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JPMorgan Chase & Co. (NYSE:JPM)

Q4 2007 Earnings Call

January 16, 2008 9:00 am ET

Executives

Michael J. Cavanagh - Chief Financial Officer

James Dimon - Chairman of the Board, President, Chief ExecutiveOfficer

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

Operator

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

At the conclusion of the presentation, you’ll have theopportunity to ask a question. (Operator Instructions) At this time, I would liketo turn the call over to JPMorgan Chase’s Chairman and Chief Executive Officer,Jamie Dimon and Chief Financial Officer, Mike Cavanagh. Mr. Cavanagh, please goahead, 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 throughthe quarterly results by business. I am going to hand it over, since it’s thefirst call of the year, to Jamie at the end to give a little bit of comments onwhat we see looking ahead and then we’ll spend time answering whateverquestions you have.

So again, please refer to the presentation that’s on thewebsite that I’ll start going through now, so if we go right to page two, we’llstart 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 fullyear 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 forthe year of $15.4 billion and record revenues of $75 billion. EPS again arecord, also a record at $4.38, up 15% from 2006 on a continuing operationsbasis. And that really just means, if you’ll recall, that in the fourth quarterof 2006 we had a $600 million or so gain related to the sale of our corporatetrust business, the Bank of New York, that was counted in discontinued ops, sono difference between continuing ops and reported ops for 2007.

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

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

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

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

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

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

So now going to page three, I won’t spend time on this. Youcan just glance at it but this is a quick look at the numbers that I justdescribed 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 startwith the, as we usually do, with the investment bank on the fifth slide. Sohere you see we had net income of $124 million on $3.2 billion of revenues forthe quarter, an ROE of 2%. For the year, we had $3.1 billion of net income anda 15% return on equity.

Moving down the P&L for the fourth quarter, you see wehad $1.7 billion of investment banking fees, which were up 5% from a year agoand driven by record advisory and equity underwriting, offset by lower on thebond and loan syndication side. For the year, and you’ll see on the next pagesome 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 millionworth 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 talkedabout last quarter, we had a modest gain net of hedges. I’ll show you a page togo through the details there in a second. On the sub-prime side, which issub-prime positions inclusive of sub-prime CDOs, we had mark-downs and hedgesof $1.3 billion and I’ll have a page to go through the details there in aminute.

We also had a little bit of improvement, a gain of about$154 million related to the widening of credit spreads impacting the value ofcertain structured liabilities. And then that gets you back to about $1.7billion worth of fixed income markets. Revenues for us not as strong as wewould like to see and what’s going on in the remainder there is additionalpressure in the remaining securitized products business away from sub-prime andlosses in the credit trading side, offset in part by very strong revenues inrates 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 tradingresults was the story there, partially offset by strong client flows in thequarter and again a little bit of revenue related to the widening of creditspreads 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 thebusiness, which is really driven by growth in the loan portfolio. Overall weended 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 bityear 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 thefull year to 44% on that line.

Flipping to the next slide, slide six here, Jamie cancomment further on this a little later in his remarks but I’ve got to say we’revery 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 lastseveral years. So you see on the right side the lead table results and workdown the page, you see that we either have leading or very strong positions allthe way down the page and you see a circle in the places where we’ve grownshare year over year.

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

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

We did in fact close or distribute $16.5 billion inclusiveof some deals that went away, so in the quarter we actually sold inside themarks or better than the marks we had put up last quarter, which if you’llrecall was a $1.3 billion mark, taking the mark down to 4.9%. So on what wesold in the quarter, we did better than that, creating a little bit of P&Lpick-up. But on what remained, we plowed back much of that money into lowermarks 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 leveragedloans space.

Now, moving on to the next slide, I’ll take you through alittle 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 inone bucket. Here we are capturing all sub-prime exposure inclusive of sub-primeCDO on this page.

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

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

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

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

And the second point is that we actively risk manage all ofthese 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 togive you some sense of size and dimension in these categories, which again wethink 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 andthe warehouse related to that, so $5.5 billion of positions there, easilymarked by easy visibility into marks on this stuff, negligible sub-primeincluded 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. Movingdown 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 hasbeen 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 oftotal exposure, $4 billion in securities, $2.4 billion in loans, and you seethat mostly highly related or first lien positions in the case of the loans.

Just to make a comment away from the investment bank in thiscategory while I’m on it, between the investment portfolio that we hold atcorporate 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-Awhich we think is noteworthy and very manageable -- noteworthy in that it’ssmall relative to the size of the portfolio we hold at corporate and mortgageloans.

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

Now moving on, finished with the investment bank, let’s moveon to retail on slide 10. So retail financial services, as usual, let me justtalk you through some of the drivers of what goes on, what’s driving theP&L that we’ll see on the next page. So here you see average deposits forthe year over year up 4% to $209 billion; checking accounts up 8% to 11 millionaccounts, and then related to that, just the improvement in sales productivityreally 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 thatgoes to the details on home equity.

Mortgage loan originations as we talked about, greatopportunity to use our balance sheet and capital strength to grow a businessthat’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 termsof our underwriting standards, and our market share in the space increasing toaround 11% versus 6% a year ago. So we feel very good about that and themortgage 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 ayear ago. Moving through the revenue side, $2.7 billion worth of net interestincome, up 5% from a year ago, reflecting higher balances and a little bitwider spreads and higher deposit balances as well. The $2.1 billion ofnon-interest revenue up substantially from a year ago. I’ll take that in twobuckets. You can see that lending and deposit related fees, asset managementfees, and all other income, all up well into the double digits and that goesback to the growth in the branch system and the sales productivity of thebranches that we’ve been talking about and investing in for a while now.

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

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

Moving to slide 12, just goes back to the same slide I’vetaken you through before on the home equity business. So you see that in theupper left, the 30-day delinquency trend continues to march higher for thereasons we’ve talked about before. In the upper right, you see the portfoliojust shy of $95 billion and charge-offs stepping up as we expected from 150 to248 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 thereserves in the business to bring us to a total build during the course of theyear of just over $1 billion in the home equity portfolio, and that brings us tocover this for the increase in charge-off rate in the portfolio to somewhere inthe 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 firstquarter.

I won’t go into the details below there but again, it’s thesame reasons in terms of the layering of risk and home price appreciationdeclines that we’ve seen in various parts of the country that is driving thisand along with that though, as we’ve talked about before, significanttightening 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 $15.5billion, charge-offs of 71 for the quarter and a charge-off rate of 208. Herewe added $125 million to the loan loss reserve for sub-prime.

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

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

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

Jamie will comment a little bit later on the outlook but aswe’ve said before, we do see visibility into the first half of the year wherewe 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 thenormalizing trends really that we saw in mid to late 2007, which includeshigher delinquencies and losses in parts of the country that are suffering fromthe greatest pressure in home prices, same as we talked about last quarter.

Moving on to page 15 and the commercial bank, $288 millionor profits up 13% from a year ago, $1.1 billion on profits on the year. Averageloans 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 businessdriving the record revenue we had in the quarter of $1.1 billion, really comingacross the board but particularly treasury services revenue, which is the cashmanagement side, and the lending side and a sequentially lower investment bankingrevenues.

Credit costs here really just follow a little bit ofaddition to the reserves. Very low charge-offs -- you see the charge-offscontinue to be 21 basis points, which is running below the 50 to 75 we talkabout as a normalized number for the business, and with the reserves againstadditional reserves against the growth we’ve seen how we maintain a very strongreserve-to-loans ratio of 266 basis points in the business. And on the expenseside, you see the real improvement we’ve had in the overhead ratio to 46% forthe quarter.

Moving to slide 16, treasury and security services, hereagain, third quarter in a row, record profits of $422 million, up dramaticallyfrom the year-ago of 65% and a pretax margin of 35% in the business. Similarstory as the commercial bank growth in activities with existing clients and thenew business volume helping drive liability balances and assets under custodyas indicators of the growth, up 30% and 15% respectively. So overall, you get26% growth in revenues in the business versus a year ago.

Market conditions obviously did help a little bit in thequarter with spread earned on [switching] deposits being helped a bit bymarket conditions and a little bit better revenues in securities blending aswell.

Asset management on slide 17, again a record profit in thebusiness of $527 million, up 29% from a year ago. Here again you see driven bythe continued growth in assets under management, which were up to $1.2trillion, or 18% from a year ago. And I would just point you to the supplementthat shows the positive in-flows we’ve been seeing in the business, up $33billion 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 strongperformance fees -- seasonally high in the fourth quarter and that’s about halfof 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 tocorporate on slide 18. Here another strong quarter in private equity with $712million of private equity gains on a pretax basis, driving private equityprofits to $356 million, and then treasury and corporate other, negative $93million, inclusive of some higher litigation expense related to some of thecredit 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 thecapital and reserve side. So you see on page 19, $89 billion worth of tier onecapital up from $81 billion a year ago. That’s inclusive of $8 billion of sharebuy-backs for the year, though as you know we substantially shut down thebuy-back program, only buying back less than $200 million in the fourth quarterto hold on to our capital. That allowed us to see -- you see the risk weightedasset growth, year over year $935 billion to $1.05 trillion, and about $30billion 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 companyand as we’ve talked about business by business, it’s all in the context of whatwe think are very strong allowance to loans ratios across all of ourbusinesses, and you just see a table at the bottom giving you a little bit ofthe trend of what’s gone on.

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

James Dimon

Mike, thank you very much. If you go to page 22, you canfollow along with some of my comments. I think this is a difficult year foranalysts because you all are going to have to be making a lot of your ownassumptions about what you think the environment is going to bring, so I amgoing to separate my comments a little bit into what we know and what weactually see, and then the things we obviously have to think about about thefuture.

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

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

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

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

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 numberone 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 wasabout six months ago is Greenwich did a survey on fixed income sales andservice and research and again, we were number one, two, three in most of thecategories.

We have a good management team. They are disciplined. Theypay a lot of attention. I think we told you a while ago that we were going tobuild a mortgage business and we weren’t going to try to pick the cycle. Wedidn’t. Obviously maybe we could have paid more attention but I would tell youwe are going to build one of the best mortgage businesses on the street and sowe are going to continue to build this business, we are really proud of theprogress across the board. We think in the environment where there’s so muchupheaval and we have a lot of stability, we can just keep on marching step bystep 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 fromheld-for-sale to held-to-maturity. The reason I am pointing it out is becausewe are doing it as a long-term investment. At some of these prices, we thinkthat 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 goodlong-term investment.

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

In the investment bank, and we still think these numbers aregood, we would hope to earn 20% ROE on average through the cycle, which means30% at really good times, hopefully 10%, no worse than 10% in a bad year, andno worse than 0% in a quarter.

And where you did see it in the first half of the year, wewere at 30% and the second half of the year, I think we averaged around 4, andobviously 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 acyclical business. It always has been. It always will be. There should be nosurprise about that and we still would expect some of that.

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

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

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

I think we had told you three months ago and six months agothat we are going to try to gain share in the mortgage business and that youmight be able to accuse us of having done it too early here too. I think youcan now accuse us of that because we do know that some of the stuff we did inthe first and second quarter, we probably would have wished we hadn’t done. Onthe other hand, our share in the mortgage business has gone from 6% to 11% andwe are going to continue to try to build it in the right way. It is one of thelargest markets in the world. It is a necessary product for consumers. We do itthe right way so we are going to continue to build this business, even if itcauses 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 knowand it really does depend on the economy and unemployment levels, et cetera. Ithink we mentioned at one of the prior analyst meetings that if you rollthrough what we know about home prices, and I think they are worse than thenumbers you see, I think they almost always lag, they don’t capture all of thehome prices, that would bring you at least 5% by the end of the year and that’swithout a recession. So that’s kind of in my mind where we are kind of planningfor in the company.

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

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

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

So these businesses at record or near-record profits almostquarter by quarter and we are going to continue to grow them. Obviously theycould 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 assetmanagement, there’s a little cyclicality between the fourth quarter and thefirst quarter which you should probably build into your models and I think Mikementioned the factors why.

Private equity, we had just an outstanding year. I think ourfolks at One Equity Partners took advantage of when they saw active market tosell some assets. We had $4 billion in profits. We have told you a morenormalized 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 weobviously tell the folks there to do what maximizes investment values, so it isgoing to be volatile by quarter. A lot of you had $300 million a quarter inyour model. It could be a little bit lower because I think we kind of broughtforward 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 theeconomy weakens from here, you should expect in I think all of thesebusinesses, the credit losses will start to go up. You are going to be readinga lot about are loan loss reserves adequate and what happens to businessvolumes. They all could be affected.

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

We believe in strong loan losses, or to the extent you canand accounting rules make it hard sometimes to do that but the commercial bankat 2.68% I would say is as high as anybody in the business. The investment bankis now almost 2%. I think large corporate losses are very idiosyncratic andthey 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 getworse, 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 backoffices, the branding, the reputation, we’re kind of getting stronger andbetter in every way, so whatever the environment holds, we think we are goingto build one hell of a great company here.

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

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

Question-and-AnswerSession

Operator

(Operator Instructions) We go first to Glenn Schorr withUBS.

Glenn Schorr -UBS

I heard your comments loud and clear on balance sheet risingdue to facilitating clients, especially when I think competitors are on theirheels. But in terms of -- I think there’s 35% year-on-year increase in tradingassets and we still have the same $21 billion allocated to the -- equityallocated to the IB. Does that need to change or is that just inter-departmentaccounting 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 thatthe leverage has increased. We look at that relative to -- like a rating agencywould and you have seen leverage of investment banks ticking up, so we takethat into stock. But as we look ahead, we’ll definitely be looking at capitalin a Basel II world against all our businesses.

You know the scene, which is that hold the amount of capitalin each business related to what each of them would need if they stood aloneand needed to get a single A rating. So that’s still the framework that wethink 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 thispast quarter, these past few quarters.

Glenn Schorr -UBS

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

James Dimon

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

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

Michael J. Cavanagh

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

Glenn Schorr -UBS

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

James Dimon

Those are the assets that in syndicated leverage finance ofthe $26 billion that Mike spoke about and what I’m saying is at these pricelevels, we think some of them may be terrific long-term assets to hold. And sosince we have the capital, we might very well -- and we would probably look atthe 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 allthat, you move it to held for maturity and there would be no -- because they’dmoved in market or fair value, and then over time you have to build up properloan loss reserves against those. And we would fully disclose that so thatthere’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 - DeutscheBank

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

James Dimon

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

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

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

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

Mike Mayo - DeutscheBank

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

James Dimon

Charge-offs, yeah.

Mike Mayo - DeutscheBank

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

Michael J. Cavanagh

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

Mike Mayo - DeutscheBank

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

Michael J. Cavanagh

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

Mike Mayo - DeutscheBank

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

James Dimon

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

Mike Mayo - DeutscheBank

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 creditand the outlook ahead. Now, you had given us some expectations of $250 millionto $270 million a quarter of write-offs in home equity and this quarter youcame in at 248, so sort of in line with the guidance. But I think if Itranslate your 155 to 160 loss rate ahead into something else, that could speakto maybe an extra $100 million or so a quarter of losses, which presumably wewould 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 firstquarter, Guy, losses ticking up from the level they are at to something like140, 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 runningat. The reserves would be sufficient if we stabilize ultimately at a charge-offrate 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 couldprobably anticipate provisions would be higher ahead but otherwise theprovision 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, butthat’s the way to think about whether we would need to have future reserves, ifwe 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 monthsago in Boston about loss rates, delinquency and loss rates spiking specificallyin home equity from the third party originated area. Can you give us any kindof 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 whatpercentage of your portfolio is originated away?

James Dimon

I think if you looked at the home -- first of all, this is lessonthat’s been learned over and over about broker originations, how much worsethey 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 isless than 20% but a lot of the losses are coming from that 20%, which is highLTV broker originated business -- stated income, high LTV, broker originatedbusiness.

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

Guy Moszkowski -Merrill Lynch

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

James Dimon

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

Guy Moszkowski -Merrill Lynch

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

James Dimon

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

I think that -- I think we do a very good job havingcollateral against all derivatives, including CDS, marking the CDS, making surethe 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 theoperational 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 settlelarge CDS positions -- in fact, they were much larger than the outstanding bondpositions. And the street came up with a procedure to do it that worked fairlywell and was fairly consistent.

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

Guy Moszkowski -Merrill Lynch

Thanks, and final question on mono-line exposure, can youcomment 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-lineexposures?

James Dimon

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

But kind of okay, there are exposures there and so I want tobe careful to say that -- I wouldn’t say there are none. What would worry mefar more is if one of these entities doesn’t make it, is kind of the impact onmarkets and people who won’t be able to own certain bonds or have to sellcertain 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’sreally hard to predict where and how that would happen through the system.

But our direct exposures, we think -- we have some but thinkof 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 - Bancof America Securities

Good morning. A couple of the other banks are showing sometrouble 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 incommercial real estate? Mike, I don’t know, have you disclosed your exposure toresidential construction in CRE?

Michael J. Cavanagh

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

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

John McDonald - Bancof America Securities

Okay. Mike, any other comments about expense trends in thefourth quarter? The comp was up in the investment bank. You trued that up butit 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, acouple hundred million dollars of litigation expense higher on the corporateside. And then I think you saw comp expenses in the investment bank, compexpense in the asset management business, and no other big trends for me topoint to.

John McDonald - Bancof America Securities

And is there any outlook you can give in terms of how youthink 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 theyear with a tough year in revenue environment, going up to 49, bringing us to44% on average for 2007. And we’d say a number in the similar range is the bestway to think about ’08, 43% plus or minus a little bit. But it’s going to behighly dependent upon the revenue environment and the actual market environmentwhen we get to the end of the year next year and look at what proper pay needsto be.

John McDonald - Bancof 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 thereserving methodology and analysis, and I know there’s a lot of moving parts inhere but my basic question is how far ahead of what you are experiencing canyou be with the reserve?

Michael J. Cavanagh

Well, Betsy, you are embedding everything you know todayabout what’s going on in your portfolio. So Jamie mentioned we’ve got therecent trends we see in delinquencies and what is going on in various differentgeographies with weak home prices, so you’ve seen us quarter to quarter toquarter taking that and factoring it in to our four expectation of losses thatwe have in the portfolios that are on the books as of now and topping upreserves to cover you for that. And then telling you what we think the amountof charge-off ratio that reserving covers us for. So that’s the 155 to 160 asan 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 getversus the trends we already see and also what goes on in the broader economythat 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 alittle bit of a different regulatory environment prior to -- as opposed toprior 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 havewhat kind of portfolio you have and what type of reserving you’ve done in priorcycles. 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 fromthat so you’d have to take a view on the parts that you were back then, but isit reasonable to consider prior cycle peaks in that type of analysis that weneed to do?

James Dimon

I think we -- first of all, you can assume that we try to beas conservative as we can be on loan loss reserving. And I can give you a lotof complaints about the pressures put on banks not to reserve, to reserve, theregulators 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 whatthe company did before about what is reasonable cycles, so we’ve actually shownyou all in prior things what we think the cycle could be.

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

So loan loss reserving just simply follows charge-offs. Youhave 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 whencharge-offs go up, now you have a higher charge-off, you’ve got to add to loanloss reserves. And people question other people, properly not just capitalizebut they properly reserve.

But I would say relatively, look at our numbers. We arealmost 2% in the investment bank against loans. We are 2.6%, almost 2.7% in thecommercial bank against loans. I mean, most regional banks are 1.2, 1.3, and1.4. So we are trying to -- we try to do everything we can to protect thiscompany.

Betsy Graseck -Morgan Stanley

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

James Dimon

You’ll have different opinions on that. That’s why I saidit’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 issuefor you but I just want to understand the consequences of something thathappened last night. S&P revised down expectations as to how they areanalyzing sub-prime RMBS and sub-prime CDOs, and I am sure you saw that. Doesthat 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 lookat and take sub-prime -- we have our own underwriting and we know by thevintage, by the type, by the LTV, by the location, by the MSA, we make our ownforecasts 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 havethat much left anymore, so hopefully we don’t have to talk about this very muchmore in the future, so if you take the sub-prime, we know -- we’ve been talkingabout 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 upwith 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 thatwas well underwritten, not broker, et cetera, et cetera, with a loss -- youknow, accumulative loss, [like loss ratio] 7% to 10%, which is much higher thanoriginally estimated and you have some others out there where they are going tobe north of 20%, and that’s what S&P was saying. The market already priceda 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 onthe home equity slide, and that relates to mortgage but I really want to focuson the prime book. You had said that some of the problems were based on theoverall lines of FICO and underlying property values. How much have youprotected yourself? Or is it too late to protect yourself from what you thoughtwas a prime loan that has a prime FICO score that the LTV has just run awayfrom you and the rest of the market?

Michael J. Cavanagh

I think you live with what goes on with what you’veoriginated and address it as it relates to your new production, Meredith, buildit in tighter, bigger cushions and therefore willing to originate at lower LTVsthan we were before, but once it’s on the books, we just try to manage itthrough 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 equityin 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 detailedapproach to your underwriting and certainly your accounting, but it seems as ifthe delta of change -- sorry, the delta of loss rates has accelerated beyondanyone’s expectations and faster than your provision rate.

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

James Dimon

I think what we’ve seen in the last three months we’ve builtinto the projections and why we put up the reserves. Could it get worse fromhere? 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 thatstruck me as most concerning was the American Express announcement last weekthat said that they saw a rise in delinquencies across every bucket. And I knowyou had said that clearly the states that have the higher home price declinesare showing evidence of the higher loss rates. Can you comment on generaltrends outside of those states, please?

James Dimon

Outside of where -- first of all, there are very few homemarkets now that are not down, so I think of the top 20, the latest numbers are17 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 inthe home -- where home prices weren’t down, you didn’t see a lot of changes indelinquencies 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’squestion, my first would be what type of home price depreciation are you guysfactoring into your loss assumptions that you are giving? And I guess thepiggy-back to her question is just given the acceleration in the delinquencytrends and the loose underwriting standards that had taken place in themortgage world, what gives you the level of comfort that these models are goingto 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 guessis as good as our guess about future home prices but we are being a littleconservative and assuming that they are still continuing to go down in terms ofour reserve -- and I would use a number like 5% or 10%.

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

William Tanona -Goldman Sachs

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

I guess just to follow-up to your question, so just so Iunderstand, you are assuming 5% type of home price deterioration, further homeprice 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, andyou go back to very traditional 80% or 85 LTV, you are more rigorous inappraisal and stuff, you probably are making pretty good loans at this pointand we are willing to make that bet. So we are doing that in home equity, weare 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, youmight wish you didn’t make those loans but we like the business and we’ve justgone back to old fashioned, tougher standards.

William Tanona -Goldman Sachs

Okay, and then my follow-up relates also to the mortgagebusiness and you know, you’ve talked ad nauseam about how you want to continueto grow that business and build that business, and you’ve done a very good jobof that organically. Is that something that you are going to continue to focuson 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 growththere?

James Dimon

No, it’s organic because we have a boundary, we are puttingjumbo loans in our balance sheet, the new sub-prime, which I think again, Iwould probably [throw in] the first quarter but I think this quarter the -- oneday we will be right that this vintage will be good and so we are using our ownbalance sheet, we’re building our ownsystems. The folks in mortgage have hired a lot of and moved around a lot ofsales people. We are doing far more production of our own retail branches andso 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 - NABResearch

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

James Dimon

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

I remind people that five of our business lines other thanthe IB are done out of the average regional bank. So we didn’t invent puttingthose five businesses together -- that’s TSS, private client, middle market,small business, consumer. They have been together for eternity and to me, thequestion 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. Wethink 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 needfor another leg. We think we can expand these businesses for the foreseeablefuture and if somehow we are wrong and the world changes or we think there’s astrategic misfit, then we should reconsider that.

Nancy Bush - NABResearch

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

James Dimon

Yes, to the extent they can use it. The commercial bank doesa lot of investment banking business now. They started a -- we call it ChaseCapital but think of it as kind of a mezzanine investment. They put on severalhundred million dollars of loans and I think the folks have done a great jobgrowing 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 forthe clients. We can be very competitive in price. We can bring them things thatother 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 behappy to give them capital.

Nancy Bush - NABResearch

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

James Dimon

I don’t think so. I think -- you know, we want it to bebigger, but that’s because we like it but I don’t think it’s needed to supportthe 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 themcorrectly, $66 billion of loans, $95 billion of deposits. TS&S, $250billion of deposits, so we are probably the largest corporate depository in theworld because -- and as long we’re sounding strong, we’ll always be able toattract cost effective deposits.

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

Nancy Bush - NABResearch

Thank you.

Operator

Mr. Dimon, Mr. Cavanagh, there are no further questions atthis time.

Michael J. Cavanagh

Great. Thank you very much. Thanks, everybody for joiningthe call.

Operator

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

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