yes, let me just answer, because I think in one quarter, it can be, again, a little misleading.

Let me just give you a full-year perspective.

Last year, the U.S. business was about 63, 64% of the firm.

Our estimate for '06 is that that's closer to 60, 61%.

Europe and Asia is obviously where we have seen the growth, and the growth has been pretty evenly split between those two regions.

So we are seeing this shift that we have been talking about around the globe.

I do think it's important to say, however, that the U.S. business has continued to be very robust across many of our businesses.

And what was the growth rate year-over-year, U.S. versus non-U.S.?

As I said, the U.S. mix is down slightly.

So the growth disproportionately was higher outside of the U.S.

And then lastly, as it relates to Discover, is John still there?

No.

Yes.

What's up, Mike?

Hey.

Why now?

It's not new that you have Discover, and you could have sold it before.

What's changed here?

Well, when I came in here, the firm was really in turmoil.

And Discover was one of our best businesses at the time.

We had weaknesses in our others, and we had I think real growth issues.

So with the performance that we've put in our other businesses, and the firm, I think, having the momentum and strength, I think both Morgan Stanley and Discover can go their own paths and really create a lot more value for shareholders.

So that's the reason we did it.

And what about taking a look at asset management -- ?

You ask a lot of questions, keep going.

This is the last one here.

That's what I heard earlier.

All right, what is it?

What about Asset Management?

Why stop with Discover?

Asset Management is kind of lagging some of the pure play peers.

Well, there's no question that we are investing very strongly in our Asset Management business.

It will take awhile for that to pay off.

But there's a lot of synergies between our Asset Management business and our other securities businesses.

The retail business, and also the institutional business.

So that would not be a candidate to be spun off.

Okay.

Great.

Thank you.

Glenn Schorr, UBS.

First, I think you slipped in in the Asset Management commentary that margins in 2007 would be closer to 20%.

I wasn't sure on why.

I'm assuming that it's maybe initial dilution related to recent investments, but -- ?

We actually spent -- if you remember, Owen Thomas did a very in-depth presentation of our Asset Management business at a conference less than two months ago, and we talked about this in some detail there.

And anyone who is interested, I think that presentation is still up on our website; it's a really good presentation.

Obviously, we're investing in the core business.

We continue to invest in alternatives.

And we are investing and most of that new investment will take place next year in restarting our private equity business.

And that's why we would expect margins next year to be weaker as we make those investments.

And some of that you saw, because actually the margin in the third quarter was weaker and it just got bolstered in the fourth quarter by some of the Heritage private equity gains.

Okay.

On the M&A line, you mentioned real estate and the good M&A environment.

It's a noticeable up-tick.

Anything in there that -- in terms of special gains related to real estate?

Or is this pure advisory revenue, the plus 39%?

It's very broad-based, which I think is, if you want a theme across our businesses, it's the breadth of the franchise.

So there's nothing that's a method of the particular standout.

Well, the number itself is, so that's cool.

Yes.

And then finally on Discover, I do think that it clearly creates value and they will be better off separate.

I'm not sure if there's anything you could describe that Discover hasn't been doing on its own, in terms of pursuing growth?

And then -- so that's one.

And then part B of that is, just if anything you can tell us in terms of separating out revenues and expenses and earnings related to the network as opposed to the card business?

Well we'll obviously go through a very detailed process in creating the Form 10.

And we will work actively during the first quarter to get that completed, and obviously in that will be a full description of all aspects of the business.

So I think will you get more information as we complete that process.

We do -- just to give you some data points, we do give you the volume data.

And again, that is set out in this separate deck that we have put out called "Discover Overview."

Okay.

Thank you.

Guy Moszkowski, Merrill Lynch.

Question for you first of all on the VaR.

If I'm reading the numbers right, it seems like you have a pretty significant uptick at the end of the quarter, relative to what your quarterly average was.

And you did say that that mostly related to the equities business.

Is that the result of a single set of transactions which might already be sort of through the pipeline?

Or is it really speaking to your view on what you think the opportunities are as we look into the early part of next year?

I'd say, Guy, I think, in terms of looking at trends, you're much better to look at the averages.

We thought it was important because this data about the period end will be available, we did want to highlight it, because you will be seeing it when the 10-K comes out.

But I think in terms of getting a sense of where VaR is going, I think to look at the longer term trends is better.

And we actually do give that data, which takes you for the last eight quarters, which I think is probably a better place to look.

So if I can draw an inference from what you said, it would sound like there were some specific transactions that might make the period end number higher than what we might expect as a quarterly average in the first quarter.

I don't really want to get into the specifics of what drives it at any one point.

I just wanted to highlight that it was a little bit higher, but you can also see the trend.

Okay.

That's fair.

A much smaller transaction, but Quilter; why decide now to spin that business off -- or to sell that business, rather, to Citigroup?

Well, again, I think it's as we focus in all of our businesses on what it's going to take us to succeed, the business of Global Wealth Management is going to be very focused on the high net worth and ultra net worth category.

And if you look, that's why we have been very focused on the million-plus household segment in the U.S., which has been growing, and you see the disclosures of that.

Quilter is much more of a mass affluent business.

It doesn't fit within that strategy.

And to succeed in that sector, you really need to have a much bigger scale than we had.

And obviously, presumably that's the focus that Citi has had on this asset.

Got you.

And then just a question on equity underwriting.

I mean, you did allude to the fact that your pipeline is looking very strong going into '07.

But you certainly had a pretty significant decline in revenue and market share and position there.

Is that just a matter of timing of transactions or something?

I just think it's hard to look at these trends and just when you look at the stand-alone quarter.

If you look at the calendar year-to-date, we were number three in global equities, number two in IPOs.

If you look over time, the actual revenues book can be lumpy.

It was actually a very high quarter, the fourth quarter of last year.

I would not read anything into this.

I think we feel very good about the pipeline.

We feel very good about our investment banking business, and the dialogue we have with our clients.

Thanks.

And finally, with respect to the Discover spin, when is your best estimate of when you would have the tax-free ruling from the IRS?

I think it's going to be along this timeline in the -- sometime in the first half of next year hopefully.

It may not necessarily be completed, and I'm not sure we're going to make it a condition precedent for the spin.

But we will work as quickly as we can to get that ruling.

Okay.

Thanks very much.

Daniel Goldberg, Bear, Stearns.

Within Global Wealth Management, pretax margins have been relatively flattish, around 11, 12%, for the past couple quarters.

Although you are seeing some solid progress.

When can we expect this to accelerate, and where would you see that leveling out?

Well as we said, our goal, and James has been very explicit about this, is to get to margins which are consistent with the industry -- with the industry leaders.

And I think we've also said that that's going to take a couple of years to achieve that.

I think what we have been very pleased about, is that many of the fundamental ground -- foundations, if you like, for that are being done.

The work that's been done around stabilizing the FA population.

We now have 8,000 very productive FAs.

If you look year-on-year, assets under management in this business are up 11%, despite a much lower FA count.

And I think that reinforces having the right people is critical to this business.

FA productivity is the highest it's ever been in terms of revenues and assets under management.

There's a lot of focus on making sure we're developing the right products.

And so we have done a number of closed-end funds.

All of those have been significantly well received.

And to John's point earlier, that's one of the synergies between the institutional business and wealth management.

The deposit sweep program has increased up to about, as I said, just over $13 billion by the end of the quarter.

So all these steps, if you like, are going to be critical to get the margins to where they need to be.

And as we've said, that will probably be a couple of years more of hard work to get there.

Got it.

Okay.

On the Discover side, you did mention Discover being a stand-alone makes it easier for them to use their currency for acquisitions.

Any sense for what types of acquisition?

I think at this point, I don't want to speculate about the types of transactions they may or may not do.

Just consistent with I don't really want to do that for the rest of the firm, either.

You will hear about it as soon as we have something to say.

Okay.

And then just lastly, taking into account the spin-off and then the buybacks of 6 billion over the next 12 to 18 months, any sense for where ROE can level out or be sustainable?

Well, I think we've certainly talked about our goals being to be very consistent with the leaders in our industry.

And I think we would say that over that time that has you in this 18, 22% sort of ROE range.

And we are very pleased with the ROE that we produced in 2006.

Okay.

Thank you.

Meredith Whitney, CIBC World Markets.

I just have a quick question because most of mine have been answered.

But I don't remember what your philosophy was in terms of securitizing the Discover portfolio, the portion that did you or did not securitize.

When I do a best efforts in trying to project a value for that spin-off, are part of the plans less reliant on the credit ratings because you would securitize more of those assets?

I think that -- and this is -- I think this is a very useful page in this overview, which is page 6, which gives you a balance sheet for Discover.

And we have had securitizations over the last two years be about 53% of managed receivables.

Obviously, that can be higher, and probably will be a little bit higher.

But I think we would expect to have a combination of funding which is through securitization and also bank and other funding.

Okay.

Because theoretically, it would be a lot cheaper than for them to securitize more of those receivables so they would have more earnings leverage.

I think that that's going to be obviously dependent on market conditions at any one point in time, the need for funding, and this will be very actively managed, as it is today.

Okay.

Thanks.

And I had one little quickie.

In terms of the wealth management business, is 8,000 a run rate number?

Is that a good number?

We think hopefully we will be a little higher next year through a combination of new recruits and people seasoning out of the training program.

I think, though, it's very important to realize that we certainly feel that this is the right -- we're in the zip code of critical mass to operate this business profitably.

Okay.

Thanks so much.

[OPERATOR INSTRUCTIONS] William Tanona, Goldman Sachs.

Just in terms of the credit rating, obviously, you had indicated that you want to have investment grade for Discover.

And that the capital that you are deploying there would probably get them an investment grade rating.

But will there be any impact to Morgan Stanley's credit rating?

No, actually -- and I want to make sure I don't get ahead of the rating agencies.

But I believe that Moody's, S&P, Fitch, and the rating agency in Canada, DBRS, have all confirmed the ratings for Morgan Stanley at this point.

Okay.

And that's ex this transaction?

They have considered the transaction, and have confirmed our ratings this morning.

Okay.

Great.

And then in terms of the Global Wealth Management division, we continue to see attrition there.

Is that, again, kind of housekeeping, or are you guys seeing competitive pressures?

And what's going on in terms of the continued attrition on that front?

It was 40 people in the quarter.

Which, on an 8,000-plus workforce, is obviously very small.

It's -- and let me make a broad market comment as opposed to our Wealth Management business.

The environment is very competitive for people.

And so I think you are going to see that dynamic for us and our competitors.

I think that we have continued to be very successful in recruiting.

And we have brought on board people who are more productive than the people we have lost.

So I think net-net, we, as I said earlier, this is a level of workforce we're comfortable with, and during the course of 2007 we would expect to see the number go up.

Okay.

Great.

And then lastly, you mentioned that you would expect that the comp to net revenue ratio to move up a point or two possibly next year in a flat revenue environment.

Again, can you remind us what the driver of that would be?

If you remember, and we have a page in the financial supplement which shows the way that equity awards amortize into our P&L, that's one factor.

And the second factor is the discussion we had a moment ago about asset management, where, as we continue to invest in people, there will be this margin impact in that business.

And so of the two, you would expect it to be equal?

I actually don't have the schedule in front of me, so I can't look.

I did it, and I think the first will be the larger impact.

Okay.

Obviously at the end of the day, this will depend very much on our revenues and other business performance next year.

So this is very, very early days.

And as you know, we will adjust our comp to revenue ratios each quarter, based on the facts and circumstances as we know them at that time.

Excellent.

Thank you.

Okay.

So thanks, everyone.

Happy holidays.

Ladies and gentlemen, thank you for your participation in today's conference call.

This does conclude your presentation, and you may now disconnect.

Have a great day.