Welcome to the Morgan Stanley conference call. The following is a live broadcast by Morgan Stanley and is provided as a courtesy. Please note that this call is being broadcast on the Internet through the company's website at www.MorganStanley.com. A replay of the call and webcast will be available through the company's website and by phone through November 21, 2009. This presentation may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, which reflect 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 Morgan Stanley, please see Morgan Stanley's annual report on Form 10-K for the fiscal year ended November 30, 2008, Morgan Stanley's 2009 quarterly reports on Form 10-Q, and Morgan Stanley's current reports on Form 8-K. The presentation may also include certain non-GAAP financial measures. A reconciliation of such measures to the comparable GAAP figures are included in Morgan Stanley's annual report on Form 10-K, Morgan Stanley's 2009 quarterly reports on Form 10-Q, and Morgan Stanley's 2009 current reports on Form 8-K, which are available on Morgan Stanley's 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 Colm Kelleher for today's call. Please go ahead.

Good morning, everybody, and thank you for joining us. This quarter we continued to show operating improvement as we execute on our strategy. The integration of Smith Barney's on track, operation results in Institutional Securities improved, we are improving earnings in core Asset Management, and we continued to invest in talent during the quarter. For the quarter ended September 30th Morgan Stanley generated net income of $793 million and diluted earnings per share of $0.38. Negative revenue of approximately $900 million from the narrowing of the firm's debt-related credit spreads impacted earnings per share by $0.36. Firm-wide real estate losses declined from last quarter and were approximately $400 million. This quarter we continued to focus on the optimal use of our balance sheet and demonstrated leadership in our businesses, including investment banking, credit trading and global wealth management. Following our earlier repayment to TARP Capital, we repurchased the warrant received with that program as well. We continue to be well positioned and are capitalizing on the recovery in global capital markets while not limited by a large loan portfolio or direct consumer exposure. Turning to our consolidated results on Page 2 of our Financial Supplement, firm-wide revenues of $8.7 billion included the negative impact of approximately $900 million from the tightening of Morgan Stanley's credit spreads on certain long-term debt carried at fair value. Non-interest expense was $7.5 billion, up 24% from the second quarter, largely driven by compensation as we continue to invest in our people and our talent, which I will discuss later. Non-interest expense is also increased due to the inclusion of a full quarter of both compensation and non-compensation expenses from Smith Barney. We've continued to accrue compensation based on our estimate of full year needs. Non-compensation expenses were $2.5 billion, up 16% from last quarter, primarily driven by impairment of present assets. Excluding expenses related to Smith Barney, Crescent, and auction rate securities from both years, our recurring non-compensation expenses were lower by just under $1 billion on a year-to-date basis, well ahead of the $800 million in annual savings we targeted last year. Turning to Page 3 in the Financial Supplement, total assets increased to $770 billion at September 30th, primarily driven by our client financing businesses, especially prime brokerage. Of this, $153 billion is our liquidity pool. We continue to keep a significant portion of our balance sheet in cash and equivalents as we believe maintaining strong liquidity is prudent in the current environment. Our capital ratios demonstrate the strength of our balance sheet. While we're still finalizing our calculations, we believe our Tier 1 ratio under Basel I will be 15.3%. Risk-weighted assets are expected to be approximately $300 billion at September 30, and we expect our Tier 1 common ratio to be 8.2% and, finally, our tangible common equity to risk-rated asset ratio to be 9.6%. Level 3 assets are $51 billion at September 30th, representing approximately 7% of total assets. Now let's turn to the businesses. Starting with Institutional Securities detailed on Page 5 of the supplement, revenues of $5 billion included the approximately $900 million negative impact from the tightening of credit spreads, as discussed earlier. Non-interest expenses were $3.7 billion in the third quarter of '09, up 13% from the second quarter on higher compensation. Excluding DVA, the compensation ratio in the business was 44.4% in the quarter, up 40% year-to-date. The business reported a pre-tax gain of $1.3 billion. Specifically turning to Investment Banking on Page 6, our franchise continued to capture market share in the quarter and delivered a very strong performance. We were number one in announced and completed global M&A and advised on 8 of the top 10 announced transactions for the first nine months of the year. We also gained share across capital markets as activity broadened, with strength across products, industries and regions. We saw the IPO market fully reopen, particularly in Asia, and we ranked number one in global IPOs. We led significant deals in the quarter. To name a few, IPOs for China Metallurgical Construction and Wynn Macau, Volkswagen's $32.4 billion restructuring and Rio Tinto's $15.7 billion rights offering. We continue committing risk capital to support our clients, including the sale of the Swiss government's $5.2 billion stake in UBS, the largest capital committed equity deal post the credit crisis, Barrick Gold's $4 billion common stock offering, the largest North American capital committed equity deal ever, and we committed financing for Warner Chilcott's acquisition of P&G Pharmaceuticals, the first non-investment grade commitment in the market in over a year. Third quarter Investment Banking revenues of $1 billion were down 7% from the second quarter on lower fixed income underwriting. Advisory revenues were up 4% from last quarter, and while M&A market volumes remain subdued overall, the outlook is clearly improving. Equity underwriting revenues were flat from the strong second quarter, but a significant increase in revenues from Asia, fueled by China IPOs, as well as several large transactions in Europe, the Middle East and Africa areas offset the decline in U.S. activity. Fixed income underwriting revenues decreased 24% for the second quarter on lower investment grade and high yield bond issues. Equity sales and trading revenues of $1.1 billion were negatively impacted by $206 million from the narrowing of debt-related credit spreads on firm-issued structured notes. Cash equity revenues were down 7% from the second quarter of this year on seasonally lower market volumes. Derivatives reported lower revenues, down 11% sequentially, affected by the end of the dividend season in Europe as well as lower client activity. Prime brokerage revenues were up modestly from last quarter, but our average client balances increased 14% from last quarter, with growth across our client base. Momentum in prime brokerage continues, including the return of a number of key franchise clients showing the recaptured market share in line with our objectives, as previously laid out. The fixed income sales and trading revenues of $2.1 billion included losses of $546 million from the narrowing of credit spreads on firm-issued structured notes and a net gain of $334 million related to sale of the firm's participating interest in a claim against a derivative counterparty that filed for bankruptcy protection. Excluding DVA, fixed income sales and trading revenues increased 13% from the second quarter of this year. Commodities revenues were up 35% from the second quarter; however, reduced volatility in the commodities market did mute opportunities. Interest rate, credit and currency trading revenues combined were down slightly from last quarter on lower activity levels. Interest rate products reported another strong quarter, with revenues up slightly from the second quarter. Credit trading revenues increased 4% sequentially. Within credit trading, credit corporates had another standout quarter, with revenues surpassing second quarter levels from strong investment grade and distressed trading on a broader increase in market share. Currencies reported 18% higher revenues from the second quarter on strong trading. On a year-to-date basis we have seen good performance in interest rate and credit trading, with revenues up 79% and 114%, respectively. The total of our mortgage-related net exposures across residential and commercial mortgages were reduced from $7.9 billion to $7.4 billion during the quarter. We're seeing liquidity return to these markets and are more actively trading in them. Consequently, we have dropped our mortgage-related schedules from the Financial Supplement as changes in our net exposure are also driven by trading activities. Other sales and trading revenues benefited from spread tightening and valuation gains in our lending business, which includes leveraged acquisition finance and relationship lending. Net marked-to-market gains for the quarter were approximately $500 million. These gains were partially offset by a $98 million impact of tightening credit spreads on Morgan Stanley's [dash] related to CIC's investment. Total average trading and non-trading VAR increased to $168 million from $154 million last quarter, reflecting an increase in both our trading and non-trading VAR and lower diversification benefits. Average trading VAR increased to $118 million from $113 million, reflecting increases in foreign exchange and interest rate risk. Now we turn to Page 8 of the supplement and our Global Wealth Management business. With a full quarter of results from the Morgan Stanley/Smith Barney joint venture consolidated within this segment, a comparison to the second quarter where only one month of Smith Barney was included is not particularly meaningful. Revenues of $3 billion continue to be stable and consistent despite the overall weakness in the retail markets. Non-interest expenses were $2.7 billion and included $65 million of joint venture-related integration costs. The business reported a pre-tax profit of $280 million. Excluding those JV-related integration costs, PTP was $345 million and the PTP margin was 11%. On Page 9 you can see the quarterly productivity metrics of the business. Total client assets increased 8% to $1.5 trillion on higher market levels. The number of FA's declined to 18,160, and attrition primarily within the lower quintiles has substantially declined since the closing of the joint venture. For comparison, FA turnover within our top two quintiles was at historic lows of under 1%. Net new asset outflows of $8.8 billion reflect the lag affects from financial advisors that left Smith Barney prior to the closing. We are seeing a significant reduction in outflows compared to the first half of this year. Deposits in our bank deposit program increased [to] $110 billion, of which $52 billion is held by Morgan Stanley banks. Total firm-wide deposits at quarter end were $62 billion. Turning to Asset Management on Page 10 of the supplement, Asset Management recorded a pre-tax loss of $356 million, primarily driven by real estate losses related to Crescent within merchant banking. Excluding non-controlling interests, pre-tax loss attributable to Morgan Stanley was $294 million. Core Asset Management was profitable for the third consecutive quarter. Excluding the SIVs - S-I-V gains reported in the second quarter - core Asset Management revenues of $600 million were higher by 18%, driven by an increase in performance, management fees, and gains in our alternative investments whilst pre-tax profits were up over 80%. Merchant banking revenues of $98 million were higher in the second quarter due to lower losses in real estate investments; however, due to the Crescent impairment the business reported a larger pre-tax loss this quarter. Non-interest expenses for Asset Management increased 29% from last quarter, entirely due to a $251 million impairment charge related to Crescent within non-compensation expenses. Turning to Pages 11 and 12 of the supplement, you can see the assets under management and asset flow data. Total assets under management increased to $386 billion during the quarter as market appreciation of $33 billion was partially offset by $8.7 billion in net asset outflows. Nearly all of the quarterly outflows were in our core business, primarily from our money market and equity funds. Fixed income inflows were $1 billion, benefiting from improved performance and asset inflows for investments under TALF. Outflows in equity were primarily related to manager changes or certain mandate changes; however, we continued to see performance improving, with 71% of equity strategies performing above the Morningstar peer median for one year versus 54% a year ago. In addition, we are seeing an increase in the number of funds rated four and five star by Morningstar to 47 from 35 a year ago, and the percentage of four and five-star assets increased to 42% from 21% a year ago. Turning to our firm-wide real estate exposures on Page 14 of our Financial Supplement, certain real estate funds were consolidated on our balance sheet under Accounting Standards Codification Topic 810: Reassessment Guidelines. In the second quarter Morgan Stanley provided financial assistance amid tight liquidity in the funds. The consolidation of these funds was triggered by the continued deterioration of equity in the funds combined with our financial support. This consolidation resulted in a transfer of the applicable portion of exposure to Morgan Stanley from the real estate fund line to the consolidated interest line on the schedule. Asset Management's income statement with respect to these funds had virtually no P&L impact to Morgan Stanley, with the limited partnership interests deducted through the non-controlling interest line. Our real estate gross asset exposure as reflected on our statement of financial condition was $4.4 billion at the end of the quarter, down from $4.6 billion at the end of June. Including $1.6 billion of contractual commitments and other arrangements with respect to these investments, our total exposure would be $6 billion, down from $6.3 billion at the end of June. This exposure excludes assets in investments for the benefit of certain deferred employee compensation or co-investment plans. This quarter we continued to make progress in our three business segments. Institutional Securities, our core business, continues to demonstrate the strength of our leading client franchise. Investment banking continued to gain strength. We are currently ranked number one in both announced and completed global M&A for the year, number two in global equity, number one in global IPOs. We are hiring over 400 people, consistent with our strategic goals, and are committed to improving the operating performance in our trading businesses. We are more than halfway through this global hiring plan, the majority of which is outside the U.S. as we rebalance and position our trading positions for growth. For example, we are increasing headcount by over 20% in areas like foreign exchange, emerging markets and equity derivatives. Global Wealth Management posted solid revenues despite the challenging retail environment, and the integration of our joint venture with Smith Barney is on track. We are optimizing the many businesses reported in our Asset Management segment, and we are executing our multi-pronged approach. We announced the sale of our retail asset management business, including Van Kampen Investments to Invesco, while maintaining a minority stake in the combined firm. This will allow the firm to participate in the future growth of retail asset management via its interest in Invesco while focusing on its institutional client base. More broadly, our partnership with MUFG continues to gain strength. We successfully executed an export-related deal for the Egyptian General Petroleum Corporation, furthering the collaboration between our two firms and a testament of our leadership in structuring complex transactions. Now, finally a few words on the outlook. Global economic conditions have improved, and market continues continue to normalize. The overall operating environment is clearly better, with higher client volumes. The global M&A market is picking up with increasing availability of funding, and financing markets are open with investment grade and high yield debt markets rebounding. The cost of funding has declined as financials continue to raise debt and equity; however, it does still remain higher than pre-crisis levels. Global equity markets are open across industries and geographies, and the IPO market is accelerating with the emerging markets, particularly Asia, leading the way. The securitization markets have shown continued improvement, while government programs like TALF have had a meaningful impact. These are all encouraging signs of more normal markets. We expect the industry's cyclical and structural changes to continue through the rest of the year. The regulatory landscape is evolving, and we expect significantly higher capital and liquidity requirements across the industry in the future. We believe we are well positioned for this. Housing markets continue to be challenged, and although banks have made significant progress in deleveraging, consumer deleveraging will take additional time; however, consolidation of better pricing of risk [inaudible] opportunities for market share gain and higher spreads globally. So in conclusion, near-term cyclical challenges do not change our view of long-term secular growth as we continue to focus on leveraging Morgan Stanley's global brand to grow our franchise's share of the market. Thank you. With that, I'll now take your questions.

(Operator Instructions) Your first question comes from Glenn Schorr - UBS.

Maybe just a quick comment on how you view balance sheet size and leverage. Awhile back you put a 750 cap out there, but obviously equity's grown. But you did take leverage up a little bit and a little bit over that 750 size, so just curious on how you're thinking about the balance sheet and size.

Sure. I mean, I gave that balance sheet size within the definition at the time of the leverage ratio. And that's really what I want to focus on, Glenn, that the guidance I've given is a 5% to 7% leverage ratio, which I believe will probably be the new norm - although I'm prejudging the regulators on this - which means that you're talking about 14 to 20 times leverage. Obviously, our equity has grown, which allows us to take the balance sheet up. At this level we're 15.7 times levered, and that still gives me room for any potential consolidation under 166/167, which we're obviously keeping a weather eye on.

And then I guess it all fits together, but the unallocated capital is now at $9.4 billion. And interestingly, I think the capital allocated to the institutional business went down. I don't want to read too much into that either but just your thoughts on as you project forward. You made the comment specifically on higher capital requirements coming but where you think you're at in terms of the true unallocated capital.

I can't prejudge that because where we're at in true allocated capital is where we're at, Glenn. We have unallocated capital which the businesses can pull. I obviously am keeping capital in reserve because as a firm we do believe there will be higher capital charges. At the moment I think it's fair to say that we've had no holistic response from regulators as to what that answer will be. We've clearly seen things like the securitization framework, which if they were to be applied today would have a significant affect on capital. You can take mitigating steps. So my view is that I am prepared to keep and the firm believes we should keep our unallocated capital for the time being. The business can use some of it if it makes sense on a risk-adjusted basis. But clearly we are keeping an eye on the developing regulatory situation.

You have a good table in the Q that shows some of the anti-dilutive securities outstanding. It has the CIC units and [inaudible] preferred stock and some other option stuff. How are you thinking about share count because there's some things that are hard timelines and some of them are more stock related, and if this call goes on a little further MUFG stuff will be in the money. So how do you think about future share count and your ability to offset some of that through repurchases?

We clearly would like to address those issues, but we think it's too early to do that at the moment. I think the market is still not stable enough. Clearly, we will negotiate and deal with our regulators on when is the right time to do either stock buybacks or deal with dividends going forward. I think it's far too early to think about that at the moment, but it's certainly something you know that we are very focused on.

Yes, I guess with 645 of them outstanding, there's a big difference between using 1.3 or 1.9 in the model, but cool. I appreciate it.

I do understand the conversion times of those securities as well.

Absolutely.

So we have some time there on that scale, Glenn.

Your next question comes from Guy Moszkowski - BAS-ML.

I just want to pursue for a moment the question of the equity allocation to the Institutional Securities business, which did come down pretty smartly in the quarter as it had the prior quarter as well, even as you're increasing the human capital component there, as you pointed out, and the VAR was a little higher. So maybe you can just give us a sense for how to reconcile those two moves.

I think you reconcile it by what I've been speaking to you about for awhile, Guy, which is looking at risk-adjusted returns and clever deployment to capital. We clearly believe that where we have an edge is where we have increased footprint, and we've put capital behind that sort of business. As we increase market share, we get a better ROA. That is capital efficient. We've also been reducing our legacy assets, which obviously soak up a lot of capital in our economic capital model and so on. So what I'm suggesting you look at is that our strategy is to pursue those businesses that make sense from a [inaudible] point of view, and that’s really the answer.

Let me ask you, since you brought up legacy assets and you explained why you dropped some of those disclosures, which of course makes perfect sense given where we are in the markets at this point, but I think it would still be useful to get a little bit of an update for where you are in commercial real estate financing exposure, CMBS whole loans and what your hedges look like against that.

Sure. Well, I've given what we think is our relevant commercial real estate exposure. In terms of where we are on some of the other stuff, we're probably down on the net exposure now September 30th 7.4 from 7.5, so the non-subprime are pretty much unchanged. Commercial mortgages, 7.8, 8.6, we are trading around that. U.S. subprime pretty much unchanged, slight tick up on that, and obviously relatively unchanged from where we were last quarter, if that's fair.

Okay and then finance?

And what was the legacy book, I think we're down. I think the last time we showed it to you it was $5 billion or something. We're about $3 billion in that sort of zip code now and what with the legacy book, but clearly we have been doing new trades there.

Right. And you booked a mark back up on some that, right, during the quarter?

Yes, we did, but it was split between the relationship lending book, where the hedges came back, as well as the legacy book. In terms of the marks where we are, if you want to know where those are, CMBS bonds, low 70s, senior commercial loans, high 80s, mez commercial loans, mid 70s, Alt-As, mid 30s, U.S. and U.K. residential loans, mid 80s, subprime ABS/CBO/mez, low teens, leveraged finance portfolio, mid 80s. And remember, the other thing you've got to talk about is - and it's on Page 14 of the schedule  is the real estate funds, where we have the exposure there. If you want me to give you a value on that, I would say low 20s.

And then I just have a final question on compensation. I guess year-to-date, as you pointed out, in Institutional you recruited about 40%. Given the hiring that you've been doing and are continuing to do, presumably you've got to give some guarantees in many cases. How should we think about that year-to-date accrual rate relative to where we might need to be in the fourth quarter?

I don't think it changes particularly. Remember, we had attrition; we had people who left. So we have a savings from that. We're pretty much targeting around this sort of level. We will pay competitively and are proving to pay competitively. We're just being much more discriminating about the pay curve itself, Guy.

Your next question comes from Michael Hecht - JMP Securities.

I guess just a question on fixed income sales and trading. Can you help us think about how we should think about the opportunity from here? You've added some people and you said, I think, you're more than halfway through your hiring plan, and maybe some of those people have come online, some not. And then how we reconcile that relative to what you're seeing in terms of trading spreads by some of the different trading areas, whether you expect those to narrow or normalize over time.

Well, let's begin with trading spreads. It's clear that trading spreads weren't as wide as they were when the market was abnormal or dysfunctional, as it were. But it's also our personal belief that, with reduced competition and regulatory barriers being high, you will have systemically or secularly wider trading spreads. So the gain then is one of market share. We've said to you that we feel - we said this last quarter - we had slipped in market share in certain product areas where we have been dominant before. We believe that we will be able to rebuild that market share. It will take time, and what we're doing is showing you steady progression. It's clear that we've shown you some progression this quarter. Foreign exchange revenue is up quite significantly. Interest rate revenues are up as well. We've held our, I think, very high market share in investment grade credit and distressed debt, where we will continue. It really is an issue of footprint, Michael, and it's about extending that footprint. I think Morgan Stanley is very well placed; it has a lot of goodwill from clients to sort of step into that breach and have that better footprint.

And then can you give us any color on I guess the pace of revenues you saw in trading, both fixed income and equities, over the pace of the quarter? Any month stand out as particularly strong?

No, it was more normalized this time around. August a little bit slow, as you'd expect, more like a traditional August, but nothing unusual in the pace this time. It really feels like the markets are normalizing, and things are moving back to where they should be.

And then on the retail asset management deal - and congratulations; it looks like a good transaction - I understand it's not closing until mid 2010, but can you help us understand the impact on book value and maybe kind of the earnings presentation of the IBZ stake at closing?

Well, it's a bit early yet to make impact on [inaudible]. We've probably got a pre-tax gain of around $1 billion, but that's clearly dependent upon the closing price of the shares in the acquiring company; we are taking an equity stake. But think about it in terms of that, and then think about what that will mean. It will be accretive for us. In terms of earnings, I don't think it will be significantly material to what we're doing, and it will allow us to focus much more keenly on the institutional business and the merchant banking business left within Asset Management.

Your next question comes from Howard Chen - Credit Suisse.

There's been a lot of press about Crescent. I was just curious if you could give us an update on what your plans are doing with the interest there, clarify your exposure and maximum loss that could be taken?

Well, look, as previous - first of all, in terms of the loss, as you know, we consolidated this REIT from a bridge and had to take it onto the company's books, so we need to make an impairment assessment each quarter. Based on continued evaluation of properties, including an analysis of our options, we took impairment charges based on a combination of fair value of the properties and also the impairment themselves. We'll continue to make those assessments for as long as we own the properties. Now, as previously disclosed, we negotiated a loan extension with Crescent's lender during the current quarter. You know the amount of that loan - it's $2.5 billion. No additional payments were made to the lender as part of that extension agreement. While I won't go into a lot of detail, we continue to work closely with the lender towards an orderly transfer of [inaudible] operations as well as other related matters.

And then on Global Wealth Management and the full quarter's contribution of the JV, could you just touch on how you think about the pacing of synergy realization and one-time costs as we think about you integrating that transaction?

Nothing has changed our timeline in terms of our expectation of the realizations we're doing, and we will continue to give you more disclosures as we reach those milestones; we've already given you some. So we are very comfortable with the plan we laid out for the integration and the merger, Howard.

With respect to prime brokerage, could you wrap some numbers around the rebound that you noted and maybe speak to a bit of the profitability from those clients who left and have now returned vis-à-vis a year ago.

No. All I'd say is that our balances are up 14% and profitability is coming back. We do think we have pricing power. As I've said, we're not targeting a market share strategy, but we want to be a significant player, which we believe we are in that market. The quality of clients is good. The internal funding aspects of the business are much more in line with what we want. So I think that's really all I'm prepared to say rather than do a line-by-line item.

Your next question comes from Mike Carrier - Deutsche Bank.

Another question on the fixed side - when you look at the recent hiring that you've done across the platform as well as the increased level of risk taking, do you view the platform as being where you want it to be - and this is really just focused on FIC - or are you maybe 50% or 75% of the way there? And then probably more importantly, when you look at managing risk given all the recent hires, just relative to the past, I just want to get your view on how you're looking at risk just to ensure that if we do run into more volatility you guys have a grasp on all the recent hires.

Well, first of all, we're just about halfway through the hiring that we need to do, so that's not finished, so we still go and this firm clearly is attracting talent with its strategy and the execution of that strategy, which people can see. Clearly, you'll see the benefits of a lot of that hiring coming through in 2010 because of the way people tend you with three-month notice periods and so on. In terms of risk, it really doesn't change for us. We're talking about looking at things on a risk-adjusted return - going back to one of the earlier questions - and allocation of capital. We will take risk based on the back of our client franchise, which is client flow, and trade on the back of that accordingly. So the more that we have a strong client franchise, increased flows, we will be able to make risk-adjusted returns on that business. So I don't think you're seeing anything away from an execution of a strategy that we've outlined.

And then another question on the Wealth Managements side. When looking at the $8.8 million in outflows, it's tough to compare that to the $2 billion because that was only one month, but I think in a slide presentation you guys used $32 billion of outflow in the second quarter. So, one, I just wanted to know if that's relatively comparable. And then it looks like the revenue and assets are okay, you know, is doing well despite some attrition, so when you look out over the next 12 to 18 months, once the full integration is in place, given the skill that you have, is there any reason that - and I guess more structurally - is there any reason why you wouldn't potentially be able to achieve industry leading margins of, say, like 25%?

There's no reason at all why we shouldn't be able to achieve that in line with the integration itself. Let me be clear on that. Remember, you had a lot of attrition in the closing days of Smith Barney, and what you're seeing is the tail affect of that. With positive recruiting and more productive FAs, we'll see an improvement in those client flows and clearly improvement in margin.

And then just finally, on the asset management segment, when Invesco gave their presentation they just mentioned some of the costs that were related to the retail portion, you know, of the business, and then they just mentioned some of the expense sharing divisions across institutional and retail that they weren't taking. So I guess when you look at the Asset Management business  and, granted, it's very early - but I think when you guys can give some color just on the expenses that are related to the institutional business.

Sure. Well, on the first point, we can't speak for Invesco, but they believe they can run the business more efficiently than we have in the past. The outlook for the remaining Asset Management, we had $267 billion of assets under management as of September 30. Our remaining Asset Management will be more focused and streamlined. It will better leverage our strengths, build on our strong relationships, and we believe that we can take the cost out of that going forward. So we feel very comfortable about this.

Your next question comes from Mike Mayo - CLSA.

Just to follow up on the Wealth Management question, so if the revenues went from 575 to 698, can you give us some apples-to-apples figures, either take out the Smith Barney impact both quarters or throw in a full quarter of Smith Barney in the second quarter, what would have happened to revenues?

Mike, you know, I said last quarter, I'm not going to do that. We view this as a consolidated business. We're already getting synergies quicker than we thought. It wouldn't be fair to do that, and it wouldn't help us achieve the sort of goals that we're trying to do in that business. In terms of the revenues themselves, I will say we clearly had a weakening retail environment, but net-net we do believe with those revenues and results that we're on track for the integration plan as laid out.

Were those revenues weaker than you expected? I saw some numbers out of Schwab that were decent. I know it's not the same client base.

There's nothing in those revenue numbers that knocks us away from what we consider to be our plan and execution on the strategy.

On the Asset Management side, the biggest increase in AUM this quarter was Van Kampen and that's the business you're selling, so just a little bit more color why you chose to sell that.

Well, it's the same as I've said to you before. We felt it was a subscale business for us. We had one of two choices. We think we chose the right choice for a best of breed manager, with whom we will have an ongoing equity interest involved. Having said that, if you look at our core businesses, the performance has improved significantly, as we've outlined to you, and we do believe that those asset outflows will stop in accordance with the A) improved performance, and B) we're clearly getting the operating margins improved as we're taking out cost.

And have you kind of retained optionality with the rest of the Asset Management at Morgan Stanley, potential additional joint ventures or sales?

No. We are running the business, the institutional business. If you think about Asset Management, it's two big legs. It's the merchant banking business, which is the real estate, infrastructure and private equity funds, predominantly real estate, and within the institutional business you have the fund-to-funds business, which we believe is a big growth area for many reasons, the hedge fund business, which we have, the liquidity business, and then our [loan] only business. In all of those we feel very well positioned.

And the backlogs in investment banking, how do they look?

I'm telling you, they're building up very well. We're looking very healthy now, so we feel very good about our pipelines.

And then lastly, the marks, you said you wrote down the low 20s, the real estate investments. I thought you said real estate funds. Was it for the real estate funds?

I said the real estate funds. They're [our LP] interests.

So what is it for real estate investments, the $4.4 billion or the $6 billion including the commitments? What are those written down to?

We don't do that because of the nature of what they are. If you'll remember, we've given you the composition of those. Within that you have the Crescent deal, against which there's a $2.5 billion nonrecourse loan. You have other investments. We'll either take some combination of fair value or impairment testing; 94% of that book is actually at cost, so it's really very much focused on the impairment testing.

Your next question comes from Roger Freeman - Barclays Capital.

Most of my questions are actually around the Asset Management business, just to sort of flesh that transaction out. Colm, can you say how much of the Morgan Stanley/Van Kampen run rate production is into the Morgan Stanley/Smith Barney channel, and how much of the AUM is Morgan Stanley retail client?

Certainly if you look at retirement products it's absolutely negligible. One of the other issues we had is that we were potentially running into regulatory issues through the Morgan Stanley channel, which is why this was a neat solution for us. So, you know, we're selling retail products to Invesco. What you see in the Financial Supplement is assets under management by distribution channel anyway, so it's hard to pull that out. I think we will be much better placed as a result of this transaction for selling product through the retail channel.

Right, but, I mean, how leveraged has that business been on a percentage basis to Morgan Stanley retail as opposed to out to any other triple play?

I'll have to come back to you on that. It's not something I can answer.

Okay. Actually, your point on the retirement headwinds, it's a very interesting one; it's gotten some discussion recently. How much of the retail business is into retirement products that were essentially impacted? I'm trying to figure out how much has that business been revenue impaired or do you think on a run rate basis?

You're talking about a broad market question now, which I think others can answer. The current amount that we do out of our network, out of Van Kampen, into that network is negligible. In the overall market I think other people could probably be able to answer that better than me.

And then I guess on the gain that you were referring to, I know it's early to say, but is that coming from writing up the Morgan Stanley brand retail? Because it seems like the sale price here is pretty close to what you paid for Van Kampen back in [inaudible].

No, I mean, I think, Roger, in all fairness, I've given you a good idea of what the gain is, and I don't particularly want to give the component parts. It's fair enough to sort of - I mean, that's relevant.

Since they did put some data out on the run rate or profitability and it was actual data, they're bagging out what they consider to be shared services and corporate overhead. Let me just ask you: How profitable was that business inside of you fully costed?

The business was profitable, but our core business will remain profitable. So, you know, net-net we are very comfortable with the transaction for every aspect, including what's left in core Asset Management.

So the costs that they're putting essentially back to you or they won't have a revenue stream tied to it -

As I said, I don't want to comment on what they're saying, but we're very comfortable with what we're doing.

Prime brokerage, you talked about the improvements there. What percentage of your equities revenues at this point would you say are prime brokerage?

We don't give that, so I don't particularly want to give that. And I also think the model, as we explained before, is that, if you go back to last year, you could have spoken about a stand-alone prime brokerage business. I think the prime brokerage business is very much contiguous and integral part of our equity business now, so it would be like trying to strip out one line.

Your next question comes from Jeff Harte - Sandler O'Neill & Partners L.P.

You talked about M&A, and I thought maybe a little bit more optimistically than I was expecting. Can you talk a little bit about how we keep hearing about how great conversations with clients are but no one's actually moving through to pull the trigger or actually moving to the announcement phase. Are we progressing more toward announcements picking up, and do you have any kind of a timeline in mind as to when we could see a pickup?

Well, you're already beginning to see a pickup. I think we're at the low at the moment. The real issue has been access to funding markets and whether people can get that funding. With the opening of the funding markets you're seeing that beginning to happen. You're already seeing in leveraged buyouts admittedly low [gearing] multiple deals getting done, deals being circulated around. And strategically people are looking because they're more comfortable in the funding. We can mention some big names currently in the market. So I do think you're seeing the recovery.

And looking at Wealth Management at Morgan Stanley/Smith Barney, the concept of 20% to 25% pre-tax margins a couple of years out, that would be very impressive. Is the key to getting there more scale and pulling out costs or is there some kind of increased revenue productivity?

No. I think the guidance we've given is very much on a plug-and-play basis, which is the scale of business, and James has been very clear on that. I mean, any revenue synergies will be additive to that.

And finally - you might have touched on this earlier and maybe I missed some of the numbers  some of the, let's call them legacy or the mortgage positions that we no longer get specific disclosures on, were there gains on those portfolios this quarter? I guess I'd specifically be interested in commercial mortgages, where you have that portfolio very heavily hedged.

Look, we had gains up and we had losses down, but net affect on the legacy position was pretty much flat. In commercial mortgages, to give you better color, our hedges didn't work as well as they could have done, but obviously the exposures were significantly down, obviously because the hedges are more liquid when the market recovers and it takes time for the instruments to catch up. But on the legacy book it's been pretty much a wash for gains and losses on the quarter.

Your next question comes from Douglas Sipkin - Pali Research.

Three questions here. First, with respect to retail, Global Wealth Management, what percentage of your asset management fees in there are on a lag basis, you know, priced maybe on the beginning of period assets versus sort of an average or an ending? I know you guys reported $1.57 billion this quarter. Do you have any idea of what percentage of that is sort of lagged?

Offhand, I don't. I don't. I'm sorry.

And then secondly, any update - I know Citigroup has sort of flat out said that they plan on selling the entire position, which I don't think is really a surprise, and I think you guys have sort of indicated that - any update on sort of the timeline of that, how that phase-in happens? Maybe a little bit more detail around it now that we're several months into the transaction?

This is a staggered acquisition with pre-defined timelines where we control the optionality on that, which suits this firm and is shareholders just fine. So unless there is a compelling reason for us to reevaluate that, we will execute on the timeline as laid out in the agreement signed at the time. And that's really where we are.

Third question: Could you just give a little color on maybe what type of impact the government guying mortgage-backed bonds and government bonds is playing on whether it's easier or harder to make money in fixed income trading with that sort of element of concentrated buying in place and what business may look like when that ends in the beginning of next year?

Well, it's clearly provided more liquidity to the market, and more liquidity to the market clearly is better for the market. So by definition, it's better for everybody. But what's it's also done is it's kick started trading in the market, so to some degree you would expect government buying to end and to pull back because that was the intent of what they did. So the issue is will the market be robust? When that happens our view is that it will be. You have a lot of liquidity. You have spreads still at quite wide levels, but you've got people coming into the market now and making investments and making returns. So I think it's been a very useful exercise and very helpful in this market stabilization.

And then just a final question: I was a little surprised, not so much on your end but with Invesco. There doesn't seem to be any selling restrictions attached to your roughly $1 billion investment, and I was just wondering from a partnering standpoint how if at all will this change how you work with Invesco on the retail side of the fence obviously now having a 9% percentage? And then will that change anything that Smith Barney/Morgan Stanley is doing in terms of selling Asset Management products?

I foresee no changes at all. We have a very healthy and constructive relationship with Invesco.

Your final question comes from James Mitchell - Buckingham Research.

Can I just follow up on the comp ratio? You said you expect it to be pretty flat in the fourth quarter. Is that with the 44% in the third quarter on a normalized basis or the 40% year-to-date?

No, I didn't say in the fourth quarter. What I said was [it'd be] year-to-date. You look at the sort of revenue ratios we're giving. Across the firm we've been giving you guidance at just under 50%. What I then said was - sorry if I didn't make myself clear - is that we've been giving segments, each segment number, and of course then what we've given you guidance on ex DVA. So in the case of GWN, there is no DVA because it's all allocated to that. They're accruing in the low 60s, as you know, on a comp ratio. Now remember that that's a grid payment system, very little subjectivity. In Institutional Securities, where there is more of a bonus element, what we've been saying is ex DVA we're in the low 40s for Institutional Securities, and that's the way we're looking at the business. Traditionally what you do in the fourth quarter, as you know, is you'll true up. But that's the guidance we're giving, James.

You're saying low 40s for the full year in ISG?

Yes.

And just following up on Wealth Management, as you pointed out, you're 64% comp ratio, if you look back before you did the acquisition in '08 you were doing 60% or below. How much of that is a function of just needing to get through cost saves versus a lower revenue environment, and do you expect that to get back below 60% over time?

Yes. I mean, I don't exactly where it's going to end up, but we expect that to be the trend, so that's the way we'd look at it.

Okay, and then one last follow up on FIC. Where have you guys lost the most market share since, say, '07, early '08, and where are you concentrating your efforts to recapture that market share the most?

And I think we are regaining market share as we go on. It really is in the interest rates and foreign exchange area in FIC, but we are regaining that market share. We have seen some improvement this quarter.

But you're saying that where you saw the most loss was in those areas?

Yes. All right, well, listen, thank you very much, everybody. I'd like to thank you for your time on the call.

Ladies and gentlemen, that concludes your conference call for today. Thank you for your participation. You may now disconnect.