道富銀行 (STT) 2008 Q4 法說會逐字稿

Good morning.

Welcome to State Street Corporation's fourth quarter call and webcast.

Today's discussion is being broadcast live on State Street's website at www.StateStreet.com/stockholder.

This call is also being recorded for replay.

State Street's call is copyrighted, all rights are reserved.

The call may not be recorded for rebroadcast or distribution in whole or in part without express written authorization from State Street, and the only authorized broadcast of this call is housed on State Street's website.

At the end of today's presentation, we will conduct a question-and-answer session.

(Operator Instructions).

Now I would like to introduce Kelley MacDonald, Senior Vice President for Investor Relations at State Street.

Before Ron Logue, our Chairman and Chief Executive Officer, and Chief Financial Officer, Ed Resch, begin their remarks, I would like to remind you that during this call we will be making forward-looking statements.

Actual results may differ materially from those indicated by these forward-looking statements.

As a result of various factors, including those discussed in a Form 8-K filed this morning, as well as State Street's 2007 Annual Report on Form 10-K, and it's subsequent filings with the SEC.

We encourage you to review those filings including the sections on risk factors concerning any forward-looking statements we make today.

Any such forward-looking statements speak only as of today, January 20th, 2009, and the Corporation does not undertake to revise such forward-looking statements to reflect events or changes after today.

I would also like to remind you that you can find slide presentations regarding the Corporation's investment portfolio and asset-backed commercial paper conduits, as well as our fourth quarter and fiscal year 2008 earnings press release, which includes reconciliations of non-GAAP measures referred to in this webcast, in the Form 8-K filed this morning, a copy of which can be accessed in the Investor Relations' section of our website, as referenced in our press release this morning.

Ron.

Kelley, thank you.

Good morning, everybody.

This past week and weekend have been very unsettling in the global markets of financial stocks.

Last week, two of the larger US banks announced continuing issues, and sought further assistance from the government, impacting investor attitudes towards US financial stocks.

Then yesterday, regulatory intervention in the United Kingdom further damaged the market and it's impact in the US today is as yet unknown.

We today, announced strong 2008 results, and fortunately have built our regulatory capital, our Tier-1 capital stands at 20.49%, and our Tier-1 leverage ratio stands at 7.74%.

Now despite the two strong ratios, we understand that many of our investors are concerned about the mark-to-market impact of conduit consolidation on our tangible common ratio.

Therefore we had considered raising additional equity capital.

To assess that issue and evaluate the current marketplace, we held confidential discussions with some of our institutional investors.

Based on these discussions, and given our strong regulatory ratios, our outlook for 2009, the strength of our business, we have determined not to raise equity capital.

As several of them mentioned, the environment right now is changing very quickly.

We are likely going to see additional government initiatives to stimulate a more normal financial market, and in fact, as I will explain in a minute, the marks on our investment portfolio have improved over the past two weeks.

In addition, we expect to generate between 160 and 200 basis points of organic capital over the course of 2009.

Obviously the increases in the negative marks in our investment portfolio and in our conduits concern us.

But we still believe that they are for the most part a result of the lack of liquidity in the market, and not a result of their credit quality.

Although the first two weeks of this year is not a valid statistical sample, we have some room for optimism, as the negative after tax marks in the investment portfolio have improved about $400 million after tax.

While the conduit marks have remained flat compared to December 31st, 2008.

As to what happened since the presentation at the Merrill Lynch Conference on November 11th, when we indicated that our outlook for 2009 was for operating EPS to approach the low end of our 10 to 15% range, and what we meant by that was a 6 to 8% increase from 2008.

After my remarks, in fact I believe on the very next day, Secretary Paulson announced that the government no longer would be purchasing troubled assets with TARP funds, which in our opinion further stressed the securities markets, and reflected in further degradation in our marks.

This followed by the issues with the auto manufacturers plus more dour news about the consumer markets, caused our assumptions about our 2009 outlook to change.

Hence we are adjusting our outlook to expect flat operating earnings per share.

We believe we have had a head start in rebuilding this earnings growth, due to our strong financial performance in 2008.

Now in many ways, we are unique with respect to our financial performance compared to many others in the financial services industry.

We achieved all of our financial goals in 2008, which we will discuss in detail on an operating-basis.

We never reported a quarterly loss.

We generated significant positive operating leverage on an operating basis.

We achieved record revenue growth.

We quietly and successfully integrated our acquisition of IFIN, while keeping almost all of their customers.

Throughout the last six quarters of market turmoil all the assets in our investment portfolio and conduits that were due to mature during that period did in fact mature at par.

As we have been saying all along, as we have been saying all of our unmatured portfolio holdings continue to make required interest and principal payments.

Regarding our 2009 outlook, we expect servicing fees to be down, new business momentum is strong going into the first quarter.

Market disruption has caused many participants to rethink outsourcing of their administrative functions.

We don't think securities lending revenue is going to suffer the kind of contraction some may think.

The customer flight to quality is expected to become a bigger wave as time goes on, and will manifest itself in later quarters and later year revenue.

This should benefit trading as there will be fewer secure firms with which to trade.

Likewise, hedge funds, many of which do their own administration or source it to a prime broker, are looking to outsource administration to independent third-party providers, like State Street.

Managing expenses will be a bigger factor in our performance.

Although we will keep our long-term financial goals, we do not expect to meet them this year.

But we are creating the foundation to allow us to meet those long-term goals in later years.

Let me briefly be a little more specific about our Let me briefly be a little more specific about our 2008 performance.

For the year and the quarter, whether on an operating or a GAAP basis, we earned a profit.

On an operating-basis comparing 2008 with 2007, revenue increased 25% against our goal of 14 to 17%, and EPS was up 14%, against a goal of 10 to 15%.

Our return of common equity also on an operating-basis was 17.9%, ahead of our 14 to 17% goal.

Given the background of the market disruption I would say our business performed very well.

Looking at the entire year, we saw continued strength in our servicing, trading, and securities finance businesses, despite weakness in equity markets.

Our servicing fee revenue was up 11% in 2008, compared to 2007.

And our management fee revenue was only down 10%, compared to a decline of approximately 18% on average in the S&P 500 and the EIFA.

Due to increasing spreads and securities financed and volatility in FX markets, both of those businesses grew, whether comparing 2008 with 2007, or comparing the quarterly year-over-year rate, or the sequential quarter rate.

Fully tax equivalent net interest revenue due to the reductions in the federal funds rate, as well as the impact of additional deposits left with us increased 56%, comparing 2008 with 2007, and net interest margins certainly outperformed most expectations.

And lastly, through a combination of revenue growth and cost controls, we achieved about 240 basis points of positive operating leverage for 2008, compared with 2007.

Due to the continuing questions we get on our securities lending program, let me also differentiate our program for you.

First, we act as agent, not as principal.

Securities lending provides a vital source of liquidity to equity, bond and money markets, as well as reduces the cost of trading and settlement, thereby benefiting all market participants.

Our securities lending funds continue to perform well, despite illiquidity in fixed income markets, a dramatic deleveraging of the markets generally, and a reduction in the demand of borrowed securities.

The investment funds underlying the program are invested conservatively.

It is true that some of of our customers have suspended participation in our program.

But that number has not changed significantly since the end of the third quarter, when we reported about 10%, or 45 of our customers had suspended participation in our program.

We have seen increased withdrawal activity from the collateral pools, due to the general deleveraging in the marketplace, but have been able to manage these outflows in a manner that protects our customers.

And in keeping with the flight to quality that I mentioned earlier, we are seeing additional interest in our program from several potential customers.

Continued wider spreads are expected to at least partially offset the impact of lower volumes, until some of our customers resume their lending activities.

If spreads narrow, we would need to see an uptick in volumes to maintain the same revenue level.

I would contend that while our securities lending industry is facing challenges, our securities lending program remains strong.

Let me remind you that the two primary ratios we manage to are regulatory, one is our leverage ratio, and the other is our Tier-1 capital ratio.

Corporation's Tier-1 capital ratio is 7.74% at December 31st, 2008.

We have let it rise to this level to provide us with additional flexibility.

Corporation's Tier-1 capital ratio as of December 31st, 2008 stands at 20.49%, we believe high by any standard.

We have confidence in the quality of our assets, both in the investment portfolio, and in the conduits.

Now as some evidence of our confidence in the quality of these assets, in 2008 over $8 billion of our structured securities in the investment portfolio paid down.

All did so at par.

Despite the fact that they were priced on average at a 7.8% discount to book value.

Also I remind you that none are in default, and all are current for principle and interest.

Same could be said for the conduit marks, which have improved a bit in early January, and all securities are current for principal and interest.

In the fourth quarter, we recorded about $78 million in other-than-temporary impairments, 0.1% of our total average portfolio.

I hope you would agree, a very small number on both an absolute and a relative basis.

We believe multiple government programs like the TARP, and others anticipated by Washington, will eventually have a positive impact on the overall market environment.

Our unrealized marks at least for the first two weeks of this year have improved.

Importantly, we can earn 40 to 50 basis points in organic capital each quarter in 2009.

We believe our assets are for the most part going to mature at par.

All of our assets, both in the investment portfolio and the conduits, as I said are current for principal and interest.

Moody's has reviewed our assets.

They consider the ultimate loss on portfolio to likely be low on a held to maturity basis.

Our regulatory ratios are among the highest in the financial services industry.

We are also making progress at reducing the size of our asset-backed commercial paper program, which stood at $29 billion as of December 31st, 2007, and was about $24 billion as of December 31st, 2008.

So if the FASB proposal is passed as it exists today, we believe we would be required to consolidate the conduits on January 1st, 2010.

We are managing the conduits to a smaller size, which together with at least four more quarters of additional organic capital growth, and hopefully more normalized markets, will help to mitigate the impact of consolidations.

Sometimes we are asked, why don't you just consolidate the conduits and put this issue behind you?

Well the answer is simple.

Our financial risk is exactly the same, whether we consolidate or not.

We still have exposure to the assets, which as we have repeatedly said, we believe the vast majority will mature at par.

Until markets begin to repair and resume some degree of normalcy, we expect some volatility to continue in foreign exchange, and spreads to remain wider than normal in securities lending, we would say at least during the first half of 2009.

It is also an emerging strong interest on the part of traditional asset managers, to finally outsource the administration functions of their business, and we are talking with many of them now.

There is no guarantee that we will see many large outsourcing deals this year, but we are talking to firms that heretofore would not have entertained the idea.

And as I mentioned earlier, we expect to see additional business from large hedge funds that traditionally self-administer.

On the expense side, we are executing against our reduction in force, and other strategic cost initiatives that we announced in December.

We are maintaining very tight controls in head count, and we are budgeting no salary increases in 2009.

At this point, I would like to turn the call over to Ed to give you more detail.

Thank you, Ron.

Good morning everyone.

I would like to start talking about the investment portfolio, particularly the mortgage-backed and asset backed securities classes, which in November saw significant widening of spreads, in what we think is an incredibly illiquid market.

During the quarter we made one classification change to the investment portfolio, where we transferred $14.6 billion of RMBS, Alt-A and CMBS assets to the held-to-maturity portfolio from the available-for-sale portfolio.

97% of these securities are rated A or above.

As we have said many times, we believe these assets are of high quality, and we have the ability and intent to hold them to maturity.

The unrealized after tax mark widened by $3 billion, from $3.3 billion at September 30th, 2008, to $6.3 billion at December 31, 2008.

With respect to the November 7th transfer of the $14.6 billion of assets from the available-for-sale portfolio to the held-to-maturity portfolio, $1.4 billion of after tax unrealized losses is included in equity, and therefore is included in the OCI calculation.

As of last Friday, January 16th, the after tax unrealized loss in the investment portfolio had improved by $400 million to $5.9 billion, compared to December 31st, 2008.

As in the investment portfolio, the illiquidity in the market resulted in an increase in the unrealized after tax mark-to-market loss in the conduit portfolio to $3.6 billion.

An increase of about $1.4 billion from September 30th, 2008, due primarily to higher credit spreads on US non-agency RMBS.

As of last Friday, January 16th, 2009, the unrealized after tax loss on the conduits remained approximately flat compared to December 31st, 2008.

Now let me move on to a discussion of our fourth quarter results.

This morning all of my comments will be based on our operating basis results, as defined in our press release this morning.

In Ron's remarks, he highlighted some of the achievements of the year.

My remarks will focus on the fourth quarter's operating results.

Servicing and management fees actually performed fairly well, particularly in light of the more than 40% decline on average in market valuations on both the S&P and the EIFA, comparing the fourth quarter of 2008 with the fourth quarter of 2007.

The continuing volatility in the market benefited our trading revenue growth, particularly foreign exchange, compared to the fourth quarter of 2007.

Performance in securities finance was also strong on a year-over-year and quarter-to-quarter basis.

At quarter-end, we had $347 billion in securities on loan, and the duration on the securities lending book was 22 days.

I would like to stop here, and call your attention to the 8-K we recently filed, calling attention to the net asset values in the co-mingled pools of assets, that support our securities lending program.

These pools represent about 1/3 of the total $347 billion period-end securities on loan that I just mentioned.

The securities lending business transacts at $1, while the net asset values of the underlying funds float over time.

On December 31st, 2008, the average current market value of the unregistered funds was approximately $0.939.

The issue that we have highlighted is whether our participants in our program, including our SSgA funds that engage in securities lending, will be able to continue under current accounting rules to value the interests they the collateral pools at the transaction price of $1, or at the NAV of the underlying pool.

Customers continue to enter our program, knowing that the valuations can vary.

We have not had any credit issues on securities in the co-mingled pools.

This disclosure does not affect customers whose cash collateral is managed in separate accounts, which is a significant percentage of our overall book, or any of our registered money market funds.

Now for the remaining items in the income statement.

The increase in processing and other fees on both a year-over-year and sequential quarter basis, was primarily due to increases in product related revenue.

Of particular note, however, are the higher fees from the asset-backed commercial paper program, where fees from this program increased from $5.7 million in the third quarter, to $28.5 million in the fourth quarter, due primarily to the timing of rates where asset backed commercial paper funding rates dropped, relative to the higher reset rate on the assets.

Regarding the Investor's Financial acquisition, we achieved accretion of $0.06 per share for 2008, significantly ahead of our original plan at the time of the acquisition.

Regarding expenses, a 6.5% increase in fourth quarter expenses compared to the third quarter.

I will comment on only two areas.

First, salaries and benefits expenses declined 5% from the third quarter, due primarily to a lower level of incentive compensation.

And other expenses, however, were up more than 65% compared to the third quarter, primarily due to three items.

One, securities processing costs were higher than normal, while the third quarter costs were lower than normal.

Two, the costs of regulatory fees and assessments increased more than $30 million.

And three, risk and compliance expenditures increased.

We do not expect this level of increase on the other expense line to continue into 2009, but rather expect it to decline about 20% on an annual basis.

Due primarily to strong customer deposit flows, and the lowering of the Fed funds rate late in the third quarter and again in December, net interest revenue increased about 42% from the year-ago quarter, and was up 27% from the third quarter.

The 75 basis point cut was unexpected at the time of the third quarter call, and so our performance exceeded our expectation at that time.

Net interest margin of 228 basis points was up 6 basis points from the third quarter of 2008 on an operating-basis.

Now let me turn to the investment portfolio.

The size of the investment portfolio has not changed significantly since the third quarter.

However as I mentioned in my opening remarks, the unrealized mark-to-market losses have widened further as of year-end.

Two issues continue to dominate the financial system.

Declining housing valuations and weakness in consumer markets as unemployment increases.

It appears as if the government's proposed programs are beginning to impact these two issues, but it is far too early to tell if the government actions will eventually return these markets to a more functional state.

In our investment portfolio slide presentation, we have updated the data through year-end for you to review.

Since our holdings of non-agency RMBS, Alt-A, and subprime asset-backed securities have raised questions, let me provide some additional data on these compared to industry benchmarks, particularly the JPMorgan MBS credit index for the mortgage-backed securities, and the ABX for various vintages and the INTEX indexes.

First, the non-agency prime RMBS holdings.

The JPMorgan MBS credit index shows a loan to value of 71%, and State Street's holdings have an average loan to value of 69%.

Credit enhancement.

The JPMorgan MBS credit index has credit enhancement of 5% whereas State Street's holdings have an average credit enhancement of 9.1%.

84% of of our holdings are rate AAA or AA, and 61% are 2005 vintage or older.

Then the non-agency Alt-A holdings.

The JPMorgan credit index shows 24% of these holdings comprised of option ARMs, whereas State Street has no option ARMs in it's portfolio at all.

Secondly, the 37% of the Alt-A securities in JPMorgan's MBS are fixed rate, whereas State Street has 73% fixed rate.

The JPMorgan MBS index has a loan to value of 75% in it's Alt-A holdings, whereas State Street's loan to value is 69%, and the credit enhancement on the Alt-A securities in the JPMorgan MBS credit index is 7.5%, and State Street's is 11.1%.

And last, the subprime asset back securities.

State Street's credit enhancement is almost 43%, and 45% of it's holdings are from vintage years 2005 or earlier.

The historic cumulative loss for State Street's 2005 portfolio is 3.91%, for 2006 is 4.01%, and for 2007 is 3.53%.

The INTEX market shows 4.95%, 8.1% and 5.61% for respective periods, and the ABX historic cumulative losses are 5.73%, 6.89%, and 5.54%, also for the respective periods.

I use these three examples to illustrate the differences among our holdings, and those referenced in industry-wide tables, which I realize many of you may rely on for information.

As Ron said earlier, we expect the overwhelming majority of these assets to mature without loss.

We chose them after a thorough review of their quality and risk in those assets.

I think everyone will admit these are very unusual times, and we believe our portfolio has and will continue to perform very well.

During the quarter we recorded $78 million of other-than-temporary impairments, and for all of 2008 we recorded $122 million, or about 0.2% of the average portfolio for the year.

At the same time, we are not in the corporate lending business.

The majority of the loans on our balance sheet are customer overdrafts, mostly overnights, and are not subject to the types of credit risk associated with commercial or mortgage loans.

As of December 31st, 2008, our portfolio is 89.3% rated AAA or AA, 78.2% AAA rated and 11.1% AA rated.

We have had no defaults, and all securities are current as to principal and interest.

For the past two quarters our balance sheet has been larger than normal due to increased liquidity from our customer deposits in the recent market environment, and our participation in the Fed's AMLF facility.

I remind you that we bear no credit or capital risk for holding the AMLF assets.

As we indicated on the third quarter call, we are not recording revenue from the AMLF program as part of our operating revenue for 2008, or for 2009, although it has been extended through April 2009, we expect it will be phased out by then.

As of December 31, 2008, we left $52 billion in excess balances with central banks.

Ron already talked about the two main ratios that we manage to, the leverage ratio which stands at 7.74% as of December 31, 2008, and the Tier-1 capital ratio which is 20.49%.

On a pro forma basis, considering consolidation of the conduits as of December 31, 2008, the Tier-1 leverage ratio would decline to 5.56%, and the Tier-1 risk based capital ratio would be 14.73%.

Our TCE ratio is 4.46%, but is 1.05% on a pro forma basis, considering consolidation of the conduits.

Next a discussion of the asset-backed commercial paper program.

As in the past, you can find a detailed quarterly review of the assets displayed by type, country of origin, and ratings in the asset-backed commercial paper slide presentation.

Also there you will find the unrealized after tax mark-to-market losses for each asset type, and the stresses we applied to them.

In the interest of time, I will not discuss them in detail today.

As of December 31st, 2008, the conduits held assets of $23.9 billion, down from $25.5 billion on September 30, 2008, due to the strengthening of the US dollar, as well as asset amortization.

As I have said many times, we created this program in 1992, primarily to address customer requests for high quality, highly rated commercial paper.

The conduits have never suffered a credit loss on any asset they purchased, evidence of our strong credit discipline.

78% of the assets are rated AAA, AA and A, compared to an average computed by Moody's of 51 programs, which is 30%.

None of the assets in our conduits are subprime, nor are there any SIVs in the conduit program.

As of December 31, 2008, the assets continue to have an average weighted maturity of about four years, and as I have said all securities in the conduit are current as to principal and interest.

As I am sure you are aware, the commercial paper market has been considerably strained, particularly in the fourth quarter.

As a result, we utilized the CPFF program to prudently manage our year-end liquidity position.

As of December 31, 2008, our conduits sold $5.7 billion in commercial paper to the CPFF program, and we held just $230 million of commercial paper on our balance sheet.

Due to the high quality of the assets and their performance, we do not currently believe we need to consolidate the conduits.

We stress test the assets to support this conclusion, and of course if the credit situation were to deteriorate more severely than the criteria we used in our testing, then we might be required to consolidate them in the future.

From a funding standpoint, the risk of a more immediate consolidation is included in our contingency funding plan.

Also we are well prepared for consolidation if required by FASB as of January 1st, 2010.

Also the CPFF provides us with a liquidity facility for our commercial paper if necessary.

As of December 31, 2008, given the market environment, we carried about $43 billion in liquid assets on our balance sheet.

Before I make some concluding remarks, I do want to correct some misinformation in the market.

In the fourth quarter of 2007, we took a charge, which included $160 million we contributed to SSGA's Stable Value funds.

That infusion was made in January 2008.

We took an additional charge of $450 million for an infusion made in the fourth quarter of 2008.

The January 2008 contribution has been misinterpreted as January 2009.

We have not put any money into the Stable Value funds during 2009.

And those funds today are among the healthiest in the Stable Value industry.

Let me make a few brief remarks about our outlook for net interest revenue in 2009.

First of all, we believe 2008 was an anomalous year with unusually strong growth in net interest revenue, and atypical net interest margin expansion.

In 2009 we assume that we will continue to invest conservatively, preserving capital, and not reach for yield.

We have about $15 billion in assets maturing in 2009, the spreads available to us for reinvestment are wider, by about 100 basis points than the spreads of the assets maturing.

We are evaluating opportunities for reinvestment carefully, and are waiting for government programs like the TALF to take effect, so as create a more normalized environment for new issuances.

We expect the yield curve to remain steep, but with LIBOR spreads coming in as the market more normalizes.

We expect interest earning assets to remain relatively stable with those of 2008.

Our net interest margin is expected to be around 225 basis points on average for the year, about flat with the net interest margin in 2008.

Both numbers excluding the impact of the AMLF revenue, and in 2008 also excluding the SILO adjustment to net interest revenue.

We also assume that Bank of England will cut it;s overnight rate to 1% by April, and hold it at that level for the rest of the year.

And similarly the ECB to cut it's overnight rate to 1.5% in April, and hold it steady for the rest of the year.

And in terms of the US Fed, we expect the Fed funds rate to stay where it is, 25 basis points for all of 2009.

So in conclusion, 2008 was a very successful year for State Street, setting record levels of operating revenue and operating earnings per share in the face of a dysfunctional market, and serious issues arising in the financial services instrument.

While 2009 we believe will be challenging, we also feel we are positioned to perform very well, and deliver returns to our shareholders.

Now I will turn the call back to Ron.

Ed, thanks.

Given our outlook for 2009, as compared to 2008, we believe we have the revenue opportunities and the expense controls to meet our new 2009 goals.

Revenue growth is expected to be fairly flat with our record level in 2008.

We expect operating earnings per share to be flat from 2008.

And we expect returns on common equity to be slightly below the low end of the 14 to 17% range.

So to summarize, on the revenue side we expect the momentum we achieved in 2008, with wins to be installed in 2009 to benefit us.

Additional revenue synergies from Investors Financial Services acquisition, strength in the first half of 2009 in trading and securities financed due to the continuing volatility in the market.

Some improvement in the equity markets over the year, so that for the year we are assuming a 1,000 average for the S&P 500.

Net interest margin to be similar to 2008, as Ed explained in his remarks.

On the expense side, we expect to retain strong control of headcount, budget for no salary increases in 2009, and in general we expect expenses to be lower in 2009.

Now it is clear 2009 is going to be difficult for all of us.

Revenue and earnings are going to be harder to find.

Customers will continue to seek safety, and expenses are going to be very tightly controlled.

We think the survivors of this financial crisis are going to be the ones that have stronger capital positions, effective risk management processes, and a legacy of strong revenue generation.

So now with that, I would be happy to take your questions, so I will turn it over to questions.

Thank you.

(Operator Instructions).

Your first question is from the line of Glenn Schorr with UBS.

Hi, thanks, guys.

Hi, Glenn.

I don't know if I missed the actual numbers, but during the quarter what was moved into held to maturity, and how much?

About $14 billion, Glenn.

And is there an additional cost?

Can I add the two numbers up and come up with the over $2 billion additional cost, or if it got moved or not, is there indifference or the impact on TCE?

Yes, it is in two pieces, okay?

We brought the securities over on November 7th, and at that point in time we recognized about a $1.4 billion mark-to-market through equity, and then since the time it has been in held-to-maturity, the mark has declined another $800 million.

So you have to add those two numbers together, to give you the effect on a mark to market basis, relative to those $14 billion of securities.

Okay.

So whether you move them or not, the 1.4 has moved through the OCI line, correct?

That is correct.

Tha i's the mark you took when you moved it over.

The 800 has not.

That is correct.

So theoretically there was no additional cost of moving anything over, it is just that, I am assuming it is subprime, foreign RMBS and Alt-A, things like that got moved over?

RMBS, CMBS and Alt-A.

So if there is further spread widening, that will not run through the OCI?

That will not affect OCI, nor the TCE ratio, correct.

And then just talking about the TCE, I thought there was a bit of a move by the regulators, rating agencies, to have some more comfort with TCE to risk weighted assets, or something maybe in between the regulatory ratio and TCE ratio.

Where does that stand?

Because there is no mention of it in the release.

The rating agencies have expressed some views on that, relative to State Street, and I think, frankly, for one of the rating agency their thinking on the TCE ratio has moved a bit, to consider it to be more important in their evaluation of us, and the other rating agency that I am referring to, seems to have more of a focus on risk weighted assets and other metrics.

So I think there is a little bit of a difference as to approach among the two rating agencies that I am referring to.

And our discussions with them relative to our ratios and our earnings release continue, as they normally do.

And normally I would say customers don't care, but how much do customers care now?

In other words, if the game plan is no capital raised right now --

Right.

-- can you run with a 1% for a while?

Well, Glenn, this is Ron.

In terms of customers, in terms of past experience, there has been, never that I know of, any discussion about that whatsoever.

So yes, I think we can.

Now running with that means consolidation of the conduits, which hasn't happened.

I understand.

I understand.

We unfortunately tend to price in all bad things these days.

I understand.

And then in terms of the thought process on the go-forward, A) we are kind of levered to the direction of spreads, not as levered, given the move of some things into held-for-mature, but we are still levered toward incremental widening of spreads, so is there any thought process around, besides constantly monitoring the public markets, another TARP injection, a strategic buyer, anything along that lines?

Well, obviously we are going to look at other ways to deal with TCE, but I think what we have to do is, first of all, obviously it is a fluid situation.

There are going to be a lot of I would sa,y different government stimulus programs.

I think we have to evaluate that first, and obviously take a look at that, and depending on what they look like, take advantage of that, if we so feel that way.

So obviously we are going to be open to that.

Got it.

And then one last question.

On the negative spread in the conduit, you mentioned the reinvestment potential.

I think I remember the rules being that you can actually go up to four quarters before you actually even need to address, right?

The negative spread at the end of this quarter is not necessarily a force.

Is that correct?

You are referring to the slide, Glenn?

Yes.

Yes.

That is actually a reflective of the very positive funding cost at the conduit, given what rates did in the quarter.

But you are correct in your question, that the conduits have to be what is called a going concern, and it is not a short-term test for a week or a month.

The conduit can experience a contraction in it's profitability, and still be considered a going concern, and pass the FIN 46 test.

Okay.

I will let others get on.

Thanks.

Thanks, Glenn.

Your next question is from the line of Ken Usdin with Banc of America.

Thanks.

Good morning.

Good morning, Ken.

Ron and Ed, just to follow up, just on the rating agencies, where do they just currently stand, as far as the current capital ratios?

I think, Ed, you mentioned that one might be moving toward the analysis of TCE.

Have they both come out and reiterated their views, or changed their views at all?

No, we have purviewed our earnings with them, and we are awaiting their feedback.

They have not given us any indication as to their reaction to this earnings announcement.

Obviously, we have discussed with them all of our capital ratios as part of that process, Ken.

Okay.

My second question is just regarding just other potential calls on capital.

You mentioned a couple of the items that were in the 8-K, but as far as right now, are there any anticipated charges, or sizable hits that could come down the pike, like of which we have seen in the last few quarters, either via market related disruptions or OTTI, and if anything is baked into your assumptions?

No, we don't have anything like that baked into our assumptions, Ken.

And we don't have anything that we have identified, either.

Okay.

And then my last question is just can you talk about, on the expense side you talk about having a lot of flexibility.

We obviously know about the severance package.

But can you just walk us through just the litany of the whole expense base, and maybe just even if you can size it relative to 2008, or how much discretionary spending you really expect that could go away, I guess as we go forward?

About the salary and benefits piece with the severance, the reduction of force that is taking place, so that is there.

That is obviously the biggest line item.

Second biggest line item is IT, and I think as you know, the way we express that is spending 20 to 25% of our operating expense every year in IT.

Now obviously in 2009, we are going to be closer to 20, if not at 20, or maybe even a little lower.

Obviously that is discretionary.

One of the good things in 2008, because we had such a good year, we got a lot of things done.

We built capacity.

So we are in pretty good shape there, so we have some discretionary there.

The third piece would be other expenses.

You can see that other expenses were up quite a bit in the fourth quarter.

Again there doing some things where we have some discretion, and actually where we have some variable expenses in using contractors, as opposed to full-time programmers.

So we built in I think over the last two or three years a little more variability in our expenses, so we are able to do more than we were able to do three or four years ago.

Okay.

Thanks a lot.

Your next question is from the line of Nancy Bush with NAB Research.

Good morning.

Hi, Nancy.

Ron, I guess I am grappling as is everybody else with the change in guidance, and I realize that if indeed you come through with flat operating earnings in '09 versus '08, that is probably going to be a heroic performance, but why did you wait until now to lower the guidance?

I mean, it is not a newsflash that '09 was going to be a tough year, so why didn't you do this at the end of the fourth quarter?

Well, we just waited for the earnings call.

There was no real reason why we didn't do it then.

I guess we could have, but we were just going to do it in conjunction with our earnings.

Obviously we also needed to understand what the situation was.

We had to approve a budget from our Board in the middle of December.

So I would say just normal reasons.

No particular reason.

Could you just repeat for us, I am sorry if I missed this, but the factors that have led you, any specific line item factors that have led you to lower the guidance from I think it was up 10% to 15% to flat?

I mean, what are the --?

Oh, yes.

A lot of it had to do with what happened in the last quarter of the year.

Let's talk about rates for a second.

Fed rate going down to 0.25, what is happening with rates in Europe.

The markets themselves in general, in terms of our assumptions of where we thought the equity markets would be.

Continued dislocation.

And all that was emerging and happening in the last couple of months of [2004], as we were gauging basically what we thought we could do and looking at where some of those offsets were, one, expense, and two, if there were other revenue lines where we could do some things.

Also understanding that there was significant new business that was sold in the third and fourth quarter, that was being installed in the first and second quarters.

I think we alluded to it in the press release.

We may not have alluded to it here, but I believe the number is $317 billion of custodial assets that will be installed in the first and second quarter, and in varied types of revenue.

And so all of that was being factored in in that equation to come to that conclusion.

And I guess I would ask at this point, I mean, since the improvement in the TCE ratio, which is what you are forecasting 40 to 50 bips per quarter, is based on your comfort with your outlook for '09, I mean, what is your comfort level with the new guidance?

Well, we feel pretty comfortable about that.

If things got worse, obviously that is going to have an effect.

But I think like a lot of others, we are thinking towards the latter half of the year, hopefully things will get better with all of the government programs.

We are seeing potentially some continued big business wins.

I talked about some of the outsourcing things.

As I said, I can't guarantee that, but the activity and the pipeline, and the fundamental business is extremely strong right now.

I think a lot of that has to do with the flight to quality.

So we feel pretty comfortable in terms of the basic business.

The securities lending spreads are still wide.

We are still seeing volatility in the FX markets.

So I think there are some offsets there that we feel pretty good about.

But what we come back to is the fundamental strength in the underlying business.

Thank you.

Your next question is from the line of Mike Mayo with Deutsche Bank.

Hi, Mike.

Can you elaborate more on the decision not to raise --

Mike, we can't hear you.

Can you hear me now?

A little better, yes.

Can you comment on the decision not to raise capital?

I mean, you have among the highest regulatory ratios in the industry.

Yes.

But to the extent that you have the lowest common denominator effect.

In other words, if one major party says they are concerned about your capital ratios, even if it is just one rating agency, would that become the relevant indicator that you need to raise capital, and how did you weigh that against the reaction you got from the investors?

Well, obviously the regulatory ratios are very, very important to us, but there has been continuing concern on the TCE ratio, and yes, the rating agencies may be going back and forth, or having different opinions, but I think what we need to do is balance the need for capital, different types of capital, in terms of earnings, and what we need to do is make sure that we have good data, a good understanding of what we think we need to do, and an understanding, some understanding of how the environment is going to change.

So there is not one bright piece of data that I can point to, but I think it is all of that.

Well, can you give more detail about what the investor feedback was?

Was it like 90% said don't raise capital?

Was it unanimous among the large investors?

No, what I can say, I think investors said the financial markets are pretty crazy right now.

It is a difficult time to do something like that.

There are government programs that are going to come into play pretty soon.

So as I have said, what happened in the last couple of weeks, things have become very disrupted, so there was a feeling that it may not be the best time.

And we took that to heart.

The more general question is I will put words in your mouth.

I am sure you think the stock price is ridiculous, relative to the fundamental value of the firm.

Yes.

The question is what can do you about it, would you consider mergers?

Would you consider selling off pieces of assets?

What is in your control to get the stock price higher, so this doesn't become a self-fulfilling prophecy, and eliminate the flight to quality benefit that you have?

Obviously, I can't talk about some of those things, Mike.

What I can talk about is things that we can, not in detail, but things that we can do to affect TCE.

And things that we may or may not do in terms of the new government programs, and that is about all I can really discuss in terms of things that we can do.

And when might we hear, I guess this was asked already.

The issue is we don't know what the rules are for capital, and I would say that covering the industry, and covering it for two decades.

What are the rules for capital, and it varies bank to bank, regulator to rating agency.

Do you agree with that, and have you spoken to anyone in government about that, because we don't know if it is tangible common equity.

We don't know if it is Tier-1.

We don't know if it is leverage, or if it is case by case.

How can we analyze the industry, why would anyone put private capital into the industry, and how do you manage your business?

Do you have any thoughts about that?

Are you dealing with government at all here?

You broke up a little bit, I think I have the essence of your question.

We look to the regulatory agencies as extremely important.

And one of the reasons why they are what they are and we are going to continue to do that, but we have to look at all of the ratios, and find some way to moderate, I guess I would say, the balance in terms of what is the right thing to do.

I don't know what more I can say about that, other than it is truly the balance that we are trying to find there in terms of the ratios, between rating agencies and regulatory agencies.

All right.

Thank you.

Your next question is from the line of Betsy Graseck with Morgan Stanley.

Thanks, good morning.

Hi, Betsy.

Couple of questions.

One is on the various portfolios and the duration of the portfolios.

Could you just give us the duration of the held-to-maturity portfolio, as well as the held-for-sale and the conduit at this stage?

Let me get it, Betsy.

He is looking for it right now, Betsy.

Okay.

Okay.

The investment portfolio duration is 1.69 years at the end of the year, Betsy.

That is in total.

I don't have the breakout on the HTM portfolio at hand.

Why don't I get back to her?

Yes.

I think Kelley MacDonald can get back to you, Betsy, with details there.

Okay.

And on the conduits, let's see.

Quarter of a year.

So one quarter?

Yes, because it is all floating rate.

Oh, right.

Okay, and the liability side?

Of the conduits?

Yes.

Is 25 days.

Right.

On average.

Okay.

And then could I ask how you are thinking about the dividend, because the dividend does obviously reflect your long-term earnings capability, but in this environment where you are triangulating between different investor needs and capital needs, how are you thinking about that going forward?

I guess the best way to answer it is we are thinking about it, and obviously we are going to be evaluating that in the first quarter.

We will take a look at it.

I don't think we have any hard and fast decisions about that at this point in time, but it is obviously one of the things that we can use.

Okay.

Thanks.

Your final question is from the line of Gerard Cassidy with RBC Capital Markets.

Good morning, Gerard.

Ron, on the assets under custody and assets under management, obviously the market has had a very severe negative impact on the balances outstanding, how much new business did you have coming in the quarter, or did you lose any business going out, besides due to market deterioration?

Again, you are breaking up.

I think you are asking how much new business did we bring in and how much did we lose?

Correct.

We brought in a lot of new business, continued record new business.

As I said, we are installing $317 billion in this year that we won.

The fourth quarter numbers, I don't know them off the top of my head.

There was about $400 billion in assets, in business launched.

About $400 billion in asset servicing in the fourth quarter.

And about 34 in Asset Management.

And about 34 in Asset Management.

Losses were very small in asset servicing.

Actually, probably smaller than we have seen in past times.

And a lot of the losses were basically liquidations in funds, as you might imagine, as opposed to losses to others, and Asset Management, I can't remember how much it was.

It was about 400.

398.

398.

Yes.

No, of Asset Management.

How much losses?

I don't know.

I don't have that Gerard, right now.

Okay.

We will get it for you, though.

In the third quarter you mentioned that you had a terminated repo agreement with one of your customers, and you took the collateral from Lehman, which I believe is CMBS.

Yes.

You set aside $200 million, I believe, in the third quarter.

Where is the value of that CMBS today, or did you add to that reserve?

Gerard, this is Ed.

We are carrying on our balance sheet that collateral at a value of $800 million.

We evaluated it year-end, and determined that the carrying value was appropriate so we took no additional write-downs on that, subsequent to originally putting it on our balance sheet net of that $200 million reserve.

Regarding the OTTI in the Accounting literature, is there any time requirement, meaning if the temporary impairment lasts longer than 12 months or 18 months, are you forced to then make it an OTTI charge, even though you may not believe it is deserved?

No, there is no bright line test in the accounting literature.

It is an area of judgment.

And we have what we think is a very robust process around looking at our securities for Other Than Temporary Impairment.

And I can just describe it briefly.

We have a price screen and a duration screen for how long the security has been at a certain level.

That then gives us a population of securities to look at on a more detailed level.

We do detailed cash flows on them, and the accounting requirement is that if we determine that it is probable that all amounts due under the terms of the securities will not be collected, then we impair it, and we did so this quarter on 11 securities, for a total of $78 million pretax.

Finally, in your 8-K that you filed on Friday, you guys talked about your unregistered cash collateral pools, and how you have been purchasing and redeeming them at $1 NAV, and I think you said the average weighted net asset value was $0.95955.

How much in the quarter, did that cost you any money for you to keep your customers at $1, in terms of from a P&L statement, even though the value was about 0.955?

No, Gerard, it did not.

I mean, that is a disclosure item in the NAV calculation.

It is presented as part of our financial reporting to the customers of the program, and if you recall the program that we are talking about, is one where we operate as agent in the securities lending business.

So there is no financial impact to us in the quarter, nor do we anticipate that there will be going forward.

Okay.

Thank you.

This concludes our question-and-answer session.

I will turn the call back over to Mr.

Ron Logue for any closing remarks.

No, no closing remarks.

Thank you everybody for attending this morning.

Thank you all for participating in today's conference call.

You may now disconnect.