Fairholme BAC conference call

Number one, our core franchise continues to perform in the market, is growing market share in its core businesses. When we look at our array of businesses, they are the strongest positions that anybody has across businesses or consumers, companies and institutional investors

The second point is we continue to execute on a broad scale transformation of this company. We do that through focusing on the core strategic customer basis, selling noncore assets, and that helps our focus and also generates capital, and moving from product sales to customer-focused execution in each of our businesses

The third point is our capital levels are among the highest they've ever been in this institution's history. They're sufficient to run the company even after we took $20 billion in the second quarter, to help with the mortgages issues behind us. We have a clear path on implementing the new rules under Basel III, the new banking regulatory capital rules

The fourth point is the focus on the key issues: continuing to clean up the mortgage issues related to the Countrywide acquisition, get our operating cost down across the board, and that has to be especially true on the tough revenue and extended low interest rate environment, which isn't that favorable to some of the core banking activities, and to continue to lower the risk in our company across the board

As we look at our consumers in 1 or 2 households, we have millions of debit and credit card holders. In the month of July 2011, those consumers spent about $37 billion on their cards, 5% more than they spent in July 2010. the core customer base continues to push along, consumers are continuing to spend money, maybe not as fast as people have projected, but this is about the 15th to 16th month of continued increases. Gas prices contributed about 1.5% to 2% of that growth. The rest is core spending growth. Credit demand across our portfolios continues to be slow, but credit risk continues to improve. And we've seen the trends of improved charge-offs and delinquencies that we saw in the second quarter of 2011 continue in July

However, if you think about it, the fundamentals are so much better in our country and in our company and in our industry than they were 4 years ago when last the financial crisis hit. There's a lot less leverage, whether it's for consumers' leverage, companies' leverage, leverage in the financial system and leverage across the world.

in the acquisition phase between 2006 and 2008, the company bought MBNA, U.S. Trust, La Salle, Countrywide and Merrill Lynch.

Post-Merrill Lynch, the combined Bank of America Merrill Lynch on 1/1/09 had $70 billion of tangible common equity, $1.7 trillion of risk-weighted assets and total assets of about $2.5 trillion. Today, we have $128 billion in tangible common equity, $1.4 trillion in risk-weighted assets and $2.2 trillion in total assets.

We simply cannot continue on the course of diluting our shareholders to build capital. So as I said, our #1 priority is to transform the company and its balance sheet, to rebuild that balance sheet to be able to support growth, navigate through a cycle that would come someday without a dilution and, frankly, align the franchise to the core strategic customer-focused businesses. We had to bring down risk across the board in our consumer portfolios, our commercial estate portfolios and our trading risk. So we started on an asset transformation.

The continued focus on long-term shareholder growth remains in this company, and we believe a key to that is to focus on tangible book value per share growth. That's the measure which translates over time to strong shareholder returns

we sold 23 units in 6 quarters. We've built reserves for the mortgage issues from a negative amount at the beginning of that time period to over $18 billion. And on top of that, we have litigation reserves. We've driven down credit risk, so that charge-off coverage ratio increased from 1x trailing charge-offs to 1.6x.

We have moved our profit trading off the company's. This completely could have all the positions are sold [ph]. We're not doing any acquisitions. We completed the last third or fourth in the process of finally completing the last transitions of Merrill Lynch. We sold $20 billion of equity investments. We significantly tightened the underwriting standards on the consumer side, reducing unsecured consumer book from $225 billion to $150 billion

Our commercial real estate book is down from $80 billion, as peak, to $40 billion. Our legacy asset market assets left over financial crisis are down materially. This work is and will continue to be the massive transformation to continue to build capital and focus the company. So where that left us was more capital, more reserves, both credit- and mortgage-related, less risk and, most importantly, more tangible book value per share

debate about selling core assets and why would we not prioritize that.

First, the customers want us to provide all the services we provide: the corporation to be able to provide corporate investment banking advice to them, an individual to be able to provide both banking and brokerage and investing advice to them. That's what the customers need and want, a corporation that can serve them in the United States and outside the United States. That's the customer-driven franchise we built. The second reason is sale of core assets would hurt that franchise. But more importantly, it's also where we earn the bulk of our money right now. And third, when you have encore assets to sell, why would you sell the core assets.

As I spoke about before, we're also focused on the reality of managing in a protracted economic recovery that's going slower than people predicted even earlier this year. And that means cost management. It's not surprising that post-Merrill Lynch and post-financial crisis, there's a lot of inefficiencies we've built for the company, even setting aside the legacy asset servicing business, which solely deals with the delinquent mortgage loans and has 40,000 people working on that on a given day

All that's in an effort to build the expenses to continue to support the areas of growth for the company, whether it's in international area, growing our financial advisors, growing small business relationship managers or other internal growth. Core expenses have been running about flat. we started on a company-wide campaign called New BAC to begin to take out significant expenses from the company

The other thing we continue to focus on is the mortgage cleanup. Obviously, there aren't many days that I get up and think positively about the Countrywide transaction in 2008. In each quarter, we continue to put risk behind us. In the past quarter, we made a significant step forward in doing that. The mortgage area will continue to make noises and get through the current legal cases, but the risk has been lowered each quarter for the last 3 and the quarters before that

So as we think about what we have done in transformation, increased the focus, lowered the risk, managed expenses, the key is to focus on what we have that no one else has, and that's the best franchise in the business

So as you think about our franchise in the second quarter, let's talk about what happened. The core franchise continues to perform. In the second quarter, all of our businesses made money. They made a total of $5.7 billion [ph] . But when you added the mortgage charge, we produced a loss

We also shed in the quarter 63 less productive branches as we continue to fine-tune the retail deposit franchise on our way to our goal of eliminating 750 branches over the next few years. Our broad coverage banking centers in the markets around the U.S. enables us to continue to right-size the network while there's a continuing to build the cash density of distribution we have.

We made over $2 billion in the Credit Card business, and that was aided by reserve releases. Importantly, we added over 750,000 accounts for the quarter, another solid quarter of new accounts. Credit quality of this underwriting remains very, very strong. We've seen credit improvement in both delinquencies and charge-offs in the second quarter

Our Global Wealth and Investment Management businesses, Merrill Lynch Wealth Management and U.S. Trust continue to produce solid results with more than $500 million of after-tax profit. In those businesses, we added advisors. The client balances continue to grow on the second quarter, and we'll continue to drive the connectivity of these businesses throughout our franchise

Our Global Banking and Markets businesses, our large corporate investment banking and trading businesses earned $1.6 billion after tax in the quarter. Our investment outside the U.S. continues to bear fruit as our loans in our investment banking fees outside the U.S. were at record levels for us. And in fact, our loans to large corporations outside United States, our funded loans are bigger than our loans inside the United States. Our Investment Banking team finished second in the world of fees received with about $1.6 billion

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So as you think about it from the top of the house, credit in the second quarter continued to improve, and our reserve shows strong coverage at 1.6x our annualized charge-offs. Delinquencies and charge-offs continued to improve trends, which you see across the board continue in July

Loan growth remains muted except internationally, as I spoke about before. We continue to run off the noncore portfolio, which has dragged our earnings out the charge-offs. But that reduction of portfolio releases capital

Our margins will continue to -- as we stated last year in the second quarter, will continue to be under pressure as the interest rate environment goes forward. And we've been clear about that we think we've hit a plateau there, and we'll continue to work to improve that. Expenses for the quarter were flat on a core basis, subtracting out the mortgage charges. But that's clearly not good enough. We continued to absorb large expenses to clean up our legacy assets. We've seen the headcount generally take over on the company, and our New BAC program is well underway to provide significant expense leverage beginning later this year and in 2012 and beyond

The 2 issues are mortgage risk and capital. On Mortgage, we've continued to work to encapsulate risk, take risk off the table and put it behind us. On rep-and-warranty putback risk, each of the last 3 quarters, we've made major steps. Over the past several quarters, we built the reserves over $18 billion plus in rep-and-warranty liability reserves and also -- and more in litigation reserves.

On the operations side of the Mortgage, one of the more encouraging things is that we saw during the quarter, we're able to reduce the number of delinquent customers by about 150,000 mortgage holders. That's on a base of about 1.5 million

If you look at our overall loan reserves for credit losses at the end of June, they totaled $37.3 billion, which, to put in context, represents 1.64x our annualized charge-offs, as well as 4% of our total loan and lease balances.

Let me move to mortgage within the credit loss area because we tend to receive a lot of questions on that. If you look at our loan loss reserves within the mortgage business at the end of June, they totaled $21 billion. To put that in context, that's 2.5% of our total residential mortgage loans, and the piece that we allocate for Home Equity is nearly 7% of a reserve relative to our total Home Equity balances, excluding purchase credit impaired.

Once a mortgage loan goes more than 180 days past delinquent, it is charged down to the net realizable value. And as we go forward, we update that net realizable value on a quarterly basis.

In addition to our credit reserves, we have approximately $18 billion in reserves in our mortgage business for rep-and-warrants, and we have additional reserves for litigation matters. The rep-and-warrant liability of approximately $18 billion at the end of June compares to only $4 billion that was on our books at the beginning of 2010.

We have a mortgage servicing right on the balance sheet, $12.4 billion at June 30 of 2011. Under Basel III, a portion of this is deducted from Tier 1 common capital. As we have said previously, we're working aggressively to reduce this and recently signed an agreement to sell approximately $500 million of certain mortgage servicing rights. We continue to work on additional sales as we move forward, as well as focusing on reducing the level of MSR that we originate on the front end within our mortgage business.

regulatory requirements that will be implemented under Basel III starting on January 1, 2013. I think it's important to take a step back and realize that effective January 1, '13, the minimum Tier 1 common standard under Basel III will be 3.5%

we'll have roughly $70 billion of risk-weighted assets under Basel III in a loan runoff portfolio that we would expect to run off largely by the end of 2015. We also have the credit correlation trading portfolio that we'd expect to be about $30 billion of Basel III risk-weighted assets at the end of 2012 that will run off largely by 2018. From a private equity perspective, our private equity investments, we believe, will be approximately $50 billion of risk-weighted assets under Basel at the end of 2012, and we'll continue to work through those in '13 and beyond. Those 3 items obviously total about $150 billion of risk-weighted assets that we will look to work through in 2013 and beyond. Over and above that, we'll continue to sell assets that are not core to the customer franchise that Brian alluded on earlier. We will continue to be very focused on reducing MSRs, as I indicated before. Those are 100% risk-weighted deductions. And obviously, going forward, as we make money and use the deferred tax assets that we have on the balance sheet, capital will accrete at a rate greater than the amount of net income that goes through the income statement