Jeff Hart (Sandler O’Neill): There is good loan growth on the Commercial side of the business. You are seeing good credit quality as far as charge-offs going, but you build reserves. Does that reserve build is in anticipation of troubles in commercial or just a function of how quickly you are growing your balances?
Michael J. Cavanagh: It is two pieces. We have been cautious related to commercial real estate, as we have talked about the Commercial Bank. When you look at some small portions of the portfolio related to homebuilders, you saw in the first quarter the more significant additions to reserves in the quarter. As time goes by and certain portions of the portfolio go under stress, they get downgraded and require incremental reserves. In aggregate, we feel confident about where we are putting on growth from here, but it is just the dynamics of degradation in certain sectors, particularly anything related to homebuilders.
James Dimon: You should expect nonperformers to go up. We have never seen environments like this where that does not happen, even in a strong portfolio. All of the growth, we are comfortable. We see enormous opportunities to grow it and feel like Wells felt about it, that there are a lot of clients, they need loans and they want to grow. There are a lot of municipalities - a lot of the growth is coming from government and not-for-profit, which is generally secure, so we feel good about it. It almost has to deteriorate in an environment like this.
Jeff Hart (Sandler O’Neill): What are your thoughts on visuals of IndyMac and what is going on there?
James Dimon: Our deposits in asset under management are up 25% and TSS up 15% and Commercial Bank up 19%, which shows you the power of this franchise over time. We worry about us. There are going to be issues. You have heard a lot of regulators talk about some of the issues with banks out there which may have more problems in their commercial real estate, and that will cause some depositors to be concerned about it. We think we will be a beneficiary of all that.
Meredith Whitney (Oppenheimer): Do you have any comments in terms of an industry comment?
James Dimon: It is different all over the place, the competition for deposits right now. We are not chasing it, so you are not seeing growth in our deposits because we are chasing them. Some of the people have raised rates, not just uninsured but have raised rates because they need them.
Meredith Whitney (Oppenheimer): What do you see in terms of any type of Northern Rock issue, where people are actively splitting accounts?
James Dimon: We do not know the answer to that question.
John McDonald (AllianceBernstein): How much of a concern the potential changes in the QSPEs might be in terms of impact on capital ratios, and then also the potential changes in the credit card billing practices?
Michael J. Cavanagh: We do not think the change in accounting would be consequential at all, though it could put hundreds of billions of dollars back on the balance sheet, the risk-weighted assets may be different. It is not clear. We may show you a lot more of this next time because it has come up many times, but we analyzed it, we do not think it is that big a deal for us. We understand the regulator''s points, but it is putting too much fear in people''s eyes that is unjustified, particularly in our case. On the credit card changes, it depends. We already got rid of double-cycle billing and we already got rid of offers default pricing or offers repricing at all. The new changes coming up, depending on how it gets rolled out, could have an impact. It could be material. A lot of it will be one shot, just one time; it will hurt you for a year or something like that. It remains to be seen how it gets implemented and how competitors react. You change price, all the competitors react and do something bad in the first place. The interchange thing could also be dramatic though I would be surprised if you have pricing controls like that in the United States of America.
John McDonald (AllianceBernstein): Typically card issuers have some flexibility to raise pricing. Should that flow through over the next couple of quarters as you reprice?
Michael J. Cavanagh: That would be some of our hope. That potentially is some response on our part to what we are seeing could be a factor in the second half of the year.
Ron Mandel (GIC): You are not being worried on FAS 140. You have $75 billion or so of off balance sheet managed credit card loans. If that came back on, that would be about 50 basis points or so of capital. Could you comment on that?
James Dimon: It would be $50 billion of risk-weighted assets.
Michael J. Cavanagh: That is the accounting effect; that we would agree that that is likely, that credit card QSPs come on. That $70 billion and something less than $50 billion of RWA being conservative will eat into Tier 1 capital ratio. The regulators get to take their view themselves and not necessarily follow accounting on how they are going to handle all that.
James Dimon: We are retaining a lot of capital. Our dividend is low. We are retaining capital even at these low earning numbers. We expect that to continue.
Ron Mandel (GIC): Have your conversations with regulators indicated that they will take a different approach than the accountants?
Michael J. Cavanagh: It is too early to tell.
James Dimon: If you go through what I would consider almost the worst case, it is still not that big a deal. It hurts your Tier 1 ratio by 50 basis points, other ratios. At one point it is just another number on a piece of paper. We have got plenty of ways to raise capital or add preferred stock or reduce asset growth.
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