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 the webcast will be available through the company’s website and by phone through July 18, 2008. 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 management’s 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 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; management’s discussion and analysis of financial condition and results of operation in part 2, item 7; and quantitative and qualitative disclosures about market risks in part 2, item 7A of the company’s annual report on form 10-K for the fiscal year ended November 30, 2007 and other items throughout the form 10-K; and the company’s quarterly report on form 10-Q for the period ended February 29, 2008; also the company’s 2008 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 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 would like to turn the program over to Mr. Colm Kelleher for today’s call.

Good morning and thank you for joining us. What I’m going to review with you today will be consistent with what we have been saying about business conditions in the quarter. Strong client flows characterized the first quarter. Second quarter flows were severely disrupted by the Bear Stearns situation and the fallout of the forced liquidation of hedge funds and financial institutions continuing to raise capital and recognize further write downs and ongoing [FEEB]. Following the events in March that froze the markets, client activity improved but remained subdued throughout the remainder of the quarter and had a significant impact on revenues in our institutional securities business. There were a few attractive risk adjusted opportunities and we continue to be prudent in our use of capital. The strength and health of our balance sheet will be evident when we disclose our tier 1 ratio in the 10-Q. While we are still finalizing the numbers, we expect our tier 1 ratio will be between 11.5-12%. The themes that we laid out last quarter, including market deleveraging and de-risking continue. We further reduce our leverage to 25.1 times, adjusted leverage to 14.1 times and increased our [peer aden] liquidity to $169 billion and feel we have navigated through this difficult quarter. Let me begin with an overview of our firm-wide results outlined on pages 1 and 2 of our financial supplement. We generated net income of $1 billion, diluted earnings per share of $0.95 and a return on equity of 12%. These results included the divestiture of our Spanish onshore mass affluent wealth management business reported in global wealth management which affected profit before tax by $698 million and EPS by $0.43. We also completed a partial sale of our investment in MSCI through a secondary offering that had an additional impact on our profit before tax of $732 million and a $0.45 impact on earnings per share. Results also included severance charges related to our recent reduction in force that reduced EPS by $0.15. While extremely challenging markets had a broad impact, several franchise businesses performed well, including prime brokerage, cash equity trading and foreign exchange. Our global wealth management business contributed strong results due to the momentum we’ve established with increasingly productive brokers and the fact that retail investors remained relatively engaged. Firm-wide net revenues were $6.5 billion and PBT margin was 22%. Non-interest expenses were $5.1 billion, down 70% from the first quarter driven by lower compensation that included severance expenses of approximately $245 million. On page 3 of the financial supplement you can see the total global headcount decreased by 4% from yearend, reflecting our continued efforts to resize certain businesses in this difficult operating environment. The compensation to net revenue ratio was 46% or 54%, excluding the severance of the impact from the gains. Our current estimate of compensation to net revenue ratio for the next two quarters would be closer to first quarter of 08, excluding severance charges of 47%. This is the ratio you should model going forward. Non-compensation expenses were $2.1 billion. Our non-comp levels are consistent with prior periods as we are using operating efficiencies to fund investments in technology and geographic expansion to enhance our client servicing capabilities. Now let me turn to the businesses. Starting with institutional securities detailed on page 5 of the supplement, these results were significantly affected by the ongoing market challenges and the corresponding decrease in client activity that we experienced this quarter. Net revenues of $3.6 billion were 42% lower than the first quarter and include $744 million from the secondary offering of MSCI that you will see in other revenues in the institutional securities income statement. Excluding the gain, revenues decreased 54%. Non-interest expense of $2.9 billion decreased 28% from the first quarter of 08. Excluding the severance charges in both quarters, these expenses decreased 31% from the first quarter, primarily driven by lower compensation as a result of lower revenues. Pretax income was $679 million with an ROE of 9%. Revenues in investment banking decreased 11% from the first quarter, although our overall pipelines continue to be healthy with corporates maintaining high levels of strategic dialogue. This quarter we’ve participated in several high profile deals, including: Time Warner Cable’s $42 billion separation transactions, Northwest Airlines’ announced merger with Delta, GE Capital’s $8.5 billion debt offering, New World Resources’ $2.5 billion IPO and CIT Group’s $1.5 billion concurrent common and convertible offering. Looking at page 6 of the supplement, investment banking revenues were $875 million. Advisory revenues were $367 million, a 17% decrease from the first quarter, in line with completed industry volumes. Underwriting revenues decreased 5% to $508 million, as higher equity underwriting revenues were offset by lower revenues in fixed income underwriting. Sequentially, equity underwriting revenues of $298 million were up 14% driven by improved activity levels from the first quarter of 08. Fixed income underwriting decreased 24% to $210 million, reflecting lower revenues from loans and securitized products which offset strong results in bond issuance, particularly investment grade. Page 6 of the supplement shows total sales and trading revenues of $2 billion, down 61% from the strong results of last quarter. Last quarter our trading businesses produced exceptional results on the back of our client franchise. Since then, client activity, illiquid credit markets and poor positioning drove trading revenues significantly lower, particularly in fixed income. Total fixed income sales and trading revenues were $414 million, down 85% from the first quarter of 08 on low revenues across all major categories as the difficult credit environment continued to weigh on the corporate credit and mortgage businesses. While volumes in interest rate and currency businesses remained strong, unfavorable rates positioning drove revenues lower. Interest rate, credit and currency trading revenues combined were down 63% from the first quarter. Credit trading generated a loss. In addition to overall subdued customer activity levels, our results included losses of $390 million which I’ll refer to again later from monoline exposures. The credit trading loss also included a $120 million negative adjustment to marks previously taken in our London traders book that did not comply with firm policies. Let me add here that our valuation review group and business unit controllers, in the course of a valuation review, became aware of some anomalies in marks and reacted accordingly. We continue to work out our mortgage proprietary trading business and significantly reduce its losses versus last quarter. Our commodities business declined 67% from last quarter on poor positioning in North American electricity. Firm issued structured notes have little impact on this quarter’s fixed income results. Equity sales and trading revenue of $2.1 billion were 39% lower than last quarter’s record results as the market environment led to significantly lower derivatives and proprietary trading revenues, which offset continued strength in prime brokerage and cash trading. Despite the severe drop in volumes in the credit markets, global equity volume has remained strong resulting in a slightly higher cash equity revenues. Derivative revenues were 25% lower than the first quarter as volatility levels decreased, creating fewer trading opportunities. Prime brokerage business produced strong revenues with average customer balances up slightly from last quarter. The quarter’s equity results also benefitted from a $90 million gain on firm issued structured notes. Let me now update you on our progress in managing down our exposures in those areas most affected by the credit cycle downturn that began last summer. At that time our exposures were at peak levels in areas that concerned us most, namely leveraged lending, commercial real estate and residual subprime. Today and in our 10-Q, we will be disclosing broader gross exposure information to help you understand the financial impact of the marks we have taken in commercial mortgage backed and monolines. Our leveraged acquisition portfolio is now down to $12.7 billion from a peak of $35 billion in the third quarter. This number is imbedded in the non-investment grade loans and commitments, or $22.3 billion on page 7 of the supplement. Some liquidity did return here in the marketplace this quarter. We had net positive market movements of $430 million on non-investment grade loan commitments, which were offset by losses on hedges of $910 million, resulting in net losses of $496 million. These losses were primarily in the leveraged acquisition portfolio. These are the major components of the $590 million loss reported in other sales and trading. Last year we anticipated CMBS commercial whole loan issues early and repositioned our portfolio across regions with a greater proportion of the reduction in net exposure coming out of the US. We have provided details of our gross and net exposures of CMBS and commercial whole loans on page 70 of our financial supplement. We continue to get observable market prices from executed trades and as you can see in the supplement, we reduced our net exposure to $6.4 billion from $11.6 billion and our gross exposure to $22.1 billion from $23.5 billion. Please note that included in the gross exposure are other secured financings that we do not consider to be at risk assets. Total losses this quarter here were $100 million. On page 16 of the supplement, we reduced our total ABS CDO subprime net exposure this quarter to $300 million from $1.8 billion. As stated earlier, we have optimized our subprime portfolio with exposure primarily in higher quality vintages which we are managing more efficiently. Our hedges have performed well, producing a $300 million gain and we reduced our super-senior mezzanine exposures by $1.2 billion from last quarter through dispositions and write downs. In other mortgage related exposures, including alt-A, RMBS bonds and European mortgage loans, we reduced our net exposure to $6.7 billion from $8.7 billion. Our gross exposure was $12.3 billion at quarter end, down from $14.5 billion last quarter. Within the $6.7 billion, there was $2.4 billion in alt-A exposure, down from $4.6 billion last quarter through executed trades and corresponding marks calibrated to those trades. Total write downs were $300 million and are the main driver of our losses in mortgage proprietary trading. RMBS bonds and European mortgage loans that make up the remaining net exposure in the non-subprime residential category were flat to last quarter and did not include any significant net losses or write downs. Our aggregate net direct exposure to monolines is down $1.9 billion to $2.8 billion. Our net exposure includes: $1 billion of ABS wrap bonds held by our subsidiary banks, $1.3 billion of ensured municipal bond securities and net counter-party exposure to monolines of $500 million which represents gross exposure of $3.6 billion, net of hedges and cumulative credit valuation adjustments of $900 million. As I mentioned, our losses related to monolines were $390 million this quarter, which included an increase in credit valuation adjustments of $250 million. Turning to capital liquidity, we are still very focused on maintaining a strong capital position, high levels of liquidity and prudent leverage ratios. Page 4 of the supplement highlights our current capital position. We’ve continued to be well capitalized with excess capital. As I mentioned before, while we are still finalizing the numbers, we expect our tier 1 ratio will be between 11.5-12% in our 10-Q. This ratio represents the overall strength of our balance sheet. We are still placing a significant emphasis on our capital and liquidity to ensure we have enough dry powder to continue investing in our businesses and to take advantage of attractive risk adjusted opportunities. We further strengthened our liquidity position and built on the momentum of the previous few quarters. We ended the quarter with total liquidity of $169 billion, up $46 billion from the prior quarter end. Let me take you through the components. During the quarter we accessed the capital markets and raised $14.3 billion in unsecured parent company debt, bringing our year to date public long term debt issuance activity to $22.9 billion. This amount, together with incremental non-public issuance activity exceeds our scheduled maturities for 2008. We continue to actively manage down positions requiring significant cash funding and reallocate balance sheet to liquid assets with significant two way customer flows. And lastly, with higher levels in our liquidity reserve, we reduced our commercial paper outstanding to $12.3 billion for this quarter end, a reduction of roughly $5 billion from the first quarter and down from a peak of $28 billion. Total liquidity which we have added to our financial supplements on page 3 includes the liquidity at the parent company bank and non-bank subsidiary levels. Total liquidity averaged $135 billion in the quarter, up 11% from the record levels of $122 billion in the first quarter. Parent company liquidity was $80 billion at quarter end and averaged $74 billion, up from $71 billion average in the first quarter. Bank and non-bank subsidiaries liquidity position was $89 billion at quarter end, and averaged $61 billion in the quarter. Last quarter I told you that the weighted average maturity on our fixed income repo book turning to secured financing was 34 days which is a relatively long duration. Recently in out books, average repo maturity has been around 48 days. The more comprehensive metric that we planned to disclose to you in our 10-Q filings going forward is the weighted average maturity across all asset classes in our repo and stock lending books. The weighted average maturity of these books was recently been about 45 days. We continue to work to extend the term of this book as part of our overall liquidity planning and financing capabilities. We are managing our balance sheet prudently and further reduced the total and adjusted assets during the quarter. Our discipline in maintaining and appropriately sized balance sheet in today’s environment, along with our strong capital position has brought our total leverage ratio down to 25.1time from 27.4 and our adjusted leverage ratio down to 14.1 from 16 times. This combination of our strong capital, high liquidity and reduced leverage positions us to take advantage of market opportunities. As regards value at risk, total average trading and non-trading VAR increased to $112 million from $103 million at last quarter. Average trading value at risk was up slightly to $99 million from $97 million. Moderate increases in VAR were driven primarily by higher realized market volatility that more than offset reductions in key trading risks. In addition, the increase in aggregate trading and non-trading VAR was also driven by the issuance of long term debt, referred to earlier, used to fund the increase in the company’s total capital. In our 10-Q filing, in addition to our tier 1 ratio, we will be reporting risk weighted assets, [inaudible] to market, credit and operational risk. This will provide you an additional tool to evaluate our risk taking each period. Turning to page 8 of the supplement and our global wealth management business. As I mentioned at the beginning of the call, we divested our Spanish onshore mass affluent wealth management business during the quarter and our results reflect the impact of that transaction. The net gain on the sale after accounting for related expenses was $698 million of PBT. Excluding this gain, PBT for the quarter was $291 million, and the PBT margin was 17%. Revenues, excluding the divestiture increased 6% sequentially, reflecting a significant amount of new issue activities and increased investment banking revenues by 46%, primarily in fixed income underwriting. Fees and commissions declined slightly from last quarter in lower market levels and client activity. The increase in principal transaction revenues reflect stronger volumes, primarily in municipals and corporate equities. Excluding certain expenses related to the divestiture, non-interest expenses increased 4% from last quarter. The increase was primarily driven by higher business development expenses and an increase in legal reserves. Excluding the divestiture, ROE for the business was 51%. On page 9 you can see the productivity metrics. Net new assets of $13.3 billion represented our ninth consecutive quarter of positive client inflows on our second highest ever. Assets in the $1 million plus household segment increased 4% from last quarter to $511 billion and represented 72% of our total client asset base. Total client assets increased 2% from last quarter to $739 billion, largely reflecting market levels and net new assets. And average FA production, excluding the divestiture, increased to $810,000 as a result of increased revenues. Average assets per FA of $89 million, increased also 5% compared to last quarter, reflective of asset levels in the quarter. And if you exclude the reduction in brokers from the divestiture, FA headcount increased slightly compared with the first quarter of 08. Our bank deposits grew to $34.3 billion as clients kept assets and cash due to the volatile markets. Let me turn to asset management which continued to be negatively impacted by the turmoil in the markets. On page 10 of the supplement, our asset management business reported a pretax loss of $227 million. Revenues were down 10% sequentially, primarily reflecting investment losses in merchant banking, partially offset by higher revenues in our core business. Merchant banking posted losses on principal investments of $212 million, primarily driven by markdowns in real estate. $150 million of these markdowns relate to the write down of one major investment that was acquired in 2007 as part of the building of a future real estate fund. Crescent, a REIT, includes high quality office buildings and investments in resorts and residential developments located in select high growth markets across the United States. Due to factors including changes in market conditions, the timing, valuation and size of the investment, we will not include Crescent in the investor fund. As a result, $4.6 million of assets are being consolidated on our balance sheet. We will continue to evaluate these assets and position them for sale as opportunities arise. Core results include lower management and administration fees, primarily reflecting lower performance fees in our alternatives business and lower trading losses. The trading results include losses of approximately $86 million related to marking securities issued by structured investment vehicles held on balance sheet by asset management. The total structured investment vehicle or SIV exposure in our money fund as of quarter end was $1.3 billion which are all bank sponsored, down from $3.6 billion at the end of last quarter. This decrease came from maturity sales and pay downs. The current balance is approximately $1 billion and will drop below $600 million by the end of June. The value of assets relating to SIVs on our balance sheet was approximately $500 million at the end of the quarter. Non-interest expenses of $715 million increased slightly from the first quarter driven by higher compensation, partially offset by lower non-compensation expenses. These results contrast sharply from the strong results we delivered last year. There has been a significant falloff in this business and it continues to be a difficult environment, particularly for real estate. The primary drive of the volatility in revenue is negative marks for the real estate portfolio compared to substantial gains the prior year and to a lesser extent, the SIV related marks to our proprietary positions. We continue to see investment interest in real estate because of our strong track record and ability to take advantage of the distressed markets. Turning to pages 11, 12 and 13 of the supplement, you can see the assets under management and asset flow data. This quarter we revised our disclosure to provide more transparency around assets and flows by product and channel, including a breakdown of our merchant banking business. Total assets under management increased 5% to a record $605 billion. We generated $15.5 billion in flows, our seventh consecutive quarter of positive flows. From a product perspective, we now show asset flows at both the core and merchant banking business. There were $13.8 billion of inflows into core with strong inflows into fixed income and alternative products and we had outflows from equities. Core inflows were driven primarily by institutional money markets. Flows into merchant banking products have remained positive and we recorded $1.7 billion in asset flows in the quarter. We continue to show positive flows at our non-US and US institutional channels while regional channels recorded outflows in the quarter. As we have said earlier, we are committed to improving our performance in the retail and mutual fund space. This continues to be a major focus for our management team. On page 3 of the supplement, you can see the regional revenue disclosure at the firm-wide level. This quarter, 57% of our revenues were international, with 43% from Europe, the Middle East, Africa and 14% from Asia and 43% have come from the Americas. Finally a few words on the outlook. After a difficult start to the quarter, customer flow activity returned to more normal levels in May and these flows have continued into June. Clearly the markets are still nervous and [inaudible] encouraging signs for trend, many issues remain: rising inflation, higher energy prices, rising unemployment and the ongoing housing downturn will continue to pressure the US consumer. Uncertainty remains surrounding potential regulatory and accounting changes. Against this backdrop, the underlying trends in our customer businesses are good. We are starting to see an increase in risk taking and leveraged loans and financial bonds, credit and the emergence of interest in [CL] loans. While securitization markets are relatively quiet, we have been able to reduce gross exposures with cash sales. In particular we have seen non-leveraged buys of distressed assets in this class. Retail clients remain engaged, albeit in safer and lower margin investments and our emerging market pipelines are robust. So, we will continue to stay close to shore given the current market conditions. Importantly we continue to focus on liquidity, capital and balance sheet transparency and we are very focused on servicing our clients. We are confident that our global platform is strongly positioned to capture the opportunities of the market dislocations with a look for risk adjusted returns. Thank you and I would now be happy to take your questions.

(Operator instructions) Your first question comes from Guy Moszkowski - Merrill Lynch.

Could you remind us in calculating your liability marks, do you use CDS spreads or do you use specific bond spreads?

On our liability marks, we use bond spreads.

I’d like to talk for a minute about the leveraged finance hedge loss, can you give us a sense for what sort of mix of hedges and type of hedges you use in hedging that portfolio?

Yes, well in broad terms, I mean we actually had hedge losses across our whole book on the non-investment grade as well. The preponderance of those losses was in the what I would call the bridge facilities. And the reason for that Guy is that it’s much harder to either get specific CDS against them and you have to use by and large index as a proxy. So we’ve been dynamically managing it on that basis and that really has been the bulk of the loss on those hedges. Because as you know, there is huge idiosyncratic risk there, it’s very name specific and very concentrated.

I guess basically then what we saw was a, despite the attempt to use single name hedges, an inability to get enough of those to really protect you and therefore some macro level hedges which just had a lot of basis risk this quarter?

Yes, I think that’s fair.

The next thing I’d like to talk about and this is probably a little bit more of a complex discussion is maybe if we can go to page 16 of the supplement. And what I’d like to try to do on the subprime and resi analysis is relate the exposures and P&L impact that we see here to the $430 some odd million net mark that you talked about for the prop mortgage business. And then separately, how can we interpret these exposure numbers to really get comfortable that your exposure here is being brought down through sales of losses.

Let’s start, our mortgage proprietary trading, as disclosed on the page 16, includes most of our legacy US subprime positions. Sorry, our mortgage proprietary trading in toto includes most of our legacy US subprime positions, but also alt-A and a few commercial positions. So if you look at the loss itself, the net $300 is made up of a gross $400 loss on mortgage proprietary trading and a $100 gain on credit trading and I’ll break that down for you. Within that, within mortgage proprietary trading, subprime, there was a write off of $100 million. We had a commercial write down of $200 million and non-subprime residential which is primarily the alt-A which is the $300 million mark. That’s $400 million. In credit trading, you have $100 million which is made up of a write off in subprime of $200, so that $200 plus $100 gives you the $300 write off you see on the schedule. The commercial write off of $100 in credit trading nets against the $200 write down in the prop desk to give you the net write down of $100 that is on the schedule on page 17. Right? And that kind of balances it for you. Let me just clarify one thing. As the schedules present all of our direct exposures, they include positions that are outside what were the legacy proprietary trading desk. So that credit trading number I’m giving you offsets those mortgage proprietary trading desks which is what you relate it to in the fourth quarter.

Not to beat a dead horse but I just want to essentially get some comfort around the idea that because of the losses that you talked about as well as actual portfolio sales, it’s really a fair analysis to say that your exposure is being significantly wound down here, such that for example in subprime we really are at $300 million.

Yes well as you know, the financial supplement, the analysis we present, it presents all our US subprime gross and net exposure. Now we’ll continually and we’ve said we would manage down our exposure in the areas where we incurred our greatest losses in 2007. And that was through a combination of dispositions and write downs and that has been calibrating our valuations and so on. That’s clearly evidences by the $1.8 billion decline you see in the exposure in our super senior mezz line. Right? And the ABS bond positions. But I also said last quarter given the market dynamics, we’ll continue to look for opportunities to manage our overall risk exposure on this portfolio. So there is some dynamic hedging on the short side which feeds into that. But you should feel very comfortable that we are managing this exposure down.

The numbers seem to say that but like I said, I wanted to reconcile and I think you did a good job of thinking that through. The final question I’m going to ask is on the $120 million mismarking that you talking about in London, I mean I assume that the person or people involved in that are no longer with Morgan Stanley.

Well it’s not quite that simple because we’ve got to go through process. The person responsible is suspended. There is an investigation involving a number of bodies which we reported. We immediately informed the FSA when we discovered this through our controls. There’s a full internal review of this matter, I’m sure we know what the sentence is going to be, but I don’t want to be like the queen of hearts.

Your next question comes from Roger Freeman – Lehman Brothers.

As you think about all the changes you’ve made around risk management and you talk about the sort of Federal, local, sort of split. How fully has that been implemented and how is it working so far. And I guess tied to that, when you kind of look in the trading results this quarter, you see a number of places where the results are not up to par where bets were taken, whether it was I guess in electricity, mortgage trading losses, positioning for spread widening when they compressed. How is that sort of factoring into the risk management and how do we get comfort that maybe some of that volatility decreases. In fact VAR actually went up in the quarter.

First of all I would say that, and I will end up with risk management as the conclusion from what we come through. First of all, the mortgage proprietary trading losses we’re taking are relating to by and large as I’ve just explained to Guy, the previous legacy portfolios we have. So we’re long these things, we need more efficient markets to reduce the exposures. So I don’t think there’s an issue there. I do think actually if you look at the bulk of the charges we’ve taken, they relate to legacy positions. In terms of the commodities positions, we have got a great commodities business. Year in year out, it’s been one of the two top businesses. They made a strategic bet, well thought out, well reasoned on the basis of information they had. We got it wrong. We’re in the risk game, occasionally we get things wrong. We’re not blasé about it, but that’s, we get more right than we get wrong, unfortunately at this quarter, so we’re not worried about that. The risk was well managed, it was just the wrong view and so on. In terms of level 3 assets which you mentioned, we got those under control, the 7% of the total balance sheet, so they’re in line, even though we’ve reduced our balance sheet. So I think we’ve got these positions where we, under control. Now risk management has played a very active role in this whole process. The reason we’ve disclosed this loss from the London trader is to be open to The Street. I don’t want to be blasé about the fact that we discovered it because we’re very angry about it. But in this sort of environment of stressed markets, one would expect to see people trying to behave improperly. The issue is, do you have the controls to catch them. We believe we do. So that’s where I would end up. I think Ken DeRegt our Chief Risk Officer, the hiring of [Kashi Hopsuki] as Head of MRD and a thorough overhaul of where we were, I feel very comfortable that our balance sheet is in good order and we understand our risks. VAR, you say it’s gone up, but it has, it’s gone up marginally. But actually if you look the inputs on that, volatility itself, particularly feeling it, you can see that I would say that if we were to normalize this VAR to previous inputs it has gone down. Our balance sheet has come down, our gross exposures have come down, our net exposures have come down. So what you’re seeing is a dynamic in the market that is driving VAR up. For if we had taken more trading risk, that VAR would be significantly more pronounced. Non-trading VAR is up purely as a function of the increased funding we did. What I propose to do next quarter is to try and see if we can work up some better disclosure around non-trading VAR, or the quarter after. But we’ll work on that.

Switching to your commercial mortgage securities loans exposure, can you help me think through any basis risk that, sort of basis losses that apparently you didn’t have in the quarter. But I guess I would have expected given the big difference between gross and net there.

We disclosed that we had a $100 million loss in the first quarter. We didn’t take losses managing this position down. I mean there were different risks in this book. We show gross and net. If you look at the bottom line, you’ll see that we have an accounting gross up which nets that off. The statement of financial condition which is bonds, warehouse lines and loans, greatest exposure was reduced $2.5 billion. The net exposure reduced $3.6 billion. You can see that. And it’s reasonably well distributed regionally and in terms of the loans themselves, more disclosure, commercial loans was 71% senior, 29% mezzanine. So I think if you look at it, take out the gross ups, I think we’ve actually got this position under control, well down from the peak which we had of I believe $35 billion to where we are now. And we’ve taken a lot of the basis risk out. In addition, remember, I’ve always said that the best basis for our valuation to preempt these questions is recalibrating the trades which is done a lot. And we’ve been justified in the marks we’ve been taking on that Roger.

But the primary mechanism for hedging of exposures is, is it more single name CDS or CMBS?

It depends on the name. It could be credit default index and total rate of return swaps. It depends, what we’re showing you is that the way we’re managing this, zero loss in the management of the position the first quarter, $100 million this quarter, what has been a very stressed environment for basis risk and index performance. Look, effectively the best hedge is getting your gross exposures down. That’s what we’ve been doing.

And the mix between fixed and floating, what’s the average duration of the floating rate?

Floaters, 94%, fixed 6%.

I guess with respect to these CFC ratios, your tier 1 ratio obviously looks pretty good relative to what we’ve heard so far this quarter, how useful do you think that ratio is going to be given, I think you’re going to talk about some of the risk components in the Q, but one piece that’s not captured is the liquidity risk. Do you think that’s going to end up having to get reworked, do you think it’s going to be a useful metric?

I really don’t want to comment on that, we’re clearly heavily involved. The fact that we’re running liquidity the way we are is telling you that we think liquidity is a main input. But I do think there’s a measurement of risk, I do think Basel II and the trading book review is a very thorough exercise. So personally when you see risk weighted assets disclosed and the composition of those, I think it will be a much more useful tool than actual accounting classifications.

Your next question comes from William Tanona - Goldman Sachs.

On the loss, the $120 million, obviously you guys also had losses, I think it was in the fourth quarter of last year as it related to the CDO book. Just can you elaborate and help us understand exactly where these losses stem from? Exactly what didn’t comply and as you think about these losses, $120 million for I guess a single trader is significant, so just trying to understand over what timeframe this had occurred as well.

Very different set of circumstances. What we had in the fourth quarter was a proprietary trade. There was never any issue of financial control mismarking, anything. It was a bad trade that went south very badly and we’ve given you the data points on that. What we’ve had here this quarter is we’ve had a trader who was mismarking his book. And we found it, our controls picked it up. Obviously in an environment like this you will get more of that. There was some involvement going back to the previous quarter, possibly the quarter below that, it had become subject before that, it’s subjective. We did not think it was material, but we certainly did think it was time to disclose this to people and to send a very strong message that we have zero tolerance on this sort of behavior. So I do believe it’s isolated. I think it’s a very different situation from a prop trading bet going wrong. I think it’s just something we caught, our controls caught and we dealt with it.

On the prop trading side, I mean obviously there are numerous businesses that seem to be negatively impacted by prop trading this quarter, even though on the equity side, I know one of the big initiatives that John Mack had implemented when he got there was increased risk taking. And I was just wondering whether or not you guys are kind of rethinking your ability or willingness to take risk, just given some of these losses this quarter or was it just a perfect storm of events of bad luck for you guys?

First of all, I think losses this quarter, as I said before, a lot of these losses relate to re-dispositions. Our equity division still produced $2.1 billion this quarter which is one of our best quarters ever. So I don’t think that that impacted that business. It shows the breadth, diversification and so on. In terms of risk taking, look, we will take risk but we want to take risk adjusted risk. We did not believe, we flagged throughout this quarter that we felt these were very, very treacherous waters. We saw events that took place, as you say it’s a perfect storm. People cannot gloss over lightly the event that took place in March and the effect that had on the market. And since then you’ve had a number of other deteriorations in the consumer lending sector and so on. So that is what made us pull down the sales, sale close to shore, reserve our ammunition. We do have excess capital, we do have excess liquidity, we do have leverage if we want to where we can take risk and we cannot [surmise] our balance sheet. That is our priority.

Lastly, in terms of the regional revenue breakout. When you strip out the gains that you had highlighted from MCSI as well as the wealth management business, it looks like all of the regions were down anywhere from 25-50%. Were the losses that you highlighted in kind of the trading businesses across all of the regions or were the core international trends really that weak this quarter?

No, I mean core international trends were strong. Look the way I would answer it is the first quarter, we did well because we had very good client activity and that’s really our edge, that’s where we had a good ROE. This quarter we saw generally a fall off in client activity in broad terms, right, and that’s what has affected us. In Asia, if you look at it, down a little bit primarily in sales and trading, investment banking was up slightly, Europe was fine. We were 57% international for our revenues. If you normalize that for the loss it was still very much roundabout the 50% level. So not losses, sorry, the markdowns were taken on legacy positions and so on. So I think that our diversification is paying off. And I say also if you were to look at a normalized operating rate, yes you can look at some of these gains taking but you’ve also got to look at some of the losses we’ve taken and try and work out what is the run rate. Hopefully we’ve given you enough information for you to be able to compute that.

Your next question comes from Glenn Schorr – UBS.

A follow up question on FICC, we could stay at the high level because I know I’m not going to get specific numbers, but if we’re at $2.8 billion last quarter, we go to $400 or so million this quarter. We have the prop mortgage issues. We have lower customer volume issues and then we have the commodity. It still feels like wow, were customers volumes that soft across the board or was the commodity number actually that big?

Customer volumes for us and I know some of our competitors have come out with slightly different stories, I will tell you customer volumes for us and I think we have a very good market position, in March, I have never seen anything like the drop off that we saw and we went back to test that. April, if I scale it this way and I’ve done this to you before, so I apologize for repeating, if you say zero was no volume, five is very good volume, March was zero, April was two, May came up to about a four, we’ve definitely seen an improvement since into June. But yes, we were hit hard by the lack of customer volume.

I guess everyone is going to try to think about the impossible task of modeling going forward, can you box in, a 67% falloff in commodities, seems like a big falloff because I know that the commodity business has been doing pretty well. So it seems like a reasonably large number. And is that normal that a directional bet can account for such a big chunk of commodities?

We have some mismatch between GAAP and economic accounting. But I can’t really give you more clarification on that.

If we could just switch over to slide 17 on commercial real estate, just a couple of things, one is there any equity component included there, because it wouldn’t fall in within any of those lines. So I’m assuming no.

No.

And then the bond section, is that mostly mezz?

Well in the commercial loans, 71% is senior, 29% is mezz. And the bonds are primarily just straightforward bonds, yes, senior, yes.

And who are the swaps with and I don’t mean exactly who but I’m just curious in general buckets, who do you tend to do the swaps against because that’s one of the major differences between your gross and net exposure. So I’m just trying to think about counter party exposure there.

I don’t think there’s any one person, it’s a diversified portfolio of people, most of which is done on a [classualized] base anyway. As you know in the 10-Q, we will be publishing and disclosing who our swap counter-parties are anyway.

But not at this granule level, right?

I’d rather wait and get the right numbers. But in principle what I’d say to you is look, you know, we’re very comfortable with our swap counter-parties.

Always, lower volume environment, it becomes a very slippery slope to bother even asking, but, market share and rank have moved lower in a bunch of the banking categories, is that a function of just you got less of the FICC storm, in terms of banking because that’s where there has been a lot of activity?

I think there are a number of things there Glenn. I mean it is certainly true we got less of the US FICC but as you know in Europe which is probably going to be more of a third quarter event, we did five out of the seven rights issues. If I look at my pipeline, I think that our pipeline in terms of ECM, DCM, sorry, excuse me, Equity Capital Markets, Debt Capital Markets and M&A are all up over the last quarter. And we have a very healthy pipeline. So I think there’s an element of timing there, I have no doubt we’ll reassert our rankings, but there is a bit of lag. And I think there’s some temporary distortion because of volumes in markets which have been a bit lopsided.

Wealth management flows were pretty awesome considering the environment. Can you talk about how much of that is coming from say the existing FA base versus your, what appeared to be a great ability to recruit during a tough time.

I think it’s a combination of both. We’re getting very good productivity from the existing FA base. But as you know, that’s a good cumulative effect. But in addition, we’ve clearly been doing very well on what they call the balance of payments in hiring versus losses. So I think James and Allen [McCulgack] who’s running GW have really done a fantastic job there.

Your next question comes from Mike Mayo – Deutsche Bank.

Can you comment on the investment banking pipeline, you said it was healthy but could you quantify that a little bit more? And also, down 11% is a bit worse than some of your competitors, if you can give some more color on that.

I mean I would say it would be very difficult for me to give you specifics on that. We are up in the first quarter significantly in announced and pending on M&A pipeline and also on a probability rated revenue on that basis. And we are marginally up to a reasonable number up in equity and debt capital markets. I think that’s all I want to say on that Mike.

And then Asia was down one-fourth linked quarter, and it looks like the lowest level since the quarter ending around late 06.

I mean the real swing factor as I said before in Asia was our sales and trading which was the swing factor there. What I can tell you is I mean our investment banking business in Asia, slightly positive. Our pipelines in Asia are very, very strong.

And the sales and trading, did that relate to the legacy mortgage position?

Not at all in Asia. That was just literally reduced client volume.

Was there any outsized loss there because that’s still a pretty big swing?

No.

And then just going back to the big picture here, I try to add up all the numbers you gave on the call and I got $1.7 billion of write downs and losses. I can go through the list, you said it kind of quickly, monoline $390 million, the mismarking on the trade $120 million, leveraged loans write down was $496 million, commercial real estate CMBS $100 million, alt-A $300 million, the trading loss on FICC $86 million and then mark downs on private equity of $200 million, is that right?

That’s correct.

And there’s nothing missing there. So as we think about go forward, I think what you’re implying here if you’re marking everything correctly, in the perfect world, if nothing changes, those $1.7 billion of marks would go away or not necessarily? Where do we stand with these write downs?

I’m not going to give specific details on marks and I’ll tell you why. I think we’ve been very clear about our philosophy on marking itself. We calibrate the trades, if you look at the subprime exposure, let me give you an example which his anecdotal. If you look at page 16, subprime exposure, if you look at that now, we’ve marked that down, we’ve got the exposure down to another $300 million, but if you look in the footnote, we’ve now got marks that are implying losses in the range of 18-41%, those cumulative loss levels at a severity rate of 55% are implying defaults of 73-84%. So if you take that as an example and the fact that we disclosed this all fully, we’ve calibrated the trades, we’ve done that in CMBS, we’ve done that in leveraged lending. My view is the marks are what they are, we’ve proven in subsequent trades that they’re the right marks. Sometimes we’ve done better than that, obviously. Whether we’re going to get continued deterioration or not, I don’t know. I mean there’s been a big write down already, they’re marked appropriately and it is a function of whether the markets return or not.

And then the tier 1 ratio, you mentioned you want to keep dry powder. The tier 1, 11.5-12% preliminary, does that reflect dry powder or is that where you’d want to run it?

You’re going to have to judge that for yourselves. I mean when you look at our, look, there’s a lot of uncertainty in the market. We know where our contemporaries are in tier 1, we feel pretty good about that. But also we have uncertainty in the market generally. So it does give us a capital buffer which is the way I look at it. So yes, I feel good about capital [inaudible].

Your next question comes from Prashant Bhatia – Citi.

Your comment that you’re going to continue to stay close to shore, does that imply that it’s just too early in the cycle right here to take more or deploy capital more aggressively and you’re okay to let some opportunities pass by or is it more the view that you just don’t think there will be much near term?

Well we actually think that if you remember the end of last quarter, I gave a more positive outlook. I mean not that I’ve ever been Mr. Happy. But the issue is there were definitely better signs of recovery in the market then March actually was a pretty nasty event. So when we looked at the outlook this time, it clearly is not as rosy as it would have been at the end of the first quarter when various people were talking about sports innings and so on. But I do think there’s going to be an opportunity to make money here. So it is an issue of taking advantage of dislocation, taking advantage of opportunities that will present themselves. We were hoping that would be the case this quarter. But the key for us is risk adjusted and we really did not feel, and you can see than in our VAR numbers, we really did not feel that on a risk adjusted basis, we didn’t, it was worth taking bets away from areas where we were comfortable with. Now clearly in commodities we made a trade on the basis of good fundamentals and so, it didn’t work, but more often than not we get those right. So I’m not saying we’re in risk reduction mode, we clearly have reduced the risk, we’ve reduced the balance sheet, we’re liquid, we’ve got capital, we clearly feel we can make money through bear cycles and bull cycles and we’re just waiting for the right risk adjusted opportunity to come along.

On the size of the asset base, $1 trillion gross, $580 net, where do you think that ends up settling? Is there a fair amount more to go or would you stay at these levels?

I kind of think we’re in the right sort of spot at the moment in terms of giving us the optimality we need to be opportunistic and to be defensive. Obviously we’d like a more normalized market to get rid of some of this legacy portfolio so we can optimize returns of the balance sheet. But I kind of think we feel comfortable that we’ve got optionality sitting where we are at the moment given all the uncertainty around.

On the $6 billion of commercial loans in your disclosure, do you have at hand what the delinquency rate is on that loan portfolio or just anything else that you could provide to help people understand the quality there. It seems pretty good because I don’t think you’ve taken any.

I have it, I believe it is very good quality which is our view and that’s evidenced in our marks as well. But we’ll see what we can, I just think generally we consider it to be very good quality and well marked.

On the asset management side, it looks like the alternative asset flows are actually pretty strong over the past several quarters. That’s a little different than what we’ve seen at some of the peers. Can you just talk about, is that partly driven by distributing into retail a little bit more or what’s the driver there?

I think it’s a number of factors. I mean we’ve had some very good performance within that historically. We’ve got a broad suite of products and it is by retail as well. The other thing as well I would point out is that remember one of the big drivers this quarter has been institutional money market.

Could you point out areas in the business where you’re actually seeing higher returns on the capital you are deploying, that pricing power you talked about a little bit in prime brokerage in the past. Are there other areas where you’re seeing, you’re basically getting paid more on capital being deployed?

I think our equity business is strong and our ratios there look good. Prime brokerage is good. Obviously we’re improving our profit margin on our retail business. That’s kind of where I’d point to. But I mean drawing a trend away from this quarter, away from those which I mentioned before, is kind of hard.

Finally on headcount, could you share maybe what your budget is to end the year at?

We don’t look at headcount, we look at cost. And we’ve done some pretty big moves on costs as you can see. Headcount is a secondary consideration. So we’re really looking at comp based spend and by that you get a proxy for headcount. You can clearly see that we are, with a smaller reduction in headcount with some others, but a big reduction in comp, what we’re trying to do is really get our bang for our buck in that allocation of resources.

Your last question comes from Michael Hecht – Banc of America.

Can you give us a sense of where the level 3 assets ended the period and just any components of the change, transfers in out, that kind of stuff?

No, I mean it’s a bit early yet to get into that much detail and I’ve noticed can be a dangerous thing to do. But we are at 7% of the balance sheet, roughly, proportionality decreased the overall balance sheet itself as we took it down. And in the Q we’ll give you the full disclosure on that. So there’s no specific story for us in level 3. And the same sort of stuff you’d expect in there, broadly, proportionality will be in there at the end of the Q.

The $90 million in structured note gains you noted in equities, what were the total firm-wide gains on structured notes this quarter?

That was it, $90 million.

On the monoline exposure, the mark that you guys took, can you give us a sense of how you guys come up with the credit valuation?

Sure, we’ve always done, we don’t do our credit valuation on ratings, we do it on spread. And as spreads widen we take increasing reserve and it’s on that basis. So I think that’s conservative. This time around we’ve shown our gross exposures as well because obviously monolines have been more topical on that basis so you can see that.

On the gross and net leverage which came in quite a bit, I think you said the balance sheet is appropriately sized, should we expect leverage to kind of continue to fall and what do you think the implications are for the type of ROE you guys can earn through this cycle and are you seeing any pressure here from regulators, rating agencies, investors, to kind of bring leverage down further?

We’re obviously in constant touch with a broad array of regulators. I mean what we’ve been doing is taking down the balance sheet because on a risk adjusted basis, that’s what we want to do. And that’s the same thing, we’ve been running cash because we wanted to do that given our risk profile. So the answer is we’re in constant dialogue but we’re not getting any pressure in terms of the cycle ROE. I mean it’s clear that increased leverage has been popping up ROE. So I do think it top slices our return off it, but I think you can make up a good chunk of that by optimizing your balance sheet more efficiently. To do that, however, we’re going to need more normalized markets to liquidate positions.

On the equities business, I mean it sounded like the flow businesses in cash and derivatives were pretty strong, prime brokerage as well but it’s all really a function of the prop trading losses, can you give us any additional color on those and was it more of the bad positioning versus environmental?

No not really, I mean I think some of those small, as I’ve said to you before, some of those small prop trading desks we’ve wound down. So I think generally, look, I mean let me just restate, equities was $2.1 billion, our record quarter was $2.5 billion, it was still a very strong quarter. It was broad based. I think it was our fourth best quarter. But I’ll have to confirm that, I think that’s right. So I think it’s just testament to the strength of that business. The story this quarter is clearly our fixed income and the fall off in flows.

Any color on the tax rate, I mean it was a little bit lower than expected this quarter.

It’s just the changing nature of our business globally, so that’s what it is.

There are no further questions.

Thank you very much everybody. And I’m sure we’ll have follow ups. Thanks.