My New Favorite Sell Side Analyst

My new favorite sell side research analyst. Unless you know the game of Wall Street you do not know how rare this is where an analyst will challenge a company much less a CEO. Often times this is because any one who is negative on a call well get screened for next quarterly call. Go Mike!!

Operator
Your next question comes from Mike Mayo - Deutsche Bank.

Mike Mayo - Deutsche Bank
Chuck said this was the year of no excuses. You guys say the results are disappointing. So what are the repercussions at the level of the Office of the Chairman? When I look at results, and feel free to educate me, but the business line mishaps are not just investment banking. There are some other areas. There are some risk management issues. Expense management, no matter how you look at it, year-over-year, year-to-date, linked-quarter, you add back the charges, reducing some for comp, you still have negative operating leverage.

Then management. It was a year ago when Tom Maheras, Michael Klein were moved to head the Investment Bank and now that has kind of changed a little bit. Also, Dave Bushnell, Head of Risk Management, was promoted three weeks before the preannouncement. I was not sure what was going on with that.

But the bottom line here is almost all the investors that I talk with feel like there needs to be more significant changes in terms of management. So that is the data I am looking at. What are you looking at, or what is the board looking at that they feel more comfortable?

Charles Prince
I think I would repeat a large part of what I said to Ron. It sounds to me like a very similar question. If you look at our results this quarter, no one can be happy with the results in our fixed income business or with the results that relate to that. But I think if you are able to look at the other parts of our business, if you look at the strategic plan that we are executing on, I think any fair-minded person would say that strategic plan is working. The benefits that we saw in the fourth quarter and then more in the first quarter and then more in the second quarter are showing through in the third quarter in the businesses that haven't been impacted severely by the fixed income dislocations.

So if you look at parts of securities and banking, and we called those out; if you look at our international business; if you look at our GTS business; if you look at our wealth management business; if you look at our various businesses, the trend line of growth that we have sustained now for several orders is continuing. It is clear that the fixed income dislocation hurt us, and hurt us in a very significant way in those businesses. But I think I certainly have confidence in our strategic plan. I think that it is showing through. I personally expect that it will continue to show through in the future. I think those are the factors that people are looking at.

Mike Mayo - Deutsche Bank
Well, one of your main targets for this year was to grow revenues faster than expenses and that is not going to pan out. This could be the third year in a row where that doesn't pan out. That was clearly a very important factor. Also at the corporate level, the risk management you said it was on the extreme areas of where you thought it should be. How do you think about that?

Charles Prince
Well, you ask two questions there. Obviously, we want revenues to grow faster than expenses. It is true in many of our businesses. As I said, we had a very severe dislocation in revenues in our Markets & Banking business, one that I am not sure any fair-minded person would see a way to lower expenses rapidly enough to offset that in a five-week period. In the rest of our business, I think we are actually making very considerable progress in that.
In terms of risk management, obviously, we wish that our risk management models had predicted what had happened here. In fairness, they included it, but only at the wide margins of what we thought was possible. I am not sure we were alone in that difficulty. But the facts are the facts. Our job is to sustain our strategic plan is we go forward, and that is what we're going to do.

Mike Mayo - Deutsche Bank
As it relates to risk management, the promotion, or maybe it's not a promotion. I am not sure what it was. The addition to responsibilities of the risk management head three weeks before the preannouncement?

Charles Prince
I am not sure of your question, Mike, but it was a promotion for David. David has taken on a broader set of responsibilities. Again, I don't see risk management as a guarantor of results in the kind of market dislocations that we have had this quarter, so I don't see that as a connection at all.

Mike Mayo - Deutsche Bank
I mean, reasonable people can disagree. If you don't like the Office of the Chairman or the way it is being run, you just sell your stock. But my question is, I saw Robert Rubin quoted in the press saying that your job should be safe for four years from now. Did the board kind of reaffirm your CEO status for the next several years? To what degree was your job title reinforced?

Charles Prince
I don't think it would be appropriate for me to comment on what Bob said or about what the board might be thinking in that regard.

Mike Mayo - Deutsche Bank
But you did say the board feels comfortable with the levels of changes that have been made. So should we assume that the changes are done?

Charles Prince
Again, Mike, I think it just wouldn't be appropriate for me to comment further on that subject.