Merrill Lynch & Co., Inc. 1Q08 (Qtr End 3/31/08) Earnings Call Transcript

Apr.17.08 | About: Merrill Lynch (MER)

Merrill Lynch & Co., Inc. (MER) Q1 2008 Earnings Call April 17, 2008 8:00 AM ET

Executives

Sara Furber - Investor Relations

John A. Thain - Chairman and Chief Executive Officer

Nelson Chai - Chief Financial Officer

Analysts

Glenn Schorr - UBS

Michael Mayo - Deutsche Bank

Prashant Bhatia - Citigroup

Susan Katzke - Credit Suisse

James Mitchell - Buckingham Research

Operator

Good morning and welcome to the Merrill Lynch first quarter 2008 earnings conference call. (Operator Instructions)

I'd now like to turn the call over to Sara Furber, head of Investor Relations. Please go ahead, ma'am.

Sara Furber - Investor Relations

Good morning and welcome to Merrill Lynch's conference call to review our first quarter 2008 results. The following live broadcast is copywrited to Merrill Lynch.

Statements made today may contain forward-looking information. While this information reflects management's current expectations or beliefs, you should not place undue reliance on such statements as our future results may be affected by a variety of factors that we cannot control. You should read the forward-looking disclaimer in our quarterly earnings release as it contains additional important disclosures on this topic. You should also consult our reports filed with the SEC for any additional information, including risk factors specific to our business and the information on calculation of nonGAAP financial measures that is posted on our Investor Relations website, www.ir.ml.com, where an online rebroadcast of this conference call will be available later today at approximately 11:00 a.m. Eastern Time.

And with that, I'll turn the call over to John Thain, Merrill Lynch's Chairman and Chief Executive Officer.

John A. Thain - Chairman and Chief Executive Officer

Thank you, Sara. Good morning, everyone.

I would characterize our first quarter results as good operating results in a very difficult environment. The widening in credit spreads, forced liquidations, high volatility, the lack of market liquidity for many credit products is probably as difficult a quarter as I've seen in my 30 years on Wall Street.

And in that context, we generated $7.4 billion of revenues before marks and the fair value gains, and a number of our businesses did very well. We had record Global Wealth Management revenues, with an industry leading proportion of fee-based revenues. We added $9 billion to our annuitized products, and we added $4 billion in spite of the market environment in net new money, $1.3 billion of which came from First Republic so that acquisition is starting to bear fruit. In our trading businesses, we had record revenues in Rates and Currencies, almost double from the year ago quarter. We had 20% year-over-year revenue growth in our Equity and Financing and Services businesses, and we had the highest revenues in Cash Equities in the Americas and EMEA since our 2000 record levels.

Investment banking, we did well. We were in the top five of debt and equity lead tables. We were the number one in EMEA mergers on a completed basis. We were number three in the Pac Rim. And although our investment banking revenues were down significantly for the first quarter, what's interesting and good is that our pipeline was down only 5% from the fourth quarter and down 6% from the first quarter of '07, which means that, although the deals were delayed, they're still there and so we would hope to realize those over the course of the rest of the year.

Internationally, our revenues were strong. Japan was up 87%; Latin America was up 67%. EMEA also had good growth. We are focusing on the rapidly growing parts of the world. In Brazil, you saw we hired a senior investment banking team. In India, we're building out our equities trading platform and our wealth management business. In Korea, we've just obtained our banking license, and I recently last week was in Japan and China. We also see great opportunities to grow our businesses.

And then our investment in BlackRock has experienced exceptional growth and just on a market value basis, the current market value of BlackRock's over $13 billion versus about $8 billion that's on our balance sheet.

So I think that our operating businesses in this environment have done well.

The second focus for us has been on our balance sheet. We've been very actively managing our balance sheet and our liquidity positions. As you've seen already from the release, our liquidity is up from the fourth quarter of last year. We were very concerned about the market environment at the end of last year. We had $79 billion of cash available at that time, and we've increased that to $82 billion at the end of the first quarter. This gives us tremendous flexibility in this difficult market environment. And I would also say that our bank deposits, we have $100 billion of bank deposits. It's a very stable source of funding for us.

On the capital side, we've increased our stated capital from $36.7 billion at the end of the fourth quarter to $41 billion. We are well capitalized under the risk weighted asset tests. And, for those of you who like to blog, we do not have any plans to raise any additional common equity, and Nelson actually agrees with that.

In terms of leverage, we had been reducing our balance sheet. Our risk weighted assets are down 7%. Our leveraged loan book - this is a good example of places where we've been able to make some progress reducing our balance sheet - our leveraged loan book was down from $18 billion at the end of the fourth quarter to $14 billion. And that reduction was actually a $5 billion reduction with a $1 billion increase. Those were done through cash sales right around our marks. So that actually is a good sign that we're getting some liquidity into the marketplace.

On the subprime, except for CDOs our subprime position is down from $2.7 billion to $1.4 billion. And we're bringing our risk down. Our VAR was down from 65 to 59.

We've also been successful in what we said at the beginning of the year we would do in terms of our principal investing. So we said we would start to move our principal investing into third-party funds. The first piece of that was completed this quarter where we raised a third-party commercial real estate fund in the Pac Rim, and we moved $723 million of assets from our balance sheet into that fund. That fund ultimately we expect to be between $2.5 and $3 billion.

So our balance sheet's in good shape. Our operating businesses are good.

There's no question that the credit spread widening that occurred in this quarter impacted our inventories, particularly our ABS CDO inventory. You saw from the press release we had $1.5 billion of net write-downs on ABS CDOs, obviously much, much lower than the fourth quarter of last year. Just to give you an idea of how we were pricing those, we moved cumulative loss assumptions on subprime mortgages from what was a range of 16% to 21% at the end of the fourth quarter to a range of 19% to 24% at the end of the first quarter. And remember, at 24% that would mean that if half of the mortgages defaulted you would lose 48% of the value of the home, so very, very significant price declines. And just in terms of the average over the U.S. so far, year-over-year home prices are down about 11% although subprime in certain areas are down more than that.

We did increase our credit reserves on monoline hedges against the ABS CDOs by $2.2 billion, and I think what's important there is that if you look at the total gain that we have on our shorts that are protected by the monolines it was $7.8 billion. We have reserved $4.8 billion of that, which is over 60%. But unlike the CDOs where I think that it's not very likely we will recover value on that, we do expect in many cases to recover a significant amount of the reserves and at least some of those monoline insurers continue to be rated triple-A. So we're much more comfortable that we're being conservative on the monoline reserves, and we would expect to recover that over time.

On the expense side, we have announced that we are going to reduce our headcount approximately 10% from the beginning of the year levels excluding our financial advisors and the support to the financial advisors. That should generate about an $800 million a year run rate savings. It's a very targeted headcount reduction. We are not in any way pulling back from our fundamental strategy. We are not changing our view that we need to invest in the faster-growing parts of the world, and so the headcount reduction will be made in those slower growing areas that are not the focus of our global strategic growth.

And then lastly I'll just comment a moment on the economic environment, and then I'll turn it over to Nelson to give you some more details. I think that we are seeing some improvement in the credit markets. The leveraged loan market's probably a good example of that. We are seeing some improvement in spreads, and I think the real risk going forward here is how much do all of the problems in the financial and credit markets seep into the real economy, you know, what is the impact of higher energy prices, higher food prices, higher unemployment, and falling home prices on the consumer and what's the impact of that in terms of the U.S. economy and ultimately the global economy.

We are planning for a slower and more difficult next couple of months and probably next couple of quarters, but we're also optimistic for our results for the full year 2008.

And so with that I will turn it over to Nelson.

Nelson Chai - Chief Financial Officer

Thanks, John. Let me take a moment to review our major segments.

In our Global Markets business, first quarter revenues of negative $690 million were up substantially from the fourth quarter but lower than the prior year period as a result of the weaker capital markets environment. GMI's pre-tax loss for the quarter was $4 billion.

Turning to the revenue detail by business line, FICC revenues were negative $3.4 billion as the business continued to face significant headwinds due to our CDO monoline related exposures, which I'll detail in a minute. However the positive trading environment drove FICC revenues of $1.9 billion, which exclude marks of $6.6 billion and fair value debt gains of $1.4 billion. In fact, the vast majority of the FICC business has demonstrated sequential growth from the fourth quarter, including rates and currencies, credit trading, commodities and municipals. Rates and currencies in particular generated record revenues this quarter, benefiting from the combination of increased capital allocations, favorable market positioning and strong client float.

As I'm sure you've all seen, we disclosed our key exposures in Attachments 5 and 6 in this morning's release. With that in hand, let me walk you through each of our major exposures.

The majority of the write-downs this quarter were related to the ABS CDOs and related monoline exposures that John mentioned earlier.

On the super senior ABS CDO front, the quarter and our gross exposure was $26 billion, down from $30 billion at the end of the year, and the net exposure related to these positions was $6.7 billion. As you can see in our release, write-downs in this area were offset by an increase in our net exposure due to the reduction of certain hedges, namely at quarter end we made a decision to consider notional hedges of $1.1 billion with MBIA ineffective as we are working to expedite the resolution of a potential conflict related to hedges we have with SCA. This was a decision that made clear economic sense as the carrying value of the MBI hedges that we have considered ineffective was less than $50 million.

We remain prudent in our approach. During the quarter we increased our average cum loss assumptions for this portfolio across all underlying collateral types, and we are taking into consideration incremental remittance and other data which was negative during the quarter although for which the velocity of the downward trend has slowed.

As a result of the losses in our underlying super senior ABS CDO positions, the corresponding value of our related hedges with the monolines increased during the quarter. For these hedges, our credit valuation adjustment was negative $2.2 billion during the quarter, which were largely driven by gains on hedges and a number of rating downgrades for the monolines we have exposure to. As John mentioned, again, on average we have written down the value of these hedges to 40 cents on the dollar at quarter end, levels that while appropriate are conservative relative to the fundamental cash flow expectations for most of the monolines.

Away from the $10.9 billion of hedges we have with the monolines on the super senior ABS CDOs, as you can see at the bottom of Attachment 5 we have $9 billion of CDO hedges with other financial counterparties such as insurance companies and hedge funds. We remain confident in the strength of these hedges as the ratings outlooks for these counterparties are stable and they continue to post collateral as required.

With respect to residential mortgages within the FICC business, our exposure has increased slightly although approximately 70% of this figure reflects prime mortgages, almost all of which are from our GWM private client which in their history of experience virtually default.

During the quarter, the most significant drivers of change were $3 billion of prime mortgage originations and the net purchases of $900 million of Alt-A securities, which were partially offset by sales, securitizations and other changes in hedging activity.

On the leveraged finance front, our write-downs were slightly more than $900 million, driven by significant spread widening and market illiquidity. We reduced our exposure by approximately $4 billion in the quarter, and sales were completed at levels consistent with our marks at the time of the execution.

In commercial real estate, our exposures were also impacted by the weaker market environment, however gains on commercial real estate loan sales more than offset our marks.

We remain comfortable with the quality of both of these portfolios and will selectively reduce our net exposures to these asset classes consistent with our overall strategy to reduce less liquid assets.

Finally, within our U.S. bank investment securities portfolio, we recognized approximately $3 billion of pre-tax net write-downs through other comprehensive income, or OCI, and approximately $400 million of net write-downs through the income statement.

The largest contributor to these write-downs was our exposure to Alt-A securities, which we have written down to an average of less than 70 cents on the dollar.

Turning to Equity Markets, first quarter net revenues of $1.9 billion were down 13% sequentially. The solid growth in Financing and Services, Equity-linked and approximately $700 million in fair value adjustments related to certain long-term debt liabilities were more than offset by declines in our principal related businesses.

Within our Financing and Services business we reported double-digit sequential and year-on-year revenue percentage increases. Our client balances are up 27% year-over-year and down only modestly from record levels in the 2007 fourth quarter despite significant industrywide deleveraging during the period.

Our Prime Brokerage business continues to gain momentum as we are currently ranked number two prime broker by the Global Custodian Survey and have added new clients during the quarter.

Net revenues from our Private Equity business this quarter were negative $207 million, down almost $100 million sequentially and $650 million versus the year ago period primarily due to price declines for our publicly traded investments.

Net revenues for our Proprietary Trading and hedge fund-related business were also negatively impacted by the adverse market conditions this quarter, declining $300 million sequentially. However, we believe we are well positioned for the remainder of the year.

In Investment Banking, revenues declined by 30% sequentially as industry volumes were materially lower and we faced challenging comparisons to last quarter, which included significant revenues from our role as an advisor to a consortium's acquisitions of ABN AMRO.

While revenue in Strategic Advisory declined slightly from the year ago quarter, the business showed strength, outperforming [the decline in] industry transaction volumes from the year ago level.

Our Investment Banking fee pipeline remains strong although execution, of course, is market dependant as our client dialogue is active despite the continued volatility in the capital markets. We ended the quarter down 5% from 2007 year end and saw increased levels in the Pac Rim.

Turning to our Global Wealth Management business, GWM continues to deliver record performance with quarterly revenues of $3.6 billion, up 8% on a year ago basis even in this challenging period, which included significant asset depreciation and market volatility. Pre-tax earnings of $720 million were down 8% year-over-year as we continue to invest in the business and fully reserved for an $80 million client receivable. Excluding the impact of this reserve, GWM's margin was 22.2%, comparable to year ago levels but down sequentially, reflecting the seasonal impact of payroll taxes and the generally tougher market conditions.

During the quarter we achieved positive net new money and more than $9 billion of net new annuitized flows, client assets of more than $1.6 trillion, down less significantly than the approximate 10% decline in the S&P 500, success in retaining our industry leading team of financial advisors, with net positive recruiting in our top quintiles, annualized revenue per FA of $862,000, overall FA growth of 5% year-over-year, including 18% outside the Americas.

GPC net revenues in the first quarter were $3.3 billion, up 7% from the year ago period. Revenue growth was driven by increased fee-based revenues and record net interest revenues, reflecting the inclusion of First Republic and greater client inflows into deposit programs.

Transaction and origination revenues remained relatively strong, up slightly from the prior year quarter but down sequentially from the fourth quarter in 2007 due to continued market weakness. March marked the fifth consecutive month of declining market indices and persistent volatility coupled with a downward bias that typically causes the retail investor to sit on the sidelines. Furthermore, we're still identifying new opportunities to enhance our market leading position.

During the quarter we effected enhancements to our FA training program, a result of a year-long study to improve our return on investment. Specifically, we have tightened the timeframe to make decisions on continuing our investment in trainees which reduced our FA census this quarter, but we expect to increase our returns from the program.

We are also continuing to invest in our platforms and planned initiatives to deliver a new online platform for all ML clients, upgrade our advisor work stations, support international growth by adding local products and platforms outside the U.S.

Lastly, in GIM net revenues were $299 million for the quarter. Year-over-year growth of 15% was driven primarily by an increase in earnings from our investment in BlackRock, which John touched upon earlier.

That concludes my discussion of the segments. Now I'll turn briefly to the firm as a whole and discuss expenses.

I'll start with the compensation expenses for the quarter, which were $4.2 billion and reflect increased headcount levels and productivity for FAs from a year ago partially due to acquisition. Comp expenses also include approximately $180 million related to the accelerated vesting of our shifted stock we effected last quarter.

As John mentioned, we intend to reduce our headcount by about 4,000 employees or 10% of our work force excluding the financial advisors and the investment associates. These headcount reductions will occur predominantly in GMI and support areas, but they will not impact the FA or investment associate population. We estimate the cost savings from this reduction will be approximately $800 million of compensation expense on an annualized basis, which includes approximately $600 million for the remainder of 2008. As a result, we expect to record a restructuring charge of approximately $350 million in the second quarter of this year.

On the non-comp costs, they increased 10% year-over-year to $2 billion, largely related to acquisitions, increased headcount and growth in brokerage clearing and other expenses during the quarter. As I mentioned, managing the firm's expenses to be better in line with the business activity are a key focus for 2008.

At year end and adjusting for our convertible preferred securities on an as-converted basis, total equity capital was $41.3 billion, and our adjusted book value per share was $28.93, reflecting the impact of our net loss and increased negative balance in OCI.

And our effective tax rate was 40% for the quarter, a significant increase reflecting changes in the geographic mix of our earnings.

Finally, as John mentioned, in terms of outlook we remain cautious in the near term and continue to monitor the U.S. economic environment. Merrill Lynch is truly a global firm, and we continue to be optimistic regarding our long-term growth opportunities in each of our major business lines, particularly outside the U.S.

And with that we will open it up to questions. Thank you.

Questions-and-Answer Session

Operator

(Operator Instructions) Your final question comes from Jeff Hart with Sandler O’Neill. Sir, your line is open. Mr. Hart, your line is open.

That question has been withdrawn. Your next question comes from Glenn Schorr with UBS.

Glenn Schorr - UBS

Maybe a first question just on mechanics. I get the securities - don't like it - but I get the securities in the bank portfolio, a lot of the marks go to the OCI line. Can you just help me with what differentiates a mark and the marking to market in the securities portfolio that would go to the P&L versus anything else?

Nelson Chai - Chief Financial Officer

Well in our investment portfolio, as you know, we've invested in some ABS, some prime, but mostly Alt-As. We've obviously done our analysis of the positions, and we believe we have the ability and intent to hold until maturity, which we intend to do.

There obviously are differences between the individual pieces. And again, we maintain the same [inaudible] we always have, which is we continue to monitor each of the positions if there are any kind of price fluctuations, if you will, to determine whether or not we would maintain them in OCI or whether or not they move over. And as you know and as I mentioned in the quarter we had about $400 million that we took into OTTI, which is -- and take it to the P&L.

Glenn Schorr - UBS

Okay. So it's just if there's temporary or permanent impairment?

Nelson Chai - Chief Financial Officer

Yeah, we have an impairment assessing process. I would say based on what I know of it ours is actually very conservative relative to others. So we do test each of the pieces in there as markets fluctuate.

Glenn Schorr - UBS

Okay. Moving on, can you comment on what gross and net adjusted leverage ratios were and just thoughts on moving forward?

Nelson Chai - Chief Financial Officer

Well the adjusted leverage ratio got reduced from about 17.7 times at year end to 16.2 times. And again, when you say as we move forward, I'm not sure I understand the question.

Glenn Schorr - UBS

Well I think there's pressure and talk by some that leverage ratios need to move lower, as imperfect a measure as it is.

Nelson Chai - Chief Financial Officer

Yeah. I think we'll continue just to focus on that. I think you heard John's comments. I mean, we continue to focus on reducing our illiquid positions. We've taken our risk weighted assets down 7% in the quarter. It's a big focus of ours, and it also is one of the drivers - as you know, John mentioned earlier that in the capital ratio calculation, it's two-sided - and so we continue to do a very, very good job on our risk weighted assets. And as John mentioned earlier, the line for well capitalized is 10% and we are doing very well relative to that.

Glenn Schorr - UBS

Ten percent?

Nelson Chai - Chief Financial Officer

That's not our number, Glenn.

Glenn Schorr - UBS

Okay. I'm with you. I'm with you.

Nelson Chai - Chief Financial Officer

We don't disclose where we are today.

Glenn Schorr - UBS

Last one is at last look, last quarter there was a large refinancing need, meaning just debt coming due over the balance of '08. Can you just talk about how much has been done, what your plans are for the rest of the year on the debt side, and how much of the higher funding costs are direct impact versus there's an offset on the asset side?

Nelson Chai - Chief Financial Officer

Well first of all if you look - and John mentioned the excess liquidity pool we have, which was $82 billion at quarter end and it's actually greater than our funding obligations - I think in the 10K you saw that we talked about $44 billion of debt maturities coming due in 2008. We obviously continue to roll commercial paper and repo, but we obviously will continue to be active in the markets and look for opportunities.

As you know, as we talked about capitalization and debt, I mean, we have funded some of the stuff just by reducing the balance sheet and we continue to do that. In the first quarter, given where the credit markets were, the returns are much better to do that, and obviously we focus very much on continuing to do both.

And so I think you'll see us continue to look at reducing the balance sheet, which obviously reduces the need for the funding, but importantly, we will be looking at the markets in the back quarters of the year.

Glenn Schorr - UBS

Okay. Well, thanks, Nel.

Nelson Chai - Chief Financial Officer

Okay.

Operator

Your next question comes from Matt Fischer with Deutsche Bank.

Michael Mayo - Deutsche Bank

Hi. It's Mike Mayo. Could you just confirm the lower guidance for pro forma book value? Is that strictly due to the loss this quarter and OCI?

John A. Thain - Chairman and Chief Executive Officer

Yes.

Nelson Chai - Chief Financial Officer

Yes.

Michael Mayo - Deutsche Bank

Okay. And the decline in the brokerage margin, I think you said on a core basis it would have been closer to 22% to 23%, but are you looking to improve that or you just need better markets for that to improve?

Nelson Chai - Chief Financial Officer

Well, I think, first of all, there's a seasonal thing in terms of payroll taxes and where some of that stuff comes in, Mike. We also mentioned that we took an $80 million reserve against a client receivable as well. So I think when we talked about on a more normalized basis, that was the number that you're referencing. And yes, we're always looking to improve our margin.

Michael Mayo - Deutsche Bank

And I know this is a sensitive topic, but the FAs are protected from the new restructuring. But as you point out, investors are kind of sitting on the sidelines. At what point do you need to reconsider that?

John A. Thain - Chairman and Chief Executive Officer

Well, as you heard, our wealth management business is actually doing great. It's adding assets, it had record revenues, and as long as they keep doing that, I don't see any reason we would reconsider this.

Michael Mayo - Deutsche Bank

Okay. And then one question I get a lot. You mentioned at the top of the conference call BlackRock's worth $13 billion and it's on the balance sheet for $8 billion. What's the unique synergy that you need to maintain that investment, and why not monetize that unrealized gain of $5 billion?

John A. Thain - Chairman and Chief Executive Officer

There's a great relationship between our two companies and the ability for them to create products that we then distribute through our system is working very well. And so we really wouldn't want to disturb that relationship, and frankly, the earnings that are being generated from BlackRock are very positive for us.

Michael Mayo - Deutsche Bank

And then lastly, what metrics should we look going forward when we analyze your leverage? I mean, some firms say the net leverage ratio is what their managing to, and other firms say there's five or six different measures. Should we think about Tier 1 ratios a few quarters from now, or how should we think about that?

John A. Thain - Chairman and Chief Executive Officer

Well, as you know, we are operating under the Basel II framework so obviously we take a lot of credence in looking at our regulatory capital, our risk weighted assets, and we are going to focus on that.

And I know those numbers aren't disclosed today. What we hear in the marketplace is that they will likely push towards the back half of this year in terms of having all the firms disclose it.

Additionally we look at the adjusted assets as well, which we talked about, and that ratio as well, the adjusted leverage.

Michael Mayo - Deutsche Bank

And we should have that by the fourth quarter at the latest?

John A. Thain - Chairman and Chief Executive Officer

Again, we'll see where - again, we will dictate what we're apt to do in terms of disclosure. Obviously, we're working with other parties regarding this.

Michael Mayo - Deutsche Bank

Thank you.

John A. Thain - Chairman and Chief Executive Officer

You should expect it in 2008 is what we hear.

Michael Mayo - Deutsche Bank

Thanks.

Operator

Your next question comes from Prashant Bhatia with Citigroup.

Prashant Bhatia - Citigroup

Hi. Just on the - you talked about you don't need to raise capital; you've been very clear on that - can you just walk through the thought process on what would drive you to change that, number one, and number two, can we infer that because you don't need to raise capital, as you've said, that your expecting to be profitable in the quarters ahead?

John A. Thain - Chairman and Chief Executive Officer

Sure. At the end of the year last year we raised $12.8 billion in new capital, and for '07, as you know, we lost $8.6 billion. So we basically raised $4.2 billion of excess capital.

That capital, that excess capital, was intended to reassure the market that we didn't have to come back into the equity markets and it'd give us the capital base to go forward into 2008. And that continues to be the case.

Your comment about profitability going forward, we obviously don't give guidance so we're not going to project anything. But your comment is a very, very reasonable expectation.

Prashant Bhatia - Citigroup

Okay. Also on the Alt-A side, it looks like you added some Alt-A assets as [inaudible] side of the bank. Are you buying Alt-A assets in the marketplace? And I guess your marks of 70 cents on the dollar, do you have a view on if that's reflecting the cash flow characteristics of these assets or is that really market pressure?

Nelson Chai - Chief Financial Officer

No, we did add to our Alt-A position. We did buy some.

Prashant Bhatia - Citigroup

Okay. And where they're valued, is that more the pressure in the marketplace or is that you think reflective of 

John A. Thain - Chairman and Chief Executive Officer

No, no, I think it's absolutely because of forced liquidations. And so I think that the prices that the Alt-As traded at were very low and were driven down by forced liquidations.

Prashant Bhatia - Citigroup

Okay. On the auction rate securities, can you update us on how much of these securities are owned by Merrill Lynch clients and maybe a view on how you think this issue gets resolved over time?

John A. Thain - Chairman and Chief Executive Officer

Sure. Our clients own about $18.5 billion of them. Of that $18.5 billion, about $12 billion are closedend funds, which are the most problematic of them. And we have been working with those closedend funds to refinance the securities, which is the ultimate answer here. And you've seen Nuveen announce the intention to do that. You saw BlackRock a couple days ago announce the intention to do that. That is the answer to this problem.

Ultimately these things are very well protected from a credit point of view, and so I don't think there's any question that the investors will ultimately get their money back at par. But they have to be refinanced, and that's what we're working to do.

Prashant Bhatia - Citigroup

Okay. And then one final question. The [Fed] facility thing, just talk a little bit about how you're using that facility.

John A. Thain - Chairman and Chief Executive Officer

The Fed facility?

Prashant Bhatia - Citigroup

Yeah.

John A. Thain - Chairman and Chief Executive Officer

We've tested it so that we can use it if we wanted to, but we have not actually used it to any significant amount.

Prashant Bhatia - Citigroup

Okay. Thank you.

Operator

Your next question comes from the line of Susan Katzke with Credit Suisse.

Susan Katzke - Credit Suisse

Thank you. Two questions: One, can you talk about the Private Equity business a little bit within the Equities business and just review again what the negative mark was this quarter and what your intentions are for your larger, single-name holdings, whether or not you want to continue holding those concentrated positions or you will seek to exit or hedge them?

And then second of all, when I look at your fixed revenue run rate of $1.9 billion before marks, that's materially below where FICC revenues ran in prior quarters before the market dislocation, and while I understand certain businesses aren't performing if you look at volumes and volatility in the first quarter, I would have expected a higher level of run rate. So can you walk us through the businesses that weren't working and why?

Nelson Chai - Chief Financial Officer

Okay. Sue, it's Nelson. Let me handle the Private Equity question. In the first quarter last year, because it's the comparison you're asking about, we had revenue of about $450 million there and it had to do with mark to market on positions. As you know, we have publicly traded companies in that portfolio, and there, because of the market and a few of the larger positions traded down during the quarter, we took the net revenues down $200 million. That actually is a fairly significant swing if you think on a year-over-year basis.

In terms of what our position is it's that we will evaluate what we think the relative value of each of the positions periodically, which we do, and if we think that it makes sense to exit the positions because the prices are right, we will. I think fundamentally we still like the properties we have in our book.

Susan Katzke - Credit Suisse

Okay. I'm confused, though. You said your Private Equity marks were down $200 million year-over-year, so they were still net positive?

Nelson Chai - Chief Financial Officer

No, no, no, no, no. I'm sorry. The revenue the year ago would have been a positive $450 million.

Susan Katzke - Credit Suisse

Right.

Nelson Chai - Chief Financial Officer

Revenues in the first quarter this year are down $200 million.

Susan Katzke - Credit Suisse

Okay.

Nelson Chai - Chief Financial Officer

A negative $200 million. So that's a $650 million swing.

Susan Katzke - Credit Suisse

Okay. Thanks for the clarification.

Nelson Chai - Chief Financial Officer

Sure.

John A. Thain - Chairman and Chief Executive Officer

In terms of the trading revenues in FICC, March was a much more difficult month than January or February. And so it's really the negative impact of March - which I think was a significantly more difficult month across the board on the street - and so that's really what impacted the revenues.

Susan Katzke - Credit Suisse

Okay, great. Thank you.

Operator

Your final question comes from the line of James Mitchell with Buckingham Research.

James Mitchell - Buckingham Research

Yeah, hi. Most of my questions were asked and answered, but just maybe if you could talk about the comp. It did come in a little bit higher. There clearly wasn't a lot of flexibility there. Can you talk about what we can think of as a reasonable compensation line going forward I guess from a comp ratio in a more normalized revenue environment?

John A. Thain - Chairman and Chief Executive Officer

Right. And I guess what I would say is the comp line, there's about $200 million of incremental in this quarter versus the year ago quarter and that had to do with the acceleration of some employee stock.

In addition to that, the comp in the first quarter did include some continued acquisition and stuff. And as I mentioned in my comments, we are in the process and we announced today that we are going to reduce our headcount by 4,000 employees versus the end of the year.

And so I think as we work forward, obviously the comp is two metrics: one is the actual number of employees - and you're seeing the action we're taking there - and the other is really on the discretionary side, and that business will continue to be scaled relative to the performance of the business.

So we don't give you forward guidance on things, but I think you can see that we're going to take the appropriate actions to continue to work through that. And I think you will see as we continue to break down - as we already have done already - some of the silos in the businesses and operating as one, I think you'll see more opportunity for efficiency there.

James Mitchell - Buckingham Research

Yeah. No, I hear you. I just looked at even if you take out the $180 million, you were at $4 billion, so on an annualized basis, $16 billion. I think that's even a little bit more than what you accrued for last year and not really materially down from the first half of last year when you were in the 4-7, 4-8 range despite a much lower revenue environment. So I'm just trying to - is it really just the acquisition of Republic in there and a couple other things? That just seems a little high, that's all.

John A. Thain - Chairman and Chief Executive Officer

Yeah, yeah. It's the acquisition of First Republic.

James Mitchell - Buckingham Research

Okay. All right, fair enough. Thanks.

John A. Thain - Chairman and Chief Executive Officer

Okay.

Operator

This concludes today's conference call. You may now disconnect.

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