Welcome to the Morgan Stanley conference call. The following is a live broadcast by Morgan Stanley and is provided as a courtesy. Please note that this call is being broadcast on the Internet through the company’s website at www.MorganStanley.com. A replay of the call and web cast will be available through the company’s website and by phone through January 17, 2009. This presentation may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they are made which reflect managements’ current estimates, projects, expectations or belief and which are subject to risks and uncertainties which may cause actual results to differ materially. For a discussion of additional risks and uncertainties that may affect the future results of the company, please see forward-looking statements immediately proceeding Part 1 Item 1, competition and regulation in Part 1 Item 1, risk factors in Part 1, Item 1A, legal proceedings in Part 1 Item 3, managements’ discussion and analysis of financial condition and results of operations in Part 2 Item 7, quantitative and qualitative disclosures about market risks in Part 2 Item 7A of the company’s annual report on Form 10K for the fiscal year ended November 30, 2007 and other items throughout the Form 10K, managements discussion and analysis of financial condition and results of operations and risk factors in the company’s 2008 quarterly reports on Form 10Q and other items throughout the company’s quarterly reports on form 10Q and the company’s 2008 current report on form 8K. The presentation may also include certain non-GAAP financial measures. The reconciliation of such measures to the comparable GAAP figures are included in our annual report on Form 10K, our quarterly reports on Form 10Q and our current reports on 8K which are available on our website www.MorganStanley.com. Any recording, rebroadcast or other use of this presentation in whole or in part is strictly prohibited without prior written consent of Morgan Stanley. This presentation is copyrighted and proprietary to Morgan Stanley. At this time I’d like to turn the program over to Colm Kelleher for today’s call.

Good morning everyone and thank you for joining us. Today we will review our results and highlight how we are positioning Morgan Stanley for this rapidly changing environment. The major equity indices all fell for three straight months losing 30% for the quarter, amounting to a loss of 40% of more for the fiscal year. Financial stocks, which led the way, were down 40% for the quarter, 60% for the year. Emerging markets were similarly stressed. Capital market conditions were extremely weak. Volatility peaked across asset classes and de-leveraging accelerated, adding to the already severe asset price declines. Hedging strategies became less effective as correlations broke down. In addition, the market reaction over the purpose of TARP and the uncertainty of its use caused a re-pricing of fixed income assets in November to distressed levels that materially impacted market liquidity and evaluation of a broad range of financial instruments. Despite these challenging conditions we had strength across several of our industry leading businesses including commodities, foreign exchange, equity sales and trading including derivatives, advisory and global wealth management. We took leverage down substantially to 11.4x on a gross basis at the end of the fourth quarter of 2008 and significantly reduced our total assets by 33% sequentially to $658 billion of which $128 billion is our liquidity pool at the end of the quarter up again to $140 billion as of today. We further strengthened our strategic alliance along with successful $9 billion capital raise from Mitsubishi UFJ. Along with eight of our peers we received capital from the TARP. In our case it was $10 billion. With institutional securities we are engaged in a deliberate and focused reduction of balance sheet intensive businesses including a resizing of Prime Brokerage, the ongoing exit of select proprietary trading strategies, the reduction of principle investments and the closure of residential mortgage origination. However, as stated before we are targeting capital on a risk adjusted basis to our industry leading businesses including flow trading, equity derivatives, foreign exchange, interest rates and commodities. We are scaling back on risk and capacity but not capability. Therefore, we expect to generate attractive risk adjusted returns when markets return to conditions that are more normal and clients re-engage. Global wealth management provides a stable earnings base, high ROE and attractive risk adjusted returns although not immune to market conditions. Our asset management business has been affected by poor performance this year. This business remains a top priority and we are positioning it for profitability. As announced, we are launching a retail banking group to grow deposits and banking products. We have already announced the hiring of industry veteran Cece Sutton and Jonathon Witter and are looking forward to their arrival in January. Under their direction we will leverage our existing retail banking capabilities and financial holding company status. We are developing our strategic alliance with Mitsubishi UFJ. Now we have established a steering committee composed of the four most senior executives at both firms. We identified and are pursuing more than 12 different initiatives including corporate investment banking, retail banking and lending activities which we expect to be finalized no later than June 30, 2009. We are committed to cost reductions and have targeted $2 billion in cost savings for 2009. After this roughly $1.2 billion related to low compensation from our previously announced headcount reductions. The remaining $800 million relates to a 10% reduction in our recurring non-compensation expenses. Let me now turn to our results. In the fourth quarter we reported a net loss from continuing operations of $2.2 billion or $2.24 per share. Despite this loss this quarter Morgan Stanley delivered three straight quarters of profitability and earned $1.8 billion from continuing operations for the full year. For the quarter net revenues were $1.8 billion and total non-interest expenses were $5.2 billion. Full year compensation expense was down 26% from 2007 driven primarily within institutional securities. The compensation ratio excluding severance was 46.5% as we managed compensation to reflect the lower revenues and earning environment. For the quarter non-compensation expenses were up 50% sequentially including $725 million of non-cash goodwill and intangibles impairment charge primarily within institutional securities. We reduced our balance sheet with total assets down 33% sequentially to $658 billion, largely driven by a decline in Prime Brokerage and reductions in proprietary trading, interest rates and credit products. Leverage was 11.4x and our adjusted leverage was 8x at quarter end, both down substantially from peak levels in 2007 or 32.6x and 18.8x respectively. Now we are expecting the absolute value of level three assets to increase this quarter and they represent approximately 13% of total assets. The increase in the value is primarily due to the volatility seen in the derivatives market especially given the widening of credit spreads. The dramatic reduction in our total assets this quarter exacerbated the ratio of level three assets to the balance sheet. As we have previously said there are offsetting hedges to these positions in the other levels of the fair value hierarchy. As you can see in our financial supplement on pages 16-18 we continue to systematically sell our level three legacy assets whenever opportunities arise. Our last year has been enormous mark to market volatility this quarter, Morgan Stanley operates and will continue to operate under fair value accounting rules using conservative assumptions. Book value per share at November end was $20.24 relatively unchanged from last quarter and up 6% from a year ago, demonstrating our ability to preserve and grow book value in an extraordinarily difficult operating environment. Page four of the financial supplement highlights our current capital position. While we are still finalizing our calculations we estimate that our Tier-1 ratio will be approximately 18.3% this quarter under the SEC’s interpretation of FAS 02 guidelines. The increase over last quarter was primarily driven by our new Tier-1 eligible capital. Risk weighted assets declined sequentially to approximately $282 billion at November 30. This decrease reflects the combined reduction in our total assets offset by an increase in credit risk charges due to the present environment. Looking ahead we are well positioned to take advantage of market opportunities given our strong capital position, broad set of funding tools and lower leverage. We successfully issued $6.6 billion of FDIC guaranteed debt over the month. Given the market dynamic we took the opportunity to repurchase $12.4 billion of firm issued debt which resulted in gains of $2.3 billion this quarter. This was predominately recorded in other revenues within institutional securities. Now let me turn to the specific businesses. Starting with institutional securities detailed on page five of the supplement, the business reported a pre-tax loss of $2.1 billion. Revenues of $844 million reflected the difficult trading environment and asset write downs. Up to early November our revenues in institutional securities were encouraging. A slate of news beginning with the redirection of TARP resulted in a step re-pricing of the market. Extreme levels of negative sentiment are priced broadly across the credit market spectrum including the investment grade, loans and the ABX sub prime index. Of that current market price, CMBX AAA implied unprecedented high default rates. The CMBX AAA index as a benchmark currently implies a cumulative default rate of greater than 60% over the duration of the underlying bonds assuming 100% loss severity. Equity market volatility is reflected by the [vix] more than double this quarter. Principle investments revenues were negative $1.8 billion. The majority of which relates to write downs in real estate limited partnership interests and other principle investments. Non-interest expenses decreased 21% sequentially largely reflecting lower compensation which is partially offset by non-cash goodwill and intangible impairment charges of $694 million. Turning to investment banking on page six our leading investment banking franchise remained active notwithstanding the challenging market conditions. Revenues of $743 million were down 28% for the third quarter in an environment with volumes down dramatically across products. Completed M&A was down nearly 25%. Global equity and debt reached down nearly 50% and the IPO market was virtually shut down in the quarter. Despite these conditions we advised on several important transactions including Northwest’s merger with Delta, the sale of H Foster Lloyds, the sale of a stake in Fortis Bank to the combined governments of Belgium, the Netherlands and Luxembourg. Significant underwriting transactions included equity follow on issues for Wells Fargo and General Electric and bond issues for IBM, [Barrett Gold] and PepsiCo. We are currently advising Verizon of the largest indicated financing transaction in the U.S. this quarter. On this transaction Morgan Stanley has been instrumental in working with Mitsubishi UFJ, another example of our burgeoning partnership. Advisory revenues increased 32% sequentially in Europe even though activity slowed measurably in the quarter. Equity underwriting revenues were down 72% from the third quarter of 2008 of global equity and IPO volumes were at anemic levels. Fixed income underwriting decreased 57% as issuance was down across all product and credit markets remained severely strained in the quarter. Our pipelines are down given the secular downturn in global capital markets. Investment grade is one exception as there is considerable pent up demand. We continue to maintain high levels of strategic dialogue with corporate financial sponsors and sovereigns and remain well positioned to take advantage of client activity when it returns to the market. Equity sales and trading revenues of $1.7 billion were down 35% sequentially. Trading in the quarter was at two extremes with volatility in liquid trading producing strong revenues and credit and illiquid trading producing significant losses. The revenue decline was primarily driven by losses of $729 million in proprietary trading. The difficult market exacerbated losses on trades as the convertible bond asset class collapsed and spreads widened. Despite the losses this quarter proprietary trading results were slightly positive for the full year as gains from quantitative strategies offset losses from several other strategies. We remained focused on quantitative strategies including program driven trading and statistical arbitrage where we believe we can out perform. Prime Brokerage revenues declined 50% from a record last quarter on lower client balances which are down 37% on average from the previous quarter. Cash equity revenues were up 8% from last quarter on strong performance in portfolio trading despite lower commissions on lighter volumes in Europe and Asia. Derivatives reported a strong quarter of continued volatility and increased customer activity and full year revenues were a record, up 35% from 2007. Equity revenues also included $685 million in gains from the widening of credit spreads on firm issued structured notes. In fixed income sales and trading we reported negative revenues of $1.2 billion, down significantly from the previous quarter reflecting the difficult trading environment and further asset write downs. An area of strength this quarter was commodities with revenues up 7% sequentially on strong customer flows across sectors driving broad based strength. For the year commodities reported record revenues and were 62% higher than 2007. Interest rate, credit and currency trading revenues combined were down significantly from the third quarter of 2008. Interest rate products were lower as new client trading was offset by unfavorable positioning in Europe as the result of the November re-pricing. Foreign exchange reported a record quarter and high volatility and increased customer flows. For the year foreign exchange reported record revenues 56% higher than 2007. Emerging markets recorded a loss driven by credit widening in Eastern Europe and credit trading generated a loss. In addition to significant deterioration in consumer credit and related assets and further spread widening, our results include further losses of $360 million from mono lines, aggregate net exposure debt direct exposure to mono lines increased to $4.3 billion. This net exposure includes $700 million of ABS wrap bonds held by our securities banks, $3.1 billion of insured municipal bond securities and $500 million of net counterparty exposure representing gross exposure of $8 billion net of hedges in cumulative credit valuation adjustments of $3.8 billion. The significant increase in our gross counterparty exposure reflects the current credit environment impacting the mono lines. We are managing this counter party risk through a hedging program that utilizes both credit default swaps and transactions that effectively replace the potentially impaired component of underlying transactions as well as credit valuation adjustments. Fixed income revenues also included $2 billion in gains from the widening of credit spreads on firm issued structured notes. Details on pages 16-18 of the financial supplement are on mortgage related gross and net exposures which we further reduced this quarter. On page 16, within the ABS CVO sub prime schedule you can see our total net exposure was slightly net short. Of note on this schedule is the reduction of our super senior legacy mezzanine positions from $1.1 billion to zero which was accomplished with minimal P&L impact. On page 17, within non-sub prime residential mortgage we reduced our gross and net exposures by roughly 20%. These exposures include alt-A which declined 27%. Overall net write downs were $900 million including $650 million in alt-A. On page 18 within CMBS commercial whole loans we reduced our gross exposure to $17 billion driven by nearly 40% reduction in CMBS bonds. Net exposure declined over 60% to $2.9 billion. Overall here we recorded a net gain of $200 million. Other sales and trading revenues of negative $1.1 billion were primarily driven by net losses of $1.7 billion in our lending businesses which include leveraged acquisition finance and relationship lending. These net losses reflect negative market losses and write downs of $4 billion, offset by effective hedges. The five-year cumulative implied probability of default in the cash and derivatives market for loans is now greater than 60%, much higher than the worst five-year cumulative historical default rate of approximately 25%. We continue to reduce our non-investment grade leverage acquisition portfolio which is now $5.6 billion as you can see in the footnotes of page seven of the financial supplement. During the quarter we added $420 million in new commitments and had $3.4 million of reductions. Also included in other sales and trading are losses of approximately $800 million from our subsidiary banks driven by further deterioration of the investment portfolio which is fair valued? Offsetting these losses were derivative mark to market gains of approximately $1.1 billion following their de-designation as hedges of certain Morgan Stanley debt. Total average trading and non-trading VaR decreased to $119 million from $128 million last quarter reflecting a decline in non-trading VaR. This was primarily driven by a reduction in lending exposure. Average trading VaR remained near flat from last quarter at $98 million, as higher spread and volatility levels were offset by reductions in key trading risks. As I mentioned, we continue to re-shape our institutional securities business. We have taken steps to exit select proprietary trading strategies and have de-emphasized our principle investing business in institutional securities. We are exiting our remaining international mortgage origination business. Within the U.S. we are shifting origination activity to global wealth management. In addition we are re-shaping other businesses. We remain committed to maintaining a premier prime brokerage franchise and while this business is smaller it will benefit from the re-pricing of services. As stated before, we will no longer be market share driven but rather a contiguous and strategic extension of our strategic client relationships. We have repositioned research in an effort to coordinate analysts better with the business and leverage the intellectual capital more broadly throughout the firm. We continue to develop and invest in our client driven [inaudible] revenue upside. This includes [inaudible] as markets move towards exchanges. We are building out distressed, credit trading and prioritizing risk from the credit desk. We are focused on reducing our infrastructure costs and geographic footprint and the margin by closing or relocating offices. Now turning to page eight of the supplement in our global wealth management business, this business continues to produce strong underlying results, stable recurring revenues despite volatile market conditions. Revenues of $1.4 billion decreased 9% from the third quarter reflecting write downs of $108 million in auction rate securities repurchased from clients and recorded in principle transactions. Revenues also included higher commissions on increased transaction volumes offset by the lack of new issues affecting investment banking revenues and lower fees on declining market levels. Overall revenues were offset by non-interest expenses including an incremental provision of $256 million for the auction rate securities settlement as valuations have declined and repurchases are estimated to be higher than anticipated at the time of our official announcement. Excluding the provisions from both quarters, non-interest expenses were down 7% from last quarter driven by overall compensation. As a result of all PBT was a loss of $55 million. On page nine you can see the productivity metrics. Total client assets decreased 23% as market levels declined sharply during the quarter while client withdrawals driven by market volatility let to outflows of $3.9 billion; they were less than 1% of total client assets. Net new money for the full year was $34.5 billion, our second highest year and best in class. The number of FA’s were slightly down for the quarter and for the full year FA’s were flat to a slight reduction of 233 representatives from the sale of our Spanish wealth management business. We expect to continue to grow FA’s to take advantage of market turmoil particularly the franchise has largely stabilized after a tumultuous September and October. Our bank deposits including client sweeps and client holds at Morgan Stanley issuance certificates of deposit increased slightly in the last quarter to $36.4 billion. As of today our total deposits are $44 billion. In 2008 we achieved double digit increases in our number of accounts using key banking services although there is a lot of room for future growth. In support of the firm’s goal of achieving 50% of funding from stable sources, including equity, long term debt and deposits; we will further build out our deposit base. Our private wealth management group continues to grow its global footprint of investment representatives and expanded into significant new markets opening offices in India and Saudi Arabia. Going forward we are leveraging our high net worth franchise and are focused on building a retail banking group as I stated earlier under the direction of Cece Sutton and Jonathon Witter. Let me turn to asset management on page ten of the supplement. Asset management recorded a pre-tax loss of $1.2 billion in the fourth quarter primarily driven by principle investment loss and expenses related to credit. Core revenues which included traditional funds, hedge funds and fund to funds asset management were down 87% sequentially and included a decline in management of administration fees resulting from lower average assets under management. Losses of $261 million in alternatives were in our core business and losses of $187 million related to market securities issued by SIVs held on balance sheet. The carrying value of these assets is now down to $209 million at the end of the quarter. In addition, total SIV exposure in our money funds as of quarter end was down to $100 million. These are all bank sponsored and are maturing in January. Merging banking revenues were negative $454 million and included principle investment losses of $532 million in real estate including $130 million on present financial assets driven by the continued deterioration in the global real estate markets and $100 million in private equity and infrastructure bonds, particularly our Asia portfolio. Non-interest expenses decreased 3% in the third quarter primarily driven by lower compensation expenses. This decrease is partially offset by higher costs related to credit which includes an impairment charge on real estate assets of $243 million. Approximately 90% of the credit portfolio is real estate assets primarily held at cost with quarterly depreciation. These assets are subject to quarterly impairment review. Our total real estate net exposure which includes present as well as our direct investments in real estate, private equity and infrastructure costs was $5.3 billion at the end of the quarter. This exposure does not include assets included in investments for the measure of employee compensation or co-investment plans. Turning to pages 11-13 of the supplement, you can see the assets under management and asset flow data. Total assets under management decreased 30% to $399 billion largely due to the extreme drop in global financial mark during the quarter which had a broad impact towards the industry. We also recorded $77 billion in net outflows in the quarter, virtually all of them in our core business. The primary driver here was money market outflows of $51 billion due to the dislocation of the industry. As we mentioned in our third quarter 10Q nearly all these outflows occurred in September when credit and liquidity markets were under severe stress. During the quarter we repurchased approximately $25 billion of these securities to fund the investor redemptions amid the liquid markets. We reduced these positions substantially to $600 million at the end of November with no losses incurred. The current balance is roughly $200 million. Improving our financial performance in asset management is a top priority. Asset management is facing significant headwinds in 2009 with a decline in assets under management and a difficult environment for gathering assets. Within core asset management we reduced net headcount by nearly 20%. We are closing and consolidating non-performing subscale and over lacking products as well as enhancing the efficiency of our technology and operations. Despite the issues in asset management this business remains a critical component of our strategy. It diversifies earnings into a high ROE business, takes advantage of our distribution power and provides a channel to monetize our intellectual capital. We are confident we can drive this business to competitive advantage and profitability as markets improve. An additional note I wanted to make you aware of is that our board of directors have approved a change to our calendar year reporting cycle which will commence January 1, 2009. In effecting this change we will have a one month transition period ending December 31, 2008 that will be reported along with our first quarter 2009 results in April 2009. Now in closing I just have a few words on the outlook. 2008 was a very challenging year yet Morgan Stanley delivered three straight quarters of profitability and was profitable for the full year. While we do not expect the fourth quarter to repeat nor the dramatic fall off in client activity to persist, we do expect the near-term environment to be very challenging. This recession has turned global in a relatively short time frame. Action is being taken to remediate the status of the markets in an unprecedented scale around the world. Such moves will likely improve market stability near term and economic recovery long-term. We are expecting 2009 to be a year of transition. There is no doubt that earnings power has been affected in the short-term and there is potential for further negative marks despite our reduction of risk positions and leverage. Given the systemic reduction in leverage we expect ROE to be lower but still a healthy 12-15% over the fiscal year. Clearly though our ROE will improve over time as we expand global wealth management, asset management and retail banking to be a greater contributor to our business mix as we have good opportunity to invest in these businesses. Overall we do not expect the volatility in the market to subside until at the very least the mortgage market and ultimately the housing markets stabilize. However, we see opportunity amidst all the turbulence and market uncertainty. For example, recent corporate new issuance activity is an encouraging step towards the normalization of conditions in the debt capital markets. We are seeing investment grade credit deals being completed. In fact, November was the second busiest month for European investment being non-financial new issuance since March 2001. In the U.S. total issuances increased each month since the lows reached in September. Even within high yield we are starting to see some activity such as the $500 million El Paso transaction which marks the re-opening of the high yield market. While limited, there have been select opportunities for issuance within the equity markets. While we cannot control the difficult environment we are committing to improving our operating performance by reducing non-compensation costs by 10%, continuing to return legacy assets as markets allow, allocating capital on a risk adjusted basis to the client within flow businesses in our market leading institutional franchises, returning asset management to profitability and as I stated maximizing our relationship with Mitsubishi UFJ. Our leading client franchise and premium brand remains intact. Morgan Stanley has been and will continue to be a premier global financial services firm. We are confident that we will be well positioned to generate attractive returns when markets normalize and clients re-engage in a more significant way. We have successfully evolved and adapted our business across numerous business cycles in the past and are doing so again today. Thank you. Apologies for the long intro. Now I will take your questions.

(Operator Instructions) The first question comes from the line of Roger Freeman – Barclays Capital.

In listening to your commentary about risk positioning and appetite for principle investing going forward, how do you think about your approach to markets when we get to this eventual point where credit markets stabilize and we see increasing asset values again? Are you going to be taking advantage of that? You clearly have excess capital given your really high assessment class Tier-1 ratio. How do we sort of balance that versus the commentary here on the call?

It is clear we are very negative on these markets at the moment and have been for some time as you know. We are seeing client fall off and as I have stated on a number of occasions where Morgan Stanley does well is where we have large client activity because that is our franchise. When we see that pick up we will be there to make capital to the markets and I think we are just ready to do that. A combination of two things are interesting here. We did have obviously legacy assets which we reduced but what is interesting is they hurt us in the fourth quarter but not as we have outlined to what degree. Really what is happening here is a broad based price destruction which is represented in what is going on in the market. I think we need to be prepared to commit capital as we see the market moving again.

With respect to the balance sheet decline this quarter can you help us think about some of the buckets there? It was a more than $300 billion decline on the absolute level. Obviously a lot of the markets were illiquid. A lot of treasuries and agencies?

No, you can see our adjusted leverage has come down as well. So it was broad. Obviously it is easier to reduce a matched book which we did but if you think about it in terms of where we are it was pretty broad based. About half the reduction came from a reduction in prime brokerage balances and the rest is pretty much spread out. What we have done is continued to reduce legacy assets.

On the proprietary debt you actually purchased, can you give us a little more color around that? What maturity did you buy? Was it shorter term? Longer term? Do you still hold this? Also the hedging, the re-designation of hedges there do you actually hedge your debt in addition to the natural hedge you have around FAS 157?

Yes we do. We took the opportunity given market dynamics to repurchase some of our debt. It was a broad range of maturities that were trading at very distressed levels. Those were purchases, as I said, resulting in direct gains of $2.3 billion. Now as you said, and I’ve just confirmed when you swatch the hedge for the interest rate risk in making those repurchases we were required to modify our hedging program. So accordingly a good number of those swaps were de-designated from being hedges of our debt and became mark to market instruments. So that is the $1.1 billion gain we noted associated with de-designation reflecting the mark to market change for these swaps when they are no longer considered to be hedges. Now the whole discussion of that hedge accounting is in more detail on page 14 of our August 31 form 10Q if you want to have a look at it.

On the call back, with respect to your comments, how is that going to work? Is there any specific call back for each employee based on amount of P&L that is at risk under them?

Really it will be to the deferred cash part of their compensation. It will relate to that and there will be various rules and we will give you more color on that going forward. It has only just been approved by the board. I have to go through it myself and I’d like to come back to you on that.

The next question comes from Guy Moszkowski - Merrill Lynch.

I’m wondering just to pick up on the call backs for a moment. I am wondering if you can give us a sense for whether that could result in lower expense recognition in year one of a bonus award since it is not actually paid until certain future hurdles are cleared or would you go ahead and recognize all of it and therefore it really wouldn’t initially result in lower comp costs?

No, there is no game like that going on. It is going to be treated the same as liquidity. We have kept those components the same so it will be amortized so from an accounting point of view there is no arbitrage there.

I wasn’t trying to imply that there was a game, just that…

I know you weren’t but some people might think it was. What we are doing is we are just taking part of that deferred comp which we will now have the ability to call back on.

Can you give us a sense for what happened to the compensation ratio within the institutional division in the fourth quarter? Was there a meaningful further comp accrual there in the quarter or was there either a very low accrual or indeed a reversal in institutional as Goldman Sachs had for the whole firm?

What I will tell you is that in 2008 the comp to revenue accrual for the end of the year in institutional securities is 43.9%. Minus severance 39.9% and obviously that is related on much lower revenues so I think you can work out it was a pretty drastic reduction in compensation.

On the ARS are you still holding the majority of the assets you had purchased over the last couple of quarters?

Yes we are. As you know we are funding it through the facility. As of November 30 we repurchased $3.8 million of eligible ARS that we hold in our inventory. We did take write downs which we described of $108 million on that. That was reflected as part of principle trading. Additionally during the fourth quarter as you know we have the ability to purchase up to $6.4 billion on the terms of the settlement, we took because of the price deterioration that took place in November an incremental provision of $256 million.

Which again is a provision and next quarter if there has been further negative variation there could be a further charge which would be the equivalent of the $108 this quarter, is that the right way to think about it?

Correct and equally if these things clear through the auctions and so on there is a call back. So, it works both ways.

Can you give us a sense for the carrying value as a percent of what you currently owe on the books?

The auction rate securities, 75-80%.

On the SIV’s, you mentioned some that are maturing in January. Is that all of what you are currently carrying that you have had to repurchase over the last…

I hope I didn’t mislead you. The $100 million maturing in January is actually what is held in the third-party fund which we have not taken of. That is just what is left of the various money market funds. They mature and they are bank guaranteed. What we have written down is just over $200 million of written down SIV’s which were approximately $680 million or something like that when we originally put them on the books.

Okay. So that is a very low holding value basically. On the $2 billion cost savings that you are anticipating or target for next year, should we realistically expect most of that to come to the bottom line or is there a significant amount of investment savings which you are anticipating?

I’m trying to get an absolute savings to the bottom line. That’s what I’m trying to do and that is what we’ve targeted and we have given you the component parts of that. That is clearly our goal and we will report to you quarterly on that purpose.

Is there a range of full year revenue that you are predicating that $2 billion on?

No this is independent of that. This is synergies and efficiencies.

The next question comes from Glenn Schorr – UBS.

I don’t know if you have mentioned the face amount of the debt bought back?

I think I did. It was $12.3 billion.

Did you buy back any stock during the quarter?

Yes I did. I bought a small amount of stock back. Obviously this was pre-TARP and was a combination of two aspects of the stock. One we had some employee related buy backs which is the normal course of business and then in addition to that in those periods when our stock was trading down very low I bought back, I think it is in the earnings release actually.

The bigger question, how much of the reduction in the average liquidity pool during the quarter was this versus just say calls on the de-leveraging?

No, let’s talk about the average reduction of the liquidity pool. I think you need to understand that our contingency funding issuance certainly drains our liquidity. By the way we repurchased 39 million shares only in our repurchase in the quarter. I think I had it out, by the way just to finish that question on the third quarter earnings calls on a Tuesday night I said I reserved the right to do that. Then things sort of spiraled as you know.

Was that any contribution to the reduction of the liquidity pool or was that…

Not at all. Let’s talk about the liquidity pool. Today I’ve got liquidity of about $140 billion. I am not sure this is as meaningful a number now that we are a bank holding company and we have facilities we don’t need and we have the operational we used to have. You have to think about $140 billion in relation to my current balance sheet. At the time of the third quarter when we felt the market was going to be very stressed we had gotten that liquidity up, as you remember, to $179 billion and that obviously was a significant drain on liquidity for a period of time during that stress period but that was not part of this. We now rebuilt our liquidity through a number of actions and actually if anything are probably in a more conservative place because the contingent drains on our liquidity are much less given the size of our balance sheet and certain aspects of our business.

So I guess when you look and you have $7 billion of unallocated capital and you have some really large Tier-1 ratio, how do you balance it? Because you bought back debt and then generated $3 billion of gains. It produces equity. It reduces your debt load. How do you draw the line between tapping into your liquidity, pissing off the regulators and doing something economic?

I think we were first of all we were buying debt as part of a debt defense as well. Secondly, it was an incredibly distressed level which is in the interests of our shareholders and thirdly I think we are in a very strong liquidity position regardless. So, it basically comes out of our contingency funding plan. We look at what we need to issue, what we need to cover our liabilities and as we reduced the balance sheet we clearly have less requirement for that funding. So, frankly I think it was a good trading decision in the interest of our shareholders to buy back debt which was at incredibly distressed levels and frankly if I had left a bit out there it wouldn’t have sent out a balanced signal.

So at what point is that basically a statement that leverage considering where assets are less liquidity pool is leverage finally at a resting point or does it continue to go lower?

I don’t think leverage is going to go down any more. I think we have actually squeezed our balance sheet down actually preparing to take advantage of market dislocation. So I am hoping we can take leverage back up but to do that we need to see opportunities in the market and frankly I am still reeling from what happened in November.

Implicit in your comments about maybe 12-15% over the course of the cycle, does that assume some normal cost of debt in the unsecured debt market? In other words the funding pressures that are there today, subside?

No, I made assumptions. I don’t want to get into details but I made some reasonable assumptions about where I think debt spreads are going to be and where I can refinance clearly within that in terms that we will have a more normalized EDS spread than where we currently are. Frankly I don’t think 460 or 500 is a sustainable financial spread.

How come book wasn’t down a little bit more? Meaning you lose $2.24 book goes down by about $1. There are obviously a bunch of moving parts.

Going back to one of your first questions, we repurchased stock at below book value and we had certain transactions relative to employee stock awards that decreased our share account and they were accretive too. That is why.

The next question comes from Mike Mayo – Deutsche Bank.

Can you just talk about the balance between of pulling back in proprietary trading and taking risk where you see some upside when you had the proprietary equity loss this quarter? I think you said $700 million and this is one year after the big losses and you have ratcheted up risk management and oversight and here we have another trading loss. How do you balance those?

I don’t think they are connected. I think the losses in proprietary trading are in businesses in very distressed markets. I think it is actually because we have ratcheted up risk management a significant amount and so on. What we did and I’ve spoken to you about before in the previous few quarters we had a very analytical look at risk adjusted returns. With the metrics I consider business was based on a revenue driven model. Frankly I think a lot of these businesses on a risk adjusted return have been producing negative NPV. So we made a decision to exit some of these businesses and there is a cost associated with those. That cost is being exacerbated by incredibly stressed market. Within that remember we are keeping our PBT business up and strategy business and equity because it is a business we believe we have an insight into. We believe where we have insight like commodities we can position risk of a proprietary nature in the back of those client flows and so on. I think to look at some of these losses, and they are winding down losses, is perhaps misleading. What we are doing is reallocating businesses on a risk adjusted basis to where we think we can generate alpha. So these were not unexpected in so far as the market away from what the market did itself.

As it relates to equities being down, I think you said prime brokerage was down 50%. Is anything else going on in that category?

In equities? In what sense?

In the decline in contrast to one of your competitors yesterday it just didn’t do as well. So I’m just wondering if there are any one-time factors there.

I think it was the prop trading you referred to a few minutes ago that comes into the SG line item. I think if you were to normalize that I don’t think we would be a million miles away. It was a very strong year for us in equities. Volumes were down in the fourth quarter certainly but I think that is probably the delta.

The next question comes from James Mitchell – Buckingham Research Group.

Can we just talk a little bit about fixed income? Obviously it was a tough quarter for credit but if I kind of normalize for the mortgage related write downs as well as the gains on debt it looks like you had about $2 billion loss in that line. Was that all credit? You mentioned you had interest rate positioning that was difficult as well. I’m just trying to think what the major drivers were.

I think it was a broad based loss. As I stated earlier, going into November we were looking pretty good in terms of our revenues and so on. But obviously there was a re-pricing of a lot of things so obviously credit got hit hard by just about any measure you want to look at but you had curve changes as well as volume swap spread changed dramatically. In Europe we certainly got hit on some European curve positions we had but I think it was broad based. I think to try and look at what happened in November and extrapolate from that is very difficult. It was such a discrete event.

Switching over to asset management, were most of the outflows you mentioned, at least money market was mostly in September and October. Maybe you can talk in the equities and fixed income area if some of those flows have stabilized of late?

I think that is fair. September and October those flows have stabilized. Obviously it goes without saying the major indices are down and that is affecting size of assets under management but certainly for us it was the money market flows.

And that started to stabilize?

Yes.

In the support of investments in the institutional securities I think you gave us a number for the asset management business down the $5 billion or so. Was that down meaningfully in the institutional business? Can you give a number there?

The private equity institutional business? It is a relatively small portfolio. It is about $3 billion which has been written down. Our losses there have about $2.6 billion or something like that. It is something that we have kept a close eye on.

That is a pretty substantial rate though if you had $1.8 billion.

Within that though remember in that we had the LP interest in our commercial real estate funds that actually held in ISG and that was a big part of that write down.

The next question comes from David Trone – Fox Pitt Kelton.

If I heard you correctly when you talked about the prime brokerage balances you mentioned a 35% delta. I assume that was average. Could you tell us the end of period?

End of period is about down 65% but let me qualify that. We had a lot of balances wanting to come back. So what we are doing at the moment is looking at…and also it is a function not only of balances that left it is clearly a function of the down size of the hedge fund business at the moment as well. But we have a number of balances that are wanting to come back and we are at the moment engaging clients in a strategic dialogue to decide where we are and what we want to do. Remember, of the accounts that were closed we only had 7% of accounts closed so you would expect a high rate of return because it wasn’t a particularly stressed environment when a lot of those balances went.

So at what point during the quarter did that stabilize? What is December like?

It stabilized probably post closing of the Mitsubishi UFJ deal. But I’d have to confirm that. By then you had other dynamics in place. So far it is no longer about Morgan Stanley prime brokerage or anything else in prime brokerage; it is about the hedge funds themselves at the moment. So we are certainly seeing hedge fund balances wanting to move back towards this market so I think we feel pretty encouraged about it. What we are not too encouraged about is the overall state of the hedge fund industry.

On the bank deposit side, in the context of bricks and mortar, obviously and acquisition, what too small to matter or what is the right number where you start to have an interest in property that might come up? How do the regulators feel about you doing that type of an acquisition?

First of all, let me explain what we are saying about garnering bank deposits is they have to fit into our existing strategy; our retail and high net worth strategy. So in that sense there is no single thing too small. It has to fit into what we want to do. I think the regulators, and we are in very close contact with the regulators, are very comfortable with our strategy hopefully and that is the feedback I get. What we are not talking about, at least today…we never say never, is large strategic transactions. We are talking about garnering deposits that fit into a well defined retail strategy and that is why we have hired Cece Sutton and Jonathon Witter who have been very successful in pursuing these sort of strategies at large money center banks. So I think this will evolve as they join us.

The final question comes from the line of Jeff Harte - Sandler O’Neill & Partners.

You talked about the size of the net real estate exposure within asset management. I believe you said it was $5.3 billion.

Yes but remember there is some secured financing in there against Crescent. So you have to net that out as well. If you look at it, we bought Crescent is $3 billion of that $5.31 billion and the residual net of secure financing is just under $600 million so you would knock off $2.5 billion from those numbers.

Given how difficult hedging relationships have been, that is a net number. Can you give us a gross exposure number?

That is a gross exposure number. I gave you the gross originally which is the $5 billion number and I said the secured financing is Crescent, which is secured financing, so you take that out.

Looking at the debt repurchase gains this quarter and seeing that actually a transaction I guess would be realized and I’m looking at the structured note gains you have been recording quarter in and quarter out, is there the opportunity or can you actually lock in or realize those structured note gains or have you yet?

We can. I look at DVA, the structured note gains, slightly differently. I think the structure of debt on the real P&L is a real time gain. We did it in stressed markets. One hopes that will never repeat itself. Obviously DVA, the credit spread once it moves around, you can to some extent lock it in by retiring debt associated with it. But the way I look at it is to say we are a fair value or mark to market and very conservative the way we mark things so the same way as we have been penalized for taking things at mark to market eventually we give you an example of where we are. CMBS bonds in the third quarter of 2008 we have in the low 70’s. We now have them in the high 40’s. Senior commercial loans were high 80’s to low 90’s are now being marked down as well to the high 80’s. Mezz, mid 70’s to low 60’s. There is Mezz commercial loans, alt-A mid 30’s to high 20’s. We have actually taken some very significant marks here. So my view on the credit spread is you have to look at that in the round if that makes sense. So if you are trying to get a sense of what our core operating are, I think you would knock out owned credit certainly as revenue that is maybe not the highest quality but against that you would have to offset the legacy charges against it to get a sense for what the underlying is.

You mentioned in ROE maybe the 12-15% over the cycle. You are talking that is your thought as to what the average would be over the cycle?

Absolutely. I’m assuming 2009 is going to be a tricky year.

Given everything that has gone on from becoming a bank holding company and everything else, where would you historically have pegged that number? I’m trying to get a feel for how much you think some of the changes we have seen come into effect this year may impact what you think your loss on ROE is.

I think I have addressed this before. We have always been pretty consistent that we are in a world of reduced leverage and reduced leverage does mean lower ROE. I know there is some debate around that but we think that hair cut is 3-5%. But we can mitigate that a lot by much more efficient use of balance sheet and it is not that long ago that institutions had very nice ROE’s with lower balance sheets. We have to get back to that world. I just want to wish everybody a happy holiday and thank you.

Ladies and gentlemen that concludes today’s conference. You may now disconnect.