Good day, ladies and gentlemen. Welcometo the Morgan Stanley conference call. The following is a live broadcast byMorgan Stanley, and is provided as a courtesy. Please note that this call isbeing broadcast on the Internet through the company's website atwww.morganstanley.com. A replay of the call and webcast will be availablethrough the company's website and by phone until January 19, 2007. This presentation may containforward-looking statements. You are cautioned not to place undue reliance on forward-lookingstatements, which speak only as of the date on which they are made, whichreflect management's current estimates, projections, expectations or beliefs,and which are subject to risks and uncertainties that may cause actual resultsto differ materially. For a discussion of additionalrisks and uncertainties that may affect the future results of the company,please see "Forward-looking Statements" immediately preceding Part 1,Item 1; "Competition and Regulation" in Part 1, Item 1; "RiskFactors" in Part 1, Item 1A; "Legal Proceedings" in Part 1, Item3; "Management's Discussion and Analysis of Financial Condition andResults of Operations" in Part 2, Item 7; and "Quantitative andQualitative Disclosures about Market Risks" in Part 2, Item 7A, of thecompany's Annual Report on Form 10-K for the fiscal year ended November 30,2006, "Management's Discussion and Analysis of Financial Condition andResults of Operations", and "Risk Factors" in the company's 2007quarterly reports on Form 10-Q and other items throughout the Form 10-K, andthe company's 2007 current reports on Form 8-K. The information provided todaymay also include certain non-GAAP financial measures. The reconciliations ofsuch measures to the comparable GAAP figures are included in our annual reportson Form 10-K, our quarterly reports on Form 10-Q and our current reports on 8-K,which are available on our website, www.morganstanley.com. Any recording, rebroadcast, orother use of this presentation in whole or in part is strictly prohibitedwithout prior written consent of Morgan Stanley. This presentation iscopyrighted and proprietary to Morgan Stanley. At this time, I would like toturn the program over to Colm Kelleher for today's call. Please proceed.

Thank you, operator and goodmorning everyone. Before I go through the details of our results, John Mack hasjoined me and will begin the call. John?

Good morning, everyone. Theresults we announced today are embarrassing for me; for our firm. This was aresult of an error in judgment incurred on one desk in our Fixed Income area,and also a failure to manage that risk appropriately. Make no mistake, we've heldpeople accountable. We're moving aggressively to make necessary changes and[this law shouldn't] be overshadowed the fact that the rest of the firmdelivered really outstanding results for the quarter and for the year. We had a record full year resultin investment banking, equity, sales and trading, and asset management. GlobalWealth Management was more than double pre-tax profit for the year. The fact is,our core business remained strong. We are moving quickly and decisively tobuild on that momentum. The strength of our business andour strategy is clear in the, approximately, $5 billion long-term investmentwe've announced this morning from CIC, a China Investment Corp. This investmentwill help us further bolster Morgan Stanley's strong capital position, whilealso building on our deep historic ties and market leadership in China.It also will ensure we have resources necessary to pursue the growthopportunities we see in this region across all of our businesses: Institutionalsecurities, Wealth Management, Asset Management businesses into '08 and beyond. Before Colin take you through thisquarter's results in detail, I've got a few things I'd like to say. First, totalk about the writedowns in our mortgage business; second, the strongperformance across our other businesses; and third, actions we've taken toaddress this quarter's loss and build momentum across the rest of the firm. So, let's start with the mortgagebusiness. Let me give you a quick recap of what led this writedown on oursubprime trading position. We had a large illiquid trade on AAUK and adeteriorating credit market. The early view is to hold the position, ratherthan curl the cost of the unwind, as it was believed we had adequate hedges inplace. However, the hedges did notperform adequately in extraordinary market conditions of late October andNovember. Subsequently, given the illiquidity or positions; we are now writingit down to these levels. We have moved aggressively to address these issues.We've been as transparent as possible about our exposure. Indeed, back in early November,we provided you details on the net exposure of the subprime trading position inour mortgage business. We told you as of October 31, we expect to take a $3.7billion write-down of the subprime position. We also made it clear thatyear-end remarks would depend on market conditions. During the month of November, thevalue of that position continued to deteriorate, that led us to write downanother $4.1 billion on the subprime trading position in the fourth quarter. Wewere also taking a writedown of $1.6 billion on other mortgage-related assetsthat had suffered deterioration in value as a result of dislocations in themortgage market. Colin will take you through that later on. Virtually, all writedowns thisquarter were the result of trading about a single desk in our mortgage business.And I want to be absolutely clear as head of this firm, I take responsibilityfor performance. Let's go to our other businesses.Beyond the loss of our mortgage business, almost every other business at MorganStanley continued to perform exceptionally well this quarter, and as I saidearlier, strong for the year. Our Investment Banking revenueswere a record $5.5 billion this year, up 31% from last year. We finished ranknumber one in global completed M&A, and number three in global IPOs. Our Equity sales and tradingrevenues were a record $8.7 billion, up 38% from last year. We had recordresults both in derivatives and prime brokerage, where we continue to be marketleaders. Equity underwriting revenues were up 48% at a record $1.6 billion. Our Global Wealth Managementbusiness has been dramatically reinvigorated. Revenues were up 20% from lastyear. We had a PBT of $1.2 billion, up a 127%, margins at 21% in the fourthquarter, the highest quarterly margins since 2000, and a major improvement fromthe 2% margins this business is delivering in early '06. Our financial advisors are nowthe most productive in the industry, with the record annualized FA productivityof 853,000, and we had strong client inflows of $40 billion this year. Our Asset Management businessalso delivered its best year ever in '07. We had record revenues of $5.5billion, up 59% from last year. We had a record PBT of $1.5 billion, up 72%. Weachieved five consecutive quarters of net customer inflows. Our assetmanagement business has also reached a record high of $597 billion at the endof November, up nearly 35% from two years ago. Our international business hasnever been stronger across Europe, Asia andthe emerging markets. We achieved record international revenues of almost $16billion this year, up 44% from 2006. In Asia,we finished the year ranking number two in IPOs overall, and number one inChina-related international IPOs. In China, we've tripled our revenuesover the past year. We've secured a banking license. We are now in the processobtaining a securities license, a trust license and asset management license,which will help continue strengthen our Chinese business. We are also building out ourbusinesses in the Middle East as well, forming a joint venture with the Saudi Arabiasecurities firm, Capital Group and opening new offices in the region. Thoseimportant investments will help us increase our revenues about 90% in the Middle East since '05. Now, let me move to kind of theactions that we’ve taken. While, we move very aggressively as you know, theissue raised by our loss in the mortgage business insure that we are wellpositioned to build on our businesses going forward. So, we have made somemajor changes. We have put in place a new senior management team. We changedGorman and Walid Chammah as Co-Presidents, with Mitch Petrick as Global Head ofSales, and Trading and Ellyn McColgan as Head of our Wealth Management business,which we announced yesterday. I think it was in the press. We've also made other changes torestructuring our institutional sales and trading businesses. We are furtherstrengthening our risk management function. It will now report to Colm our CFO,and we will look to add additional talent to our risk management team. We arealso restructuring our prop trading businesses. These businesses will operateunder unified management reporting to Mitch. Finally, as I mentioned earlier,we have further strengthened our balance sheet by raising approximately $5billion in capital to the long-term passive investment made by China InvestmentCorp. That investment grew out of our strong relationship in China, and Ibelieve will help strengthen our deep ties to this critical important growthmarket in the years ahead. So, as we move forward, I'm confidentthese actions and the new leadership team we put in place will help us adjustto the changing market conditions. The near-term outlook ischallenging. The mortgage business is going to be dramatically reduced. Creditand leverage lending would be on a lower basis, as well. However, despitechallenging credit markets, we see opportunities in other parts of our fixedincome business, as well as, in equities and investment banking. We continue tohave strong momentum in Asset Management and Global Wealth Management. We remain bullish on MorganStanley's significant growth opportunities in our international and emergingbusinesses. The fact is, that we have a strong broad-base business. We arepositive about our business mix, and we continue to believe diversification isa great strength of ours. And despite the challenging market conditions we'refacing, we are optimistic about the long-term prospects for this global growthof financial services and for Morgan Stanley. And with that, I'm going to turn itover to Colm.

Thank you, John. We have a lot ofmaterial to cover today, and it will take some time, but I want to make surethat we provide you with all the information you need for your analysis. Therewill be plenty of time for questions-and-answers. As you are aware, over the pastyear our trading Group decided to short the subprime market. The traders wereshort, the lowest transaction in subprime securities with a notional value ofapproximately $2 billion. The traders decided to cover the cost of the negative[count] in the short position. In doing so they went along approximately $14billion at the Super Senior AAA or BBB subprime securities, we refer to asmezzanine. But the credit market declineddramatically; the implied cumulative losses in the subprime market [action] tothe value of the Super Senior AAA branch were [notionally] long. As a result,notwithstanding the short position, the implied loses of the notional longgenerated a major net loss from the position of advanced markets. The loss was non-linear with thedecline of the relevant ABX index, given the long-short structure of thisparticular trait. Now, when I last spoke with you November, we provided a riskmanagement non-GAAP perspective on our US subprime exposure throughOctober 31. On page 15 of the supplement, you can see the updated schedulethrough November. Our writedown reflected the impact of November increased to$7.8 billion from $3.7 billion as of October 31, while our total net exposuredecreased to $1.8 billion from $6 billion over the same period. Using consistent valuationmethodology, the fair value of these positions declined from October 31 toNovember 30. Our valuations of these positions takes into considerationobservable traits, the continued deterioration in market conditions, thedecline in the ABX indices and other market developments, including updatedmortgage remittance and cumulative loss data. The decrease in the fair value ofour subprime exposures has led to our first quarterly loss. The traits weobserved on exposures has led to our first quarterly loss. The trends weobserved were those we executed in November, as part of our effort to reduceour exposure. The ABX deterioration in the class to two senior positions,namely the BBB061 Vintage where our most significant exposure risk, wasapproximately 24% during November, which relates to 2005 collateral. In addition to the $7.8 billionin subprime writedowns, we also wrote down approximately $1.2 billion in othermortgage related positions as a result of fair value declines in November, ofwhich $400 million relates to CMBS, were trained to execute as part of ourbalance sheet reduction. A $180 million in Alt-A, andother loans, where credit spreads widened and real estate deteriorated. $175million in first and second year loans spent for securitization, whilesubordination changes by rating agencies and executed trades at $450 million ofEuropean non-conforming loans on credit spread widening and executed trades. We also took a $435 millionwritedown on the securities available for sale portfolio in our subsidiarybanks. We continue to see value in this portfolio, which is made up ofexclusively of AAA rated residential mortgage-backed securities and theportfolios contains no subprime home loans, subprime residuals or CDOs. This portfolio was re-designatedas trading effective November 30. To preserve our flexibility with theportfolio until [in line] with the accounting treatment of our other tradingportfolios so that any mark-to-market will flow directly through the incomestatement each quarter. These factors totaling $9.4billion in writedowns drove the fourth quarter loss $3.6 billion down from lastquarter's $1.5 billion profits. The EPS impact from these writedowns was $5.80.Basic EPS from continuing operations for the quarter was a loss of $3.61 pershare versus $1.45 gain the quarter last quarter. Net revenues were negative $450million driven by the loss of fixed income revenues reflecting the write-downsI mentioned. As John said, despite clearly disappointing results in our credittrading business with fixed income, many of our businesses produced recordresults and contributed to the second strongest year on record. Let me now address other aspectsof our firm-wide results, which are outlined on pages one and two in thefinancial supplements. Consolidated revenues for the quarter were negative $450million, and total non-interest expense were $5.4 billion, down 6% from lastquarter. Our largest component Compensationand Benefits expense were $3.2 billion, reflecting an adjustment to the fullyear payout. Despite the quarter with significantly lower revenues, ourcompensation reflects strength across most businesses and our recognition ofthe competitive environment and the need to retain talent. The full year compensation to netrevenue ratio is 59%. As you know, next year’s compensation is very difficultto forecast, particularly given on certain market conditions in 2008. As of now,the best data point we can direct you to is our full year 2006 comp net revenueratio of 47%. We will provide you with updated guidance in the first quarter. Non-compensation expenses was$2.2 billion, which includes the $360 million reversal of the Sunbeam Coleman Reserve resulted from the recent Florida Supreme Courtdecision. Excluding this reversal, non-comp expense dropped 21%, driven byhigher business development in professional service expenses. Our full yearrevenues decreased 6% from 2006. Our effective income tax ratecontinuing operations for the full year was 24.5%. The decrease reflects theimpact of lower earnings and lower tax rate applicable to non U.S. earnings partially offset bylower estimate domestic tax credits. At this point, we wouldanticipate that next tax rates will be close to 2006 tax rate of approximately33%. The raise depends on a number of factors including the level in geographymix of our earnings. Now, I would like to discuss thedetails of our business segment results. Starting with Institutional Securitywhich is detailed on page five of the supplement. The significant loss on fixedincome sales and trading drove negative revenues of $3.4 million in thissegment, down a 169% from the third quarter. Non-interest expense of $3.1million decreased 12%, driven by lower compensation expenses, excluding $360million recovery the Coleman Sunbeam Reserve, non-interest expenses were down2%.PBT was $6.5 billion loss. Full year net revenues were $16.1billion, down 24% from last year, yet still the second highest on record. Fullyear PBT decreased 89% to $817 million, and return on equity was 4%. Page six of the supplement showssales and trading reporting total negative revenues of $5.6 billion, reflectingthe loss in our credit business within fixed income and the write-down andsecurities available for sale portfolio within other sales and trading. Theselosses were partially offset by record results in equities and recoveriesrelated to our leverage lending business. The credit environment impact inour sales and trading results was partially offset by a gain of approximately$455 million from the spread widening in Morgan Stanley’s credit on some of ourown structured notes. Of this amount, approximately $185 million was reportedin fixed income sales and trading, and $270 million in equity sales andtrading. In fixed income sales and trading, we reported $7.9 billion in losses,compared to $2.2 billion in revenues last quarter, reflecting the write-down ofour subprime related assets. For the year, fixed income sales and tradingrevenues was $650 million, down 93% from our record results in 2006. Corporate credit and securitizedcredit product sales and trading, which includes our residential and commercialmortgage business reported losses of $9.2 billion, down from an approximately$260 million gain last quarter. Majority of the losses were in our U.S. subprimeresidential business, and the result’s partial positions that we took in thebeginning of 2007. The other mortgage related markdowns were driven by theNovember fair value deterioration I mentioned earlier. Interest rates andcurrencies all were down 17% from our record third quarter, continues toperform well in this environment reflecting strong customer flow, increasedvolatility and the $185 million benefit from the impact of widening creditspreads on firm-issued structured notes. Commodities decreased 84% drivenby lower trading revenues across metals, oil, electricity and natural gas andthe lack of structured deals this quarter. Our client flow business performedwell, it was more than offset by poor positioning performance relative toopportunity in the market created by volatility of most products. Equity sales and trading revenuesof $2.5 billion were 40% higher than last quarter, that set a new quarterlyrecord. For the year, equity sales and trading revenues were up 38% to $8.7billion, our best year ever. Looking at the quarter, strong revenues weredriven by client flow of prime brokerage businesses, positive results in ourQuant trading strategies for $270 million benefit for the widening of creditspreads of firm-issued structured notes and regional strength outside the U.S. especially in Asia.Non-U.S. regions contributed well than half of this quarter's total revenue.The cash business had record revenues and strong performance across regionsincluding record results in Europe. Derivativerevenues decreased from a strong third quarter reflecting difficult marketconditions with poor liquidity and even volumes. Our quantitative strategiesbusiness recovered from losses last quarter that contributed healthy revenuegains more consistent with historical level, despite operating in a reducedrisk and capital environment. Our prime brokerage business produced the secondbest revenue quarter ever with our average customer balances down slightly fromthe end of the third quarter. Outside of the U.S., the business reported recordrevenues. Our prime balances were down slightly towards a significant increasein client balance in October though it sustained in November consistent withthe recovery in the equity markets. For the full yea,r this businessproduced record revenues and client balances of each region. Other sales andtrading was negative $202 million, driven by the write-down in our securitiesavailable-for-sale portfolio offset by recoveries and our leveraged acquisitionpipeline reflecting the improvements in liquidity that we’ve saw in thequarter. Loans and commitments detail is on page 7 of the financial supplement.As we told you last quarter, our leverage finance business is subject toliquidity in the marketplace and this quarter we saw deals price activity beganto return to the market. Total loans and commitments net of hedges declined$12.1 billion, to $55.1 billion. Commitments including both investment andnon-investment grade are down 18% to $70.2 billion, through a combination ofdeal closings, renegotiation or deals going away. Now, just based on our totalloans and commitments, we'll continue to drive in the Q1, if capital marketsremain receptive. On non-investment grade corporate lending commitments of $20billion, this includes $12.2 billion of commitments related to our leveragedacquisition finance pipeline, which is down from $31.3 billion. Over the courseof the quarter, $4.4 billion of deals were withdrawn and $14.7 billion of dealswere closed. Of the deals closed, $6 billion have been funded and are includedin the $10 billion of non-investment grade loans. Moving to page six of thesupplement, Investment Banking revenues were $1.4 billion, down 5% in the thirdquarter of '07. Advisory revenues increased 17% to a record $779 million,driven by revenue strength across all regions. Underwriting revenues were lowerthan last quarter in both, equity and debt underwriting. Sequentially, equityunderwriting revenues were down 19% to $348 million, but up 37% from the fourthquarter of '06 with particular strength in Asia,fixed income underwriting revenues of $236 million, down 32% from the thirdquarter largely reflecting the decline in non-investment grade issuance asinvestors grappled with the deterioration in the credit environment. Partiallyoffsetting this decline was the significantly increased demand for investmentgrade debt in the quarter, especially during September and October. Theinvestment banking environment was mixed during the quarter, volumes decreasedacross products as uncertainty returned through the overall market in November,except an announced M&A where volumes remained healthy. We maintain leadingpositions in our lead table standings for the calendar year-to-date throughNovember. We continue to meet M&A market shares and the number one rank inM&A completed at approximately 37% market share; on number two it announcedwith approximately 33% market share. Our rank in U.S. IPOs is number one, andwe are number three in global IPOs. We are number two in U.S.equity-related issues, and number five globally. At Bloomberg, we are number twoin global IPOs, number two in Asia Pacific equity offerings, and number one inInternational China IPOs. In debt underwriting, our rank was number five, witha stable share of the market. Our rank in investment grade debt market isnumber four. Our non-investment grade rank was number nine. Full year advisoryrevenues increased 45% to a record $2.5 billion, 21% higher than the previousrecord set in 2000. Equity underwriting was up 48%, to a record $1.6 billion,and debt underwriting increased 1% to a record $1.4 billion. Our investmentbanking pipelines continue to be healthy. Depending on market conditions,we remain cautiously optimistic about our M&A backlog, as there is afavorable flow of strategic activity even as we expect financial sponsoractivities down in 2008. Our equity backlog is higher than the third quarterand fourth quarter of '06, with particular strength in Europe and Asia. But our non-investment grade debt backlog is downsignificantly, investment grade backlogs are higher as capital raising needsremain robust. Principal transactions, investment revenues were $496 million up$279 million increase versus the third quarter and full year revenues increased35% in 2006. The increases were largely driven by higher investment gains inBovespa Holding to the fourth quarter and Grifols SA in the full year. As John mentioned, we are veryfocused on our risk management and VaR represents one of the key measures ofrisk. Aggregate average trading and non-trading VaR increased to $98 millionfrom $91 million last quarter, driven predominantly by the increase in non-tradingVaR. The increase in non-trading VaR primarily reflects the firm's exposure toevent loans that closed during the quarter and are currently in the process ofbeing distributed. Aggregate average trading VaRincreased modestly to $89 million from $87 million. Aggregate quarter-endtrading VaR decreased to $78 million from $81 million, reflecting an activereduction in risk exposure that was offsetting the VaR model by higher realizedmarket volatilities. We have aggressively and thoroughlyreviewed our stress test scenarios to ensure that the market moves contained inthese scenarios are superior enough, in light of what's going on in themarkets. Over the past two quarters, wehave repeatedly increased the magnitude of market moves contained in our stresstest scenarios, reflecting the increased levels of uncertainty and realizedmarket volatility. In the high levels of price volatility realized during thisquarter, we continue to pay close attention to our stress test scenario result,one of the most meaningful risk indicators with respect to rapid and dramaticmarket moves. As John mentioned, we are issuingapproximately $5 billion of securities to the China Investment Corporation(CIC) that mandatorily convert into shares in August 2010. This additionalequity capital will build the firm's strong capital position and enhance ourability to pursue global growth and revenue opportunities. Mandatory convertible securitieswe are issuing to CIC targeted yield of 9% and the after-tax profitapproximately 7% because significant portion of the yield is tax deductible.Therefore, the after-tax yield of these equity securities is only 4.75% overour common dividend yield. In return for this excess yieldof these equity securities, we retain the first 20% depreciation of our stockprice. We believe that the combination of paying less than 5% annual excessyield probably two years and seven months, the return for 20% premium isattractive to our shareholders. The 20% premium will be set above a referenceprice to be determined shortly. The number of shares themandatory convertible securities will convert into is based on our stock priceof conversion. A higher future stock price lowers the cost of the equitycapital because the number of shares issued at conversion declines. Given this feature and the taxdeductibility of the yield on the combination of regulatory capital eligibilityand high equity trading from the rating agencies, we believe this is anattractive security to add to our capital base, as we pursue growth and revenueopportunities in 2008 and beyond. Turning to page 4 of theSupplement on our current capital position, average unallocated capital,economic capital was negative $400 million, down from $3.5 billion surplus the lastquarter. The period end unallocated economic capital was a shortfall of $4.1billion. However, the firm continues to maintain total capital level tosignificantly exceed regulatory requirements. Over the course of the quarter,we assessed and assigned more economic capital requirements for our businesses,particularly institutional securities, while available capital decreased due tothe write-downs. Capital requirements for institutional securities increasedmainly due to increased volatility in the credit markets and rating hasdeclined in underlying assets of certain credit businesses. We also intend to strengthen ourbalance sheet and optimize deployments of capital across our businesses.Furthermore, we will maintain flexibility in our share repurchase program,while we build up our capital. During the quarter, we repurchased approximately9.2 million shares of common stock for approximately $560 million. Year-to-date, we have repurchasedapproximately 51.7 million shares of common stock for approximately $3.8billion. Even after reflecting the write-downs and losses in our fixed incomebusiness and response to current market conditions, we reduced total assets onthe balance sheets by a $133 billion to $1.1 trillion. This brought theadjusted leverage ratio down from 18.8 to 17.6. These steps including theinvestment by CIC will ensure that Morgan Stanley has resources necessary topursue growth opportunities globally across our institutional securities,wealth management and asset management businesses into 2008 and beyond. Page 8 of the FinancialSupplement describes our Global Wealth Management business. Despite the marketenvironment in the quarter, Wealth Management produced very strong results; thefourth quarter was our best revenue quarter to the second quarter 2000. As we announced earlier thisweek, Ellyn McColgan will be joining the firm to succeed James Gorman asPresident and Chief Operating Officer of GWM in April 2008. Ellyn brings thebreadth and depth of experience that will enable us to build the momentum wehave achieved in this business over the past two years. Revenues reached $1.8 billion, up6% from the third quarter, as the retail investor remained active during thequarter. Commission on principal tradingresults was strong, which more than offset the sequential decline in investmentbanking revenues. Non-interest expenses of $1.4 billion were up 1% from lastquarter, reflecting increases in business development expenses, the absence ofthe insurance recovery in the third quarter and commission-based compensationreflecting higher revenues. We continue to focus on and maintain a costdiscipline. I believe that expense control can help fund our investmentspending as we grow this business. PBT of $378 million was up 32%, andour PBT margin increased to 21% from 17% in the last quarter. The return onequity of this business was 52%. 2007 was our second best yearever with strong performance across the business, reflecting higher financialadvisor productivity, new and enhanced product offerings, strong clientactivity and focused cost discipline. The full year net revenues of $6.6billion, were up 20% and expenses of $5.5 billion increased 9%. PBT totaled $1.2 billion, up a127% from 2006, and our PBT margin improved 17%. The return on equity forfiscal '07 was 41%. On page 9 of the Supplement, youcan see the strong productivity metrics. Net new assets of $10 billionrepresented our 7th consecutive quarter of positive client influence. Assets in the $1 million plushousehold segment increased $29 billion in the quarter, increased to 72% of ourtotal client asset base, as we continue to be effective in gathering assets inthe high network segment. Total client assets increased 3%sequentially to $758 billion, driven by both marked increases of net newassets. Fee-based assets represented 27% of the total, down from 29% lastquarter. This decline largely reflects the termination on October 1st of ourchoice of fee in lieu of commission brokerage program. Client assets in the Choiceprogram primarily moved to commission-based brokerage accounts for the electionof our clients, the fee-based advisory programs including Morgan StanleyAdvisory, a new norm discretionary advisory account launched in August. Inaddition, we are developing an [internship] program that we believe will beattractive to former Choice clients. Average production and totalclient assets for Global represented record levels in the quarter of $853,000and $90 million, respectively, as our FA headcount increased to 8,429producers. We are achieving increased FAproductivity, while growing the number of FAs. We continue to hire producerswith higher production than those we lose. Our bank deposit program ended theyear at $26.2 billion, exceeding our goal of $20 billion. We launched another closed-endfund this quarter, PIMCO Income Opportunities Fund bring the total to five thisyear with over $4 billion in sales. While there may be pressure on thisbusiness in 2008 if U.S.enters the recession, we believe that our more protected sales force includingnew hires will mitigate the slowdown in retail activity. We will continue to invest intechnology and other infrastructure and continue to expand our U.S.and international Private Wealth Management business to grow our globalfootprint and capture the long-term growth potential of the business. On page 10 of the Supplement, wedescribe our Asset Management business. The business perform well in thequarter, net revenues were $1.3 billion were down 8% for the third quarter,driven primarily by $129 million of losses in securities issued by structuredinvestment vehicles SIVs and held by asset management. Our total SIV exposure in ourmoney funds as of today is $7.7 billion; of that 92% is in lower risk SIVs thatare sponsored by banks, which have continued to support our SIVs. Income beforetax is $294 million, down 40% from the third quarter driven by lower revenuesand higher expenses including both compensation and non-compensation expenses.PBT margin was 24%, and ROE for the quarter was 18%. Looking first of revenues,our principal transaction revenues excluding the losses of securities onnon-bank sponsored SIVs and held by asset management decreased 7% reflectedlower revenues from real-estate investment is offset by higher alternativeinvestment gains. Management and admin fees, a keyindicator of the positive momentum in this business increased 6% to just under$1 billion driven by asset growth in a more favorable asset mix. Non-interestexpense of nearly $1 billion grew up 10% for the third quarter driven by highercompensation reflecting expenses associated with deferred compensation plans aswell as increases in professional services and occupancy cost. For the fullyear revenues were a record $5.5 billion up 59% from 2006. PBT was $1.5billion, PBT margin was 27% and our return on equity was 26%. This year wesuccessfully built our management team and expanded our product array. We had avery successfully year for capital raisings. In our Private Equity Asia FundIII, we have raised $1.5 billion including $350 million of commitments from thefirm. In real-estate, we’ve raised almost $15 billion in 2007 across our fundsmost notably measured at fixed international where we have a rate $8 billionand committed $1.6 billion of our own capital. As you can see on page 11 of thesupplement, it should be continue to show improvement in all key metrics.Assets under management and supervision increased by $20 billion to end thequarter a record $597 billion primarily due to market increases in Septemberand October. We have $400 billion in total net inflows as $5.6 billion ofinflows in non-liquidity products were partly offset by $5.2 billion ofoutflows in liquidity products. Positive net flows were driven bynon-U.S. channels that had $7.4 billion of inflows, the majority of which werefrom alternatives from real-estate products. U.S.institutional and America'sintermediary channels had inflows of $800 billion and $400 billionrespectively. Van Kampen and Morgan Stanley branded retail funds showedoutflows of $1.4 billion and $1.6 billion during the quarter respectively.Institutional liquidity outflows were $2.9 billion compared to $12.4 billion innet inflows last quarter. This quarter’s short-term outflows were driven by anexpected $5.2 billion client outflow gained in the prior quarter. Retail liquidity outflows are$2.3 billion primarily driven by additional bank deposit programs introduced inour Global Wealth Management business. Our total net inflows of the year were$35 billion, when compared favorably to the $9.3 billion in net outflows we sawin 2006. We launched and incubated 14 new products in the fourth quarterincluding six alternatives, seven in equities, and one in fixed income. For thefull year we launched 74 new products, 37 in alternatives, 25 in equity, and 12in fixed income. In a summary, we are pleased withthe performance of this business. We are focused on improving our margins andour own products expansion, especially in alternatives and widening ourdistribution capabilities. In addition, we continue to develop our privateequity and infrastructure investment management business and continue to seeinvestment opportunities generated from the firm's franchise and geographic footprint. Our global real estate businessoperates at a higher level around the world and we continue to raise new fundsto take advantage of the current market dislocation. Real estate fundamentalsgenerally remain intact, although headwinds will increase when we get thedownturn, given the downturn on the economic activity on the fallback andavailability of debt financing. We will continue to be focused on expanding ournon-U.S. footprint in both Europe and Asia, aswell as invest in our Morgan Stanley and Van Kampen brands. On page three of the supplement,you can see the regional revenue disclosure at the firm-wide level. This year43% of our revenues have come from the Americas,36% from Europe, Middle East and Africa, and 21% from Asia.Year-over-year international revenues have increased 44%. Our regional results in thesecond half of 2007 are skewed in favor of non-U.S. results and the majority ofour trading losses is sustained in our U.S. business. If we were toexclude these losses, 55% of our revenues will be from the Americas, 29% from Europe, Middle East andAfrica, and 16% from Asia. We continue tobelieve that the pace of international growth will exceed that of the U.S. Next, I'd like to review with youother mortgage related assets on the balance sheet to briefly discuss thevaluation methodology for each. In non-subprime residential mortgages, we haveboth balance sheet and net exposure in the U.S.,Europe and Asia. This includes RMBS bonds,European mortgage loans and to a lesser degree residential Alt-A loans. At end of the fourth quarter, wehad $16.4 billion on our balance sheet with a total net exposure of $10.8billion, and a write-down reflected in our income statement on $800 billionthis quarter. These positions are value based on subordination changes byrating agencies and execution of trades and comparable instruments. In CMBS, commercial whole loanswe have $31.5 billion on the balance sheet at the end of the fourth quarter.During the quarter, we significantly reduced our net exposures to thesepositions by more than half from $36.2 at the end of the third quarter, to$17.5 million at the end of the fourth quarter. The write-down on the portfoliowas $400 million, based on fair value inline with the observable market pricesfrom our executed trades. A majority of these assets are categorized as Level2. Our residual exposures are well diversified and approximately two-thirds areoutside of the U.S.As a result of the write-downs in the quarter, the level of financial assetscategorized in Level 3 has decreased. The movement of assets from Level 2 intoLevel 3 category was more than offset by losses in Level 3 driven by corporateand other debt and derivative contracts. In our 10-K, and that’s inamongst position is classified within the same level, will be now included inthat level. In our third quarter disclosure these positions were showed on agross basis we’re going to actually – going to a separate column, this will benow more comparable to our peers. Within this presentation, change of totalasset position in Level 3 at the end of the third quarter was, approximately,7% of our total assets and Level 3 liabilities represents approximately 2% oftotal liabilities. While we're still working on the fourth quarter disclosures,we anticipate that the total Level 3 asset positions as a percentage of totalassets and the total Level 3 liability positions as a percentage of totalliabilities will remain approximately the same when we file our 10-K. Now, a bit on the outlook. As I mentionedin August and again in November, we believe that the credit environment remainschallenged. It may take several quarters to return to a more normal marketactivity levels of credit extension on liquidity provision. As we said lastquarter, this affects not only trading but also customer flow andsecuritization. Lending standards have tightened and we are seeing a return tomore traditional credit analysis. We expect many of the structured creditproducts to remain challenged for an extended period. However, there continuesto be opportunities in other areas of fixed income including interest rate,foreign exchange, commodity products and within emerging markets. Volatility in the equity marketsdoes not appear to be subsiding. This creates opportunities in our cashderivatives and prime brokerage businesses. Investment banking pipelines remainhealthy across advisory equities and fixed income, and we are still cautiouslyoptimistic. Asset Management and GlobalWealth Management continue to provide strong results for the market turmoil anda positive momentum going into next year. The near term cyclical challenges donot change our view of the long-term secular growth opportunities. But we willcontinue to allocate resources and capital into high growth areas globally andon a risks reward basis. Thank you for bearing with me; weare now happy to take your questions.

(Operator Instructions). And our first question comes fromthe line of Guy Moszkowski with Merrill Lynch, go ahead.

Good morning.

How are you doing?

Can you tell us how you think wegot to think first of all about the roughly 100 million shares, or obviously,possibly less than that coming into the share count for EPS purposes over thenext couple of years? What's the timeframe and what will drive the recognitionof those shares in the fully diluted count?

Sure. Well they come in, as youknow, in August 2010; so short-term we will have a small charge upfront whichwill not probably down by a small amount. Then on conversion, depending on thestrike price, we will have 9.9% of the company will be represented by shares.

But as they come into or closerto the money, isn’t there are some gradual increment to the diluted shares asopposed to what happens to the book value calculation?

There will be, yes. There will beimpact, as we come closer to the money much itself from the threshold price.

Okay.

[For that] impact I have aschedule but I rather do on that Guy is that we've got the reference price andso on just come back to you with the schedule and show you the impact.

Okay, great. That will be veryhelpful. Thank you. How do you think at this point about your Tier 1 to assetsratio?

Mean.

Yeah assuming --

Kind of operation.

Yeah your Tier 1 capital ratiowith the $5 billion included?

Look, we felt, we were prettywell capitalized despite the write-downs ahead of the equity infusion. Weobviously feel even more strongly confident about that post that.

And what is that ratio, because Ijust to get all of the numbers in place and put it relative to your assets atthe end of the quarter. What do you now viewed that ratio is?

Look, all I can say at this stagebecause as you know we are not in a position yet to disclose until we met allour minimum regulatory requirements on Tier 1. We feel, we are adequatelycapitalized, and on regulatory capital, we think we have a significant access.

Guy, this is John Mack. Also iscompared to our peers. We are more than adequately capitalize then our Tier 1.At this time, we just can't put out that number?

Okay. That's fair. If I can thenchange the topic could you talk us a little bit about the remaining $5.5billion or so of sub-prime related assets in the bank? Did you actually, didyou just change the status to trading assets within the bank or did the bankactually sell the position to the broker dealer and if not wouldn't it had beenwise to actually do that to transport out of the bank?

Well, we decided we re-designatedso we've not sold the broker dealer. The reason, I have done this or we've donethis is to be transparent rather than taking temporary or permanent impairmentsthrough OCI and than taking a charge any permanent impairment. As we explainedbefore, these assets are of a very high quality, prices have been volatile inNovember and in some cases they went down to, for instance 93 and then reboundto 95, 96. We just felt that it was much clearer to re-designate these asmark-to markets securities.

Okay, that's fair. Maybe you canhelp us understand what happened in the asset management unit with the SIVcharges and what the interrelationship might or might not be between the SIVholding issues there and the net out close to your liquidity products?

Well, I don't think those, thatout flows are related. So we talk about the SIV exposure, and as I said now onthis currently $7.7 billion of that repeat 92% is in low risk SIV that aresponsored by banks, which we continue to support them. The exposure is downfrom off peak in the quarter. Our biggest risk was from four SIVs that were notsponsored by the banks. I will just put this in context, the ABCP market andits peak was $1.2 trillion has shrunk to just around about $800 billion, manymoney market funds owned this paper. Of the four positions we had, onewas fully paid off, one is approximately two-third paid off, one we have takena charge against, which I described earlier. And the fourth one, we are notunduly concerned about given the credit quality of that SIV. I think overall,we feel that our exposure to SIVs we are comfortable with and we are committedto managing these funds folks from safety and liquidity.

And you bought those assetsessentially out of the --

We bought one significant feesout of the money market fund once materialize.

Okay. And then, if can just ask afinal question. Share repurchase obviously declined materially during thequarter because you were experiencing losses and obviously had a capital issue.Should we assume that the share repurchase is probably suspended for some time?

I think the Board gives usdiscretion to repurchase shares up to a cap as you know. I think it's safe toassume for the time being that we will be not exercising discretion torepurchase shares until we have clarification about the general overallclimate.

And also, Guy, we need to see oneof the opportunities out there--I think one of the things that's happening--yes,we have had this loss, but there are going to be some opportunities that willbe very interesting for us internationally and domestically. So for the timebeing, we just wanted to see what is the best use of that capital and we get abetter feel for that. I don’t think it make sense to start repurchasing shares.

Fair enough. Alright, thank yougentleman, I appreciated it.

Our next question comes from theline of Glenn Shorr with UBS. Go ahead.

Thanks very much. From what Iunderstand that MSCI gain ran through equity I just wondered if you could helpus just with the accounting and then maybe relative size. And if that meaningwe never going to see anything run through the P&L?

Well, it was a two step process,as you know right on MSCI, and in a two step IPO you don't recognize the gain,it flows through the balance sheet that preserves the tax free nature of thespin off itself. That treatment is pursuant, if you want to be a talking aboutthis Staff Accounting Bulletin 51. Saleof MSCI shares represents the first step in a broader corporate reorganization.After that i.e., the anticipated future tax we spin off any gain associatedwith the sellers required to be recorded as a capital transaction. The impactis estimated to both of pre and after-tax addition to shareholders' equity ofapproximately $230 million. Now, we obviously have options on MSCI as towhether there are other things we can do with that, but that's where we are atthe moment plan.

So, the $230 million was for thepiece recognized, there is actually another slug that would eventually runthrough equity, if that's what you said though.

Correct.

And that piece is a lot largerthan the piece that you have already recognized, correct?

Yeah.

Okay. On your CDS hedges and thethings that you identify on as hedges on slide 15. Can you talk at all towards counterparty,how you feel about it, and I'm sure you won't tell us who it is, but I'll trywho it is?

Are you talking about thesubprime position?

Yeah, I'm actually talking aboutthe hedges that are backing up the subprime position. So I see you short ABS,CDS in one or two places on that far right net exposure column on?

I mean in that broad-based CDS, Imean that rocket of hedges have markets observable on a highly tradableinstruments with a broad range of counterparties.

Okay. Down the line, it's thefirst side often not concentrated in any of the problem areas.

Volatile.

And then you mentioned earlier, Ijust want to make sure if I heard it right, it is the net of the charges comethrough about $5.80 if you take that less to 361, you get to 219, you mighttake a reverse -- the common reversal and the FAS 159 benefit. Is that the bestway to try to come to, what was not a normal world, but semi-normalized number?

If you got to counterfeit thatwhen go through, you are going to take into account the taxation. So I thinkyou have to look at those.

The $5.80 not after tax, or youare saying tax effects, the common in 159.

It is after tax, correct.

Okay, great. And then finally onthe capital raise, it came after quarter, in other words the book per share up$28.56 that we are looking at?

Yeah.

Is that free the capitalinfusion?

Well, it is. Yeah, because thecapital infusion does a kick in, for the time being the capital infusion willbe a debt instrument at the point of conversion.

Okay. Got it. So, no turns onthat.

There is mismatch betweenobviously the way the rating agencies and your regulatory capital tax.

And so how does that, is it fullyreflected on slide 4 then in terms of the unallocated capital position?

They are absolutely not. As ofNovember 1st we are showing what slide 4 is.

Okay, got it.

Let me just remind you what theunallocated capital is. And the assumption, we obviously have a regulatorycapital requirement, we are even before the capital infusion in excess of ourregulatory capital requirements and the economic capital is an internal modelwe use for allocating capital for businesses. And that was a level ofdisclosure we gave surplus or deficit and I think.

All right, and I mean I got it.You are going to raise, if you are in a deficit on your unallocated capitalthat's going to be a better driver than just whatever the regulatory capitalrequirements of the broker dealer are?

Absolutely.

Okay, cool. Thank you.

Thanks, Glenn.

Our next question comes from theline of Prashant Bhatia with Citigroup. Go ahead.

Hi, can you just help usreconcile the accounting impact of the $9 billion versus what the cash impacthas been, so just realized versus unrealized?

I'm sorry Prashant, in respect towhat sorry?

How much of this is just markeddowns that you haven't been able to sell out of position?

Of the $9.4 billion, the greatfocus is unrealized. Obviously, the $400 million that related to the CMBS wasrealized right. But the great focus is very much mark-to-market, is that whatyou are asking?

Right. Okay. So when we thinkabout -- I think the $1.8 billion in exposure that's left, is it fair to saythat from where you are sitting, you'd probably just want to leave thatexposure on until you have the cash flows end up performing on some of thesepositions? Or would you, if given the opportunity, liquidate that $1.8 billion?

Well, I think that's tradingcolumn. We're on doing with the $1.8 billion is shown you a net exposure thatcomes out of our valuation using consistent valuation methodology. And just toget it out, the $1.8 billion exposure, remember what I said on November 7th,that is a function of assuming a 100% default with zero recovery and all yourshort expiring worthless. Within that, you can have some mark-to-marketvolatility.

Okay. And then on the CMBS side,it looks like you cut your exposure in half?

I mean that's, yeah, I think Igave you the numbers. We took our net exposure from August down from $37.2billion to $17.5 billion.

Okay. And does that reflect, wasit relatively easy to reduce that exposure at some point in the quarter? Didyou kind of hit the wall and begins to reduce that cost?

Well, I think looking at ageneral point, what I would say is, I gave a commitment early in November toreduce my balance sheet to get the leverage ratios, our all balance sheet tookthe leverage ratios back in line with the third quarter. We have done a significantreduction on that balance sheet to maintain those ratios as you can see. Itwasn't easy. Bits were easy, bits were not easy and there were some frictionalcosts involved with that. But I would say that, on the whole, we managed to getthat done.

Yeah. Let me just add to that, Imean, the majority of this is overseas. And as a result, we continue todistribute these positions out in anywhere from our $100 million, to sometimes$4 million or $5 million a week. So that's how, that has taken place. Now, have we as Colm said,reduced the balance sheet, have we put some (inaudible) out there that we get alot more focus on, the answers yes and its worth. So, we continue to be activein that market.

Okay. And then in terms ofbalance sheet size going forward, the 1.1, should we expect that to continue toease down a little bit?

I think you should expert us tobe judicious in our sizing of balance sheet and look to the very close eye toour leveraged ratios.

Okay. And then just finally onthe Wealth Management side, the new head of Wealth Management from Fidelity,does that signal in anyway maybe more of a focused on either at the massoutflow and/or the RIA channel at all?

No, that's the continuation ofwhat James had started and she plugs into that and continues to build that.

Okay. Thank you.

Next question.

Our next question comes from theline of Roger Freeman with Lehman Brothers. Go ahead.

Hi. Good morning. So just wantedto follow up on the mortgage exposure. So it's fair to assume, I think you saidthat the vintages are all '05, maybe early '06 in the CDO holding, is thatright?

I think that she gave a ratio,but I am prepared to say that roughly 50% of the vintages are '05 and that'swhat quarters in November.

But I guess the question would beif it's only about 50%, the mark seems kind of stiff, if the remainder is latervintages where those ABS indices actually ended November roughly flat with theOctober. Can you give us little more color on?

Sure. Of course I can. Well,first of all, we are absolutely confident that the valuation we gave as of 31October was a right using consistent valuation methodology. Two things happenedin November, which changed the valuation which we have to look to isidentifiable inputs. One was the sell off as you know in the '05 collateralwhich we can described. But two is in risking this position, we actually didexecute observable trades, which we have to calibrate to, and it was thatcalibration to external marks that has driven the valuations.

Okay.

In addition to that, you areaware there is a lot of stuff going on in the market without thecounterparties, where circumstantially you are getting some evidence onpricing.

Okay, I mean, I guess, so is itpossible that some of these actual transactions occurred closer to mid month,as some of those other tranches were hitting their lows before they reboundedat the end of November?

That's right.

Okay. Maybe John you couldcomment on this. Can you help us to think about the changes that you alluded toin risk management? I guess some of it is coming now in the column and there isanother piece that's going into mutual. And can you just talk about what'sactually changed specifically to how things were running and sort of whatliability issues?

Well, in the past the way it wasrun that risk monitoring, risk management reported into the President of ISG.So, I’m just observing, what's going on I think the right reporting law is notto the business unit head or the division head that someone totallyindependent, who reports directly to me and that's why we’ve made the change.

Okay. What's the component that'sgoing to report into Mitch Patrick?

Well, it’s going to be Tom Daula,who is in our risk monitoring area, who will work closely with Walid Chammahand that his whole risk monitoring team but it will be that team reporting toour CFO. And then Mitch Patrick, who has over side for all trading sales, willnot have a direct report to Colm, but clearly we work very closely with him.But the key is that risk management now reports to someone outside of thedivision, and reports to our CFO.

Okay. With respect to the fixedincome business…if we back out, the charges it looks like the run rate wassomething in the $1.1 billion range. Can you comment on the impacted November,specifically, had on that particularly around client growth maybe what you areseeing here in December, I know, it’s not a greater representative month? Butthen your thoughts about sort of the run rate going forward i.e., couldrevenues actually be down year-over-year not including charges?

I think John described accuratelywhat was going on in the credit markets, and that’s where we have the greatestdegree of uncertainty. There is no doubt that not just in the mortgage area,but in our credit markets broadly we are seeing relatively little activity.Having said that, we continued to see very buoyant activity in our interestrates and currency business. This is our second best quarter ever, and thatcontinues the pace, and we see demographic trends that will underscore thatbusiness and allow us to grow it. We see no fall off in activity there. Secondly, our commoditiesbusiness, I think I’ve described the fall off was not a result of fall off offlow. It was a result of poor trading, and we feel pretty optimistic aboutthat. So, in terms of the run rate on the fixed income business and Johndescribed this very well what you are looking at is certainly a few quarters ofcontraction in the credit businesses until we can get some clarification onextension of credit to liquidity.

Okay. And do you think investmentbanking it sounds like you think that’s going to be up next year? What changedyour view?

It provides, i.e., all thesegains is that our investment banking pipelines are healthy. Our M&Apipelines are healthy. Our IPO pipelines are healthy. So, the world economycould change that could be contingent.

Yes, no doubt about it, again thissponsor business have been a very active business not only for us, but for thestreet and it slowed down there is just no question about that.

Right. Okay. Alright thanks alot.

Our next question comes from theline of Mike Mayo with Deutsche Bank. Go ahead.

Hi. Your super senior mezzanine,you have net $3.9 billion left; how much of that has been written down--you had$11 billion a year-ago, which would imply it’s written down to, like, to $0.35of a dollar, but it was $14 billion when you took the positions--that implies$0.29 of a dollar; we don’t know if you sold any, so can you give us some colorthere?

We have sold some Mike, but theproblem with giving you that ratio and I think its best for you to calculatingyourself is, you are not looking at like-to-like instruments in the street. AndI am not ducking the question, all I can say is that we've used the valuationmethodology where we are comfortable with the valuations we've taken, but theseinstruments have different attachment points, different vintages fromhouse-to-house. So you can workout the math if you think it’s relevant, what Ican assure you is that what we've done is used the relevant inputs to get tothe right valuation for this as at November 30.

Is that in the ballpark, likeusing $11 billion from a year ago though?

I mean, those are numbers thatare correct numbers. So, as I have said the proviso is, it’s a function of thecollateral tools underlying them, it’s a function of the attachment points.

I guess. Did you sell a lot orlittle?

We didn’t sell. Well, it depends on what your definition isof a lot or a little; we sold a significant enough amount to allow us to priceour portfolio.

Okay. And then just for aclarification with the new $5 billion of capital, though only be a modestimpact on book value until August 2010?

That’s right.

And there will be no impact onfully diluted shares until then?

No it starts accreting independing on the threshold price. So as I said to a Guy before, what I’d liketo do is that when we actually settle -- get the reference price and so on. Wewill give you further details on that Mike.

Can you give us any kind ofballpark way of thinking about this?

I would rather not until the dealis struck as I have said.

Okay.

It will be shortly.

Okay. And then lastly I guess forJohn, what?

This is not a [Merlyn Duke]question is it?

What count do you want to givefor risk taking at the organization? You can pull back on risk a whole lotacross the board and I guess the firm kind of faced that at the start of thedecade or you can continue to take a lot more risk and potentially face moreproblems. So where is the happy middle?

Look, I think, and I've said thiswas a caveat that we are in a risk business and we will be taking risk. If youlook at currencies, the interest rates, if you look what we did in the equitytrading businesses, they were really exceptional results. Again, like this isone desk who in my view took risk that they made a misjudgment on. So, in theshort run, I am going to be, this firm is going to be much more cautious insome of these larger bets. So from that perspective we are going to dial itback a little bit. But for putting risk capital into our trading positions andalso into some of our proprietary positions, we will continue to do that. But Ithink anytime you have a situation like this and as we've changed reporting ourrisk monitoring we have Mitch Patrick running the trading areas with moremonitors working for him and do we get that really set up the way we want? Ithink we’ve been sprinting and we're going to be jogging right now for a while,but we will still be in the market taking risk.

Alright, thank you.

Our next question comes from theline of Meredith Whitney with CIBC World Markets. Go ahead.

Good morning, now good afternoon.I wanted you thank you for your level of detail and ask you two follow-upqualitative questions. If you look at the last couple of quarters, obviouslymarred by the subprime melt down, but also what has struck me in terms ofchallenged trading strategies within your commodity business. And If you couldjust outline characteristically, are there any similarities in terms of tradingstrategies and then how you're going to manage risk and then how you would looktowards trading into -- this commodities trading into '08? And then my second question isrelated to compensation expense in the fourth quarter, really nice number foryour employees is, it’s fair to read the [QAs] and say that you are, therefore,optimistic towards 2008 and that or what does it say about your outlook forstaffing?

Hi, Meredith. I thought the firstquestion was about five questions, in other way it would be…

You call me a cheater.

Look, I think our commoditiesissue is a very simply issue. It was poor trade. It’s as simple as that, it wasa nothing, we had a structure or whatever; we were badly positioned inelectricity, natural gas and oils, right. And we -- that's an easy remedy giventhe call, pre-evidence we have in that business. And we’ve taken steps ofmoving people around to reenergize that DNA. So, I don't think there is anyissue there of risk management or anything wrong otherwise. We think it's abusiness that will contribute significantly to our projections going forward. On compensation you areabsolutely right, we have to represent and repay the enterprise value of thefirm. The bottom line is, if you’d have backed these losses to our businessesthis would have been a great year for Morgan Stanley. These losses came from asmall desk, proprietary trading desk. We didn’t feel it was appropriate topunish the rest of the firm for that, but we also think as John has said weactually may have challenging -- we will have challenging times ahead of us.There are going to be opportunities, where we with our franchise can take realadvantage and make money here and we want to make sure we have the best peoplein place for that.

Meredith, John I -- let me addjust a couple of things. I think now what the change is with Walid and James andwe will take a much deeper dive into something that I have been a littlefrustrated with is making progress outside of our non-comps. And in the firstpart of the year I can't announce it now we have someone joining us who willhave a couple of hats on and one of those hats will be specifically on some ofour non-comps and some of the things we've structured that I think would be alot more efficient. So, let me just put that into the mix of '08 what we'll bedoing?

Okay. Thank you.

Our next question comes from theline of William Tanona with Goldman Sachs. Go ahead.

Great, thank you. Just if wecould ask you a question on the risk again, I know everybody has been dancingaround, but I guess my question would be more. Help us understand how thiscould happen that you could take this large of a loss I mean I would imaginethat you guys have position limits and risk limits as such I just -- it believesme to think that you guys could have one desk that could lose $8 billion?

That's a wrong question.

Excuse me.

Hello hi and…

I missed you.

Bill, look, let's be clear. One,this trade was recognized and entered into our accounts. Two, it was enteredinto our risk management system. It's very simple. When these got, it's simple,it's very painfully, so I am not being glib. When these guys stress loss thescenario on putting on this position, they did not envision that's stresslosses that we could have this degree of default, right. It is fair to say,that our risk management division did not stress those losses as well. It'sjust simple as that. Those are big fat-tail risk that caught us hard, right.That's what happened. Now with hindsight, can you catchthings? We are not unique in being along in these positions, right? What isunique is that, this was a trade that was put on as a propriety trade and wehave learnt a very expensive and by the way Bill humbling lessons.

Okay. Fair enough. I guess, theother thing I kind of would question to those, I am surprised that your tradingVaR stayed stable in the quarter given this level of loss, and given that Iwould suspect that these were trading assets. So can you help me understand whyyour VaR didn't increase in the quarter dramatically?

Bill, I think VaR is a very goodrepresentation of liquid trading risk. But in terms of the (inaudible) of that,I am very happy to get back to you on that when we have been out of this,because I can't answer that at the moment.

Okay. Fair enough. And then Iguess a follow-up question in terms of the Supplement page 15. Can you help meunderstand a little bit better in terms of reconciling the statement offinancial condition columns over on the left hand side with the net exposurecolumn on the right hand side?

Really problem is that most ofthese positions are derivatives, right. So, that's the answer. So the onlyreason we put in the statement of financial condition initially was that one ofour peers had done that if you remember. We clarified it by putting in P&Lmovements in net exposure. Really the column you want to look at is the netexposure, because it reflects the bulk of these positions, the super senior mezzanine,which I know you are very familiar with are derivative contracts.

Okay. So for the most part,that's the one we should focus on the net exposure column. And I guess my lastquestion we obviously saw some ratings actions out of S&P this morning onthese financials guarantors. I think probably the most significant one being onACA moving that to C from A or CCC from an A. Can you just tell us kind of whatyour exposure is to some of these model lines and if you do have exposure tothese model lines?

Well, Bill, I think everybody hasexposures to these model lines of the business, but we think that all modellines exposure is relatively modest, right. So in terms of what we have, youknow what we own in the Utah Bank, which is $1.54 billion. We have $1.34billion of municipal model line bonds and we have approximately 130 million ofothers positions away from that. In terms of counterparty exposure, we have anet exposure of $761 million.

And that's the aggregate for allmodel lines?

Yeah.

Okay. Great, thank you.

I mean that's pretty modest.

Yes, thank you.

Our next question comes from theline of Steven Warden with JP Morgan. Go ahead.

Hello. I just wanted to follow upon the capital question again. I am a little confused. So I understand that theequity will accrete in the book value over time as we get closer to theconversion date. But I guess my question is, do you get regulatory capitaltreatment for the mandatory convert?

Yes. We do.

Yes.

We also get rating agency hasdifferent treatments for different pockets, but broadly this is a regulatorypiece treated as tier-one and rating agencies give us to a large extent fullcredit for the whole thing, some savings depending on which rating agencies. Sothis is very definitely seen as a capital.

Okay, great. That’s all myquestions. Thanks.

Our next question comes from theline of Michael Hecht with Banc of America. Go ahead.

Hi guys, thanks for taking myquestion.

You’re welcome.

I just want to come back on thecomments on the Level 3 assets I guess you mentioned they have declined toabout 7% of assets at the end of the quarter. So, that would put them at about$83 billion, if I’m doing my math right?

I don’t want to do that numberyet because obviously we're still finishing for the year end. But if youremember it's 7% also of reduced balance sheet.

Right, okay. And then so, itsounds like there was a bit of a mix shift within Level 3. I guess, what I’mtrying to get a sense of is you guys have seen any marks as it relates to Level3 assets that maybe ran through the P&L this quarter? And then if you couldjust maybe remind us what the biggest components of Level 3 because I don’tthink, there was a lot of differentiation going on amongst what’s actually withinthat?

Well. Obviously, there was onevery big mark that ran through Level 3, which we’ve just announced right? Andin terms, if you remember in our Q last time round, we gave a definition ofLevel 1, 2, and 3 what the pretty comprehensive idea, what the inputs were thatdefine those. I can send that to you.

Well, I can revamp if you want.

No, that's fine. That’s fair.Thanks, that's all I have.

Thanks, Michael.

And our final question comes fromthe line of Douglas Sipkin with Wachovia. Go ahead.

Yeah, hi, good afternoon. Twoquestions one, how should we be thinking about the mortgage asset class goingforward? And then sort of following on that, how should we be thinking aboutsort of your acquisition sort of strategies given your investment in a mortgagecompanies at the end of 2006. So, should we be thinking you guys are still verycommitted to that asset class and you are going to commit capital to takeadvantage of opportunities on the trading side or are you going to pullback inthe mortgage business? Thanks.

Well, we are not going topullback on the mortgage business. Clearly a slowdown if you look at Saxon andthey are servicing about 65% of what they did was servicing. So, we arecommitted to it without a question though on the origination side that businessis going to get smaller. That we are still going to be active in it and we arelooking at some of the things that we have done internationally and making adecision there or we are going to take a different profile and that's what weare discussing now.

And just to add to that I thinkI've said before that one of the things that we are looking at as we feel thatthe capital market distribution model in Europe needs to be looked up veryclosely, as John just said. So, we will come back.

So, I guess the events of Q3 andQ4 shouldn't impact your ability to continue to consistently provide liquidityand take advantage of opportunities as they arise both in U.S. and globally?

That's correct.

Okay, thank you.

Well, thank you very mucheverybody for joining us. I wish you all happy holidays. We will see you nextyear with follow-up. Thank you.

Ladies and gentlemen, thank youfor your participation in today's conference. That does conclude thepresentation. You may disconnect. Have a wonderful day.