摩根士丹利 (MS) 2011 Q4 法說會逐字稿

Good morning.

This is Celeste Brown head of Investor Relations at Morgan Stanley.

Welcome to our fourth-quarter earnings call.

Today's presentation may include forward-looking statements which reflect management's current estimates or beliefs and are subject to risks and uncertainties that may cause actual results to differ materially.

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

Please see our SEC filings at www.morganstanley.com for a reconciliation of such non-GAAP measures to the comparable GAAP figure and for a discussion of additional risks and uncertainties that may affect the future results of Morgan Stanley.

This presentation, which is copyrighted by Morgan Stanley, and may not be duplicated or reproduced without our consent, is not an offer to buy or sell any security or instruments.

I will now turn the call over to Chairman and Chief Executive Officer James Gorman.

Thank you, Celeste.

Good morning everyone.

As we say goodbye to 2011 we are happy to report that our prospects look much better going forward than they have at any point since I became CEO two years ago.

Let me briefly review the year and share our outlook.

We know -- as you well know, we had a disappointing start to 2011 when we suffered a considerable loss in the Japanese joint venture.

However, it proved to be a positive catalyst because it helped MUFG and ourselves reevaluate our partnership and determined that we should take steps to align the two companies more closely.

The result was the creation of what I believe is one of the most exciting partnerships in the global financial services industry.

The partnership bore abundant fruit in 2011, including the conversion of the preferred into common, the elimination of the preferred dividend, and now MUFG equity accounts for our earnings, MUFG now has two Board seats, the enhancement of a loan marketing agreement for the Americas.

And we are continuing to look for other ways to expand this partnership around the world.

All of these show our commitment to each other for decades to come in good times and in bad.

I am taking you through this in detail because I believe our deeper relationship is perhaps the most underappreciated of all the strategic moves that have taken place.

On the business front we had terrific progress against our goals in 2011.

In particular look at equities.

The growth in our share in equities where we increased wallet significantly with the more than 300 basis point increase in the first nine months.

We grew share in fixed income.

We also increased our wallet share in this business as has been our focus, while deemphasizing certain parts of securitized products and now the Basel III capital-intensive areas.

We grew our share in Investment Banking capital markets where we achieved 100 basis point improvement in overall wallet share and significant positions in all of the rankings.

We improved our margin and flows in Smith Barney.

While margin improved modestly for the year to 10%, net managed flows were the highest since the inception of the JV at $43 billion.

We are now moving to the final stages of the integration of MSSB.

Our technology platform will be fully integrated this summer.

We revitalized MSIM, which is evident in the flows in that business for the year and our momentum exiting the fourth quarter after several years of outflows.

Finally, we restored research to its preeminent place in the industry where we have seen improved Greenwich rankings and II rankings through the year.

On the organization front, we sought stability in management and a successful transition among our senior team.

That has been done.

On the legacy front, we resolved the last major significant issue for us, MBIA, which was settled through the difficult decision to take a loss of $1.7 billion, but most importantly, in the process we freed up approximately $5 billion of capital pro forma under Basel III.

We also continue to tightly risk manage our exposure to the periphery with exposures before hedges well below where we ended the third quarter.

Ruth will review this with you in detail in a minute.

In addition, we have reshaped our balance sheet.

Consistent with our commitment to you when I took this job, we exited 2011 with no outside risks and with -- and are fortified with a much stronger balance sheet.

With regards to compensation, 2011 represented a high water mark for our deferrals, due to the unusual aggregation of prior periods into this year.

We are acutely aware of the impact of deferral decisions on future periods, but with the last years behind us we will have more flexibility in the years to come.

Ruth will address the meaningful progress we made with respect to capital, funding and liquidity, but let me end with a few brief comments.

First, this management team was determined to clear the decks of significant legacy issues and material exposures from 2008 and prior years, and we have done that.

For the first time in two years our to do list is not our problem list, and we can focus our energies on enhancing our franchise.

Second, this management team is determined to gain share in the businesses we have chosen to remain in, and we are doing that.

In addition, we are assuming we come to acceptable terms, we would look to purchase the next 14% of MSSB.

Finally, this management team is resolute in its goal to generate acceptable and clean returns in quarters and years ahead.

The recent decision to execute a reduction in force of 1,600 employees, as well as the ongoing reshaping of fixed income, are examples of important steps to achieving better performance on a sustainable basis.

We cannot control the accounting noise of DVA, the movement of counterparty spreads, the capital requirements imposed by our regulators, or the evolving Dodd-Frank regulatory framework.

However, there is a tremendous amount that we can and do control, and we will remain nimble, highly focused and disciplined in doing so.

2011 was a very difficult year for the markets and for financial services.

We are very glad to have it behind us.

Although the markets remain fragile, Morgan Stanley is dramatically better positioned than it was just 12 months ago.

With that I will now turn over to Ruth to take you through our earnings in greater detail.

Good morning.

As James said, we are particularly pleased this quarter with the steps we have taken to address legacy issues and position the Firm for the future.

Given the magnitude of the loss associated with the MBIA settlement, a $1.7 billion reduction to revenue and approximately $0.59 to EPS, to simplify comparisons to prior periods I will provide reported numbers, but then also provide certain amount excluding the impact of the loss to help with comparability.

Additionally, I will provide data with and without the impact of DVA.

Our Firm-wide revenues for the fourth quarter were $5.7 billion, down 42% sequentially on a reported basis and down 15% when excluding DVA in both periods.

DVA in the quarter was $216 million.

Excluding the MBIA loss and DVA in both periods, revenues of $7.2 billion in the fourth quarter were up 12% over the third quarter.

Our non-interest expenses were $6.2 billion, virtually unchanged from last quarter.

The Firm-wide compensation ratio was 67% in the quarter compared to 37% in the third quarter.

Excluding the effect of DVA in both quarters and the MBIA loss this quarter, the ratio was 53% in the fourth quarter versus 57% in the third quarter.

We expect to incur a $150 million of severance expense due to the recently completed reduction in force that James mentioned.

Non-compensation expenses were $2.4 billion, down 6% from last quarter.

Although we have historically experienced a seasonal increase in non-compensation expenses in the fourth quarter, Firm-wide discipline resulted in the sequential and year-over-year decline.

Overall for the quarter income from continuing operations applicable to Morgan Stanley was a loss of approximately $227 million.

Net loss from continuing operations per diluted share was $0.14 after preferred dividends.

DVA positively affected our results by approximately (technical difficulty) per share.

And as I mentioned, the MBIA loss negatively impacted our results by $0.59 per share.

Period-end shares outstanding were 1.93 billion, while our diluted average shares outstanding were 1.85 billion.

Book value at the end of the quarter was $31.42 per share and tangible book value was $27.95 per share.

Turning to the balance sheet.

Total assets were $750 billion at December 31, down from $795 billion last quarter reflecting lower client activity.

The liquidity pool was $182 billion at the end of the quarter and has remained at or above those levels even after paying down $2.5 billion of debt in early January.

Although our calculations are not final, we believe that our Tier 1 common ratio under Basel I will be approximately 13% versus 13.1% in the third quarter, and our Tier 1 capital ratio will be approximately 16.6% versus 15.1% in the third quarter.

Risk-weighted assets under Basel I are expected to be approximately $316 billion at December 31.

The change in RWAs from last quarter reflects the impact of the MBIA settlement, our move away from RWA intensive businesses, and the reduction in the balance sheet.

You'll note that our Tier 1 common ratio under Basel I is down slightly from last quarter despite the significant reduction in RWAs.

This was driven by two adjustments to Tier 1 common.

First, the diluted impact of the MBIA transaction under Basel I, as we indicated when we announced the MBIA settlement.

Second, a release by the Federal Reserve in December in which the regulatory definition of Tier 1 common capital was formalized to require the deduction of goodwill and non-servicing intangible assets associated with non-controlling interest.

This means that we deduct $4.2 billion of goodwill associated with MSSB NCI.

There is no impact to our Basel III ratios from this change because our current and future estimates of Basel III capital reflect the deduction of NCI.

We continue to build our Tier 1 common ratio under Basel III, which was approximately 8% pro forma as of the end of the fourth quarter, assuming full Basel III inflation of RWAs, no benefit from mitigation and unfavorable treatment of NCI.

In addition, we expect to have a Tier 1 common ratio under Basel III of close to 10% at the end of 2012 reflecting passive mitigation driven by position roll offs and consensus earnings.

Now turning to our businesses in detail.

In Institutional Securities reported revenues of $2.1 billion were down 68% from last quarter, including the $1.7 billion negative impact related to the MBIA loss that flowed through our fixed income business.

Excluding the impact of DVA in both periods and the MBIA loss this quarter, revenues were up 20% sequentially.

Non-interest expenses were $2.9 billion, down 4% from the third quarter.

The compensation ratio was 75% in the quarter.

Excluding the impact of DVA and the MBIA loss the ratio was 43%.

Non-compensation expenses declined 10%.

The business reported a pretax loss of $779 million.

Turning to Investment Banking.

Our results reflect our strong market positions against the backdrop of generally low market activity resulting in revenues of $883 million, up slightly versus last quarter.

At the end of the fourth quarter according to Thomson Reuters, Morgan Stanley ranked number one in global completed M&A, number two in global announced M&A, and number two in both global equity and global IPOs.

Notable transactions included Kinder Morgan's $39 billion acquisition of El Paso Corporation, Groupon's $805 million IPO, and Amgen's $6 billion investment-grade debt offering.

Advisory revenues of $406 million were roughly flat to the third quarter as higher revenues in the Americas offset lower results in EMEA.

Equity underwriting revenues were $189 million, down 21% versus the third quarter driven in part -- particular by lower activity in Europe.

Fixed income underwriting revenues of $288 million increased 36% from last quarter.

Results primarily reflected higher loan syndication activity and investment-grade bond revenues.

Equity Sales and Trading revenues of $1.3 billion included negative DVA of $23 million and were down 36% versus last quarter on a reported basis.

Excluding DVA revenues were down 5% sequentially and were up 8% from a year ago.

Although market volumes and liquidity declined in the fourth quarter with the Eurozone crisis weighing on client activity, our client revenues remained relatively resilient and we successfully navigated the turmoil.

The fourth-quarter results capped a strong year overall for the equities business.

Specifically cash equities and electronic trading volumes in particular outperformed broader market volumes.

After three sequential record quarters derivatives were down in a seasonally weaker period.

Prime brokerage revenues, similarly reflected typical fourth-quarter seasonality and lower market levels in the quarter.

The number of clients remained unchanged from the prior quarter and up from the prior year.

Fixed Income and Commodities sales and trading negative revenues of $257 million included positive DVA of $239 million and the negative $1.7 billion impact from the MBIA loss.

Revenues were down 107% on a reported basis.

Excluding DVA in both periods and the MBIA loss this quarter, revenues were up 13% versus last quarter and up 52% versus a year ago.

We continue to increase share in our focus areas and position the business for Basel III.

The investment in our rates franchise maintained its momentum with revenues up modestly sequentially and up materially year-over-year.

FX results were modestly lower than last quarter and up significantly year-over-year.

Our credit businesses recovered from a weak performance in Q3, but were still down materially versus a year ago.

Commodities revenues were lower due to unseasonably mild northern hemisphere temperatures and slower global GDP growth.

Results in the fixed income business were positively affected by the release of credit valuation adjustments due to the restructuring of certain peripheral exposures.

The other sales and trading line reflects revenues of $83 million versus a loss in the third quarter.

Turning to VAR.

Average VAR decreased from $130 million in the third quarter to $123 million this quarter using a four-year data series.

Period-end VAR declined from $143 million at the end of Q3 to $87 million at the end of Q4.

Total trading VAR was down at period end in large part due to the MBIA settlement closing towards the end of the quarter.

Related positions were captured in credit portfolio VAR.

Our average aggregated VAR by primary risk category for the quarter was $66 million versus $93 million in the third quarter, reflecting reduced activity, particularly in credit products.

Global Wealth Management revenues of $3.3 billion were roughly flat to the prior quarter in a period marked by low client volumes and the headwind of lower market levels at the end of the third quarter.

Specifically, Asset Management revenues were down 7% because fees are based on asset levels at the close of the prior quarter.

GWM's Investment Banking-related fees were relatively flat to last quarter, in line with the Firm's underwriting revenues.

Trading revenues were up significantly versus Q3, primarily driven by markups in deferred compensation plans, although it is important to note that this increase was offset nearly 1 for 1 in the compensation expense line.

Commissions were down 6% from last quarter reflecting reduced levels of client activity.

The other revenue line includes lower realized AFS gains compared to the prior quarter.

Net interest was up 12% sequentially attributable to the continued buildout of our lending business and performance of our investment portfolio.

Non-interest expenses were $3 billion, up 4% from last quarter.

The compensation ratio of 64% in the quarter continues to be driven primarily by the formulaic payout grid, but was elevated this quarter by the revenue mix, certain year-end adjustments and severance charges.

Non-compensation expenses were $932 million, up from $896 million in the third quarter reflecting seasonality and more normalized FDIC expenses, as I mentioned on our last earnings call.

Integration costs were approximately $73 million in the quarter.

Profit before tax was $244 million, while the PDT margin was 8%, which reflected the revenue mix and the expense movement I mentioned.

NCI for the quarter was $16 million, down from $52 million in the third quarter.

Total client assets increased to $1.6 trillion due to market appreciation and net asset inflows of $6 billion in the quarter.

Global fee-based asset flows were $4.9 billion.

Fee-based assets under management grew to $496 billion at quarter end, up 6% year-over-year.

Global fee-based asset inflows for the full year were $43 billion, the highest since the inception of the JV.

We are focused on growing this portion of flows because they enable us to deliver the best of our content to clients while building stable fee revenue and are more relevant to the economics of the business.

Global representatives at quarter end were 17,156, down just over 130 sequentially.

In preparing for the move of Smith Barney advisors onto the new platform, we reviewed and harmonized role definitions for Morgan Stanley and Smith Barney FAs, resulting in an increase of approximately 500 in the FA count as shown in our supplement as global representatives adjusted.

Our disclosure going forward will provide the FA count using the new methodology.

Turnover in our top two quintiles was at the lowest level since the fourth quarter of 2009.

Bank deposits were $111 billion at the end of the quarter, with approximately $56 billion held in Morgan Stanley banks.

Turning to Asset Management.

Revenues of $424 million were up from $205 million in the third quarter due primarily to markups in the Merchant Banking and Real Estate funds this quarter versus sizable markdowns last quarter.

In traditional Asset Management revenues of $290 million were flat to the third quarter.

In Real Estate Investing revenues of $111 million compared favorably to the prior quarter, which included markdowns on investments.

Given the ownership structure of these funds the majority of these revenues are passed to third-party investors in the non-controlling interest line.

In Merchant Banking revenues of $23 million were up from third-quarter results, which included markdowns related to declines in global markets.

Compensation expense was $183 million in the quarter, up from $132 million in the third quarter, driven primarily by favorable markups in deferred compensation plans.

Profit before taxes was $78 million.

NCI was $44 million versus negative $18 million last quarter, again, reflecting markups in funds versus markdowns in Q3.

Total AUM increased $19 billion sequentially to $287 billion driven by net asset inflows of $15 billion and market appreciation.

Net asset inflows included $8 billion of net inflows into AIP funds, leveraging both the institutional sales force as well as the MSSB platform and $7 billion of net inflows into liquidity fund.

With respect to our exposures in the European periphery and France we have provided updated and expanded disclosure in our earnings supplement.

Specifically we added a column for unfunded commitments, which are now included as a component of our exposure before hedges and our net exposure.

Previously we disclosed unfunded commitments in a footnote.

For the most part the unfunded commitments and the exposures excluding the unfunded commitments are consistent with the prior quarter.

The notable change is with respect to Italy.

In December we began to restructure certain derivative positions and amendments to those positions settled in January.

As a result, our Italian exposure was higher at year-end relative to the third quarter; however, as we highlight in the footnote to our exposure schedule upon settlement in early January the exposures declined materially, thus the data in the footnote most accurately reflects our positions post settlement.

Following settlement of the restructuring and excluding the unfunded commitments our comparable exposure to last quarter for the periphery are $4.3 billion before hedges and $2.3 billion net of hedges.

For France our comparable exposure to last quarter are $1.7 billion before hedges and less than $100 million net of hedges.

In conclusion, I will end where Jane started.

We are focused on that which we can control.

The markets continue to be affected by ongoing uncertainty in the Eurozone.

However, the strategic steps that we took in 2010 and 2011 cleared out legacy positions and enable us to focus our attention on building on the momentum we have across our businesses.

Notably, these strategic steps have both a P&L benefit as well as a balance sheet benefit reducing our funding needs.

Our banking pipeline is healthy globally.

Our equity business continues to distinguish itself.

Our fixed income business is on its way to reestablishing itself as a market leader in the areas we have targeted.

And we continue to focus on capital efficiency and balance sheet velocity.

Our wealth and asset management businesses begin 2012 well-positioned to leverage 2011 flows, the highest in some time for both businesses.

The steps we took also fortified our capital ratios, beginning in the first half of the year with the MUFG equity conversion, and ending the year with the MBIA settlement, providing additional capacity to deliver for our clients.

Our strategic moves have resulted in diversification of our funding sources, allowing us significant degrees of freedom.

Because of our increased funding diversification our plain vanilla debt issuance should be meaningfully lower than last year as we benefit from efficiencies available from additional channels.

Such as we have $66 billion of wholly-owned deposits across the Firm, a benefit of our MSSB joint venture.

Deposits are an attractive source of funding not only for our loan book, but increasingly for certain derivatives, which we are moving into the bank consistent with new regulations, including Dodd-Frank.

Our relationship with MUFG opened a new funding channel for the Firm.

We issued [Euro Daiichi] bonds through our joint venture in Japan in the last two quarters.

With our ongoing shift to more liquid flow businesses we reduced the number of assets that require unsecured debt funding, or what we refer to as cash funding, for our asset liability management governance.

And we have incremental flexibility in our liquidity pool, because our rolling 12-month maturities will be $10 billion lower at the end of the first quarter versus the peak in September of 2011, thus lowering our funding needs by a portion of that amount.

Now in 2012 with legacy problems behind us we are relentlessly focused on maximizing the return levers of our franchise.

We have momentum in our businesses.

We have and will continue to show discipline with lower non-comp expenses and have our peak compensation deferrals behind us.

Thank you for listening and James and I will now take your questions.

(Operator Instructions).

Howard Chen, Credit Suisse.

James, your comments on capital management seem more definitive on proceeding with the first phase of the buy in, where previously it seemed you are a bit more open to buying back the stock.

Am I reading that correctly, and if so, what is driving that change in thinking?

Well, I think, listen, the first tranche is only 14%.

It is a core plank in our overall corporate strategy, which we have made very clear.

We are very happy with the business.

I know the margins aren't where we would all hope they would be at this point, but the stability of the revenues, the stability of the asset flows and the stability of the managed money gives us great confidence in the business.

And, frankly, we are getting close to the end of the integration period.

So in a trade-off between financial management being a short-term decision around buybacks versus a long-term strategic management, our bias is on the long-term strategic management, which is the first tranche of the purchase.

Now all of that said, it is subject to price and it is subject to an appropriate price at fair market value.

So if we felt that we couldn't come to appropriate terms we wouldn't move ahead with it.

We have no problem with that.

Great.

And what about both?

Would it be a disappointing outcome if you had to choose between either doing the first phase or repurchasing the stock this year?

Listen, from my perspective you take these things sequentially.

I think that you have plenty of opportunities to move forward with buying back stock, raising dividends or buying the remainder of Smith Barney.

And what we have tried to do as a firm over the last couple of years is be very steady and methodical and take one step at a time.

Great, thanks.

Then in equities you both highlighted the share gains within the business over the recent-year quarters, but could you just elaborate on what businesses and/or regions have been the primary contributors and how sustainable you believe those share gains to be?

So we have had actually strength globally and across products, as I noted, and are pleased with the strength of the global team.

I think that as we have gone through the year you heard it on both the banking side and the sales and trading side, given the ongoing overhang of issues in the Eurozone that has been a more challenging market but real breadth across -- around the globe.

Thanks, and then, Ruth, a quick one on the numbers.

On that $600 million crystallized CVA gain this quarter can you help quantify what losses to date were on those exposures prior to this quarter's gain?

I don't have that, but that is, as you characterized, the reversal of prior losses that have bled through the P&L.

Okay, finally, and then I know it is early in the year, but could you just give a flavor for how business is progressing?

One of your peers mentioned yesterday business was about the same as the beginning of last year, and wanted to get your thoughts on that.

Thanks.

Well, with a caveat that it is -- two weeks is not a quarter, I would say that we ended the year feeling better about the state of the market.

There is a lot of cash on the sidelines from clients, our banking pipeline is very healthy.

The equity new issue pipeline in particular has been on hold for quite some time given the volatility in the market last year.

The M&A pipeline is healthy.

So with that very large caveat that two weeks is not a quarter, it is feeling a bit better.

But I come back to the -- that point there is still uncertainty in the Eurozone, there are still issues in the macro environment.

We are feeling better, but it is still early.

I would just add to that on the broader economic front that in the -- our view has been that the US is a little better off than has generally been perceived, and that Europe is more likely than not to resolve itself, although over a period of a couple of years, not a couple of weeks, which was our collective attention span in the fall.

So against that macro outlook it is -- we are as Ruth said.

Great, many thanks for the thoughts.

Mike Mayo, CLSA.

If you could elaborate a little bit more on MUFG.

You commented on the funding.

What is your intention highlighting that so much at the top of today's call?

Is it that they are there -- someone with deep pockets if you needed some extra help or am I just missing the point?

Listen, it is -- how many times in the history of financial services have you seen a cross-border equity investment from one bank to another of this kind and the merger of different parts of their businesses, which we did with our securities business in Japan?

And so, number one, there is a strategic story here.

Number two, the conversion obviously improved our capital and reduced a mandatory dividend that we were paying.

And I just felt, and maybe I am the only one who felt this, but I felt that the world at large did not appreciate both the strategic and financial value of this transaction.

They are the second-largest depository institution in the world.

I think they have 70% more deposits than any US institution.

I may be incorrect on that, but I think I'm roughly correct.

And I think because they are in Japan they are not as well understood as, frankly, they are in our backyard.

They are great partners, and they have worked hard with us over the last several months to find ways to be do business together.

And I think that is a strategic imperative for us to keep growing with the most partners and finding ways to do business around the world, and I just felt it was important to get that message out there.

Right, thanks.

Then one separate question.

When you think about rightsizing the firm, the Company has hired many employees the past few years and now you need to reduce employees.

It is always very difficult in markets like this, but can you talk about the trade-off between rightsizing for the current cycle and investing for the long term?

We were focused on -- have been focused on the pacing of the recovery and it continues to be slow.

We therefore felt it was appropriate to reduce headcount.

But that reduction is very consistent with what we have been describing strategically and is quite targeted.

So we have been judicious in investment areas, particularly within sales and trading.

So, for example, in rates, which has obviously been a focal area, and as I noted up again this quarter, up year-over-year, we have continued to make key hires in research and trading to protect and support those growth areas.

We have also been making -- taking steps deemphasizing and reducing balance sheet and risk in areas that are inefficient under Basel III.

So, for example, within our sub investment-grade securitization through 2011 we were reducing risk, which not only freed up capital and liquidity, but enabled us to make some headcount reductions.

But we have a strong team there that has been proactive in repositioning the business and now they're focused on those portions within securitization, the higher-quality, credit-quality tranches that actually are quite consistent with the new Basel III regime.

So what we have tried to do is really strike that right-downs between reducing headcount where we could, while making sure we well-positioned for the recovery, which as James said, hopefully comes sooner rather than later.

All right, thank you.

Guy Moszkowski, Bank of America.

There is some sort of phone problem, so thanks for taking me back in the queue.

I wanted to ask you if you could elaborate a little bit on some of the headwinds that you had in 2011 from multiple years of deferred comp.

And if you can just give us a little bit more granularity on how that rolls off after 2011 and 2012 and beyond?

So in Institutional Securities we did take comp down meaningfully per person this year.

As we said in the fourth quarter of last year call, we have increased the deferral rate to 60% for 2011 versus 40% previously and made a number of other changes.

This resulted in a higher comp expense in 2011, notwithstanding the decrease in comp per person, because 2011 was a transition year with an unusual aggregation of referrals coming into 2011.

But as James said, when we look at the deferral schedule going out from here, and going most important into 2012, prior-year deferrals normalized and, in fact, decline in 2012, and we do have more flexability.

So it is really about 2011 being that transition year.

Is there any more quantification that you can provide us as we try to accurately reflect this in our models?

No, we are not doing that.

Okay, fair enough.

I wanted to ask about Global Wealth Management and the divergence in the fourth quarter of the revenue versus the expense trend.

I think you did cover it a little bit, but it was a pretty meaningful divergence, not for the full year but certainly for the fourth quarter, and yet I would hope that by now we would be starting to be able to see some of the benefit of the efficiency movements that you have made and being able to take advantage of the single platform.

A fair point.

Fundamentally we had consistent revenues which underscore the stability of the business, but as James said, the margin wasn't quite where we want it, and there were a couple of factors affecting that.

As we said on the third-quarter call, revenues are meaningfully affected by the S&P close at the end of the year.

You know that better than anyone.

And the 9/30 S&P close was pretty depressed.

That is used as the basis for setting asset management fees for the quarter.

I think the good news as we are sitting here today is the S&P close at the end of the fourth quarter as of 12/31 was 11% higher than it was at the end of the third quarter.

But that was a head wind for the fourth quarter.

The other thing was there was a lighter equity issuance calendar.

And, again, that is market related, and hopefully we see some more activity coming out of that new equity pipeline, which does remain strong.

The other factors though that were fourth quarter specific, affecting in particular the comp expense, one, we have been taking out the -- reducing headcount with the lower performers and so we had some severance costs in there.

The other is that productivity of financial advisors has been increasing, and at higher productivity levels they are entitled to a higher comp.

And this year that was a fourth-quarter true-up.

Last year was a fourth-quarter true-down.

And then the other factor I noted is market appreciation from the deferred compensation program, that is those that are invested in funds, generally flows through the revenue line and the comp expense line, so it becomes zero margin revenue.

And it was really a number of different factors, but you are right and the focus of the team is very much focusing on expense across the board so that we can continue to drive the margin higher.

Thanks, I have one final question, which is just on the investment banking and trading opportunities that you might be seeing emerging from the problems that some of your European competitors are seeing, and their need to shrink balance sheets may be faster than some of the US firms -- are you see significant revenue opportunity starting to develop there?

Well, we are focused on it across industries given the strength of our banking franchise globally, but in particular in Europe.

So on the financial institutions side the expectation is there will be more opportunities to help clients raise capital and restructure balance sheets.

But I think the other factor to consider is it is not just within the same client base, it is really more broadly across industries.

As we look at in 2008 European banks took share from US banks, and that is obviously when this country was going through its capital raise focus and liquidity raise.

And given that European banks are now going through similar issues, our view is that that creates an even broader set of opportunities beyond just say given the strength of our franchise, we do see this as an opportunity to gain share.

On the sales and trading side we are well-positioned and hope to build off the momentum that you have seen in some of the numbers through this year.

And then on the balance sheet side, I think that, again going back to James' comments about the strength of our partnership with MUFG, it just further strengthens our ability to help clients in Europe as well.

I think as you -- in any industry restructuring as the players between sort of 10 to 20 range exit, clearly that share is going to flow to those at the top.

And a lot of our businesses are ranked one, two or three in the key businesses we are in.

So I think there is probably a little bit of a short-term impact, but I do think there is a longer-term changes in industry structure that should play to our advantage.

Is there any sign that some of those changes might be starting to improve market-making spreads pricing?

We haven't seen it yet.

Okay, we will keep our fingers crossed.

Thanks.

Glenn Schorr, Nomura.

Two quick follow-ups on FICC and equities.

First, in FICC in general, whether or not you want to include the CVA changes, if you back out TBA, CVA, MBIA is the right starting point for the quarter for FICC on a clean basis going forward $600 million-ish?

I will let you judge how you want to look at it.

Excellent, I can read that.

Thanks.

And equities, Ruth, your comments were very clear that cash in electronic was a better driver.

In the quarter NPB and derivs sequentially were lower.

I mean, something is going really right in cash and electronic, and I just don't know if you have any more you can tell us.

Is it what you and James both just alluded to in Europe or is this just constant progress and getting a greater share of client, while of course it is significant outperformance if it is cash and electronic?

It is real outperformance relative to the market volumes that we saw.

With market volumes down there was strength there.

I would say that the strength of the team across products continues to be a real driver for the performance in the business and you see it year-over-year.

When you look at the sequential improvement, the strength that we had in derivatives, and it goes back to a lot of the comments we have had on prior calls, which is the team has been focused on really building adjacencies across its business, ensuring that we built up what we did on the derivative side.

You go back two years ago and we said we are going to build up equity derivatives.

We had three sequential strong quarter there.

And so it is really across products working together as well as they do and around the globe.

So the benefit of the electronic platform is it is still delivering to clients electronic and voice.

It is working well and it is really enabling us to stay as well connected to clients as possible.

It sounds like you feel it is sustainable as well.

I appreciate that you're the only person I cover that actually expanded the European exposure disclosure.

But what is the net net?

Meaning I don't know if I heard the -- we feel very comfortable, we think their exposures are collateralized.

What is your net net feeling on your euro exposures?

We do feel -- I think you have summed it up well -- we feel very comfortable with our exposures.

We think that continuing to provide the transparency is helpful, and so we have expanded the disclosure this quarter.

But we feel very comfortable with our exposures.

We have got a strong business in Europe and we remain present, but we like the way we have managed over the last several years here.

I would say we were never quite in the camp of the hysteria that surrounded us last October about our European exposures.

We are a little bewildered by it to be honest, which led us to a very fulsome disclosure in the appendix last quarter, and it has been added to with the unfunded commitments this quarter.

Frankly the position has been improved by reducing one of the larger concentrated positions.

And then lastly is the overhang in Europe and uncertainty there, is that the major impetus to remove a cloud to get to a higher earnings level?

I appreciate all the progress made, but I am sure people are still looking for more in 2012.

That is the primary overhang.

This year -- this past year, 2011, was the dual complexity of all of the drama around the debt crisis and the downgrade for the US.

But as James said, I think there are more signs of progress so far in the US and that the ongoing uncertainty in the Eurozone continues to be a big cloud.

There clearly also is some of the question marks around regulatory uncertainty.

But if you were to rank them I think the Eurozone and therefore the issues that are holding back some clients from executing on transactions is the problem.

All right, thank you.

I am good.

Roger Freeman, Barclays Capital.

I guess first just you have talked about some of the resizing that you have done.

I guess I'm curious how much of the forward-looking -- and you said too -- you identified business you want to be in, but how confident are you around where the outstanding regulatory questions, the rules around derivatives, Volcker are going to land, such that that may still be subject to substantial revision going forward or do you think you have a pretty good sense of positioning at this point?

Well, I think, as we have said for a while, the most important regulatory change or the capital requirements coming out of Basel III, and I think we have a reasonably good handle on where that is likely to end.

The whole Volcker Dodd-Frank discussions are obviously still very much ongoing, as witnessed by the hearings yesterday.

And it is -- listen, we have obviously done an enormous amount of work internally quantifying the impact of different rule changes, what they would mean for our business and so on.

We are -- our base case is not an extreme shutting down of all market-making activity.

And we think that the original concept of Volcker, which was to ensure that deposits were not used for highly liquid prop trading should be honored and then we would move forward with that.

So it is -- the regulatory front remains very much in dialogue.

You've got governments around the world weighing in on the US position to make sure that the various international bond markets aren't disproportionately affected.

You've got inventory management by large institutions like ours to ensure that we can provide liquidity for our clients.

So it remains fluid, as you know, but we run all sorts of scenarios against it.

Okay, that's helpful.

Thanks.

And separately, other sales and trading, I was wondering if you could give us a little more color on what drove the delta there?

You mentioned hedge gains on owned debt.

Did you repurchase some of your own debt during the quarter, and if so, how much and is that an ongoing activity?

Well, you've got a couple questions in there.

So the other sales and trading line is -- we have talked about in the past it is pretty difficult to model, I appreciate, because it has a number of items in it.

It has amortizing hedges from debt we bought back in 2008, 2009.

It has our long-term debt hedging program.

It has our bank liquidity portfolio, loan book, our deferred compensation plan and so it is -- sometimes the items all move in one direction.

Sometimes they are offsetting, and so therein lies the complexity.

We did buy back some of our debt over the quarter.

It was a small amount, and so that really didn't explain it.

It was really just the various across-the-board items.

Okay, got it.

Then lastly, do you -- similar to what Goldman talked about yesterday on their relationship lending, both the CV backdrop, is that a big business for you?

Are you considering potentially moving to hold to maturity?

And tied to that more broadly are there other issues like this that maybe we put in the active mitigation bucket that when we look forward to Basel III it helps you to even grow these ratios higher than what the passive roll forward points to?

So with respect to lending and HFI, fundamentally we are a mark-to-market shop.

I think as it relates to the loan book we obviously have a bank.

We are the 15th largest US depository by deposits.

And so we are always considering what makes sense in terms of capital and funding efficiency.

I think notably in CCAR mark-to-market loans were penalized substantially more than HFI loans.

And I would argue it is our responsibility to consider what makes sense for shareholders.

So that is one consideration.

Then the other question I think you are asking is with respect to what other repositioning under Basel III.

And I think we have, as I noted, continued to focus on two things really within fixed income.

One is share gains, the other is return on capital.

And part of the return on capital driver is really having a forward lens to Basel III requirements and ensuring that we are positioning our businesses to be as capital efficient under this Basel III regime.

And so there should be continued benefit from active mitigation as we continue to right-size some of the business -- portions of businesses that are most affected by Basel III.

Okay, thanks a lot.

Michael Carrier, Deutsche Bank.

Ruth, maybe one follow-up on the expenses.

So you guys have the efficiency initiative over the next, I think, two more years on the $1.4 billion side.

And then you have some of this restructuring.

So I guess just some update on what is going on maybe in the first, second quarter on the cost side, given some of the more recent moves versus any change on that longer-term efficiency project for the $1.4 billion?

So on the Office of Reengineering we remain comfortable with that $1.4 billion.

That is a target by 2014.

And we are also very comfortable with the run rate target for this year, which is $500 million.

The key focus areas are the same as the ones we have discussed previously, the highest ones being location strategy, procurement programs and tech spending.

And so that is very much on track.

But I would underscore the non-compensation expense this quarter, which as I said, was down relative to last quarter, and that is notable because the fourth quarter is typically our sequential high, and it really underscores what we are doing at the tactical level.

So if you put the Office of Reengineering in this bucket of bigger, more strategic, however you want to define it, cost cutting that takes longer to do, because we are repositioning the way we do certain elements of the business, and put that to the side.

We also have a tactical initiative and we are pleased with our non-comps because it shows that on even across-the-board small items we have taken a really diligent approach to ensure that we are doing all that we can to control costs.

And that also persists as we move into this new year.

Okay, that's helpful.

Then, James, just on the Wealth Management business, so two things there.

Margins in the fourth quarter tend to be low, you guys mentioned, just given the seasonality of expenses and then given where markets were.

As we head into this year, and assuming rates don't change, where do you think margins can get assuming flat to slightly up markets?

And then just in terms of the buy in, based on where you guys have it marked and where Citi has got it marked, in terms of odds of getting that concluded or taking in that 14% state, like if it is somewhere in between like a middle ground is that -- do you see enough value in that business to be purchasing it for some level that is in that range?

I will talk about the second question and Ruth can talk about where we are looking at the margins here.

On the process, just recall it is a call option exercisable I think at May 31 or June 1.

If the parties can't agree we go to a third-party and it is at fair market value.

I don't think there is going to be a whole lot of mystery, frankly, irrespective of whatever institution has it marked at is kind of irrelevant.

It is a question what is fair market value.

And we are both mature grown-up institutions.

I think we will quickly figure out fair market value, and if we can't then we will obviously go to a third-party.

So it is not a traditional M&A type transaction in that the price is already determined, which is fair market value.

So I am not particularly focused on that element of it.

And as we said earlier, if you look at the strategic rationale for this business it is part of our long-term plan, and we obviously count the goodwill against our capital already in it, so the incremental cost, if you will, of doing this against the benefit is relatively small to say the least.

Ruth, I don't know if we want to -- if we have anything more to add on fourth quarter and where we are looking at it this year.

The only other thing to add, this is our call option, so similarly our call option and whether it goes to arbitration.

But with respect to margins, now we are continuing to focus on the mid-teen margin target.

And the levers that we've talked about remain very much the ones that Greg and his team continue to be focused on.

So on the cost side the lower integration expense having cracked the back on the major expenditures with the technology platform done in the third quarter of last year.

But, also, given the environment, the team has raised the bar in expense management.

And then similarly on the revenue side, the real focus on continuing growth of the managed account platform, as I mentioned, the ongoing growth in lending and a couple of other issues, and to be clear, that is not mid -- that is not 2012 guidance, that is our mid-next year guidance.

Okay, thanks a lot.

Fiona Swaffield, Royal Bank of Canada.

I just had a question on the risk-weighted assets under Basel I.

I think you said $316 billion.

Could you take us through some quantification of the moving parts?

And then I also think that you mentioned some investment-grade securitizations having done some work on reducing.

Would that then mean that the Basel III, is that part of the $100 billion roll off or does that mean the $480 billion, which I think will obviously have gone down post the MBIA to maybe $430 billion, if you could confirm that, does that mean that number could be coming down a bit?

I wonder if you can help us on that.

So on Basel I why are the risk-weighted assets lower?

They are lower in part as I noted because of MBIA, and also the balance sheet is lower and so risk-weighted assets came down in line with where the balance sheet is.

With respect to Basel III, what we are really focused on given there have been a number of changes affecting -- in guidance affecting both numerator and denominator over the last year and a half when we initially gave out guidance on RWA, inflation and mitigation, and Basel 2.5 has moved from an NPR to 2.5 -- it is moving around, so as a result, what we thought is the most effective and useful is to give you where we are in Tier 1 common ratio.

Our Tier 1 common under Basel III, we are comfortable that it is approaching 10% by year-end 2012.

And the numerator we are deducting the MSSB NCI and adding consensus earnings.

And in the denominator you have RWA inflation and passive mitigation from here through the end of 2012.

We will continue to be focused on active mitigation to your question, and so that remains incremental upside any active mitigation, but focused on the overall ratio here.

Okay, thank you.

Daniel Harris, Goldman Sachs.

I was wondering if we can continue to focus on Global Wealth here for a second.

So you mention that by the middle part of the year the integration should be largely complete on the technology side.

What happens then at that point with regards to the number of offices you have, and how do we think about that, assuming all else equal, with regards to your ability to take out non-compensation?

The offices -- we are continuing to look at where there are efficiencies in combining offices.

Sometimes there are; sometimes there aren't, because you have fully staffed active offices potentially within a similar area.

So you can assume that across the board we are continuing to look at where there -- where it makes sense to further consolidate or take -- or cut costs and that the team is being quite detailed about that.

With respect to the technology spend and integration-related costs, the integration expense does come down.

There is some software capitalization that then comes in, so you can't assume it is a cliff that drops off to zero.

But it has come down meaningfully and that is the real point here.

And so we hit the high point and it is rolling off.

There are ongoing expenses that hit the P&L, and then the other expenses that the team can focus on include everything that you can imagine, all the details within the P&L to do whatever we can to drive margins.

So the integration costs this quarter were roughly $70 million or so and you expect that should trend down a little bit and not get to zero?

The point is the integration expense comes down to zero, but I just wanted to make it clear that from a margin impact that there are offsets to that.

Namely, I think the one most relevant is software capitalization and there are some other items that continue to flow through the P&L once we are steady-state.

Okay, thanks.

And then lastly on for me, so thanks for the color earlier on the very early two weeks of the year here.

Obviously, a lot of us track activity levels and they certainly seem weaker, but I wanted to focus in on one area that is more difficult and that is credit.

I think that that is the one area where we look at that we can actually see some good results if you're thinking about credit tightening and structure credit trading.

Is that an area that has been something that has been better than we saw in the fourth quarter, which was down -- better in the first quarter that was down last year?

Well, it is again -- it is very early, too early to say.

I think that the marks that we -- the pain in credit in the third quarter was acute.

And as I noted, it was modestly -- you know, it was better this quarter, but still not running at levels that are consistent with historic levels for that business.

We have a very strong credit business broadly, and so there is upside as credit markets continue to heal.

But I would say that given that the major overhang, as both James and I said, is the Eurozone crisis or uncertainty in the Eurozone, it is too early to make a call on that.

Okay, thanks, Ruth.

With that we look forward to speaking to you on our first-quarter call.

Thanks so much for joining us this morning.

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

You may now disconnect.