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Executives

Michael J. Cavanagh - Chief Financial Officer

James Dimon - Chairman of the Board, President, Chief Executive Officer

Analysts

Glenn Schorr - UBS

Mike Mayo - Deutsche Bank

Guy Moszkowski - Merrill Lynch

John McDonald - Banc of America Securities

Betsy Graseck - Morgan Stanley

Meredith Whitney - Oppenheimer

William Tanona - Goldman Sachs

Nancy Bush - NAB Research

JPMorgan Chase & Co. (JPM) Q4 2007 Earnings Call January 16, 2008 9:00 AM ET

Operator

Good morning, ladies and gentlemen and welcome to the JPMorgan Chase fourth quarter 2007 earnings call. This call is being recorded. Today’s presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements speak only as of the date hereof and reflect management’s current beliefs. These statements are by their nature subject to significant risk and uncertainties and the firm’s actual results could differ materially from those described in the forward-looking statements. Please refer to JPMorgan Chase’s filings with the Securities and Exchange Commission, including its most recent Form 10-K and Form 10-Q for the description of the risks and factors that could cause the firm’s results to differ materially from those described in the forward-looking statements.

At the conclusion of the presentation, you’ll have the opportunity to ask a question. (Operator Instructions) At this time, I would like to turn the call over to JPMorgan Chase’s Chairman and Chief Executive Officer, Jamie Dimon and Chief Financial Officer, Mike Cavanagh. Mr. Cavanagh, please go ahead, sir.

Michael J. Cavanagh

Great. Thank you. Good morning, everybody. Welcome to the call. Thanks for joining us. We’re going to do the usual today. I will run through the quarterly results by business. I am going to hand it over, since it’s the first call of the year, to Jamie at the end to give a little bit of comments on what we see looking ahead and then we’ll spend time answering whatever questions you have.

So again, please refer to the presentation that’s on the website that I’ll start going through now, so if we go right to page two, we’ll start with just some overall comments on 2007. So I’d say for my part, anyway, it’d be hard not to first not to be pleased and satisfied with the 2007 full year results in light of the market and operating conditions we faced, particularly in the second half of the year.

So to just hit the points here, we had record earnings for the year of $15.4 billion and record revenues of $75 billion. EPS again a record, also a record at $4.38, up 15% from 2006 on a continuing operations basis. And that really just means, if you’ll recall, that in the fourth quarter of 2006 we had a $600 million or so gain related to the sale of our corporate trust business, the Bank of New York, that was counted in discontinued ops, so no difference between continuing ops and reported ops for 2007.

For 2007, we had a return on tangible common equity for the year of 23%. As I’ve talked about recently, when you look at the wholesale side of the house, the investment bank, asset management, private equity, and treasury and security services, return on capital in those businesses for the year together was 30%.

And then talking about credit reserves, so through the P&L we added $2.3 billion to bring credit reserves in total to $10.1 billion. And I’ll just say that we always talk about managing through a cycle and so we’ve remained focus on credit cost as a predictable part of the cost of business for us and again, we’ve spent a lot of time focused on improving operating margins over the past several years, so it’s satisfying to be able to allow us to significantly increase the reserves as we did this year while still producing record earnings.

And so you see what we think are strong reserve ratios across our business here at a pretty aggregate level. You’ll see more as we go through the businesses. $4 billion on the wholesale side for 1.67% of loans and on the consumer side, $6.1 billion, or just over 2% of loans.

And so lastly, we are very pleased that we’ve done all of that while maintaining strong capital ratios, so you see we ended the year with a tier one ratio of 8.4% and that is the same as last quarter and actually the same as we ended June 30th of last year, so a lot of focus across the firm on preserving capital and efficiently using the balance sheet, and I’ll spend a little bit more time later on that.

And all the while we did all of that while continuing to invest in and grow across our businesses to build for the future.

For the fourth quarter, I am going to hit the businesses in detail so I’ll just say here mixed performance. Earnings, though, $3 billion on revenues of $18.3 billion and EPS of $0.86 for the quarter, down 21% from fourth quarter 2006 on a continuing ops basis and a 17% return on change of common equity.

So now going to page three, I won’t spend time on this. You can just glance at it but this is a quick look at the numbers that I just described for the full year of 2007 for the firm. And then again on page four, it’s a quick look at the same for the fourth quarter of 2007.

So moving right now to our business results, let’s start with the, as we usually do, with the investment bank on the fifth slide. So here you see we had net income of $124 million on $3.2 billion of revenues for the quarter, an ROE of 2%. For the year, we had $3.1 billion of net income and a 15% return on equity.

Moving down the P&L for the fourth quarter, you see we had $1.7 billion of investment banking fees, which were up 5% from a year ago and driven by record advisory and equity underwriting, offset by lower on the bond and loan syndication side. For the year, and you’ll see on the next page some details around this, we had a record year in investment banking fees of $6.6 billion.

Moving on to the next item, the circled number, $615 million worth of fixed income markets revenues. Let me just tick through some items here. So on the leverage finance funded and un-funded commitments, which we talked about last quarter, we had a modest gain net of hedges. I’ll show you a page to go through the details there in a second. On the sub-prime side, which is sub-prime positions inclusive of sub-prime CDOs, we had mark-downs and hedges of $1.3 billion and I’ll have a page to go through the details there in a minute.

We also had a little bit of improvement, a gain of about $154 million related to the widening of credit spreads impacting the value of certain structured liabilities. And then that gets you back to about $1.7 billion worth of fixed income markets. Revenues for us not as strong as we would like to see and what’s going on in the remainder there is additional pressure in the remaining securitized products business away from sub-prime and losses in the credit trading side, offset in part by very strong revenues in rates and currencies.

In the equity markets business, $578 million of revenue, down 40% from a year and up a touch from last quarter. Some weaker trading results was the story there, partially offset by strong client flows in the quarter and again a little bit of revenue related to the widening of credit spreads on structured notes related to that business.

Moving to credit costs, you’ll see we added credit costs of $200 million which was largely or almost totally additions to reserves in the business, which is really driven by growth in the loan portfolio. Overall we ended the year with a 1.93 ratio of reserves to loans for the investment bank.

And then lastly on the expense side, expenses down a bit year over year but impacted in particular you see by a true-up of comp expense, where we had a 49% comp-to-revenue ratio in the fourth quarter, bringing the full year to 44% on that line.

Flipping to the next slide, slide six here, Jamie can comment further on this a little later in his remarks but I’ve got to say we’re very proud of the investment bank’s results here that you see on this page. Steve, Bill and team have done a great job building the business over the last several years. So you see on the right side the lead table results and work down the page, you see that we either have leading or very strong positions all the way down the page and you see a circle in the places where we’ve grown share year over year.

So another great year after several before it in the investment bank on this score, and so it’s not surprising to look at the left side of the page and see the external recognitions that we’ve got, particularly the recent Institutional Investor coverage where clients of ours named us the best overall investment bank.

So flipping to slide seven and shifting gears back to what went on in the P&L in the investment bank for the quarter, I’ll start with the leverage lending side of things. Again, a modest gain in the quarter in the fixed income markets revenue line. Let me just take you through the details of the remaining exposures and talk about where we are marked. So as you’ll recall, last quarter we predicted or forecasted that if nothing got funded, if the market stayed close we would end the year with around $40 billion, $41 billion of funded and un-funded commitments. That was our expectation.

We did in fact close or distribute $16.5 billion inclusive of some deals that went away, so in the quarter we actually sold inside the marks or better than the marks we had put up last quarter, which if you’ll recall was a $1.3 billion mark, taking the mark down to 4.9%. So on what we sold in the quarter, we did better than that, creating a little bit of P&L pick-up. But on what remained, we plowed back much of that money into lower marks on the $26.4 billion that would remain in exposure, funded and un-funded. And so that gives us mark-downs in excess of 6%, close to 6.5% in the leveraged loans space.

Now, moving on to the next slide, I’ll take you through a little bit on sub-prime and sub-prime related. Remember the last quarter, we -- it’s just a little different than last quarter where we captured all CDOs in one bucket. Here we are capturing all sub-prime exposure inclusive of sub-prime CDO on this page.

So here you see we had markdowns net of hedges of $1.3 billion. Obviously here we’ve seen a significant deterioration in this asset class during the quarter. The $1.3 billion for us includes a write-down related to $1.4 billion par value of sub-prime CDO assets that we removed from two of our multi-seller conduits on to our balance sheet during the quarter. These suffered significant markdowns in the quarter before we were able to put on any hedges there. And these were the only sub-prime CDO assets in any of our conduits and they are not going to be allowed in the conduits in the future.

Importantly, with this action we are very comfortable with the remaining assets in our conduits and the ongoing conduit business plan but obviously that is a major part, or is the major story in terms of the write-down we took in sub-prime CDO this quarter.

You then see in the table, we’ve tabulated here for you in the various buckets of risk categories or asset categories $2.7 billion of remaining exposure in the asset class. And just note that against that we have about $2 billion worth of hedges and short positions, so obviously these numbers we think are very manageable in the context of JPMorgan Chase. Given the hedge position we have, we could make money or we could lose money here as we look forward, but the size is obviously something that we wanted to just give you a sense of -- manageable in our minds.

And lastly on the investment bank, moving to slide nine, we just want to flag for you the size of our exposures in some of the other categories which I know you have an interest. So rather than repeat myself as I work through the page, let me just make two points here. First, everything you see here is carried at fair value, so our fourth quarter P&L that we already saw reflects whatever write-downs we think are appropriate, given the spread widening we’ve seen in some of these asset categories during the quarter.

And the second point is that we actively risk manage all of these positions, meaning that we may have first loss protection in some places, hedges, short positions in others, which again like I just said on sub-prime, you shouldn’t take that to mean we have neutralized all risk. Just looking to give you some sense of size and dimension in these categories, which again we think are reasonable given the size of our investment banking company.

So starting at the top, CDO warehouse and unsold positions, so again this is largely our corporate loan and corporate bond CDO business and the warehouse related to that, so $5.5 billion of positions there, easily marked by easy visibility into marks on this stuff, negligible sub-prime included in there.

Of the $5.5 billion above, again talking to risk management, we have a significant first loss protection against about half of it. Moving down to CMBS, we’ve got $15.5 billion of total exposure, 14.5 of that funded. The majority of this is stuff that is 64% triple A rated and again, credit has been risk managed there, that I don’t try to describe for you but it exists.

Alt-A in the investment bank, we’ve got $6.4 billion of total exposure, $4 billion in securities, $2.4 billion in loans, and you see that mostly highly related or first lien positions in the case of the loans.

Just to make a comment away from the investment bank in this category while I’m on it, between the investment portfolio that we hold at corporate and our warehouses that we have in our retail mortgage business, there’s $2.5 billion away from the investment bank number here related to Alt-A which we think is noteworthy and very manageable -- noteworthy in that it’s small relative to the size of the portfolio we hold at corporate and mortgage loans.

Fair value accounting, last point here is that obviously the addition of some lower leveraged loans on to our balance sheet during the quarter and the movement of the Alt-A positions from observable to non slightly increased the amount of investment banking related level three assets in the firm overall, will likely move from 4% of total assets to 5% in the quarter.

Now moving on, finished with the investment bank, let’s move on to retail on slide 10. So retail financial services, as usual, let me just talk you through some of the drivers of what goes on, what’s driving the P&L that we’ll see on the next page. So here you see average deposits for the year over year up 4% to $209 billion; checking accounts up 8% to 11 million accounts, and then related to that, just the improvement in sales productivity really through those branches with credit card sales up in the branches by 34%, mortgage originations up 4%.

Going to the home equity business, origination is down 24% but average loans held up 12% and I’m going to give you a page in a second that goes to the details on home equity.

Mortgage loan originations as we talked about, great opportunity to use our balance sheet and capital strength to grow a business that’s going to be important to us over the long term, so you see we had a 34% increase in mortgage loan originations despite substantial cut-backs in terms of our underwriting standards, and our market share in the space increasing to around 11% versus 6% a year ago. So we feel very good about that and the mortgage loan service up 17%.

Going on slide 11 to the retail financial services P&L, you see here we had profits of $752 million for the quarter, up a bit from a year ago. Moving through the revenue side, $2.7 billion worth of net interest income, up 5% from a year ago, reflecting higher balances and a little bit wider spreads and higher deposit balances as well. The $2.1 billion of non-interest revenue up substantially from a year ago. I’ll take that in two buckets. You can see that lending and deposit related fees, asset management fees, and all other income, all up well into the double digits and that goes back to the growth in the branch system and the sales productivity of the branches that we’ve been talking about and investing in for a while now.

The other big piece of non-interest revenue is the mortgage fee line. You see $888 million of revenue in the fourth quarter of ’07, which include just about a $500 million write-up to the value of the MSR asset, which is really driven by the slowing of expected pre-payments, given less REFA activity, given lower home prices, so -- and a predictable dynamic on that score, just given what we are seeing in the mortgage market. We also had higher mortgage originations, which I talked about on the prior page, driving higher production revenue on the mortgage side.

Credit costs here, I’ll spend a little time again on home equity and sub-prime in a second, but total credit costs of $1.1 billion includes some reserve additions in home equity and sub-prime, as well as higher charge-offs pretty much across the board -- home equity, auto finance, and sub-prime mortgage, where again you see credit costs normalizing in all cases. And expense growth really just related to the investment in the business that we’ve been talking about for many quarters.

Moving to slide 12, just goes back to the same slide I’ve taken you through before on the home equity business. So you see that in the upper left, the 30-day delinquency trend continues to march higher for the reasons we’ve talked about before. In the upper right, you see the portfolio just shy of $95 billion and charge-offs stepping up as we expected from 150 to 248 in the quarter and a charge-off rate of 105.

So in the quarter, as we did for two quarters prior to this, given the continued increase in delinquencies, we’ve added $395 million to the reserves in the business to bring us to a total build during the course of the year of just over $1 billion in the home equity portfolio, and that brings us to cover this for the increase in charge-off rate in the portfolio to somewhere in the range of 155 to 160, and we do expect to move up in the first quarter, forecasting something in the 140 or so range of charge-off rates in the first quarter.

I won’t go into the details below there but again, it’s the same reasons in terms of the layering of risk and home price appreciation declines that we’ve seen in various parts of the country that is driving this and along with that though, as we’ve talked about before, significant tightening of underwriting standards for production that we are doing today.

Going to page 13, sub-prime mortgage, similar trends. Again, 30-day delinquencies continue to march higher. The portfolio now at $15.5 billion, charge-offs of 71 for the quarter and a charge-off rate of 208. Here we added $125 million to the loan loss reserve for sub-prime.

Moving to slide 14, now I’ll finish retail and more on to card. So card services, you see we had profits of $609 million, down 15% year over year with credit -- increasing credit costs really being the story. For the year, we had $2.9 billion in profits and a 21% ROE.

Average outstandings, you see the circled number, $151.7 billion, up 3% and up 2% versus last quarter. Charge volume of 95.5, overall growth of 2% year over year, but an 8% growth in volume that relates to actual sales, and as we talked about before with strategies that we implemented during the mid part of 2007 to cut back on promo offers to gamers, that’s reduced our balance transfers. That also has had an effect on end-of-period outstanding, so you see the growth from 152 to 157, but for that change in targeting, so to speak, we would have been several billion dollars higher in end-of-period outstanding. So better underlying growth we see than what appears in the aggregate number.

All that leads to the 6% growth in revenues but going to credit costs, the real story here, you see the 389 net charge-off rate in the quarter, up from 364 last quarter and 345 a year ago, and 30-day delinquency rates following a similar trend. So overall credit costs of $1.8 billion, again up 507 or 40%, inclusive of a $300 million addition to the allowance for loan losses in this business, as well as higher net charge-offs.

Jamie will comment a little bit later on the outlook but as we’ve said before, we do see visibility into the first half of the year where we see charge-offs going to the 4.5% from the 389 plus or minus a little bit, and that’s driven by the worsening trends in credit that we, or in the normalizing trends really that we saw in mid to late 2007, which includes higher delinquencies and losses in parts of the country that are suffering from the greatest pressure in home prices, same as we talked about last quarter.

Moving on to page 15 and the commercial bank, $288 million or profits up 13% from a year ago, $1.1 billion on profits on the year. Average loans here of $65.5 billion for the quarter as of the end of the year, up 14% and liability balance or deposits up 22%, so nice growth in the business driving the record revenue we had in the quarter of $1.1 billion, really coming across the board but particularly treasury services revenue, which is the cash management side, and the lending side and a sequentially lower investment banking revenues.

Credit costs here really just follow a little bit of addition to the reserves. Very low charge-offs -- you see the charge-offs continue to be 21 basis points, which is running below the 50 to 75 we talk about as a normalized number for the business, and with the reserves against additional reserves against the growth we’ve seen how we maintain a very strong reserve-to-loans ratio of 266 basis points in the business. And on the expense side, you see the real improvement we’ve had in the overhead ratio to 46% for the quarter.

Moving to slide 16, treasury and security services, here again, third quarter in a row, record profits of $422 million, up dramatically from the year-ago of 65% and a pretax margin of 35% in the business. Similar story as the commercial bank growth in activities with existing clients and the new business volume helping drive liability balances and assets under custody as indicators of the growth, up 30% and 15% respectively. So overall, you get 26% growth in revenues in the business versus a year ago.

Market conditions obviously did help a little bit in the quarter with spread earned on [switching] deposits being helped a bit by market conditions and a little bit better revenues in securities blending as well.

Asset management on slide 17, again a record profit in the business of $527 million, up 29% from a year ago. Here again you see driven by the continued growth in assets under management, which were up to $1.2 trillion, or 18% from a year ago. And I would just point you to the supplement that shows the positive in-flows we’ve been seeing in the business, up $33 billion for the quarter and $115 billion for the full past 12 months.

Record revenues of $2.4 billion in the quarter, up 23%, really coming across the board in the business and inclusive of strong performance fees -- seasonally high in the fourth quarter and that’s about half of the revenue growth we saw versus last quarter came in performance fees, increase in performance fees.

Lastly on the businesses or the P&L, let’s go to corporate on slide 18. Here another strong quarter in private equity with $712 million of private equity gains on a pretax basis, driving private equity profits to $356 million, and then treasury and corporate other, negative $93 million, inclusive of some higher litigation expense related to some of the credit card litigations, but that’s on a net number of a few items there.

Last page for me, let me tell you a little bit about the capital and reserve side. So you see on page 19, $89 billion worth of tier one capital up from $81 billion a year ago. That’s inclusive of $8 billion of share buy-backs for the year, though as you know we substantially shut down the buy-back program, only buying back less than $200 million in the fourth quarter to hold on to our capital. That allowed us to see -- you see the risk weighted asset growth, year over year $935 billion to $1.05 trillion, and about $30 billion or $20 billion of growth from the third quarter to the fourth quarter.

So we’re there for our clients, growing our balance sheet, growing our business, yet very pleased that we maintained the capital ratios, which we think are very important, obviously, in this kind of environment.

Liquidity and funding position, very strong for the company and as we’ve talked about business by business, it’s all in the context of what we think are very strong allowance to loans ratios across all of our businesses, and you just see a table at the bottom giving you a little bit of the trend of what’s gone on.

So with that, let me hand it over to Jamie for any other comments on the fourth quarter and then ’08 outlook.

James Dimon

Mike, thank you very much. If you go to page 22, you can follow along with some of my comments. I think this is a difficult year for analysts because you all are going to have to be making a lot of your own assumptions about what you think the environment is going to bring, so I am going to separate my comments a little bit into what we know and what we actually see, and then the things we obviously have to think about about the future.

In investment bank, it’s an uncertain environment. It changes by the week and by the month and obviously we pay a lot of attention to it. Mike took you through some of the large positions which are illiquid, largely hedged though the syndicated leveraged finance positions are idiosyncratic, so they are not largely hedged. And those are large illiquid positions.

I would point out while the hedging is there and we actively try to handle all of that, you can lose money on the asset side and the hedge side all at the same time because they are not perfect hedges.

I think one of the key points Mike said that’s notable is that some of these positions just aren’t that big a risk, particularly anymore the sub-prime or the sub-prime CDO.

Equally important, we don't normally put a marketing slide in our investor presentation but the slides that Mike showed of our positions in kind of around the world in underwriting, debt equity, fixed income, you name it, it is the most important thing we do in the investment bank is build all the time to serve corporations, institutions, and investors around the world.

We don’t normally rely on anecdotal evidence. The II survey, we’ve just surveyed 350 CEOs and CFOs around the world, said we were the number one investment bank based on reputation, consistency, innovation, et cetera. And you see that in the numbers, in the market share.

Another survey which I don’t think is on that page which was about six months ago is Greenwich did a survey on fixed income sales and service and research and again, we were number one, two, three in most of the categories.

We have a good management team. They are disciplined. They pay a lot of attention. I think we told you a while ago that we were going to build a mortgage business and we weren’t going to try to pick the cycle. We didn’t. Obviously maybe we could have paid more attention but I would tell you we are going to build one of the best mortgage businesses on the street and so we are going to continue to build this business, we are really proud of the progress across the board. We think in the environment where there’s so much upheaval and we have a lot of stability, we can just keep on marching step by step ahead and make it a great company.

One other comment on the syndicated leverage finance, there’s a small chance we’re looking at moving up to $5 billion from held-for-sale to held-to-maturity. The reason I am pointing it out is because we are doing it as a long-term investment. At some of these prices, we think that some things are very, very good and we will rue the day that we sold them, so we are still thinking about it and for no other reason than making a good long-term investment.

And the investment bank, I just want to comment again on what we call normal cyclicality, and I think it is true for all of our businesses -- you have to manage all of these businesses knowing there is going to be a cycle and I think it is very hard to always be surprised when a cycle starts. We shouldn’t be surprised. We know it’s there and we try to build them that way and we understand and we want the management teams to think about that way.

In the investment bank, and we still think these numbers are good, we would hope to earn 20% ROE on average through the cycle, which means 30% at really good times, hopefully 10%, no worse than 10% in a bad year, and no worse than 0% in a quarter.

And where you did see it in the first half of the year, we were at 30% and the second half of the year, I think we averaged around 4, and obviously maybe we would have liked to have done a little bit better than that, but we still think those are kind of the guidelines you should look at. It is a cyclical business. It always has been. It always will be. There should be no surprise about that and we still would expect some of that.

I think you will have to make your own forecast about the profitability over the next few quarters of investment banking -- the volumes, the liquidity, et cetera.

Moving on to retail financial services, Mike went through the home equity reserves. I do just want to point out -- I’m not going to go through them again -- that for all consumer credit, and I think we’ve pointed it out consistently, that we see an auto, home equity, sub-prime, credit card where home prices are down; delinquencies, charge-offs are going up and so we’ve kind of been preparing for that, thinking about that and try to build that into sort of our models, and that’s what you see in home equity. And I hope we’re getting near the end of this but this is certainly higher than we would have expected even at the peak of the cycle, by the way.

In retail also, we’re going to continue to build. We’re going to open branches where we can and should. I don’t want to mask again here the fact that the underlying numbers are just terrific, from investment sales to credit card sales to opening branches to adding bankers to refurbishing the branches, checking accounts up 8%, credit card sales up 34% in the branches. And we are going to continue to grow the mortgage business.

I think we had told you three months ago and six months ago that we are going to try to gain share in the mortgage business and that you might be able to accuse us of having done it too early here too. I think you can now accuse us of that because we do know that some of the stuff we did in the first and second quarter, we probably would have wished we hadn’t done. On the other hand, our share in the mortgage business has gone from 6% to 11% and we are going to continue to try to build it in the right way. It is one of the largest markets in the world. It is a necessary product for consumers. We do it the right way so we are going to continue to build this business, even if it causes a little bit of problems in the short run.

And credit card, Mike mentioned visible losses. It’s really -- think of the next two quarters at 4.5%. I think after that, we don’t know and it really does depend on the economy and unemployment levels, et cetera. I think we mentioned at one of the prior analyst meetings that if you roll through what we know about home prices, and I think they are worse than the numbers you see, I think they almost always lag, they don’t capture all of the home prices, that would bring you at least 5% by the end of the year and that’s without a recession. So that’s kind of in my mind where we are kind of planning for in the company.

Overall, again I don’t want all the conversation here about the issues and problems in consumer and recession to mask that we are growing TS&S, asset management and the commercial bank, and just to give you some numbers, which we really are happy with, commercial bank grew loans at 14% year over year, deposits up 22%.

Asset management -- assets under management up 18%, loans are up 13%, deposits are up 26%. They added 200 bankers during the course of the year and we think we are adding really great people.

TS&S, deposits up a staggering 30%, assets under custody up 15%.

So these businesses at record or near-record profits almost quarter by quarter and we are going to continue to grow them. Obviously they could be affected by the economy but we’re going to continue to grow them.

I just want to point out that both TS&S and asset management, there’s a little cyclicality between the fourth quarter and the first quarter which you should probably build into your models and I think Mike mentioned the factors why.

Private equity, we had just an outstanding year. I think our folks at One Equity Partners took advantage of when they saw active market to sell some assets. We had $4 billion in profits. We have told you a more normalized would be a lot lower, so the year before that we were $1.3 billion.

We don’t really have visibility into what this is and we obviously tell the folks there to do what maximizes investment values, so it is going to be volatile by quarter. A lot of you had $300 million a quarter in your model. It could be a little bit lower because I think we kind of brought forward a lot of the gains in the year.

And treasury corporate, same kind of loss of 50 to 100. That’s unallocated corporate overhead, et cetera.

Maybe the most important thing, you know, we have -- if the economy weakens from here, you should expect in I think all of these businesses, the credit losses will start to go up. You are going to be reading a lot about are loan loss reserves adequate and what happens to business volumes. They all could be affected.

And so we are -- we are not predicting a recession because it’s not our jobs, but we are prepared in almost every way possible to the extent that we can see it. And we’ve always believed in a fortunate balance sheet. We don’t believe in a fortunate balance sheet because we have a philosophical bent to be conservative. We think it’s a strategic imperative and you it in environments today.

We believe in strong loan losses, or to the extent you can and accounting rules make it hard sometimes to do that but the commercial bank at 2.68% I would say is as high as anybody in the business. The investment bank is now almost 2%. I think large corporate losses are very idiosyncratic and they could be kind of large and lumpy, but the 2% is a healthy number.

You know, we’ve increased credit card loan loss reserves. We’ve increased home equity loan loss reserves and obviously if things get worse, there may be more. But we feel pretty good about the position there.

So this company, we end the year thinking that we’ve done -- and the other thing I should mention, which is important, the systems, the back offices, the branding, the reputation, we’re kind of getting stronger and better in every way, so whatever the environment holds, we think we are going to build one hell of a great company here.

So I will stop there. Oh, one other thing -- we do have an investor day. It’s February 27th, starts at nine o’clock, goes to the end of the day. The whole management team will pretty much be there taking you through all the current issues and facts, so please come by and we’ll try to talk about everything, everything that’s on your mind.

So we’ll stop there and Mike and I will be happy to take questions at this point.

Question-and-Answer Session

Operator

(Operator Instructions) We go first to Glenn Schorr with UBS.

Glenn Schorr - UBS

I heard your comments loud and clear on balance sheet rising due to facilitating clients, especially when I think competitors are on their heels. But in terms of -- I think there’s 35% year-on-year increase in trading assets and we still have the same $21 billion allocated to the -- equity allocated to the IB. Does that need to change or is that just inter-department accounting and I shouldn’t get too caught up on it?

Michael J. Cavanagh

I wouldn’t get too caught up on. You are right to see that the leverage has increased. We look at that relative to -- like a rating agency would and you have seen leverage of investment banks ticking up, so we take that into stock. But as we look ahead, we’ll definitely be looking at capital in a Basel II world against all our businesses.

You know the scene, which is that hold the amount of capital in each business related to what each of them would need if they stood alone and needed to get a single A rating. So that’s still the framework that we think about, but you are right to point out that as the environment evolves, that could lead to some changes.

Glenn Schorr - UBS

Okay, cool.

Michael J. Cavanagh

But we did consider that in leaving the number flat this past quarter, these past few quarters.

Glenn Schorr - UBS

Great. And then Jamie, you’ve been abundantly clear over the last couple of years about what you would and wouldn’t do. I think we’ve seen a lot of -- we’ve seen a lot of investments in financial companies that are on their heels from all around the world, so as the environment sinks, you are doing a great job building your own business organically. You have the capital ratios and reserve ratios that you talked about that contain all those exposures. How do you think about timing given the outlook that you just described in terms of you too partaking in troubled but still good franchises?

James Dimon

I think in terms of either buying assets or buying companies, you know, we’re very open minded and if we think we can do the right kind of due diligence and understand the values and that we are giving the value that we are getting, we’d be very happy to do it.

This environment doesn’t change that at all. It just may make it more likely.

Michael J. Cavanagh

And the first priority is to use our capital and balance sheet to build our existing businesses, meeting client needs across the board.

Glenn Schorr - UBS

Well, that’s clearly happening. Last, just a follow-up on your comments on potential for $5 billion or so going from held-for-sale to held-for-maturity, you said? What type of assets are those and what would be the theoretical accounting?

James Dimon

Those are the assets that in syndicated leverage finance of the $26 billion that Mike spoke about and what I’m saying is at these price levels, we think some of them may be terrific long-term assets to hold. And so since we have the capital, we might very well -- and we would probably look at the ones we think are good long-term investments, hopefully recession proof. And the accounting is simply that you move it over and fully disclose and all that, you move it to held for maturity and there would be no -- because they’d moved in market or fair value, and then over time you have to build up proper loan loss reserves against those. And we would fully disclose that so that there’s no issue about what that did to the company.

Michael J. Cavanagh

And then you’d [inaudible] the yields.

Glenn Schorr - UBS

Yes, I’ve got it. Cool. Thank you very much.

Operator

We go next to Mike Mayo with Deutsche Bank.

Mike Mayo - Deutsche Bank

Good morning. Can you comment just more broadly on consumer credit conditions? I think you are guiding credit card losses to be 50 to 100 basis points higher than you were before, but you said that’s without a recession. So what do you think the root cause is for these consumer losses getting worse at an accelerating rate?

James Dimon

Remember, credit card was always kind of abnormally low, so part of what you are seeing we think is the catch-up to getting back to a more normal -- forget everything else.

The second effect is that in HPAs there were price -- think of California, Arizona, Miami, Michigan, Ohio, we are seeing that credit card delinquency loss is simply going up. So where we have real visibility, we know it’s going to hit 4.5% or thereabout in the first and second quarter, with obviously a little less certainty about the second quarter.

What I’m saying is I believe that home prices are worse than people think. That’s my own personal belief just looking at numbers and thinking of lags and what goes in those things. Therefore, if you roll that through, while there’s nothing in the current data that shows it, I think that more likely than not it will be 5% by the end of the year and that’s barring a real recession.

Remember, in the credit card, in the consumer business, on top of all this other stuff we talk about which has normally driven credit losses, real cyclical credit losses is unemployment. I think that will still be a factor if you see unemployment going up on top of this other stuff.

Mike Mayo - Deutsche Bank

And then for sub-prime mortgage, you said we should think about $75 million a quarter in losses and --

James Dimon

Charge-offs, yeah.

Mike Mayo - Deutsche Bank

Charge-offs -- you were already at $71 million in the fourth quarter, so is that part stabilizing or is that unique?

Michael J. Cavanagh

Yeah, we can actually -- the additional reserves contemplates real increase of, call it $40 million a quarter, Mike, so that’s a little bit of noise in those numbers, the way we put them on the page.

Mike Mayo - Deutsche Bank

Okay, and then if I can just follow-up --

Michael J. Cavanagh

The reserve is for losses higher than what we are currently running at by a little bit.

Mike Mayo - Deutsche Bank

Okay, and then if I can follow-up to your other answer about acquisitions, you said it’s more likely -- is there a preference to troubled situations or healthy firms, U.S., non-U.S.?

James Dimon

I have no preference. Whatever makes sense for the shareholders of this company.

Mike Mayo - Deutsche Bank

All right. Thanks.

Operator

We go next to Guy Moszkowski with Merrill Lynch.

Guy Moszkowski - Merrill Lynch

Good morning. I just wanted to follow-up on consumer credit and the outlook ahead. Now, you had given us some expectations of $250 million to $270 million a quarter of write-offs in home equity and this quarter you came in at 248, so sort of in line with the guidance. But I think if I translate your 155 to 160 loss rate ahead into something else, that could speak to maybe an extra $100 million or so a quarter of losses, which presumably we would then see reflected directly in the P&L. Is that fair?

Michael J. Cavanagh

Yeah, you could see -- like I said, we do see in the first quarter, Guy, losses ticking up from the level they are at to something like 140, 150, from what was it, a 105 charge-off rate in the quarter?

Guy Moszkowski - Merrill Lynch

That’s what you said, yeah.

Michael J. Cavanagh

Yeah, so we do see a tick-up from the level we’re running at. The reserves would be sufficient if we stabilize ultimately at a charge-off rate in the 155 to 160, so that’s the way to think about the guidance there.

Guy Moszkowski - Merrill Lynch

Okay, so if we don’t stabilize at that level, we could probably anticipate provisions would be higher ahead but otherwise the provision would still show up probably in the 250 to 270 a quarter range?

Michael J. Cavanagh

The provision will equal charge-offs in the near-term, but that’s the way to think about whether we would need to have future reserves, if we saw the stabilized rate going through those 155 to 160 numbers.

Guy Moszkowski - Merrill Lynch

Okay, and you had spoken at a conference a couple of months ago in Boston about loss rates, delinquency and loss rates spiking specifically in home equity from the third party originated area. Can you give us any kind of update on how that is performing relative to your self-originated portfolio? And at this time, would you be willing to give us some color as to what percentage of your portfolio is originated away?

James Dimon

I think if you looked at the home -- first of all, this is lesson that’s been learned over and over about broker originations, how much worse they perform than our own originations. And if you separate home equity into -- we call it good bank, bad bank, and broker, I would say it’s about -- it is less than 20% but a lot of the losses are coming from that 20%, which is high LTV broker originated business -- stated income, high LTV, broker originated business.

The high LTV business is also bad in our own but I would say it’s -- if you look at sell by sell, it’s probably two or three times worse in any broker sell.

Guy Moszkowski - Merrill Lynch

And the 20% you referred to a minute ago in round numbers is the specifically high LTV and originated away, is that right?

James Dimon

It’s been very consistent. In both our own originated and broker originated, high LTV stated income is bad. It is three times worse in broker than it is in our own. And Charlie I think made a presentation that actually showed people some very specific numbers and so if people are interested, you can call Julia Bates and get those charts that he did when he made a presentation about it.

Guy Moszkowski - Merrill Lynch

Thanks. And then if I can just switch for a minute to the investment bank, obviously there is rising concern about the credit default swap market and that’s a product that in many ways you originated. What have you done in recent months to make sure that your counterparty risks there are well controlled and what you want them to be?

James Dimon

I think one of the good things that has kind of been tested a little bit in the market here is that the problems you didn’t see happen, and one was in derivatives because that would have been something a year-and-a-half ago that people have said watch out for derivatives and that wasn’t what happened.

I think that -- I think we do a very good job having collateral against all derivatives, including CDS, marking the CDS, making sure the counterparties are good. But obviously there is a risk in that and I think -- I guess it was Bill Gross who pointed out, part of the risk was the operational size. What happens when these things actually are called upon?

So like a couple of years ago, we had a couple of examples. I think it was [Kons] and Aikman and Delphi and stuff where you had to settle large CDS positions -- in fact, they were much larger than the outstanding bond positions. And the street came up with a procedure to do it that worked fairly well and was fairly consistent.

If it happens that there’s a lot of it, there will be winners and losers in that like in anything else. I can give you good counterparties if you know your collateral, if you are marking the stuff all the time, you’ll be much more okay than anybody else.

Guy Moszkowski - Merrill Lynch

Thanks, and final question on mono-line exposure, can you comment on what that is for you in terms of wrapping CDO or other instruments? How much you have and have you taken significant marks against mono-line exposures?

James Dimon

This is a very complex subject so I’m going to separate it into two pieces, what I’m going to call primary risk, which is where we have it, need it, own it, direct exposure to mon -- I think we are kind of okay and that’s including everything you could mention.

But kind of okay, there are exposures there and so I want to be careful to say that -- I wouldn’t say there are none. What would worry me far more is if one of these entities doesn’t make it, is kind of the impact on markets and people who won’t be able to own certain bonds or have to sell certain bonds and on the auction preferred market and all these various things, kind of the secondary effect which I think could be pretty terrible. But it’s really hard to predict where and how that would happen through the system.

But our direct exposures, we think -- we have some but think of them as almost normal credit exposures.

Guy Moszkowski - Merrill Lynch

Great. Thank you very much.

Operator

We go next to John McDonald with Banc of America Securities.

John McDonald - Banc of America Securities

Good morning. A couple of the other banks are showing some trouble in commercial real estate and their exposure to homebuilders, residential construction. Your commercial banking results look pretty strong. Could you just comment on maybe how you’ve avoided some of the issues in commercial real estate? Mike, I don’t know, have you disclosed your exposure to residential construction in CRE?

Michael J. Cavanagh

Well, I think we’ve been talking about it for a couple of years now, how we’ve been very cautious in commercial real estate. It was an easy place to book loan growth, so I would say we lagged behind what was going on there. So Todd [Macklan] and team have done a good job there.

Overall, the size of the outstandings in all real estate in the commercial bank, about $7 billion, about $2.5 billion of that related to the residential side. So again, a lot of focus on the space but we think we are size wise, again not over [inaudible].

John McDonald - Banc of America Securities

Okay. Mike, any other comments about expense trends in the fourth quarter? The comp was up in the investment bank. You trued that up but it seemed like overall, expenses were up a decent amount in the fourth quarter. Was there any other true-ups across the company?

Michael J. Cavanagh

I think I mentioned the litigation expense in corporate, a couple hundred million dollars of litigation expense higher on the corporate side. And then I think you saw comp expenses in the investment bank, comp expense in the asset management business, and no other big trends for me to point to.

John McDonald - Banc of America Securities

And is there any outlook you can give in terms of how you think about comp expense in the investment bank next year?

Michael J. Cavanagh

I think we’d say it’s -- you know, we talked about a 43%, 44% comp-to-revenue ratio in 2000-and -- 42, 43 I think it was, so we ended the year with a tough year in revenue environment, going up to 49, bringing us to 44% on average for 2007. And we’d say a number in the similar range is the best way to think about ’08, 43% plus or minus a little bit. But it’s going to be highly dependent upon the revenue environment and the actual market environment when we get to the end of the year next year and look at what proper pay needs to be.

John McDonald - Banc of America Securities

Okay. Thanks.

Operator

We go next to Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley

Thanks. I would just like to dig in a little bit on the reserving methodology and analysis, and I know there’s a lot of moving parts in here but my basic question is how far ahead of what you are experiencing can you be with the reserve?

Michael J. Cavanagh

Well, Betsy, you are embedding everything you know today about what’s going on in your portfolio. So Jamie mentioned we’ve got the recent trends we see in delinquencies and what is going on in various different geographies with weak home prices, so you’ve seen us quarter to quarter to quarter taking that and factoring it in to our four expectation of losses that we have in the portfolios that are on the books as of now and topping up reserves to cover you for that. And then telling you what we think the amount of charge-off ratio that reserving covers us for. So that’s the 155 to 160 as an example in the home equity portfolio versus this quarter’s 105 rate.

So the real question goes back to Jamie’s original point is, everybody needs to take their own view about how bad housing conditions get versus the trends we already see and also what goes on in the broader economy that could affect just how deep we go in terms of credit pressures.

Betsy Graseck - Morgan Stanley

And one of the challenges we have is what’s viewed as a little bit of a different regulatory environment prior to -- as opposed to prior cycles. And from our seats, what we have are things like you mentioned, what are your inputs going to be on the economy, et cetera, but we also have what kind of portfolio you have and what type of reserving you’ve done in prior cycles. Is it fair to look at prior cycles, and I’m talking about not only ’01, ’02, but the early 90s and I realize that the company is very different from that so you’d have to take a view on the parts that you were back then, but is it reasonable to consider prior cycle peaks in that type of analysis that we need to do?

James Dimon

I think we -- first of all, you can assume that we try to be as conservative as we can be on loan loss reserving. And I can give you a lot of complaints about the pressures put on banks not to reserve, to reserve, the regulators want X, the SEC wants Y, et cetera.

But we try to be really conservative, really transparent. We’ve been talking about the cycle -- and forget -- I wouldn’t go back to what the company did before about what is reasonable cycles, so we’ve actually shown you all in prior things what we think the cycle could be.

So in credit cards, we said the normal is X and the cycle could be 50% higher, and home equity the normal is X and that we thought we were below that. In fact, we always -- we knew, I think we told people that we thought we had the most benign consumer and wholesaler credit environment that we will ever see in our lifetimes in ’06 and early ’07. And we were trying to prepare for that.

So loan loss reserving just simply follows charge-offs. You have to think of it very simply. If your loan losses are going to go to X, well, your reserves have to proportionally go up to X.

One of the problems in the business has been that when charge-offs go up, now you have a higher charge-off, you’ve got to add to loan loss reserves. And people question other people, properly not just capitalize but they properly reserve.

But I would say relatively, look at our numbers. We are almost 2% in the investment bank against loans. We are 2.6%, almost 2.7% in the commercial bank against loans. I mean, most regional banks are 1.2, 1.3, and 1.4. So we are trying to -- we try to do everything we can to protect this company.

Betsy Graseck - Morgan Stanley

It’s clear you are in a much better position than peer group and to your point, our issue is where do we think we are going. Is it a slow down, is it a mild recession, is it a deep recession and that’s for all of us to consider independently.

James Dimon

You’ll have different opinions on that. That’s why I said it’s a tough year for analysts because you have to make clear what you think, but that’s going to drive someone’s forecast.

Betsy Graseck - Morgan Stanley

Just separately on CDO valuations, I know it’s a small issue for you but I just want to understand the consequences of something that happened last night. S&P revised down expectations as to how they are analyzing sub-prime RMBS and sub-prime CDOs, and I am sure you saw that. Does that have any implication for how you value your CDOs?

James Dimon

Absolutely, positively not.

Betsy Graseck - Morgan Stanley

Could you just give us some color on why?

James Dimon

Because there again, they lay the dollar short. So we look at and take sub-prime -- we have our own underwriting and we know by the vintage, by the type, by the LTV, by the location, by the MSA, we make our own forecasts about what’s going to happen to real delinquencies, real roll rates, real charge-offs, real recovery rates, and so if you take -- and we don’t have that much left anymore, so hopefully we don’t have to talk about this very much more in the future, so if you take the sub-prime, we know -- we’ve been talking about the delinquencies being much higher for a long time. So we take all that, we make our assumptions, we discount at high rates, and that’s how we come up with our number.

I think it already incorporates what you heard from S&P, but again it’s very idiosyncratic. You have some sub-prime ABS out there that was well underwritten, not broker, et cetera, et cetera, with a loss -- you know, accumulative loss, [like loss ratio] 7% to 10%, which is much higher than originally estimated and you have some others out there where they are going to be north of 20%, and that’s what S&P was saying. The market already priced a lot of that in.

Operator

We go next to Meredith Whitney with Oppenheimer.

Meredith Whitney - Oppenheimer

I had a question about a detail you provided on page 12 on the home equity slide, and that relates to mortgage but I really want to focus on the prime book. You had said that some of the problems were based on the overall lines of FICO and underlying property values. How much have you protected yourself? Or is it too late to protect yourself from what you thought was a prime loan that has a prime FICO score that the LTV has just run away from you and the rest of the market?

Michael J. Cavanagh

I think you live with what goes on with what you’ve originated and address it as it relates to your new production, Meredith, build it in tighter, bigger cushions and therefore willing to originate at lower LTVs than we were before, but once it’s on the books, we just try to manage it through mitigation, that more than anything else.

James Dimon

Are you talking about prime home equity or prime mortgage?

Meredith Whitney - Oppenheimer

Prime mortgage and -- well, prime mortgage and home equity in terms of -- sorry.

James Dimon

The prime home equity is in the numbers that Mike gave you. It’s all in there.

Meredith Whitney - Oppenheimer

But in terms of the -- you guys take an incredibly detailed approach to your underwriting and certainly your accounting, but it seems as if the delta of change -- sorry, the delta of loss rates has accelerated beyond anyone’s expectations and faster than your provision rate.

So will you look back a quarter from now and say things have changed so much more materially in terms of can you sequence what’s gone on in the last three months?

James Dimon

I think what we’ve seen in the last three months we’ve built into the projections and why we put up the reserves. Could it get worse from here? Yes, it can. Are we saying it’s going to? No, we don’t know.

Meredith Whitney - Oppenheimer

Okay, and then the follow-up question is the thing that struck me as most concerning was the American Express announcement last week that said that they saw a rise in delinquencies across every bucket. And I know you had said that clearly the states that have the higher home price declines are showing evidence of the higher loss rates. Can you comment on general trends outside of those states, please?

James Dimon

Outside of where -- first of all, there are very few home markets now that are not down, so I think of the top 20, the latest numbers are 17 are down and three are up and the three are like --

Meredith Whitney - Oppenheimer

Obviously some are more extreme than others, right?

James Dimon

Yeah, but I think those are probably down now too, but in the home -- where home prices weren’t down, you didn’t see a lot of changes in delinquencies or loss rates. That does not mean it’s not going to happen. That’s why I say I still think it’s not recession proof.

Meredith Whitney - Oppenheimer

Okay. Thank you.

Operator

We go next to William Tanona with Goldman Sachs.

William Tanona - Goldman Sachs

Good afternoon. Just a follow-up on that to Meredith’s question, my first would be what type of home price depreciation are you guys factoring into your loss assumptions that you are giving? And I guess the piggy-back to her question is just given the acceleration in the delinquency trends and the loose underwriting standards that had taken place in the mortgage world, what gives you the level of comfort that these models are going to hold up?

James Dimon

When you say what we are building in, I would tell you -- again, that’s why I was very careful about visible versus guessing. Your guess is as good as our guess about future home prices but we are being a little conservative and assuming that they are still continuing to go down in terms of our reserve -- and I would use a number like 5% or 10%.

But honestly, it is as much your job to guess what that’s going to be as it is our job to guess what that’s going to be. The second part of your question is what again?

William Tanona - Goldman Sachs

In terms of the acceleration that we are seeing in the delinquency trends in home equity, and given some of the loose underwriting standards that we’ve seen in the mortgage world, what gives you the confidence that these kind of models are going to hold up in this environment?

I guess just to follow-up to your question, so just so I understand, you are assuming 5% type of home price deterioration, further home price deterioration in your model?

James Dimon

Five or 10 in the next year --

Michael J. Cavanagh

High single digits.

James Dimon

I think if you go to traditional underwriting when you have -- and home equity has been around a long time and FICOs and stated income, and you go back to very traditional 80% or 85 LTV, you are more rigorous in appraisal and stuff, you probably are making pretty good loans at this point and we are willing to make that bet. So we are doing that in home equity, we are doing it in sub-prime, we are doing it in jumbo loans, et cetera.

That does not mean that if there is a severe recession, you might wish you didn’t make those loans but we like the business and we’ve just gone back to old fashioned, tougher standards.

William Tanona - Goldman Sachs

Okay, and then my follow-up relates also to the mortgage business and you know, you’ve talked ad nauseam about how you want to continue to grow that business and build that business, and you’ve done a very good job of that organically. Is that something that you are going to continue to focus on in terms of organic growth? Or given some of the carnage that’s out there, is that an area of focus for you guys as well in terms of inorganic growth there?

James Dimon

No, it’s organic because we have a boundary, we are putting jumbo loans in our balance sheet, the new sub-prime, which I think again, I would probably [throw in] the first quarter but I think this quarter the -- one day we will be right that this vintage will be good and so we are using our own balance sheet, we’re building our own systems. The folks in mortgage have hired a lot of and moved around a lot of sales people. We are doing far more production of our own retail branches and so we are just going to continue to build organically.

William Tanona - Goldman Sachs

Okay, thanks.

Operator

We go next to Nancy Bush with NAB Research.

Nancy Bush - NAB Research

A quick question for you; Jamie, in light of what’s happened with Citigroup and the fact that Bank of America seems to be more or less leaving the investment bank business, you are kind of the last universal bank left and I think probably the most ardent proponent of that model. Do you see the allocation of resources within your bank changing as a result of what’s happened in the last few quarters? Or are you kind of happy with where you are right now and you are going to go on with that?

James Dimon

You know, I don’t know honestly what a universal bank means and I’ve never been a proponent of universal banking. I’m a proponent of serving the customer really well. And I think that the businesses that we have and there are a lot of what I would call natural linkages and natural product sets and I’ve always hated the word cross-sell because it sounds unnatural but our retail branches serve consumers, small businesses, and middle market across a broad variety of financial products. That’s what a bank does.

I remind people that five of our business lines other than the IB are done out of the average regional bank. So we didn’t invent putting those five businesses together -- that’s TSS, private client, middle market, small business, consumer. They have been together for eternity and to me, the question is can you do something for the client better, faster, quicker, cheaper, not because you simply like it.

We are going to continue to build our client businesses. We think we’ve sold anything that doesn’t fit. We don’t really see, you know, people talk about do you need another leg or not. We don’t really see the need for another leg. We think we can expand these businesses for the foreseeable future and if somehow we are wrong and the world changes or we think there’s a strategic misfit, then we should reconsider that.

Nancy Bush - NAB Research

It seems that a commercial bank, which I know you’ve been emphasizing the commercial bank over the past couple of years but it kind of has gotten lost in the crush of everything else there. It seems like it is one of your best-performing units at this point. Do you see more capital being allocated to the commercial bank going forward?

James Dimon

Yes, to the extent they can use it. The commercial bank does a lot of investment banking business now. They started a -- we call it Chase Capital but think of it as kind of a mezzanine investment. They put on several hundred million dollars of loans and I think the folks have done a great job growing the bank but growing it carefully with a real conscious eye on credit. And I think these markets will just play to our strengths. We can do more for the clients. We can be very competitive in price. We can bring them things that other banks can’t bring them, like checking accounts in China if they need that. You’d be surprised how many middle market accounts need that now.

So yes, as long as they can do it and do it well, we’d be happy to give them capital.

Nancy Bush - NAB Research

Just the final piece of this question -- does the core deposit base, i.e. the retail generated core deposit base need to be significantly bigger to kind of support the plans, the growth plans you have going forward?

James Dimon

I don’t think so. I think -- you know, we want it to be bigger, but that’s because we like it but I don’t think it’s needed to support the growth plans going forward, no.

If you look at this company, we are deposit rich. I mean, take just the -- take the commercial bank. If my numbers, if I remember them correctly, $66 billion of loans, $95 billion of deposits. TS&S, $250 billion of deposits, so we are probably the largest corporate depository in the world because -- and as long we’re sounding strong, we’ll always be able to attract cost effective deposits.

Obviously we’d love the retail bank to grow as aggressively as it can.

Nancy Bush - NAB Research

Thank you.

Operator

Mr. Dimon, Mr. Cavanagh, there are no further questions at this time.

Michael J. Cavanagh

Great. Thank you very much. Thanks, everybody for joining the call.

Operator

That does conclude today’s conference. Again, thank you for your participation. Have a good day.

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