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Q1 2008 Merrill Lynch Earnings Conference Call - Final
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| Copyright: | CCBN, Inc. and FDCH e-Media, Inc. | | Source: | FD (FAIR DISCLOSURE) WIRE | | Wordcount: | 6664 |
OPERATOR: Good morning and welcome to the Merrill Lynch first quarter
2008 earnings conference call. All lines have been placed on mute to
prevent any background noise. After the speaker's remarks there will
be a question-and-answer session. (OPERATOR INSTRUCTIONS)
I'd now like to turn the call over to Sara Furber, Head of Investor
Relations. Please go ahead ma'am.
SARA FURBER, DIRECTOR OF IR, MERRILL LYNCH: Good morning and welcome
to Merrill Lynch's conference call to review our first quarter 2008
results. The following live broadcast is copyrighted to Merrill
Lynch. Statements made today may contain forward-looking information.
While this information reflects management's current expectations or
beliefs you should not place undue reliance on such statements as our
future results may be affected by a variety of factors that we cannot
control. You should read the forward-looking disclaimer in our
quarterly earnings release as it contains additional important
disclosures on this topic. You should also consult our reports filed
with the SEC for any additional information including risk factors
specific to our business and the information on calculation of
non-GAAP financial measures that is posted on our investor relations
website, www.ir.ml.com where an online rebroadcast of this conference
call will be available later today at approximately 11 a.m. Eastern
time. And with that I'll turn the call over to John Thain, Merrill
Lynch's Chairman and Chief Executive Officer.
JOHN THAIN, CHAIRMAN OF THE BOARD, CEO, MERRILL LYNCH: Thank you
Sara, good morning everyone. I would characterize our first quarter
results as good operating results in a very difficult environment.
The widening of credit spreads, forced liquidations, high volatility,
the lack of market liquidity for many credit products is probably as
difficult a quarter as I've seen in my 30 years on Wall Street. And
in that context we generated $7.4 billion of revenues before our
marks and their fair value gains. And a number of our businesses did
very well. We had record Global Wealth Management revenues with an
industry leading proportion of fee-based revenues. We added $9
billion to our annuitized products and we added $4 billion in spite
of the market environment in net new money, $1.3 billion of which
came from First Republic, so that acquisition is starting to bear
fruit. In our trading businesses we had record revenues in rates and
currencies, almost double from the year ago quarter. We had 20%
year-over-year revenue growth in our equity financing and services
businesses. And we had the highest revenues in cash equities in the
Americas and EMEA since our 2000 record levels.
Investment banking we did well - We were in the top 5 of debt and
equity lead tables. We were the # 1 in EMEA mergers on a completed
basis. We were # 3 in the Pac Rim. And although our investment
banking revenues were down significantly for the first quarter,
what's interesting and good is that our pipeline was down only 5%
from the fourth quarter and down 6% from the first quarter of '07.
Which means that although the deals were delayed they're still there
and so we would hope to realize those over the course of the rest of
the year.
Internationally our revenues were strong. Japan was up 87%, Latin
America was up 67%, EMEA also had good growth. We are focusing on the
rapidly growing parts of the world. In Brazil you saw we hired a
senior investment banking team. In India we're building on our
equities trading platform and our wealth management business. In
Korea we've just obtained our banking license. And recently, last
week, I was in Japan and China, where we also see great opportunities
to grow our businesses. And then our investment in BlackRock has
experienced exceptional growth, and just on a market value basis the
current market value of BlackRock is over $13 billion versus about $8
billion that's on our balance sheet. So I think that our operating
businesses in this environment have done well.
The second focus for us has been on our balance sheet. We've been
very actively managing our balance sheet and our liquidity positions.
As you've seen already from the release, our liquidity is up from the
fourth quarter of last year. We were very concerned about the market
environment at the end of last year. We had $79 billion of cash
available at that time, and we've increased that to $82 billion at
the end of the first quarter. This gives us tremendous flexibility in
this difficult market environment. I would also say that our bank
deposits, we had $100 billion of bank deposits,is a very stable
source of funding for us.
On the capital side we've increased our saved capital from $36.7
billion at the end of the fourth quarter to $41 billion. We are well
capitalized under the risk rated asset test. And for those of you who
like to blog, we do not have any plans to raise any additional common
equity and Nelson actually agrees with that. In terms of leverage, we
had been reducing our balance sheet. Our risk related assets are down
7%. Our leveraged loan book- this is a good example of places where
we have been able to make some progress reducing our balance sheet-
our leveraged loan book was down from $18 billion at the end of the
fourth quarter to $14 billion. And that reduction was actually a $5
billion reduction with a $1 billion increase. Those were done through
cash sales right around our marks. So that actually is a good sign
that we're getting some liquidity into the marketplace.
On the sub-prime, except for CDOs our sub-prime position is down from
$2.7 billion to $1.4 billion. And we're bringing our risk down, our
VaR down from 65 to 59. We're also, we have also been successful in
what we said at the beginning of the year we would do in terms of our
principal investing. So we said we would start to move our principal
investing into third party funds. The first piece of that was
completed this quarter where we raised the third party commercial
real estate fund in the Pac Rim and we moved $723 million of assets
from our balance sheet into that fund. That fund ultimately we expect
to be between $2.5 billion and $3 billion.
So our balance sheet's in good shape, our operating businesses are
good. There's no question that the credit spread widening that
occurred in this quarter impacted our inventories, particularly our
ABS CDO inventory. You saw from the press release we had $1.5 billion
of net write-downs on ABS CDOs, obviously much, much lower than the
fourth quarter of last year. Just to give you an idea of how we were
pricing those, we moved our cumulative loss assumptions on sub-prime
mortgages from what was a range of 16% to 21% at the end of the
fourth quarter, to a range of 19% to 24% at the end of the first
quarter. And remember, at 24% that would mean that if half of the
mortgages defaulted you would lose 48% of the value of the home. So
very, very significant price declines. And just in terms of the
average over the U.S. so far, year-over-year home prices are down
about 11%. Although sub-prime in certain areas are down more than
that.
We did increase our credit reserves on monoline hedges against the
ABS CDOs by $2.2 billion. And I think what's important there is that
if you look at the total gain that we have on our shorts that are
protected by the monolines it was $7.8 billion. We have reserved $4.8
billion of that which is over 60%. But unlike the CDOs where I think
that it's not very likely we will recover value on, we do expect in
many cases to recover a significant amount of the reserves and at
least some of those monoline insurers continue to be rated AAA. So
we're much more comfortable that we're being conservative on the
monoline reserves and we would expect to recover that over time.
On the expense side, we have announced that we are going to reduce
our headcount approximately 10% from the beginning of the year
levels, excluding our financial advisors and the support to the
financial advisors. That should generate about an $800 million a year
run rate savings. It's a very targeted headcount reduction. We are
not in any way pulling back from our fundamental strategy, we are not
changing our view that we need to invest in the faster growing parts
of the world. And so the headcount reduction will be made in those
slower growing areas that are not the focus of our global strategic
growth.
And then lastly, I'll just comment a moment on the economic
environment, then I'll turn it over to Nelson to give you some more
details. I think that we are seeing some improvement in the credit
markets, the leverage loan markets probably a good example of that.
We are seeing some improvement in spreads. And I think the real risk
going forward here is how much do all of the problems in the
financials and credit markets seep into the real economy? What is the
impact of higher energy prices, higher food prices, higher
unemployment and falling home prices on the consumer and what's the
impact on that in terms of the U.S. economy and ultimately the global
economy? We are planning for a slower and more difficult next couple
of months and probably next couple of quarters. But we're also
optimistic for our results for the full year of 2008. And so with
that I will turn it over to Nelson.
NELSON CHAI, CFO, MERRILL LYNCH: Thanks John. Let me take a moment to
review our major segments. In our Global Markets business first
quarter revenues of negative $690 million were up substantially from
the fourth quarter, but lower than the prior year period as a result
of the weaker capital markets environment. GMI's pretax loss for the
quarter was $4 billion. Turning to the revenue detail by business
line, FICC revenues were a negative $3.4 billion as the business
continued to face significant head winds due to our CDO
monoline-related exposures which I'll detail in a minute. However the
positive trading environment drove FICC revenues of $1.9 billion
which exclude marks of $6.6 billion in fair value debt gains of $1.4
billion. In fact the vast majority of the FICC businesses
demonstrated sequential growth from the fourth quarter including
rates and currencies, credit trading, commodities and municipals.
Rates and currencies in particular generated record revenues this
quarter benefiting from the combination of increased capital
allocations, favorable market positioning and strong client flows.
As I'm sure you've all seen, we've disclosed our key exposures in
attachments five and six in this morning's release. With that in
hand, let me walk you through each of our major exposures. The
majority of the write-downs this quarter were related to the ABS CDOs
and related monoline exposures, as John mentioned earlier. On the
super-senior ABS CDO front,at quarter-end our gross exposure was $26
billion, down from $30 billion at the end of the year. And the net
exposure related these positions was $6.7 billion. As you can see in
our release write-downs in this area were offset by an increase in
our net exposure due to the reduction of certain hedges. Namely at
quarter end we made a decision to consider notional hedges of $1.1
billion with MBIA ineffective as we are working to expedite the
resolution of a potential conflict related to hedges we have with
SCA. This is a decision that was made-- made clear economic sense as
the carrying value on the MBIA hedges that we have considered
ineffective was less than $50 million.
We remain prudent in our approach. During the quarter we increased
our average cumulative loss assumptions for this portfolio across all
underlying collateral types. And we are taking into consideration
incremental remittance and other data which was negative during the
quarter, although for which the velocity of the downward trend has
slowed. As a result of the losses in our underlying super-senior ABS
CDO positions the corresponding value of our related hedges of the
monolines increased during the quarter. For these hedges our credit
valuation adjustment was negative $2.2 billion during the quarter
which are largely driven by gains on hedges and a number of rating
downgrades for the monolines we have exposure to. As John mentioned
again, on average we have written down the value of these hedges to
$0.40 on the $1 at quarter end, levels that while appropriate are
conservative relative to fundamental cash flow expectations for most
of the monolines.
Away from the $10.9 billion of hedges we have with the monolines on
the super-senior ABS CDOs, as you can see in the bottom of attachment
five, we have $9 billion of CDO hedges with other financial counter
parties such as insurance companies and hedge funds. We remain
confident in the strength of these hedges as the ratings outlooks for
these counter parties are stable and they continue to post collateral
as required. With respect to residential mortgages within the FICC
business our exposure has increased slightly. Although approximately
70% of this figure reflects prime mortgages, almost all of which are
from our GWM private clients, which in their history of experience
virtually zero defaults.
During the quarter the most significant drivers of change were $3
billion of prime mortgage originations and the net purchases of $900
million of Alt-A securities which are partially offset by sale
securitization and other changes in hedging activity. On our
leveraged finance front our write-downs were slightly more than $900
million driven by significant spread widening and market illiquidity.
We reduced our exposure by approximately $4 billion in the quarter
and sales were completed at levels consistent with our marks at the
time of the execution. In commercial real estate our exposures were
also impacted by the weaker market environment. However gains on
commercial real estate loan sales more than offset our marks. We
remain comfortable with the quality of both of these portfolios and
will selectively reduce our net exposures to these asset classes
consistent with our overall strategy to reduce less liquid assets.
Finally within our U.S. Bank investment securities portfolio, we
recognized approximately $3 billion of pretax net write-downs through
other comprehensive income or OCI, and approximately $400 million of
net write-downs through the income statement. The largest contributor
to these write-downs was our exposure to Alt-A securities which we
have written down to an average of less than $0.70 on the $1.
Turning to equity markets, first quarter net revenues of $1.9 billion
were down 13% sequentially. The solid growth in financing and
services, equity length and approximately $700 million in fair value
adjustments related to certain long-term debt liabilities were more
than offset by declines in our principal-related businesses. Within
our financing and services business we reported double-digit
sequential and year-on-year revenue percentage increases. Our client
balances are up 27% year-over-year and down only modestly from record
levels in the 2007 fourth quarter despite significant industry wide
deleveraging during the period. Our prime brokerage business
continues to gain momentum as we are currently ranked No. 2 Prime
Broker by the Global Custodian survey and have added new clients
during the quarter.
Net revenues from our private equity business this quarter were
negative $207 million, down almost $100 million sequentially and $650
million versus the year ago period primarily due to price declines
for our publicly traded investments. Net revenues for our proprietary
trading and hedge fund related businesses were also negatively
impacted by the adverse market conditions this quarter, declining
$300 million sequentially. However we believe we are well positioned
for the remainder of the year. Investment banking revenues declined
by 30% sequentially as industry volumes were materially lower and we
faced challenging comparisons to last quarter which included
significant revenues from our role as an adviser to a consortium's
acquisition of ABN AMRO. While revenue and strategic advisory
declined slightly from the year ago quarter the business showed
strength outperforming the decline in industry transaction volumes
from the year ago levels.
Our investment banking fee pipeline remains strong. Although
execution of course is market dependent as our client dialogue is
active despite the continued volatility in the capital markets. We
ended the quarter down 5% from 2007 year end, but saw increased
levels in the Pac Rim.
Turning to our Global Wealth Management business, GWM continues to
deliver record performance with quarterly revenues of $3.6 billion,
up 8% on a year ago basis, even in this challenging period which
included significant asset depreciation and market volatility. Pretax
earnings of $720 million were down 8% year-over-year as we continue
to invest in the business and fully reserved for an $80 million
client receivable. Excluding the impact of this reserve, GWM's margin
was 22.2%, comparable to year ago levels but down sequentially
reflecting the seasonal impact of payroll taxes and the generally
tougher market conditions. During the quarter we achieved positive
net new money and more than $9 billion in net new annuitized flows.
Client assets of more than $1.6 trillion down less significantly than
the approximate 10% decline in the S&P 500. Success in retaining
our industry leading team of financial advisors was net positive
recruiting in our top two quintiles. Annualized revenue per FA of
$862,000 overall FA growth of 5% year-over-year including 18% outside
the Americas.
GPC net revenues in the first quarter were $3.3 billion, up 7% from
the year ago period. Revenue growth was driven by increased fee-based
revenues and record net interest revenues reflecting the inclusion of
First Republic and greater client inflows into deposit programs.
Transaction and origination revenues remained relatively strong up
slightly from the prior year quarter but down sequentially from the
fourth quarter in 2007 due to continued market weakness. March marked
the fifth consecutive month of declining market indices and
persistent volatility coupled with the downward bias typically causes
the retail investor to sit on the sidelines.
Furthermore we're still identifying new opportunities to enhance our
market leading position. During the quarter we effected enhancements
to our store FA training program a result of a year long study to
improve our return on investment. Specifically we have tightened a
timeframe to make decisions on continuing our investment in trainees,
which reduced our FA census this quarter, but we expect to increase
our returns from the program. We are also continuing to invest in our
platforms and planned initiatives to deliver a new online platform
for all ML clients, upgrade our advisor work stations, support
international growth by adding local products and platforms outside
the U.S.
Lastly in GIM net revenues were $299 million for the quarter
year-over-year growth at 15%, was driven primarily by an increase in
earnings from our investment at BlackRock, which John touched upon
earlier. That concludes my discussion of the segments. Now we will
turn briefly to the firm as a whole and discuss expenses.
I'll start with the compensation expenses for the quarter which were
$4.2 billion, and reflect increased headcount levels and productivity
for FAs from a year ago partially due to acquisition. Comp expenses
also include approximately $180 million related to the accelerated
vesting of restricted stock we effected last quarter. As John
mentioned we intend to reduce our headcount by about 4,000 employees
or 10% of our work force excluding the financial advisors and
investment associates. These headcount reductions will occur
predominantly in GMI and support areas but they will not impact the
FA or investment associate population. We estimate the cost savings
from this reduction will be approximately $800 million of
compensation expense on an annualized basis which includes
approximately $600 million for the remainder of 2008.
As a result we expect to record a restructuring charge of
approximately $350 million in the second quarter of this year. On a
noncomp cost they increase 10% year-over-year to $2 billion largely
related to acquisitions, increased headcount and growth in brokerage
clearing and other expenses during the quarter. As I mentioned,
managing the firm's expenses to be better in line with the business
activity our key focus for 2008. At year end and adjusting for our
convertible preferred securities on an if converted basis, total
equity capital was $41.3 billion and our adjusted book value per
share was $28.93 reflecting the impact of our net loss and increased
negative balance at OCI. And our effective tax rate was 40% for the
quarter, a significant increase reflecting changes in the geographic
mix of our earnings.
Finally as John mentioned in terms of outlook we remain cautious in
the near term and continue to monitor the U.S. economic environment.
Merrill Lynch is truly a global firm and we continue to be optimistic
regarding our long-term growth opportunities in each of our major
business lines, particularly outside the U.S. And with that we will
open it up to questions, thank you.
OPERATOR: (OPERATOR INSTRUCTIONS) Your first question comes from Jeff
Harte with Sandler O'Neill. Sir, your line is open. Mr. Harte, your
line is open. That question has been withdrawn. Your next question
comes from Glenn Schorr with UBS.
GLENN SCHORR, ANALYST, UBS: Maybe a first question just on mechanics.
I get the securities don't like it, but I get the securities and the
bank portfolio a lot of the marks go to the OCI line. Can you just
help me with what differentiates a mark, a marking-to-market in the
securities portfolio that would go through the P&L versus
anything else?
NELSON CHAI: Well, in our bank investment portfolio, as you know
we've invested in some ABS, some prime, but mostly ALT-As. We've
obviously done our analysis of the positions. And we believe we have
the ability and intent to hold until maturity, which we intend to do.
There obviously are differences between the individual pieces. And
again, we maintain the same process we always have, which is we
continue to monitor each of the positions if there are any kind of
price fluctuations if you will to determine whether or not we'd
maintain them in OCI or whether or not they move other. And as you
know, as I mentioned in the quarter we had about $400 million that we
took into OTTI which we didn't take to the P&L.
GLENN SCHORR: Okay. So it's just-- if there's temporary or permanent
impairment.
NELSON CHAI: Yes, we have an impairment testing in process, I would
say based on what I know of it ours is actually very conservative
relative to others, but-- so we do test each of the pieces in there
as the markets fluctuate.
GLENN SCHORR: Okay. Moving on, can you comment on what gross and net
adjusted leverage ratios were and just thoughts on them, move
forward-- moving forward?
NELSON CHAI: Well, the adjusted leverage ratio got reduced from about
17.7 times at year end to 16.2 times. And again, when you say as we
move forward I'm not sure I understand the question.
GLENN SCHORR: Well I think there's pressure and talk by some that
leverage ratios need to move, move lower as imperfect as the measure
as it is. And--
NELSON CHAI: Yeah, I think we'll continue to focus on that, I think
you heard John's comments. I mean we continue to focus on reducing
our illiquid positions. We've taken our risk weighted assets down 7%
in the quarter. It's a big focus of ours and it also is one of the
drivers, as you know John mentioned earlier that in the capital ratio
calculation it's two sided, and so we continue to do a very, very
good job on our risk weighted assets. And as John mentioned earlier,
the line for well capitalized is at 10% and we are doing very well
relative to that.
GLENN SCHORR: 10%?
NELSON CHAI: No, no that's not our number, Glenn, but--
GLENN SCHORR: I'm with you, I'm with you.
NELSON CHAI: We don't disclose what our, what our-- where we are
today.
GLENN SCHORR: Last one, is you at last look last quarter there was a
large refinancing need, meaning just debt coming due over the balance
of '08. Can you just talk about how much has been done, what your
plans are lastly on the debt side and how much of the higher funding
cost are direct impact versus there's an offset on the asset side?
NELSON CHAI: Well, first of all if you look, and John mentioned the
excess liquidity pool we had which is $82 billion at quarter end and
there's actually greater than our funding obligations. I think in the
10-K you saw that we talked about $44 billion of debt maturities
coming due in 2008. We obviously continue to roll commercial paper
and repo but we obviously will continue to be active in the markets
and look for opportunities. As you know as we talked about
capitalization and debt I mean we have funded some of the stuff just
by reducing the balance sheet, and we continue to do that. In the
first quarter given where the credit markets were the returns were
much better to do that and obviously we focus very much on continuing
to do both. And so I think you'll see us continue to look at reducing
the balance sheet which obviously reduces the need for the funding,
but importantly we will be looking at the markets in the back
quarters of the year.
GLENN SCHORR: Okay thanks now.
NELSON CHAI: Okay.
OPERATOR: Your next question comes from Matt Fischer with Deutsche
Bank.
MIKE MAYO, ANALYST, DEUTSCHE BANK: Hi, it's Mike Mayo. Could you just
confirm the lower guidance for pro forma book value, is that strictly
due to the loss this quarter and OCI?
NELSON CHAI: Yes.
MIKE MAYO: Okay. And the decline in the brokerage margin, I think you
said on a core basis it would have been closer to 22% to 23%. But are
you looking to improve that or do you just need better markets for
that to improve?
NELSON CHAI: Well I think, first of all, there's a seasonal thing in
terms of payroll taxes and where some of that stuff comes in, Mike.
We also mentioned that we took an $80 million reserve against the
client receivable as well. So I think when we talked about on a more
normalized basis that was the number that you're referencing and yes,
we're always looking to improve our margins.
MIKE MAYO: And I know this is a sensitive topic, but the FA's are
protected from the new restructuring. But as you point out, investors
are kind of sitting on the sidelines. At what point do you need to
reconsider that?
JOHN THAIN: Well, as you heard our wealth management business is
actually doing great. It's adding assets, it had record revenues and
as long as they keep doing that I don't see any reason we would
reconsider this.
MIKE MAYO: Okay. And then one question I get a lot, you mentioned at
the top of the conference call BlackRock's worth $13 billion and it's
on the balance sheet for $8 billion. What's the unique synergy that
you need to maintain that investment? I mean why not monetize that
unrealized gain of $5 billion?
JOHN THAIN: There's a great relationship between our two companies
and the ability for them to create products that we then distribute
through our system is working very well. And so I-- we really
wouldn't want to disturb that relationship. And frankly that the
earnings that are being generated from BlackRock are very positive
for us.
MIKE MAYO: And then lastly, what metrics should we look going forward
when we analyze your leverage? I mean some firms say the leverage
ratio is what they're managing to and other firms say there's five or
six different measures. Should we think about Tier 1 ratios a few
quarters from now or how should we think about that?
NELSON CHAI: Well as you know we are operating under the Basel II
framework, so obviously we take a lot of credence in looking at our
regulatory capital, our risk weighted assets, and we are going to
focus on that. And I know those numbers aren't disclosed today. What
we hear in the market place is that they will likely push towards the
back half of this year in terms of having all the firms disclose it.
Additionally we look at the adjusted assets as well which we talked
about in that ratio there, the adjusted leverage.
MIKE MAYO: And we should have that by the fourth quarter at the
latest?
NELSON CHAI: Well again, we'll see, again we will dictate what we're
asked to do in terms of our disclosure. Obviously we're working with
other parties regarding this. In --
MIKE MAYO: Okay, thank you.
NELSON CHAI: You should expect it in 2008 is what we hear.
MIKE MAYO: Thanks.
OPERATOR: Your next question comes from Prashant Bhatia with
Citigroup.
PRASHANT BHATIA, ANALYST, CITIGROUP: Hi. Just on the-- you talked
about you don't need to raise capital, you've been very clear on
that. Can you just walk through the thought process on what would
drive you to change that number one? And number two can we infer that
because you don't need to raise capital as you've said, that you're
expecting to be profitable in the quarters ahead?
JOHN THAIN: Sure. At the end of the year last year we raised $12.8
billion of new capital and for '07 as you know we lost $8.6 billion.
So we basically raised $4.2 billion of excess capital. That capital,
that excess capital was intended to reassure the market that we
didn't have to come back into the equity markets and that we-- it did
give us the capital base to go forward into 2008. And that continues
to be the case. Your comment about profitability going forward, we
obviously don't, we don't give guidance, so we're not going to
project anything. But your comment is a very, very reasonable
expectation.
PRASHANT BHATIA: Okay. Also on the ALT-A side, it looks like you
added some ALT-A assets as well outside the bank, are you buying
ALT-A assets in the marketplace? And I guess your marks of $0.70 on
the $1, is there-- do you have a view on if that's reflecting the
cash flow characteristics of these assets or is that really market
pressure?
JOHN THAIN: No, we did add to our ALT-A position, we did buy some.
PRASHANT BHATIA: Okay. And where they're valued is that more the
pressure in the marketplace or is that you think reflective of --
JOHN THAIN: No, no I think it's absolutely because of forced
liquidations. And so I think that the prices that the ALT-A's traded
at were very low and were driven down by forced liquidations.
PRASHANT BHATIA: Okay. On the auction rate securities can you update
us on how much of these securities are owned by Merrill Lynch clients
and maybe a view on how you think this issue gets resolved over time?
JOHN THAIN: Sure. Our clients own about $18.5 billion of them. Of
that $18.5 billion about $12 billion are closed-end funds which are
the most problematic of them. And we have been working with those
closed-end funds to refinance the securities which is the ultimate
answer here. And you've seen Nuveen announce the intention to do
that, you saw BlackRock a couple days ago announce the intention to
do that, that's, that is, that is the answer to this problem.
Ultimately these things are very well protected from a credit point
of view, and so I don't think there's any question that the investors
will ultimately get their money back at par, but they have to be
refinanced and that's what we're working to do.
PRASHANT BHATIA: Okay. And then one final question, the FED facility
can you talk about how you're using that facility?
JOHN THAIN: The Feds, the Feds facility?
PRASHANT BHATIA: Yeah.
JOHN THAIN: We've tested it so that we can use it if we wanted to,
but we have not actually used it to any significant amount.
PRASHANT BHATIA: Okay, thank you.
OPERATOR: Your next question comes from the line of Susan Katzke with
Credit Suisse.
SUSAN KATZKE, ANALYST, CREDIT SUISSE: Thank you. Two questions. One,
can you talk about the private equity business a little bit within
the equities business and just review again what the negative mark
was this quarter and what your intentions are for your larger single
name holdings, whether or not you want to continue holding those
concentrated positions or you will seek to exit or hedge them? And
then second of all, when I look at your FICC revenue run rate of $1.9
billion before marks, that's materially below where FICC revenues ran
in prior quarters before the market dislocation. And while I
understand certain businesses aren't performing if you look at
volumes and volatility in the first quarter, I would have expected a
higher level of run rate. So can you walk us through the businesses
that weren't working and why?
NELSON CHAI: Okay, Susan this is Nelson, let me handle the private
equity question. In the first quarter last year, because it's really
the comparison you're asking about, we had revenue of about $450
million there and it had to do with mark-to-market on positions. As
you know we have publicly traded companies in that portfolio and
there because of the market and a few of the larger positions traded
down during the quarter. We took, the net revenue was down $200
million. That actually is a fairly significant swing if you think on
year-over-year basis. In terms of what our position is, is that we
will evaluate what we think the relative value is of each of the
positions periodically which we do. And if we think that it makes
sense to exit the position because the prices are right, we will. I
think fundamentally we still like the properties we have in our book.
SUSAN KATZKE: Okay. I'm confused though. You said your private equity
marks were down $200 million year-over-year so they were still net
positive?
NELSON CHAI: No, no, no, I'm sorry. The revenues a year ago would
have been a positive $450 million.
SUSAN KATZKE: Right.
NELSON CHAI: Revenues in the first quarter this year are down $200
million but--
SUSAN KATZKE: Okay.
NELSON CHAI: Negative $200 million, so that's a negative-- that's a
$650 million swing.
SUSAN KATZKE: Okay. Thanks for the clarification.
NELSON CHAI: Sure.
JOHN THAIN: In terms of the trading revenues in FICC, March was a
much more difficult month than January or February. And so it's
really the negative impact of March which I think was a significantly
more difficult month across the board on the street. And so that's
really what impacted the revenues.
SUSAN KATZKE: Okay, great, thank you.
OPERATOR: Your final question comes from the line of James Mitchell
with Buckingham Research.
JAMES MITCHELL, ANALYST, BUCKINGHAM RESEARCH: Hi. Most of my
questions were asked and answered, but just maybe if you could talk
about the comp. It did come in a little higher, there clearly wasn't
a lot of flexibility there, can you talk about what we can think of
as a reasonable compensation line going forward I guess from a comp
ratio in a more normalized revenue environment?
NELSON CHAI: Right and I guess what I would say, the comp line
there's about $200 million of incremental in this quarter versus the
year ago quarter and that had to do with the acceleration of some
employee stock. In addition to that, the comp in the first quarter
did include some continued acquisition and stuff. As I mentioned in
my comments we are in the process, and we announced today, that we
are going to reduce our headcount by 4,000 employees versus the end
of the year. And so I think as we work forward, obviously the comp is
two metrics. One is the extra number of employees and you're seeing
the action we're taking there. And the other is really on the
discretionary side. And that business will continue to be scaled
relative to the performance of the business. So we don't give you
forward guidance on things, but I think you can see that we're going
to take the appropriate actions to continue to work through that. And
I think you will see as we continue to break down and as we already
have done already some of the files in the businesses and operating
is one I think you'll see more opportunity for efficiency there.
JAMES MITCHELL: No, no I hear you, I just look at even if you take
out the $180 million you're at a $4 billion, so on an annualized
basis $16 billion, I think that's even a little more than what you
accrued for last year. And not really materially down from the first
half of last year when you were in the 47, 48 range despite a much
lower revenue environment. I'm just trying to-- is it really just the
acquisition of Republic in there and a couple other things, it just
seems-- that just seems a little high, that's all.
NELSON CHAI: Yeah, yeah. It is the acquisition of First Republic.
JAMES MITCHELL: Okay. All right, fair enough, thanks.
NELSON CHAI: Okay.
OPERATOR: This concludes today's conference call. You may now
disconnect.
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