425 1 y43616e425.txt THE CHASE MANHATTAN CORPORATION 1 Filed by The Chase Manhattan Corporation Pursuant to Rule 425 under the Securities Act of 1933 and deemed filed pursuant to Rule 14a-6 under the Securities Exchange Act of 1934 Subject Company: J.P. Morgan & Co. Incorporated Commission File No. 1-5885 Date: December 15, 2000 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 Forms 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 Chase's Registration Statement on Form S-4 referred to below. In connection with the proposed transaction, Chase has filed a Registration Statement on Form S-4 with the Securities and Exchange Commission containing a joint proxy statement-prospectus with regard to the proposed merger. Stockholders are advised to read the joint proxy statement-prospectus because it contains important information. Stockholders may obtain a free copy of the joint proxy statement-prospectus 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 joint proxy statement-prospectus and the SEC filings that will be incorporated by reference in the joint proxy statement-prospectus 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). # # # # 2 [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 3 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 4 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 5 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 6 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 7 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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 15 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 16 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 17 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 18 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, 19 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 20 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 21 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 22 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 23 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 24 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 25 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 26 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 27 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 28 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? 29 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. 30 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 31 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.