Laurence Fink: I do not believe in any circumstance that the debt be impaired at all. We are a large holder of their debt in terms of mortgage backed securities. If the credit markets are an accurate representation of what the market feeling is, Freddie and Fannie securities have basically done fine. In fact a few days ago they tightened a lot. I think yesterday they widened because of the change in the marketplace but the credit markets are saying whatever is the outcome the credit should be fine.
I believe there is no other choice than to make sure the credit is fine because a high percentage of this credit is held by foreigners, sovereign wealth funds, central banks and this is known within the administration. I see no outcome in which if there was ever a need to do something in which the debt would not be paid in full.
The equity is a bigger question. There is stability in the two GSE’s in the last two days. I see them up today. The raging debate in all financial markets is if there is a need to do something with the agencies and/or if there is a need by the FDIC to consolidate a bank, what would the regulators do to the preferred holders. That is the big question that is in the capital markets now. Obviously preferred, by definition is equity. However, in the case that if there was any need to close a bank, the raging debate is would they make the FDIC make the preferred holders whole or would they get zero. That would have pronounced ramifications to the whole capital structure of banks going forward.
If we determined that preferred is zero in a nationalization of a bank or close down of a bank, one would think it would be very difficult in the future to ever raise preferred again because you were not paid that much difference versus common stock. Therefore I think it would be very difficult for banks to raise preferred and it would have a pronounced impact on leverage ratios because they would only have capital raised through common equity.
This is something I am watching and we are paying attention to. I don’t have an answer but I think it is going to be one of the definitive issues we will have to watch. Regarding Freddie and Fannie, this country needs a strong platform for mortgages. Freddie and Fannie have provided the strength around the residential mortgage market. Whatever the outcome is, I hope they are able to resolve it. For everyone it would be good to have a very strong Freddie and Fannie but I do believe whatever the outcome is we have to have a strong secondary housing security market or the residential housing market will be impaired for many years beyond anyone’s dreams. It is just incredibly necessary to have a strong GSE whether that is a GSE that is presently structured as is and they are able to rebound and to get the strength that the market hopes they are going to get or whether it needs other type of assistance in the form of what Secretary Paulson has suggested in back stops.

Prashant Bhatia (Citigroup): You have got a very active dialogue with sovereign wealth funds. Has that appetite changed over the past year or so possibly in terms of a shift in direct investment to outsourcing some of this to third-parties and is that something that could potentially benefit BlackRock over the next couple of years?

Laurence Fink: Most certainly our sovereign wealth fund business has grown dramatically. I don’t think we ever list that but it has grown dramatically. I see that continuing to grow dramatically but I also see them and work with them that they are looking for direct investments. The sovereign wealth funds have been very involved in some of our structured products. They are looking for customized solutions. We had sovereign wealth funds invest in our UBS portfolio and so whether that is direct or indirect I’m not sure how that differentiates. In our case, our relationships are growing. Our dialogue is constant. We are working with them on things that ultimately we are not investing for them. We have that constant dialogue in which we are helping them as they have greater and greater needs given their cash balances are exploding.

Prashant Bhatia (Citigroup): Looking at your stock and the relative out performance versus a lot of other asset management type entities, is this a time when you would think about acquisitions to fill in any kinds of needs you had or would you tend to be more inquisitive based on your relative out performance versus some of your peers?

Laurence Fink: I don’t look at our relative PE as a means in which we look at acquisitions. That may be the tenth reason or fifteenth reason. We look at acquisitions purely if they enhance our manufacturing platform and/or our distribution platform. We are not interested in doing acquisitions for accretion. It is too much hard work and displacement of time and people to do something solely because of accretion. If we can do a transaction in which it totally transforms our manufacturing and/or our distribution platform and it is accretive we would look at that type of transaction.
We have had numerous inquiries over the last quarter in which a client would we be interested in doing another strategic acquisition. There are many organizations worldwide who have requested to have dialogue with us. We are not walking away from any dialogue. We have a very high bar to do anything. We have incredible momentum. We are transforming our business relationships with our clients in a very positive way. I would have to have a very high bar to do a transaction because I would not want to disrupt the organic momentum we have.

Prashant Bhatia (Citigroup): On auction rates, how far along are you in terms of refinancing what you need to get done and what is the appetite for money funds on picking up some of these new securities?

Laurence Fink: The new securities are not complete yet. We are working towards it. We have had the IRS come back and give us a ruling that makes us believe we are going to get the ability to make these 287’s eligible. We are working with the banks so we do meet standby commitments for banks. The credit market is the issue. That is why we are having such problems but to do this properly we still need banks to sign up on this for standby commitments so ultimately the assets would be put back to the fund.

Michael Hecht (Banc of America): Can you give detail on the outlook for performance fees in the second half of the year and what is your comment on performance fees versus comp expense in the second half too?

Laurence Fink: We have a lot of performance fee triggers in the third and fourth quarter. That is where we get them. I can’t predict what the market is going to do and how well we out perform or under perform so in some of the areas we are in the right spaces and some of the areas we are in the wrong spaces right now. We did have strong performance fees in the last few years in real estate. We don’t expect to see strong performance fees this year in those spaces. It really depends on the product. Fortunately, over the last few years we have really built out a more robust and diversified alternative to space and we believe we will have flows and performance fees but I am not permitted to forecast them out.

Mark Irizarry (Goldman Sachs & Company): On the $32 billion, can you talk about where you have those set up fees hitting in the advisory mandates. Would you have those set up fees hitting in the third quarter?

Laurence Fink: One of them yes. We are not certain when the second one will fund. We don’t have any definitiveness. We are working with them but it requires some governmental signs offs and all that.

Hojoon Lee (Morgan Stanley): In terms of your alternative business, can you give us a sense of where you are seeing stronger or weaker demand?

Laurence Fink: Our flows were even which would signify a greater momentum in our own manufactured products because we never had this type of momentum in those products before.

Hojoon Lee (Morgan Stanley): In terms of the non-operating income items, you had a slight positive gain in private equity. Was that due to crystallization or just a mark-to-market gain?

Anne Marie Petach: That is a mark-to-market.

Hojoon Lee (Morgan Stanley): What drove the mark-to-market decline in real estate?

Laurence Fink: We appraise our properties every quarter. We market those up and down based on the direction of the marketplace.

Hojoon Lee (Morgan Stanley): In the last quarter, you had slight mark-to-market declines on some of the recent credit and mortgage investments that you made. Is that $15 million in gains in non-operating income related to those assets?

Anne Marie Petach: Are you looking at the “other” there?

Hojoon Lee (Morgan Stanley): Yes, the other investments.