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TWST: A few portfolio managers have told our readers that they will not invest in any loan-based entities at this time. In a very informative research report, you conclude that aside from telecom and health care, most problem loans are not expected to be concentrated in any particular sector but rather in certain types of loans. Will you give us a profile of the types of loans that investors should be concerned about?

Ms. Blecher: Certainly. What we saw in the beginning of last year was a gradual deterioration in credit quality, a deterioration that accelerated in the second half of the year. The problems were centered in commercial loans. Among the commercial loans, the weakest area was syndicated credits. This was primarily due to the seasoning of loans that were put on the books two years ago when underwriting standards and/or spreads softened. As these loans aged and the economy slowed down, we saw a number of the large companies go into bankruptcy. Going forward, credit quality deterioration should continue but at a much slower rate of increase. Helping the loan portfolios has been the trend in real estate. We’re not in the type of economy now where you can say, “All real estate loans are overvalued and are going bad,” since real estate values have not dramatically risen like they did in the late 1980s, creating a bubble. Additionally, the problem loans are not in any one sector; they’re very diversified. Last year we saw problems in, as you said, telecommunications, the healthcare sector and the asbestos companies. But going forward, those are not necessarily going to be the problem areas. Now the problem areas are going to be the ones that are driven by the weakening economy. One potential problem area is the companies that have borrowed money for merger and acquisition activity. If a borrower leveraged up to make an acquisition, and then that acquisition did not provide enough cash flow or revenue to support the added debt levels, those companies are having trouble. Then there are companies that are engaged in shared national credits or the syndicated loan market. Shared national credits are also a problem. I think they’re going to continue to be problematic because when banks are aggressively looking for loans, sometimes they’re not as prudent on underwriting as they should be.

TWST: “Bank of New York should shine in a bear market relative to its peers,” according to your research.

Ms. Blecher: Indeed. I think that Bank of New York (NYSE:BK) is a very unique animal. It is not only a bank; it is a processing company, and they’ve got a leading market share in most of their business lines. For example, in global custody, they’re the largest in the world. They’re also the largest in the government securities clearing operation. Domestic custody and ADRs are businesses that don’t sound very exotic, but what Bank of New York does is make revenue on them. As long as the transaction is there, Bank of New York makes its revenue because it is purely a transaction fee. So, even if markets go up or markets go down, as long as there’s volume, Bank of New York benefits. In addition, if the volume falls off on the New York Stock Exchange, it might go up in bonds or money market accounts or yen. But wherever it flows to, Bank of New York has a presence — and if it’s a customer, it receives a transaction fee. We believe fee-based products, or noninterest income, makes up about 75% of their revenue. And because these are so stable and they’re growing so rapidly (close to 20%), we think the company is going to be able to outperform. While most of the growth is internal, the company also has an active acquisition program, purchasing fee-based books of business from other institutions. We think that over the long term, its earnings should grow 14% or greater. Again, there are very little credit quality problems here because the company is not an active lender; they’re a transaction bank. Actually, they have been decreasing their lending exposure to large corporations. So we think that it’s a beautiful franchise and it has always outperformed, and we don’t see any reason that that should change.