摩根士丹利 (MS) 2009 Q4 法說會逐字稿

Welcome to the Morgan Stanley conference call.

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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 for a period of seven days.

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 risk and uncertainties that may affect the future results of Morgan Stanley, please see Morgan Stanley's annual report on Form 10-K for the fiscal year ended November 30th, 2008 annual report on Form 10-K, Morgan Stanley's 2009 quarterly reports on Form 10-Q and Morgan Stanley's current reports on Form 8-K.

The presentation may also include certain nonGAAP financial measures.

The reconciliation of such measures to the comparable GAAP figures are included in Morgan Stanley's annual report on Form 10-K, Morgan Stanley's 2009 quarterly reports on Form 10-Q and Morgan Stanley's 2009 current reports on Form 8-K which are available on Morgan Stanley's website, www.morganstanley.com.

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At this time I would like to turn the program over to James Gorman for today's call.

Thank you, Operator.

Good morning, everybody.

I'm delighted to be here.

I wanted to join you for our first call under my watch as CEO and I'm here with Colm Kelleher and Ruth Porat and the rest of the team.

Before we review our financial results, I'd like to do a couple of things, review our accomplishments and provide a brief outlook.

Looking back, 2009 was a year of transition in which the Firm achieved a number of milestones.

We maintained a prudent balance sheet and held appropriate levels of capital and leverage while reducing our troubled exposures.

We were among the first bank to repurchase TARP and the associated warrant.

We raised $6.9 billion in common equity and sold our remaining interest in MSCI enhancing our capital structure.

We issued a total of $13 billion in unguaranteed senior unsecured debt including a fourth quarter EUR1.5 billion raise which was our first non-US dollar unguaranteed issuance of 2009.

We made significant progress on our global hiring plan which is on track.

The new hires are primarily in our sales and trading businesses, further building out our footprint and expanding our client franchise.

We closed the Morgan Stanley Smith Barney joint venture earlier than expected creating the industry leader with more than 18,000 financial advisors and over $1.5 trillion in client assets.

We've made progress towards optimizing Asset Management.

The sale of our retail Asset Management business to Invesco is on track to close mid-2010.

This is an important accomplishment for Asset Management as we emphasize our core institutional strengths while establishing a stake in Invesco.

We entered into a strategic outsourcing partnership with State Street for our (inaudible) business, which enables us to take advantage of their scale and ensures we will remain well positioned to deliver best-in-class service to our investment teams and to our clients.

The assets and liabilities related to Crescent that were the subject of approximately $2 billion of remaining third-party financing with a single lender were conveyed to that lender in November.

In addition we have a number of new funds that are well positioned to invest opportunistically.

Turning next, our partnership with MUFG continues to gain strength.

We announced an MOU to integrate our Securities operation in Japan, which is on track to be completed later this year.

Morgan Stanley and Bank of Tokyo and Mitsubishi UFJ in partnership now lend to over 900 corporations, elevating us to the top five lenders in the Americas.

Together we committed on an aggregated basis $3.2 billion to NBC Universal, largest amount of any bank and critical to Comcast acquiring control.

Looking forward, I believe 2010 will be a year of execution for Morgan Stanley.

We have the best Management team in place to execute the Firm's strategy to be number one, two or three in all of our businesses.

The team includes, as you know, one Colm Kelleher, Paul Taubman, co-Presidents of Institutional Securities, Charlie Johnston as President of Morgan Stanley Smith Barney, Greg Fleming who is due to arrive here in early February as President of Morgan Stanley Investment Management, Walid Chammah, Chairman and CEO of Morgan Stanley International.

In addition Ruth Porat who is joining us as CFO, formerly from Investment Banking, Ken deRegt as Chief Risk Officer maintains that role, Tom Nides becomes our Chief Operating Officer, and Jim Rosenthal is the Chief Operating Officer of Morgan Stanley Smith Barney in addition to being Head of Corporate Strategy for the Firm, and finally Gary Lynch remains as our General Counselor or Chief Legal Officer.

I'm very pleased to have elevated several key Executives and it's important that Charles, Ken and Gary who have proven track records continued in their roles.

Together this extremely seasoned team has on average approximately 25 years of experience in the industry.

The group has complimentary skills, and has been tested through one of the most difficult times for our industry.

I'm bullish on Morgan Stanley, as I believe we're well positioned to capitalize on the recovery in the global capital markets.

Now I'll turn it over to Colm my colleague, but before I do so I want to just publicly thank Colm for his contributions as our CFO in an extraordinarily difficult environment, I think that he has done an extraordinary job.

So Colm with that note, let me turn it over to you for financial results and I'll be available with Colm for any Q&A that might be pertinent at the end of this meeting.

Thank you, James.

I'm pleased to have my colleague Ruth Porat here with me this morning.

Ruth and I have been working closely together to ensure a smooth transition of the CFO function.

Beginning with our consolidated results on Page two in our financial supplement, for the quarter ended December 31 Morgan Stanley generated net income of $770 million and diluted earnings per share from continuing operations of $0.14.

Negative revenue of approximately $600 million from narrowing of the Firm's debt-related credit spreads lowered earnings per share by approximately $0.27.

Firm-wide revenues were $6.8 billion, and non-interest expenses were $6.2 billion for the quarter.

The full year compensation ratio excluding the negative impact of the improvement in Morgan Stanley's debt-related credit spreads was 50%.

This ratio reflects the inclusion of seven months of Morgan Stanley Smith Barney which carries with it an industry standard higher ratio.

We considered the impact of the UK bonus tax on 2009 compensation levels, and since this legislation has not been finalized we see this largely as a 2010 event, probable timing between -- being between the first and second quarter of this year.

Having said that, the costs of this tax will be shared significantly by employees globally.

While non-compensation expenses increased 17% sequentially, full year non-compensation expenses declined 10% from a year ago, illustrating the success of our cost saving initiatives.

We exceeded our annual cost savings target of $800 million by over 30%.

Excluding expenses related to Smith Barney, auction rate securities and goodwill impairment from both years our recurring none compensation expense and savings totaled over $1.1 billion.

The effective tax rate for the quarter was a benefit of 11% reflective of the geographic mix of earnings, domestic tax credits and the utilization of state net operating losses.

Now we turn to Page three in the financial supplement.

Total assets at December 31 increased slightly to $773 billion of which $163 billion is our liquidity pool.

We continued to keep a significant portion of our balance sheet in cash and equivalents.

Our capital ratios demonstrate the strength of our balance sheet.

While we are still finalizing our calculations, we believe under Basel I our Tier 1 ratio will be 15.4% and Tier 1 common ratio will be 8.2%.

Risk weighted assets are expected to be approximately $301 billion at December 31.

Level 3 assets were in the mid-$40 billion range at December 31 representing approximately 6% of total assets.

Now if we turn specifically to the businesses.

Starting with Institutional Securities details on Page five of the supplement.

Revenues of $3.2 billion including approximately $600 million negative impact from tightening credit spreads as discussed earlier.

Non-interest expenses were $2.8 billion in the fourth quarter of 2009, down 25% from the third quarter on lower compensation.

Excluding the negative impact of the improvement in Morgan Stanley's debt-related credit spreads, the compensation ratio in this business was 39% for the quarter and 40% for the year.

This business reported a pretax profit of $464 million.

Specifically turning to Investment Banking on Page six.

Our franchise continued to deliver very strong performance for the quarter and the year, despite volatile markets and economic uncertainty.

We were Number ONe in announced and completed global M&A and we secured the top spot in both the Americas and Europe.

In the quarter we led Comcast $14.4 billion joint venture with General Electric.

And for the year we advised in eight of the top 10 announced transactions, more than any other Firm.

We continue to act as a trusted advisor to the US and European governments and corporates with respect to important government-sponsored reorganizations.

Capital markets remain very active and were up from third quarter levels and we continue to see a broadening across products, industries and regions.

We led significant deals in the quarter including the IPO's of China Longyuan Electric and various analytics and Warner Chilcott $3.2 billion leverage financing to acquire P&G's drug unit.

Fourth quarter investment banking revenues of $1.5 billion were up 42% sequentially.

Advisory revenues increased 90% up across all regions on completed M&A activity.

While announced M&A volumes increased significantly in the fourth quarter of 2009, they do remain on a par with 2004 levels.

Equity underwriting revenues in the fourth quarter of 2009 were $627 million, our highest disclosed quarterly revenue.

Activity was very strong across all regions with substantial increases in Asia and Europe.

Fixed income underwriting revenues increased 7% from the third quarter and higher loan syndication fees and high yield bond activity.

Turning to equity sales and trading.

Equity sales and trading revenues of $722 million were negatively impacted by $221 million from the narrowing of debt-related credit spreads on Firm-issued structured notes.

Morgan Stanley was named the Top Prime Broker for funds with more than $1 billion in assets by Institutional Investor for 2009.

Prime brokerage continues to recapture market share, reflected by a 10% increase this quarter in average client balances.

However, a combination of seasonal and market factors, including lower hedge fund activity, resulted in lower revenues, down 20% sequentially.

Derivatives reported lower revenues driven by lower activity in the second half of the quarter.

Cash equity revenues were flat sequentially as higher commissions from increased client flow were offset by lower trading revenues.

Turning to fixed income and other sales and trading.

Fixed income and other sales and trading revenues of $963 million included losses of $380 million from the narrowing of credit spreads on Firm-issued structured notes.

As mentioned earlier, we are positioning this business for growth through our global hiring plan, integrated analytics and new Management, and this will take time.

Interest rate credit and currency combined revenues were down significantly from last quarter.

Revenues were lower across all products due to seasonality, lack of market volatility and tighter spreads.

On a full year basis, IRCC revenues rebounded from 2008 driven by a strong performance in interest rates and credit trading.

Commodities revenues were lower from the third quarter of 2009 driven by range bound prices and lower volatility.

Other revenues of $277 million include spread tightening and valuation gains in our corporate lending business.

Turning to value at risk.

Total average trading and non-trading VaR increased to $187 million from $168 million primarily reflecting a modest increase in fixed income and equity trading risk.

However, methodologies must be examined when comparing VaR measures across the industry as they are not standardized.

Morgan Stanley uses a four year market data series, therefore our VaR has a tendency to maintain higher volatility assumptions with a modestly increasing trend on the current market conditions.

If you now turn to Page eight of the supplement in our Global Wealth Management business.

This quarter marked the second full quarter of consolidated Morgan Stanley Smith Barney results.

Revenues were up 4% sequentially to $3.1 billion on higher fee-based revenues and were in line with the overall retail environment.

Non-interest expenses were $2.9 billion and included $146 million of integration costs.

Full year Morgan Stanley Smith Barney integration costs were $280 million.

For 2010 we expect integration costs of approximately $450 million, mostly relating to the rationalization of real estate and IT.

Full year closing costs related to the joint venture were $221 million, and mostly related to FA replacement awards.

The business reported a pretax profit of $231 million and pretax margin of 7%.

If we exclude the JV-related integration costs in the quarter, PBT would have been $377 million and PBT margin would have been 12%.

On Page nine you can see the [core fee] productivity metrics of the business.

Total client assets increased 2% to $1.6 trillion on higher market levels, the number of FA's remain relatively unchanged, 18,135.

FA turnover within our top two quintiles remain at historic lows at under 1%.

Attrition primarily within the lower quintiles has substantially declined at the closing of the joint venture.

Net new asset outflows of $4.7 billion continue to reflect the lag effect of financial advisors that left Smith Barney prior to the JV closing.

This magnitude of outflows has declined substantially and we expect this trend to continue.

Total Firm-wide deposits at quarter end were $62 billion.

Deposits in our bank deposit program increased to $112 billion, of which $54 billion is held by Morgan Stanley banks.

If you now turn to Page 10 of the supplement on Asset Management, The financial results related to Crescent subsequent to the data consolidation and the Retail Asset Management business being sold to Invesco have been reclassified to discontinued operations in all periods presented.

In the fourth quarter discontinued operations also included an accounting gain related to the Crescent conveyance.

The continuing operations of Asset Management recorded a pretax loss of $55 million as profits from the core business were more than offset by losses in merchant banking.

This was the fourth consecutive profitable quarter for the core business.

Core Asset Management revenues of $357 million declined 15% sequentially on lower net gains on alternative investments and lower performance fees, which were partially offset by higher asset management fees.

Merchant banking revenues of of $153 million were up from the third quarter of 2009 driven by gains in principle investments.

Asset Management noninterest expenses of $565 million declined slightly from the third quarter of 2009 on lower compensation expenses.

If you turn to Page 11 of the supplement, you can see the assets under management in asset flow data.

This data has been restated and excludes assets that will be transferred to Invesco upon the deal close.

As such, total under-- assets under management are $283 billion, up 6% sequentially on asset inflows and continued positive momentum in the equity markets.

Total net inflows were $10.3 billion and the core business generated positive flows for the first time since the second quarter of 2008.

Inflows were mostly directed to money market funds.

Fixed income flows were positive for the second consecutive quarter.

Equity flows were slightly negative, however we did see some significant mandate wins as performance continued to improve at 77% of equity strategies in the continued business performing above the Morning Star peer median for the three-year time period.

If we turn to Page 14 of the financial supplement to look at our Firm-wide real estate exposures.

Our real estate gross asset exposure as reflected on the statement of financial condition was $2.2 billion at the end of the quarter, down from $4.4 billion at the end of September.

Including $1.5 billion of contractual commitments and other arrangements with respect to our real estate investments, our total exposure would be $3.7 billion, down from $6 billion at the end of September.

This exposure excludes assets and investments for the benefit of certain deferred employee compensation of co-investment plans.

Now finally a few words on the outlook.

Global economic conditions are improving and the financial markets are healing.

The global economy likely troughed in 2009 and is recovering.

We expect short-term rates to remain low for the time being and expect a tightening of monetary conditions thereafter.

Global equity markets are reasonable healthy and open across industries and geographies.

Public credit markets are functioning normally, although bank lending remains slow.

Global M&A activity is improving as funding becomes available and corporate confidence recovers.

IPO activity has returned to a more normalized level and the momentum in completed offerings and file backlogs are encouraging for 2010.

We do believe that real estate markets continue to be challenged and rising foreclosures may threaten prices and the availability of credit.

We expect the industries cyclical and structural changes in-- to continue for some time.

This industry is on the path to reregulation and we expect significantly higher capital and liquidity requirements.

We are well positioned for this although concerned about the apparent lack of international coordination.

Industry consolidation, better pricing of risk and stronger growth in emerging markets present opportunities to gain market share and maintain spreads globally.

We at Morgan Stanley remain focused on long-term secular growth opportunities in the capital markets and we are leveraging our global brand and client franchises to grow our share of the markets.

And with that I would like to thank you and invite you to ask questions.

(Operator instructions).

The first question will be from Mike Carrier of Deutsche Bank.

Thanks, guys.

Just a -- first a question on the trading side of the business, you accessed CVA, you had some other benefits last quarter from some spreads tightening within the derivative business and FIC.

Just curious in the current FIC results, were there any reversals in this quarter or was it just a weakness across the board on both the client side and lower volatility across the products?

Well, a CVA itself was really not much of an issue at all this quarter.

Our spreads have normalized, Mike.

And also I'm somewhat skeptical about trying to pull CVA out of business because I don't believe you can run a derivatives business without CVAB and integrated (inaudible), although we do disclose it in the Q.

Broadly the story was one of subdued activity for us this quarter, as you know spreads didn't do too much during the quarter itself, and I think the larger the footprint you have, the more you will benefit and I think what just you saw there was reduced client activity in our case.

There was no one story that I can point to, other than reduced activity.

Okay.

And then just on the comp side, you gave the adjusted numbers in the Institutional business, like 39% for the quarter, 40% for the year.

While I understand with more equity vesting over time, that ratio could trend lower at least for the next one to two years before we get to a full run rate.

But I guess when we're looking out for 2010, 2011, and this is not just for Morgan Stanley but what you're seeing for the industry, is a 40% comp ratio going to be more like the new norm?

Obviously it depends on activity levels and competitive environments, but it's obviously down significantly from the 50% that we're used to in the past.

Look, I mean, generally I've said on a number of cases I think comp generally will come down in the industry but we are in an environment where forecasting compensation is difficult for a number of reasons, including market pressures and regulatory oversight.

Having said that, we have to pay our people competitively and not only retain but also attract the top talent.

The market is still competitive itself but obviously the structure of compensation is changing and on that measure Morgan Stanley was the first to introduce claw-back, we've strengthened those provisions and we give a high degree of deferred compensation to all of our employees, the operating committee specifically getting a very high level at 75% and I think that that is a trend that you will see continue.

Okay.

And then just a final one, given the updated Basel guidance and taking into consideration that we're not yet on Basel II, some of the banks have been giving some estimates in terms of the potential impact to the regulatory capital ratios and just curious your take on that?

And then probably more importantly, when do you expect -- it is still like a first half 2010 to get guidance from the US-- the regulators on capital requirements for the US firm?

Look, I think that Chairman Bernanke said it best that Basel was a journey, not a destination.

And what you've seen is proposals come forward that are now subject to the impact of QIS studies.

We have been very clear in the past about expecting and forecasting what we consider to be a big risk, which is the regulatory changes coming forward and increased capital.

We are looking at all of the alternatives and modeling those appropriately.

We believe that we've positioned this Firm with our capital ratios the way we changed our balance sheet to be able to adapt to those.

Nothing that I saw on December the 17th surprised me that came out of the BCBS suggestions but obviously the QIS, the Quality of Impact of those needs to be worked through and you can -- you can have quite significant book ends at the way that you interpret that and it will take some time to work through this.

Okay.

Thanks a lot.

Your next question will come from Howard Chen of Credit Suisse.

Good morning, everyone.

Hello, Howard.

Maybe one for James to begin.

James we've heard a lot about the long-term goals for Institutional Securities, Global Wealth Management, but wondering if you'd just share some of your thoughts on plans for the Asset Management business and maybe long-term timeline for getting there?

There's a five or six point plan, Howard that we're working on.

The first was to integrate our fund of funds business which we did by merging Graystone and AIP, which is about a $16 billion business which we expect can be very significantly larger than that given our distribution capability.

The second was to sell our retail Asset Management businesses but to keep an equity stake option, which we did with the Invesco transaction.

The third is to restructure our Institutional Asset Management business which we're doing with the outsourcing of State Street and now hiring portfolio managers and generally focusing our attention on the Institutional liquidity space.

The fourth is to look at all of the hedge fund stakes that we have and that's something that Greg Fleming is now coming in to run.

Core Asset Management and merchant banking we'll be looking at, includes stakes across how we're managing FrontPoint and our various stakes in Avenue and Lansdowne Traksys.

And then finally to work with our Merchant Banking side both in rolling out more funds across private equity, we have a mes fund we've just raised, we're looking at the stress fund, potentially commodities.

And then on the real estate side we have MSREF IV which is over a $5 billion fund waiting to invest.

Obviously we've had a traumatic couple of years in terms of initially fund performance and then in terms of actual investments in the merchant bank and problems in our [CIV] portfolio.

We believe the vast majority of that is behind us, with Crescent being an important sort of chapter closed.

And we're looking forward to Greg's arrival and prosecuting that strategy.

Great.

Thanks for the update.

And then Colm just on the numbers, on the trading businesses clearly as you spoke to are very muted fourth quarter activity levels but there's also a few moving parts with the human capital installation and the allocation of unallocated capital in the business.

So as we try to just gauge a bit of a run rate or progress report on getting to this top one to three player in 2010 of year of execution, can we just get an update or early thoughts on kind of how the year has begun?

Are you pleased with just -- are you seeing the same seasonal uplift as you saw seasonal downdraft in the fourth quarter?

Well look I mean it's early days but we've had a pretty buoyant January so far in the same way as we had a very depressed December.

So I would hope it would last like that, but I suspect it won't but-- so we feel pretty good about that.

In terms of getting to one or three, I think what you have to do is not going give you guidance on numbers but you have to look at what our gap to leader is across our competitors in these sectors and see what our aspirations have been which would plot that.

And thirdly you keep talking about unallocated capital, not you specifically but everybody, this is part of what we were talk -- we call it buffer capital these days because our expectations are that that capital will be absorbed in the light of what's happening with regulatory change.

Okay, thanks, Colm, and point well taken.

And just on the muted client activity I guess some of more transaction-driven expense items that I would think like brokerage and clearing appeared to be a bit higher in the year end quarter, am I wrong to think that?

And-- or if not, what's driving that?

No, it's up slightly.

We definitely have some activity going up there.

I mean clearly when we look at our non-comp expenses the way we've been managing them, the one variable that you can't control too much is brokerage and clearing because that is dependent on client activity and so on.

My view is if that goes up, that's probably because we've seen a pick up in activity in client revenues so actually it nets itself out but away from that we've made significant inroads in getting the non-comps down.

Okay.

And then final one for me, could you just provide a bit more color on the accounting writeup that you mentioned related to Crescent this quarter?

And then post the conveyance, what remains to be resolved with Crescent if anything?

Sure.

Thanks.

Yes, I mean it's a relatively small writeup.

In fact is there if you look at Page 13 of the financial supplement you'll see a $200 million line, it is the bulk of that.

If you remember we took impairment charges and then as we moved the portfolio across to the bank we provide the secured finance, the nonrecourse financing, we were able to write that back.

In terms of what we got left is relatively small, it's primarily related to our invest-- it is one very small property, two very small properties which we've taken impairment charges on them, not material.

And in addition to that, we do have a keep well agreement, more of a guarantee than a line of credit, it's meant to cover losses of certain defined obligations.

It is on our exposure format although still operation, we don't believe there's a lot of risk in that.

Thanks so much.

(Operator instructions).

Our next question will come from Guy Moszkowski with Banc of America.

Good morning.

I just wanted to try and follow up a little bit on the, the unallocated capital issue.

Given what we know so far about Basel III, shouldn't we expect that some of that will be allocated back into some of the lines of business, especially Institutional?

You're small in terms of your allocated capital relative to some of your peers, and obviously you are rebuilding the footprint there.

Well, first of all, Guy, we're one of only a few institutions that actually show our economic capital model in all fairness.

So, so given that we do that, I'm not sure we're comparing light for light but yes, I totally agree with you, the bulk of our capital will be absorbed in the Institutional Securities business in the light of the BCBS recommendations we saw on December the 17th and that's why I refer to it as buffer capital.

There's no doubt that we could not operate a business with $17 billion dedicated to ISG unless people thought there was a significant amount of capital behind that.

And I think that the regulatory changes will take -- will force that issue.

And do you think that we should expect some of that capital to roll into the business over the course of this year, or is that really still in abeyance until you know more about BIS?

I think it's a function of what's happening.

As you know there are a number of initiatives going on, the securitization framework which is now law, there was the Basel II/Basel I conversion for us in the other firm, which will become active as well.

And then rolling forward, you have the Basel I to Basel II conversion and what you're referring to is Basel III.

So I think there are a number of initiatives in here that will actually start soaking up that buffer capital.

Fair enough.

If I can just turn the conversation to the Global Wealth Management, Smith Barney integration, can you just give us an update on time period and estimates of when we might expect to see those further integration costs realized, and what we should be thinking of in terms of timing of the IT and real estate integration?

Guy, it's James here, I'll address it.

We're obviously through a very -- we're in the middle of a very complex integration program.

The first most immediate concerns, we're getting the Management structure right, harmonizing the compensation programs and harmonizing the pricing differences.

And all of that is now in place, we've essentially made our technology decisions and we are now planning the roll-out of the new technology integration in addition to closing some of the excess real estate that we have.

So we have said for some time that these items will all come to a head full year 2011 and some of the charges expensed at the end of -- through 2012.

So it's kind of a two to three-year program essentially from when we closed and we're confident as we've said of achieving our 20% pretax margin targets up from obviously where we are today.

Great.

And then just a final question on GWM, can you just help us reconcile the minority interest expense for the joint venture to the net profit shown above that line?

It sure seems like a lot more than 51% -- or rather a lot more than 49%.

No.

I think it -- well, it's because there's a lot of reconciling items going back and forth in terms of the normalization.

It's the costs allocated more than anything else, we can give you specific details later under the severance cost in there which is probably what's SKUing it but that's really what's happening, Guy.

And going for as we model should-- is it fair to think of a 51/49 split or is there still a potential for a lot of these items?

No, I think it's pretty fair to think of a 51/49 split.

You won't get much noise after this.

Great, thank you.

The next question will be from Glenn Schorr of UBS.

Thanks, hi, guys.

Hi, Glenn.

The-- let's do a quick follow-up on the non-comp first.

So part of the pickup in the quarter was the merger-related charges, I'm sure.

But I hear you loud and clear on the uncontrollable brokerage and clearing, but all the line items were up, for one, and two the brokerage and clearing was up a lot but the revenues weren't and activity was down.

So I'm being nitpicky but I'm trying to set the stage for what I think the Company can earn going forward, so just want to understand the mechanics.

Well, we had -- look, we had some occupancy write-offs in GWM.

There was $146 million in JV integration costs.

There's some type of professional service fees there.

However we reduced our recurring non-comp expenses by approximately $1.1 billion for the year.

So if you actually take out the normalization and even adjust 2008 for auction rate securities and all the goodwill impairments and so on, and compare like for like, what you have got is a true rate is $1.1 billion value.

And the-- but in your mind the true rate on the quarter is the two or 47 less the merger and integration?

Yes.

Okay.

That's what I was trying to get at.

Sorry.

No worries.

I don't think you disclosed it but I'll take a shot, but head count year end for the Institutional business this year versus last?

No we don't disclose it.

Nice try.

In Wealth Management you -- you've made the comment about the lowest turnover in a long time and the top-- overall and the top two quintiles.

Just curious for a little color, how much do you think of it's seasonal, how much of it do you think is the fact that everybody except one of the big guys has lockups and then just maybe anything on expectations on it keeping this low?

Oh, I think, Glenn, it's James, we went through a frenetic period as an industry over the last couple of years in terms of deals and dislocation and then ultimately mergers, so some of it is exactly as you described it, lockup and people sitting on previous deals but I truly believe the industry is moving toward a more rational recruiting model.

There is relatively low recruiting activity, probably the lowest that I've seen in my career of ten years of overseeing these kinds of businesses.

And the lower turnover, I believe, is for real.

I cannot predict five years out from now but I think for the next couple of years that we'll see- it should stay low and relatively stable.

Wow, that will be a breath of fresh air.

Final question, maybe Colm, on the -- on the "rebuild", I think I -- we have a pretty clear -- and some visibility on what you've done and what's going on in equities and prime brokerage on the banking side, I could use a little more color on the fixed side.

And maybe-- and I'm not looking for head for head, obviously, I'm looking for more of where you think there's market share but where is the largest market share potential because you mentioned gap to leader and what-- I basically-- I'm looking for a redefinition of what you do and don't want to be because I feel like the whole industry got in trouble from gap to leader analysis.

And I know that's not what is driving the rebuild, because I think that there are some real constraints and (inaudible) process around [ray rock] and stuff like that?

Yes, well we know we don't want to do off floor proprietary trading, and you know that, Glenn, right?

Yes.

So what (inaudible) about is having a business where trading and sales work together to optimize the footprint.

So if we look specifically at fixed income, which is what you want to know about, we actually have a business where we believe we are in the top three, which is the credit trading business.

The revenues there are very sound and they've been a significant improvement over last year.

The interesting thing is that the clients by and large are the same clients from the other business where we underperform, so what we have to do is sort of join those dots up.

And interest rates while it's head-to-head, we have very productive salesmen and traders we just don't have the footprint from the client point of view and the salesmen and traders themselves, and that's what we're working on and that's what part of this hiring spree has been.

The same is true for foreign exchange as well.

So we have productivity for employee but we don't actually have the footprint and frankly the breadth of talent for various reasons that where there, (inaudible) working it.

Now I was talking specifically about commodities, I actually think commodities is one of the two best businesses around, it's a very good business.

We don't think that that business is in any way impaired it's doing well, but that business needs volatility and client transactions to support it.

And as you know, for various reasons the commodities market has been somewhat subdued from a client point of view for the last few quarters.

You tend to get bumper quarters every now and then because of extreme volatility and pricing that draws on it.

So what you need to look at really is within our fixed income business I am very focused or will be going forward on our interest rate and foreign exchange businesses and the subparts thereof, if that helps.

It does help.

And just the last follow-up on -- on the rebuild because I think you brought it up perfectly is same clients are participating that you have this top three credit business but a lot of times different person in each asset class at the client.

So you do need the higher end on the sales and distribution side.

I guess tying into Mike's earlier question on comp is, can you rebuild, have a lower absolute and relative comp ratio and manage that process all at once?

Well, I think -- I think the answer to that is you can, because Morgan Stanley is clearly a winner here in terms of being an integrated global bank providing a range of services.

There's a huge amount flowing to us from clients who want to have Morgan Stanley as a credible counterparty but what they want to see is those dots joined up, i.e.

delivering the firm to the client.

And you correctly state that the credit portfolio manager in a long earning fund may be different from the rates manager and so on, so what we have to have is a lot more discipline in the way we approach this.

Now remember there was a time when we were dominant in these markets with our client coverage and by the way you and I can think of two firms that not that long ago have slipped quite significantly in their coverage of clients and they've made it back up.

I think the quality of the Morgan Stanley brand name and the quality of people we have will allow us to attract people to deal with this.

Excellent, all right, thanks very much.

Your next question will be from Roger Freeman of Barclays Capital.

Hi, good morning.

Hi, Roger.

Hi.

I guess I'll start out with FIC.

Specifically in commodities, a couple of questions there, one is-- I mean can you maybe just talk a little bit more about the market conditions?

I know you said that sort of volatility was down, prices were range bound, but I think one, as I understand it, one business has been important for you is sort of the physical business given that you're I think the largest owner of storage outside of commercials and I'm wondering how the economics of that have sort of progressed over the course of the year?

And I also notice that I think there was a write-down or an impairment of an alternative energy business that was actually in discontinued ops, but I wonder if there's anything tied in there?

And the second sort of unrelated, sort of related question I guess is what do you think about the impact of the new CFTC rules proposed last week with respect to dealer hedge exemptions and how much of an impact that might have on your client business and commodities:?

Well, you've asked four questions there, Roger.

Yes, sorry, stuffed them all in.

The write-down impairment had no standing or influence whatsoever.

Fourth quarter 2009 revenues were down significantly from last quarter, the overhang of inventory in the late cold snap basically created an oversupply in inventory that reduced volatility and dampened opportunities, and as you know to a large extent commodities can be weather or event related, right?

So the market itself remained range bound for most of the quarter and as a result customer flow was subdued.

So I think it was that.

You do need that volatility or events to happen to drive it.

In terms of the regulations coming forward it's just too early to say.

I mean, I cannot handicap those.

We're looking at them very closely.

I see a whole range of interpretations from analysts, so I just really wouldn't want to comment on them at this stage.

Okay.

Fair enough.

And then -- so I -- with respect to head count, I think you've -- you mentioned I think there was a quote this morning from an interview that you've hired like 350 of the 400 folks in Institutional Securities, I guess my question is what percentage of those people have actually started that have completed their (inaudible)?

I think -- quite a lot have started or are about to start now.

So what I think you should be thinking about is that certainly by the first quarter of 2010 we're going to be pretty much up to speed on most of those people.

Okay.

That's helpful.

And then also following up on Basel III, obviously a lot of moving pieces there but I guess the broad question from my perspective would be, like how do you see these proposals, which in my opinion look pretty draconian, how do you see them pushing out any capital plans that you might have with respect to your general overcapitalization, i.e.

that it's fair to say this pushes back any thinking about stock buy backs or anything down the road?

Well I think without upsetting my regulators I'd like to make sure that we get the full feedback from what the QIS studies will be on this.

And I do think we're probably going to end up in a different place, and I do think it's going to take some time to work this out.

You and I have spoken a lot about what I thought the regulatory changes would be and I think that on a relative basis we're well positioned, so I think this is less a Morgan Stanley issue than an industry issue and I think that's what the regulators are looking at.

Got it.

Okay.

And then my last question, just not to nitpick around Crescent, but could you just explain how you were actually able to get a $200 million gain?

Were you having to accrue for the difference between the equity value and the value of the loan?

Just remember it's not-- we weren't fair valuing Crescent, we were consolidating it.

So after reflecting all the write-downs and impairments in prior periods, the carrying value of Crescent (inaudible) were left in the amount the remaining finance outstanding and as such the conveyance of those assets being pooled satisfaction of the financing resulted in that gain.

Okay.

Got it.

Okay.

Thanks.

The next question will come from Mike Mayo with CLSA.

Good morning.

Hi, Mike.

First a follow-up for the 350 to 400 employees that -- that you've hired, how will you know if you're getting your return on investment and whether you've hired too many or if you should be hiring more?

How are you going to measure that investment?

Well, we have a number of measures and metrics and we've done this before.

I mean in the -- certainly in the '90s we did the -- we had a hiring plan and we were able to measure the effectiveness of those employees through a number of measures, whether it's just revenue per employee, which is one crude measure, you clearly look at return on assets because you want to look at the velocity of balance sheets and so on.

I think we'll be able to work that out and we have internal metrics that will allow us to do that, Mike.

And then in Wealth Management you continue to have outflows and you look for what $50 billion of inflows this year or so.

So how do we -- how do we get from outflows to inflows?

Mike, as you've probably seen, the business at Smith Barney in particular in the first half of this year had very large outflows relating to their turnover from the end of 2008 and early 2009 and that continued through the the year, we anticipated or projected expected outflows of between zero and $10 billion, we thought it would be around $5 billion.

We must be pretty good forecasters because it was negative $4.7 billion.

I expect this quarter it would be closer to flat.

It's, it's just a function of the runoff of the assets which take about six months after a financial advisor leaves and that's netted against the inflows.

We said we've got a target of $50 billion for 2011 not for 2010, I expect us to be positive for 2010 and it will grow throughout the course of the year.

The good news is that the very significant outflows for the first half of this year, which we predicted would decline dramatically, did decline dramatically and we're back to now sort of rounding our territory and obviously we expect to grow from here.

All right and then last question for you, James, just a big picture question as you take over the Firm.

What sort of risk appetite do you want to set for Morgan Stanley?

I mean at times risk was taken up and it was taken down and how do you view risk taking at Morgan Stanley over the next, say three to five years.

Yes well let's -- firstly let's just step back from it a little bit.

There's a lot of discussion, a lot of people have asked me this question, and it's presented as a binary answer, we either take risk or we don't take risk which is obviously absurd.

We are in the risk taking businesses, we have a balance sheet now about $800 billion and we currently leverage around 15, 16, 17 times, at our peak we were leveraged at 35 times, and we had a balance sheet of $1.2 trillion.

At our trough for about $600 billion and leverage of about 11 or 12 times.

So we're a leveraged institution, we take risk across currencies, emerging markets, credits, equity trading, we take risk in commodities, we take risk in our structured products group and we take risk in rates.

So we take a lot of risks, we take positional risk and we take trading risk of around the inventory that we carry and we take risk in our various capital investments in our merchant bank and seed capital.

So we are clearly in the risk business.

This is all about turning the dial and it's about not taking outside risks for particularly in complex illiquid products with little ability for ourselves to get out of these positions.

So for example, we are -- we will not be making investments in our merchant bank for mature funds on bridges we deal with Crescent, that is clearly a kind of risk which-- where we're basically open to turning the market environment in real estate.

We have closed down most of our proprietary trading positions and are working off a number of those trading desks with a couple of exceptions, we have two setup businesses we have.

We monitor the risk across all of the businesses and my view is we're in a risk taking industry, we take risks professionally, we apply our capital, we get the leverage on it.

The question is what outside risks are we going to be taking which could jeopardize our health going forward and the answer is none.

So tell me if I'm paraphrasing correctly, so less illiquid investments, less complex, less proprietary trading and less leverage?

And less outsized.

I mean go back to the subprime trade.

We will not be having a $10 billion net exposure on one trade for one group.

Okay.

All right.

Thank you.

Our final question will come from Michael Hecht of JMP Securities.

Hi guys, good morning.

Just one quick follow-up for me on just capital management and balance sheet from here.

I mean any expectation in kind of further accelerating your growth in deposits or even reducing growth leverage, particularly given concerns around Obama's kind of proposed tax levy proposal?

Well, let's talk about that for a second.

We give a pretty clear guidance on where we think leverage ratios should be, which is 5% to 7%, 14 to 20 times.

We think that that operates for us and makes sense.

In terms of the guidelines that come from Obama, we really have no-- President Obama, we really have nothing to add at this stage, but I think the balance sheet itself and the leverage is fine as it stands and is a workable proposition.

We center the balance sheet around a certain size, we are obviously carrying a significant amount of liquidity.

I think that's all we have to say on that really.

Okay.

Fair enough, thanks, guys.

Thank you.

Thank you very much, everybody.

Thank you.

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

You may now disconnect.