摩根士丹利 (MS) 2010 Q4 法說會逐字稿

Welcome to the Morgan Stanley conference call.

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

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

A replay of the call and webcast will be available through the Company's website and by phone 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 risks and uncertainties that may affect the future results of Morgan Stanley, please see Morgan Stanley's Annual Report on Form 10-K for the year ended December 31, 2009, Annual Report on Form 10-K, Morgan Stanley's quarterly reports on Form 10-Q and Morgan Stanley's 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 Morgan Stanley's Annual Report on Form 10-K, Morgan Stanley's quarterly reports on Form 10-Q, and Morgan Stanley's current reports on Form 8-K, which are available on Morgan Stanley's website, www.MorganStanley.com.

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This presentation is copyrighted and proprietary to Morgan Stanley.

At this time I would like to turn the program over to the President and Chief Executive Officer, James Gorman, for today's call.

Well, thank you, operator, for that fulsome introduction, and good morning everyone and thank you for joining us.

Before we review our financial results I would like to do two things -- review our accomplishments in 2010 overall and for each business and provide a brief outlook.

In 2010 Morgan Stanley participated in nearly every signature transaction that raised capital and helped reinvigorate the markets.

Whether it was the GM and Citi IPOs in the US, ABC in China and Petrobras in Brazil, among many others, Morgan Stanley was a skilled and trusted advisor to governments, corporations and investors as we work to restore economic growth and create new investment opportunities around the world.

In Institutional securities we finished at or near the top of the league tables in M&A, global equity and IPOs.

A great testament to the teamwork between investment banking, global capital markets and equities.

It is Morgan Stanley at our best.

We also saw marketshare improvements in our equity sales and trading business.

Clearly we faced difficult markets in 2010.

Our results reflect that more work needs to be done in some of our fixed income businesses.

While our strategy in this business remains intact, we bolstered our efforts through the following organizational changes, including Ken deRegt as global head of fixed income sales and trading, based in the US.

And as a result Keishi Hotsuki will serve as the Interim Chief Risk Officer to better align our business and geographic objectives, which will also -- which we will also do in reinforcing our efforts in fixed income.

Colm Kelleher, in addition to running sales and trading, will assume coverage of Europe, the Middle East and non-Japan Asia, and will now be based in London.

And Paul Kelleher, in addition to running global capital markets and investment banking -- I'm sorry, Paul Taubman -- will assume coverage of Latin America and Japan, and will remain in New York.

In global wealth management we have also made some additional organizational changes driven by Charlie Johnston's decision to retire at the end of this year.

Charlie will continue through the end of the year as Vice Chairman of Morgan Stanley Smith Barney, and Greg Fleming will become President of GWM in addition to Asset management.

Jim Rosenthal was appointed Chief Operating Officer of the Firm in January, and continues in his role in the integration of Morgan Stanley Smith Barney.

Overall these management changes reflect our desire for superior execution and our belief in what the future environment demands from our leadership, as well is obviously the departure of Tom Nides, our former Chief Operating Officer, who has moved to serve in Washington.

With regards to the Smith Barney integration, we are pleased with our progress.

We remain on track as evidenced by the increased profitability this quarter and net new money for the full-year.

Revenues and margins will continue to improve as individual investors further engage.

In Asset management we refocused the business around our core institutional and Merchant Banking franchises, added talent and addressed the issues posed by a distressed global real estate market.

Globally our colleagues in Japan worked hard to launch our strategic joint venture with Mitsubishi Bank, a partnership that is already starting to pay important dividends in terms of our ability to serve clients.

And with the sale of CICC's stake we are poised to start a new chapter on the very strong relationships we have built in China and across Asia for many years.

We are currently pursuing a domestic license in China and recently received approval to form a new investment banking joint venture with Huaxin Securities, also known as China Fortune Securities.

In Europe, the Middle East, Latin America and Australia our people on the ground are capitalizing on the Morgan Stanley brand to take advantage of the many opportunities we now see.

Overall we have made progress executing our strategy despite challenging market conditions this year.

We may remain confident as evident by our success in investment banking equities, our disciplined approach with Smith Barney, and our substantial improvement in Asset management.

Looking forward we continue to focus on growing revenue, earnings and ROE in each of our businesses.

Our priorities for 2011 and 2012 include -- within Institutional securities, obviously improving our results within fixed income sales and trading and maintaining our leadership positions in investment banking and Equity sales and trading.

Within global wealth management, growing our transaction and advisory business, increasing deposit and lending revenues, and after the completion of the integration in 2012 to see a commensurate cost reduction.

Within Asset management, monetizing our strong investment performance in the core business and optimizing our expenses.

Let me turn to compensation.

A year ago we explicitly said you would not see the same compensation ratios of 2009, and we did not.

The full-year ratio was 51%, down from 62% a year ago, which was in part driven by extremely high DVA.

In absolute terms full-year compensation was higher due to Morgan Stanley Smith Barney completion of 12 months and the investment in sales and trading.

We also demonstrated discipline through our compensation structure.

In fact, our higher deferral rates and clawbacks balanced prudence with incentives, which are important to shareholder considerations.

This management team is intently focused on improving earnings and ROE, and in the process we will reward our shareholders and our employees.

Thank you.

Now I will turnover to Ruth to review our financial results in more detail, and we will both be available for question and answer.

Thank you, James.

For the quarter ended December 31, income from continuing operations applicable to Morgan Stanley was $867 million, with diluted earnings per share of $0.43 after preferred dividends.

There were four factors that drove our results this quarter.

First, ongoing strength in investment banking and equity sales and trading, historically very strong areas for us.

Second, subdued results in fixed income where we continue to work on our turnaround.

Third, notable progress in both global wealth management and Asset management.

And, finally, strategic asset sales and expense discipline.

Our fourth-quarter revenues of $7.8 billion included two noteworthy items, a $668 million or $0.17 per share gain from the sale of CICC, and negative $945 million or $0.36 per share impact from the tightening of credit spreads on Firm-issued structured notes, commonly referred to as DVA.

This quarter DVA was driven by a larger outstanding balance, a longer weighted average maturity, and further maturity extension in a portion of our note.

The full-year Firmwide compensation ratio was 51%.

Excluding negative DVA of $873 million and the UK bonus tax of $272 million, the ratio would have been 49%.

Noncompensation expenses increased 12% sequentially, including higher technology and legal costs.

For the full-year noncompensation expenses were up roughly 7% annually, normalizing for 12 months of Smith Barney.

The increase was driven by higher business activity, as well as our ongoing investments in technology.

Notably book value at the end of the quarter was $31.49 per share, up 16% for the year.

Turning to the balance sheet, total assets were $808 billion at December 31, down $34 billion sequentially, driven by lower client activity.

Although our calculations are not yet final, we believe our Tier 1 capital ratio under Basel I will be 16%, and our Tier 1 common ratio will be 10.5%, demonstrating the strength of our balance sheet.

Risk-weighted assets under Basel I are expected to be approximately $328 billion at December 31.

Now turning to our businesses.

Institutional securities revenues of $3.6 billion included the impact of CICC and DVA, as mentioned earlier.

Noninterest expenses were $3.2 billion in the quarter, up 20% from the third quarter on higher compensation and the seasonality of noncompensation expenses.

For the full-year noninterest expenses increased slightly.

The full-year compensation ratio was 43%.

Excluding negative DVA of $873 million and the UK bonus tax of $269 million, the ratio would have been 40%.

The business reported a pretax profit of $437 million.

Investment banking revenues were $1.5 billion, up 50% from last quarter.

For 2010 Morgan Stanley ranked number one in global IPOs, number one in global equity, and number two in both global completed and global announced M&A.

For the year we advised on eight of the top 10 announced M&A transaction.

In the quarter we were a bookrunner on all five of the top five transactions in global equity and four of the top five transactions in global IPOs.

Advisory revenues of $484 million were up 30% sequentially, driven by a higher activity in EMEA and the Americas.

Significant announced M&A transactions in the quarter were the $21 billion combination of weather investments in VimpelCom in Europe, and the $10 billion restructuring of Westfield Group in Australian.

Equity underwriting revenues were $661 million, our highest reported quarter.

We saw improvement across all regions.

Asia, once again, was particularly strong with notable offerings, including AIA's $21 billion IPO, Petronas Chemicals Group's $5 billion IPO, and China Rongsheng Heavy Industries' $2 billion IPO.

Fixed income underwriting revenues of $370 million were relatively flat to last quarter as lower bond issuance was largely offset by higher loan syndication fees.

Overall our investment banking pipelines remain healthy across products and regions.

Equity sales and trading revenues of $1.1 billion included negative DVA of $103 million.

Cash equity revenues increased sequentially on higher client activity and increased marketshare.

Derivatives revenues similarly improved, given a more stable volatility environment and increased client flows.

And prime brokerage revenues increased from the third quarter as we continued to deepen relationships with our existing clients.

Average client balances continue to grow, up 11% sequentially.

Fixed income sales and trading negative revenues of $29 million included negative DVA of $842 million.

Interest rate credit and currency revenues were down from last quarter across all businesses.

Commodities revenues were relatively flat to the third quarter as lack of market volatility continued to dampen client activity.

Our results also continue to reflect a drag from the tightening of monoline credit spreads.

Turning to VaR, average trading VaR declined to $132 million from $142 million last quarter, primarily driven by reductions in interest rate and credit.

Average non-trading VaR decreased to $95 million from $103 million, primarily due to the sale of our equity stake in Invesco.

Global wealth management revenues of $3.4 billion increased 8% sequentially as higher commissions, asset management fees and net interest income more than offset lower trading revenues.

Commissions increased 31% from last quarter as higher client activity was driven by new issuance and secondary trading.

Noninterest expenses were $3 billion, up 5% from last quarter, both on higher non-compensation and compensation expenses.

Integration costs were approximately $63 million.

The compensation ratio of 59% in the fourth quarter continues to be driven primarily by the formulaic grid payout.

However, the lower ratio this quarter reflects reductions in non-FA compensation, which is not likely sustainable in the near term.

Profit before tax was $390 million and the PBT margin was 12%, up from 9% last quarter.

Total client assets increased 4% sequentially to $1.7 trillion on market appreciation and net asset inflows of $14.1 billion in the quarter.

Net new money for the year was $22.9 billion.

The number of the FAs was 18,043, within our expected range of 17,500 to 18,500, while turnover within our top 2 quintiles remained in line with historical lows.

Deposits in our Bank Deposit Program where $113 billion, of which $55 billion is held by Morgan Stanley Bank.

Asset management net revenues of $858 million increased 7% from the third quarter.

Core asset management revenues of $410 million included higher asset management fees and increased gains on seed investments, as well as a $126 million impairment charge related to the restructuring of FrontPoint and a $96 million gain on the sale of our equity stake in Invesco.

Merchant Banking revenues of $448 million included investment gains in real estate and private equity.

Approximately $109 million was related to investment gains from consolidated mezz rev funds.

Given the ownership structure of these funds, the majority of the gains are passed to third-party investors in the noncontrolling interest line.

Approximately $95 million of the principal investment gains were from private equity, primarily driven by Asian investments.

Noninterest expenses for Asset management declined 4% from last quarter on lower compensation and noncompensation expenses.

PBT was $356 million for a margin of 41%.

Total AUM increased slightly to $279 billion, primarily due to higher market levels.

Assets flows were negative $600 million during the quarter, primarily driven by $1.5 billion of outflows related to FrontPoint.

As of December 2010 over 70% of our long-term strategies continued to outperform their respective benchmarks on a 3-, 5- and 10-year basis.

Now turning to our outlook.

We are increasingly encouraged by the pace of the recovery as reflected in capital markets activity.

Key indicators include strengthening equity markets, improving corporate confidence reflected in M&A activity, successful equity issuances across industries globally, higher investor activity and ongoing growth in emerging markets.

That said, the potential for more policy intervention that drove the risk on/risk off investor sentiment last year remains due to both macroeconomic issues and ongoing regulatory implementation.

Sovereign credit concerns in Europe continue to be at the forefront.

In the US distressed state and local budgets, as well as the deficit, remain open items.

Inflation risks in emerging markets could also elicit policy moves.

And on regulation added clarity regarding certain elements of Basel and Dodd-Frank are helpful, although final rules are clearly still in formation.

While our overall performance is dependent on the global market environment, we believe we are well-positioned for the evolving regulatory regime, with an emphasis on client-focused businesses supported by appropriate capital and liquidity.

Our growing client footprint and investments across the Firm are key to leveraging the strengths we have across many of our businesses and closing gaps in others, with disciplined investment and implementation preceding performance.

Looking forward we are focused on growing our share of the market by leveraging our global brand and client franchise to provide the highest quality service to clients and stronger returns to our stakeholders.

Thank you, and now we will take your questions.

(Operator Instructions).

Howard Chen, Credit Suisse.

James, you spoke to more work to be done in fixed income to drive revenue and market share growth.

Other than the announced management changes, could you just give us maybe your top three action items to get there?

I get a lot of questions from investors on what exactly is the limiting factor in closing that gap.

Why don't I go ahead with that.

As James said, as I said, we are in the first of a two-year steady build of that business.

As we have talked about in the past, our view is that we were subscale, and although we had a good mix of structured solutions and flow business, we really needed to build out the flow business more.

And that is really the conversation we have been having about rate and foreign exchange.

So we have built out that footprint; we're building flow.

But when you look at this quarter there is really a bit of a virtuous cycle with broader, deeper footprint allowing more efficient trading to support our client activity.

So really with the buildout of our footprint we are leveraging the strength we have across Institutional securities with clients to drive those relationships deeper.

But it is the first of a two-year steady build.

Okay, thanks, Ruth.

Then switching gears over to global wealth management, we certainly saw the impact of improving retail engagement on the topline results.

But could you just give us an update on the timeline of the platform integration, and when should we expect these cost synergies to be realized, and then help -- continue to help margins drive higher?

Sure.

We were pleased to see continued retail investor engagement in the fourth quarter, and that is reflected in higher transactional revenues.

The integration process is moving very much on track.

As you look at what does that mean and how do we look at the overall PBT targets, we are still very much focused on PBT of 20%.

That is market dependent.

So just a couple of pieces as you look through 2011 and beyond.

First of all, retail activity was important.

It helped drive the transaction revenues.

I would caution you there are fewer trading days in the first quarter of '11; that is relevant.

But as we look forward the market remains constructive.

The building blocks to get to that 20% PBT margin are, to your point, completion of the integration and the drag that comes from the spend.

But it is also a function of building up our lending business, as we have talked about before.

Because with the lending business we have the benefit of driving the noncompensable revenues, which are an important part to reducing our overall compensation ratio in the business.

The third element of the PBT margin expansion is market dependent, we have said that.

But just to give you a couple of data points that might be helpful, every 100 point change in the S&P we estimate impacts margin around 1%, all else being equal.

And that is not looking at investor psyche in reaction, but it is really more on the Asset management fee side.

Similarly, every 50 basis point change in Fed funds can impacts margin around 1% as well.

So it is really those elements -- completing the integration, building up the lending business and market dependent that drives us to the 20% margin over time.

Okay, thanks.

Those sensitivities are really helpful.

I guess maybe asked another way, and I don't know if you look at it this way, but if there is no change in revenues from, let's say, where we are to end the year in the fourth quarter, what would you anticipate your margins to be as we exit 2011?

We are not going to do a forecast roll forward.

We were hoping to give you the pieces so that you can model it out yourself.

(multiple speakers).

I would just say this, we are not passive in managing the business.

Okay, thanks, understood.

And I will put pencil to paper.

Then finally for me, Ruth, you spoke about the impact on the monoline exposure on fixed income results.

Could you just give a little more detail on what exactly is driving that?

Is that the health of the [wraps] or your hedging against that, or the counterparty exposure, and what should we be watching going forward to just continue to see that and how it impacts FICC?

Thanks.

So this is a legacy exposure.

It is going to take time to work out.

The main point that we have talked about repeatedly is we are not taking on new outside risk.

We were a counterparty in a trade and we hedged our exposure.

There was detail in the Q, and that will of course be updated there in the K.

But this quarter the hedges went the other way on tightening monoline credit exposures, which is what resulted in the losses.

So it was costly to hedge this quarter.

You may continue to see a drag depending on market direction.

The loss this quarter was $263 million, pretty much in line with last quarter.

Okay, many thanks for all the details.

Glenn Schorr, Nomura.

A quick one.

So equity was up in the quarter, assets came down a little bit on the balance sheet, but the Tier 1 common ratio was down a little bit.

I am just curious if something changed on the risk weightings or how that works.

I know it was small, but just interesting directionally.

Sure.

First, at this point our risk-weighted asset number is just an estimate.

The final numbers will be in the K.

But risk-weighted asset increased from $325 billion at the end of the third quarter to, we estimate, $328 billion at December 31.

So to your point, it was a small move.

It was really much more of a mix change that resulted in a modest change.

And the Tier 1 common was a bit lower due to a higher DTA deduction.

Higher DTA deduction, okay.

Thanks.

Then just curious, on the 4% reduction on assets, where are you seeing the opportunity to reduce balance sheet?

You're asking about overall balance sheet size coming down?

Yes, and I will tell you why I am asking.

If you look at the 17 or so times common leverage -- assets divided by common equity, that is about in the range where you think you can rest over time.

I'm just curious how you think about the improving ROA, and what is left on that balance sheet that is dragging that ROA down, meaning it is a little different question than FICC improving.

Right, a number of different questions in your question.

So balance sheet was down this quarter.

That was really much more about client activity than anything.

And we still remain comfortable in that $800 billion to $850 billion range that we are talking about.

But the point about ROA is very important and we are very focused on it.

To your point, it is about ensuring that we are redeploying capital out of kind of the capital heavier areas and putting them behind our core institutional money management business and sales and trading business.

And in particular on the sales and trading side our view is as we continue to build out our footprint and our flow business we are going to be able to drive a more efficient utilization of the balance sheet and we are very focused on ROA.

So I guess it takes time -- in other words, I think a simple question is where is the leverage being used -- like it takes time to wean yourself off of that, is that what I'm hearing?

There are two elements -- very important, as we said, in fixed income we are in the first of a two-year study build, and it is about delivering consistency and dependability to clients, which will increase our flow business and efficient utilization of the balance sheet.

So that is one element of it.

The other is we are systematically reducing the drag from legacy positions, or as we are moving into more of a Basel III world we will be continuing to redeploy capital behind our core sales and trading business.

Okay, maybe a simple (multiple speakers).

In the efficient areas -- in the most efficient areas.

Understood.

A simple last one on balance sheet.

Is the 10.5% Tier 1 common, I was just curious if you had any updated thoughts on Basel III compliance today and how that plays out?

Well, as we have said before, we remain very comfortable with respect to Basel, both capital and liquidity, and have capacity to absorb the new roles with parent capital, which is about $20 billion.

Just to give you a bit of an update on Basel III, our RWA guidance is virtually unchanged -- essentially unchanged, same zip code from the commentary after the third quarter.

So if you take -- our RWA is at 12.31, take our balance sheet, under Basel III RWAs would be [up] $240 billion.

And then through passive mitigation through the end of 2012 it would be down about $100 billion.

I guess the other factors to layer into how we think about Tier 1 common under Basel III, a couple of items affecting capital.

First, we have, as you know, $7.8 billion of MUFG convertible to common, which is meaningful.

We have the 14% Smith Barney buy-in in 2012 and the [MCI] associated with Morgan Stanley Smith Barney.

So if we take our consensus earnings, those are factors -- our 12/31 balance sheet under Basel III, the ratio at the end of 2012 would be between 8% and 10%, which is why we say we are very comfortable with respect to Basel III.

Great.

Thanks, Ruth.

I appreciate it.

Mike Mayo, CLSA.

Do you have any more specific financial targets?

That was helpful, your commentary for the year ahead.

I was wondering if we could get a little more meat on the bones.

A lot of your peers have more specific financial targets.

And if you don't have a specific financial target, are you looking more at revenues or earnings or ROE or which metrics?

So we -- across the businesses I think we have -- we gave you some more specifics on [GWI] and what we are looking for longer-term is this PBT margin of 20%.

Again, I will give you the caveat, market dependent.

But we are continuing to execute on that plan as I went through.

On the Investment Management side, you saw the improvements in particular this quarter, and again, it is about building the core institutional money management business and being -- efficiently redeploying capital out of merchant banking, hedge funds, seed investments to support that core institutional business.

Within our Institutional securities business we have real strength in investment banking and equities, where on our steady build within fixed income, it is about driving ROA.

And I think in the aggregate what we are looking at is overall we are very focused on what is ROE and delivering attractive returns for shareholders.

So that is what we are driving.

As James said, we are not standing still on any of these businesses, driving execution across them.

The only thing I would add is that last year we hired a lot of people.

We hired a lot of very senior people.

Actually the weighted number of folks that we brought in, a lot of MDs, and these folks are getting traction.

We are not aggressively hiring right now.

Obviously, if a specific opportunity comes up, we would fill it.

But we want to see some of the progress from those hires, and improved client penetration we are getting, particularly into some of our fixed income products.

So this is a year where we are now digesting the expenses, and if things go as we plan them to go, we will see if the returns come off those.

I know you said it is the first of two years of a build in the trading areas and you hired a lot of traders, do you think it is working?

What sort of conviction do you have about this hire for growth strategy within trading?

Do you feel better or worse about it?

We remain very confident and comfortable with the strategy.

If we look at third-party data it would suggest that we are gaining marketshare in a number of the businesses.

The key is seeing that third-party data translate into greater results.

So when we look at the drivers of the business, in particular this quarter, we think that we are seeing signs of progress.

We are pleased with the steps we are taking, continuing to execute against the plan.

But it was challenging being in a risk on/risk off market.

So we had client activity, but trading facilitation market-making was limited, and it is about both building up what we are doing.

And we do remain very much on track, on point in that regard, and having a bit of the more constructive market.

Thank you.

Jeff Harte, Sandler O'Neill.

Can you talk a little bit about the investment banking outlook?

I guess I'm thinking -- we see a lot of equity deals getting done, but coming off of a record revenue quarter are you seeing enough potential activities filling the pipeline for strength to continue?

So overall our investment pipelines do remain healthy across products and regions.

It was a bit frustrating throughout the year to keep saying our pipeline is building, and it was just a question of time seeing the transactions moving through the pipeline.

And I think you saw that in the fourth quarter.

But the pipelines do remain healthy across products and globally.

So on the M&A front the pipeline is strong.

We do expect the positive momentum that we experienced in 2010 to continue into 2011.

We are seeing increased private equity activity and cross-border activity and emerging markets M&A.

And it is very much about a lot of the factors we spoke about during the year with high corporate cash balances and now with increasingly improved corporate confidence.

On the equity side, the backlog does remain strong.

Again, it is around the globe.

Asia remains strong, as does Europe and Latin America.

We expect also to see more of the sponsor-led financings coming through the pipeline.

How about on the fixed income trading side of the business.

You have built up the business, what kind of market or environment or assumptions are you making for how big this business should be?

I think that we are looking for more of a -- we're not looking for a heroic move in the fixed income market.

We are looking for a more muted or a more predictable environment.

So in contrast to what was a pretty stark risk on/risk off market this past quarter, the absence of that kind of whipsaw is what we need.

We have two things, really, the backdrop of the environment, and it is not as though we are looking for another 2009 type environment.

What we are looking for is, again, this absence of the risk on/risk off that had at its core a lot of policy-related events that drove activity, and so kind of a more benign environment, and that enables us to really close the gap we have within fixed income.

So if you look across our Institutional securities business, we have a top-tier investment banking franchise, a very strong institutional equities business.

And what we are really just looking to do is close the gap within certain areas -- not even across-the-board, within certain areas of fixed income capitalizing on strengths we already have within fixed income.

I would just add, also, we have an important commodities business.

The last couple of years metals and agriculture has been major drivers of revenue for the industry.

Our historic strengths have been in gas and oil.

And I think as those markets are now starting to move that business becomes more important to us.

Okay.

As I look at the wealth management business, one of the things that jumps out at me is net interest income doubling plus year-over-year.

But then I look at the deposit balance and it is essentially flat on a year-over-year basis.

That implies net interest margin expansion that we are not really seeing from other players.

Can you talk a little bit about what is driving that net interest income increase?

I will check into that.

My guess is there are two drivers behind that.

One is the business wasn't owned for 12 months; it was owned for seven months, so you get the impact of the $50 billion plus of deposits that sat on the Citi side, in addition to the $50 billion that sat on the Morgan Stanley side.

So you are getting $100 billion per year.

The other is the growth in the lending businesses.

You look at the margin book, and I saw some of the online players reported their margin balances had grown pretty dramatically.

We don't have as volatile a margin book as that, but clearly with the rising equity markets our margin business has grown, and some of the lending and the spreads you get on the lending product that we have been building out.

Is the margin book the bulk of the lending within GWM still?

And I guess as you look forward is nonmargin-related lending something you would try to grow?

Sure.

The margin book is significant, but we have also -- we originate prime mortgages and small-business loans and other things.

Okay.

And finally just trying to reconcile some of the items in the quarter, it looks as though ex DVA you accrued compensation expense against some of the other gains.

Am I thinking of that correctly?

Yes, you are.

Items like CICC are included as part of our revenue and we accrued comp against it.

Okay, thank you.

Guy Moszkowski, Bank of America.

I just wanted to go back to the DVA.

It is so sizable I was just hoping that maybe you could give us some metrics that can help us get some analytical clarity around the number.

We have all been conditioned to look through it, and even so when it is a sizable as this you just want to really feel like you understand it.

Given what we know happened to your cash bond spread, and even though you have issued a lot of structured products, it just seems like it was a very outsized move.

Can you give us some of the underlying metrics to help us understand it?

Absolutely.

Good question.

There are a couple of things I mentioned briefly.

So to expand upon them, first, the average outstanding balance was up almost about 10% from the third quarter.

There was a lot of interest in this product, so up almost about 10%.

Second, the weighted average maturity of the portfolio extended, and so the change in the 10-year spreads played a bigger role.

And then about 20% of the overall DVA was due to the option of extending maturity that is embedded in certain of the notes.

So on the metrics, if you go to WAM, that moved nearly 5 years in the fourth quarter.

It was 3.5 years when we last disclosed it in 2009.

So, again, focusing on the 10-year cash bond spreads this quarter, they tightened 56 basis points versus 27 in the third quarter.

I'm glad you pointed out it is cash bond spreads, because CDS was in only -- the 10-year CDS was in only 7 basis points.

But that was a pretty meaningful narrowing.

And to your point, with the WAM moving out, it became more relevant to look at the 10-year.

And the WAM moved out partly because of the nature of what you issued and also partly because there was some -- there is essentially some negative convexity built into this?

It was really by virtue of what we were issuing.

Got it.

Then just to tie it together, you were talking before about some of the monolines credit spread impacts.

Is that related to this as well?

Is that part of the 900 and some odd million or is that separate?

Completely separate.

Okay.

Thanks for the clarity, that certainly helps.

To the point that was brought up a minute ago on the compensation effect on the CICC, would comp -- do you believe that comp really would have been lower if you hadn't had the gain?

The reason I ask is that, again, as we think about modeling out future earnings power we need to really understand what your comp dollar needs are.

Based on what we heard in the press, and obviously a lot of that stuff can be wrong, it seems like the Firm needed every dollar of comp that it had available to it.

I wonder if your comp dollars actually would have been less even if you hadn't had the gain.

We are focused on balancing what we think is right for our shareholders, and ensuring that we pay the right people the way we've got to pay them.

The fact of the matter is, if we didn't have the revenues and we didn't have the earnings, we would have adjusted it through our compensation.

We have been very deliberate and very focused on that.

But we wouldn't do it at a level where we thought we would be putting significant risk into the franchise.

We are also aware that these businesses aren't -- they don't start and begin on January 1 and close on December 31, they are multiyear processes.

So we look at the total book of earnings.

We look at the various charges that we make.

You could make arguments that you could extract legal reserves.

You could extract restructuring of businesses, whether it be FrontPoint or other businesses.

We look at the total mix, and then when we deal with what we've got on a net revenue basis, that is how we think about comp.

So I can't cherry-pick it.

I regard the CIC as good revenues generated through the wherewithal of folks at this Firm, and that is something we feel very comfortable compensating on.

Okay, that's fair.

In asset management in the quarter, and you spoke to this, the ratio of the payout to noncontrolling interests as a percentage of the investment revenue that you showed was a lot lower.

It was about 28% in the fourth quarter it was almost half in the third.

Can you just explain to us why this shift?

I think -- I am going to need to get back to you on that one.

Okay, fair enough.

Again, it is just as we look forward and try to model revenues ahead it is just useful to have that.

Okay.

The final question I have for you is was there any significant change in the cash versus equity component or mix of compensation this year?

So in our compensation we did increase the deferral, but when we talk about deferred comp we talk about both deferring cash and differing stock, and so the overall mix was pretty much the same with our deferrals.

Okay, great.

Thank you very much for that.

Roger Freeman, Barclays Capital.

I just wanted to come back to the FICC buildout.

And you're looking at some of the personnel changes and folks have moved around, to what extent does that stretch out timelines or doesn't it?

Does that impact just given the magnitude of the reporting line changes going on?

No, I think I have said it a couple of times now, this is the first of a two-year steady build.

Colm left this seed a year ago.

And we have been really building out the team.

It does take time, but we are going to repeat -- it is the first of a two-year steady build.

We have completed -- I apologize -- completed the first of a two-year steady build.

Okay, but then -- sorry, just tying back to the other comment, I think, James, you made about growth -- or headcount growth, you're not really hiring, so really it is net neutral on the year.

So you still have a buildout going on, but assuming there will be some turnover in the process, is that how you're thinking about it?

I wouldn't -- as I look at the businesses I think Institutional securities, we hired about 70% of our total plan last year.

We pulled the curtain over it about in August.

There are a couple of areas where we didn't quite get done what we wanted to get done, and a couple of our support areas, particularly in risk and technology, where -- but these are very small numbers.

In wealth management we are carrying something like 2,000 contractors working on the integration.

I think that is now pretty much, if not running at peak, pretty much at peak.

And I think our financial advisor headcount will stay in the band that Ruth put out, [17.5 to 18.5].

It may be down a couple of hundred from this year; it may not be.

I wouldn't draw too much from that one way or the other if it is up or down, as long as it stays in that band.

In asset management some of the merchant banking businesses we have had a lot of success in Asia, and in our infrastructure business, but they are small numbers.

So I think you are probably -- we haven't actually sat down and laid out a headcount plan for the firm, but I would say the aggregate picture would be roughly flat.

I would be surprised if it is up much.

We are certainly not anticipating any big RIF or anything of that nature.

So selective.

Okay, that's helpful, thanks.

Then just coming back to that question on the net interest income in the bank.

The other thing that popped out at us or had noticed that is that the net interest income in the Institutional securities business has been declining at the same time.

We are just wondering if there is any connection between the two, like transfer pricing of any sort or anything?

No, there is not a connection.

In Institutional securities, as you know, it is more of a -- NIM is more of a banking book than a trading book concept.

So thoughts in Institutional securities is really driven by our trading and derivatives activities that have an interest component.

So we think of that business holistically.

There is not a link between the NIM discussion we would have there and the [NIM in TW].

And the way we reported in wealth management, we manage it internally, there are two separate businesses.

There is the BDP, the deposit spreads and then there is the net interest margin on the loan -- on the core loan book.

Okay.

Is the tax rate -- can you give us any sort of comments on the go forward?

It has been low and I understand it jumps around quarter to quarter depending on levels of net income, and credits and this and that you could get, but just looking at it on the aggregate, you still generated $6 billion of pretax profit.

It is not a small amount in 2010.

And to the extent that goes up, do you have enough or do you sort of shield to keep the tax rate unusually low?

No, we do our tax planning annually.

So if you just exclude the discrete items from 2010, the effective annual tax rate from continuing operations would have been about 28%.

As we look forward to 2011 we would just suggest that you look at the effective -- the statutory tax rate, so about 35%, something less than 35% would be the right way to look at it for 2011.

Okay, last question.

Given the charge on FrontPoint can you say where that is carried now on the books?

Just, again, the backdrop is our overall strategy in this area is to free up capital in Merchant Banking activities and hedge funds (inaudible), and we are continuing to do that.

But with respect to FrontPoint specifically, we are continuing to restructure our ownership to a minority stake.

Given the events last quarter and with the lower AUM, there were some changes to the deal terms.

We did take a higher charge in the fourth quarter.

It was about $126 million, if I recall correctly.

But presumably to the extent that assets continue to flow out that can continue to be revised I guess is the assumption?

The carrying value as of the fourth quarter is $30 million, just so you have that.

Okay, perfect.

Okay, I appreciate it.

Thanks.

Mike Carrier, Deutsche Bank.

Thanks, guys.

One follow-up on the wealth management business.

And the clarity around rates and markets, that is helpful.

If we look at what you have left in terms of consolidating in the platforms, the remaining synergies -- and I think the last time you guys gave the number there was about maybe $400 million or $500 million left.

If we just look at that and assume that that gets done at some point at the end of this year or beginning of next year, then if we just run those synergies through the model, based on what you can control, can you still get that pretax margin to like the mid-teen level, call it 15%, 16%, 17%?

Then basically whether it is the rates or the markets, the scenario that you gave there would it be able to push you above that 20% level?

Because I am just trying to figure out what you guys can still control.

I think you -- I went through the building blocks, and I think you just articulated it well.

Getting through the spend is an important part of it.

We are still very much on track with the platform for the third quarter of this year and moving the Morgan Stanley FAs over the third quarter.

We will be training the Smith Barney FAs through the fourth quarter and starting to move over, again, next year.

So there is some spend that continues.

That is an important element of it.

And building up the lending book, as we have talked about, is an important element of it to get noncompensable revenues to increase.

So, again, driving towards that 20% PBT margin over time, market dependent.

Just the -- I know a lot of folks are very curious about the margin notes.

To be honest, it doesn't give us a whole lot of anxiety.

This business used to have under $6 billion in revenues and had 7%, 8% margin.

It now has revenues of over $12.5 billion.

So you understand fixed costs; you understand the arithmetic.

In some normalized market scenario, frankly, that is not a big anxiety for us.

In fact, where we are more focused is that it really helps us have a very attractively diversified revenue stream by business and products and geography.

We have talked a lot on this call about capital, some are more capital intensive.

Businesses like GWM, banking, Asset management are more capital light.

So it is really in the aggregate the portfolio that is, in our view, one of the most important elements.

Okay, and then just based on your capital ratios and we will all come up with our valuation for the buy-in for MSSB, but if you look at the amount of capital that you're going to generate through 2012, if you look at just normal leverage ratios, do you have any sense in terms of how much you would be paying in equity versus cash or debt?

No.

Then last one, just on the fixed income side, on the legacy issues in terms of the monoline, like what is the timing on that?

And is there any way -- I don't know -- to either restructure it -- basically how much is that going to weigh on the earnings?

Then on the core business, is it like 2010 more getting the people in place from a products, and then 2011 is more gaining traction with clients?

So on the monoline point, it is a legacy exposure.

It is going to take time to work out, so I would just refer you to all the detail that is in the K and was in the Q last quarter.

In terms of your key issue there in terms of the ongoing implementation in sales and trading, 2010 was about adding talent and structure around the way we cover clients and drive client relationships deeper.

As we have talked about before, we have strength in a lot of our franchises across a lot of clients with this brand globally and the strength that we have it is just continuing to execute.

So adding talent to the platform was an important element of it.

But I [wouldn't] like to suggest we did one last year, we are doing the other this way.

We had signs of marketshare improvement in the fourth quarter, as I said, that we are driving to bottom line results that we can talk about hopefully in the not-too-distant future.

But it is -- we are consistently executing, adding talent and driving relationships across our clients.

That is really what is very important.

And the fixed income moved, closing the gaps in certain of the areas, building on the strengths in many of the others.

Okay, thanks a lot.

Thank you.

And thank you all for being on the call today.

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

You may now disconnect.