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<PAGE>
This filing contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements include, but
are not limited to, statements about the benefits of the merger between Chase
and J.P. Morgan, including future financial and operating results, Chase's
plans, objectives, expectations and intentions and other statements that are not
historical facts. Such statements are based upon the current beliefs and
expectations of J.P. Morgan's and Chase's management and are subject to
significant risks and uncertainties. Actual results may differ from those set
forth in the forward-looking statements.
The following factors, among others, could cause actual results to differ from
those set forth in the forward-looking statements: the risk that the businesses
of Chase and J.P. Morgan will not be combined successfully; the risk that the
growth opportunities and cost savings from the merger may not be fully realized
or may take longer to realize than expected; the risk that the integration
process may result in the disruption of ongoing business or the loss of key
employees or may adversely effect relationships with employees and clients; the
risk that stockholder or required regulatory approvals of the merger will not be
obtained or that adverse regulatory conditions will be imposed in connection
with a regulatory approval of the merger; the risk of adverse impacts from an
economic downturn; the risks associated with increased competition, unfavorable
political or other developments in foreign markets, adverse governmental or
regulatory policies, and volatility in securities markets, interest or foreign
exchange rates or indices; or other factors impacting operational plans.
Additional factors that could cause Chase's and J.P. Morgan's results to differ
materially from those described in the forward-looking statements can be found
in the 1999 Annual Reports on Form 10-K of Chase and J.P. Morgan, filed with
the Securities and Exchange Commission and available at the Securities and
Exchange Commission's internet site (http://www.sec.gov) and in J.P. Morgan's
Definitive Proxy Statement referred to below.
J.P. Morgan has filed with the SEC a Definitive Proxy Statement on Schedule 14A
relating to the proposed merger. Stockholders are advised to read the
definitive proxy statement because it contains important information.
Stockholders may obtain a free copy of the definitive proxy statement and other
documents filed by Chase and J.P. Morgan with the SEC, at the SEC's internet
site (http://www.sec.gov). Copies of the definitive proxy statement and the SEC
filings incorporated by reference in the definitive proxy statement can also be
obtained, without charge, by directing a request to The Chase Manhattan
Corporation, 270 Park Avenue, New York, NY 10017, Attention: Office of the
Corporate Secretary (212-270-6000), or to J.P. Morgan & Co. Incorporated, 60
Wall Street, New York, NY 10260, Attention: Investor Relations (212-483-2323).
<PAGE>
[The following is a transcript of a joint conference call for the investment
community discussing fourth quarter earnings and providing a merger update.]
Conference Call for the Investment
Community December 14, 2000
8:35 a.m.
Chase Headquarters
270 Park Avenue
New York, New York 10004
Reported by:
Michael Williams
ADVOCATE REPORTING, A LegaLink Company
APPEARANCES:
Thomas B. Ketchum
David Sidwell
Geoffrey T. Boisi
Donald H. Layton
Peter Gleysteen
John Borden
MR. SHAPIRO: Good morning. My name
is Marc Shapiro and I'm delighted to have you
join a joint conference call for J.P. Morgan and
Chase. I'm joined this morning by Thomas
B. Ketchum and David Sidwell of J.P. Morgan and
also joined by Chase colleagues Geoffrey T. Boisi
<PAGE>
and Peter Gleysteen who is our new senior credit
officer, as well as John Borden. I thought I would
comment for about
five minutes on our announcement that we made
this morning, and then open it up to questions
and I'll be joined in responses to those
questions by my colleagues.
The announcement that we made this
morning I think contains both good news and bad
news. The bad news is that the current
outlook is certainly more challenging than we
might have hoped for. Capital markets are difficult in
several respects. The shutting down of new
issuance in many of the markets, the widening of
credit spreads, the lack of volatility in
currency markets and a general decline in
customer volumes in the first two months of the
quarter all will contribute to lower trading
revenues at both firms than we have had in
previous quarters.
In addition, we continue to be
affected by the valuation of the public portfolio
of Chase Capital Partners. While the investments
in this public portfolio still have a value that's
more than three times what we paid for them as
private investments; they have declined in value since
September 30, and we are required to record that
decline in value through our earnings. It would appear
<PAGE>
that Chase Capital Partners, which had negative revenue in the third
quarter, will have more substantial negative
revenue in the fourth quarter.
A third factor affecting our earnings
is expenses, which by our account are higher than
they should be. Part of that is the acquisitions that
we have done of Flemings and H&Q, which did
contain certain guarantees of compensation, which
become more pronounced as revenues -- become more
evident -- I suppose, as revenues decline. In addition,
both firms have built up capability over the year
prior to the merger and the impact of that on our
earnings is evident in the fourth quarter, along
with a seasonal build up in, a normal seasonal build up,
in expenses.
We have taken a close look at
expenses, as I will get to when we talk about the
merger synergies, and because we now believe we
will be in a position of market leadership and
not needing to continue to build our platform, we
believe that we can hold expenses flat for next
year on a pro forma basis as if we had Flemings
all year.
A forth element affecting our
earnings would be credit. Credit conditions are
difficult. I think in this environment our
statistics have held up much, much better than
any of our competitors. We do not expect a
material change in nonperforming assets in the
<PAGE>
fourth quarter. We do expect some uptick in
commercial charge-offs and some increase in our
provision for credit losses.
For all those reasons, we believe
that our bottom line in the fourth quarter will
be substantially below the third quarter and the
current analyst estimate.
On the other hand, the good news is
that the long term value of this company, I think,
has increased in value over the last 90 days. The
merger, which was announced only
90 days ago, has come together extraordinarily
well, both from a people standpoint and an
execution standpoint and most importantly from a
customer standpoint.
We find tremendous customer
acceptance of this merger. We have made over 100 joint pitches
with over a 40 percent success rate, and we now
have incremental revenues, almost all of which
will be booked next year in excess of $200
million.
We are proceeding well from a
management standpoint, having made over 1,000 key
management appointments, having selected almost
all of our application suites and having made all
of our key facility decisions.
We have received approval from the
Fed. We are waiting, hopefully, in the next day
<PAGE>
or two, approval from the New York State
Department of Banking, and we have our
shareholder meetings scheduled for next Friday.
If all goes on schedule, we will
close this merger on December 29th, and we will emerge
next year in a much stronger position with a terrific
completed platform to go forward.
At this time, I would like to open it
up for questions.
THE OPERATOR: Thank you, gentlemen.
The floor is now open for questions. If you do have
a question or a comment, please press the number one followed by
four on your touch tone telephone at this time.
Our first question is coming from
Chip Dixon of Lehman Brothers.
MR. DIXON: Morning. Marc, on the
expense, I think this announcement really
focuses on the issue of control, getting your
arms around the expenses, I guess the level of
guarantees, how high were they? What kind of
confidence can you give us that expenses will be flat,
and when you say flat, a little more
guidance there. I guess I'd leave it at
that.
MR. SHAPIRO: Well, it's hard to be a
lot more specific than flat, Chip. I think that in both of the mergers
there were guarantees of compensation levels that
were consistent or, in some cases, slightly
higher than prior years, which works out fine
<PAGE>
when revenue is strong. When revenue is weak, obviously,
those begin to bite a little bit more.
We also, both firms during the year,
hired a number of people who had guaranteed
contracts. Those will generally run off next
year and do not extend, well, actually all of it
sort of runs off at the end of next year. The two
acquisition guarantees run off at that point in time.
I think that there are other factors
at work. But I think that the primary focus is
that we are committed as a management team to a
level of expenses in 2001 that does not show any
increase over 2000, assuming that we had
Flemings from the beginning of the year. The
Flemings expenses for the first
seven months of the year I think would amount to
somewhere around 3 percent of total expenses. So
not on a pro forma basis, that would
probably imply an increase of about three or four
percent. But it is flat, or down, actually
substantially down, from the current running rate
of expenses. We believe we will get there because
of synergies. We believe we will get there
because we do not have a need in the short term
to invest in building up new product
capabilities. Again, this is something that has
affected both firms and coming together as a new
management team it is something we are determined
<PAGE>
to get our arms around.
MR. DIXON: And just if I could
follow up, in terms of the synergies, when should
they start becoming evident assuming the deal
closes at year end?
MR. SHAPIRO: I think that, although we have
made some actions, I guess we have had about 400
job eliminations between the two companies, the
great majority of the front office will be middle
to the end of the first quarter and really be the
second quarter before they begin to show up.
Most of the back office and staff
areas will be after the beginning of the third
quarter because of the necessity to do systems
work before we can begin those job actions.
THE OPERATOR: Our next question is
coming from Judah Krushower of Merrill Lynch.
MR. KRUSHOWER: Good morning, Marc.
MR. SHAPIRO: Good morning, Judah.
MR. KRUSHOWER: I just want to ask a
little bit about the flatness of nonperforming of
assets, I have some questions from clients asking
how aggressively you and other banks maybe
using the loan for sale category or held for sale
category to Marc down problem credits and
basically hold the reported nonperforming
trajectory flatter than it would ordinarily be.
So I guess what I'm really asking is can
you talk about a little bit about of the flow either
<PAGE>
out of existing nonperforming assets into the
available for sale category, whether that's a
factor this quarter, and, more broadly or whether even
in a performing credit that you have your eye on,
whether you are doing that as well?
MR. SHAPIRO: The answer to that
accounting question is no. We have not utilized
that technique as a way of affecting our
nonperforming totals.
MR. KRUSHOWER: You've made some
pretty upbeat comments in a very general sense
about the near term outlook for nonperformers.
Can you talk at all about what you
see in the pipeline and how you think the first
half of next year may evolve as you currently see
it.
MR. SHAPIRO: I think it would be
appropriate for Peter Gleysteen to respond to
that question. As you know, Peter has run our
syndication business for the last 20 years,
successfully building it up into the largest in
the world and in that process has done a terrific
job on credit, and we have asked him now to take
over the role of senior credit officer and,
Peter, I wonder if you would respond to our
short term outlook.
MR. GLEYSTEEN: Thank you, Marc. We
are very mindful of the economy, but we expect to
<PAGE>
do relatively well, indeed, to compare
favorably, and reasons include, first, we have a
highly diverse credit profile. Perhaps uniquely
so. A major, major focus has been place
in both firms on risk concentration avoidance,
both by name and by category. Second point would
be our product leadership is based on origination for
distribution, not retention. Holding credit is how not to get
ahead in this company. Risk transfer is, and
that is old news. Third, we are very confident in a
strong and comprehensive credit process and a
focus on continuously improving it. And so, in
summary, we believe this framework in our business
practices will serve us very well, even in a
challenging environment, to specifically try to
answer your question about the outlook ahead.
MR. KRUSHOWER: Maybe this
is an editorial, but I was wondering whether you
are going to be giving any more sector exposure
in your balance sheet portfolio. I think that
would be helpful specifically if you are not
planning to do that.
MR. SHAPIRO: I think we will. We
intend in our either in our fourth quarter
release or in certainly by the time we file our
annual report, but most likely in our fourth
quarter release, to give some sector exposure
because I think it is a good story and I think
people need to understand the diversification
<PAGE>
of our portfolio.
MR. SHAPIRO: Peter, do you have
another comment?
MR. GLEYSTEEN: Yes, Marc, if I could
just add that, the new firm, the mix of credit
risk is going to shift strongly to more
investment grade from what is already majority
investment grade risk profile in the separate
companies.
MR. SHAPIRO: I think it is right that
in the new firm, total credit of our total
commercial credit exposure, 68 percent will be
investment grade.
THE OPERATOR: Our next question is
coming from Ron Mandell of Bernstein.
MR. MANDELL: Good morning, Marc.
Just one editorial comment on credit, if you
could also include the flow, the flows in and out
that would be very helpful, and in terms of --
Marc, are you there?
MR. SHAPIRO: Yes. I was just making
notes.
MR. MANDELL: I heard nothing so I
just wanted to be sure. The question I had was in regard to
the revenue synergies, I guess two or three
things.
Over what time period do you think
you can get the $2 billion in gross revenue
<PAGE>
instead of $1 billion? The second is, why you raised it so
much because you mentioned $200 million in
synergies so far, but that seems like a far cry
from $200 million to $2 billion. And then the third
question is you've also raised your profit margin forecast.
In the earlier forecast you had I
guess a 40 percent margin after expenses and now
you have a 50 percent margin. So if you could
comment on those elements I would appreciate it.
MR. SHAPIRO: I will let Geoff comment
on the first two and maybe the third. I will be
happy to add in on the third. I think Geoff is
one of the guys on the spot in terms of delivering
synergies so it is appropriate that he answer the question.
MR. MANDELL: Mr. Synergy.
MR. BOISI: On the revenue side,
we've now had an opportunity since we first
announced those numbers to work with each of our
business leaders, and ask them in a very rigorous
fashion to go through their build up of both the
expense saves and the revenue side of things
from a variety of different angles. Not only
from a product standpoint but from a client
coverage and management standpoint. So we have
crossed rough in every
single one of our businesses our revenue
expectations and that has led to the increase
that we are talking about.
Now in terms of a feeling for how
<PAGE>
that breaks down, we are seeing fairly
significant increased expectations in every single
category. I would say that the equities
category both in terms of new issuances and equity
derivatives is where we would see the biggest
increase. Secondly, I think in the M&A area, we
see a very, very substantial increase. In the
credit rates area we see a big ramp-up as well.
We also feel that in businesses like
operating services, given our background
historically at Chase, increasing the utilization
of that capability off of J.P. Morgan's client
base will show a very significant increase as
well. And just to give you a little bit of
specificity on this, for instance, in the M&A
category, since we announced our merger, we now
are either leading or number two in announced
mergers on a volume basis, on a global basis,
and, frankly, we are neck and neck
with my old brand [inaudible] at this point, and that's
in almost every region of the world, we believe,
since we have announced this transaction that in
the merger area we have a number of
transactions and in many areas in volume of
transactions have gotten either to a number one
or number two position. Just to give you a flavor of what we
are seeing, when we put the 559 M&A deals that
either J.P. Morgan or Chase have either announced
<PAGE>
or closed, excluding our merger, we have
coadvised the same client we believe on only five
deals. Just to give you the sense of
complimentarity between the two organizations.
So that's just in the M&A area.
From an equity standpoint, we are
seeing, for instance, I just came back from Asia
with some of our colleagues here, and we were
meeting round the clock, every hour on the hour
with a different client for a week's time, and I
would say 90 percent of the conversations that we
had with those clients were related to either an
equity offering or an equity derivative
opportunity, some linked with significant merger
activity.
So we're seeing a very, very
significant increase in the level of
communication and conversations we're having in
those two areas, just to give you an example.
MR. MANDELL: And on the profit
margin?
MR. SHAPIRO: I think as we drill
down with the managers who are held responsible,
they push back and say that they didn't feel that
the incremental expenses associated with those
revenues were going to be as high as we had
estimated, and that we had the capacity to do
those. There is some incremental
compensation expense but, as a general rule, they
<PAGE>
felt strongly that we were being too conservative
on the expense side.
MR. BOISI: And as we mentioned to
you in our November meeting, we are laser-like
focused on this expense issue, and now that we
have announced all of our first and second level
business leaders, we've been able to get a much,
much clearer view of the people needs that we
have in terms of sizing our business and exactly
who it is that we want to have on the "A" Team.
As Marc mentioned, we have
already commenced changes in our people
structure, both in terms of asking some folks to
leave and reassigning people. Given the benchmarks that we are
putting together in terms of productivity per
person, we are very, very committed to
showing you all that we will be increasing our
margins significantly from where we were before.
MR. MANDELL: Marc, just one last
element related to this, and that is you say the
revenues estimates assume a return to more normal
market. Is that third quarter or first
quarter? What is your definition of a normal
market?
MR. SHAPIRO: I think second and
third quarters would be normal markets. First
quarter I would say is a little bit on the hot
side and this quarter is a little bit on the cold
<PAGE>
side, but I would say if you look at the middle
of the year that would probably be a good
definition.
THE OPERATOR: And our next question
is coming from Bridgette Madden of Solomon
Smith Barney.
MS. MADDEN: Hi. I have a few
questions. First just to follow up on credit,
based on your comments, can I assume you are not
thinking that you have to change your commercial
write-off guidance from the 40 to 60 basis point
range?
MR. SHAPIRO: Absolutely.
MS. MADDEN: And the second question
is, on the mandate wins that you are talking
about, can you tell us what type of business it
is, whether it is M&A or equity?
MR. BOISI: It's really an across the
board in there with names like Quaker Oats,
Daimler Chrysler, Kellogg, General Mills, Gillian
Sciences, South African Telecom, Verizon and they
are anywhere from major merger mandates to one
stop shop bridge financing with syndicated
finance opportunities, to equity mandates. So
they are really across the board. I think that to give you a little
flavor, more flavor of that, we actually have
done 117 joint pitches, 47 new mandates for $250
million of incremental fees that we do not
believe that we would have achieved either firm
<PAGE>
alone. By sector we're seeing a 54 percent
hit rate in the technology, media and
telecommunication area. We're seeing a 46 percent hit rate in
both Europe and Latin American pitches.
We are seeing a 45 percent hit rate
on advisory pitches and we have another 150 joint
pitches in the works as we speak. So if you were
wondering whether we are counting,
we are giving you a flavor of that.
MS. MADDEN: Also just one last
question, assuming that the environment is going
to be different next year than from what it's
been in recent years, how will that impact the
loan business and how will it impact J.P. Morgan's
credit derivative business, sort of excluding
whatever synergies you are looking for?
MR. SHAPIRO: When you say different,
how do you mean different?
MS. MADDEN: Lower volumes.
MR. SHAPIRO: On the syndicated
loans?
MS. MADDEN: Yes.
MR. SHAPIRO: I think the value of
this merger is it gives us a much broader product
set to deal with. I think one of the issues that has
affected Chase this year is the fact on the
investment banking side up until this year
syndicated loans were a very, very high
<PAGE>
percentage of our total fees. This year we have strong
increase in M&A, so that now M&A is high or
actually higher than our syndicated loan fee
income. But I think the value of this merger
is that we have a very broad number based set of products,
and whatever part -- if any part of the capital
markets is open and functioning, I think we have
an opportunity, maybe better than any other firm
to capture that opportunity.
MR. BOISI: I just might add, our
pipeline right now across the board, I think is
at a historic high. Now the issue will be whether or not
the markets allow us to execute those
transactions, but the mandates that we have in
the pipeline right now are at a historic high.
MR. SHAPIRO: We will have an
increase in investment banking fees in the fourth
quarter on a combined basis to firms from the
third quarter and, of course, up significantly
from last year. And I think, I would be interested to
see how that plays out. But my guess is that
that will be better than most competitors.
MS. MADDEN: Is there one particular
area in investment banking that is doing better this quarter
at Chase or J.P. Morgan?
MR. BOISI: Our merger business has
been skyrocketing.
THE OPERATOR: Thank you. Our next
question is coming from David Berry of Keith,
<PAGE>
Bruyette and Woods.
MR. BERRY: Hi Marc.
MR. SHAPIRO: Hi David.
MR. BERRY: On private equity you all
commented that cash realized gains were
significantly lower in Q-4 from Q-3. Of course
Q-3 was a high pop for capital partners. I was
wondering if you could make any
comments about the transaction where you all sold
the $1.5 billion of fund investments, whether that
should be, does that contribute to cash realized
gains in the quarter? Is it a material item?
Help us put that into perspective.
MR. SHAPIRO: I think that we will
have a gain. It won't be a significant gain.
Most of it will close in the fourth
quarter. I'm not sure that all of it will close
in the fourth quarter as it is several
transactions. It was a sale of our fund investments
where we have invested in other people's funds,
and, of course, it will show a realized gain.
But because it is closing partly this
year and partly next year, I don't think it will
be a super large part of the gains that we
realize.
MR. BERRY: Any comment on just the
fact the cash realizations will be lower in Q-4?
I mean again Q-3 was high. Is this a return to normal or is this an
<PAGE>
unusually depressed level in Q-4?
MR. SHAPIRO: No. And, of course, a
lot things may close and may not close. We are
dealing with a fairly inexact science.
As you know, we run the business as a
fund would run the business, and the people that
run Chase Capital Partners sell those investments
when they feel like it is the right time to sell
and we don't influence them from a corporate
perspective. So I would say that, again, as we
have talked about so often, it is not a business
that fits into a quarterly accounting model in a
great way because sometimes the sales come in
bunches and sometimes they don't.
And I would characterize the third
quarter as a somewhat normal level of, I mean,
the fourth quarter as a somewhat normal level. I
think third quarter was unusually high in recent
times.
I do think that we should expect to
see more realized gains as we go forward next
year and the following year as a result of the
increased investments that we have made over the
last several years. We continue to feel good about the
quality of investments that we have and our
opportunities for return on those investments.
MR. BERRY: Can I just follow up with
an unrelated question? You
all commented about flow trading marked conditions in
<PAGE>
the first two months, can you get a read on just
-- is that continuing in here into the third
month of the quarter or has there been any kind
of pick up?
MR. SHAPIRO: We are seeing a little
pick up, and Donald H. Layton has joined us. Maybe I
will ask Don to comment on that.
MR. LAYTON: Hi Dave. Putting both
banks together, what you have is that the flow
oriented business is just slow this quarter due
to quiet conditions. That was very clear in
October, November. December has had a pick up.
It has had a pick up because economic and
financial conditions have had some announcements,
the most famous being Greenespan's recent remarks
about rate policy, and flows have gotten a little
more normal. And, in fact, December is not looking
particularly bad in any way. In fact, it could
be a good month depending on how it ends up.
I would mention in this that both
banks this is an issue of slower markets. There
are no large trading losses or loss days or areas
that have had major write downs in here.
In fact, they have been very good
risk management activities in terms of steady as
she goes. It is just the flow issues.
Structured business continues to do
well through all this, I might add, in particular
<PAGE>
on the heritage Morgan side and so someone asked
about credit derivatives. I think in fact,
those kinds of businesses are such underlying high growth
businesses that as the world
adopts the technique we are not going to see
any kind of fall off there in tougher general credit market
conditions. One can even make an argument people will be
more interested in hedging and managing credit
risk by using such instruments.
Again, structured instruments are
doing quite well through all this. Equity derivatives,
asset backs in both banks, tax structures, the high IQ type
transactions are continuing to be accepted and
done in the marketplace.
THE OPERATOR: Our next
question is coming from Andy Collins of ING
Bearings.
MR. COLLINS: Good morning. Last
quarter you reported a 25 percent hit against
consensus. I was just wondering what prompted
you to prereport this quarter versus last and
also what specific areas of trading have showed
the most relative weakness - foreign exchange,
derivatives, fixed income commodities?
And finally if the market sensitives
don't pick up next year, do you think there could
be more potential expense savings coming out of
the organization?
MR. SHAPIRO: I think with regard to
<PAGE>
earnings, we are mindful that we have a
shareholders meeting next week. We wanted the
market to know about the position of both firms
so they would have a full information.
The reaction from our shareholders
has been very good, and we feel that we will get
a very strong vote in that merger because of the
logic of the transaction. I think also that we felt that last
quarter the weakness was pretty much focused on
Chase Capital Partners. This time it's a little
more broader in terms of other items.
Finally with regard to the trading,
I'm not sure I quite understood your question on
the trading business.
MR. COLLINS: Which one would
experience the most relative weakness against,
say, the third quarter -- foreign exchange, fixed
income, derivatives, those areas -- are you seeing
any weakness in one particular market versus the
other?
MR. LAYTON: I would say it is more
characterized by the flow oriented businesses are
weak. So you will a concentration more in the FX
and traditional derivatives area. Also, some
conventional debt issuance
has been very quiet which has [inaudible] impacted
on the trading side as well.
MR. SHAPIRO: Final question was
could we cut expenses more if the markets stay
<PAGE>
slow? And I think the answer to that question is
yes.
MR. LAYTON: Geoff and I have a
commitment on managing the P&L expenses next year. It is
predicated on quite modest market assumptions and we
know if the market is worse, we will have to
manage the P&L.
THE OPERATOR: And our
next question is from Steven Eisemann of CIBC.
MR. EISEMANN: Good morning. I just
want to get a better feel for when you say
"substantially less" in terms of earnings of the
fourth quarter versus the third. Are we talking less than half, more
than half, half? Give me a range, please.
MR. SHAPIRO: I figure that you guys
would have a lot to do this morning, so we tried
to give you guidance on certain line items.
MR. EISEMANN: I don't want you guys
to give me a supreme court decision here. I
would like a little clarity.
MR. SHAPIRO: We have never had a
habit of giving out specific numbers in part
because our numbers tend to move around a lot,
even from day to day. And so what we felt was appropriate
to give guidance on certain line items where we
feel that there might be at variance with what
people were expecting, and I think we will leave
it to you to draw your own conclusions from
<PAGE>
that.
THE OPERATOR: And our
next question is coming from Adam Herwich.
Please state your affiliation.
MR. HERWICH: Ulysses
Management. Two quick questions, one is your
expectations for next year I assume are built on
a view of the macro-economic environment.
Could you share that with us. And the second thing, a more minor
issue, although the SEC has this inquiry into IPOs and
allocations and whether or not you would think
that will have an impact on the business going
forward?
MR. SHAPIRO: With regard to the
former, I think our primary assumption here is a
soft landing. We certainly see the U.S. economy
weakening. We think it's likely that the Fed
will lower rates at the appropriate time, and
that will soften what appears to be some negative
economic indicators at the present time.
We certainly are mindful that it
could be worse than that and we are cautious,
especially in our credit outlook, with regard to
what happens if it is worse than that.
That's in the US economy, and in the
European economy I think we feel that it will do
somewhat better than that.
With regard to the impact of the SEC
probe on IPOs, I don't think we feel that there
<PAGE>
will be any substantial impact on new issuances.
THE OPERATOR: Our next
question is coming from Peter Monaco of Tudor
Investments.
MR. MONACO: Thank you for your
time. Two questions, if I might. You talked a little bit about your
expectations on the commercial loan front.
Looking at a couple of models, there
doesn't seem to be any expectation of much
deterioration on the consumer front.
Could you explicitly address that,
and then, secondly, could you talk a bit about
your current expectations for free capital
generation and the degree and aggressiveness with
which that might be deployed to share repurchase.
MR. SHAPIRO: With regard to the
former, we've had steadily improving consumer credit ratios
over the last two years. We see those bottoming
out as we approach the current environment, and
it's possible that on a quarter-to-quarter basis,
they could increase somewhat. On a year-over-year basis, we think
it is doubtful that the consumer credit loss will
be much higher than it was in the year 2000.
With respect to, I'm sorry, the
second part of your question?
MR. MORACO: The current thinking on
free capital generation and use of...
MR. SHAPIRO: We certainly believe
<PAGE>
the name of the game in terms of creating
stockholder value is creating free cash flow, and
one of the benefits of this merger is the ability
to gain synergy in the use of our capital.
We have identified what we think are
some of the synergies right away from combining
the two banks, I would say right away to be
realized probably over the first half of the
year, in terms of reduced risk-weighted assets,
as a result of combining the two firms without
much impact on revenue. Going forward, we think that the firm
will be able to grow revenue with less dependence
on growth in the balance sheet than we might have
had before. Neither firm has been interested in
growing commercial loans, and if you look at our
sources of revenue, many of them, including
asset management and M&A, are not dependent
upon balance sheet growth. We have had a pattern in the past of
using excess capital, in both firms, we have had
a pattern in the past using excess capital to
repurchase stock. That obviously is not something we are
looking at right now, but when we get to the
appropriate point in time it is something we will
be looking at.
THE OPERATOR: Our next
question is coming from Chip Dixon from Lehman
Brothers.
MR. DIXON: Thanks. Just a couple of
other questions. How are the other businesses
<PAGE>
doing in the environment -- consumer,
global services, asset management? And, Marc,
going forward, what should the tax rate be?
MR. SHAPIRO: The tax rate I think is
around 35 percent. It could vary a little bit.
It has been pretty close to that in both firms.
The other businesses are doing well.
The global services business
continues to do very, very well both in terms of
revenue growth and expanding margins.
The consumer business I think that we
continue to see some pick up in revenue. They
had a very good third quarter in terms of bottom
line. It is not clear that it will be quite as
good as the third quarter was, but that's just a
function of a number of items coming together at
one time. Obviously the mortgage business has
been more challenging. It is a difficult
environment for the mortgage business and in
credit card we have had some additional expenses
on marketing in this quarter.
So I think the other businesses are
doing well. We continue to need to focus on the
consumer business. David Colter has been doing a lot of
work in that regard. We would hope to have a
view on that that we can share with the market in
our January analyst conference.
MR. DIXON: And asset management?
<PAGE>
MR. SHAPIRO: Asset management is
doing extremely well. That clearly is an area
that has come together very well in the merger in
terms of the way people are fitting together and
in terms of the complimentary strengths of the
two firms and we see that as a significant growth
item for next year.
THE OPERATOR: Our next question is a
follow-up coming from Ron Mandell of Bernstein.
MR. MANDELL: While you are referring
to the mortgage business, I was wondering if you
have any guidance you can give us on the affect
of 133 on derivatives and hedge accounting or how
you use it and how you think it might affect how
your customers use derivatives.
MR. SHAPIRO: With regard to how we
use it, we have shifted more to hedging with
on-balance sheet securities and have used
derivatives less. We do think on the margin that it
decreases the use of derivatives by those types
of companies. On the other hand, you are talking
about a huge, huge, market for derivatives that
has been growing over time at 15 to 20 percent a
year, and I don't know that this one item will
have the significant effect on that.
Most people hedge for economic
reasons and over time, accountants have always
been able to figure out a way to make those
hedges work for accounting reasons.
<PAGE>
So I think we continue to believe
that derivatives are a growth market.
MR. MANDELL: You don't see a
significant effect on your reported earnings
from the way you've changed your hedging for your
mortgage banking or other businesses?
MR. SHAPIRO: It does introduce
slightly more income statement volatility because
we still do use derivatives to hedge a portion of
it, and it introduces slightly more capital
volatility because the balance sheet hedges that
we use are marked to market through
capital. Again, the virtue of
this firm is that it is a large, diversified
firm, and, therefore, I don't think that the
additional volatility you see will register much
in the overall scheme of J.P. Morgan Chase.
Do we have time for maybe one more
question?
THE OPERATOR: Thank you. And our
last question is coming from John Barrett of
Gannett, Walsh, Cupler.
[Crosstalk]
THE OPERATOR: Mr. Barrett, are you
on the line?
MR. SHAPIRO: Hello?
THE OPERATOR: Once again, if there
are any further questions, please press one
<PAGE>
followed by four at this time.
Gentlemen, I'm showing no further
questions.
At this time, would you care to make
any closing comments?
MR. SHAPIRO: Yes, I would just say
that in spite of a difficult market conditions
right now, my colleagues and I are even more
convinced of the value, of the long term value
created by this merger. We think it puts us in a
terrific competitive position.
We are seeing a terrific response
from our customers, and we believe that we have
the unusual opportunity to build value over
time. We appreciate investor patience in
that process because it's not built in 90-day
increments, but we do believe that there is a
substantial pay-off waiting as we put these two
companies together. Thank you very much.
