Today's presentation may also make reference to non-GAAP financial measures and you should refer to the information contained in the written slides accompanying this presentation for information about their calculation. The firm's SEC filings and such slides are available at the firm's website.

At the conclusion of the presentation, you will have the opportunity to ask questions. (Operator Instructions) At this time, I would like to turn the call over to JPMorgan Chase's Chairman and Chief Executive Officer Jamie Dimon and Chief Financial Officer Mike Cavanagh.

Mr. Cavanagh, please go ahead, sir.

Mike Cavanagh, Chief Financial Officer

Good morning, everybody, it is Mike and Jamie here. We are going to do the usual so you have got a presentation available to you on our website that I will walk through, through all the businesses and then Jamie and I will take some Q&A.

If you go to the presentation, I just want to start right off the bat on page 1. For the sake of clarity throughout all the numbers, just explain right upfront how the accounting for the Bear Stearns acquisition, which closed during the quarter, affects all the numbers throughout the presentation. Really, I'm going to hit this quickly and simply reference you back to what we said the last time we gave you an update here in mid-May. For anybody who has detailed follow-ups we can take that offline.

Working through the big items here. First of all the extraordinary gain, there isn't one. It is zero. We talked about that being possibly as much as $1 billion in May down from our earlier estimates. So obviously it deteriorated a bit from where we expected to be in May, but for the same reasons we described there at the time we gave the guidance in May.

So all it really means is we, in the pricing of the deal, we had cushion which we ended up in fact needing and used all of that up in the deleveraging and accounting for the deal and the reserving associated with it.

The next big item is just merger-related items that run through the operating results of the company for the quarter, which totaled $540 million and we are putting all of those in corporate. That compares with $500 million after-tax that we had expected or talked about at the time of our last update in mid-May.

Again, that breaks down into two pieces: equity pick up for the shares we owned for the month pre the close of $420 million; and other merger-related items, I think merger expenses and other things of $117 million after-tax. So those are the above the line items of $540 million that are Bear Stearns related.

When you think about it, we talked also at the last update about merger costs and merger related expenses that continue past this quarter. We talked about that number being as high as $900 million after-tax. Bringing that guidance down a bit, it will probably come out to be something more in the neighborhood of about $500 million after-tax, over time. It will be lumpy. You can think of it being maybe up to $150 million after-tax or so per quarter for the second half of the year, and then trend down over time beyond that in '09 and after.

Beyond that though, the real point is that we continue to be very confident that the ongoing businesses we've picked up -- prime services, equity, etc. -- are going to contribute on a go-forward basis. The $1 billion plus after-tax of annualized earnings by the time we get ramped back up and exit '09 going into 2010, so we continue to be confident about that.

The last point is just the geography of all of this. As I said, we put the merger-related expenses for the quarter and into the future go in corporate, but the ongoing activities, that $1 billion of earnings that we will ramp up to, will appear in the Investment Bank and Asset Management businesses, where the Bear Stearns businesses went.

Last point on just the merger-related items. We talked about derisking the balance sheet that we took over from Bear Stearns, so we're very pleased with the progress we've made on that score. Risk-weighted assets, which we calculated under our Basel I method of about $220 billion or so reduced by 45% or so as of the June 30 reporting date; and Bear Stearns VAR reduced by 70%.

So to sum up at the bottom what it all means in terms of financial impact, the total income of the company after tax was $2 billion or $0.54. That includes in it what I described above, the $540 million in merger-related items or $0.15 worth, leaving us with results ex the Bear Stearns items of $2.5 billion after-tax.

Moving on to page 2, I am sure you have read all this, these are the highlights from our press release identifying special credit reserving items and marks underlying growth across the businesses and strong capital position. I'm going to save this and go through this as we roll through the presentation.

Let's skip past slide 2 as well as slide 3 which just tabulates the numbers for you on a consolidated basis and goes straight to the Investment Bank's results which we'll dive into in detail on slide 4.

So as you see here on slide 4, we had profits in the Investment Bank after-tax of $394 million on revenue of $5.5 billion. The June results for Bear Stearns are included in these numbers and the overall results in the Investment Bank would have been a bit better but for that, so there was a little bit of a drag from Bear Stearns results for the month of June in the Investment Bank, though we expect that to turnaround and make a positive contribution in the second half of the year.

Working down the revenue components of the Investment Bank, you see we had $1.7 billion of Investment Banking fees, the circled number over there, which is our second-highest quarterly performance of all time. So obviously we feel very, very pleased with the continued strength of our Investment Banking, Corporate Finance and Advisory franchise, and you will see some of the rankings on the next page.

Moving down, Fixed Income Markets $2.4 billion, $2.3 billion, down slightly from a year ago which is very strong despite the fact that in these numbers we took markdowns of about $700 million on leveraged loans to go through in the second and markdowns of about $400 million on mortgage-related positions we have in the Investment Bank. Clearly offset by very strong performance in rates, currencies and some other businesses, emerging markets and credit trading as well. And a slight positive, $165 million, related to widening of our credit spread on structured notes in the fixed income business.

Equity Markets, $1.1 billion, down a bit from a year ago total revenues and also in there about $150 million of benefit from widening of credit spread.

So moving down to the next circled number you see there, credit costs of $398 million, so there is essentially no charge-offs in the quarter; net recoveries actually, slight net recoveries. But we added about $400 million to allowance for loan losses, given the deteriorating trends and some of the names in the portfolio and that brings our overall loan loss allowance to average loans, you see it averaging 3.19%; at the end of the quarter that is 3.35%. Extremely strong, up from 2.55% at the end of the last quarter and you will see that across other businesses as well.

Continuing down you see expenses of $4.7 billion, up over the prior year in part due to Bear Stearns, but primarily due to the high comp to revenue ratio in the quarter, which you see is 57%. That brings us to year-to-date comp to revenue of 52% which we think positions us properly given the environment that we're faced with and the performance year-to-date and we'll obviously see what the second half of the year brings.

Lastly, we had a benefit in the tax line that contributed to net income being about flat to pre-tax income.

Lastly on VAR, you see 142 is our VAR calculation for the quarter, 139 spot at the end of the quarter, up only slightly from the 122 that JPMorgan had alone at the end of last quarter. So that speaks to the derisking that we did on the combined balance sheet in the Investor Bank of the Bear Stearns assets we brought on, together with the JPMorgan positions that were there to start with. And topped up the common equity that we allocate to the business from $22 billion to $26 billion, which is up a total of 5 versus the year-ago period.

Moving on to slide 5, you just can read it for yourself, it is #1 working all the way down the page of all the capital raising categories that are here, along with year-over-year increases in share. As I said, that translates also into #1 in global fees, so it is not just league table rankings, there are also fees as well, along with being #3 on an announced basis in M&A.

Now moving on to slide 6, I will just talk you through some of the remaining significant risks we have in the Investment Bank. So remember, I am talking leveraged lending now on slide 6. Remember that JPMorgan as of the last quarter end of 3/31/08, we had $22.5 billion of total leveraged lending commitments that we talked to you about. From here forward, I'm just going to break that down into what we are now going to call legacy deals. Think of those as $18.3 billion embedded in last quarter's end that were hung deals from last summer; off-market terms against which we've had to take marks, versus $4.2 billion at the time of the recent commitments done at market terms which are moving in and out the door on a normal type of basis.

So focused only on the $18.3 billion of leveraged loans, you see in the third bullet here that we started with $18.3 billion, added $1.9 billion related to Bear Stearns' legacy commitments; we sold 19% of that combined exposure of $3.9 billion to end the quarter with $16.3 billion of legacy leveraged lending commitments.

During the quarter, we took the $696 million of markdowns net of hedges which brings us to cumulative markdown of $3.3 billion or 20% of that $16.3 billion of commitments. Obviously that's a 20% average mark and each position is specifically marked where appropriate. Level 3 assets, no major change, a slight uptick from 6% overall to 7% or so which you will see more when we file our Q.

Moving on now to slide 7, Investment Bank mortgage-related exposures. Here, look at the second blue row. Total mortgage exposure at 3/31 for JPMorgan alone, looking across what we flagged to you before as the risky components of the mortgage space, $28.2 billion across prime, alt-A, sub-prime and CMBS.

When you pro forma that for what we acquired and brought onto the balance sheet, together with Bear Stearns, at that time it would have increased to $45.8 billion. And then during the quarter, from that peak level, we brought it down by 28% or $12.8 billion dollars to get down to the $33 billion we have across these categories at the end of the quarter. Obviously down substantially, still a bit more than we want to have, so we will be continuing to actively reduce here.

Mortgage-related markdowns, so against all of this is where we took $405 million of marks net of hedges. And I'm not going to talk you through each bullet, which gives you a little bit of texture on what is in each line, but just point out that much of what we own is AAA securities. We actively hedge across these categories where we think it actually makes sense. Of course, you see very little sub-prime when you look at the table. So that's it for slide 7.

Last point on the Investment Bank, slide 8, aside from the financial impact of Bear Stearns, I have got to say we're pleased with the progress we've made on integrating the business into ours. On the people side, people selection done, 7,000 or so Bear Stearns employees have been identified to join the combined Investment Bank. On the infrastructure side, a tremendous amount of work done to get the May 30th closing done and integration there, and as you can read for yourself we have got a robust set of plans, business by business, unit by unit to go all the way through to bringing it fully integrated infrastructure. So it is a lot of work still to do. We know how to do all this stuff, and that work is underway. Think of that as business as usual execution for us from now.

At the bottom of the page, a repeat of some of the details of the derisking that I talked about upfront.

With that, I'll leave the Investment Bank and move on slide 9 to Retail Financial Services where we'll look on page 9 at some of the stats that drive the overall performance of the business. So look at these and keep in mind that on the next page you are going to see 15% revenue growth in the Retail Financial Services businesses overall, and this is what is driving it. So you see continued growth momentum across these stats.

Starting with the regional bank, you see deposits of $214 billion, up 3% from a year ago. Checking accounts below that circled at $11.3 million, up 9% from a year ago. Along with that comes the continued growth in sales activity against the customer base. Mortgage originations, investment sales, credit card sales, all up and all continued focus on investing in the growth of this business for the long term.

The other side of it is tightened underwriting standards in the lending businesses driving home equity originations of $5.3 billion in the quarter, down 64% from a year ago. And then mortgage loan originations, $56.1 billion in the quarter, which is up from a year ago. Our share in the business is actually up from in the mid single-digits to something like 14% or so overall, which we're pleased with. You will see that much of that, more than 90% of that origination is conforming to government standard, so moving along through to the agencies. Lastly, 15% growth in the servicing book.

Moving on to slide 10, you will see how that translates into P&L. So total profit in the business, $606 million after-tax for the quarter, which is down year over year despite the 15% revenue growth to $5 billion that you saw from the prior page. The big driver here is credit. So you see circled $1.3 billion of total credit costs in the retail business, which includes higher charge-offs across all the major categories that I am going to go through in a second, along with additions to reserves, loan loss reserves, of $430 million, primarily related to the sub-prime and prime mortgage portfolios.

Additional to that we added $170 million in loan loss provision to get to a total of $600 million against the residential mortgage portfolios. That $170 million relates to prime loans we hold in the corporate investment portfolio booked in corporate which you will see in a second as well.

Expenses, modest growth, really reflecting the top line growth that you see. Then you can read for yourself where the profit growth really comes from with tremendous improvements and growth in the profits of the deposit-taking consumer and banking business, which is up to $674 million of profits.

Let me dive down for a second now into the credit picture for the retail business. On slide 11, you've seen all these pages before, I am not going to walk through every piece of it here. Let me take you immediately to the upper right-hand corner here, key stats, where you see the total portfolio at $95 billion in home equity. We had $511 million of net charge-offs, up from $447 million last quarter and obviously up very substantially from a year ago.

Now we talked about this as being a portfolio that versus the first quarter 450 or so of charge-offs, was potentially going to grow to $900 million of charge-offs by the fourth quarter of this year, is what we told you at our investor day. What I would say now is the $511 million is still going to deteriorate by maybe a couple hundred million dollars to get to a quarterly level that may be less than $900 million, could be around $700 million or so, but it is still too early to declare victory on that. But the trend of deterioration may be slowing a bit here, but we will wait and see.

Moving on to sub-prime though on page 12, go to the same upper right box and you see the $14.8 billion portfolio which, by the way, is in runoff at this stage. We've effectively eliminated all new production in this bucket. So that $14.8 billion deteriorating credit continues. So charge-offs of $192 million in the quarter, up from $150 million last quarter. Here I would say these numbers could increase to something to the tune of $350 million per quarter sometime in 2009 if we continue to see no improvement in some of the loss curves, as we've talked to you about before.

Lastly on the prime side, slide 13, you see in total a split between what sits in corporate and what sits in retail business, $47 billion of prime loans. Charge-offs related to that of $104 million split between those two categories, corporate and retail, for 91 basis points of charge-offs, obviously very high and up dramatically from a year ago.

Here again, the loss curves, unless they abate, we could see these quarterly losses growing to be as high as $300 million a quarter sometime in 2009, but likely to take a few quarters before we get there.

Moving along from retail to card on page 14, pretty much as we expected in May. So you see that we had net income of $250 million, down year over year. The big driver here is credit costs, so you see charge-off rate of 498, so just shy of 5% or right at 5% as we talked about. Along with, we added $300 million to the allowance for loan losses in the credit cost line during the quarter.

So even though you see decent growth relative to the competitive field and average outstandings up 4% from a year ago and flattish from the prior quarter and charge volume growth of 7% in sales volume, despite that you see pretty weak revenue growth, just up 2% year over year and as we talked about, we would have expected that to be a little stronger given the weakening of the credit environment. But the somewhat good news is that the low level of early delinquency rates, the 30-day delinquencies, still at 346 or so; together with continued relatively strong payment rates in this environment, has not given us the revenue pickup we would usually expect to see in the business. We'll see whether that continues in second half of the year or not.

Moving on to the Commercial Bank, slide 15, great results here. You see for yourself record profits of $355 million, up strongly from a year ago on record revenues of $1.1 billion, which is up 10% happening across all products. You see the balance sheet, 19% growth in loans and 18% growth in liability balances as the people in this business do a great job of capitalizing on a challenging environment from many of our competitors, taking market share.

In particular on the revenue side, I just want to point out, remember we talked about at the time of the Bank One merger the opportunity here to grow annualized investment banking revenues delivered to this customer base from something like $400 million or $500 million annualized to $1 billion was our goal. This quarter we set a record there and with $270 million per quarter of Investment Banking revenue, have exceeded that target for the first time.

Credit actually continues to be well-behaved here. Credit costs, charge-offs running 28 basis points below, through the cycle average here and a very strong allowance to loan coverage, 261 the ratio there. We feel very good about that and a very modest change in non-performers in the course of the quarter.

Also now moving on to Treasury and Security Services, you see excellent results here as well. $425 million of profits, up 21% from a year ago. That is a record, as is the revenues of $2 billion, up 16% from a year ago in both the Treasury Services and Worldwide Security Services segment. Liability balances, again, think deposits up 23% from a year ago and assets under custody to $15.5 trillion, up 2% from a year ago.

A little bit of seasonal benefit in the dividend season in Europe gives some revenue lift from the first quarter to the second; that will abate a bit as we go from second to third.

Moving on lastly across the businesses to Asset Management, here we did $395 million of profits, up from last quarter, down from a year ago. The decline from a year ago obviously driven by the lower market levels driving management fees down, as well as a year-over-year decrease in performance fees driving the changes in the institutional and retail segments you see there.

Private Bank revenues up very strongly and we continue to do what we need to do to continue to build what we think is a great business here.

On Corporate, slide 18, just break it down into three pieces. You're used to seeing two of them and Bear Stearns is new. Private equity had after-tax profits of $99 million on pre-tax gains of $220 million. Portfolio ended at $7.7 billion of carrying value. The Bear Stearns numbers of 540 after tax negative is exactly what I talked to you about on the first page, so I won't bother talking about that. And then Corporate, excluding both of those pieces, $19 million to the positive.

You see on the bullets to the right, I just break out, there are obviously always lots of ins and outs here, I will just point out two of them in this particular quarter. We did have a gain after-tax related to sale of MasterCard shares of $414 million, a positive result in there. And then as I've already told you, we had after-tax credit costs related to the prime mortgages we hold in the investment portfolio originated by retail of $157 million to the negative after-tax on both higher charge-offs and reserve additions there.

Moving to slide 19, I'll just spend a second on the capital position. So you see here in the middle of the page the Tier 1 capital ratio very strong at 9.1%. I will tell you that we had talked about the relief that we had got in our risk-weighted assets for our intended liquidation and reduction of the Bear Stearns balance sheet over the next year or so is relief in the risk-weighted assets number. Without any of that relief, we would still have been at an 8.1% tier 1 ratio, which we think is obviously excellent given that this is a quarter with challenging markets for reducing balance sheet and risk. We nonetheless absorbed the entirety of Bear Stearns and still maintained our target range of 8% to 8.5% tier 1 even without the relief that we have here. The relief suggests that we intend to continue to reduce risk there as time goes by.

If you look down the page, all the ratios, whether it is on a with relief basis or without, extremely strong. I will just point out at the top of the page you see tier 1 capital of $99 billion, up from $89 billion last quarter. If you recall, we issued $6 billion of a straight DRD preferred stock issuance in the quarter, tangible common equity obviously up without that, just due to growth in the retained earnings position of the company.

So very strong capital position, but I will point out that in that tier 1 capital, our mix of components of tier 1 capital is more heavily weighted, on average, to common equity and your traditional trust preferreds, so like we did the straight DRD preferred in the first quarter, we have ample room to issue hybrid type of capital instruments to help us make sure we are in a position to meet organic balance sheet growth needs of our businesses in what is obviously a great time to have capital to deploy yet still be confident that we are going to be able to maintain very strong capital ratios, if we choose to do so.

That is it for the current quarter. Let me just take you through slide 20 and just talk you through what I haven't already in terms of outlook. So in the Investment Bank in particular, obviously the markets look to remain challenging and volatile and stressed for the remainder of the year, and liquidity is not as strong as we'd like to see it just yet. So it is a reasonable expectation to see continued lower levels of earnings than we would like to see over time in the Investment Bank for now.

While we have strong loan loss reserves in the Investment Bank, and as I said, low level of current losses, credit is pretty idiosyncratic in this segment, so a single name in the portfolio has problems and you can see a significant P&L event in any given quarter. Despite our satisfaction with what progress we have made in balance sheet derisking during the quarter, as you saw from the page that I flagged, we still have substantial remaining risks to remain focused on.

In retail, the underlying growth, we're going to continue to invest and grow so you can count on that. Also as I said, continued deterioration in the residential mortgage credit factors. Just a broader point, the weaker that housing gets you are going to start to see more and more areas of potential deterioration. Pointing out too, that could emerge somewhat in the future would be a greater level of loan repurchases and also losses taken if mortgage insurers can't meet their obligations to the banking industry.

Card Services, nothing different than what we said before. Losses 5% or so in the second half of the year, plus a little bit, and could average 6% in 2009, and continued pressure on the revenue side, both charge volume and outstandings.

Commercial Bank, continued underlying growth; the same in Treasury Services. Asset Management, you have got to remain focused on market levels because that obviously affects both management and can have an effect on performance fees.

Then lastly in the Corporate segment, private equity, expect in these market conditions that will trend lower than we have over time, would be our best estimate, so lower levels of realization gains than what we've seen for first half of the year. On Bear Stearns, as I said upfront, $500 million of after-tax merger costs remain to be booked. It could run up to $150 million a quarter after-tax in the third and fourth quarter and trend down from there.

Lastly on Corporate, I'll just remind you that we typically talk about a net loss after-tax in the range of $50 million to $100 million. Now there are two exceptions to that. One is going to be on top of that we'll have the prime mortgage credit costs as that portfolio works itself through, and remember that was $157 million after-tax in this quarter. And then investment portfolio volatility, just changes in values of positions there could cause some volatility in any given quarter.

With that, I wrap up the comments here and Jamie and I will just take some questions.

Q&A

Operator

Your first question comes from Glenn Schorr, UBS.

Glenn Schorr, UBS

I think you mention in the comments that Bear was a slight drag on the Investment Bank. I'm assuming you meant some form of P&L comment. Can you talk about the strength in Investment Banking and then particularly in FICC trading on JPMorgan versus Bear, and then maybe a little bit more on the color commentary by product?

Mike Cavanagh, Chief Financial Officer

I flagged some of the areas. Let's take it in two pieces. A little bit of drag means that just for the month of June, the Bear Stearns ongoing activities contributed somewhat to the marks we took in leveraged loans and mortgages. As well as we basically have taken on expenses ahead of revenues, so a little bit of drag after-tax related to that.

All that is saying is the $400 million of after-tax profits in our Investment Bank could have been a couple hundred million higher had it not been for including the Bear Stearns results in the second quarter. As we said, those results are going to trend to the positive beginning in the second half of the year, they will be incrementally positive.

As we said the areas of strength, as you'd expect, very strong results in rates, currencies, emerging markets, credit trading, so some areas really with stand out performance.

Glenn Schorr, UBS

But you can't help us with the breakdown? It is going to be impossible going forward, but the breakdown between JPMorgan and Bear Stearns contribution to the FICC line in the quarter?

Mike Cavanagh, Chief Financial Officer

No, I wouldn't even think of it that way.

Jamie Dimon, Chief Executive Officer

There was no contribution, almost no contribution, FICC and Bear in this quarter.

Glenn Schorr, UBS

Well, that's a great quarter, then. You both touched on it a drop, but maybe as a follow up is just how you balance, Jamie, your outlook commentary in the text which is realistic, I think, and then how you grow. Because I never know what the roots were in terms of growth in cards and retail at a time when credit is starting to break down. Obviously you try to price for it, but maybe just comment on that.

Jamie Dimon, Chief Executive Officer

When you look at the growth numbers in retail, the revenues are up 15% and almost all categories were growing: deposits, accounts, investments, our mortgage share is up to 11%. While right now that isn't very profitable, I would have pretty good hopes that will be far more profitable down the road.

That is just opening branches and hiring salespeople and doing the things you always do. Some of the credit costs, you could almost look at them as a sunk cost at this point. Card, spend is up 7%. The way to look at it a little bit is we are gaining share in consumer and small business, albeit obviously sales themselves down a little bit. We're continuing to invest in marketing in that business like any other business. We are not going to stop doing that because you have credit losses.

Operator

Your next question comes from Guy Moszkowski, Merrill Lynch.

Guy Moszkowski, Merrill Lynch

As you think of a waterfall when you are looking at initially $11 billion or $12 billion of booked value in Bear Stearns, and you pay $1 billion and change for that, I know you have a page that looks a little bit like this in your appendix, page 23, and you try to work down to the extraordinary gain of zero...

Within all of these transaction-related costs that add up to the difference between what their capital initially was and the lack of the gain or negative goodwill, how much of these transaction-related costs that you are talking about here are essentially reserves hung up on the balance sheet which, over time if not used, could work their way into earnings?

Jamie Dimon, Chief Executive Officer

I think, Guy, the way to look at it is very little. There are some reserves to litigation and taxes and things like that, but those are our best estimates in ordinary course now; they will be changed over time as the expectations change. Mostly severance and real estate and stuff like that is actual cost, we know the cost at this point. And then all the things related to the balance sheet -- derisking, deleveraging, conforming accounting -- think of that as gone.

Mike Cavanagh, Chief Financial Officer

And those operating losses are already spent.

Jamie Dimon, Chief Executive Officer

There is nothing else there.

Guy Moszkowski, Merrill Lynch

So derisking and deleveraging costs essentially are realized losses on disposition of the portfolio?

Jamie Dimon, Chief Executive Officer

Realized or just marked down.

Mike Cavanagh, Chief Financial Officer

To appropriate values.

Jamie Dimon, Chief Executive Officer

At the rest of the company.

Guy Moszkowski, Merrill Lynch

So you don't want us to think that some portion of this is essentially like traditional purchase accounting?

Jamie Dimon, Chief Executive Officer

Absolutely not.

Guy Moszkowski, Merrill Lynch

Okay, that's important. On the home equity side, changing topics here completely, it sounds like you've lowered the guidance of what we might expect the loss rate to look like by year end to about $700 million a quarter from $900 million a quarter. I was wondering if you could elaborate a little bit on what trend lines it is that are giving you a little bit more comfort there?

Jamie Dimon, Chief Executive Officer

One of the things that Mike mentioned is that number has come down a couple hundred million, but the expected losses of sub-prime and prime is up by a couple hundred million, so it is kind of a wash in our eyes.

If you look at the latest numbers of delinquencies and roll rates, people go from 30 days to 60 days to 90 days, it looks like it might be a little below what it was before. It is very early. We do not know, it is June and a lot of people could argue there is some seasonality in that. But it is a little ray of sunshine which is okay to grab onto for now.

Guy Moszkowski, Merrill Lynch

Right, but like you said, there are other clouds in a couple of other portfolios.

Jamie Dimon, Chief Executive Officer

That is absolutely correct.

Guy Moszkowski, Merrill Lynch

The point you made about actively hedging when you were talking on page 7 about some of the various mortgage exposures, could you remind us what your mono line exposure looks like there and whether any of your actions this quarter included any writedowns to that?

Jamie Dimon, Chief Executive Officer

There were no writedowns this quarter to mono line, maybe some modest marks or something like that. I want to point out, we have always shown the gross exposures, some are hedged and some aren't hedged, because we've always acknowledged that there are risks on both sides of that and there is no real perfect hedge, as you well know. Some things like alt-A really can't be hedged.

The mono lines, we took on, I think we told you in the past that for JPMorgan alone, unless there is an actual default, the risks are not high. We took on some additional risk from Bear Stearns. I would still make that statement, that the risk, unless there is a major default of one of the major ones, that they are really not that high. There could be marks up or down a couple hundred million dollars, but we are relying a little bit more than we used to on the mono lines for some of the things because Bear Stearns had some, but it is really not a major thing for us.

I mean, put it this way: the worst case isn't that bad.

Guy Moszkowski, Merrill Lynch

In the investment bank you mentioned the comp levels and comp ratio and they do seem quite high, especially given that your result was actually quite strong. Even with your charges, your year-over-year Fixed Income results, for example, were actually up a little bit or sorry, modestly down, but really in very good shape. So when I looked at a 57% comp ratio it just seems very, very high. Maybe you can give us a sense for what is driving that not recurring and where we ought to think about that ratio for the full year?

Jamie Dimon, Chief Executive Officer

That ratio obviously is high, and I think it was a very healthy reserve relative to results. Ongoing should probably look a little bit more normal and it's just reflective of how we think we need to pay people, etc. Obviously it was a fairly healthy addition this quarter. We don't want our people getting depressed, put it that way. We want to keep morale up.

Guy Moszkowski, Merrill Lynch

I certainly applaud that sentiment. The final thing I'll ask you is on Basel II. Obviously the pure investment banks are showing us CSE Basel II ratios at this point, obviously very difficult to compare. What is your timetable for beginning to show us Basel II?

Mike Cavanagh, Chief Financial Officer

Guy, we are working on that now. As you know, we are under a different regulatory regime for Basel II and examination and the Investment Bank and we are hoping to be the first major bank to be approved to go into parallel run, potentially as early as the fourth quarter this year.

Jamie Dimon, Chief Executive Officer

Our Basel II number, as we currently see it, would be very strong and I think if we use the same rules and requirements that the investment banks use it would be even stronger than that.

Guy Moszkowski, Merrill Lynch

Maybe you can give us a sense for how it would compare to those 12% numbers that we are seeing from those guys?

Jamie Dimon, Chief Executive Officer

I challenge those numbers, okay? I'm not sure that those investment banks are using true Basel II type numbers, but we don't know the detail. Ours would be strong. We just have to wait until it sorts out.

You saw recently the Fed and the SEC have an agreement to be sharing the stuff like that, so there will be some commonality down the road in how people do Basel II. I would question whether those Basel II numbers are the same as ours.

Guy Moszkowski, Merrill Lynch

Any particular area in which you would question that?

Jamie Dimon, Chief Executive Officer

No, but just do your own analysis of the facts.

Operator

Your next question comes from Mike Mayo, Deutsche Bank.

Mike Mayo, Deutsche Bank

Can you elaborate more, you mentioned home equity might be a little bit better than you expect, you talked a lot about that at your investor day. But prime mortgage going from 48 basis points up to 91 basis points linked quarter, can you just elaborate more on what you are seeing there and why?

Jamie Dimon, Chief Executive Officer

Mike, it is exactly the same risk factors and all the other things. It is high CLTV, high LTV, stated income, it's California, Florida, Arizona. I agree with you, they are staggering numbers. You know, it may be higher because we have all the politicians telling people it is okay not to pay your mortgages. It is just really hard for us to tell. Our current expectation of those losses could triple from here. We're prepared for that and we will reserve for that appropriately going forward.

Mike Mayo, Deutsche Bank

I'm sorry -- prime mortgage losses could go from 91 basis points to 270 basis points?

Jamie Dimon, Chief Executive Officer

Yes, that's what I said. We had $100 million a quarter and it could go up to $300 million a quarter. We don't expect it to happen next quarter, but if you look at current trends -- and maybe we are being a little overly conservative – that could be $300 million a quarter sometime in '09. For a while, not forever.

Mike Mayo, Deutsche Bank

That is a lot worse – that is a lot worse than you expected before and now you are expecting home equity to be a little bit better, so how do you reconcile those two?

Jamie Dimon, Chief Executive Officer

Mike, we don't. We can't.

Mike Mayo, Deutsche Bank

Okay. And then unrealized securities losses, what are those or how much non-agency MBS do you have?

Mike Cavanagh, Chief Financial Officer

So our total OCI deteriorated by about $1 billion in the quarter, if that is the question, Mike.

Jamie Dimon, Chief Executive Officer

Non-agency MBS where?

Mike Mayo, Deutsche Bank

Firm-wide, just because it declined in value.

Jamie Dimon, Chief Executive Officer

Okay. I think if you look at non-agency MBS, that is the number we are talking about at prime, which is held both in retail and in corporate. That is non-agency whole loans, mostly jumbo whole loans.

Mike Mayo, Deutsche Bank

How about securities?

Mike Cavanagh, Chief Financial Officer

Securities?

Jamie Dimon, Chief Executive Officer

Very little. Very little other securities which are non-agency. There are some, you know, we buy and sell securities all the time. We bought some credit card BBB loans and we have bought some CLOs. We have a huge portfolio that we try to manage for total return.

Mike Mayo, Deutsche Bank

Just to reconcile two other comments, you said continued lower investment banking results but on the other hand, Bear's contribution should get a lot better. What are you thinking about going forward that might be a drag?

Jamie Dimon, Chief Executive Officer

So Bear, what we hope to see is that it will be a positive contribution next quarter and build up to sometime in '09 to $250 million a quarter. The underlying results are outstanding, I mean the trading results, the Investment Banking results, I mean really outstanding. If you talked to clients, I think they would be very happy with us across the board. But you have to look at the environment today and just assume it is going to continue for a while. There are still assets we want to get down. There is a lot of risk in holding syndicated loans and mortgages. The values are much better because they were down so much.

Mike mentioned the average leveraged loan is now $0.80 to the dollar. But in an environment like this, we assume that as we sell stuff, hedge stuff that we will probably have to pay a little bit more going forward. Eventually that will end and you will get the real underlying results.

The only other thing in there, since we do have a lot of credit exposure which is very idiosyncratic, great reserves but you have some big surprise in a credit loan somewhere and that could cost us and we should be prepared for that, too.

Mike Mayo, Deutsche Bank

Last question, mergers. I think you have been waiting your whole life for this environment, or planning for it. So what is the impediment to you pursuing a merger right now in the retail banking side? Is it lack of willingness of sellers and boards? Is it the mark-to-market accounting? Is it the lack of your willingness?

Jamie Dimon, Chief Executive Officer

I think the mark-to-market accounting makes it harder for a bank to buy a bank because have you to basically write the loans to a market value, but it does not make it impossible; certainly not for us. Under the right circumstances we are sure we could raise the capital we need to do it, but it does make it harder.

This is a good environment. I would expect – I am speaking generically now – that this will lead to more mergers over time. Nothing is impeding us, but it is not just up to us, as you pointed out.

Mike Mayo, Deutsche Bank

If you close a deal by year end, do you still have to do the mark-to-market accounting on the loan book?

Jamie Dimon, Chief Executive Officer

Yes. That is effective immediately, right?

Mike Cavanagh, Chief Financial Officer

I believe so, Mike.

Jamie Dimon, Chief Executive Officer

It is effective immediately and it is effective from now going forward, unless it gets changed. We don't know if it will be changed or not. We wouldn't do a deal or not do a deal based upon pure accounting like that. We would do a deal or not do a deal based upon how much value we thought it added to shareholders. It just make its harder, that's all.

Operator

Your next question comes from Betsy Graseck, Morgan Stanley.

Betsy Graseck, Morgan Stanley

Two questions, one on the Bear Stearns assets, you did sell down a dramatic amount relative to prior expectations. How much more do you anticipate reducing from here?

Jamie Dimon, Chief Executive Officer

I wouldn't look at them like they are Bear Stearns assets anymore, because these books are combined and run by a consolidated management team at this point. But I think if you look at the assets Mike spoke about, mortgages, leverage finance and obviously some other categories that we didn't spend time on, they will come down over time.

Betsy Graseck, Morgan Stanley

As you executed that sell down of assets, did that at all help the trading line? I mean, I know you indicated there was a bunch in Bear Stearns operating business in your trading line, but I am wondering if there was anything else given where rates have gone during the quarter that may have helped out that line at all?

Jamie Dimon, Chief Executive Officer

No. I would think of that as large liquidation or the large contributors consuming the book value that we were talking about earlier between writedowns and operating losses as we deleveraged.

Betsy Graseck, Morgan Stanley

Lastly, I just wonder how you are thinking about the dividend policy given the very strong capital ratio that you ended the quarter at, and well above, I think, expectations?

Jamie Dimon, Chief Executive Officer

Well, we applaud our friends at Wells Fargo but we don't have quite that much guts going forward. We bear some more risk and we are not going to create the dividend until we see clear daylight.

Operator

Your next question comes from William Tanona, Goldman Sachs.

William Tanona, Goldman Sachs

Good morning, guys. Just help me understand the decision to increase the equity in the Investment Bank by $4 billion? If you looked at Bear Stearns, prior to this deal the equity was at $11.5 billion. We all know that they were far greater levered and looking at how much it took risk-weighted assets down by 45% if you just keep the same kind of leverage ratio, it implies $6.5 billion of equity. I am just trying to understand why you only allocated $4 billion to the Investment Bank?

Mike Cavanagh, Chief Financial Officer

Well remember we took equity up in anticipation, somewhat, of all of this by $1 billion in the first quarter from $21 billion to $22 billion. Remember also that our allocated equity is really just allocated common equity. So when you look at pure comparisons you have to add a share of the non-common equity component of the firm's capital to get to the real denominator when you do some of the calculations that are often done.

So we go through all of that and I guess the one last thing to remember is that when we do our own internal compares of capitalization to get to standalone single A type of ratings, you have to parse through versus our competitors that hold asset management businesses, private equity businesses, etc., inside their overall units. When doing a comparison of our investment banking units to those, you have some parsing to do to arrive at what real pure comparisons look like.

So on all that kind of basis, I think we get to a place that we feel like is appropriate and we continue to watch it and look beyond just the nominal levels and look at some risk weightings and our sense of where risk really sits and compare to economic capital calculations internally as well.

Jamie Dimon, Chief Executive Officer

I think it is good to point out because Mike mentioned our tier 1 has a much higher component of common equity which you can say is higher quality to tier 1. Across the board, we try to be conservative. I always have a quality of capital, which is maybe a peculiar concept, but loan loss reserves are very strong. Our BOLI/COLI is very strong. We are massively over-reserved by a couple billion dollars in our pension plans. We got out of the auto-leasing business. Our card IO is very small, so it is really across the board.

You can look at all these things and call us pretty conservative and we really believe in maintaining a strong balance sheet on all counts, not just on tier 1 but all these other things I just mentioned.

William Tanona, Goldman Sachs

Fair points. The follow-up question -- and I have to go back to it because I can't let you off that easy -- but helping us reconcile the commentary in terms of prime mortgages versus home equity. I mean, what is it precisely? I know you can't obviously comment about the industry as a whole or choose not to, but in terms of your individual portfolio what is it about to your prime mortgage portfolio that you expect losses could potentially triple from here? Is it just the segments that you are in? I am just trying to understand and reconcile that, as well as the commentary between the home equity?

Jamie Dimon, Chief Executive Officer

You know, you saw sub-prime go first and then on a slight lag you saw home equity go. Now on a lag you are seeing prime go. It is exactly the same loss factors, but remember, the components of where we are in the States and all the stuff like that is very different. We started doing more jumbos in 2007 so part of that is 2007 vintage. I think I told you at the time we were going to do and grow our balance sheet and gain share, and we were wrong. We obviously wish we hadn't done it.

So when you adjust for all of those things -- vintages, CLTVs, stated income, where it was done -- that is what we are seeing. It is very early in the loss curve so the 300 is just kind of rolling forward and projecting. We hope it doesn't go there, but it easily could.

Mike Cavanagh, Chief Financial Officer

It is the same as our guidance on home equity was; it is where things could go depending on a set of views internally.

William Tanona, Goldman Sachs

I guess I understand that, it is just as you think about them potentially going up to 300 or 250 or whatever it may be, and given your new guidance on home equity which would also put that at 3, I guess it is just tough to imagine how home equity, given everything that is going on there with housing prices, that that number could be as low if you do really expect prime to potentially double or triple from here.

Jamie Dimon, Chief Executive Officer

At different locations, different vintages... But we understand your point. We disagree. It is, prime looks terrible and we're sorry. I mean we can say it eight times, it looks terrible.

Operator

We'll go next to Jeff Harte, Sandler O'Neill.

Jeff Harte, Sandler O'Neill

Sticking with the prime mortgage for a second, when you talk about deterioration I look at your prime mortgage portfolio and it's dominated by jumbo and alt-A. Can you give us any color as to how the jumbo bucket is performing versus the alt-A, versus what I guess I will call other prime mortgages that don't make up as big a part of your portfolio?

Jamie Dimon, Chief Executive Officer

I don't know the number off hand. Mike?

Mike Cavanagh, Chief Financial Officer

The way I might explain it, Jeff, is we significantly ratcheted back our underwriting standards in prime to be fundamentally much more traditional underwriting standards; much less stated income, LTVs from here that are targeted to not be in excess of the expected home price in given areas. So we're in some parts of the country at max LTV currently at 65%, etc.

So when you layer that through and look at our portfolio split between the balances that we would continue to underwrite on our given standards and those that we wouldn't, for what we would continue to underwrite the existing credit performance is substantially lower than this overall level of 91 basis points of loss. So we feel confident that our current underwriting is wholly different than sort of the pig and the snake that we have just working through of what has been already underwritten, with the risk factors that Jamie described.

I think one of the real drivers is home prices in some of the areas where we put on loans have come down so substantially that where we were in situations of relying on, or rather because it was prime not relying on mortgage insurance and home values have dropped even below 80% original LTVs, we are taking losses. Those are some of the dynamics.

Jamie Dimon, Chief Executive Officer

I should just point out what we see is if home equity goes, we are going to be north of 3 by a little bit, and that the prime would be 220, 230, 240. But it may be temporary. It may hit that and come down fairly quickly.

Jeff Harte, Sandler O'Neill

But is prime going to that level of function of over three quarters of your portfolio being jumbo and alt-A versus just the overall what you would call housing market?

Mike Cavanagh, Chief Financial Officer

It may be. That's all we have so we don't have a great compare point because that is the preponderance of what we have in the portfolio.

Jeff Harte, Sandler O'Neill

From what you have in the portfolio, are you seeing better performance away from jumbos?

Mike Cavanagh, Chief Financial Officer

That is my point, Jeff, I don't have a good compare point inside the portfolio except the preponderance of what we have actually on balance sheet. Conforming stuff obviously goes straight out the door to the agencies and doesn't stay on balance sheet.

Jamie Dimon, Chief Executive Officer

I think jumbo is more proportionally California, too. That probably has a lot to do with it.

Jeff Harte, Sandler O'Neill

On the commercial side of the business, we're seeing what is still pretty good loan growth, very nice loan growth. We are seeing really good credit quality as far as charge offs go but we are seeing you build reserves. Can you talk a little bit about whether that reserve build is in anticipation of troubles in commercial or just a function of how quickly you are growing your balances?

Mike Cavanagh, Chief Financial Officer

I'd say it is two pieces. We've been cautious related to commercial real estate as we have talked about in the Commercial Bank. But when you look at some small portions of the portfolio related to home builders you saw in the first quarter, really, the more significant additions to reserves in the quarter and that is really as time goes by and certain portions of the portfolio go under stress, they get downgraded and require incremental reserves.

In aggregate, we feel confident about where we are putting on growth from here but it is just the dynamics of degradation in certain sectors, particularly anything related to home builders.

Jamie Dimon, Chief Executive Officer

By the way, the portfolio -- and thanks for pointing it out -- is very strong. I would think you should expect nonperformers to go up. We have never seen environments like this where that doesn't happen, even in a strong portfolio. All of the growth, we really are comfortable. We see enormous opportunity to grow it and feel kind of like Wells felt about it, but there are a lot of clients, they need loans, they want to grow. There are a lot of municipalities, a lot of the growth is coming from government and not for profit which is generally, very secure so we feel pretty good about it. It almost has to deteriorate in an environment like this.

Operator

Your next question comes from Meredith Whitney, Oppenheimer.

Meredith Whitney, Oppenheimer

Good morning. I'm out of gas in terms of home equity and prime questions.

Jamie Dimon, Chief Executive Officer

Thank you.

Meredith Whitney, Oppenheimer

I wanted to ask a separate question which is on uninsured deposits. Any type of market share moves and obviously important moves within that sector, a $2.5 trillion sector, and your thoughts on visuals of Indy Mac and what is going on there, please?

Jamie Dimon, Chief Executive Officer

Thanks for pointing out that our deposits in assets under management are up 25%, TSS up 15%, Commercial Bank up 19%, which shows you the power of this franchise over time.

We worry about us. I think there are going to be issues, I think you have heard a lot of regulators talk about some of the issues with banks out there which may have more problems in their commercial real estate and that will cause, obviously, some depositors to be concerned about it but we think we will be a beneficiary of all of that.

Meredith Whitney, Oppenheimer

Anything in terms of just an industry comment?

Jamie Dimon, Chief Executive Officer

You know, it is different all over the place, the competition for deposits right now. We are not really chasing it; so you are not seeing growth in our deposits because we are chasing them. I think some of the people have really raised rates, not just uninsured but have raised rates because they need them.

Meredith Whitney, Oppenheimer

But do you see in terms of any type of Northern Rock issue where people are actively splitting accounts or anything like that so you are starting to see... I mean, how long would the lag be where we would start to see real market share moves?

Jamie Dimon, Chief Executive Officer

Honestly, we don't know the answer to that question.

Operator

We go next to John McDonald, Alliance Bernstein.

John McDonald, Alliance Bernstein

Just two questions on potential accounting changes. I was wondering how much of a concern that potential changes in the QSPs might be in terms of impact on capital ratios? And then also the potential changes in the credit card billing practices?

Jamie Dimon, Chief Executive Officer

First of all, we don't think the change in accounting -- remember these are from '09 and 2010 -- will be consequential at all. Though it could put hundreds of billions back on the balance sheet, the risk-weighted assets may be different; it is really not clear.

We may show you a lot more of this next time because it has come up many times, but we analyzed it and we don't think it's that big a deal for us. We understand the regulators' points, but it is putting too much fear in people's eyes that is a little bit unjustified, particularly in our case.

The credit card changes, you know, it really depends. We already got rid of double cycle billing and we already got rid of off-us default pricing or off-us repricing at all. So the new changes coming up, depending on how these get rolled out, could have an impact; it could be fairly material. A lot of it will be one shot, just one time, it will hurt you for a year or something like that. But it really remains to be seen how it gets implemented and how really how competitors react.

Remember, if you change prices all the competitors will react and do something about it in the first place. The interchange thing could also be dramatic, though I would be surprised if you have pricing controls like that in the United States of America.

John McDonald, Alliance Bernstein

The margin hit that you saw in credit card this quarter, you mentioned the credit quality is impacting it. Do you have any flexibility? Typically card issuers have some flexibility to raise pricing. Should that flow through over the next couple of quarters as you re-price folks?

Mike Cavanagh, Chief Financial Officer

That would be some of our hope, John. Potentially some response on our part to what we're seeing could be a factor in the second half of the year.

Operator

Your final question comes from Ron Mandel, GIC.

Ron Mandel, GIC

Actually most of my questions have been answered, but in regard to FAS 140, on your comment about not being that worried. You have $75 billion or so of off balance sheet managed credit card loans. If that came back on that would be about -- which I think is highly likely -- would be about 50 basis points or so of capital.

Jamie Dimon, Chief Executive Officer

It would be $50 billion of risk weighted assets.

Mike Cavanagh, Chief Financial Officer

Correct. So clearly, Ron, just remember that is the accounting effect that we would agree, that is probably likely that credit card QSPs come on so that $70 billion, and maybe something less than $50 billion of RWA, being conservative, come on which obviously will eat into our tier 1 capital ratio. But the regulators get to take their view themselves and not necessarily follow accounting on how they are going to handle all of that when they -- and we just don't know enough yet on how that is all going to play out.

If that were the outcome, we could handle it, obviously.

Jamie Dimon, Chief Executive Officer

Also remember, Ron, we are retaining a lot of capital. Our dividend is low, we are retaining capital even at these low earning numbers. We kind of expect that to continue for a while. But we are retaining capital. You are talking about '09, '10, '11 so we would be in very good shape for that.

Ron Mandel, GIC

Have your conversations with regulators indicated that they will take a different approach than the accountant?

Mike Cavanagh, Chief Financial Officer

It is too early to tell.

Jamie Dimon, Chief Executive Officer

I'm saying, if you go through what I would consider almost the worst case, it is still not that big a deal. So it hurts your Tier 1 ratio by 50 basis points and other ratios who, cares. It's just one point, it is just another number on a piece of paper and we have got plenty of ways to raise capital or add to preferred stock or reduce asset growth or something like that.

Mike Cavanagh, Chief Financial Officer

Or recalibrate our capital targets, because nothing is fundamentally changing as accounting changes, right?

Ron Mandel, GIC

Right. Are there any third-party vehicles that you manage or otherwise, third-party related assets where you manage the conduit that might come on the balance sheet?

Mike Cavanagh, Chief Financial Officer

The conduit can go on the balance sheet but that would barely impact capital because it is already included in capital on a risk-weighted basis, and then there is a couple hundred billion of other forms of securitization, [inaudible] totally up that like Jamie said we can take you through at a future time. But there are plenty of business actions that we would see taking to make adjustments to likely make any impact from any of that very manageable.

Jamie Dimon, Chief Executive Officer

And some of that would be irrational where you have absolutely no risk but you have to put it on your balance sheet. But even so, that wouldn't matter but remember, we have a very, very forward-looking view of capital. We already project our capital throughout '09 and we already know that we can handle all that stuff easily. We might change what we do elsewhere, but we already know we could handl