Lehman Brothers F1Q07 (Qtr End 2/28/07) Earnings Call Transcript

Mar.14.07 | About: Lehman Brothers (LEH)
TRANSCRIPT SPONSOR
Better Than AdSense
Click to enlarge

Lehman Brothers Holdings Inc. (LEH)

F1Q07 Earnings Call

March 14, 2007 10:00 am ET

Executives

Shaun Butler - Director, Investor Relations

Christopher M. O' Meara - Chief Financial Officer, Executive Vice President

Analysts

Guy Moszkowski - Merrill Lynch

William Tanona - Goldman Sachs

Glenn Schorr - UBS

Meredith Whitney - CIBC World Markets

Douglas Sipkin - Wachovia Securities

Michael Mayo - Prudential Equity Group

Michael Hecht - Banc of America Securities

James Ellman - Seacliff Capital

Corey Gellermini - John Hancock

Jim Auga - Millennium Partners

Presentation

Operator

Good morning and welcome to Lehman Brothers' first quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Ms. Shaun Butler, Director of Investor Relations. Thank you. You may begin.

Shaun Butler

Good morning and thank you for joining us. Before we begin, let me point out that this presentation contains forward-looking statements. These statements are not guarantees of future performance. They only represent the firm’s current expectations, estimates and projections regarding future events. The firm’s actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward-looking statement. These forward-looking statements are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and beyond our control.

For more information concerning the risks and other factors that could affect the firm’s future results and financial condition, see Risk Factors and Management’s Discussion and Analysis of Financial Conditions and Results of Operations in the firm’s most recent annual report on Form 10-K, as filed with the SEC.

This presentation contains certain non-GAAP financial measures. Information relating to these non-GAAP financial measures can be found under selected statistical information, reconciliation of average common stockholders equity with the average tangible common stockholders equity and leverage and net leverage calculations in this morning’s earnings press release, which has been posted on the firm’s website, www.lehman.com, and filed with the SEC in a Form 8-K, available at www.sec.gov.

With that, let me now turn the remarks over to Chris O' Meara, our CFO.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Click to enlarge

Christopher M. O' Meara

Thanks, Shaun. Good morning, everyone, and thank you for joining us today for our first quarter update. As you have seen in this morning’s press release, we have reported record results for the period, including our strongest level of revenues, net income and EPS ever. Revenues for the period were driven by record performances in our capital markets and investment management business segments, along with record results in both Europe and Asia. This also marked the first quarter that our revenues have exceeded $5 billion.

The increased breadth and scale we have built, the broader diversification we have achieved in our businesses and regions, and the strong productivity we are seeing from our growing base of people all contributed to this performance, reinforcing our view that the firm is sufficiently broad and diversified to generate strong results throughout the cycle.

Underpinning these results was a favorable market environment for much of the period. During the fourth quarter, the pace of GDP growth picked up in most major economies. Global equity markets rose approximately 3% in local currency terms during the period, with the highest growth in Asia, followed by Europe and the U.S.

Excluding the volatility and revaluation in the last two days of this period, global equity markets rose approximately 7% during our fiscal first quarter and several indices reached their all-time or multi-year highs during the period.

Global equity trading volumes rose approximately 17% compared to the sequential quarter, with activity rising in all major regions, but particularly in Asia and Europe. Interest rate actions by central banks remained fairly benign over the period. The Bank of England, the European Central Bank and the Bank of Japan each raised interest rates once during the period, while the Federal Reserve kept rates unchanged in the U.S.

Investment grade and non-investment grade credit spreads tightened over the course of the quarter. However, as a result of increasing concerns about the health of the U.S. housing market and credit quality in the mortgage space, spreads of mortgage-backed securities have widened.

In investment banking, the combination of a benign rate environment, low volatility, tight spreads, and improved equity valuations caused activity to remain relatively robust, although down a bit from the very strong fourth quarter levels. M&A announced buy-ins remained strong, totaling over $1 trillion for the fiscal period.

The financing market remained highly liquid and pipelines continued to grow. The markets were subject to an adjustment very late in the quarter when concerns about the Chinese equity market, U.S. economic growth, fed policy, the health of the U.S. housing and sub-prime markets, and the price of oil caused a general reassessment of risk resulting in re-pricings in both the debt and equity markets. But on balance for the quarter, the market environment was generally favorable for our businesses.

Operating in these conditions, we posted record net revenues for the quarter of over $5 billion, up 13% year over year and up 11% from the previous record we set last quarter. Net income was a record $1.1 billion, up 6% from the previous record we set a year ago and up 10% excluding the $47 million gain from an accounting change that we recognized in the first quarter of last year.

Diluted EPS of $1.96 was our highest ever, up 7% from the previous record we set in the first quarter of last year and up 12% compared with that quarter when excluding the accounting change I mentioned.

Both net income and EPS for the quarter are up 14% versus the sequential quarter. This strong financial performance once again illustrates the significant momentum we have established in our franchise and our ability to translate our product breadth and client relationships into a higher level of earnings. The businesses that showed the strongest increases in this period are areas where we have made considerable investments over the past number of years, and we have continued to improve the overall level of client-related revenues as evidenced by a record level of capital market sales credits in the period and increases in our fee-based businesses.

Now, let me review each of the three business segments.

First, in capital markets, we posted record revenues of approximately $3.5 billion, up 15% from both benchmarks periods. Our pretax income for this segment was approximately $1.37 billion.

In the fixed income component of our capital market segment, we posted revenues of approximately $2.16 billion, up 3% year over year and up 1% from last quarter. This represents our second-highest level of quarterly revenues for this business ever. Once again, we witnessed the benefits of diversification in this collective group of businesses as strong results in certain asset classes and regions helped to offset specific pockets of weakness.

Our credit businesses posted record results amid tighter credit spreads for much of the period and increased client activity. Results were very strong in both high yield and high-grade credit, partly due to our heavy origination calendar, which prompted active secondary trading.

Our commercial real estate business, which also includes CMBS securitizations, remains strong. Results in our liquid markets business rose significantly from last quarter but were down from the record we set in the year-ago period. Interest rate products improved versus the sequential period as treasury yield movements in the U.S. prompted higher bond and derivative trading levels.

We posted record results in our foreign exchange business due to strong levels of customer activity, reflecting volatility in the YEN and we posted a record quarter in Europe. Our energy business posted increased results as well.

Results in our securitized product businesses, including residential mortgages, declined compared to both benchmark periods due to challenging market conditions in the U.S., most notably in the sub-prime sector. Our mortgage origination volumes for the period were essentially flat to last quarter, as a decrease in U.S. sub-prime origination was offset by an increase in other mortgage and asset back product. The decline in sub-prime origination was largely a function of our discipline around pricing and terms.

Our global securitization volumes decreased to approximately $22 billion from $40 billion last quarter. Activity in secondary mortgage trading and strong results from our U.K. mortgage platforms helped to offset some of this weakness.

So a strong diversification story in fixed income where a number of our business units produced record results that more than offset the impact of the weaker contribution from our U.S. residential mortgage business.

In the equities component of our capital market segment, we posted record revenues of $1.34 billion, up 42% from our prior record set a year ago and up 49% sequentially. In addition to the constructive global environment I noted earlier, these record results show the benefits we are realizing from the investments we have been making in people and technology, most notably in derivatives and prime brokerage.

Results in our execution services business were up versus both benchmark periods, due to a significant increase in client volumes from both periods, reflecting improved market conditions as well as our growing footprint in this space. We had a record quarter in this business in Europe as well.

Our revenues in equity derivatives improved significantly from last quarter, despite lower volatility for most of the period. Customer activity increased by over 40% from fourth quarter levels, as demand for structured products and risk mitigation strategies increased throughout the period.

Revenues in our convertibles business were strong, although down slightly from last quarter’s record level, as clients remained active, particularly in the airline and auto sectors.

Our prime broker and financing businesses posted record revenues. We increased client balances for the seventh quarter in a row and ended the quarter with record balance of $174 billion, up approximately 60% year over year. Part of this increase was fueled by the growth of our Asian businesses.

Our pipeline of incoming prime broker clients has never been larger. We are also seeing increased interest in our prime brokerage services from historically long only clients who are now offering 30-30 portfolio products, which combine a traditional long-only portfolio with a 30% long, 30% short portfolio.

We also saw an increase in revenues from our merger arbitrage business during the period, given the high level of M&A activity in the marketplace. Lastly, gains from our private equity investments totaled approximately $86 million in the period.

Moving to our investment banking segment, we posted very strong revenues of $850 million, up 2% year over year and down 1% from last quarter’s record level. This represents our second-highest level of quarterly revenues for this business. Our pretax income for this segment was $189 million.

Within investment banking, fixed income origination revenues were a record $428 million, up 4% year over year and up 13% from last quarter. These strong results reflect the heavy volume of leveraged finance activity, as well as solid investment grade results.

Our aggregate volumes rose sequentially while overall market volumes declined. Our results in leverage finance were a record for the period, due to strong financial sponsor and corporate M&A activity. Our high-yield bond market share rose to 8.2% from 4.1% in the fourth quarter of ’06.

Refinancing was also active, as borrowers accelerated issuance to take advantage of low interest rates, tighter credit spreads, and favorable covenants.

Our M&A revenues totaled $247 million, up 9% year over year and down 4% from last quarter, as the M&A environment remained strong. This represents the third-highest level of revenues for this business. For the quarter, our volume of completed M&A transactions totaled approximately $164 billion, significantly outperforming the overall market. We advised on several noteworthy transactions that closed during the quarter, including AT&T’s acquisition of BellSouth, which was the largest transaction that closed during the period, as well as many others, including various financial sponsor transactions in the U.S. and in Europe.

Our volumes of announced M&A transactions totaled $227 billion, more than double the sequential period versus a slight decline in announcements for the overall market. We are currently advising on the two largest announced transactions this year, a financial sponsor consortium’s acquisition of TXU Corporation and Altria Group’s spin-off of Kraft Foods.

In equity origination, our revenues were $175 million, down 12% year over year and down 22% from the trailing period. As I noted earlier, there was a decline in the overall equity origination market from the prior quarter and our volumes also fell. Despite this overall weakness, we were joint book runner on three of the top six IPOs during the period, including Oil Refineries Limited, the largest ever IPO in Israel; National CineMedia; and Fortress Investment Group, the first global alternative asset manager listed on the New York Stock Exchange.

We have significant momentum in the investment banking business and our total volume and fee pipelines both ended the period at record levels. At quarter end, our M&A volume pipeline was $389 billion; our equity origination pipeline was $16 billion; and our debt origination pipeline was $100 billion.

A few other general observations regarding investment banking: the M&A markets continue to be strong with activity more broad-based by industry sector and region than we have seen in past cycles; financing continues to be readily available as rates remain at low absolute levels and spreads remain reasonably tight; and we continue to align our banking platform with growing opportunities in the marketplace, including emerging markets clients, hedge fund clients, and infrastructure-related opportunities.

Risk mitigation remains an important theme for our clients and consequently, non-traditional banking fees accounted for approximately 10% of our total investment banking revenues for the period.

Moving to our third segment, investment management, we posted record revenues of $695 million, up 20% year over year and up 9% from the previous record we set last quarter. Our pretax income for this segment was $141 million.

For the asset management component of this segment, we reported record revenues of $416 million, up 13% from both benchmark periods. Results in asset management were driven by an increase in assets under management, as well as higher incentive fees. We ended the quarter with a record level of assets under management, $236 billion, up 5% from last period, as we realized net in-flows of $8 billion and market appreciation of $3 billion over the period.

Assets under management rose across all asset classes and businesses and we continue to focus on expanding our product offerings in alternatives.

In private investment management, which encompasses our high net worth client distribution business, we realized record revenues of $279 million, up 32% from the year-ago period and up 3% from the previous record we set last quarter.

Over the course of the quarter, we saw particular strength in fixed income activity and strong productivity from our growing high net worth sales force, especially in structure products.

Now let me briefly review the results in our non-U.S. businesses. For the quarter, we realized record non-U.S. revenues of over $2 billion, up 20% year over year and up 34% from last quarter. In Europe, we posted record revenues of almost $1.4 billion, up 22% year over year and up 17% from the previous record set last quarter. This represents our fifth consecutive quarter of revenues over $1 billion in the region.

We posted increased revenues in capital markets and investment management versus both comparable periods, and investment banking revenues also rose sequentially.

In our European capital markets business, our equities revenues were a record, driven by a 16% increase in client volumes versus both comparable periods, a record quarter in convertibles, and particular strength in equity derivatives. These results more than offset a modest sequential decline in fixed income capital markets in Europe.

Revenues in investment management in Europe rose due to higher performance fees and increased assets under management as we launched two additional funds during the period.

Revenues in investment banking in Europe rose sequentially but were slightly down year over year, due primarily to lower equity underwriting revenues. We saw significant improvement in our European banking market share for M&A completions and announcements in both investment grade and high-yield debt over the period, a testament to the investments we have made over the last four years.

In Asia, we posted record revenues of $698 million, up 15% year over year and up 83% sequentially. Results in capital markets in Asia were up significantly from the prior period. We posted record revenues in equity capital markets, led by prime services due to the growth of our statistical arbitrage business, and equity derivatives due to our increased activities in structured note products.

Fixed income capital markets in Asia rose sequentially due to strength in credit products, real estate, and foreign exchange, where we have enjoyed considerable success in corporate transactions sourced by our risk solutions group.

Moving briefly to expenses, for the quarter, we posted a compensation-to-revenue ratio of 49.3%, a level consistent with the ratio we realized in 2006. Over the period, our headcount rose approximately 4% to just over 27,000.

For the quarter, our non-personnel expenses totaled $860 million, up approximately 6% from last quarter’s level. Our non-personnel expenses as a percentage of revenues were 17%, in line with our full-year results in 2006. This increase in NPE, non-personnel expenses, was driven by two factors. First, higher brokerage and clearance fees from increased capital markets trading activity, particularly in structured products; and second, the continued investments we are making to grow the firm.

Taking all of this into account, we reported a pretax margin of 33.7% for the quarter. Our effective tax rate was 32.5%. Return on equity for the quarter was 24.4% and return on tangible equity was 29.9%.

So overall, an extremely strong performance for the quarter that demonstrates the benefits we have derived from diversification across businesses and regions, as well as within our major business segments.

On a more granular level, we have achieved this diversification by expanding the depth and breadth of our product capabilities, and we continue to serve more clients in more asset classes than ever before and our commitment to growth is evidenced by the capacity and scale we continue to build in those businesses and regions with the most rapid fee pool growth.

To that end, we have made several noteworthy investments during the quarter. To further expand our geographic footprint, we acquired Grange Securities, one of Australia’s leading investment and advisory firms. This transaction closed last week, post quarter end.

We completed the acquisition of Capital Crossing, a small balance commercial lender in the U.S., which will further diversify our origination and securitization business.

We also purchased a 20% stake in Spinnaker Capital, a London-based hedge fund specializing in emerging markets, and closed our acquisition of H.A. Schupf to continue to increase our asset management product offerings for the high net worth client base.

And as we announced yesterday, we purchased a 20% interest in the D.E. Shaw Group, a global investment management firm. This investment is part of the continued development of our investment management business.

Now let me make a few comments about our balance sheet. Over the period, our total stockholders equity increased to $20 billion. This includes an increase to opening retained earnings of $67 million related to the adoption of two recently issued accounting rules, FAS-157 and FAS-159, both dealing with fair value.

Book value per share increased to $35.15, up 4% during the period, and we ended the quarter with a net leverage ratio of 15.4 times.

Our average historical simulation value at risk increased to $63 million in the current period, most notably driven by an increase in equities. Over the course of the quarter, we repurchased approximately 21 million shares at an average price of $80.05 per share.

As previously announced, in January our Board of Directors authorized the repurchase subject to market conditions of up to 100 million shares for the management of the firm’s equity capital, including offsetting dilution from employee stock awards. At that time, we also increased our annual common stock dividend rate by 25% from $0.48 per share to $0.60 per share.

Our stock buy-back program and our track record of dividend increases are further examples of how we seek to maximize shareholder value through the effective management of our capital base.

Before we move on to our outlook, I want to take a minute to discuss recent market events and provide a bit more color around the topic of mortgages. Recent market adjustments have represented a repricing of risk, with the widening of credit spreads, increased levels of volatility, and pricing adjustments in the equity markets. Given our diversified business model, parts of our business actually benefit from wider spreads and higher volatility. We expect clients to remain active in managing their portfolios through this part of the cycle, and we stand ready to service this activity flow.

The current dislocation in the sub-prime mortgage market are consistent with late cycle trends, where credit standards and pricing are lowered to maintain volumes when liquidity is ample. The situation has clearly been exacerbated by a wave of early payment defaults and more recently, the bankruptcy of a number of mono-line sub-prime mortgage lenders.

But we are not immune to these events. We believe we have done a very good job of managing the risks within our securitization business, including the active hedging strategies we employ to mitigate our risks. This is demonstrated by the fixed income results we have reported today.

The sub-prime components of our mortgage business, which include origination, securitization, and trading, in the U.S. together account for a small portion of our revenues.

To put this into perspective, into context, over the past six quarters on average, these three businesses all taken together accounted for less than 3% of our firm-wide revenues. Additionally, our mortgage origination platform is very flexible because of its integration with our mortgage securitization platform in terms of intelligence on deal structure, collateral type, and pricing terms.

In the U.S. sub-prime space, we have adhered to our origination standards. In terms of origination, we remain far more active in the prime and Alt-A space, which accounted for 75% of our origination volumes in the current quarter.

From a balance sheet perspective, we believe we are well-protected. We actively hedge the interest rate and credit components of our inventory positions, including our non-investment grade retained interest and securitizations, the majority of which are prime mortgage related.

Recent market developments, such as the introduction of single name and index credit derivatives on asset back products, have helped us significantly mitigate our risk. It is important to note at this point, we see the sub-prime challenges as being a reasonably contained situation. The broader economy is still very strong, unemployment is low, inflation is in check, and consumer confidence is still strong. We expect that the U.S. sub-prime mortgage market will continue to face headwinds in the near-term. However, we are now seeing a significant decrease in industry-wide capacity in the sub-prime sector, and the beginnings of the return of pricing power.

We believe we are well-positioned to benefit from this evolving situation, given our experience in this sector as well as our ample liquidity and risk management practices. In addition, we expect to see various opportunities as a result of the market dislocations.

Looking forward, although we are expecting continued challenges in part of the U.S. mortgage market, our outlook remains optimistic for the rest of our businesses. Our expectation is that the adjustment process to a more normalized credit risk premiums may continue for the foreseeable future. However, we do not believe that the recent adjustment in the markets is indicative of serious trouble for the global economy.

Globally, the economy remains healthy and our outlook is for global GDP to grow by 3.1% in 2007, a slower rate than was realized in ’06 but still a level that continues to provide a favorable underpinning for our sector. We expect the slowdown to be slightly greater in the U.S. due to the hangover in the housing market, as well as weaker levels of capital spending from corporations. Also, we expect the interest rate outlook to remain fairly benign, with the fed on hold, the ECB and the Bank of England raising one more time, and the Bank of Japan prepared to hike rates ever so gradually.

Furthermore, the global economy remains highly liquid with considerable corporate cash on hand, large pools of un-invested capital from financial sponsors, a growing allocation of assets to hedge funds, cash consideration from M&A, proceeds from share buy-backs that need to be invested, and continued in-flows from regions such as Asia and the Middle East. This pool of liquidity continues to provide a strong underpinning for the global capital markets and for our own client-focused business model.

We have seen this in the market’s recent resiliency where since the late February market adjustment, activity has remained strong. Spreads tightened a bit, the equity markets improved leading up to yesterday and volatility has actually come down.

We expect credit spreads and volatility to react to period risk flares like yesterday but ultimately be supported by strong fundamentals. Our view is that the global equity market indices will rise about 10% for full calendar year ’07 in local currency terms.

So we expect additional growth in capital markets activity for the remainder of 2007, with risk mitigation playing a more important role in investor decision-making. We also expect further increases in investment banking activity for the remainder of ’07. We expect announced M&A volumes to grow by 10% to 15% in ’07. Our view is that equity origination will also increase by 10% to 15% this year, despite the slow start in the first quarter, and we project that debt origination for full year ’07 will remain fairly flat relative to the peak levels issued in ’06, driven in part by our M&A forecast.

Given the more rapid pace of growth in Asia and Europe, our view is that these regions will continue to contribute a higher proportion of the growing fee pool in investment banking and capital markets. So going forward, a generally favorable environment with plenty of opportunities for us as we continue to grow our franchise.

In conclusion, we believe our franchise has tremendous momentum. We have continued to consistently post strong results, demonstrating the benefits of the diversification and the growing breadth and scale we have achieved. Our outlook remains optimistic and we believe that we will continue to benefit from the favorable secular forces that are driving growth for both Lehman and the industry as a whole.

Now I will be happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question is from Guy Moszkowski. You may ask your question and please state your company name.

Guy Moszkowski - Merrill Lynch

Thank you. Good morning. Merrill Lynch. A question on M&A, was there any decline in M&A fee realization relative to the closed deal dollars? I know lead tables are very inaccurate and incomplete sometimes, but from what we could see the indications were that you probably would have had a somewhat stronger fee quarter than you reported.

Christopher M. O' Meara

Yes, it is not indicative of a change in M&A fees in the marketplace. It is just about the mix of deals. We had one very, very big deal which gets paid out at a smaller fee percentage that we mentioned on the call. On balance, the rest of it was actually in the range, with the exception of one other deal. So it really depends on the mix of the deals that you have in terms of their sizing, is what happened this quarter. But strong M&A, relatively, and terrific pipeline is what we are looking forward to.

Guy Moszkowski - Merrill Lynch

On the trading side, brokerage and clearing costs, at least versus last quarter, up a lot, about 38% versus your trading revenues up mid-teens, 15% or so. What about the mix of your trading business would have driven that and have something to do with the cost of hedging your assets? What was going on there?

Christopher M. O' Meara

It does have something to do with that but it is everything come together in terms of the activity level. It largely was around our structured products businesses, so the more complex, derivative type businesses where we had brokerage and the brokerage cost component of that, and then clearance costs are around the very, very high volume of activity that we have been experiencing.

So this is something that will change a bit but I would expect that these costs, which are variable with activity, and activity is generally the indicator of revenue generation, that these would go certainly directionally in tandem. But I think this period is indicative of something where the mix of our business was one in which it was heavier usage of brokerage.

Guy Moszkowski - Merrill Lynch

A final question on net leverage; you noted your net leverage up at about 15.5. That is up about two points from a year ago and about one point from last quarter. What is driving that? Again, is it a mix issue? Maybe you could help us understand what it would be.

Christopher M. O' Meara

It is a mix issue. One of the things that we have been talking about is how as time evolves and as better risk management information comes on the scene, including the risk management and capital adequacy information that we are gathering from being a CSE, a regulated entity, we are focused more on risk capital than on leverage.

One of the things that is happening in the marketplace, particularly in connection with the prime brokerage business, is that we are creating these synthetic products, these derivative products for clients which are requiring us to hedge those products. They are requiring us to put on long positions, put on cash positions to get very good hedges, perfect hedges. So we are putting those on and it is ticking up our balance sheet but it really does not represent any more market risk. Certainly we have credit risk through the derivatives and we actively manage that through a collateral provisioning, but it is really partly that.

And then we have, just generally, the continued development of our business has ticked our balance sheet up, but the thing that is really driving the leverage up is the prime brokerage business.

Guy Moszkowski - Merrill Lynch

That is very helpful. Thank you, Chris.

Operator

Thank you. Our next question is from William Tanona. You may ask your question and please state your company name.

William Tanona - Goldman Sachs

Goldman Sachs. Good morning, Chris. You guys gave some pretty good addition disclosure. I just want to make sure I heard you correctly on the mortgage side, that the combination of origination, securitization and trading for sub-prime mortgages was less than 3% of total revenues over the last three quarters?

Christopher M. O' Meara

Over the last six quarters for U.S. sub-prime, those three components you talked about, origination, securitization and trading taken together.

William Tanona - Goldman Sachs

So I guess looking at the residuals on the balance sheet, could you give us any additional disclosures there and how you feel about those, given the market swings that we have seen and how you think about hedging the different components of that between investment grade and non-investment grade?

Christopher M. O' Meara

I mentioned in the remarks that the non-investment grade interest, which include bonds that are just sub-investment grade and then various elements deeper in the capital structure, including residuals, the majority of what we have in that category is not sub-prime. But in terms of hedging, we are active hedgers of it, dynamically hedging with the various tools that are available in the marketplace, both single name default swaps, the portfolio default swaps, the ABX, which has been well-written about. We are using those tools and others as active hedging products against those positions.

Now, certainly those positions have declined in value and with the hedging strategies that we have had in place, the losses have been offset by the hedges, to the extent they have been effective and we have had a very good performance in terms of effective hedging over the course of the first quarter.

William Tanona - Goldman Sachs

Great, thank you. Then, FAS-157, you had in the footnotes that it impacted retained earnings by about $67 million after tax. Did it have any impact in terms of net income for this quarter?

Christopher M. O' Meara

No, this was just the opening retained earnings that was really this element we have spoken about in the past, this EITF 02-3, this day one P&L gains that historically you did not record into the income statement. When we carried over out of 2006 into 2007, those gains that were held up, those day one revenue gains were taken as an adjustment to increase equity rather than being taken through the income statement in ’07.

William Tanona - Goldman Sachs

Okay, great. Then, again on the investment banking side, I guess I was a little surprised too in terms of the investment banking revenues, just given the deals that you guys were involved in, both on the M&A side as well as on the equity underwriting side. If you look at year-over-year growth in investment banking revenues over the last two quarters, it has been low single digit, not necessarily indicative of what we are seeing at other peers or what we are seeing in the marketplace. I wanted to know if you had any other explanation as why that has seemed to have stalled here on the revenue side, despite seeing the robust volumes on the table statistics.

Christopher M. O' Meara

I think it is partly a timing issue. When we look at our backlog of activity in investment banking now, we have built up and it is partly about the timing of when these deals are getting closed. We have a very strong pipeline that we are looking at looking forward, and I think we are participating now and to a bigger extent, in the various larger deals that are getting done in the marketplace, including deals with financial sponsors where we have always had a presence but I think we have been a more active player recently in getting a bigger share of the fees that are in that business, or a bigger slice of the activity that is going on. I think we will be seeing that tick up over the next periods.

William Tanona - Goldman Sachs

Fair enough. Lastly, the var; obviously you said that went up to $63 million. That has increased almost double from the year-ago quarter, so I just wanted to get a sense as to -- is that a change in your overall risk appetite, or are you guys seeing something out there that is pretty opportunistic? Just getting a general overview of your current risk tolerance.

Christopher M. O' Meara

Generally, we have a risk appetite in the firm that we set. This number is well within that risk appetite -- that actually gives us a decent amount of head room from here, but we have adjusted the risk profile in the firm a bit and have taken the risk up a little bit, particularly in equities, where we do see opportunities and we have made some adjustments in how we are approaching the business in terms of our risk taking, both for clients and a little bit in the principle side.

I think this is -- when we say $63 million on average, that is higher than the $48 million that it was in the fourth quarter and I think it is more indicative of how we are going to run looking forward.

Operator

Thank you. Our next question is from Glenn Schorr. You may ask your question and please state your company name.

Glenn Schorr - UBS

UBS. Okay, so we all breathe a little easier and thank you for the disclosure on the 3% handle on U.S. sub-prime. But then I have to unfortunately shift the conversation to so why doesn’t FICC grow faster? What else is flowing through the FICC line? Is it a function of mix, meaning less commodity, less FX than others? How do you think about growth going forward? Is mortgage growth outside the U.S. enough to offset softness? Things along that line. Thanks.

Christopher M. O' Meara

I think certainly the point you made around the commodities business for us is still in the very early stages of development, so that is not a -- while that is a contributor, it is not a real meaningful contributor at this point but it has gotten better, as I mentioned in the remarks, but still a relatively small portion of what we are.

The securitized products business generally has been a challenge in terms of the -- on one hand, you have the position taking and where do you stand in terms of risk mitigation on position taking? We think we are fine from that perspective but there are headwinds in this business, particularly in the U.S., so when you look out you have to have that in your mind around.

That is factored into this number that we have posted today, is that the revenue generation, the earnings that we have made from that business are lower in this period than they were in the comparable period in the past. So that is factored in and offsetting gains that are in other businesses.

I think we are on a good track of success and growth in the fixed income business. We mentioned the credit businesses have been growing very significantly, liquid markets are strong, real estate and commercial mortgage back securities business remains strong, and then we talked about the development in Asia, which has shown gains here and Europe as well.

So I would not look at this saying that in this environment, this is indicative of us losing steam out of the fixed income shop. I would just say that the slowdown in the securitized products business is factored into these numbers and we would expect to continue to develop the business from here.

Glenn Schorr - UBS

This might be just a first quarter phenomena but if I heard you correctly, there was somewhere in the neighborhood of $1.6 billion, $1.7 billion worth of buy-backs. Net income is about $1.1 billion, share count is flattish. I know you issue in the first quarter but just thoughts going forward; does that go back down to normal second quarter going forward?

Christopher M. O' Meara

Well, the buy-backs, the other factor that is going through equity is the amortization of the stock awards that we have given to employees as part of their compensation, so when you think about it, if we have made just over $1 billion, $1.1 billion in change of net income, the amount of equity that we have retained out of that is, even net of the buy-backs and net of the rest of the items that I talked about, whether it is the restricted stock amortization or the option exercise proceeds or the tax benefits associated with them, those things themselves, just those three things add $1.4 billion to the equity base. So $1.4 billion is added to the equity base from the stock award programs. The $1.7 billion that you pointed out is what it cost us to buy back the stock, so that is a net decrease of $300 million, and then we have the earnings that we have of $1.1 billion in change --

Glenn Schorr - UBS

Right, so there is a net increase --

Christopher M. O' Meara

-- of equity in the system somewhere in that range to grow the firm and support the activities that we are growing and the balance sheet growth that we have. So I think when you look out and say what is the plan for the buy-back going forward, we would expect the aggregate shares outstanding to be in the range that they are in now. So when you look at diluted shares, obviously it depends on the stock price when we figure out the treasury stock method, but when you look at -- say we had 575 million and change diluted shares for the first quarter, we would think it would be in that range for the second quarter, subject to the share price thing. But we are not changing our philosophy at this point in terms of buying back excess stock at this point.

Glenn Schorr - UBS

Okay, last one and this is tougher, but probably the gazillion dollar question, I can’t agree with your outlook. The corporate side of the equation is still pretty good, lots of cash around, strong corporate balance sheet and the like but obviously the market is thinking otherwise. How do we get confidence around that what we are seeing in mortgage land does not have a domino effect throughout other asset classes and other parts of the economy? Have there been other instances in the past that we can learn from?

Christopher M. O' Meara

I think we are still in the relatively early stages of this. I think the market is trying to digest all of what is happening here. When you think about the sub-prime business itself, it is not something that is going to itself create a big event in the economy. But when you think about the things that could happen in terms of the consumer confidence and if there is a lot of additional housing inventory that comes out in the market over time through foreclosures, that kind of stuff could portend a bad situation.

But we are not thinking that that is going to happen. The credit quality elsewhere is very strong, so we are thinking that this is at this point a reaction to something that the market is still trying to get its hands around, and as there are certain things that are happening, as you see. There are a number of companies that are coming out of the system here and the capacity of providers, the number of providers and the capacity that is available in the sub-prime market is shrinking. This is going to play itself out and we think that this is reasonably well-contained at this point.

But to your point, the market is viewing this as something where the credit spreads certainly have widened and there has been a hiccup in the market here. We will have to see what happens as we go forward, but we are not expecting that this is going to be the catalyst to make a change in the economy.

Operator

Thank you. Our next question is from Meredith Whitney. You may ask your question and please state your company name.

Meredith Whitney - CIBC World Markets

CIBC. I have two questions. The first is to prepare my fragile constitution for some potential headlines that may be coming out. Historically during times of credit spread market disruption, you guys have been really good bottom fishers. Sometimes that gives pause in terms of headlines, like Lehman’s buying CIT, or Lehman’s buying Senova and things like that. Could you comment on what the bottom fishing environment looks like, how far away we are from that? Obviously as you said we are in the beginning stages, but is there enough that exists in companies that are on balance sheet? Typically I know you like to securitize and be done with the loans, but what does that market look like? Again, are we too soon?

The second question is you guys recently did an about-face on your strategy in Russia. I just wanted to get some more color in terms of what caused you to make that about-face.

Christopher M. O' Meara

So let’s take the first one, around the bottom fishing. I would just say it a little differently in terms of that through these types of situations where there is dislocation in the market, we do see opportunities and we see opportunities present themselves in many different ways, whether we sit right at the nexus of where investors meet issuers, as it were, so where product gets provided to where product gets purchased, and so when there are dislocations, there is opportunity.

What we are seeing and I expect that we will continue to see is one, a good opportunity for us around the sub-prime space being this is an asset class we know well and have a lot of experience and lots of sophisticated operators in, so we think that being a strong provider here that we will come out feeling good on the other side. But along the way, we do see that there will be opportunities for asset liquidations or various types of portfolio rearranging that is going on that we can be a player in, both as an agent for others and potentially as principal, or co-investor with others.

But those opportunities are things that we are constantly evaluating and we do see that this is the type of situation that historically has provided opportunity for the firm and revenue-generating opportunities. So we would expect that there would be some in here as well.

As far as the Russia situation, we recognize that there are various emerging markets that have great characteristics and great opportunities for our firm, and the clients that we interact with, they want to interact in various emerging countries. Russia being one, particularly to the natural resources sector. Turkey being another. We are in India, China we are in, Brazil, we just have gotten a foothold in again, so there is the emerging economies and the emerging countries that our clients want to be in and we want to service those clients and we see opportunities, so we are beginning to develop presences in those various countries.

Meredith Whitney - CIBC World Markets

Okay, and then just to dumb it down a little bit further, could you reiterate what you are looking for when you do go in and opportunistically take a company that has seen better days?

Christopher M. O' Meara

Well, it may not necessarily be a company. There are opportunities in these companies. There might be portfolios of instruments. There might be some individual teams of people that we think are terrific, that can operate on our platform. At this point, we have platforms that operate that we certainly always are looking to fill in gaps in where our platforms aren’t, but there are opportunities on all of those fronts. We will see there are opportunities in the secondary market where certain clients want to transition their portfolios. We are there to service that flow. So this is going to be I think a -- become an active market with this shake-out that is going on.

Operator

Thank you. Our next question is from Douglas Sipkin. You may ask your question and please state your company name.

Douglas Sipkin - Wachovia Securities

Wachovia. Just a question on the non-comp build-out. I just seem to recall I guess in late ’04, maybe late ’03, parts of ’04, the non-comp ramped up and it took a little while for the revenues to catch up. I am just wondering, it does seem like you guys are in a bit of an accelerated investments phase. How should we be thinking about that playing out over the next bunch of quarters? When can maybe that growth in non-comp slow?

Christopher M. O' Meara

I think you hit the nail right on the head there with we are in accelerated development in areas where we are not, which takes more investment dollars for things like technology and occupancy. As we look out here, you see an $860 million non-comp number we posted in the first quarter. We would expect that to continue to grow in different areas, so there are a couple of seasonally low items that are in there -- business development is one and professional fees is another -- that in the first quarter are seasonally lower than they are at other points. But the other category in non-personnel is a little bit higher than it is traditionally.

So I would expect this to go up and it really depends, as Guy was mentioning before about the brokerage costs, I think that is something we have to recognize is going to be somewhat variable and flexible. But I would think that this goes up from here to in the very high 800’s, almost 890, and I think it will stay there for the next couple of quarters, depending on ex-acquisitions. I think this thing will take a bump here in the second quarter and then stay right in the 900 range, I think, for the next couple of quarters.

Douglas Sipkin - Wachovia Securities

So you are saying the low 900s for the rest of the year, essentially? In that ballpark?

Christopher M. O' Meara

Late 800s, 900.

Douglas Sipkin - Wachovia Securities

Is there any sort of time period where you would expect to get the revenue benefit from? How should we be thinking about the lag on the leverage?

Christopher M. O' Meara

We are making this investment. One of the investments that we are making, as we mentioned, is the investments in Asia, which take some time to build out and get the people on board. A lot of this is really tagged to the people. We have talked in the past about if we increase our headcount by 10% this year, we would expect to increase our running rate of non-personnel expense costs from the fourth quarter of last year by about 10%. And that is really what is happening here. So if you just look at the -- we posted $808 million of fourth quarter non-personnel expense costs for the fourth quarter of ’06. If you annualize that and then step it up by 10%, I think that is where we will be.

It is about getting the people on. The people then become productive over a period of time and that is when you see the operating leverage that you are talking about come into effect.

Douglas Sipkin - Wachovia Securities

Then, just a second question around the ABX, obviously an effective hedging tool for you guys, or it has been. Has that dynamic changed at all, with that index sort of blowing up, so to speak, from a spread widening standpoint in the last two months or so? Or is it just getting more expensive to hedge?

Christopher M. O' Meara

It is a dynamic process that goes on. That is not the only thing that is being used, but the ABX is one tool. When you look at you have to mark all the positions that are in the book on a day-to-day basis, so you have to hold fast to the mark-to-market concept on both sides, the hedge side and the position side.

So while they may not be perfect and operate perfectly in tandem, they have actually served as pretty good hedges for us. We have not seen anything that has been a real dislocation here.

Operator

Thank you. Mike Mayo, you may ask your question and please state your company name.

Michael Mayo - Prudential Equity Group

Prudential Equity Group. Your non-U.S. revenues are doing great. I am just wondering how your non-U.S. expenses are doing, given your investment cycle overseas.

Christopher M. O' Meara

Well, we are getting strong pretax margins outside the U.S. Actually, as well as inside the U.S. When you look at this first quarter, where we posted a near 34% pretax margin, no region was less than 30%, so we feel pretty good about that, particularly in Asia, given the investments that we are making. They had terrific revenues this period and we are actually modestly higher than the firm-wide pretax margin. So the expenses in relation to revenues are in good shape there.

Michael Mayo - Prudential Equity Group

I’m sorry, Asia’s margin is higher than the firm?

Christopher M. O' Meara

Asia’s margin is -- yes, it is modestly higher than the firm for the first quarter.

Michael Mayo - Prudential Equity Group

Okay, that is a little bit of a change, because --

Christopher M. O' Meara

Yes, because Asia is the place where in the fourth quarter, we talked about it having low revenues but the expense base is being built, and so it really is going to fluctuate based on how much revenues they are generating in any particular period, but it is still a built-out. It is still an investment phase. It had very good revenues in this period though.

Michael Mayo - Prudential Equity Group

Then, a separate question; sub-prime revenues are under 3% with your characterization, but if we are not talking about a housing crash or a recession but still a possible domino effect from sub-prime to other areas, what other exposure do you have to the sub-prime mortgage market?

Christopher M. O' Meara

To the sub-prime mortgage? Okay, so there are situations -- are you talking about warehouse lending or --

Michael Mayo - Prudential Equity Group

More generally, what is your total balance sheet exposure to sub-prime mortgage, either direct or indirect?

Christopher M. O' Meara

We have a fair amount of exposure. We talked about the residual interests which represent a levered exposure. We also have whole loans, but all of it is subject to the same hedging principals that we talked about earlier and it has been working quite effectively.

Michael Mayo - Prudential Equity Group

But when you said that the hedging offset the losses, the hedging offset the losses in which areas?

Christopher M. O' Meara

Essentially everything. Our objective is to try to offset the risks that sit in the business as we are moving these instruments and holding the instruments in what we will call our client warehouse as we are moving them from raw product into securitization, and then if we are making secondary markets and taking positions that we are distributing and sponsoring client activity, while that is in this warehouse and on the balance sheet, we are trying to hedge the components of risk that exist -- the interest rate risk, the pre-payment risk, the various risks that exist. We are actively, dynamically trying to risk mitigate.

Michael Mayo - Prudential Equity Group

How is the quarter so far to date? Is it still working in terms of the hedges?

Christopher M. O' Meara

Yes.

Michael Mayo - Prudential Equity Group

So if we have the current conditions last the whole quarter, all else equal we would see something pretty similar to what we are seeing now in first quarter results?

Christopher M. O' Meara

Look, there are different things that are going on in the marketplace but over the course of the quarter, I do not think that we have seen anything here that is telling us that we are in a fundamental shift of the marketplace. We have had a couple of hiccups here and let’s see how this plays out.

Michael Mayo - Prudential Equity Group

One other potential domino I guess could be a hedge fund blowing up somewhere. Given your insight for your prime brokerage business, what are you seeing among hedge funds who might be involved in this space?

Christopher M. O' Meara

That is a tricky one. We are not seeing any hedge fund issues that we have when we have -- as prime brokers, we are vigilant around making sure that we have got the right protections in place and the right collateral and the valuation of that collateral on a day-to-day basis with the appropriate margin calls.

This risk is spread out. There are loads of investors, including investors outside the U.S., investing either directly or through CDO product, so the risks that are associated with this, who knows exactly where they are? But there is a view that they are quite well spread out, or at least they have the opportunity to be, around the world.

Operator

Thank you. Our next question is from Michael Hecht. You may ask your question and please state your company name.

Michael Hecht - Banc of America Securities

Banc of America. Just a couple of follow-ups on mortgage and then maybe I could ask a couple of questions about equities. I just wanted to come back, the 3% of total revenues from sub-prime, does that exclude servicing revenues? Would that make a big difference?

Christopher M. O' Meara

It wouldn’t make a big difference, but it is all sub-prime activities.

Michael Hecht - Banc of America Securities

Okay, and it sounds like you are not worried about sub-prime contagion to other areas of the credit market but just to follow-up, you sound a little cautious on the U.S. mortgage market overall. Just hoping any color you can give on evidence of contagion from sub-prime to other areas of mortgage, like prime or Alt-A that you are seeing?

Christopher M. O' Meara

Well, we are seeing -- we are not necessarily seeing them be contagion to one another. We have seen the delinquency rates in Alt-A in the marketplace have ticked up a bit but they are within the expectation range. So that they have ticked up is not -- some folks think of that as a real big surprise. It is in the expectation range, when you model out what the expectations are. You couldn’t look at that and say here it is, this is the spillover effect taking place.

It does not mean that it cannot happen. It just means that we haven’t really seen evidence that it has.

Michael Hecht - Banc of America Securities

Okay, that’s fair enough. Then, on the origination side, there was a pretty decent decline quarter over quarter. Could you recap for us headcount trends you guys have in the mortgage origination space overall and trends you expect there? Is there going to be some paring back in headcount?

Christopher M. O' Meara

That is something we always look at. I think the thing about this model is really about the variability in the cost space from the folks that were here, the ones that interact with the clients or the brokers, et cetera, that they are paid on a variable cost way on the basis of what they are bringing in.

So we are not prepared to talk about where we are. We have made adjustments in the past when the market conditions call for them, but we are obviously managing this closely and have great operators in it and we will see what happens here. There is a lot going on in this market, so it is an evolving situation in terms of what certain of the players who are in it and players who represent capacity that has now come out of the market. So it is something that we are working through actively now, so I do not want to give you any specifics on it.

Michael Hecht - Banc of America Securities

Okay, that’s fair enough. Just switching over to equities real quick, obviously you guys had great results in equity capital markets, even if you strip out the private equity gains this quarter and the losses last quarter. Any other color, just on the mix of cash equities versus prime brokerage versus derivatives? Any contribution from more prop trading activities, if you can size that at all for us, as well as any changes to equity var this quarter?

Christopher M. O' Meara

The business was strong across the board, so when you look out and say what was the leading contributor, it really is everything around the equities business and it is all over the globe, just up and down the line.

One thing I would like to go back to; when you say strip out the private equity thing, which obviously that is a view, I think we have shown now that the private equity thing is up to a certain level of diversification of investments that we have. It has been generating returns. I think that you can sort of expect to be seeing some returns coming into that over a long period. It could be a little bit choppy but I think on balance, if you look at four quarter rolling average, you can look at some pretty consistent returns there, I think.

You also mentioned about any principal proprietary trading. We do have some of that at work in the organization and that was up as well, along with the prime brokerage and the derivatives businesses, both flow derivatives and structure derivatives. It is really across the board.

Michael Hecht - Banc of America Securities

Last question; within cash equities, would it be safe to say that the growth that you guys have seen in Europe is better than the growth in the U.S.? Then, thinking about the equities capital markets business overall, is it safe to say that the mix of non-U.S. revenues is pretty comparable to your business overall, just under 40%?

Christopher M. O' Meara

No, actually. When you look at the equities business is actually higher than that in terms of the amount of revenues being generated outside the U.S. It is higher than the firm average. So when you look at the cash businesses in Europe, you have seen them, they are up versus both benchmark periods, as are the cash businesses in the Americas. They are both up healthy doses.

Operator

Thank you. Our next question is from James Ellman. You may ask your question and please state your company name.

James Ellman - Seacliff Capital

Seacliff Capital. First question would be just in terms of the capacity of the personnel you have in the mortgage space, can you tell us with the decline in sub-prime if you are pushing any of them towards multi-family business and building out the multi-family conduit business?

Christopher M. O' Meara

We are in a number of businesses that we have in our commercial business. We have two different businesses. We call it residential and commercial and somewhere in there, we are handling some multi-family stuff but not in the -- when you think about sub-prime, I do not believe we are playing in the sub-prime space in multi-family.

James Ellman - Seacliff Capital

Right, no, just some of the personnel though. Are you trying to focus more of your attention with the slowdown to make up for some of the drop-off in volume by pushing towards more business in the multi-family space?

Christopher M. O' Meara

No, I don’t believe so.

James Ellman - Seacliff Capital

All right, but is that area continuing to build out and deepen?

Christopher M. O' Meara

I am going to have to get back to you on that because I am not that familiar with that space.

James Ellman - Seacliff Capital

All right, very good. One other quick question would just be how are you dealing with the counter-party risk on some of the hedging tools that you are putting into place against the ABX index and credit default swaps on the sub-prime space? To what extent are you able to control that, particularly as on the question Mike Mayo asked recently regarding potential hedge fund blowing up?

Christopher M. O' Meara

Good question. I think this is one of these second order risks and third order risks that you talk about, is making sure that the counter-parties you are doing business with are credit-worthy counter-parties and that you are getting the right collateral provisioning in place. So we have that in place. We are doing fine with that but definitely a good question and one that we are very, very focused on.

James Ellman - Seacliff Capital

Certainly some of your counter-parties must have lost a very great deal of money, taking the other side of these hedges.

Christopher M. O' Meara

If you look out and you say that you know -- we know certainly who our counter-parties are. What we don’t know is what they have on the other side, whether they are intermediary or whether they are the principal and positioning that view.

The thing that is important to us is to make sure that we have the right collateral from those counter-parties in situations where we are in mark-to-market gain position that we do collect the appropriate collateral.

James Ellman - Seacliff Capital

Are these counter-parties primarily banks or are they hedge funds, are they insurance companies?

Christopher M. O' Meara

We are set up properly in terms of -- we do not feel like we have credit risk in this situation, so without getting into specifics, these are counter-parties we feel good about.

Operator

Thank you. Our next question is from Corey [Gellermini]. You may ask your question and please state your company name.

Corey Gellermini - John Hancock

John Hancock. Just a few clarifying questions on mortgages. The 3% number that you said over the last six quarters, that is on a net revenue basis? I just want to clarify that.

Christopher M. O' Meara

Yes.

Corey Gellermini - John Hancock

I guess from just simple accounting in terms of how you guys show your stuff on the balance sheet, warehouse loans to folks, is that under the resale book or is that under the mortgages that you list in your inventory?

Christopher M. O' Meara

That is under the reverse repo category.

Corey Gellermini - John Hancock

How much was that, either now or I guess at the end of the year?

Christopher M. O' Meara

I’m sorry, say that again, Corey?

Corey Gellermini - John Hancock

How much was the warehouse lines and more particularly, to sub-prime?

Christopher M. O' Meara

We do not disclose that particularly but it is something that is a very manageable number for us.

Corey Gellermini - John Hancock

What is the typical advance rate, haircut, things like that that you use for those things?

Christopher M. O' Meara

It is different in all situations, depending on the different types of collateral that you take in. I do not want to get into the specifics of that but we are comfortable with the collateral provisioning that we have.

Corey Gellermini - John Hancock

In terms of the mortgage book, obviously you originated less in residential last year. You did around, you went from 85 to 60. Since you did give some disclosure on sub-prime, I guess two questions. One, any idea, can you give us any flavor of how much of that was sub-prime? Secondly, do you mark that book to market daily, weekly, quarterly, whatever or do you show that at cost? If you set up reserves for anything in your sub-prime whole loan mortgage space, where does that flow through? Would that be a markdown like in the principal pipe stuff with all the other mark-to-market, or do reserves show through the income statements somewhere else?

Christopher M. O' Meara

The reserves would show through the principal. When we think about the reserves, just think about the markdown -- just think about our business as being one in which all of it is mark-to-market. So all of the positions are mark-to-market and it flows through principal transactions revenue.

The question about how much, what percentage of the origination, mortgage origination that we are doing is in sub-prime, I think it is about 25%. I’m just looking at the sheet here. So over 75% of it is not sub-prime.

Corey Gellermini - John Hancock

I guess the question would be is before the sub-prime market weakened in the second-half of last year, there could be whole loan sales in the 102 to 104 area. I guess right now, what do you guys see whole loan sales and roughly what do you mark your book at these days?

Christopher M. O' Meara

It is certainly lower so it is factored through in the mark-to-market process. That has been taken into consideration, without giving you specifics.

Operator

We have time for one final question. Jim Auga, you may ask your question and please state your company name.

Jim Auga - Millennium Partners

Millennium Partners. Thanks for taking the question. Just some clarification -- Chris, did you say that you guys are expecting worldwide equity originations to still be up 10% to 15% for the year?

Christopher M. O' Meara

Yes.

Jim Auga - Millennium Partners

How does that compare to what we saw in the first quarter?

Christopher M. O' Meara

The first quarter was lower, so despite the first quarter, which was actually down. Let me just get the sheet. Hang on one second. Can we get back to you on that?

Jim Auga - Millennium Partners

Yes, no problem. I’ll get that.

Christopher M. O' Meara

But the answer is yes, we do expect it to be up 10% to 15% for the year.

Jim Auga - Millennium Partners

I think in your earlier comments near the opening, you had mentioned that global securitization volumes were -- I think you said they were down year over year. I am not sure what you said quarter to quarter. How much of that resulted from the U.S. non-prime, non-conforming mortgage gridlock that we saw in February? Is it safe to assume that it is not going to get any better?

Christopher M. O' Meara

I think in this immediate term, I think it is safe to assume it is not going to change right here immediately but I think it will play itself out at some point in the next couple of quarters. You are originating a lower level. You are securitizing a lower level and you are carrying positions on the balance sheet, marking them to market and as the market gets more comfortable and there is a pricing level that gets established that puts more liquidity back into the market, then this product will be absorbed. It is going to take some time.

I actually have those numbers in front of me now. The equity origination last year, full year was $760 billion total global, and we are expecting that to be up 10%. But the first quarter annualized to 650.

Thank you again everybody for joining us. We look forward to speaking with you next quarter and if there are any questions in the meantime, please call Shaun or Elizabeth. Thank you. Bye-bye.

Operator

Thank you. This concludes today’s conference. Thank you for participating. You may disconnect at this time.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Click to enlarge

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!