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Executives

Peter Anthony Cohen - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Operating Committee

Jeffrey Marc Solomon - Chief Operating Officer, Head of Investment Banking, Director, Chief Executive Officer of Cowen & Company, Member of Executive Committee and Member of Operating Committee

Stephen A. Lasota - Chief Financial Officer, Principal Accounting Ofifcer and Member of Operating Committee

Thomas W. Strauss - Member of The Board of Directors, Member of Executive Committee, Member of Operating Committee, Chief Executive Officer of Ramius Alternative Solutions and President of Ramius Alternative Solutions

Analysts

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Jonathan Shafter

Donald Destino

Cowen Group (COWN) Q4 2011 Earnings Call March 2, 2012 9:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for joining the Cowen Group, Inc. Conference Call to discuss the financial results for the 2011 fourth quarter and full year. By now, you should have received a copy of the company's earnings release, which can be accessed at the Cowen Group, Inc. website at www.cowen.com.

Before we begin, the company has asked me to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Cowen Group, Inc. has no obligation to update the information presented on the call. A complete description of these and other risks and uncertainties and assumptions is included in the company's filings with the SEC, which are available on the company's website and on the SEC's website at www.sec.gov.

Also on today's call, our speakers will reference certain non-GAAP financial measures, which the company believes will provide useful information for investors. Reconciliation of those measures to GAAP is consistent with the company's reconciliation as presented in today's earnings release.

I would now like to turn the call over to Mr. Peter Cohen, Chairman and Chief Executive Officer. Please proceed.

Peter Anthony Cohen

Thank you, operator. Good morning, everyone, and welcome to Cowen Group's Fourth Quarter and Full Year 2011 Earnings Call. With me here today are Jeff Solomon, CEO of Cowen and Company; and Steve Lasota, CFO of Cowen Group. Before we get into the numbers, I want to express my appreciation to the efforts that our employees put forth in 2011. In an extraordinarily, volatile and challenging environment, Ramius continue to expand, at present, the asset management business. In our broker-dealer, we managed to do it with very difficult restructuring.

The fourth quarter results reflect the expenses associated with restructuring efforts and the difficult operating environment. Overall, the broker -- overall, the results were disappointing but we made real progress in positioning the broker-dealer platform to perform in the future. In a minute, we'll speak about Ramius and outline our performance within that business. But first, I want to make sure that existing and new shareholders understand what we're striving to achieve by reshaping Cowen and Company, and what it means to the performance of this organization as a whole. To our advantage, we are well-capitalized compared to our peers at nearly $450 million or approximately $4 per share of invested capital. Our balance sheet included over $345 million in cash and liquid securities at the end of the year, up from approximately $200 million at the end of 2010. We were able to invest when and how we need in order to capitalize opportunities to meet client needs to compete and build value for our shareholders. We have also returned capital to shareholders by purchasing stock. Last year, we bought back a total of 5.4 million shares for approximately $17 million. This includes 3.6 million of shares purchased in the open market, 1.2 million shares acquired under the net settlement program, and additional 500,000 shares acquired in conjunction with LaBranche acquisition.

Cowen and Company has a strong equity research, and research sales franchise and a talented group of investment banking and capital market professionals. However, the issue we are seeing in our broker-dealer and have worked to address it, the market environment and the structure of the business produced decreasing returns to our platform. We are not really interested in the Board of attrition, we are seeking market opportunities in industry segments that are in need of the kinds of products and services that we can effectively offer and do so from a leading position. In order to achieve this, we needed to make substantial changes in the organization in 2010 and '11. We increased our capitalization with LaBranche acquisition, we aligned -- better aligned our banking research and sales around growth sectors where we believe we can win business and key professionals in those areas, we migrate ourselves in trading group into a better profit center by focusing on developing electronic trading as components to our high touch legacy business, highlighted by a recently announced Definitive Agreement to acquire Algorithmic Trading Management. We committed to invest and develop our brand in Asia, and we aggressively took cost out of the business through headcount reductions in non-core sales and trading businesses that faced diminishing revenue and profitability. Later in the call, Jeff will discuss these initiatives in much greater detail.

We've accomplished a lot, but it's always expensive to invest, especially to a downturn. In undertaking these efforts at a relatively short period of time, numerous cash and non-cash losses have been incurred, and you are seeing this reflected in our financial report today. We worked hard throughout the year to reset the Cowen platform to better-position the company for profitability, and we had the need to do the same for -- from an accounting perspective in the fourth quarter.

So in terms of results for the fourth quarter, on an economic income basis, we reported a loss of $33 million versus $6 million gain in the prior-year period. The fourth quarter loss included severance expenses of nearly $9 million associated with the expense savings initiatives that we announced in November. For 2011 full year, we reported $71 million economic loss compared to a loss of $36 million in 2010. Excluding certain non-cash items, our 2011 economic loss was approximately $41 million. However, as I mentioned, we were able to increase liquidity during the year and entered 2011 in a stronger capital position than we entered with.

Now turning to Ramius, our alternative asset management platform. In the fourth quarter, total assets decreased by 8% or approximately $920 million from $10.3 billion. This change, however, was primarily the result of 2 large redemptions in our cash management business, which as I've said over many calls, is not really a profitable business or a marginally profitable business. To be clear, the redemption will not have meaning impact in our fee base as the average fee for our cash management business products are quite low.

Excluding the changes on our cash management assets, AUM increased by $200 million or 2%, primarily driven by growth in the single strategy hedge funds and alternative solutions fund. For the full year 2011, AUM increased by $1.2 billion or 14%. Excluding cash management assets, our AUM increased by $936 million during the year or 13%. Largest contributors to the annual growth was the 2 single strategy hedge funds and our healthcare royalty funds. During the year, hedge fund assets increased by approximately $500 million, and healthcare royalty assets increased by over $400 million. Growth of these areas has been instrumental on our efforts to increase fee efficiency. As a result, we're able to increase our management fee revenue in each of the sequential quarter during 2011. Fourth quarter management fees increased by 27% compared to 2010 fourth quarter, and were up 4% from the third quarter. Our average management fee increased to 71 basis points in the quarter, its highest level in 2 years. Excluding cash management activities, our average management fee was 93 basis points in the fourth quarter as compared to 80 basis points in the prior-year period.

I would like to thank all of our investment professionals. They had a very productive year both in raising assets at our existing funds and marketing new client-driven products. This is Ramius' trading strategy to manage future's fund.

As it relates, you may have seen the news from our healthcare royalty team in early January, announcing approximately $1 billion in new capital commitments for its second fund. This investment team has had success investing in product royalties to restructure financials solutions for the life sciences industry. Since raising their first fund in 2007, the team has executed on 20 investments and generated broad investor interest. In fact, the team has exceeded initial targets for funds by more than 75% from the assets raised.

This platform is a great example of what we aim to accomplish for all new funds. In 2007, Cowen formed a partnership with an experienced set of portfolio managers who had identified in this area of growing investor appeal. Using firm capital have partially seen the fund, the team was able to launch a high-quality innovative investment product 5 years out, the fund continues to attract new investments and it's a stable source of fees for the firm. Importantly, this is a model we continue -- intend to continue to pursue in 2012 and beyond. During the quarter, incentive fees decreased by $150,000 from $6.3 million in the prior period. The decrease in incentive fee income was primarily related to the decline in incentive income from our single strategy hedge funds, which recovered from the 2011 third quarter performance losses. For the full year, incentive fee income increased by 8% to $10.4 million, primarily driven by our real estate funds. On the real estate side, we continue to see a number of lending opportunities, which provided it meet our investment criteria, will be funded with the remaining capital on our fourth mezzanine debt fund, and we are exploring additional avenues to capitalize on the continued dislocation in real estate lending marketplace.

Last, I would like to touch on our investment portfolio. And as of December 31, we had $442 million in invested capital or 87% of our total equity. In the fourth quarter, we generated $18.5 million in investment income. During the year -- in the prior-year period, we generated $36.8 million in investment income, which has included $18.1 million associated with the company's Luxembourg reinsurance program. For the full year, we reported $41 million in investment income despite a very difficult third quarter, in which we incurred investment loss of $17 million. So as you can see, we worked hard in 2011, to make the changes we felt were tough but necessary in order to better position the company to success going forward.

With that, I will now turn the call over to Jeff who will provide an update on our activities at Cowen and Company.

Jeffrey Marc Solomon

Thank you, Peter. As Peter mentioned, 2011 was clearly a year of restructuring at Cowen and Company. We made a number of investments in growth-oriented products such as electronic trading, and we enhanced our footprint in several key vertical industries, as well as making some senior management changes in the organization. When Peter appointed me as CEO, we immediately implemented a plan to intelligently reduce expenses at the broker-dealer by $35 million in 2012, which we discussed in our last call. That number has now been revised upward, as we found more opportunities to better manage our expenses. The part of this plan, we reduced Cowen and Company's headcount by about 15% in the fourth quarter by eliminating several businesses not essential to our drive to profitability and not part of our core business objectives. Our aim with these reductions was to reduce -- was to resize the platform, so that it can breakeven on a cash basis even during difficult market.

To be very clear with you on this, these reductions are not expected to have a meaningful impact on revenues, and we remain positioned well to serve clients profitably as the markets fully turn. This is evidenced by the strength of our mandate in shadow backlogs in banking and capital markets as we enter 2012.

You'll begin to see the impact of these expense initiatives in 2012, as most of the savings realized in the fourth quarter were offset by severance expense. Our 2011 results also include expenses attributable to hires made in certain new businesses that we outlined for you in previous calls.

Following a difficult year, we're now in a stronger competitive position to both gain market share and benefit from industry growth trends. One area to highlight is our recent progress in the healthcare vertical, which I'd like to spend a couple of minutes talking to you about. It was a primary strategic focus for us in 2011, and remains so today. At the end of 2010, we made the decision to enhance our life sciences franchise in banking research and sales where we already had a particularly strong brand. Our goal in banking and capital markets was to focus on smaller life sciences companies as a way to re-energize our new issue capability. First, we targeted bankers with strong existing relationships, and can leverage our deep research capabilities and our capital markets expertise. Second, we recruited individuals who have utilized both capital markets and research capabilities to aggressively compete for lead managed equity financing assignments. And finally, we sought to strengthen the alignment of our banking and equity research products by augmenting our well-respected research coverage in areas that align with the new core banking and Sales and Trading initiatives.

These results have been truly impressive even after such a short period of time. Last year, our Life Sciences group alone completed 11 lead-managed equity underwriting transactions, including 7 publicly offered transactions. In fact, in 2011, Cowen ranked second across all firms and lead-manage life sciences transactions, including our participation on 2 of the largest follow-on to the year for Exelixis and ARIAD. I look forward to spending time with many of these companies, as well as our institutional clients at our Marquis Healthcare Conference next week in Boston, where we will have a record attendance, as well as a one-on-one meeting schedule that is up 25% year-over-year.

I commend our entire healthcare group and banking research and sales on their efforts and already begun to apply this roadmap to other verticals, including our technology group. Over the past 9 months, we've added 4 senior technology bankers, including a new group head, and I believe we're well-positioned for an uptick here in 2012. To highlight a few of the steps for banking group in general, in the fourth quarter we completed 8 transactions across all products, generating $11.1 million in revenue compared to 17 transactions for $15.8 million in the prior-year period. The year-over-year decline was primarily due to the equity financing market, which was particularly strong in the closing months of 2010, but was closed for a good portion of 2011. During 2011, the fourth quarter, we completed 4 equity underrating transactions including 2 book run transactions compared to 11 equity transactions in the prior-year period. We also completed 3 private placement transactions and 1 advisory assignment during the fourth quarter.

For the full year 2011, we completed 48 transactions across all products and generated $51 million in revenues, compared to 49 transactions and $39 million of revenues in 2010. So while our activity levels were relatively flat from a transaction count standpoint, our revenues were up over 30%. This is particularly impressive when considering that the capital markets were shut for almost 4 months in 2011, while being open for the entire year in 2010.

The average fee increase per transaction is largely due to our lead-managed equity business. In 2011, we completed 10 book run assignments, representing 34% of our total underwriting activity, and that compares to 4 book run transactions in 2010 or only 13% of our transactions. As in banking, we made a number of strategic investments in both Sales and Trading as well, and I think that's an important thing for us to understand. A lot of these investments we made in 2011 will start to bear fruit, we expect, in 2012. Similar to what you're seeing across the entire industry, our high-tech cash commission business continues to decline, along with U.S. exchange volume levels which fell another 20% in 2011. So to enhance our capability in our distribution and fundamental research sales, we've taken some steps to position the platform to focus on more growth-oriented products and markets that meet evolving client needs.

In the second quarter of 2012, we expect to close on our announced acquisition of Algorithmic Trading Management, which we call ATM, a provider of global multi-asset class algorithmic execution trading models. Now the ATM team has developed a first-rate execution technology that will greatly enhance our algorithmic trading capability. This strategic decision is strongly aligned with our efforts over the past year to grow our electronic trading platform and expand the business beyond the traditional high-touched cash equities business.

In 2011, we enhanced our trading capabilities by forming a quantitative trading strategies group, we then established a presence in electronic market making of retail order flow. We increased our presence also in listed equity auctions business, a market that has grown nearly five-fold over the past decade and continues to expand without the significant pricing pressure we're seeing in cash equities. Team has also launched Cowen's first event-driven -- sell side event-driven strategies group, a product capability that not only serves the needs of our existing clients, but opens up a new set of clientele who want access to our high-quality research product. While that business has experienced some challenges in the first couple of months of 2012, given the collapse in equity volatility, our commission levels continue to climb as a result of new account openings and aggressive cross-selling to targeted clients.

To oversee all of these developments, we hired Dan Charney as our co-head of Equities to serve alongside with Tom O'Mara. Both Dan and Tom have proven track records of building equity distribution platforms at leading institutions and their leadership will be extremely helpful as we enhance our Sales and Trading franchise to further implement these initiatives.

Finally, we took steps to downsize our platform in certain areas and eliminated non-core Sales and Trading businesses facing significant revenue declines and requiring major infrastructure support. In the fourth quarter, we decided to exit the remaining legacy LaBranche businesses, including ETF market making and certain other businesses. And this initiative alone, will achieve annual run rate expense savings of over $10 million per year, with only a modest decline in revenue. During the fourth quarter, brokerage revenue declined 22% to $21 million compared to $26.8 million in the prior-year period. This compares to a 27% year-over-year decline in total volume of shares on all U.S. exchanges during the fourth quarter. Moreover, we continue to man our -- we continue to maintain our strong market position. In fact, on a volume-weighted basis, no other firm our size does more volume per publishing analysts than we do. We look forward to leveraging our fundamental research capabilities further with our new initiatives in 2012.

For 2011 full year, brokerage revenues declined 11% to $100 million, from $112 million in 2010. It's important to note that fourth quarter and full year revenues do not include a meaningful contribution from our new product offerings in options and electronic market making, which I expect to be more impactful in future periods as we've made that investment already. Despite the challenges and macro headwinds in the current market environment, we believe that we have better-positioned ourselves to serve the clients to whom we matter most. Of course, none of the progress we made would've been possible without the hard work and tireless effort of our entire team at Cowen and Company. The true test of strength of an organization is how it performs in difficult times. And to echo Peter's sentiments, we are extremely thankful to everyone in the Cowen organization as we look forward to continuing our momentum in 2012. We entered the year with a streamlined expense structure and a focused growth-oriented strategy around our core fundamental research capabilities, which are unparalleled. I look forward to sharing you more about our progress in future quarters.

With that, I'll let Steve Lasota update you on the details of our financial performance.

Stephen A. Lasota

Thank you, Jeff. During the fourth quarter of 2011, we reported a GAAP net loss of $79.9 million, up $0.49 per share for continuing operations and $0.21 per share for discontinued operations, compared to net income of $4.1 million or $0.06 per share in the prior-year period. Our fourth quarter GAAP loss included the impact of a $23.6 million loss from discontinued operations related to exiting the businesses operated by the LaBranche subsidiaries. A $7.2 million and $5.2 million impairment of goodwill and intangible assets respectively, related to the broker-dealer segment, a $3.9 million charge related to vacating the remaining portion of leased office space at 1221 Avenue of the Americas, $1.1 million charge related to the termination of service contracts and $10.6 million in severance expense related to our expense reduction plan. We incurred an additional severance expense of $5.1 million related to exiting the LaBranche businesses, which is reflected in our loss from discontinued operations.

To give you a little more detail around some of these items, the loss from discontinued operations included a $12 million operating loss for the 6-month period following our mid-year acquisition of LaBranche, a $7 million writeoff of leasehold improvements in fixed assets associated with legacy LaBranche's office space at 33 Whitehall, which has been subleased, and a $4 million writeoff of intangible assets. Excluding the impact of these discontinued operations, our fourth quarter GAAP net loss, including non-controlling interest, was $56.3 million, or $0.49 per share.

Goodwill and intangible impairment, the $7.2 million impairment of goodwill and $5.2 million impairment of intangibles in our broker-dealer segment included in our GAAP loss was originally recognized in connection with the November 2009 merger of Ramius and Cowen. The challenges encountered in 2011 related to the domestic and global economy contributed to a decline in the company's broker-dealer segment value and based on the results of our analysis, we recorded an impairment charge. Our balance sheet still includes $20 million in goodwill related to a 2004 business combination within the Alternative Investment Management segment.

For the 2011 full year, we reported a GAAP net loss of $108 million or $0.88 per share for the continuing operations, and $0.25 per share for discontinued operations, compared to a loss of $45.4 million or $0.62 per share in 2010. Excluding our discontinued operations, our 2011 GAAP loss was $84.4 million or $0.88 per share. In addition to our GAAP results, management utilizes non-GAAP measures, what we term as economic income, to analyze our core operating segment performance. We believe economic income provides a more accurate view of the operating businesses by excluding the impact of goodwill impairment, gains and losses from discontinued operations and one-time gains and losses such as the bargain purchase gain on the acquisition of LaBranche, expenses associated with onetime equity awards made in connection with the November 2009, Ramius/Cowen transaction and acquisition-related expenses and other reorganization charges. Economic income also excludes the impact of accounting rules that require us to consolidate certain of our funds.

For the 3 months ended December 31, 2011, the company reported an economic loss of $33.2 million or $0.29 per share, compared to economic income of $6.4 million or $0.09 per share in the prior-year period. The year-over-year decrease in economic income was principally driven by a $30.8 million or 31% decline in revenues. This decrease was primarily attributable to an investment gain in 2010's fourth quarter from our Luxembourg reinsurance program, as well as in 2011, a decline in brokerage revenue and incentive income, partially offset by an increase in management fees.

For the 2011 full year, we reported an economic loss of $71.4 million compared to an economic loss of $35.6 million in 2010.

I'll now discuss our economic income revenue line items. Starting with our balance sheet performance, we generated investment income of $18.5 million during the fourth quarter and ended the year with $442 million in invested capital. During the 2010 fourth quarter, we earned $36.8 million in investment income, which included $18 million in revenues associated with our Luxembourg reinsurance program. For the full year, we generated $41.3 million in investment income, down 30% compared to $59.4 million in 2010. The decrease was primarily attributable to our $17 million investment loss in the third quarter, in which we incurred unrealized losses associated with our Global Credit strategy.

On the Alternative Investment Management side of our business, we recorded management fees of $19.2 million during the fourth quarter of 2011, an increase of $4.1 million or 27% as compared to $15.1 million in the prior-year period. The increase was a result of increase in management fees for our healthcare royalty, real estate and Global Credit funds. For the 2011 full year, management fees increased 31% to $67.3 million from $51.4 million in 2010. The year-over-year increase is a result of the same drivers that increased our fees in the fourth quarter and an increase in management fees for our Ramius trading strategies funds including the launch of our trading strategies managed futures funds.

We reported incentive income of $148,000 in the fourth quarter as compared to incentive income of $6.3 million in the prior-year period. The decrease in incentive income was primarily related to declined incentive income from our single strategy hedge fund products, which are recovering from 2011 third quarter performance losses. For the 2011 full year, incentive income increased 8% to $10.4 million from $9.6 million in 2010. The increase in 2011 was primarily the result of reversal of $6.2 million of previously accrued expenses related to subordination agreements entered into by the general partners of 2 real estate funds with those funds lead investor. This increase was partially offset by a decrease in incentive fees from our Alternative Solutions and hedge fund strategies.

At Cowen and Company, investment banking revenues were $11.1 million during the quarter, a decrease of 30% compared to $15.8 million in the prior-year period, we completed 8 transactions in the most recent quarter compared to 17 transactions in 2010 fourth quarter. Investment banking revenues for the 2011 full year increased 31% to $51 million, from $39 million, as a result of our lead-managed underwriting businesses. In 2011, we completed a total of 48 transactions, including 10 lead-managed assignments compared to 49 transactions in 2010, which included 4 lead-managed assignments. Brokerage revenue was $21 million in the fourth quarter of 2011, a decrease of 22% compared to $26.8 million in the fourth quarter of 2010, due to decreases in our company's core cash equity business. For the 2011 full year, brokerage revenue decreased 11% to $99.6 million from $112.2 million in 2010.

Onto expenses. We reported an aggregate compensation revenue ratio of 93% for the quarter, compared to 62% in the fourth quarter of 2010. The increase was primarily attributable to additional stock compensation expense, severance expense and investments and new professionals on our investment banking capital markets and Sales and Trading businesses. 2011 fourth quarter, we incurred severance expense of $8.6 million related to our expense reduction efforts. Excluding severance and the $1.4 million in compensation expense when the company gets reimbursed, our compensation to revenue ratio was 78%. For 2011 full year, we reported an aggregate compensation to revenue ratio of 72% compared to 68% in 2010. Again, excluding our full year severance expense of $11.7 million and reimbursed compensation expense of $4.7 million, our comp-to-rev ratio was 66% as compared to 62% in 2010.

Non-comp expenses. Fixed non-comp expenses in the current quarter increased by 35% to $26.3 million, as compared to $19.5 million in the comparable prior year quarter. This increase was due to a credit to occupancy and equipment in the 2010 fourth quarter related to the reversal of a previously recorded unfavorable lease liability at 1221 Avenue of the Americas of $5.3 million, partially offset by $2.2 million of depreciation and amortization related to the write-off of certain fixed assets at that location, $10.9 million in additional expenses incurred in connection with real estate investments and several operating companies whose operations primarily include the day-to-day management of a number of real estate funds.

For the 2011 full year, fixed non-comp expenses increased 12% to $103.2 million, from $92.5 million in 2010. The increase was primarily due to higher employment agency fee expenses, and increase in expenses related to our data center services as we transition to a new provider, increased usage of market data services and the 2010 fourth quarter reversal of the unfavorable lease liability.

Variable non-comp expenses were $9.9 million in the fourth quarter of 2011, down 19% compared to $12.4 million in the fourth quarter of 2010. The decrease was primarily due to a decline in expenses related to the company's Luxembourg reinsurance program and decreased floor brokerage and trade execution expenses.

For the 2011 full year, variable non-comp expenses increased 21% to $41.5 million, from $34.4 million in 2010. The increase was due to professional fees incurred in connection with the closing of and potential future acquisitions of Luxembourg reinsurance companies, syndication costs related to an alternative investment asset fund, offset by a reduction in our floor brokerage and clearing cost due to lower volumes.

While economic income is a pretax measure, I would like to briefly touch on our tax situation. After the acquisition of LaBranche, Cowen has significant net operating losses in the U.S., to carryforward into the future of $262 million. The associated gross deferred tax asset currently amounts to $105 million. There's 100% valuation allowance against that asset but it adds significant value to the firm. IFRS rules associated with the acquisitions of Cowen and Company in 2009, and LaBranche in the second quarter of 2011, partially limit the amount of NOL that the company will be able to utilize annually, but significant amounts of future earnings will be shielded from taxes by this asset.

Turning to our balance sheet. Our stockholders equity amounted to $508 million at December 31, and our book value per share was $4.46 per share. Tangible book value per share, which is a non-GAAP measure, was $4.23 per share compared to $5.42 per share at the end of 2010. The year-over-year decline in tangible book value per share was due to the issuance of 40 million shares in connection with our acquisition of LaBranche, and our 2011 GAAP net loss, which included the impact of our discontinued operations and reorganization expenses.

Finally, as Peter mentioned, we purchased a total of 5.3 million shares in 2011 for $16.9 million or $3.16 per share. This includes 3.6 million shares acquired as part of our share repurchase program. At December 31, we had $8.5 million remaining under the plan.

I will now turn the call back over to Peter for closing remarks.

Peter Anthony Cohen

Thanks, Jeff. Thanks, Steve. Thank you, all, for your patience listening to this excruciating detail and what I'd like to do now is open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Joel Jeffrey with KBW.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

You guys are in a kind of a unique situation, having a strong presence on both the buy side and the sell side. And over the past few quarters -- in the past few years, actually, we started to see, really, the cash equities volumes continue to decline. I'm just wondering if you guys have any comments on what you're seeing there what you think could possibly sort of turn volumes around?

Peter Anthony Cohen

Well, first, on -- as it relates to us on the sell side, volume has declined, I think the first 2 months for this year is at 82% compared to the same period last year, meaning January, February. And last year was down something in the 20s from 2010. And while that's also been going on, there's been a shift in that volume, much more towards electronic execution away from the high touch. And we definitely sort of experienced that with the supplies brokerage revenue that we experienced last year, of about $12 million. So as it relates to us, just in general, I think that the steps we've taken to have an electronic footprint or feet print, should get us penetration into that electronic place because people want to pay us for our research and we're giving them new ways to pay us. And I think it's a trend that's going to continue so that those firms that don't have some kind of serious electronic footprint are probably going to be at a disadvantage. There are always going to be a split between, I think, the big bullish purveyors, suppliers of that electronic execution capability, and then a handful of middle-market firms like ourselves, because the buy side doesn't want to be basically bound to just doing business measly for the bulge. Anyway -- so, I mean, you had this sort of perfect storm of better things happening that's expecting a lot of people in the industry. I mean, I think frankly, what is going on between the Federal Reserve and the ECB is a very concerted effort to force people into risk assets. And when you look at where they can get yield, it's very -- more growth, it's very, very limited, you can't get it in fixed income market anymore, and you can almost difficultly get it or with difficultly get it in sort of big cap stocks. So I think they're trying to force people to grow stocks. I think at some point, whether it's because of the individual or the institutional community, and there was an article last weekend about pension funds, both public and private having an estimated $3 trillion deficit in their funding liabilities, and I think that they have to move to growth equities as a way of getting the asset growth, they need to meet their future liabilities. I think and the individual too, when he run out of places to get deep in the skinny yields he gets today, he's going to have to reorient himself back towards equities, which he shied away from for a long time. I think when that happens, we'll start to see volume change. When it does happen though, there's going to be -- even a lot of that's going to be also an electronic footprint because big retail firms, they use their automated order desk to feed into electronic platforms and so the business is never going to quite be the way it was in the past. It doesn't mean it can't be very good business for people who are built for it, but I think you have to rethink your whole business model and I think there's a concerted effort to force people into equities that's going on. And even in an inflationary environment, I think that people are going to hide from cash assets and look for things that will outpace the growth of inflation. And then these central banks need to print the way they're printing inflation, it's an inevitability. But it may be 3 years down the road, 4 years, I have no idea. Anyway, that's a very long-winded answer, I apologize for taking so much time, but you opened up the source bottle with me.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

No, I appreciate the color. Just a little bit more specific to you guys then as well, given that we're sort of 2 months through the first quarter, can you just talk about a little bit more about the traction you're getting and some of your new initiatives on the brokerage side, whether it be the options activity or the electronic trading?

Peter Anthony Cohen

I'm going to let Mr. Solomon address that.

Jeffrey Marc Solomon

Some of the initiatives we've put in place last year, we're rolling them out, we want to make sure we're testing them on the electronic side, to make sure that they work very well. We're really in the final stages. Actually, we're beyond beta on many of them. Some of them in particular, where we're doing some electronic market making capturing some of that retail order flow from other firms. There, we're just getting ourselves started, good traction, clients are onboard, that's a 3-step process, you got to get clients onboard, then you got to get them to turn on, then you got to get them to actually throw volume, we've actually been holding back, in some cases. Just make sure that when you onboard clients, you're doing it without any hiccups. And so I'm feeling pretty good about where we are in that. Obviously, as it relates to ATM, we're not closed with them, so we haven't -- I want to meet with a managed expectations appropriately, we're not going to be showing any revenues, I don't think in the first quarter, from the ATM acquisition, because I don't think it'll be closed. The good news is we're out talking to clients, at least on a joint basis, and they do have a number of clients already. And so, we're talking about the different things that we can be adding and different things that we could be doing as a collective organization, and we're being met with some very positive feedback on that front. So once that transaction closes -- the integration is going quite well and we're pretty excited about it. On the institutional option side which was our other big initiative last year, volumes from a commission standpoint are up. And as you know, Joel, the volatility has come off some 40% since the beginning of December, and in that business, we run a pretty tight risk around that business, as far as customer facilitation is concerned, but it always liens a little bit long volatility, just by nature of the business. And so for the first couple of months of the year, that's been a very difficult thing for us to manage. We are positive revenues for the first few months of the year, and very positive in terms of our year-over-year commission flow. I believe we'll get a little bit of that back just in terms of facilitation book, just because the volatilities have collapsed significantly. I'm actually okay with that, because if you think about our whole business, our whole business is really short volatility in many respects, so if we're leaning a little long volatility in that book, I'm okay with that.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

All right, great. And just lastly, can you remind us sort of where you guys are in terms of high watermarks on the Ramius funds and any, and what your thoughts are thinking about the impact that could have on incentive fees in 2012 versus 2011?

Peter Anthony Cohen

Sure, Tom Strauss, who is chairman of asset management business is sitting here so I'll let him answer that.

Thomas W. Strauss

I think without exception, all of our important funds have earned back their high watermark and we're actually starting to earn modest incentive fees so far this year, so that would apply to our credit small value activist funds, small cap activist funds, some of our fund-to-fund assignments. Yes, pretty much across the board.

Operator

[Operator Instructions] And our next question will come from the line of Jonathan Shafter with Boston Provident.

Jonathan Shafter

So pro forma for the restructuring expense cuts that were made in the fourth quarter, what is the currently estimated run rate expense saves that we should expect to see over 2012?

Peter Anthony Cohen

Well, last year's numbers were distorted or got inflated because of the effect of LaBranche acquisition. So if you compare them to 2010, they went up. And I think, Steve, what, would it be fair to say it was about $100 million?

Stephen A. Lasota

Well, if we start with economic income, excluding discontinued operations, our non-comps are roughly $145 million, and we feel we've cut in excess of $25 million out of those, out of that from a run rate basis.

Peter Anthony Cohen

That's non-comps.

Stephen A. Lasota

Non-comps.

Peter Anthony Cohen

And then we believe we've cut a substantial amount of comp. One of the things that hurt us was...

Jonathan Shafter

But is there any more precision you can give to a substantial amount?

Jeffrey Marc Solomon

So what we've said on the call last time was $35 million at the broker-dealer, it's north of that now. But a lot of that depends on where revenues are going to be, higher revenues are obviously -- compensation as a percentage, is variable to some degree. What we did was we announced last quarter, so we gave you some breakdown around a non-comp expense, which is really what we're tracking very specifically, obviously, the headcount reductions helped us out from a compensation standpoint. So we should be able to do better than we had historically. But we've used and said publicly, $35 million. I can tell you that it's better than that. But a lot of that just depends on if we have higher revenues, it won't be $35 million and I'm okay with that.

Jonathan Shafter

Right. That's obviously. And I believe that there were some words on a prior call, correct me if I'm wrong, that once you were finished with examining the call structure, the broker-dealer, you would be sort of looking across the rest of the organization. Am I recalling that correctly? And is that still the plan?

Peter Anthony Cohen

Well, yes. I mean, we did it, it was being done simultaneously. And by the way, it's not done. This is an ongoing exercise. We are pushing back on vendors. We continue to find ways to cut expenses. And as you get rid of expenses, it gets easier to see what's left. And it's drill then on those. So we're going to continue to push down on expenses very hard.

Jonathan Shafter

I believe you have guaranteed compensation agreements that are rolling off in 2012. Is that -- the impact of that included in the $35 million or will that be potentially additional cost savings above the $35 million?

Peter Anthony Cohen

Let me put it this way. As Steve said, non-comp cost reductions $25 million. Jeff said total cost reductions $35 million, but we actually believe we've achieved more than that. So you can intuit that a lot of that increase from $25 million to say a number north of $40 million is the result of the effect of comp guarantees coming off and changing. Firm-wide, our guaranteed compensation will be down well more than 50% from where it was last year. I would say probably more than 60% down from where it was last year. So -- and that hurt us a lot because if you look at those people on sort of as is basis, we would not have paid them nearly what they're getting paid under the guarantees. And now, people are going to have to produce revenue firm-wide. We're in respective areas to get paid. It's a whole brave new world out there and it's industry-wide. And we got caught in that perfect storm of trying to sort of rebuild the Cowen franchise while the business was, had gone into hibernation. We feel okay about where we are going into the new year. And now, it's about having all those new people drive revenue and they got paid a revenue that they now have to produce. So it's not like they'd get paid again.

Jonathan Shafter

Just to be clear, I mean, in terms of the bottom line, you said in your comments that the intent was to restructure expenses so that at the brokerage, the investment bank or asset management, I believe, is already profitable. In a poor environment, those units will at least be breakeven, so that if they're breaking even any money that you're making on your $450 million of invested capital will flow directly to the bottom line. Could you give some comments when you say breakeven in a poor environment, the type of environment that we've been seeing thus far in 2012, is that the type of poor environment that we would expect to be at least at breakeven in all the other units? Outside of the invested capital providing a shareholder return?

Peter Anthony Cohen

Yes, well, first of all, let me try and parse my way through that a little bit. When we talk about breakeven, I mean, our objective would be to economic income breakeven, including everything. What's -- the greatest and most important sort of objective for us is to make sure that because of the compensation expense that is non-cash that we and everyone else has in the industry today, that we are cash flow positive. So we could be in a situation where we are economic income negative slightly but very cash flow positive because of the expense of writing off stock-based compensation. And that's our objective, and I would say the environment we're in today, more than achieved that objective for us based on what we've accomplished. But I don't think that, that makes us very happy, I think that as we look at the repopulation that's gone on here and the new products, the ATM acquisition, some of the electronic footprint stuff that is just starting to bear revenue, that if the environment were the same as last year, we've got to do substantially more revenue in the broker-dealer than we did. And if we don't, we're going to be very disappointed and feel like we have failed.

Jonathan Shafter

I mean, obviously, the objective is to make profits across all the lines. I guess my point was if $450 million invested capital and you earned 10% on that, which is a very low number by your historical metrics, we would expect $45 million or so to drop to the bottom line without losing money to the other operations, and thus, if the world gets better, there's additional upside from there? I just want to make sure I'm thinking about this the right way.

Peter Anthony Cohen

That's the way we're thinking about it.

Peter Anthony Cohen

That's how we think about it.

Jeffrey Marc Solomon

I think it's a multiyear rebuild for us, especially at Cowen and Company. But we're much better positioned this year if market environment where to stay the same as it were in 2011, think about it, our revenues were flat year-over-year. Some of our expenses were up but that's part -- I mean, almost exclusively as a result of severance and investing in new individuals. So we don't expect to have same kind of severance, we're not going to have the same kind of rehire trend that we had in 2011. So we need to do better revenue-wise. Peter is right. And I think what you're hearing from us is our buy side bias, which is that we want to make sure that we're not overpromising. I think we're in a much better shape to take advantage even if the market environment stayed the same as it was 2011, but our goal is to make sure when it's better, that we have enough ways to capture revenue on that growth trajectory, that's what we need to do.

Peter Anthony Cohen

One important thing, we don't really isolate it in our discussion, but happy to answer this. The amount of cash lost last year was about $40 million. Cash that went out the door. Net-net. But overall, cash liquidity in the firm increased by around $140 million, in part, obviously, because of the LaBranche acquisition. If we're right about what we've accomplished then and we continue to work at, we should be cash flow positive in the same environment, substantially cash flow positive going forward. And if the environment improves, I think there's huge amount of operating leverage we've got now in our core structure.

Operator

And our next question will come from the line of Don Destino with Harvest Capital.

Donald Destino

It's Jonathan, here is my biggest question, let me just make sure I understood the answer there, which is the cost restructuring that you did at the broker-dealer again, my understanding, it sounds like Jonathan's as well, was that it was to breakeven at the broker-dealer, given the kind of second half of 2011 environment. And so have we accomplished that? Is the simple question. Don't need a long answer, you don't need to give the long answer again, but I'm just curious what the short answer to that is?

Peter Anthony Cohen

I wouldn't say that because if you look at the second half of 2011, we had an extraordinarily difficult period, the markets were shut down for a long period of time and volumes declined across all the exchanges. I mean, in that environment, would we be cash flow positive? Yes, we believe so. We have some P&L negativity, economic income, probably. So I don't think that it would -- I wouldn't look at the second half of 2011 in a safe way, if that's a steady-state environment, we're going to be P&L breakeven and cash flow positive, probably not, but we'll be cash flow positive through a great extent and probably have some negative P&L, but we would hope substantially offset by what's going on in the Asset Management business and the firm's capital.

Donald Destino

Got it. All right, that's helpful. And then the second question is about...

Peter Anthony Cohen

By the way, do you think that's the scenario? Because if it is, we got to go -- we'll just overhead some more of it.

Donald Destino

Yes, I know. If I thought that was there, I would own many shares of Cowen. The second question is on the asset management business. The 2% AUM net of outflows from the cash management business...

Peter Anthony Cohen

In the fourth quarter?

Donald Destino

In the fourth quarter. What is that? Could you break that down in terms of inflows, outflows and bonus?

Stephen A. Lasota

You want to just kind of slowly repeat the question?

Peter Anthony Cohen

Well the net of the cash management outflows, fourth quarter inflows, I mean I could tell you, the healthcare royalties group has seriously closing in the fourth quarter, we took in money in our starboard activist group.

Stephen A. Lasota

There was $900 million that flowed out from the cash management business. When you net that out to it, pretty good positive inflows from rest of the business.

Peter Anthony Cohen

Yes, and he's trying to figure out where.

Donald Destino

Okay. So I'm just -- there's 2% -- I mean, there was any change in your interest income you're not inequities, but I think high yield had a pretty good fourth quarter as well. I'm just trying to isolate appreciation versus net flows?

Jeffrey Marc Solomon

By the way, our flows are actually a little bit better than if you look on the surface because we continue to return money from our old multi-strategy funds. And those assets which I think started the year about $650 million, something around there. We probably returned about $200-and-something-million of multi-strategy asset, but that's a net in our numbers, so our real inflows where probably a few hundred million dollars kind of net inflows better than might look on the surface.

Stephen A. Lasota

If you want to call, we'll give you kind of a broader breakdown.

Operator

Ladies and gentlemen, this concludes the question-and-answer portion of our call. I would now like to turn the call back over to management for closing remarks.

Peter Anthony Cohen

Operator, thank you and for everyone who stayed on the call and those who asked questions, I appreciate your indulgence. Well, 2011 was an extraordinarily difficult year, and I would say, for me, personally, I can't remember a year more difficult, especially the second half of the year when the world just stopped. But we took a lot of actions to get ourselves positioned for a steady-state environment and to do very well in an improved environment. And we have a strengthened capital position, we're stronger now than we were a year ago. And we've got a lot of interesting things. So we will work at demonstrating that everything we have said to you today and in prior calls comes true. I conclude my remarks there. Thank you, operator.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.

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