摩根士丹利 (MS) 2008 Q1 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 through April 19, 2008.

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 2, item 1, competition and regulation in part 1, item 1, risk factors in part 1, item 1a, legal proceedings in part 1, item 3, management's discussions and analysis of financial conditions and results of operation, in part 2, item 7, and quantitative and qualitative disclosures about market risk in part 2, item 7a of the Company's annual report on Form 10-K for the fiscal year ended November 30, 2007.

And other items throughout the Form 10-K and the Company's 2008 current reports on Form 8-K.

The presentation may also include certain non-GAAP financial measures.

The reconciliation of such measures to the comparable GAAP figures are included in our annual report on Form 10-K 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 consent written of Morgan Stanley.

This presentation is copyrighted and proprietary to Morgan Stanley.

At this time, I would like to turn the program over to Colm Kelleher for today's call.

Please proceed.

Thank you for joining us today.

Given this tough environment, it has been difficult to follow this sector, but we will continue to provide you with the information you need to understand our results.

As you know, the market is in the midst of major deleveraging, following extended period of ample global liquidity and low rates.

The first quarter was one of the most challenging we have seen but we navigated it well which is a testament to the strength of Morgan Stanley's client franchise.

We generated a net income of $1.6 billion, diluted earnings per share of $1.45 and a return on equity of nearly 20%.

We are pleased with these results, given the macro economic turmoil and dislocations in leverage lending, commercial real estate, subprime, mono lines and SIVs.

There was strength across many of our businesses including record revenues in equity derivatives, prime brokerage and interest rate products.

And significant growth in our non-U.S.

and emerging markets business.

Net revenues were $8.3 billion, and PBT margin was 27%.

Noninterest expenses was $6.1 billion, up 14% from the fourth quarter, driven by compensation that included severance expenses of approximately $161 million related to staff reductions as we resized our business to reflect the current revenue environment.

On page three of the financial supplement, you can see that total global head count decreased by 2% from the end of last year.

The compensation to net revenue ratio was 49% or 47% excluding the severance charge, which is in line with our guidance last year.

Non-compensation expenses were $2 billion, down 6% from the fourth quarter or 19% excluding that quarter's Coleman Sunbeam legal accrual reversal of $360 million.

The non-comp to net revenue ratio is 25%.

We are focused on improving our cost base and would expect to see improvements in this ratio going forward.

Before we go into the details of businesses, I would like to highlight several key accomplishments that not only helped our results this quarter, but also are helping us build for the future.

We have been clear about our expectations to the environment since the market dislocation began late last summer and we have managed our exposures accordingly.

We are maintaining our capital surface.

We brought leverage down and we continue to maintain a high level of liquidity.

As you know, the CIC capital infusion came into effect this quarter, helping to bolster our strong capital position.

We reduced our adjusted leverage ratios from 17.6 times last quarter to 16 times.

At the same time, we increased our total liquidity by $6 billion to $124 billion, including an increase in our parent company liquidity position by $8 billion to $70 billion at quarter end.

These measures put us in a solid position to take advantage of the market opportunities that will arise from the dislocations in these markets.

We continue to make enhancements to our risk management organization to support our business model and growth initiatives, including most recently naming Ken Durrant as our new Chief Risk Officer reporting to John Mack.

We have resized our organization to better align it with the revenue environment, and while we incurred severance costs expensed in the quarter it will led to cost benefits in both comp and non-compensation going forward.

We are maintaining very tight control over expenses and we are continuing to make investments in infrastructure, technology and business expenses related to increased pipeline activity.

We have continued to make leadership changes across the firm as we look to strengthen our bench of talent and Ellyn McColgan will begin in global wealth management later this quart.

We are confident she will continue to build on the momentum that James Gorman has built in this business.

Now let me turn to the businesses.

Starting with institutional securities detailed on page five of the supplement, these results reflect continued strength in many businesses including areas within credit.

Because of these strong results we mitigated the impact of negative market valuations.

Revenues of $6.2 billion, although up significantly from the fourth quarter of last year, were 13% lower than last year's first quarter reflecting the ongoing challenges, the structured credits and the overall market dynamics.

Our core client franchise continues to deliver very strong results across all businesses within institutional securities.

Noninterest expenses of $4.1 billion increased 34% from the fourth quarter of last year.

This increase is magnified because last quarter included the reversal, as I said earlier, of the Coleman Sunbeam reserve while this quarter included severance charges.

Excluding these items, noninterest expenses, increased 16% from the fourth quarter.

PBT was $2.1 billion, with an ROE in this segment of 24%.

In M&A and underwriting, volumes dropped across all major categories.

While pipelines continue to be healthy and our clients are engaged in strategic conversations however, market conditions may make monetizing pipelines challenging in the near term.

Looking at page six of the supplement, investment banking revenues were $980 million, down 28% from the fourth quarter of last year, largely reflecting low volumes.

Advisory revenues for $444 million, a 43% decrease from the record fourth quarter, but up 19% from the first quarter of '07.

Underwriting revenues decreased 8% to $536 million, as lower equity underwriting offset higher revenues and fixed income underwriting.

Sequentially, equity underwriting revenues of $261 million were down 25% driven by lower volumes of secondary offerings on IPOs and lower activity in Asia.

Fixed income underwriting increased 17% from the fourth quarter of last year, to $275 million, predominantly reflecting activity with investment-grade clients.

Page six, of the supplement shows sales and trading revenues of $5.1 billion, up significantly from last quarters negative revenues of $5.6 billion.

This quarter's results include strong results in our client franchise, across equity and fixed income sales and trading.

Organizationally we have changed the way we look at our fixed income business.

We view the major business categories as the first interest rate credit and currencies, the second commodities, and the third is the mortgage proprietary trading effort.

Total fixed income sales and trading revenues were $2.9 billion, reflecting record results in interest rate products, strong results in commodities, and a $527 million benefit from the impact of widening credit spreads on firm issued structured notes.

These gains were partially offset by losses in mortgage proprietary trading.

The interest rate credit and currency area increased close to 300% from the fourth quarter.

This was driven by record revenues in interest rate products reflecting higher volatility in flows, significantly improved credit trading results reflecting higher customer volume, continued volatility and favorable positioning as credit spreads widened during the quarter.

Credit trading excludes leveraged lending results which are reported in other sales and trading.

With an increased focus, commodities responded for weak performance in the second half of last year, producing near record results driven by particular strength in oil and liquids.

We have benefited from better positioning amid high volatility levels of strong customer flows with strength across regions and commodity classes.

We also had strong results in new areas where we have been investing, like agriculture, where we significantly increased results from last year's first quarter.

Finally, mortgage proprietary trading which is now segregated and managed separately significantly reduced the losses versus last quarter.

But still reflects the challenges of the current market environment.

Reflecting our strong client franchise, our equity business produced record results this quarter with broad based gains across regions and products.

The combination of high volatility, strong customer flow and excellent positioning with our trading businesses drove the record quarter.

Revenues of $3.3 billion were 35% higher than last quarter, reflecting record derivatives in prime brokerage, a particularly strong results in quantitive strategies.

This quarter's results also benefited from a $321 million gain on firm issued structured notes.

Turning to other sales and trading was a negative $1.1 billion, driven primarily by write down in our lending business and to a lesser extent the U.S.

Banks liquidity portfolio that we reclassified from available for sale last quarter.

Our lending business includes both relationship and leveraged lending.

We have been very clear that leveraged lending was one of our biggest concerns because the markets remain severely dislocated and virtually shut down during the quarter.

Similar to the third quarter last year, liquidity disappeared from the market and as a result, we have taken additional write-downs on our lending business of $2.1 billion gross or $910 million net of hedges with 50% of the gross write-down attributable to our leverage acquisition finance pipeline and closed deals.

While we employ a variety of hedging strategies including macro hedges on various parts of this portfolio, market liquidity was pronounced and our valuations reflect that.

On page seven of the financial supplement, you can see that our total non-investment grade loans commitments decreased from $30.9 billion at the end of the fourth quarter of last year to $26 billion this quarter.

Specifically within the $26 billion is the total leveraged acquisition financed portfolio of both pipeline commitments and closed home deals of $15.9 billion.

This is down from $20 billion last quarter, as you can see in the footnote.

Now, at this stage I would like to give you key updates on our marks and exposures hit hardest by the credit cycle.

In CMBS, commercial home loans, we continue to get observable market prices from executed trades.

We have $23.5 billion on our balance sheet, down from $31.5 billion at the end of the fourth quarter, and $11.6 billion in net exposure down from $17.5 billion at the end of the fourth quarter.

This repositioning was done across all regions without incurring any significant net losses or write-downs.

Our residual exposures remain geographically well diversified.

At the end of the first quarter, non-subprime residential mortgages, which include RMBS bonds, residential Alt A loans and European mortgage loans were $14.5 billion on our balance sheet, down from $16.5 billion at the end of the fourth quarter.

Total net exposure was $8.7 billion, down from $10.9 billion last quarter.

Included in that net $8.7 billion, Alt A net exposure of $4.6 billion was reduced from $5.3 billion at year end through executed trades and corresponding marks calibrated to those trades.

The total write-downs here were $600 million.

RMBS bonds and European mortgage loans that make up the remaining net exposure in the non-subprime residential category were reduced without incurring any significant net losses or write-downs.

You can see on page 15 of the financial supplement that our direct U.S.

subprime net exposure at the end of the first quarter remained at $1.8 billion, the same level as at year end.

However, we reduced our super senior mezzanine net exposure by $1.1 billion through dispositions and additional write downs of $700 million.

We also wrote down our residuals by $300 million.

Our hedges performed well, resulting in an overall P&L of zero for this position.

Our aggregate direct exposure to mono lines at the end of the fourth quarter was $4.7 billion, up from $3.7 billion at year end.

This increase in net exposure reflects the current environment on our continued support for selected municipal client transactions.

The net exposure includes $1.3 billion of ABS wrap bonds held by our subsidiary banks, $2.6 billion of insurance municipal bond securities and net counterparty exposure to mono lines of $800 million consistent with year end.

During the quarter we took a credit valuation adjustment, a write-down of approximately $600 million, reflecting the widening of credit spreads experienced by the mono lines.

While we expect the industry to see further mark downs as the credit cycle unwinds, we understand our exposures well, and we continue to work to reduce them.

Turning to capital liquidity, there are three key tenets that I want to emphasize.

The first is we are maintaining a strong capital position.

The second is we are maintaining very high levels of liquidity, and finally we are maintaining a balance sheet with judicious leverage ratios and capacity.

Page four of the supplement highlights our current capital position.

At the end of last year, while our regular tier capital was always in the surplus position, our period end internal capital model calculation showed a shortfall, which we disclosed and address.

During the first quarter, we earned a 20% return on equity, received a benefit from the CIC investment and we suspended our share buyback program temporarily.

So we are very well capitalized and clearly have excess capital.

Despite stronger results this quarter, we are still placing a significant emphasis on our capital and liquidity to ensure we have enough dry powder to continue investing in our businesses and to take advantage of opportunities.

Since last summer, when I said we expected the credit market dislocations to continue for some time, we took the following actions to strengthen our liquidity position.

We raised a significant amount of liquidity in the capital markets through the issuance of long-term debt and structured notes at every opportunity at reasonable levels.

We actively managed our positions requiring significant cash funding, such as event loans and commercial real estate loans from the peak in the third quarter.

This freed up a sizable amount of liquidity.

In the trading position, we focused on reallocating balance sheet to liquid assets with significant two-way customer flows.

In the lending business we used our U.S.

bank platforms where we have abundant liquidity in excess through additional liquidity to finance longer term assets.

And lastly, we strengthened our liquidity position and reduced our refinancing risk by using some of the incremental liquidity to pay down commercial paper from an average of $25 billion last year, to our current outstanding of just under 17 for this quarter end.

So our liquidity numbers let me first explain that we hold liquidity in three groupings.

We hold liquidity at the parent Company level for the repayment of debt as it comes due along with the consolidated liquidity needs of the firm.

We hold liquidity in our bank subsidiaries which support much of our lending activity and e hold liquidity in our nonbank subsidiaries, for example our UK and Asian broker/dealers for sales and trading activities.

You can find the most recent information on these on page 75 of our 10-K.

Total liquidity for all three groups is $124 billion at quarter end and averaged of $123 billion for the quarter or from the average of $85 billion in 2007, an increase of 45%.

Parent Company liquidity averaged $71 billion, up from a $49 billion average last year.

Bank and nonbank subsidiaries have averaged 52, up from $36 billion last year.

So far in the second quarter, our liquidity continues to be very strong.

Average total liquidity has been $125 billion, and average parent Company liquidity has been $77 billion.

As you know, we aggressively reduced our balance sheet last quarter.

Our discipline in maintaining an appropriately sized balance sheet in today's environment, along with our strong capital position has brought our gross leverage ratio down to 27.4 times from 32.6 and our adjusted leverage ratio down from 16 and 17.6.

This combination of our strong capital, high liquidity and reduced leverage positions us to take advantage of near term market opportunities.

Total average trading and non-trading VAR increased to $103 million from $98 million, primarily driven by increased volatility levels.

Average trading value at risk increased to $97 million from $89 million.

While position levels remained essentially the same the increase in trading value at risk came from emerging markets, foreign exchange, spread widening in the mortgage markets and the reclassification of our subsidiary banks with 13 portfolios into the trading portfolio.

These were formerly captured in non-trading VAR.

Risk management remains a top focus and we have fortified a strong risk culture.

In addition to bringing back Ken Durrant as Chief Risk Officer, reporting to John Mack, we have made several changes to our risk management organization, mainly adding increased market knowledge and trading expertise to complement our risk models and scenario analysis.

We continue to balance opportunistic risk taking with risk production in residential and commercial mortgages and leverage finance.

Now, turning to page 8 of the supplement in our global wealth management business, revenues of $1.6 billion declined 10% from last quarter, reflecting a lack of new issues affecting the investment banking revenues by general market slowdown during the quarter which drove down commissions and principal trading results.

Noninterest expenses decreased 4% from last quarter, as an increase in compensation costs that included a severance charge was offset by a decrease in noncompensation expenses which include certain subadvisory fees now being reported as a reduction of net revenues due to contract modifications.

PBT of $254 million, decreased 33% from last quarter, under the PBT margin decreased to 16%.

Over half of the decrease was driven by lower revenues.

The balance was the result of severance expenses incurred in the quarter, seasonal higher benefit expenses partially offset by lower noncomp expenses.

ROE for the business was a healthy 42%.

On page nine, you can see the productivity metrics.

Net new assets of $11.4 billion represented our eighth consecutive quarter of positive client inflows.

Access to the $1 million plus household segment increased 6% from last quarter to $491 billion, primarily due to market movements and is 71% of our total client base.

Total client assets decreased 5% from last quarter largely reflecting market levels.

Average FA production decreased to 761,000 as a result of lower revenues, reflecting in part the absence of new issues and an increase in the average number of FA versus last quarter.

FA head count was essentially flat with the end of last quarter.

Average assets per FA of $85 million were down in line with market depreciation partially offset by the increase in net new assets.

Our bank deposits, however, grew to $33.4 billion as clients moved of their assets to cash in response to the volatile markets.

Let me turn to our asset management business which has been delivering strong results in recent quarters.

There's no doubt our asset management business was negatively impacted by the turmoil in the market this quarter, especially in comparison to the strong results we delivered last year, but this shouldn't overshadow the good progress we have made executing our multi year growth plan.

We have grown assets under management 27%, from two years ago.

We are successfully building out our private equity infrastructure and alternative businesses with access in alternative strategies up more than 147% from two years ago.

We have also continued the expansion of our earnings actual footprint by hiring local sales teams, opening local offices and enhancing all the offices.

As you can see on page 10 of the supplement, our asset management business reported a pretax loss of $161 million.

Our revenues this quarter were down significantly from the strong numbers we reported in 2007, driven almost entirely by the current challenging market environment.

The sharpest declines were the two principal transaction lines, trading and investments.

The trading line includes $187 million in losses from securities issued by structured investment vehicles, SIVs held by asset management.

Told SIV exposure in our money funds is now $3.6 billion, down from $8.2 billion at the end of last quarter.

The bulk of this decrease came from securities maturing.

The remainder came from asset sales and approximately $200 million was taken on to our balance sheet.

Exposures relating to SIVs on our balance sheet was $588 million at the end of the quarter.

100% of the remaining SIVs in our money fund are sponsored by commercial banks that have provided public support for their SIV programs or have brought them on to their balance sheets.

We anticipate the maturing securities and our active management will continue to reduce positions through the second quarter.

The investments line includes gains and losses from our merchant banking business, which includes the real estate, private equity, and infrastructure businesses, as well as any gains and losses in our core asset management businesses which we define as traditional equities and fixed income funds and alternatives.

Merchant banking investment revenue declined $395 million, primarily driven by real estate losses in the first quarter, versus gains in the fourth quarter.

Core asset management investments reflected a net loss in the quarter, down $142 million from gains posted in the previous quarter.

Losses in the first quarter were primarily from equity and alternative product feed investments in those markets that saw the sharpest declines.

Asset management fees decreased 14% largely driven by lower performance fees than our alternatives business and lower core management fees primarily driven by equity market declines.

Noninterest expense of $704 million were down 27% from last quarter, driven by lower compensation related to deferred compensation plans as well as decreases in professional services and marketing costs.

On page 11 of the supplement, you can see the flow data where we continue to show positive flows in our non-U.S., U.S.

institutional and America's intermediary channels.

We had strong inflows in our alternative product distributed through the non-U.S.

and U.S.

institutional channels.

As James Gorman told you in January, we have yet to turn the call to our net positive flows in our retail mutual funds space.

This will continue to be a major focus of the management team going forward and we have recently made some key management changes in this business including the naming of CEO of Van Kampen who will also have interim responsibility for Morgan Stanley's retail funds.

We launched an additional 50 new products this quarter, nine alternatives, four in equity and two in fixed income.

In terms of new offerings we launched an additional 15 new products this quarter.

Nine in alternative, four in equity, and two in fixed income.

We have significantly expanded our product offerings over the past few years and the new products we have launched since 2006 contributed $3.2 billion of inflows in the quarter which includes flows and new merchant banking products.

On page three of the supplement, you can see the regional revenue disclosure at the firmwide level.

This quarter, 54% of our revenues are international, with 39% from Europe, the Middle East and Africa and 15% from Asia, and 46% has come from the Americas.

International expansion remains one of our most promising opportunities and we are aggressively pursuing new markets where wealth is developing rapidly and there are opportunities for us to bring global capabilities to a local level.

Now to wrap up a few words in the outlook.

There are two key issues underpinning the current crisis in the markets, one is deleveraging.

This is liability driven, but focused on the provision of liquidity that is forcing portfolio liquidation and price deterioration.

The other is derisking, reluctance to extend risk capital.

The former is being addressed in market actions, the second will take some time to resolve itself.

As a result, markets remain challenged with distribution models still frozen in some cases.

Pressure will remain until markets begin to heal and the increasing level of uncertainty is taken out of the system.

We have been consistent in our views on the market that it will take some time, at least several more quarters before credit markets and liquidity return to normal levels of activity.

We still believe that the structured and the securitization markets will remain challenges if not impaired for an extended period.

Away from these markets, however, the continued opportunities in other areas within fixed income, including interest rate, foreign exchange, commodity products within emerging markets.

The commodities business continues to build upon its leading market presence, as we saw in agricultural this quarter and we see more opportunities of moving upstream and expanding our global footprint.

The emerging markets remains a top area of investment and focus with growth prospects particularly in Asia and Latin America.

The investment banking pipeline continues to be healthy and many of our clients are engaged in strategic conversations.

The current market environment may delay monetizing the pipeline, however.

Volatility in the equity markets and trading volumes remain high, which plays to the strength of our flow business, a key operating strength of our franchise.

This creates opportunities for our clients and for our cash, derivatives and prime brokerage businesses.

Real estate and private equity investments will be under pressure near term, however this market presents and will present many investment opportunities.

Although there's been a slowdown in revenues, the retail investor has remained engaged thus far.

We believe that our more productive sales force, increased deposits and growing international businesses will lessen the impact if retail investors pull back because of the difficult markets.

Although we acknowledged the bearish view in the macro environment, there are several positives that are worth noting.

Valuations have declined, and buyers will reenter the market at some point.

Corporate fundamentals are still in good shape, with robust cash levels and relatively low leverage.

From a technical perspective, sentiment has been particularly bearish, however, there's been some evidence of noncredit players buying into the credit asset class.

The financial community is being vigilant in recognizing asset impairment and this is a necessary step for financials to move towards reparation.

The delevering process is clearly underway and this ultimately should result in a less volatile market driven more by fundamentals.

There's a lessening of alternative policy proposals on the table as rate cuts alone are not enough and we are seeing aggressive Central Bank actions.

We do not see near term cyclical challenges changing our view of long-term secular growth opportunities.

We continue to focus on leveraging Morgan Stanley's global scale franchise and integration across all of our businesses.

We are optimistic on the breadth and scope of our client franchise with our strong capital base of liquidity and our ability to continue investing in the communities that are presenting, we will grow our share of the market.

Thank you and now we will be happy to take questions.

Please stand by as we wait for the question-and-answer portion of the conference to begin.

And our first question comes from the line of Guy Moszkowski with Merrill Lynch.

Go ahead.

Good morning.

Hi, Guy.

I was wondering if you could just give us a little bit more color on the subprime analysis on page 15.

You alluded in the press release of $1.2 billion charge.

I think that you broke it down a little bit more in your comments and I would just like to try and relate your comments and the comment about the $1.2 billion specifically to the items in the table on 15.

Sure.

Well, as you know, the financial supplement, that schedule presents all of our U.S.

subprime net exposure.

So we are continually managing down our net exposure in the areas where we incurred our greatest losses in 2007.

That's through a combination of dispositions and write-downs.

So you see a decline in the net exposures, if you look at our super senior, the CDO mez line, and the ABS bond positions, it was a $2 billion decline there, right?

However, within that coordinated subprime position, we are supporting client business.

The combination of those two results in the aggregate net exposure remaining constant at $1.8 billion, but within the prop trading element, which is part of that, you do see the reduction in super senior CDO mez where we did take the write-downs and residuals.

And just to clarify that, so when we spoke about mortgage proprietary trading losses of $1.2 billion where do you see those, right.

Well, you see the write-down within the subprime which I've disclosed, and then we took additional write-downs in our Alt A positions which were about $600 million.

Okay.

All right.

I think I get that now.

And then the reduction in the CDS hedge, sort of short from 5.1 to 3.3 over the course of the quarter?

Yes, I mean, the reduction on that really is we reduced that as we reduced the position itself, obviously as a function of dispositions, either write-downs or sales.

We are looking for further opportunity into the space to manage the position.

The message I want to give about that infamous trade is that we have actually got it a situation now where we are managing it very efficiently and the shorts of working against it, Guy.

Okay.

I mean, it certainly -- it sounds like the toxic waste cleanup is considering of pace.

I guess that's key.

To that you said that organizationally you have broken out the mortgage prop trading group.

Is that something that's going to be an ongoing business or essentially is that a workout group?

I think that that's really, at the moment, our priority is to work out those positions and that's the way I would look at that activity.

Okay.

Fair enough.

Are you seeing asset growth in the institutional business that is at all material as a result of seizure of collateral from prime brokerage or repo clients?

No.

So you're basically -- whatever you size, you are able to dispose of quickly?

Yes.

You -- you mentioned deleveraging several times during the call, including right at the outset.

Clearly you as a firm did, although not all of your competitors did, at least not on a gross leverage basis.

And it sounds like listening to some of the other conference calls the last couple of days, essentially the fed's creation of their new facility has taken some of the pressure to deleverage quickly off, would you agree with that?

Or do you not really feel that that makes a difference?

I think it has taken some of the pressure off, but we are looking specifically at Morgan Stanley and how we want to manage our balance sheet and how liquid we want to keep it.

I think what the fed has been has been incredibly proactive and helpful to the markets but it doesn't get away from the way we are looking at our business and how we want to sail close to shore and manage for opportunities.

That's the way I'm looking at it.

I did hear some of those comments as well, but it doesn't change the three tenets that we have given you for this environment, Guy.

That's entirely fair.

And then if I can just ask a last one, you talked about deleveraging and then you also talked about derisking, which seemed to be a more tenacious problem.

Is the derisking something that would be closer to resolution?

Do you think if there were more sort of fiscal policy-type adjustments as opposed to what we have seen, which has principally been on the monetary front?

I think it is going to take a number of proposals to do that.

What you really need is the confidence of people to extend risk capital again and that is going to take sometime.

However we get there, it's going to be a subject of a lot of these proposals we are looking at.

At the first thought of that, I do believe which is balance sheet disclosure is largely done.

A second part of that is raising of capital through various methods and then through other proposals.

Okay.

And then the final question I would like to ask you is on book value.

This is just accounting but it didn't go up anywhere near your earnings and obviously you didn't buy back shares.

So I'm just curious--?

I think that's it.

We got the dividend, we didn't buy back shares and that's the main thing.

We can rationalize that for you later.

Okay.

That would be helpful.

Thank you.

The next question comes from the line of Meredith Whitney with CIBC World Markets.

Go ahead.

Good morning.

Hi, Meredith.

I have a couple of questions in terms of you guys have been great and consistent about giving a protracted outlook on difficult markets but in terms of the events that have happened over the last couple of weeks, does that change your near term outlook for any type of asset dispositions and particularly with the Fannie, Freddie announcement this morning?

Does that accelerate any type of near term asset disposition plan?

If it accelerates anything, Meredith, the way I look at it is we have been very consistent from August onward in our view on these markets and the proposal of scenarios that can unfold.

Obviously the acceleration of events last week accelerated much quicker than we ever thought they would.

I mean we have been looking at situations of maintaining capital, having a liquid balance sheet, maintaining liquidity and so on.

So we may get opportunities to do things quicker but I think our strategy itself has been well thought out and formulated.

Okay.

And then just a quick follow-up.

With respect to -- you guys have talked about disposing Goldfish and then with respect to outlook on goodwill, and then could you remind us if there's any goodwill associated with Saxon?

Well, Goldfish I don't know about.

It's part of a separate company.

Secondly, Saxon, we have, as you know, a small amount -- well, it's goodwill at the operating level which is consolidated at firm level where it's not deemed to be material.

Okay.

Okay.

I apologize.

The only goodwill I could pull up on you guys was related to Goldfish and, of course that's with Discover.

Thanks.

Okay.

Our next question comes from the line of Roger Freeman with Lehman Brothers.

Go ahead.

Hi, good morning.

Just wanted to actually come back to a couple of questions that Guy had.

Can you just help me reconcile again on the $1.2 billion of mortgage-related write-downs, how much in there is subprime?

It's 700 of gross, but on a net basis, was that -- what is the number there?

And then the other pieces you talked about were the 600 of Alt A and then there's 600 related to counterparty exposure.

Can you take that up?

Yes, look, it's specifically related to subprime itself was in the 1.2.

If you look at the numbers, we have 500 was the write-down on mez, the CDO mez.

400 was a write-down -- 400 was a write-down on the residuals, right, the bonds, and the Alt A we wrote down 600 and then we had some hedges offsetting those, that's how you get to 1.2.

But the hedges, they all offset right?

Because the net is a zero change on the P&L for the quartering right, specifically related to subprime?

Specifically related to the positions which are reflected on the schedule, let me explain, when we gave the schedule -- schedule, sorry.

When we gave that, we had to show all of our direct subprime exposures, including what was on trading desk.

The great bulk of that was what was happening in the mortgage proprietary trading area.

That's why you are getting the skew on the numbers, right?

So to you think about it, strip out the Alt A, which is not on the schedule itself but is part of the 1.2 billion.

What you are saying is the net of that is the number that relates to subprime.

Okay.

And then the 600 then relates to counterparty write-down, that's--?

Yes.

Is that separate?

We also need to support collective client positions on the schedule, and secondly, what you have is you have dispositions in there as well.

Within the dispositions by the way, anecdotally are some of the positions we unwound.

We actually had some small writeoffs, which is why you get some noise on the movement.

Okay.

I guess just also on the delevering, is it fair to assume you are looking in this environment right now, continuing to delever the balance sheet?

I think it's fair to say that we want to maintain a liquid balance sheet and be prudent, which is what we are being.

Got it.

Okay.

And inside of prime brokerage, can you talk to any tightening of margin requirements that you have been putting through to clients.

Has that been material?

I think what we have been doing is optimizing buying power within our prime brokerage business.

Our balances were relatively unchanged from last quarter but our revenues were up.

And really that's what's been happening.

I think we managed that business very well.

We keep a very clear eye on our free capital within the area.

So that's really all I want to say about brokerage.

Okay.

And in fixed income sales and trading, obviously a very strong quarter.

You talked on the call about both favorable positioning and strong client flows.

How would you characterize that sequential delta if had you to skew it to flows versus--?

This is the $60,000 question and having grown up in fixed income, we have had debates about that forever.

The way I have always answered that question, is we take positions based upon the edge we have, which is our client franchise, right?

I think what you should look is that this is clearly a monetization of our client franchise.

Some days positions may be off, other days it may be the throughput.

There's no doubt that bid offer has been increased.

But I think to actually try and do some percentage split between the two doesn't make sense.

We are trading clearly with information that, -- with open information based on our client flows.

Was the swing in commodities from the negative last quarter to the pretty strong positives this quarter, a pretty meaningful piece of that?

No, I think what I said to you last quarter, Roger, was that, if you remember, we had poor trading, right?

Right.

And we eliminated the poor trading.

We had very strong client flows coming through and structured positions and better trading this quarter.

In fact, the investment coming through from new businesses that we invested in, such as agriculture.

Okay.

Last question, I know that this doesn't get a lot of focus right now in terms of wealth management, but looking at the -- your clients by size, the over $10 million category assets declined the most.

I was wondering if there's anything you can speak to in terms of just market trends there or what some of the higher network contracts?

I don't think there is a market trend.

I think it is a reaction to the market.

If you look at the strength of our wealth management business, our retail business, it's really fueled by capital markets activities to a large extent.

So, -- and the capital markets have been subdued this quarter.

That's the way I look at it.

The underlying core trend of our business and the strategic push on 1 million, 10 million, 10 million above clients is very intact.

I really wouldn't read anything into this other than this is a good ongoing, good trend for that business after an exceptionally good fourth quarter.

Okay.

Do any of these -- any of the municipal issues, as far as significant issues for the wealth management business in terms of the auction rates and any repurchase you might have to make there?

Not particularly.

All right.

Thanks a lot.

Our next question comes from the line of Glenn Schorr with UBS.

Go ahead.

Hi, Colm.

Hi, Glenn, how are you?

Good.

Thanks.

The first question is -- so if you look at the leverage came down, you got a lot of attention to that and derisking but the assets are up and obviously you got the equity infusion.

So I just want to -- you also mentioned about near term opportunities.

So I get all the moving parts, but in terms of overall size of balance sheet, my gut was it sounded like that could actually go up as you see cheap opportunities in dislocated markets and then just overall controlling the net leverage number; is that fair?

I think that's a fair point.

Let's just clarify one thing.

The balance sheet went up by I think $40 billion, which is a blip on a balance sheet our size, right?

We do have a liquid balance sheet and you are absolutely right, we are selling close to shore, but there is a world where we could opportunistically put up the balance sheet if the opportunities really present themselves on a risk-adjusted basis and makes sense.

That's not our intention.

Our intention, as I think as I said before was to really sell close to shore and really opportunistically on a risk-adjusted return basis make investments on our balance sheet or liquidity.

That's totally helpful.

On the commercial real estate front, pretty meaningful reduction.

No impact in terms of marks.

I'm just kind of curious on what kind of things were sold during the quarter and then, of course, how you are hedging.

I'm assuming through the CMBX, I'm not sure how else you can.

We have a number of hedges, we have a variety of hedges and it's not just of the CMBX hedge.

Remember, last quarter, when we looked at our commercial mortgage, it was more skewed internationally.

I think at that stage we were approximately, don't shoot me, 70% or so internationally, or 65% and our hedges were in the U.S.

What's happened is we managed to reduce some of our international exposure which has performed well through dispositions and so on.

Our international exposure is down 48% on a much reduced amount, and we feel they are better symmetrically aligned with the hedges.

We flagged this at the end of the fourth quarter as our number two issue that we wanted to manage.

It was obvious at that stage we managed it down from the third quarter and it's clear we have aggressively managed it down this quarter.

I feel reasonably comfortable about that position.

Okay.

No, that's it.

That's good.

On the -- the other expense line was up a lot, but let's just take it at a higher level.

You mentioned the cost ratios in the beginning and then thoughts on how it improved going forward.

How -- in this revenue environment, I'm assuming that it's more on the cost line than the revenue line, but if it you could just elaborate on what type of things you are talking about and how meaningful that could be?

Well, I'm -- I'm undertaking a thorough review.

We are working out costs as we go forward, and obviously we have dealt with comp to a large extent, but on the non-comp side, we are aggressively looking at those situations and I think you are going to have assume that I am going to be doing things about it.

Sorry to be opaque.

No problem.

Last one, the unencumbered liquidity buckets, what do they consist of?

Cash.

Cash, near cash.

I love this term unencumbered because you could actually add -- in addition to our $124 billion, we have significant amounts of other unencumbered liquidity but our unencumbered $124 billion is cash and quickly convertible into cash-type instruments.

Good.

That's good.

It's real.

Thanks very much.

Our next question comes from the line of Prashant Bhatia with Citigroup.

Go ahead.

Hi.

Hi, Prashant.

Just in terms of the deleveraging, do you have even a rough target of where you would like to see the gross in that leverage get to?

No.

Okay.

It is very simple.

We just want to be judicious with the way we are reacting in this market, yet we want to be able to have opportunities to take advantage if it makes sense on a risk-adjusted basis.

Okay.

And then it looked like, the CDO mez position that you were able to sell, does that mean you are starting to see a vulture bid in that market?

Not really.

Not really.

I would love to think that was the case, but, no.

We just managed to get dispositions done, some sales done for various reasons and -- but as I said, I think the management of that position now is -- I don't want to shock people.

We now actually have positive convective appeal in that position because we have an ability to manage it back up.

Okay.

And then on the leverage lending, the commitments were down $5 billion on non-investment grade.

Correct.

But it doesn't look like anything was funded.

Could you roll forward what happened between the last quarter and this period end?

Yes.

It's -- what actually happened was if you look at it, we reduced our commitments to $4.5 billion, which is down from 12.2.

$900 million of the deals withdrawn and $6.8 billion were closed.

Of the deals closed, roughly $3 billion were reduced through syndication activity and commitment decreases.

Okay.

That's helpful.

Also in wealth management, on the bank sweep, you are up to $33 billion now.

How much is left there that you can bring into the bank?

I don't know.

A lot of that is a function of the markets.

But, -- fear will bring more cash.

That was our target.

It's an optimal target.

From the scale point of view, we have given normalized markets for there or thereabouts.

That's just inflow from client.

There's no transfer from money funds taking place.

Correct.

Then just on the auction rate securities, can you quantify what's being held?

How much your clients actually hold in those securities?

Rough numbers?

Roughly it's $20 billion.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Bill Tanona with Goldman Sachs.

Good afternoon, guys.

Hi, Bill.

The European results, looking at the revenues, they were down pretty sharply on a sequential basis, I know they've been largely outperforming.

Just wanted to know what ultimately was driving that type of a decline.

Was it any type of writeoffs there, or was that just a--?

I don't know what schedule you are looking at Bill, because actually our European results were pretty big.

Specifically--.

I'm sorry, the Asian results.

Oh, Asian results.

I thought you said European, excuse me.

I did.

I mistakenly said Europe.

I kist think that it's -- the market has been subdued.

Banking was a big factor last quarter for us and you are just seeing activity levels down but we don't think it is a trend.

In fact, if anything, we continue to throw more results into Asia.

We have appointed a new CEO of our Asian business, Owen Thomas and it's a major focus area for us.

I don't think there's any trend there.

I think it's just a blip, a change from one quarter to another.

Banking really is the main driver.

Okay.

So it wasn't anything -- none of the write-downs you guys had reported were in that--?

No.

In that segment this quarter?

It was all client driven?

And then I guess moving over to the IB pipeline you have more or less hinted that this environment was pretty tough in terms of deals getting executed.

I don't recall you giving any type of pipeline disclosures.

Do you have those available.

The overall investment pipeline seems to be down about 35% from this time last year, right.

We are obviously increasing market share in that.

So our pipeline itself remains healthy so -- and strategics are coming in.

I think it's very early at this stage in the year to know how that's going to play out.

But we don't feel uncomfortable about our investment banking pipeline, Bill.

Okay.

And then lastly, I guess going back to the deposit program, there's obviously a lot of concerns in the market place as people kind of build these businesses out, particularly in this environment with housing prices going down.

Can you give us a sense as to what you're adding to the portfolio there on the loan side as you are building out that deposit base?

You mean in GWM?

Yes.

The retail business.

We just do high-end mortgage business on a very heavily LTV basis.

We have no issues there at all.

This is part of our affluent management program.

So huge is the answer, Bill.

Okay.

Thanks.

Our next question comes from the line of Michael Hecht with Banc of America.

Go ahead.

Hey, Colm.

How are you doing.

Hey, Mike.

I'm well, and you?

I'm pretty good, thanks.

Question, there's been some talk and focus on the repo finance markets and I think obviously the feds new facility takes some of the risk there off the table.

Can you talk a little about any risks or challenges you guys are seeing in the repo area and then maybe give us some color on the duration, of your repo maturities today?

It seems like when I look at your balance sheet over the last two, three years, you guys have been reducing your reliance on repo and much lower than aI lot of your peers.

That's fair.

If we just talk about liquidity first, we have spoken about our liquidity itself but one of the tenets of our liquidity is to look at the term nature of our financing books.

So we have extended like the others.

The average tenure on that financing is 34 days.

The collateral is very liquid, right, and so on.

So away from that, that's Morgan Stanley.

In terms of the market, the market for collateral seems to be normalizing.

The fed has clearly helped, right?

So -- but, it's something that was well within our stress scenarios.

Okay.

That's great.

And I'm sorry if I missed this but did you give an update on where your level three assets stood at the end of the quarter versus last quarter?

I think they were like $74 billion or 7% of total assets?

I did not, but you want one.

Would you like to?

No, I'm very comfortable to.

We're still at 7%.

Still at 7%?

Yes.

So with assets up -- the actual number would just be up a little bit.

That's the way math works.

I mean, again, you are not going to shoot me for $40 billion or $1 trillion plus balance sheet, are you?

No.

No.

Any big shifts in terms of the components of the change, is it more shift from level two to level three because of spread widening during the period or?

Yes, still going through that process at the moment, but, I would suspect what you have in a market like this is with lack of observability of prices, you will have more of that drip, and you'll probably have more of your hedges as a result of that being reflected in your level three.

Okay.

No, that's fair enough.

And then can we come back to the results in equities which seemed pretty strong and it seemed like from your remarks it was kind of across of the board, PB record, quant strategy had a good quarter.

Any other color there?

And then you said prime brokers was a record.

How about the balances?

Were the balances up quarter over quarter?

How about this for flash, Michael, and we obviously had some pricing power as indeed the whole industry did, what I will say about equity, actually there's no single story across all of our business lines in equity or major business lines of equity, we had very strong quarters and that's, a lot of that is the investment paying off for us, investing in the likes of derivatives clearly in our delta one cash customer businesses, we had increased activities, we had better bid offer and, again, that's the strength of our franchise or any strong customer franchise.

Okay.

That's great.

And then the comp ratio this quarter, 49%, more like 47%.

That's right.

Excluding severance, which I guess despite the revenue declines, year-over-year, you are lower than the 48% a year ago.

How should we kind of think about that and I know the outlook will depend on how revenues come in, but just any thinking about how we should think about comp ratio this year?

Well, at the moment it's the old story, we are looking to give our best return we can to our shareholders.

We are looking to preserve the enterprise value but a major dynamic this year will be the competitive pressures.

Right.

Okay.

And then I guess head count down about 2%.

Any thoughts on where we can expect that to trend the rest of the year?

I mean obviously lots of--?

I think a lot of it is depending on what will happen with the markets and the degree of reparation within the markets, particularly on certain parts of these distribution models.

So we will be focused intently on this.

And we are looking very much at -- as I said to you, allocation of resources.

As soon as we get more clarity, I think we will be able to give you more clarity on where we are going, yes?

Okay.

That's fair enough.

Last question, just on the asset management business, the results there are obviously impacted by the marks that you saw, but if I look at the core fee traction, the core fees, the asset management fees down 14%, quarter over quarter, your assets fell about 3% and there's definitely a mix shift towards money funds going on so I guess that's part of it.

It still seemed a little bit outsized.

Was that just mix of incentive fees versus core fees that are both reported within that bucket?

It's two, one the market and the move to money markets, two os the performance fees, clearly, right?

Yes.

Which we are not benefiting from, from the investments we made.

But these things are short-term, cyclical.

We expect, as I said, we feel very comfortable about the underlying trend of our asset management business.

Is there seasonality this quarter Q1, versus Q4, that the incentive fees would typically be heavier in Q4?

Not particularly.

Okay.

Great.

Thanks a lot.

We have time for one more caller, and that is Jeff Harte with Sandler O'Neill.

When we think about the operating environment, kind of looking back at the last quarter and then looking forward, I mean in the first quarter, there were great trading volumes across a whole bunch of different products and asset classes.

How should we think of the potential for that to continue going forward against the backdrop of what seems to be a slowing economy and not a whole lot of investment banking activity levels?

It would seem some of those fundamental underliers would suggest some of the trading activity level we have seen may not be normally sustainable.

Well, I think there are a few dynamics at work.

I mean, one is we have clearly had liquidity coming through the system which will help.

Two is, you may not get the same degree of trading volume but you are getting increasing participants in the market, particularly in terms of (inaudible) of new markets and so on.

And then finally, I suspect that there will be some reduction in competitors.

We have a capital leader makeup that we can make in some of the markets where we can extend them.

So I'm not unduly concerned about that, to be honest.

I think the secular trends are towards growth of capital markets, increased activity, and so on.

Can you talk a little bit about risk appetites that you are seeing in some international markets relative to domestic?

I'm used to seeing what's going on domestically where people are often risk averse.

To what extent is that spreading through other parts of the globe, do you think?

I think within the credit markets, it's pretty much a global phenomena, right?

I think away from that, we are seeing good risk appetite in liquid products and the equity markets still seem to be pretty vibrant.

So, I think that's the way I would characterize it.

Okay.

Thank you.

Thank you very much.

Well, thank you very much, everybody.

I hope to see you all soon.

Thank you.

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

That does conclude the presentation.

You may disconnect.

Have a wonderful day.