Guy Moszkowski (Merrill Lynch): How much were the hedging gains on the $700 million reduction?
Chris O’Meara: It is hard when you look at all of the component pieces that go in here to break them out individually. Each of these businesses has long positions for assets that are in many cases themselves hedges against derivatives, where clients own returns on a synthetic basis and the assets themselves are hedges, so it is hard to say how much of the assets declined and the hedges made, but the hedges can be on both sides of this ledger. What we estimate this mark to be, the 700, is if you just looked at all of the positions and said if all of the positions stood still and we took all of the marks on both sides of the ledger, including mark-to-market of the shorts and liabilities, you will get to the 700. That all happened as a result of this massive credit spread widening that we saw in the marketplace, and that is how it behaved in all of its components.
Mike Mayo (Deutsche Bank): You went from $44 billion down to $17 billion before adding anything new on the leveraged loans. What happened from the $44 billion to the $17 billion?
Chris O’Meara: Some deals got completed, and that is an important part here. The world is saying none of these deals are getting done, that is just not right. The biggest deals are not getting done, at least they have not filled to full order books, but there are many deals that are in the $500 million to $1 billion range that have gotten done. We have seen from the $44 billion that we had, we had a number of situations in which we committed to a deal, we had some situations in which the deal we committed to fell away, the sponsor we were backing for example, did not win the property, and so that commitment fell away. We had situations where the sponsor did win the property, but used multiple financiers instead of one financier. The one other thing is there is in our $44 billion, we know that we had in there situations where we signed up for 100% commitment for a deal, and we know that other financiers, other dealers signed up for 100% commitment to that same deal, so the sponsors frequently ask their financiers, multiple ones to present full financing packages for these deals, and so once they win the property, then they will invite all of the financiers to come in together in many cases, and sometimes you will be in at a three or four-handed deal, and so that will reduce the amount of our commitment, and that is a substantial amount of the reduction from $44 billion going down to the $17 billion. Deals got done, some of the commitments were sold away, and where we risk mitigated those, or sold them away to other parties as commitments, so there is a combination of those situations that are in there that got us down to the $17 billion.
Mike Mayo (Deutsche Bank): You said the hit on the leveraged loans was well above $1 billion. Is that correct?
Chris O’Meara: Yes.
Mike Mayo (Deutsche Bank): On the $44 billion base that implies you took 3% markdown on those loans. Would you comment on that?
Chris O’Meara: A lot of that $44 billion fell away, so positions that fall away do not get marked. There are certain things when the credit spread widening took place, which was part way into this period, and many of those commitments were not with us at that time. We have got to look at the positions we got pared down out of, they do not represent marks for us.
Mike Mayo (Deutsche Bank): What would be the denominator, in other words $1 billion plus hit on what base?
Chris O’Meara: I do not want to give you the specifics of that but we did take full marks on these. Each of these deals is marked in their component pieces. Every deal is unto itself. There are some deals that are going to be marked significantly back. It is not every deal gets a blanket,. Each deal is marked not just the deal itself, but some of these deals have several, in some cases different traunches of the instruments in their capital structure and the debt capital structure, and each one of them is marked by the desk that trades in that instrument, and so they are closest to what is happening in the real market around that, and that is how they are marked.
Glenn Schorr (UBS): Can you talk more about the Level 3 assets?
Chris O’Meara: Level 3 assets are those that require the most significant amount of management judgment in determining the market value. On the levels of 1, 2, and 3, Level 3 is the one that require the most management judgment in determining their value. It typically relates to things like private equity instruments, where there has to be a lot of judgment, because these instruments do not trade and sometimes do not have anything that looks like them that trades that looks sufficiently like them, so we use judgment in determining the values on these. We had $22 billion of that at the end of the second quarter and that number will be higher this period, as we would expect. We are still finalizing this, but that will represent about 8% of the total assets that get marked, the inventory, and that that would be higher percentage-wise and dollar-wise, 10% or 11%.
Glenn Schorr (UBS): Why would you think of it to be higher?
Chris O’Meara: If the spreads widen out and liquidity pulls away, they are harder to value. The market value will go down, but they also could slip into the Level 3 category, because there is not enough good price discovery in the marketplace, so they require some judgment.
Glenn Schorr (UBS): Was there a lot of movement, Level 2 down to Level 3?
Chris O’Meara: Yes. There will be movement from Level 2 down to Level 3, particularly at certain of the mortgage products.
Glenn Schorr (UBS): Is it true that the SEC was in last week looking at everybody''s books making sure that there is some level of consistency between mortgage leveraged lending, Level 3 and the like?
Chris O’Meara: Yes, I can not comment on specific regulatory matters, but we have dialogue with the regulators, who is an interested party in the firm and we are overall under CSE, Consolidated Supervised Entity, we are regulated by the SEC at the holding company level. On specific matters of individual things, we are just not going to comment on.
Glenn Schorr (UBS): You said the losses were partially offset by large valuation gains on economic hedges and then other liabilities. What are the gains that you get on other liabilities that act as an offset to the valuation reductions?
Chris O’Meara: All of the instruments are mark-to-market in the books, so it will be the hedging instruments whether the derivatives or short positions that are in inventory or in a case where we have designated some portion of our structured notes that we have issued will be mark-to-market as well. All of those items on the liability side will generate gains in a credit spread widening environment.
Glenn Schorr (UBS): Without a further deterioration in the high profile mortgage structure credit leveraged lending credit spread markets, do you expect to see this sort of net valuation adjustment in the fourth quarter?
Chris O’Meara: No.
Glenn Schorr (UBS): You said the writedown was only in the $23 million range on BNC of goodwill. Is that correct?
Chris O’Meara: It was $27 million.
Glenn Schorr (UBS): What produced the upward?
Chris O’Meara: Eagle Energy Partners was one of the acquisitions we acquired. In India, we had the close-up of Campus Door which is our student loan originator, a couple of small things in the Investment Management business as well.
Meredith Whitney (CIBC World Markets): On the European markets the housing decline and securitization volume has been an issue that has gone on for a few years, but given the declines in August on asset backed and securitization in Europe, and that more of your revenues are coming from that, do you expect a hockey stick return to more normalized volumes this month or going forward?
Chris O’Meara: The securitization markets are challenged globally. Asia has been less affected, so they are challenged. Deals are getting done. They are just getting done at spreads which are challenged; those are revenue spreads to the dealers. People are making choices about executing securitizations or holding off until it is more liquidity support comes into the market. This is something that will be challenged for a while, but it is like past cycles, this does not go away. It sort of temporarily resets, reassesses the risk/reward paradigm, and then investors come back in when they are more comfortable that the right risk/reward is in play in terms of the yields they are going to get for the different parts of the capital structure they invest in.
Meredith Whitney (CIBC World Markets): Do you expect the trends in Europe to mirror trends in the U.S?
Chris O’Meara: There are certain types of assets that might be less affected, but as investors reassess the amount of subordination that is in the deals, particularly on investors who are investing in the top of the capital structure, it will take time for them to reassess and get comfortable generally. It does not mean deals are not going to get done. It just means that there is going to be fewer dollars at least for some period of time, but as the yields adjust those investors will be there for the right yield. It takes some time to get through.
Meredith Whitney (CIBC World Markets): Even if you take out the BNC increase in expenses in other expenses, the expense ratio was still higher than expected, or still higher than a quarterly trend rate. Are you going to continue to see pressure there?
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