Welcome to the Morgan Stanley conference call. The following is a live broadcast by Morgan Stanley and is provided as a courtesy. Please note that this call is being broadcast on the Internet through the company’s website at www.morganstanley.com. A replay of the call and webcast will be available through the company’s website and by phone through August 22, 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, projections, expectations or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of additional risks and uncertainties that may affect the future results of the company, please see the company's Annual Report on Form 10-K for the year-ended November 30, 2008, the company's 2009 quarterly report and the company’s current reports on Form 8-K. The presentation may also include certain non-GAAP financial measures. The reconciliation of such measures to the comparable GAAP figures are included in our Annual Report on Form 10-K, our quarterly report on form 10-Q and our current reports on Form 8-K, 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 Mr. Colm Kelleher. Please go ahead.

Good morning everyone, thank you for joining us. Today we will review our quarterly results and provide an update on our strategic initiatives. We remain firm in our view that 2009 is a year of transition and the 2nd quarter reflects that ongoing process. Our results show progress in this transition as we invest in talent, execute the joint venture with Smith Barney and continue to turn around asset management. A number of noteworthy items resulted in the loss of $1.37 per share from continuing operations for the quarter ended June 30, including negative revenue of $2.3 billion from the narrowing of Morgan Stanley’s debt-related credit spreads, impacting earnings per share by $1.32, an $850 million accelerated amortization charge resulting from our repurchase of the TARP-related series D preferred stock, impacting earnings per share by $0.74, and a $202 million charge relating to the partial redemption of the series C preferred stock issued through MUFG in exchange for its purchase of Morgan Stanley’s common stock, impacting earnings per share by $0.17. Other items incurred during the quarter were, $734 million in firm-wide real estate losses, $245 million in integration related costs associated with the Morgan Stanley – Smith Barney join venture and a $33 million expense relating to the FDIC special assessment. Discontinued operations included the resource of MSCI, including a $310 million after-tax gain on its sale. This quarter we continue to focus on risk-adjusted returns. Whilst I will address our relative underperformance of fixed income later in this discussion, we continue to be well-positioned for recovery in the global capital markets and are not limited by a large loan portfolio or direct consumer exposure. On May 31, ahead of schedule, we closed the Morgan Stanley-Smith Barney joint venture, creating a new global leader in wealth management. In June, we also announced further details of our global strategic alliance with MUFG. We are collaborating in corporate and investment banking through a loan marketing joint venture in the US, and business referral arrangements in Europe and Asia and we created a referral agreement to provide Morgan Stanley’s commodities products to MUFG’s global customer base. We believe these initiatives will offer us greater lending capacity to expand our institutional client base, especially in Asia. We are currently in the process of turning around asset management. We’ve examined the scale, expense, structure and performance issues of each business and are now executing the optimization of these distinct businesses. In November, we committed to $2 billion in firm-wide cost-savings for 2009. We have reduced compensation expenses by $1.2 billion from headcount reductions primarily taken in 2008. Now with the join venture closed, and with the opportunity in the market place, we are taking advantage of the market dislocation and hiring strategically. We have added talent within fixed income, derivatives, prime brokerage, investment banking and asset management and continue to invest in our people. With the inclusion of the join venture with Smith Barney and our consolidated results, our recurring non-compensation expenses are going to be higher. We had committed to a reduction of $800 million in recurring non-comp expenses for 2009. Through the first half of this year, we made significant progress toward this goal. Excluding the present impairment, Smith Barney operating expenses and joint venture integration costs, we have reduced our recurring non-comp expenses by nearly $600 million, year to date. We remain focused on identifying and reducing expenses. Now, turning to our consolidated results. We continue to demonstrate leadership in our businesses, including investment banking, credit trading and global wealth management. If you turn to page two in our financial supplement, firm-wide revenues are $5.4 billion, including the negative impact of $2.3 billion as stated earlier from the tightening of Morgan Stanley’s credit spreads on certain long-term debt carried at fair value. Revenues included Smith Barney’s contribution to the joint venture for the month of June. Results also included net losses on firm-wide real estate expenses, aggregating $734 million. Non-interest expenses were $6 billion, up over 50% from the first quarter, largely driven by compensation, as we continue to invest in our people and talent as I discussed earlier. Non-interest expenses also increased due to the inclusion of both compensation and non-compensation expenses from Smith Barney. We continue to improve compensation, based on our estimate of full-year needs and competitive market pressures. Non-compensation expenses were $2.2 billion, up 19% from last quarter, driven by as I said, a number of discreet items, including integration costs from the joint venture, charges related to occupancy and the FDIC special assessment. If you turn to page 3 in the financial supplement. After significantly reducing our balance sheet in 2008, total assets increased to $677 billion at June 30, of which $158 billion is our liquidity pool. This is primarily driven by the increase in our client-financing businesses and the addition of assets from Smith Barney. We continue to keep a significant portion of our balance sheet in cash and equivalents as we believe maintaining strong liquidity is prudent in the current environment. Our capital ratios demonstrate the exceptional strength of our balance sheet. While we are still finalizing our calculations, we believe our Tier 1 ratio under Basel I will be 15.8%. Risk-weighted assets are expedited to be approximately $277 billion at June 30 and we expect our Tier 1 common ratio to be 8.3% and our tangible common equity to risk-weighted asset ratio to be 10.4%. Level 3 assets were $61 billion at June 30, representing approximately 9% of total assets. Now we turn to the businesses starting with page 5 of the supplement on institutional securities. Revenues of $3 billion include the $2.3 billion negative impact of credit spreads discussed earlier. Principal investment revenues were -$183 million. Write downs of $285 million in real estate and limited partnership interests were partially offset by gains in corporate private equity investments. Non-interest expenses were $3.3 billion in the 2nd quarter, off 58% from the 1st quarter, primarily on higher compensation. The business reported after all this a pre-tax loss of $307 million. If you turn to investment banking on page 6, our franchise reaffirmed its leadership position in the 2nd quarter, across M&A and equity and debt products and delivered a very strong performance. We were number one in announced global M&A and advised on four of the top 5 and 8 of the top 10 announced transactions in the first half of 2009. Significant 2nd quarter advisory assignments included, amongst many others, Rio Tinto $58 billion joint venture of DirecTV’s $14.5 billion merger with Liberty Media. This quarter, we gained share across capital markets, leading significant deals and demonstrated execution strength. We were a leader in helping financial institutions recapitalize, including equity capital raises for US Banc Corp, State Street and Sun Trust. We continue to lead significant deals in July, including advising General Motors in its emergence from bankruptcy and Rio Tinto’s $15.2 billion rights issue. Second quarter investment banking revenues of $1.1 billion were up 38% from the first quarter of this year, on the strength of underwriting across all regions and exclude fees associated with the issuance of our own equity and debt. Advisory revenues declined 35% sequentially, as overall M&A market volumes remained subdued. Equity underwriting revenues nearly tripled from the first quarter of this year and the surgent volumes driven primarily by the recapitalizations in financial institutions and rates. Underwriting revenues increased over 60% from the first quarter on higher investment grade, high yield and municipal issuance. Equity sales and trading revenues of $681 million were negatively impacted by $757 million from the narrowing of debt-related credit spreads on firm-issued structured notes. Cash equity revenues were up 11% from the first quarter of ’09, on higher commissions across all regions. Derivatives reported lower revenues, down 13% sequentially as decreased volatility created fewer trading opportunities, partially offset by higher client activity. Prime brokerage revenues improved 50% sequentially, from a shift in balance mix and increasing client balances. Average client balances increased 10% from last quarter, while balances in our top 50 accounts increased 16%. Fixed income sales and trading revenues of $973 million included losses of $1.3 billion from the narrowing of credit spreads of firm issued structured notes. Excluding this DVA, fixed income sales and trading revenues were up modestly from the first quarter of ’09 as weakness in commodities muted the results reported by interest rates, credit and currency. We were more constructive on the fixed income markets in the 2nd quarter, as evidenced by our strong results in credit trading. However, we have seen some relative underperformance in other areas. We are actively investing in our businesses and aggressively hiring key talent. Earlier this week, we announced that Jack DeMayo, a recognized name in fixed income, will be joining Morgan Stanley as global head of interest rate, credit and currency trading. We believe Jack is ideally suited to help us drive improved performance of our fixed-income business as we look to further strengthen our client flow businesses. Commodities reported weaker revenues consistent with the typical seasonal pattern, despite the weakness this quarter, year to date results were 6% ahead of last year. Excluding the DVA and commodities, fixed income revenues were up over 35% sequentially. Interest rate, credit and currency trading revenues combined, were up 16% sequentially on higher activity levels. Interest rate products reported a strong quarter, driven by market volatility. Credit trading revenues were up 12% sequentially. Within credit trading, credit corporates had a standout quarter, with revenues up 92% from the first quarter of this year, primarily from investment grade and distressed trading as the credit markets remained volatile on the increased market share. Currencies reported consistent revenues driven by market volatility. On a year to date basis, interest rate, credit and currency trading revenues combined were up 54%, with interest rate products up 99% and credit trading up 87%. Details on pages 14, 15 and 16 of the financial supplement are our mortgage related gross and net exposures. Aggregate mortgage-related net exposures were reduced from $9.1 billion to $7.9 billion during the quarter. Other sales and trading revenues benefitted from spread-tightening and valuation gains in our lending business, which includes leverage acquisition finance and relationship lending. Net gains in this quarter were approximately $600 million. However, these gains were offset by the combined impact of tightening credit spreads on Morgan Stanley’s debt, related to CIC’s investment of $195 million and other losses from hedging activities. Total average trading and non-trading value at risk increased to $154 million from $142 million last quarter, reflecting an increase on our non-trading VAR. Non-trading VAR increased to $108 million from $83 million, primarily as the result of increased lending exposure on higher market valuations. Average trading VAR declined to $113 million from $115, reflecting small declines in interest rates and commodity risk. Turning to page 8 of the supplement and our global wealth management business, the results of the Morgan Stanley - Smith Barney joint venture are now fully-consolidated within the statement, effective with its closing on May 31. Accordingly, this quarter included the joint venture results from the month of June as such comparisons to prior periods are not meaningful. Revenues were stable and consistent, despite the slowdown in the retail market. Non-interest expenses were $2 billion and included approximately $245 million of JEV-related integration costs, of which $124 million is compensation for replacement awards for Smith Barney employees, contributed to the joint venture. The cost of these replacement awards was fully-allocated to Citigroup’s non-controlling interest, although they do appear in our compensation expenses. Non-interest expenses also reflect $33 million of amortization of the previous announced FA retention awards, $29 million of amortization of intangibles related to the joint venture transaction and a $25 million FDIC special assessment charge on deposits. The business reported a pre-tax loss of $71 million. Excluding the JEV related integration costs, PBT was $174 million and PBT margin was 9%. On page 9, you can see the quarterly productivity metrics for the business. Prior periods have not been re-stated. The number of FA’s was 18,444 and total client assets were $1.4 trillion. Net new net asset outflows of $2 billion reflect continued outflows from legacy Smith Barney, that are trending down from recent highs. Deposits in our bank deposit program now total $106 billion, of which just over $50 billion is held by Morgan Stanley banks. Turning to asset management on page 7 of the supplement, asset management had a pre-tax loss of $239 million, driven by real estate related losses within merchant banking, including $111 million pre-tax loss in present. Core asset management was profitable for the 2nd consecutive quarter. Overall, for the this segment, revenues of $575 million increased significantly from the 1st quarter of ’09 and were primarily driven by gains in SIB’s, gains in investments in our private equity and services products as well as gains in investments made in association with our employee deferred compensation and co-investment plans. Principal investment revenues included gains in our private equity, alternatives and other seed investments, partially offset by $154 million in real estate losses, of which $16 million were related to Crescent financial assets. Principal trading revenues were negative in the quarter as mark to market losses of $131 million on a lending facility to a real estate fund, sponsored by the firm and other real estate investment hedging losses, were partially offset by $128 million gain on the disposition of our remaining SIB positions that have been reflected on our balance sheet. Management and administration fees were 7% higher on a sequential basis, driven by a more favorable asset mix, despite near flat average asset balances. Non-interest expenses for asset management increased 29% from last quarter and include a $38 million impairment charge related to Crescent. The increase was primarily driven by higher compensation and higher revenues. Non-compensation expenses decreased 14% sequentially on lower impairment charges. Turning to pages 11 and 12 of the supplement, you can see the assets under management and asset flow data. Total assets under management increased to $361 billion during the quarter, as market appreciation of $30 billion was partially offset by $25 billion in net asset outflows. Nearly all of the quarterly outflows were not core business primarily from fixed income funds, which include our money market funds, which are the preponderance. The outflows in long term fixed income are related to our past performance issues as we reported last quarter, we continue to see our performance improve in these products. Outflows in equity are primarily related to manager changes and certain mandates moving from actively managed to passive products. We continue to see improved performance in our equity products, evidenced by an increase in the percent of assets performing in the top half of LIPA 1 and 3 year categories. Now we turn to page 17 of our financial supplement and look at our firm-wide real estate exposures. Our real estate gross asset exposure, as reflected in our statement of financial condition, which includes Crescent and other consolidated interests, investments in real estate and infrastructure funds and bridge financing, was $4.6 billion at the end of the quarter, down from $4.9 billion at the end of last quarter. Including $1.7 billion of contractual commitments and other arrangements with respect to these investments, our total exposure would be $6.3 billion. This exposure excludes assets in investments for the benefit of certain deferred employee compensation or co-investment plans. Now in summary, a few words on the outlook. As I said, 2009 continues to be a year of transition. There is some evidence of improving economic conditions, and we have become more constructive in the market. However, housing markets continue to be challenged and we expect the leveraging will be a multi-year process, as you as consumers undergo a shift in their behavior. But, there are bullish factors as well. Capacity has left our industry, corporates need to re-equitize, refinance and re-lever and clients need help in managing their risk. We are well-positioned with a favorable business mix and limited consumer exposure. This quarter, we did achieve a number of successes. In June, we were among the first financial institutions to repay TARP. Post-repayment, our capital ratios continue to be industry-leading and we are operating with excess capital. In May and June, we successfully completed 2 equity capital raises and 2 unguaranteed debt offerings. Morgan Stanley’s brand and client franchise were reaffirmed by the robust investor demand which included our international partners in Japan - MUFG and China – CIC. We are hiring in line with our strategic goal and we will continue to invest in talent for the balance of the year. Institutional securities, our core business, continues to demonstrate the strength of our leading client franchise. Investment banking exhibited strength in underwriting, prime brokerage, improves, lost and new custodial services through our trust company which will further drive continued gains in market share. Within fixed income, we have excellent results in credit trading and we are focused in adding talent, grow revenues and improve results in other areas. Global wealth management posted solid results despite the challenging retail environment. The close of our joint venture with Smith Barney was successfully accelerated and the integration is on track. We’ve established a multi-pronged approach to fixed asset management and have begun the execution phase. We merged two of our fund to fund businesses to form alternative investment partners with roughly $20 billion of alternative assets. This will drive expense efficiencies and ultimately improve margins. With innovative idea generation, leading sales and trading teams, trusted client relationships and enhanced risk-management, Morgan Stanley remains one of the only financial intermediaries with the scale, global footprint and range of capital markets expertise sought by institutional and retail clients worldwide. Thank you and with that, I’ll now take your questions.

(Operator Instructions). And your first question will come from the line of Guy Moszkowski of Bank of America.

Good morning Colm.

Hey Guy, how are you?

Good. First of all I was wondering if you could just walk through the components of the increases and decreases in both value per share over the quarter that allowed you to keep both value flat or actually slightly up in the quarter, despite the fact that you had about a $1.10 loss?

I think if you begin with common equity of firm, of you know $29 billion, you have dividends of $1.4 billion, you have the common stock offerings of $6.9 billion, you have the gain on the MSA, the JEV, the Morgan Stanley-Smith Barney JEV of $1.7 and you have a small amount of orders of about a half a billion, you end up with (inaudible) interest. So you end up with $37 billion.

Right and fundamentally, most of what offset the net loss must have been the joint venture gain which didn’t go through the P&L right? Because the share issuance you did was basically at or below book.

Correct.

Okay. I just wanted to make sure that I understood that. Can you talk about the change in the capital allocations on a unit by unit basis? Your institutional capital allocations fell by a couple of billion, it went up by a couple of billion in GWM and your unallocated, of course, because of the capital raise went up by almost $4 billion. But, in terms of the changes in the shift of the units, can you just talk about the increase in global wealth management and the decrease in the institutional business?

Well, the increase in global wealth management is obviously taking on board the assets from Smith Barney in the joint venture and the increase in risk-weighted assets themselves. Within institutional securities the slight decline, actually is tied into the corollary of what happens with DVA. The debt valuation adjustment as that comes back. So that was really what the delta is, even though we took the balance sheet up.

Right, but you didn’t choose to roll any from the unallocated into the institutional business to make up for the DVA and I’m just sort of zeroing in on that, I guess.

Well, it’s really a function of how much the business wanted to operate. So, Whilst we did increase as a proxy for economic capital if you want, in some of the businesses in other areas, we didn’t take as much risk as we could have done – which I alluded to before. So it was flat. That’s what happened. So we are positioned to put more capital into those businesses where we see the right returns on a risk-adjusted basis. And, you know, obviously in investment grade trading we did and in distressed debt we did, we could have applied more capital into the business in – for instance – interest rates and foreign exchange.

Okay. So we should sort of watch that space as the new management takes hold it sounds like?

Yeah, I would hope that we are going to be applying more capital to those businesses, yes, correct.

Okay. Then turning to the joint venture I was wondering if you could help us understand how much of the increase in net revenues that we saw versus last quarter came from the increase in FAs due to the joint venture closing in the beginning of June, as we try to think about run rates for revenues. And, the same question really for core expenses.

I think it’s just very difficult to do that. I don’t want to establish that precedent as we actually do have now a joint venture. So what I’d rather do it on a going forward basis, Guy, is just plot it that way.

Okay, fair enough. My final question is about the effective tax rate of 54%. You talked about a change in the geographic mix and change in use of tax credits. The geographic mix could be what it is, but 54% seems very high. Are you losing the usability of some tax credits or something that’s driving that very high tax rate?

It’s a gain, isn’t it? Even though we have losses, we’ll be able to utilize tax credits in 2009 on a tax basis. So really it is a function of that. So the answer is no, we won’t.

Okay. Thanks very much.

Your next question comes from the line of Glenn Shore of UBS.

Hello there.

Hey Glenn.

Just piggy-backing on the wealth management appreciating not carving out the relative contribution, it maybe just a bottom line thing – do you look at the headcount in terms of FAs; a little more than 10,000 were added. Smith Barney had a lot more than that. I don’t know if that’s a timing thing or what contributes to that. And then, part 2 of that would be, is there any color commentary in terms of what pre-tax margins on any normalized basis look like inside wealth management? Is it tracking according to plan? You know, there were some modest net outflows in the quarter. I’m just trying to get any commentary because it’s a big part of your new identity. Just any color would be helpful.

I think it’s very difficult Glenn and I’m not being evasive, because we’re trying to true up with the integration, with the merger actually completing ahead of time. Obviously, we have some lag in Smith Barney as people are leaving and then coming in and we have the compensation costs, which we’re adjusting across. So the way I would answer it is we’ve seen nothing in the integration that would derail our view of the merger. And, we expect the synergies and costs we would expect. Also, if I look at the numbers, if I look at the global wealth management group it self where we are in the add-ons, I don’t see any discrepancy in the numbers, as you describe. So I’d rather wait until next quarter when you can see it. Our margins remain solid on the line. What I don’t want to do is to get into the trap of describing Morgan Stanley versus Smith Barney, when it indeed is one company.

No worries, we can move on. The - inside asset management, the outflows are pretty brutal. You mentioned that there’s a pretty comprehensive view on a piece by piece basis, if you will, within asset management and you’re starting to execute on that. Is that something that would be shared with us or are we just expected to play out over time? In other words, when there was a wealth management cleanup program in place when James came on board, there was the pretty slide show that showed the next 2-3 years and you guys executed awesomely on it, right? It was easy for us to track. My gut tells me asset management is going to be a little bit more underneath the covers, but…

I think that’s right, when you talk about our asset management business you’re talking about four businesses, so we have four plans, right? The merchant banking business, which is primarily a real estate business, is suffering cyclical threats. I think we’ve been very open on that. Then you have the core business - institutional and equities - which we believe we’ve taken costs out of. We’ve changed some management there; we got better managers in as well, performance is improving. And there’s the retail business, itself, right? We’ve had some performance issues. But, all of them have a common theme, which is cost control. I think we’ve agreed that asset management is strategically important to us. What we will do is give you more color on that going forward as of when we make any deviation from that plan itself.

Okay, cool. Maybe the last one is related to the comment you made on capacity – that it’s left. I agree, but it’s only left certain parts of the business. For instance, where we all sit in cash equity it’s probably as bad as ever. So, maybe as you re-shift and re-jigger on the heals of your Ray Rock announcement, if you rejigger what the fixed mostly, but the whole ISG platform is going to be versus where capacity has left, I just don’t know if capacity has left in the high-risk weighted asset businesses and therefore what you’re building is actually capacity hasn’t left that much. I don’t know if that question makes sense.

I think it does make sense. I’m firmly of the opinion that capacity actually has gone out of the businesses that we actually ourselves have de-emphasized. So, structured products and things like that. I think the growth is coming in the traditional flow businesses. We’ve been always well-positioned for that so I think we will do well and that is built into our models. My concern about anything that moves away from flow structure is that it can bring with it quite a large regulatory tail risk, in terms of recomputation of risk-weighted assets, capital allocations and so on. It’s one of the reasons why we’re carrying some of the excess capital we’re carrying. I think we feel very confident. If you go back to the last 5 decades, Morgan Stanley has always been in the top rank of leading players. There clearly is a model change in the business. We’ve seen the de-emphasis of certain types of investors; we’ve seen the essential abolition of certain types of products. What we’re talking about it re-pointing the business to focus on what we’re good at, which is primarily flow businesses. I think the capacity has left there, as well. I think we will be well-positioned to take advantage of that and that’s an outfit that we will be able to trade.

Excellent. Thanks, Colm.

Your next question comes from the line of Howard Chen of Credit Suisse.

Good morning Colm.

Hey Howard.

Thanks for taking my questions. Apologies if I missed this in the prepared remarks but, any more color you can provide on the hedging loss this quarter?

There’s no basis risk in there by and large, right? We obviously have some losses from mark to market and movements on swaps and the re-designation of those hedges we mentioned last quarter related to our debt. But nothing significant. It was just a potpourri of stuff, if that makes sense.

Okay, thanks. And then, just digging in on equity sales and trading, DVA aside, it sounds like you saw improvements within the cash equities business, prime brokerage, but was curious if you could provide any sense of what some of the offsets were during the quarter?

There’s no real offsets. If you look at it, we actually have market share gains in what we call our delta one, our cash businesses and our financing businesses. We actually have some pretty good results in prime brokerage, just to give you some color there. A number of clients returned with balances in excesses of ½ billion dollars, since January 2nd our Tier 1 clients have increased 23%, whilst the Tier 4, which we have been trying to de-emphasize have decreased 14%. So our Tier 1 balances actually increased 14% in the 2nd quarter. So there’s a bit of a tail effect. That’s against a background, as you know, of redemptions earlier in the year. So we feel pretty comfortable that we’re re-sizing that business and making it was profitable as we thought we could. What really happened, I suppose if you look away from that downsizing of prime brokerage – which is coming back – is that in derivatives we weren’t as successful as we’ve been normally. And, we don’t think there’s anything there other than and absence of client flow in our case. But, I still think our equity numbers, whilst off a little bit, look reasonably solid.

Okay, helpful color. Thanks, Colm. And then with respect to capital, you said in the past, you said again today, you believe the firm is overly capitalized. You’ve raised a significant amount of capital during the quarter, ratios are high. Is there any sense of where you’d like to target the Tier 1 or Tier 1 common in the intermediate term?

Obviously we have internal targets, but I can’t give external targets because I’m really subject to what my regulators would like me to do. What’s clear though, just to talk about it, is that Tier 1 as a ratio has been augmented considerably by Tier 1 common. So, we obviously had a composition of capital mismatch which is why we did the common equity raises this quarter round. We now feel we’re very robust on Tier 1 common. I would suggest, without wanting to upset people, that we’ve probably got an excess of the hybrid type of capital in our Tier 1 capital ratio and over time, as markets normalize we would look to deal with that.

Right. So as a follow up to that, Colm, assuming you are above your internal capital targets, then the first part of the question – what’s the priority? Is it dividend restoration? Share repurchase? Internal deployment or strategic acquisitions? And the 2nd part of the question, with respect to that capital composition part, do you think that potentially impedes your timing of letting some of that excess capital go, if you do in fact have it.

Look, I think we’re reasonably under-levered at the moment. I think we can dedicate more capital to businesses. I think our balance sheet could be taken up higher. I’d like to deal with that first. I mean, any talk about repaying or buying back shares or increasing dividends at this stage are premature at this stage in the cycle. We’ll address that when we come to it.

Okay. Then the final one for me, could you just provide us a sense with the marks, where they stand on the legacy assets for the quarter?

Yeah, let me just get that for you. I’ll just run through them. CMBS bonds in the low to mid-forties in the US 32, in the UK 50. Senior commercial loans, low 80’s. Mezzanine commercial loans mid-forties. Alt Aim –mid-20’s. US and UK residential loans mid-60’s. Sub-prime ADS, CDO Mezz, low teens, our leverage finance portfolio is low ‘70s and our secondary loan portfolio would be mid-50’s. Is that okay?

That’s great. Thanks so much for taking my questions, Colm.

Your next question comes from the line of Richard Ramsden of Goldman Sachs.

Hi, good morning.

Hi, Richard.

A couple of questions. The first is on the comp to revenue ratio; it’s come in at about 71%. I know you’ve talked about competitive market pressures in the press release. I’m just wondering is there anything structural that we should be aware of that’s impacting that number, such as higher fixed comp expenses than in the past?

No, we did increase fixed comp for managing directors from $300,000 to $400,000. But I don’t mean that’s the main driver. First of all, 71% is our revenues which are being impacted by DVA. If you X the DVA out, we’re actually improving our comp to net revenue on an annualized basis at under 49%. So we have to be competitive. Now, clearly that’s the basis of our own revenue projection. If markets improve, then you can start scaling back a bit from what the revenue accrual would be. But clearly we’re not in normal markets yet, so to make long term assumptions about what revenue, what comp to net revenue should be at this stage.

Okay, but on a look-forward basis, there’s no reason to believe that it should change from what it’s historically been? That would be a fair statement?

I don’t know if that is a fair statement, Richard. I would suspect that on a look-forward basis in more normal environments, you would expect to see comp to revenue trending down.

Okay. The second question is just more broadly on the institutional businesses. I know at the end of Q1 you did talk about increasing risk. That seems to have happened to a degree. I’m just wondering though, were there other factors during Q2 that impacted your risk appetite, such as the need to keep liquidities, repay TARP or the results of the stress test? Or was this kind of in line with what you were thinking at the end of Q1?

No, I don’t think liquidity is impacting our ability to take risk. I mean, we’re very firm that we need to keep a pool of liquidity and that has a net carry drag, which I understand. But that is a relatively small price to pay for confident markets. I don’t think we’re totally out of the woods yet. No, we have the ability to take risk, as John mentioned in his comment, we can take risk. In those areas where we’ve taken it, we’ve actually done pretty well. It’s just a question of continuing to apply more economic capitals in businesses areas and take the right sort of risk. What I would always caution people of, is that we very much look at risk-adjusted returns. It’s not just a question of creating on a binary basis, and that’s the way we view things, it’s creating on the back of our customer flow and I think in certain areas we could have done a better job than we did and in some areas, we did do a good job.

That’s great. Thanks a lot.

Your next question comes from the line of Mike Mayo of CLSA.

Good morning.

Hey Mike.

Can you talk about the investment banking backlog; where it stands relative to last quarter?

Yeah. The IPO backlog is pretty strong. Let’s begin with the good stuff. The investment grade debt and high yield backlogs are strong and up from last quarter. But the investment banking backlog is down on the last quarter; but if you remember it’s been weak for a while. So, you know, I would say that M&A still looks as though its being somewhat challenged. I still believe that we’re primarily in an M&A triage environment. And, that’s the challenge we face. For that to improve, you’re going to have to see pretty unfettered access to the unsecured funding markets for that to come back and people feel that they can finance activities, Mike.

How much is that backlog down in aggregate? For underwriting and M&A?

In aggregate, I would say we’re probably down from last quarter not too much, about 14%. But from last year, you know, obviously quite significant.

Sure. And as far as wealth management; do you have a little bit of buyer’s remorse? The only reason I say that is look at the net new assets being down 1% and I know you aren’t talking about the separate entities anymore, but the Smith Barney side seemed to be weaker than your side and that seems to be following through. Also, a related question – the net new assets, does that reflect only one month of Smith Barney outflows or would that be somehow restated for the full quarter?

It reflects one month of outflows. We have absolutely no buyer’s remorse at all. We’re actually really comfortable with the acquisition, the joint venture itself. We’re very pleased with it.

But just the net new assets being down, can you give any additional color on that?

I think there’s a lot of noise there, Mike. I think you’re going to have a much better sense of where we are next quarter, when things normalize. Remember, these were two companies going at different speeds, at different times when things came together. I think you’re just going to wait for things to settle down.

Okay. Last question – this is a general question – the sustainability of trading. You have to model that for your expense control. A related question to that is, how much of your difference versus peer is due to people? I know you made a management change. And, how much of it is due to the processes it self?

I don’t think it’s structural, is the answer to the question. I think we punched below our weight. We have a very strong client footprint. We can predict a number of factors in terms of our forecast in expense control, all of which make me feel that in our case, they are certainly sustainable and can be better.

Okay. And the sustainability of trading? Is everyone going on vacation over the summer and the trading should be a lot less or is it still continuing into the quarter?

It’s still continuing at the moment. Obviously, July began with the July the 4th weekend, but I see nothing yet that’s causing me grounds for concern.

And did that spread just as wide or getting a little narrower? We kind of have mixed signals from some of the comments so far.

I don’t see any evidence of that Mike, at the moment. I’m sort of not hearing that from people.

Okay, thank you.

That is anecdotal, thanks.

Your next question comes from the line of Rodger Freeman of Barclays Capital.

Good morning Colm.

Good morning Rodger.

I guess I wanted to come back to comp for a sec. if we look at SDBA as being calculated as something like 45% in the first quarter and then closer to 50% in the 2nd, and you talk about comp being driven by sort of competitive pressures and not referencing expectations for full-year revenues or profits. How do we sort of look at that? Is that step up to 2Q all a function of what we’re hearing is a much more competitive environment for hiring top talent. Is this 2Q sort of a run rate that we need to be thinking about?

No, I think first of all, we’ve given additional disclosure this quarter. We’ve given you compensation for segments. You can say that we have our global wealth management asset manager security business. What I’m trying to point out to you all is that the nature of our compensation payout is changing. In the case of global wealth management, there’s much more of a grid structure of payout, which is not discretionary, it’s grid. With the institutional securities, you can work out what the ratios are as well. So I think we’re giving you more color so you can, rather than just looking at a blanket percentage which is comparing an apple to an orange in the case of some of our competitors, you’ll get a better handle. But clearly, we have to pay competitively. We are a preeminent investment banking franchise in our institutional securities business and we feel very confident about the prospects going forward. Now, obviously we’d like to have far more revenue that makes the compensation issue easy. But, in terms of competitive pressures, we’re clearly aware of that. We’re also very aware of the loyalty of the employees of this firm who have been here for a very long time. Hopefully, if you analyze the three segments, you get a clearer sense of what we’re doing with comp.

Right. Then I guess within equities trading – I guess what I’m curious about is with respect to your strong equity underwriting, I would have thought maybe you’d see strong trading on the back of that. I guess the question is what have the trends in facilitation been? Have you been committing much capital? Has there been a lot of demand? It seemed that’s really what drove Goldman’s trading line this quarter.

Not significantly. I mean, the equity business, the way we run our equity business by and large, is slightly different from some others. We had clear gains in Delta 1, the commission driven business, we had clear gains in prime brokerage, relative to where we were. I would say if there’s one delta in equities, it’s the derivatives, which I said does not cause us a great deal of concern. So no, I think by the way – relative to our other peers – the numbers are not at all bad.

That’s true. And, on the derivatives side, were you long ball throughout the quarter?

Actually, we were long-ball last year in the first quarter and the guys vey cleverly reduced that position and turned it.

Okay. And then, I guess on commercial real estate, I was looking inside of your real estate funds and asset management. It looks like there’s about a $5 billion decline in AUM related to write-downs; there’s $2 billion of outflows. So that’s like a 20% write down, if we did the math right? I guess my question is, if you look at sort of Crescent and your marks there are something like 8%, there’s a fairly large discrepancy. I understand Crescent’s held at cost but I guess my question and I asked this last quarter too, what would drive significant impairments there on your remaining exposures? Would it be financing related and if so, what do you have coming due on those properties this year and next?

It is financing related and primarily we do look at – we don’t talk about individual valuations per se. we have given you a lot of disclosure on Crescent. But remember that’s a gross not a net disclosure on Crescent. We do impairment tests and we have said that we have to consolidate the subsidiary, which is why it suffers the accounting treatment it does. So, I can’t add much more than that, Rodger.

Lastly, just within credit trading, was there much of a benefit from the decline in negative basis between cash and growth this quarter that would have benefitted the trading book?

I wouldn’t be able to answer that question specifically. We saw very strong client flows in investment rate trading and we do see some good positioning profits as well. I think there was generally probably a narrowing of the spread. As regards to basis, I just can’t answer that specifically, I’m sorry.

Okay, thanks Colm.

Your next question comes from the line of Meredith Whitney of Meredith Whitney Advisors.

Hi, Colm. I have just a straight forward question. I’m sorry if you went through this. I see the footnote of the restatement of the EMEA revenues in the regional breakout, but if you could provide more color in terms of what happened in EMEA and just the run rate for the last two quarters? Forgive me if you already went over this.

No, no, I didn’t actually; that’s a great question. What it is, is that all our DVA, our structured notes actually hits Europe. So if I was to do a back of the envelope recalculation, you’re basically talking about 53% Americas, 40% Europe, 7% Asia.

Okay. So those two are, you could argue, one time hits? Those two quarter, the last two quarters?

Well.

Unusual items. Is that a better way of putting it?

Unusual items. Listen, if you remember, our debt spreads widened out significantly in 2008, right? If you want, traded idiosyncratically toward the group. What’s happened is that as the more established spread has normalized, our spread has come back all the way now, so we are trading more or less the same as our competitors and better than some. So my view on DVA going forward is I can’t predict whether it’s going to go up or go down, but it will trade in line with the financial system itself, rather than the idiosyncratic pace of Morgan Stanley. Does that help?

It does. I’m going to assume from your comments that EMEA starts to normalize on prospective quarters then, not from current levels.

That’s right. Absolutely.

My next question is just trying to push you a little bit further about your newly constructed view of the markets. What’s the time, your timing between when you start to really put not reallocation of capital, but actually add more leverage to business?

First of all, I’m constructive, I wouldn’t say I’m bullish. I think the point is that we’ve always said that we felt we needed market stability to return to be able to allocate capital efficiently and properly. There are clear signs of market stability returning. First of all, you’re getting turn in the term financing markets, secondly you’re getting CP coming out, you’re getting access to unsecured debt. Funny enough, Morgan Stanley reopened the hybrid bank market yesterday. You probably saw that, where we did a deal for BB&T, which we totally pushed down our retail pipeline. Those things make me very constructive about the market itself, about the stability of the market. What I’m concerned about is the sort of macroeconomic picture, which is the consumer deleveraging which we spoke about. But now that we’ve got market stability, we feel much more positive about applying capital to segments and taking advantage of trades and we are there. This quarter, we did apply more capital to certain segments of the market and traded reasonably well. We could have traded better in one or two other areas.

Okay. Thank you, Colm.

Your next question comes from the line of Michael Hecht of KMP Securities.

Hey, Colm, how are you doing?

Hey Michael, fine.

Just going back to the core performance in fixed this quarter, which I’m getting about $2.3 billion less the DVA’s, which I think was better than the first quarter, but still kind of billions less than your peers. As you guys invest here and increase your risk appetite, how should we think about the opportunity? I mean, something closer to the $4-7 billion per quarter your large peers like Goldman, Citi, BofA and JP Morgan have been earning each quarter?

Clearly, we can do better. Despite our being more constructive in the market, some trading desks didn’t see the opportunities that our peers might have done. As a result, we didn’t take as much risk as we could have and as you can see, our trading bar is flat. Now, there may be some legacy issues for some of those people in terms of risk appetite, 4th quarter of ’08. But we’re beyond that. We’ve seen what other people are doing in the market. But what did we do in fixed income? Where we took more risk, we had strong return. We took incremental risk in applied capital and investment rate trades and distressed debt. We traded the mortgage area well. We report a very strong, we think possibly a top 3 investment rate distressed and mortgage trading revenues and we are seeing market share gains there. But clearly we need to apply that discipline to the areas where, although we’ve improved, we didn’t perform as well as we could and given that we have as good a client footprint as anybody and better than most, we think that is easily remedied. We’re addressing the flow and market share issues by hiring talent. We’re hiring more DNA, into rates and foreign exchange. We have made some management changes, but that was part of an ongoing process where we were talking about taking advantage of dislocation in the market to bring in improvement to bench and strengthen the bench. You know, we don’t think it’s a fundamental issue for us. It’s something we can easily address and have done before.

Okay. That’s fair enough. Just kind of broadly, can you speak a little bit more, a little more color on just the Smith Barney integration? I mean obviously it’s very early days but any kind of disappointments you can speak to on the technology side and talk to maybe your confidence in the expense synergies that you’ve laid our previously of around $1 billion and also as part of that, just broadly you feel broker retention is running versus your expectations.

It’s really too soon, Michael and it would be misleading. I think some newspaper reports have been misleading. We are very confident in the integration. Everything is on plan. I would say in fact, if anything, we’re slightly more pleased than we though. We closed the deal earlier and we have no issues with retention. So I would rather hold off until next quarter when we can give you something more substantive on that. Now remember, we’ve closed this early, right? It’s a big achievement and there’s a lot of cleaning up here.

Yep, I agree. I saw that press article as well and I was kind of surprised because it seems like early days. Just the last one for me. Is there a way for us to think about potential DVA markdowns from here? I mean, you guys had about $6.4 billion in gains in ’07 and ’08. I think so far this year, including the piece that you took in December, reversals of about $4.1 billion. How do we think about the potential overhang for DVA? I understand it’s a function of where your spreads kind of go from here, but is there a cumulative amount of reversal we should think about?

I can’t answer that. Well, I can answer it in one way. I think we’re now in line. Remember our DVA is based upon bond spreads, it’s not based on our bond spread, it’s not based on our CBS spread. We’re now in line with our nearest peers in the industry, broadly. So if DVA is going to come in, it’s because the whole financial system is being re-rated and viewed as a better credit. I’m assuming for that to happen, then things are getting generally better elsewhere. So I would hope that we would get some compensation write ups and positions we’ve got for some recovery. So all I would say in total is, I can’t predict what DVA will do, but I can tell you it is no longer and idiosyncratic issue for Morgan Stanley, we’re in line with the pack.

Okay. Fair enough. Thanks a lot.

We have time for one more question and that question will come from James Mitchell of Buckingham Research.

Good morning. I’d like to follow up on the asset management business. What is the long term game plan there? Obviously, if you look at your scale, not that you’re sub-scale, but smaller than some of your peers, Merrill got out of this because of conflict with the large brokerage business and you certainly have some issues around performance and flows, is that something you want to scale up? Do you want to scale down? Would you consider acquisitions to bolster it longer term? Obviously in the near term, you’ve got your hands full. But, I’m just trying to think through the long term strategy in asset management. Thanks.

As I said before, there are really four businesses there and you have to look at them individually. What we do believe is that the business broadly fits in to our wealth management, asset management strategy, where there are synergies and that makes sense. You know, our first job is to continue to do what we’re doing which is to improve performance and take out unnecessary costs. James Gorman, our co-president is specifically looking at the strategies in each of those segments. You know, we have looked and I’ve said to you before James, at a number of alternatives. Do we dispose of it? Do we do a contribution-type deal? Do we fix it ourselves? We’re very much focused on the latter, at the moment. I know it’s frustrating for you all, because it’s a slow thing to fix, but I have promised where we get improved performance and we make decisions supporting those businesses, we will keep you in touch.

Is there any value in perhaps accelerating that, the acquisitions? Obviously a lot of the asset management companies themselves that are publicly traded have been hit pretty hard. As you mentioned, you have excess capital. Is there any appetite for that?

Right now at the moment we’ve got a very strong view that we need to focus on what we have and make sure that it is efficient and making key hires for that. Obviously we’ll keep options open. But, our core case is to actually optimize what we have.

Okay. Fair enough. Thanks.

Thank you very much everybody.

There are no further questions. Gentlemen, do you have any closing remarks?

No, thank you very much. Thank you for your time. Operator.: This concludes today’s conference. Thank you for your participation. You may now disconnect.