Laurence Fink: One would have thought because of all we have seen in the last 6 weeks to 8 weeks, we have seen more people putting in cash. That would have been wrong. You say industry wide cash balances were down in June. We didn’t see that. We are having more conversations with clients about opportunities out in the yields per credit. I do believe clients, whether they are looking to finally build that new plant or purchase equipment, if they are an exporter and our clients are seeing their stocks down a lot they may be looking to buy in shares. I would have thought with all the volatility you would have seen an incredible run to the sidelines especially with all the volatility. We just did not see that.

William R. Katz (Buckingham Research): In the advisory business, the $32 billion platform might be the Canadian operation. What are the prospects for the business and can you help with the economics of these mandates as it relates to both the base management fee and the extent of any impact with performance fees associated with that?

Laurence Fink: We see a very large pipeline of opportunities. The financial stress as evidenced by stock prices is not over. In the last few days we have seen a huge rally in terms of the equity prices and the financial institutions which is very good. I would have said before yesterday that the problem if financial institutions cannot raise capital for every dollar, they are going to have to sell anywhere from $12 to $15 in debt. That was my fear a few days ago. When the equity markets rally that fear can be mitigated a little bit but we were quite worried we were going to see a huge onslaught of asset sales because people could not raise capital.
We are seeing many institutions that still need to de-leverage, who are still looking for solutions with problem products and so we have as many conversations today than we have ever had in terms of working with clients. We have never seen more interest in our Aladdin system going forward. The pipeline has never been more robust. Once again these are binary decisions so we could lose all of them or people could move away from it but at this moment it looks very strong.
In terms of how we are paid in some of them, we do have a lower base fee and a higher performance fee base. In some of them we have a very high base fee and no performance fees. Also in these assignments we do get a set up fee too and so some of the earnings in the second quarter were associated with set up fees or advice driven fees related to assets. We already have done one other advice fee already in this quarter and so there is once again no rhyme or reason. We customize it to the needs of the client.

Craig Siegenthaler (Credit Suisse): This quarter was very large add back to net income. Your private equity returns and hedge funds look strong. Real estate was a little weak with the market but it looks like there was a big add back this quarter. Why was that so?

Anne Marie Petach: What we have had was a very positive return on some deferred comp assets. Our deferred comp expense was therefore really grossed up by $25 million because there is an offset in our non-operating income because of the add that has had to return.

Douglas Sipkin (Wachovia): The quarterly non-comp was $5 million to $6 million. Is that due to some benefits of the Merrill Lynch integration which you had pushed off because business was robust and you had to focus on that before making some other adjustments?

Anne Marie Petach: First of all, we had lower effects of negative foreign exchange worth about $7 million which would totally explain the difference and in addition we had some up and down. We had some higher marketing expenses that were associated with the re-brand.

Laurence Fink: Remember we did re-brand in the second quarter and so we had a lot of high expenses.

Anne Marie Petach: Those were associated with the re-brand. We are seeing some lower consulting fees and some lower fees associated with outside advice.

Douglas Sipkin (Wachovia): On the fixed income, you mentioned the Texas Retirement win in there. Is there anything else going on in fixed income this quarter?

Laurence Fink: We are seeing more flows. One would have thought people would be taking money out of fixed and reallocating it into equities. We have seen more inquiry because there is more fear. We didn’t see it in liquidity; we saw it in more longer dated or intermediate flows. Most of our wins were less elongated but were more in the lower duration area. It could be stated that people, instead of putting it in cash, were looking for some little excess return in the low duration area.

Douglas Sipkin (Wachovia): Could you talk about the initial benefits of the strategic relationship with Merrill Lynch and pushing this out another 4 years, what could that potentially mean?

Laurence Fink: We have the ability to work alongside with the FA’s at Merrill Lynch. We have a unique position in that in terms of working with the FA’s. We have offices near or within the offices of Merrill Lynch in the global wealth management area. We therefore have this ability to work with them and help them with their clients in terms of idea generation and it has been a very powerful relationship for BlackRock and for Merrill Lynch. It is one of the reasons why we have seen in terms of our relationship since the transaction closed, our market share of mutual fund sales increasing.
Having the third-party brand name and yet having that ability to have that uniqueness in their pie form.

Douglas Sipkin (Wachovia): After the lock up period, do you still have a right to be the first buyer of that or does that go away after the lock up period?

Laurence Fink: We still have that right and they can’t sell all at one quarter anyway. I don’t have the exact formula but they have to sell a little at a time after a certain point.

Prashant Bhatia (Citigroup): On the bulk sale transaction with UBS, can you give an update on that portfolio and do you have capacity to do more of these types of transactions?

Laurence Fink: The answer is clearly yes. We are working on some right now. On that transaction alone we had the ability to raise free XE equity that we needed. We saw huge demand for distressed assets. In terms of how the portfolio is performing it is performing exactly where we thought it would be performing in terms of cash flows. As of now, we only have 1.5 months of experience. In terms of the first month of cash flows the performance did exactly what we modeled.

Prashant Bhatia (Citigroup): A lot of those transactions are seller financed. If it weren’t seller financed, would that be a limiting factor in doing these types of bulk asset sales?

Laurence Fink: Yes. To get the returns the equity holders are looking for, they need some form of leverage to take it on. There are other investors of ours who would like to just buy un-leveraged but that would be just a single account relationship, a separate account. However, to do the type of transaction we did with UBS where it was structured as a single purpose corporation the investors there were looking for a leveraged return. It really depends on the desire of the investors. A limiting factor of that type of product is leverage.

Prashant Bhatia (Citigroup): On Fannie and Freddie situation, you being one of the biggest fixed income money managers in the world, how do you think about the situation and is there need for more extensive government involvement and any risk to your franchise?