Key questions and answers from the fourth quarter fiscal 2007 earnings call conducted by Lehman Brothers Holdings Inc on December 13, 2007.

Guy Moszkowski (Merrill Lynch): Could you talk about the basis risk issues, which reduced hedge effectiveness in the quarter? Which areas were most affected and what caused that breakage?

Chris O'Meara: As we saw in this quarter, the credit spread widening extended out, it affected more products this time and went up the capital structure. We saw the big credit spread widening in Alt-A products, in prime products and in CMBS type products, which is more of a supply demand imbalance than anything else. We have a hedging program that might not be at the same parts of the capital structure, there might be some geared hedging and it's across various different types of hedging products. We thought about ABX which is a product we use as hedging. We use total return swaps on home-equity loans, the Lehman Bond Index, overall. Some single name CDS on individual traunches of securitized product. It didn't all work in the same direction. There are two things going on, one is that the notionals may not be fully hedged, and the second thing is the correlations didn't necessarily work between the cash products and the index products in a precise way. That led to the breakage that we talked about.

Guy Moszkowski (Merrill Lynch): What would be the margin impact of moving to a more plain-vanilla environment which you alluded to? How should we think about the margin in your Fixed Income trading areas evolving relative to what we saw the last couple of years when more exotic products were more in favor?

Chris O'Meara: We would expect a pullback in the amount of securitize product volume that's going to run through, particularly on the origination side. We would expect the new issue to come down significantly, for some period of time. The good news though is, that this shifts from being an origination opportunity to a secondary trading opportunity. When the market reaches equilibrium the activities will pickup, and there will be lots of secondary trading opportunities for us to help transition our clients who want to move in and out of these products, and also for us as a risk taker on this. When you think about what the margin decrease would be, certainly, it would be significant on the primary side, but we think at least part of that we'll made up on the secondary side. As we look out, we talk about this $830 million of write-down that we experienced in this period from the significant credit spread widening, certainly, we wouldn't expect that to recur.

Guy Moszkowski (Merrill Lynch): In general, VaR is defined as applying to liquid assets. As assets migrate to level 3, is there some potential that some of those assets fall out of the historical VaR calculation because they are no longer liquid?

Chris O'Meara: We don't treat that that way. We put them in the VaR calculation whether they are in level 3 or level 2. Anything that was in there that's a traded product we do put in there even if the trading markets have become opaque.

Mike Mayo (Deutsche Bank): Can you elaborate more on the $3.5 billion of gross charges? You said $2.2 billion in residential mortgages. How much of that was for subprime and what was the rest for?

Chris O'Meara: It was across the different categories. Subprime was certainly a component of it, but looking at the component pieces, it was from prime, from other asset categories including student loans, there was credit spread lightening that we saw in Europe, as well. It's spread out and the $2.2 billion is across the entirety of it. The biggest other category would be real estate, so the commercial mortgage, we call it real estate, but the commercial mortgage business also saw credit spread widening both in the US and in Europe.

Mike Mayo (Deutsche Bank): You don't expect the $830 million of net charges to recur, but you had $700 million last quarter net and prior to anything that would reoccur either, conditions can get worse. How much have you written down your exposures in leveraged loans for that $10 billion?

Chris O'Meara: The leveraged loans, last time we had $27 billion of contingent facilities that was marked at the end of August. It represented in that period, the third quarter a significant markdown. Third quarter exited August with those positions markdown. We then had a bump back-up, we sold a lot of those positions, realized gains, the ones that weren't sold are, as part of their general credit spread widening that took place in November. Those have been marked appropriately and you can see in the indexed based information that high-yield credit spreads are wider now than they were in August.

Meredith Whitney (CIBC): On the GLG gain, can you walk us through how you get from the $480 million down to a net number?

Chris O'Meara: We think about it as being part of the overall revenue generation in the firm. We don’t think about it as being a net item. It's one of the items that are in the Equities Capital Markets segment. It’s a lumpy item. We do have other private equity investments that will be generating revenue. If you look at our four-quarter rolling average, for example, you would see something like $75 million to $100 million of revenues that's coming through from our private equity investments generally. This aggregate of $500 million does represent a lumpy item that's in there that is because of the GLG transaction that was executed.

Meredith Whitney (CIBC): Where do the the Freddie deal revenues flow through?

Chris O'Meara: The Freddie deal revenues flow through the Investment Banking segment.

Glenn Schorr (UBS): You alluded to the basis risk and the effectiveness of certain hedges breaking down in November. Is there any point where we have to start getting worried about the effectiveness of hedges and have you ever unwind?

Chris O'Meara: I do think that’s something that is important to keep focused on. We do have the hedges, but hedges are with individual counterparties as a CDS is with a particular counterparty. It's a bilateral agreement that you are going to negotiate to workout of. A lot of these hedges are life of trade hedges. But, if you do get into a place where the market stabilizes and there is a movement in these assets, you are going to dynamically try to reposition your hedges and work with the counterparties to move out. In terms of the ABX, it has been very active, and so that's one that seems to get oversold because there is more hedging. People who want hedges, use the ABX. But on these other ones, there are lots of different indexes that you can point to the set hedges, but they are bilateral hedges and you are going to work with those counterparties to move out of them.

Glenn Schorr (UBS): You mentioned that commercial real-estate consume up most of the write-downs. Can you talk about what piece of the write-downs were things other than subprime and CDOs?

Chris O'Meara: Yes. They are certainly in there and significantly Alt-A across the capital structure. Each of these, in terms of how these market values are established, at the top of the capital structure, particularly on AAA, in both prime and subprime, there is market discovery. There are transactions being executed in the AAA space.

As you move down the capital structure, there are transactions being executed. Maybe there are some, but it's not as visible and there’s not as much information on it. The way to model them out is, you have to default to the information that is visible, which is the index trading around ABX in the different parts of the capital structure for ABX. That information around the ABX is used to price out the cash products in the bottom parts of the capital structure. But there are some trades being done. We've got good visibility into them. There are many of them that are being done, because we are around them. We are either participating in them or we are having a look at them for the most part. We do have intelligence around the pricing information for these instruments.