Guy Moszkowski (Merrill Lynch): The pure investment banks are showing us TSE Basel II ratios at this point difficult to compare. What is your timetable for beginning to show us Basel II?
Michael J. Cavanagh: We are working on that now. We are under the different regulatory regime for Basel II and examination of the investment banks, and we are hoping to be the first major bank to be approved to go into parallel run potentially as early as the fourth quarter of this year.
James Dimon: Our Basel II number as we currently see it would be strong. If we use the same rules and requirements that the investment banks use, it would be even stronger than that.
Guy Moszkowski (Merrill Lynch): Can you give a sense for how it would compare to those 12 percentage numbers that we are seeing from them?
James Dimon: I am not sure that those investment banks are using true Basel II-type numbers, but we do not know the detail. Ours would be strong, too. We have just got to wait until it sorts out. Now you saw recently the Fed and the SEC have an agreement to be sharing stuff like that so there will be some commonality down the road in how people do Basel II. I would question whether those Basel II numbers are the same as ours.
Mike Mayo (Deutsche Bank): You mentioned home equity might be better than you expected. You talked a lot about that at your Investor Day. Prime mortgage going from 48 basis points up to 91 basis points linked quarter. Can you elaborate more on what you are seeing there and why?
James Dimon: It is exactly the same risk factors and all the other things. It is high CLTV, high LTV, it is stated income; it is California, Florida, Arizona. They are staggering numbers. It might be higher because, we have all the politicians telling people it is okay not to pay your mortgages. It is hard for us to tell. Our current expectation is those losses could triple from here. We are prepared for that, and we will reserve for that appropriately going forward.
Mike Mayo (Deutsche Bank): Could Prime mortgage losses go from 91 basis points to 270 basis points?
Michael J. Cavanagh: Yes.
James Dimon: We had $100 million a quarter, and we could go up to $300 million a quarter. We do not expect it to happen next quarter, but if you look at current trends - and we are being overly conservative - that could be $300 million a quarter some time in 2009.
Mike Mayo (Deutsche Bank): That is a lot worse than you expected before, and you are expecting home equity to be better. How do you reconcile those two?
James Dimon: We do not. We can not.
Mike Mayo (Deutsche Bank): What are unrealized securities losses or how much non-agency MBS do you have?
Michael J. Cavanagh: Our total OCI deteriorated by about a billion dollars in the quarter.
Mike Mayo (Deutsche Bank): You said continued lower investment banking results, but on the other hand Bear''s contribution should get a lot better. What are you thinking about going forward that might be a drag?
James Dimon: What we hope to see is that it will be a positive contribution next quarter and build up to some time in 2009 to $250 million a quarter. The underlying results are outstanding. The trading results, the investment banking results are outstanding. You have to look at the environment today and assume it is going to continue for awhile. There are still assets we want to get down. There is a lot of risk in holding syndicated loans and mortgages. The values are much better because they are already been written down so much. The average leveraged loan is now 80 cents on the dollar. In an environment like this, we assume that as we sell stuff, hedge stuff, we will have to pay more going forward. Eventually that will end, and you will get the real underlying results. The only other thing in there, because we do have a lot of credit exposure, which is idiosyncratic. You have rate reserves but you have some big surprise in a credit loan somewhere that could cost us. We should be prepared for that, too.
Mike Mayo (Deutsche Bank): What is the impediment to you pursuing a merger right now in the Retail Banking side?
James Dimon: The mark-to-market accounting makes it harder for a bank to buy a bank because you have to basically write the loans to a market value, but it does not make it impossible, not for us because under the right circumstances we are sure we could raise the capital we need to do it, but it does make it harder. This is a good environment. I would expect that this will lead to more mergers over time. Nothing is impeding us, but it is not just up to us.
Mike Mayo (Deutsche Bank): If you close a deal by year end, do you still have to do the mark-to-market accounting on the loan book?
Michael J. Cavanagh: Yes. That is effective immediately and it is effective from now going forward, unless it gets changed. We do not know if it will be changed or not.
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