Chris O’Meara: On the non-personnel expenses if you strip out the charges associated with the mortgage restructuring we are up about 2%. We have announced two different mortgage restructurings. One of them is in the third quarter numbers and the other one is not, so the other one happened in the fourth quarter. We have another 800 people that we are taking out in the fourth quarter for a decision that was made in the fourth quarter. That will result in, together with some amount of the cost of closing down BNC, actually hits us in the fourth quarter the non-personnel cost, because of how you take it under accounting. When you exit leases, is when you actually take the charge for them, so there is some element of that non-personnel expense that will hit us in the fourth quarter, plus we will have the non-personnel expense for restructuring, the non-BNC businesses that we have. We would expect that non-personnel expense in the fourth quarter to be something in the neighborhood of $20 million. If you look at that other expense category that has the $44 million in it, in the third quarter you can expect that to come down by that $44 million, be hit with $20 million in the fourth quarter and then what we would see is some amount of continuing expense increases, which represent the continued footprint, that buildout of the footprint we have around occupancy and technology. We would be around the number that we posted here, modestly higher than the number that we have posted in the third quarter.
Meredith Whitney (CIBC World Markets): From a hiring perspective, you have been building out more aggressively than others outside the U.S. Are you finished there, therefore can you see more operating leverage coming out of your model over the next several quarters?
Chris O’Meara: We have largely completed the hiring program that we had in place at the beginning of 2007, so that was a successful build out, and we feel good about it. We want to try to get at the hiring decisions and get the people in the house as early in the year as possible, and we were successful in doing that in 2007. We do not expect a significant amount of additional hiring in the fourth quarter, but as we go into next year, we will be making decisions around our business plan and hiring coming into next year. We would expect a net reduction in people, just because of the mortgage restructuring that we announced earlier in September to end the year. Going into next year we would expect us to continue depending on the market environment, but if all goes as expected, we would expect us to continue on our build out program and begin hiring again next year.
Douglas Sipkin (Wachovia Securities): Can you provide color around the fee pipeline?
Chris O’Meara: Once the deals are announced we put them in there. More than half of that fee pipeline is in the M&A advisory, so these are deals that are announced and they are just on their way to completion, so that is more than half the total. We have reduced the leverage finance fee pipeline to reflect that in deals where we have had to markdown positions. We are going to make no fees on those deals so we have reduced the leveraged finance pipeline to recognize that as any of those situations, we have eliminated any fees that we expect to get from those deals that we have marked down the positions to a loss.
Douglas Sipkin (Wachovia Securities): Are the fees that absorb losses reflected in your debt fee pipeline at the end of the third quarter?
Chris O’Meara: Yes, that is the biggest change that we have from the end of the second quarter to the end of the third quarter, the biggest single item reduction in the fee pipeline is in leveraged finance.
Douglas Sipkin (Wachovia Securities): How hedging benefits and other liabilities flow through your income statement?
Chris O’Meara: Other liabilities are the instruments that are mark-to-market, and for us it is our structured notes that are liabilities on our balance sheet, and as time goes on it depends on what our own credit spread does, and how we mark-to-market those liabilities. They are mark-to-market instruments, in the same way that the trading positions are mark-to-market.
Douglas Sipkin (Wachovia Securities): Your financing costs on your own paper went up in the quarter. How would that be an offset to a loss on the asset side?
Chris O’Meara: What it does, it re-marks your debt so that your financing costs looking forward reflect a more current yield that you would pay in the marketplace, because if our debt spreads move out, it means our cost to generate new debt would cost more so the accounting within FAS 157 sets up so you mark-to-market the debt that you have outstanding so that the interest rate yield that you are paying through your Income Statement looking forward is consistent with what you pay in the market.
Douglas Sipkin (Wachovia Securities): $2.6 trillion is expected in cash coming through in 2007. Is that correct in terms of coupons and maturities on Fixed Income instruments?
Chris O’Meara: That is just from the end of August through the end of the year. That is not for the full year. It is just from the remaining four months of the year.
Douglas Sipkin (Wachovia Securities): Do you have any preliminary forecast for 2008 global Fixed Income origination?
Chris O’Meara: We do not have them yet, but we should be getting them at some point.
Jeffrey Harte (Sandler O’Neill): Can you talk about whether financial sponsors are still looking at targets and how much that slowed?
Chris O’Meara: We have seen a tremendous amount of dialogue that is happening, and financial sponsors, they are professional money managers, and so they are out there constantly looking at different opportunities. They recognize that the cost of debt is increased, and they have got to factor that into how they are going to bid on properties and prices. On the strategic side, there continues to be dialogue, people have pulled back from going forward on some deals, but the dialogue is happening, and we want to stay close to these clients, because through this kind of situation, opportunities will emerge, and you want to be prepared for them, and ready to move on something as the market firms up here.
Jeffrey Harte (Sandler O’Neill): How important the financial sponsor business is to overall revenues?
Chris O’Meara: It is an important part. It is not dominant, but like this big diverse set of businesses we have, it is one of them and if it does not go away, it will be softened, but it is not going to have a real meaningful impact in the long term around the franchise. There are lots of other things that happen as a result of financial sponsor transactions in terms of foreign currency hedging opportunities, derivative opportunities, future liquidation opportunities, through IPOs or whatever, so it is a business we want to be in, we are committed to, we will continue to be in it, and if it slows down, that is okay. It is not going away. It will be back.
Jeffrey Harte (Sandler O’Neill): Looking at BNC with that being closed out, you have talked a lot about expenses. Is that going to have any revenue impact going forward, or looking at last quarter was that more or less revenue flat to begin with?
Chris O’Meara: I think about it as revenue flat, so I would not expect it to have a significant impact from here. We will still be interested in securitizing these assets. We can acquire them in the market as opposed to originate them, and if the business comes back we will be prepared to originate those out of our U.S. originator, that was formerly Aurora Loan Services, which is now Lehman Brothers Mortgage Capital.
|
More:
