Prospekt - Hedgeconcept.de

Transcription

Prospekt
der
MORGAN STANLEY B.V.
vom 14. Februar 2008
für
bis zu 75.000 kapitalgeschützte apano AP Garant 2 Garantiezertifikate
bezogen auf
Aktien der Klasse T2 (Man AP Enhanced Garant 2 Class T2 EUR Shares)
der Man Global Strategies Investment Strategies Ltd.
garantiert von Morgan Stanley
(gegründet nach dem Recht des US-Bundesstaates Delaware)
WKN: MS5DHK
ISIN: DE000MS5DHK0
Die Zertifikate sind und werden in Zukunft nicht unter dem U.S. Securities Act of
1933 ("Securities Act") registriert. Abgesehen von bestimmten Ausnahmen dürfen
die Zertifikate weder in den Vereinigten Staaten noch an U.S. Personen angeboten,
verkauft oder geliefert werden.
INHALTSVERZEICHNIS
DURCH VERWEIS EINBEZOGENE DOKUMENTE................................................5
ZUSAMMENFASSUNG ..............................................................................................8
Warnhinweise ................................................................................................................8
Zusammenfassung der wesentlichen Risikofaktoren.....................................................8
Zusammenfassung der wesentlichen Merkmale in Bezug auf die Emittentin.............12
Zusammenfassung der wesentlichen Merkmale in Bezug auf die Garantin................13
Zusammenfassung des Angebots.................................................................................15
Zusammenfassung der wesentlichen Merkmale in Bezug auf die ausgegebenen
Zertifikate.....................................................................................................................16
RISIKOFAKTOREN DER ZERTIFIKATE ............................................................... 23
Mit der Emittentin verbundene Risiken.......................................................................23
Mit der Garantin verbundene Risiken..........................................................................24
Mit den Zertifikaten verbundene Risiken ....................................................................39
Mit der Fonds-Komponente verbundene Risiken ........................................................44
ALLGEMEINE INFORMATIONEN ÜBER DAS ANGEBOT UND DIE
ZERTIFIKATE ............................................................................................................57
Gegenstand des Prospekts............................................................................................57
Wertpapierkennummer ("WKN") / ISIN der Zertifikate ............................................. 57
Billigung des Prospekts................................................................................................ 58
EWR-Pass ....................................................................................................................58
Ausgabe der Zertifikate und öffentliches Angebot......................................................58
Verkaufsbeschränkungen.............................................................................................59
Verbriefung ..................................................................................................................60
Zahlstelle......................................................................................................................61
Verwendung der Emissionserlöse................................................................................61
2
Verantwortung .............................................................................................................61
Beschluss des Board of Directors................................................................................61
Bereithaltung des Prospekts und sonstiger Unterlagen................................................62
Ausgabe von Berichten im Anschluss an die Emission...............................................62
BESCHREIBUNG DER EMITTENTIN.....................................................................63
BESCHREIBUNG DER GARANTIN ........................................................................ 69
KOSTEN, GEBÜHREN UND SONSTIGE AUSLAGEN .........................................92
Gebühren......................................................................................................................92
Sonstige Kosten, Gebühren, Provisionen und Aufwendungen im
Zusammenhang mit der Fonds-Komponente............................................................... 93
BESCHREIBUNG DER FONDS-KOMPONENTE...................................................94
ZERTIFIKATSBEDINGUNGEN .............................................................................104
§ 1 Zertifikatsrecht; Rückzahlungsbetrag ..................................................................104
§ 2 Weitere Definitionen............................................................................................105
§ 3 Status; Garantie; Form der Zertifikate; Girosammelverwahrung;
Übertragbarkeit ..........................................................................................................105
§ 4 Aussetzungen und Verschiebungen .....................................................................106
§ 5 Berechnungen; Zahlung von Geldbeträgen .........................................................108
§ 6 Zahl- und Berechnungsstelle................................................................................108
§ 7 Bekanntmachungen..............................................................................................109
§ 8 Aufstockung; Ankauf; Entwertung ......................................................................109
§ 9 Vorzeitiger Verkauf durch die Zertifikatsinhaber................................................110
§ 10 Kündigung durch die Emittentin........................................................................111
§ 11 Ersetzung der Emittentin.................................................................................... 114
§ 12 Verschiedenes ....................................................................................................115
§ 13 Sprache...............................................................................................................116
3
BESTEUERUNG IN DER BUNDESREPUBLIK DEUTSCHLAND .....................117
ANLAGE: JAHRESBERICHT DER EMITTENTIN
ZUM 30 NOVEMBER 2007 ......................................................................... F-1 – F-20
ANLAGE: JAHRESBERICHT (FORM 10-K) DER GARANTIN
ZUM 30. NOVEMBER 2007 ..................................................................... G-1 – G-353
UNTERSCHRIFTENSEITE................................................................................... U-1
4
DURCH VERWEIS EINBEZOGENE DOKUMENTE
Sämtliche in Hinblick auf die Morgan Stanley B.V. als Emittentin ("MSBV" oder die
"Emittentin") und Morgan Stanley als Garantin ("Morgan Stanley" oder die
"Garantin") folgenden Dokumente sind Bestandteile des Basisprospekts vom
22. Juni 2007, wie durch Nachträge vom 10. Oktober 2007, 19. November 2007 und
20. Dezember 2007 ergänzt (Program for the Issuance of Notes, Series A and B) von
Morgan Stanley als Emittentin und Garantin, Morgan Stanley (Jersey) Limited als
Emittentin und Morgan Stanley B.V. als Emittentin, der von der
Finanzdienstleistungsaufsicht in Großbritannien (Financial Services Authority) in
Übereinstimmung mit der Richtlinie 2003/71/EG vom 4. November 2003 bzw. deren
maßgeblichen Umsetzungsvorschriften in Großbritannien gebilligt worden ist, und
sind durch Verweis in diesen Prospekt einbezogen bzw. bilden einen Bestandteil
dieses Prospekts:
Bezüglich Morgan Stanley als Garantin:
Einbezogenes
Dokument:
Bezug genommen in:
Information:
Für das Geschäftsjahr vom 1. Dezember 2006 bis zum 30. November 2007 wird verwiesen auf:
Jahresbericht (Annual "Ausgewählte
• "Bilanz" (Consolidated Statements of
Report, Form 10-K) Finanzinformationen" auf
Financial Condition) Seiten G-101 f. des
der Garantin zum Seite 82 dieses Prospekts:
Jahresberichts (Annual Report, Form 1030. November 2007
K)
• "Gewinn
und
Verlustrechnung"
(Consolidated Statements of Income)
Seite G-103 des Jahresberichts (Annual
Report, Form 10-K)
• "Kapitalflussrechnung"
(Consolidated
Statement of Cash Flows ) Seite G-105 des
Jahresberichts (Annual Report, Form 10K)
• "Rechnungslegungsstrategien
und
erläuternde Anmerkungen" (Notes to the
Consolidated
Financial
Statements)
Seiten G-107 ff. des Jahresberichts
(Annual Report, Form 10-K)
"Prüfung
historischer • Prüfungsbericht
(Report
of
the
Finanzdaten" auf Seite 83
Independent Registered Public Accounting
dieses Prospekts:
Firm), Seite G-100 des Jahresberichts
5
Jahresbericht (Annual "Ausgewählte
• "Bilanz" (Consolidated Statements of
Report, Form 10-K) Finanzinformationen" auf
Financial Condition) Seiten 110 f. des
der Garantin zum Seite 82 dieses Prospekts:
Jahresberichts (Annual Report, Form 1030. November 2006
K)
• "Gewinn
und
Verlustrechnung"
(Consolidated Statements of Income)
Seite 112 des Jahresberichts (Annual
Report, Form 10-K)
(Consolidated
Statement of Cash Flow ) Seite -114 des
Jahresberichts (Annual Report, Form 10K)
• "Rechnungslegungsstrategien
und
erläuternde Anmerkungen" (Notes to the
Consolidated
Financial
Statements)
Seiten 116 ff. des Jahresberichts (Annual
Report, Form 10-K)
"Prüfung
historischer • Prüfungsbericht
(Report
of
the
Finanzdaten" auf Seite 83
Independent Registered Public Accounting
dieses Prospekts:
Firm), Seite 109 des Jahresberichts
Bezüglich Morgan Stanley B.V. als Emittentin:
Einbezogenes
Dokument:
Bezug genommen in:
Information:
Jahresbericht (Annual "Finanzinformationen über die • "Bilanz" (Balance Sheet), Seite F-4
Report and Accounts) Vermögens-,
Finanzund
des Jahresberichts (Annual Report
der Emittentin zum Ertragslage der Emittentin " auf
and Accounts)
30. November 2007
Seite 66 dieses Prospekts:
• "Gewinn und Verlustrechnung"
(Income Statement), Seite F-3 des
Jahresberichts (Annual Report and
Accounts)
• "Kapitalflussrechnung" (Cash Flow
Statement),
Seite F-6
des
Accounts)
• "Erläuternde Anmerkungen" (Notes
to the Financial Statements), Seiten
F-7 ff. des Jahresberichts (Annual
Report and Accounts)
"Prüfung
der
historischen • Prüfungsbericht (Auditor's Report),
jährlichen Finanzinformationen"
Seiten F-19 f des Jahresberichts
auf Seite 68 dieses Prospekts:
(Annual Report and Accounts)
6
Einbezogenes
Dokument:
Bezug genommen in:
Information:
Jahresbericht (Annual "Finanzinformationen über die • "Bilanz" (Balance Sheet), Seite 3
Report and Accounts) Vermögens-,
Finanzund
des Jahresberichts (Annual Report
der Emittentin zum Ertragslage der Emittentin " auf
and Accounts)
30. November 2006
Seite 66 dieses Prospekts:
• "Gewinn und Verlustrechnung"
(Profit and Loss Account),
Seite 2 des Jahresberichts (Annual
(Cash
Flow Statement), Seite 4 des
Accounts)
• "Erläuternde
Anmerkungen"
(Notes to the Accounts), Seiten 5
ff. des Jahresberichts (Annual
"Prüfung
der
historischen • Prüfungsbericht (Auditor's Report),
jährlichen Finanzinformationen"
Seiten 14 f des Jahresberichts
auf Seite 68 dieses Prospekts:
(Annual Report and Accounts)
Die durch Verweis einbezogenen Dokumente werden bei der Emittentin bzw. der
Garantin in gedruckter Form zur kostenlosen Ausgabe bereitgehalten.
Die in Hinblick auf die Garantin durch Verweis einbezogenen Dokumente sind zudem
auf der Internet-Seite der US-amerikanischen Wertpapier- und Börsenaufsicht (United
States Securities and Exchange Commission) unter www.sec.gov veröffentlicht und
dort für Anleger abrufbar.
7
ZUSAMMENFASSUNG
Warnhinweise
Die folgende Zusammenfassung stellt eine Einführung zu diesem Prospekt (der
"Prospekt") dar. Der Zertifikatsinhaber sollte daher jede Entscheidung zur Anlage in
die Zertifikate nur nach ausführlicher Prüfung des gesamten Prospekts einschließlich
der Zertifikatsbedingungen (die "Zertifikatsbedingungen") treffen. Begriffe, die in
den Zertifikatsbedingungen definiert sind, haben in der Zusammenfassung die gleiche
Bedeutung, falls nicht anderweitig bestimmt.
Für den Fall, dass vor einem Gericht Ansprüche aufgrund der in diesem Prospekt
enthaltenen Informationen geltend gemacht werden, hat der als Kläger auftretende
Zertifikatsinhaber in Anwendung der einzelstaatlichen Rechtsvorschriften der Staaten
des Europäischen Wirtschaftsraums gegebenenfalls die Kosten für eine erforderliche
Übersetzung des Prospekts vor Prozessbeginn zu tragen.
Potenzielle Erwerber der Zertifikate sollten beachten, dass die Emittentin für die
Zusammenfassung einschließlich einer Übersetzung davon in diesem Prospekt haftbar
gemacht werden kann, jedoch nur für den Fall, dass die Zusammenfassung
irreführend, unrichtig oder widersprüchlich ist, wenn sie zusammen mit den anderen
Teilen des Prospekts gelesen wird.
Zusammenfassung der wesentlichen Risikofaktoren
Die im Folgenden dargestellten Risikofaktoren können sich negativ auf die Wertentwicklung der kapitalgeschützten apano AP Garant 2 Garantiezertifikate (jeweils
das "Zertifikat" bzw. die "Zertifikate") auswirken. Dabei können mehrere
Risikofaktoren die Wertentwicklung der Zertifikate gleichzeitig beeinflussen, ohne
dass über deren Zusammenwirken eine verbindliche Aussage getroffen werden
könnte. Darüber hinaus können sich weitere, zum jetzigen Zeitpunkt unbekannte oder
unvorhersehbare Risiken ebenfalls negativ auf den Wert der Zertifikate auswirken.
Anleger müssen Risikofaktoren in Bezug auf die Emittentin, die Garantin, die
Zertifikate, die den Zertifikaten zugrundeliegenden Fonds-Komponente und sonstige
Risiken beachten.
Risikofaktoren in Bezug auf die Emittentin sind unter anderem, dass
•
es keine Ansprüche der Zertifikatsinhaber gegen Gesellschafter, Geschäftsführer oder Angestellte der Morgan Stanley B.V. ("MSBV" oder die
"Emittentin") gibt; und
8
•
alle wesentlichen Aktiva von MSBV Verpflichtungen von (oder Wertpapiere
ausgegeben von) einer oder mehreren Gesellschaften der Morgan Stanley
Gruppe darstellen. Die Verpflichtungen von MSBV gemäß solchen
Transaktionen sind im Wesentlichen von Morgan Stanley garantiert. Entstehen
einer dieser Gesellschaften der Morgan Stanley Gruppe Verluste im
Zusammenhang mit ihren Aktivitäten (unabhängig davon, ob sich diese
Aktivitäten auf MSBV beziehen oder nicht), so könnten diese nur noch
eingeschränkt in der Lage sein, ihre Verpflichtungen gegenüber MSBV zu
erfüllen, und die Inhaber von Wertpapieren, die MSBV ausgegeben hat, wären
einem Verlustrisiko ausgesetzt.
Risikofaktoren in Bezug auf die Garantin sind unter anderem, dass
•
das tatsächliche Ergebnis von Morgan Stanley ("Morgan Stanley" oder die
"Garantin") im Einzelfall aufgrund zahlreicher Faktoren erheblich vom
erwarteten Ergebnis abweichen könnte. Die in diesem Prospekt aufgeführten
Risikofaktoren stellen die wesentlichen Risiken und Unsicherheiten für das
Geschäft von Morgan Stanley dar;
•
das operative Ergebnis von Morgan Stanley in wesentlichem Maße von
Marktschwankungen, wirtschaftlichen und anderen Faktoren, wie dem
politischen Umfeld, der Konjunktur- und Marktsituation, der Verfügbarkeit
und den Kosten von Kapital, dem Kurs- und Volatilitätsniveau an den
Aktienmärkten, den Rohstoffpreisen und Zinssätzen, den Wechselkursen und
anderen Marktindizes, technologischen Veränderungen und Ereignissen, der
Verfügbarkeit und den Kosten von Fremdkapital, der Inflation sowie der
Verbraucherstimmung und dem Vertrauen in die Finanzmärkte beeinflusst
werden kann;
•
Morgan Stanley einem harten Wettbewerb mit anderen Finanzdienstleistern
ausgesetzt ist und dies auf die Preise drücken und somit die Erträge und
Profitabilität des Unternehmens erheblich beeinträchtigen könnte und
•
die Finanzdienstleistungsbranche erheblichen Risiken im Zusammenhang mit
Rechtsstreitigkeiten und aufsichtsrechtlichen Aspekten ausgesetzt ist, und der
Ruf in der Finanzdienstleistungsbranche sowie die rechtliche
Haftungssituation von Morgan Stanley Schaden nehmen können, wenn die
Dienstleistungen als nicht zufrieden stellend bewertet werden oder andere
Gründe vorliegen.
Morgan Stanley musste im vierten Quartal des Geschäftsjahres 2007 Abschreibungen
in Höhe von USD 9,4 Milliarden, inklusive USD 7,8 Millarden aufgrund ihrer U.S.
Subprime Handelspositionen und USD 1,6 Milliarden aufgrund anderer
Hypothekengeschäfte vornehmen. Diese Geschäfte beinhalten etwa Commercial
Mortgage Backed Securities, Alt-A und andere Darlehen, notleidende Kredite (Non
Performing Loans) und europäische Non-Conforming Loans und eine
9
Ausgleichszahlung für Hypothekenportfolios heimischer Tochtergesellschaften.
Morgan Stanley ist weiterhin in diesen Märkten und Produkten aktiv und, soweit die
Marktbedingungen voranschreiten, könnte der Wert hypothekenbezogener
Instrumente weiter sinken. Daneben erschwert die hohe Volatilität der aktuellen
Marktbedingungen eine Bewertung einzelner Wertpapiere von Morgan Stanley.
Spätere Bewertungen unter Berücksichtigung dieser Faktoren können zu einer
signifikanten Änderung der Bewertung einzelner Wertpapiere in der Zukunft führen.
Daneben hängt der am Verkaufstag von Morgan Stanley erzielbare Preis von
Wertpapieren von der Nachfrage und der Liquidität am Markt ab, welcher durchaus
erheblich niedriger als der gegenwärtige eigentliche Preis sein kann. Sämtliche dieser
Faktoren können dazu führen, dass Morgan Stanley weitere Abschreibungen in Bezug
auf den Wert ihres Wertpapierportfolios vornehmen muss und dies einen negativen
Einfluss auf das Ergebnis in der Zukunft haben kann. Das Ergebnis des
Geschäftsjahres 2007 beinhaltete weitere Verluste, die vor allem auf die Illiquidität
des Marktes in der zweiten Hälfte des Geschäftsjahres 2007 zurückzuführen sind.
Diese Verluste spiegelten die Marktbewertungen bezüglich Darlehen und
Darlehnsengagements im Zusammenhang mit der Akquisitionsfinanzierung von
Nicht-Banken wieder. Morgan Stanleys Leveraged Finance-Geschäft beinhaltet die
Konsortialführerschaft und den Weitervertrieb von Darlehen und Verpflichtungen und
zielt darauf ab, die gegenwärtigen Positionen weiter zu veräußern. Dennoch könnte
dies wegen der Liquidität des Marktes länger als in der Vergangenheit dauern und zu
weiteren Abschreibungen solcher Darlehen und Verpflichtungen führen. Die
Bewertung dieser Verpflichtungen könnte sich in der Zukunft ändern, was unter
anderem davon abhängt, ob neue Absprachen auch bezüglich des Preises getroffen
werden und ob die zugrundeliegende Transaktion stattfindet.
Andere Geschäftsbereiche von Morgan Stanley, die bis heute nicht von der Illiquidität
des Hypotheken- und Kreditgeschäfts betroffen waren, können im Falle einer
Ausweitung der gegenwärtigen Bedingungen auf andere Bereiche negativ beeinflusst
werden.
Risikofaktoren in Bezug auf die Zertifikate sind unter anderem, dass
•
die Zahlung eines über den Mindestbetrag von 120% des Nennwerts der
Zertifikate hinausgehenden Betrags von der an einen Partizipationsfaktor
geknüpften Wertentwicklung der Fonds-Komponente abhängig ist. Sollte sich
der Wert der Fonds-Komponente nicht entsprechend entwickeln,
erhalten die Anleger unter Umständen zum Laufzeitende lediglich den
Mindestbetrag von 120% des Nennwerts der Zertifikate und keine
darüber hinausgehenden Beträge.
•
der Kapitalschutz im Umfang von 120% des Nennwerts je Zertifikat nur zum
Ende der Laufzeit der Wertpapiere greift;
10
•
ein möglicher Kapitalschutz vor dem Ende der Laufzeit wie in den
Zertifikatsbedingungen beschrieben nur zu den in den Zertifikatsbedingungen
beschriebenen Zeiträumen greift;
•
trotz des Kapitalschutzes im Umfang von 120% des Nennwerts, der Investor
das Risiko der Verschlechterung der finanziellen Leistungsfähigkeit der
Emittentin bzw. der Garantin trägt;
•
sich Nebenkosten des Kaufs und Verkaufs der Zertifikate nachteilig auf die
Gewinnchance auswirken;
•
der Wert des Zertifikats überholt sein kann, da der Wert der FondsKomponente für einen bestimmten Tag, jedoch nicht an diesem Tag
veröffentlicht wird;
•
risikoausschließende oder -einschränkende Geschäfte nicht immer möglich
sind;
•
die Inanspruchnahme von Kredit zur Finanzierung der Zertifikate zu weiteren
Verlusten führen kann;
•
sich die steuerliche Behandlung der Zertifikate ändern kann;
•
die Emittentin und die Garantin keine Verantwortung für die Rechtmäßigkeit
des Erwerbs der Zertifikate durch die Zertifikatsinhaber übernehmen;
•
potenzielle Interessenkonflikte der beteiligten Parteien den Wert der
Zertifikate und den Rückzahlungsbetrag beeinträchtigen können.
Risikofaktoren in Bezug auf die Fonds-Komponente sind unter anderem, dass
•
die Man Global Strategies Investment Strategies Ltd. eine Gesellschaft mit
zugriffsbeschränkten Konten (segregated accounts company)ist;
•
Änderungen der Besteuerung und der anwendbaren Gesetze in Bezug auf die
Gesellschaft eintreten können;
•
die Man Global Strategies Investment Strategies Ltd. - Man AP Enhanced
Garant 2 Class T2 EUR Shares einer Diversifizierung unterliegen, die nicht
offen gelegt wird;
•
die Anlagestrategie der Man Global Strategies Investment Strategies Ltd. Man AP Enhanced Garant 2 Class T2 EUR Shares Änderungen durch Man
Investments Ltd., Großbritannien, als Investment Manager (der "Investment
Manager") unterliegt;
11
•
der allgemeine Anlageansatz der Gesellschaft, sowie die Investitionen der
Anlagestrategien und Hedgefonds bestimmten Risiken unterliegt;
•
der Investment Manager weder Kontrolle noch Einfluss auf die
Investitionsentscheide im Zusammenhang mit der Umsetzung der
Anlagestrategien und der ihnen zugrunde liegenden Hedgefondsmanagern hat;
•
Transaktionskosten und Gebühren der Man Global Strategies Investment
Strategies Ltd. - Man AP Enhanced Garant 2 Class T2 EUR Shares sich
nachteilig auf den Wert der Zertifikate auswirken können;
•
der Einsatz von Leverage-Techniken durch die Man Global Strategies
Investment Strategies Ltd. die Wertentwicklung der Fonds-Komponente
nachteilig beeinflussen kann;
•
Anlagen der Man Global Strategies Investment Strategies Ltd. in äußerst
volatile Märkte nachteilige Auswirkungen auf den Wert der FondsKomponente haben können;
•
die Konzentration von Anlagen der Man Global Strategies Investment
Strategies Ltd. nachteilige Auswirkungen auf den Wert der FondsKomponente haben kann;
•
das mit den Anlagen der durch die Man Global Strategies Investment
Strategies Ltd. verbundene Gegenparteirisiko nachteilige Auswirkungen auf
den Wert der Fonds-Komponente haben kann;
•
die mit den Anlagen der Man Global Strategies Investment Strategies Ltd.
verbundenen Zins- und Wechselkursrisiken nachteilige Auswirkungen auf den
Wert der Fonds-Komponente haben können;
•
die Bewertung der Vermögenswerte, auf denen die Fonds-Komponente
basiert, nicht unbedingt den Marktwert der Vermögenswerte wieder spiegelt;
•
der Wert der Fonds-Komponente überholt sein kann.
Zusammenfassung der wesentlichen Merkmale in Bezug auf die Emittentin
Morgan Stanley B.V. wurde am 6. September 2001 nach dem Recht der Niederlande
als Gesellschaft mit beschränkter Haftung (Besloten Vennootschap) auf unbegrenzte
Dauer errichtet. MSBV ist im Handelsregister der Industrie- und Handelskammer
(Kamer von Koophandel) von Amsterdam, Niederlande, unter der Nummer 34161590
eingetragen. Der Unternehmenssitz ist in Amsterdam, Niederlande, und die
Geschäftsräume in Locatellikade 1, 1076 AZ Amsterdam, Niederlande, Telefon +31
20 5755600.
12
Gemäß den in Artikel 3 der Satzung von MSBV beschriebenen Zielen kann das
Unternehmen unter anderem Schuldverschreibungen, Optionsscheine und andere
Wertpapiere emittieren. Alle wesentlichen Aktiva von MSBV sind Verpflichtungen
von (oder Wertpapiere ausgegeben von) einer oder mehreren Gesellschaften der
Morgan Stanley Gruppe. Die Wirtschaftsprüfer von MSBV sind Deloitte Accountants
B.V. (Mitglied des niederländischen Wirtschaftsprüferverbands Nederlands Instituut
van Registeraccountants).
MSBV hat keine Tochtergesellschaften und oberstes beherrschendes Unternehmen ist
Morgan Stanley.
Die Directors von MSBV sind C.E.C Hood, J. Solan, G.C. De Boer und TMF
Management B.V. MSBV beschäftigt keine Mitarbeiter.
Das genehmigte Stammkapital von MSBV setzt sich aus 900 Stammanteilen in Höhe
von 100 Euro zusammen. Das ausgegebene, zugeteilte und voll eingezahlte
Stammkapital von MSBV setzt sich aus 180 Stammanteilen in Höhe von 100 Euro
zusammen.
Die Netto-Umsatzerlöse zu den jeweiligen Bilanzstichtagen am 30. November 2007
und 2006 beliefen sich auf 2.962.000 Euro bzw. 1.075.000 Euro, und setzten sich
zusammen aus Provisionen für die Ausgabe von Finanzinstrumenten abzüglich der
Verbindlichkeiten für Garantiegebühren. In den Geschäftsjahren mit Bilanzstichtag
30. November 2007 und 2006 wurde ein Ergebnis vor Steuern in Höhe von
2.197.000 Euro bzw. 775.000 Euro Gewinn ausgewiesen. Im Berichtszeitraum
wurden keine Dividenden ausgeschüttet.
Das Umlaufvermögen von MSBV stieg von 3.893.257.000 Euro in 2006 auf
10.182.479.000 Euro in 2007, und die gesamten Verbindlichkeiten von
3.893.257.000 Euro in 2006 auf 10.182.479.000 Euro in 2007. Hauptgrund für diesen
Verschuldungsanstieg war eine höhere Kundennachfrage nach Finanzinstrumenten.
Zusammenfassung der wesentlichen Merkmale in Bezug auf die Garantin
Die Abschlussprüfer von Morgan Stanley für die Geschäftsjahre vom 1. Dezember
2004 bis 30. November 2005, vom 1. Dezember 2005 bis 30. November 2006 und
1. Dezember 2006 bis 30. November 2007 waren Deloitte & Touche LLP, Two World
Financial Center, New York, New York 10281, USA, eine unabhängige registrierte
Wirtschaftsprüfungsgesellschaft (die "Abschlussprüfer"). Die Abschlussprüfer sind
beim Public Company Accounting Oversight Board (USA) registriert.
Morgan Stanley wurde ursprünglich am 1. Oktober 1981 nach dem Recht des USBundesstaates Delaware auf unbegrenzte Dauer mit Registernummer 0923632
gegründet. Die Vorgängergesellschaften gehen bis auf das Jahr 1924 zurück. Am
31. Mai 1997 schloss sich die Morgan Stanley Group, Inc. in einer Fusion unter
Gleichen mit Dean Witter Discover & Co. ("Dean Witter Discover") zusammen. Zu
13
diesem Zeitpunkt änderte Dean Witter Discover den Firmennamen in Morgan
Stanley, Dean Witter, Discover & Co. ("MSDWD"). Am 24. März 1998 wurde
MSDWD in Morgan Stanley Dean Witter & Co und am 20. Juni 2002 in Morgan
Stanley umbenannt.
Sitz von Morgan Stanley ist The Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801, USA, und die Hauptverwaltung befindet sich in 1585
Broadway, New York, New York 10036, USA, Telefonnummer +1 (212) 761-4000.
Zum Datum dieses Prospekts ist „Morgan Stanley“ der juristische und kommerzielle
Name von Morgan Stanley.
Morgan Stanley ist ein weltweit operierendes Finanzdienstleistungsunternehmen, das
in allen Geschäftssegmenten – Institutional Securities, Global Wealth Management
Group und Asset Management – über bedeutende Marktpositionen verfügt. Morgan
Stanley ist in folgenden Geschäftssegmente tätig: Institutional Securities, Global
Wealth Management Group und Asset Management.
Morgan Stanley leitet das Geschäft von seinem Hauptsitz in New York City, den
regionalen Niederlassungen und Filialen in den USA und seinen
Hauptniederlassungen in London, Tokio, Hongkong und anderen Finanzzentren der
Welt.
Morgan Stanley ist eine Holdinggesellschaft, die durch ihre Tochtergesellschaften und
verbundenen Unternehmen ihre Produkte und Dienstleistungen einer großen und breit
gefächerten Mandanten- und Kundengruppe anbietet, darunter Unternehmen,
Regierungen, Finanzinstituten und Einzelpersonen.
Ziele und Geschäftsgegenstand von Morgan Stanley sind auf Seite 1 der
Gründungsurkunde dargelegt und ermöglichen dem Unternehmen, alle gesetzlich
zulässigen Handlungen und Tätigkeiten auszuführen, für die eine Kapitalgesellschaft
gemäß dem General Corporation Law des Staates Delaware eingerichtet und
gegründet werden kann.
Zum Zeitpunkt dieses Prospekts hat Morgan Stanley die folgenden Directors: John J.
Mack, Roy J. Bostock, Erskine B. Bowles, Howard J. Davies, C. Roberd Kidder,
Donald T. Nicolaisen, Charles H. Noski, Hutham S. Olayan, Charles E. Phillips Jr,
O. Griffith Sexton, Laura D. Tyson und Klaus Zumwinkel.
Zum 30. November 2007 beschäftigte Morgan Stanley weltweit 48.256 Mitarbeiter.
Zum 30. November 2007 umfasste das genehmigte Grundkapital von Morgan Stanley
3.500.000.000 Stammaktien im Nennwert von USD 0,01 und 30.000.000
Vorzugsaktien im Nennwert von USD 0,01. Das ausgegebene, nicht
nachschusspflichtige und voll eingezahlte Grundkapital von Morgan Stanley betrug
am 30. November 2007 1.211.701.552 Stammaktien im Nennwert von USD 0,01.
Im Geschäftsjahr mit Stichtag 30. November 2007 beliefen sich die Aktiva von
Morgan Stanley auf 1.045.409 Millionen US-Dollar und die Gesamtverbindlichkeiten
14
und das Eigenkapital (Passiva) auf 1.045.409 Millionen US-Dollar. Im Geschäftsjahr
mit Stichtag 30. November 2006 beliefen sich die Aktiva von Morgan Stanley auf
1.121.192 Millionen US-Dollar und die Gesamtverbindlichkeiten und das
Eigenkapital (Passiva) auf 1.121.192 Millionen US-Dollar.
Zusammenfassung des Angebots
Emissionsvolumen:
bis zu 75.000 Zertifikate. Dies entspricht einem Gesamtemissionserlös von bis zu 75.000.000 Euro. Im Zeitraum
vom 15. Februar 2008 bis zum 8. April 2008, 16:00 Uhr
Frankfurter Zeit, werden die Zertifikate im Rahmen eines
öffentlichen
Angebots
in
der
Bundesrepublik
Deutschland von der Emittentin zum anfänglichen
Ausgabepreis von 1.000 Euro (zuzüglich eines Agios von
bis zu 6%) angeboten. Die Emittentin behält sich das
Recht vor, die Angebotsfrist gegebenenfalls bis zum
18. April 2008, 16:00 Uhr Frankfurter Zeit zu verlängern.
Die Emittentin ist nicht verpflichtet, gezeichnete
Zertifikate auch zu emittieren.
Anfänglicher
Ausgabepreis:
Mindestzeichnungsbetrag
1.000 Euro je Zertifikat
10.000 Euro (der Mindestzeichnungsbetrag entspricht
10 Zertifikaten)
Agio:
Es kann ein Agio je Zertifikat von bis zu 6% des
anfänglichen Ausgabepreises erhoben werden, d.h. bei
einem anfänglichen Ausgabepreis von 1.000 Euro ein
Agio von bis zu 60 Euro
Ausgabetag:
15. Mai 2008
Lieferung:
Die Lieferung der verkauften Zertifikate erfolgt gemäß
den anwendbaren örtlichen Marktusancen über
Clearstream Banking AG, Frankfurt am Main, Neue
Börsenstraße 1, 60487 Frankfurt am Main,
Bundesrepublik Deutschland (das "Clearingsystem").
Emissionswährung:
Euro
15
Zusammenfassung der wesentlichen Merkmale in Bezug auf die ausgegebenen
Zertifikate
Laufzeit der Zertifikate
Die Laufzeit der Zertifikate beginnt mit ihrer Ausgabe am 15. Mai 2008 und endet,
vorbehaltlich der Kündigung der Zertifikate durch die Emittentin in Übereinstimmung
mit den Zertifikatsbedingungen, am 15. Februar 2023.
Zertifikatsrecht
Die Morgan Stanley B.V. als Emittentin gewährt hiermit dem Inhaber von je einem
Zertifikat bezogen auf die Fonds-Komponenten der Man Global Strategies Investment
Strategies Ltd. das Recht, vorbehaltlich eines Vorzeitigen Verkaufs durch den
Zertifikatsinhaber bzw. einer Kündigung durch die Emittentin, nach Maßgabe dieser
Zertifikatsbedingungen am Fälligkeitstag den Rückzahlungsbetrag, bzw. am
Vorzeitigen Rückzahlungstag den Vorzeitigen Verkaufspreis zu beziehen.
Rückzahlungsbetrag
Der am Fälligkeitstag durch die Emittentin zu zahlende Rückzahlungsbetrag pro
Zertifikat (der "Rückzahlungsbetrag") entspricht dem höheren Betrag von:
(i)
Nennwert * 120% und
(ii) Nennwert * (120%+Partizipation * NAV(Ende) / NAV(Anfang))
Wobei:
"Barwert der Nullkuponanleihe" der in Prozent ausgedrückte Marktwert einer
synthetischen Nullkuponanleihe rückzahlbar zu 120% des Nennwerts am
Fälligkeitstag und zu jedem Bankgeschäftstag bewertet. Dieser Marktwert wird von
der Berechnungsstelle auf der Basis der EUR-Zinskurve unter Zugrundelegung eines
Zinssatzes von 1‑Monats EURIBOR plus 0,22% festgesetzt.
"NAV(Ende)" dem Nettoinventarwert
Bewertungstag entspricht.
der
16
Fonds-Komponente
am
Letzten
"NAV(Anfang)" 1 Euro entspricht.
"Nennwert" 1.000 Euro entspricht.
"Nettoinventarwert" ("NAV") der Nettoinventarwert der Fonds-Komponente ist, wie
er durch Man Valuations Ltd. (die "Bewertungsstelle") ermittelt und durch
Man Investments bekannt gegeben wird.
"Partizipation" voraussichtlich 43%* beträgt (*indikativ, die Partizipation wird am
Festlegungstag auf Basis der Differenz aus 100% und dem Barwert der
Nullkuponanleihe von der Berechnungsstelle festgelegt).
Weitere Definitionen
"Festlegungstag" ist der 13. Mai 2008.
"Bankgeschäftstag" ist jeder Tag (außer Samstag und Sonntag) an dem die Banken
in Frankfurt am Main, Bundesrepublik Deutschland, Amsterdam, Niederlande und in
London, Großbritannien, für den Geschäftsverkehr geöffnet sind, das Trans-European
Automated Real-time Gross settlement Express Transfer System ("TARGETSystem") geöffnet ist und das Clearingsytem (§ 3) Wertpapiergeschäfte abwickelt.
"Letzter Bewertungstag" ist der 31. Dezember 2022.
Vorzeitiger Verkauf
Jeder Zertifikatsinhaber ist, vorbehaltlich der Zertifikatsbestimmungen, berechtigt, die
von ihm gehaltenen Zertifikate insgesamt oder teilweise der Emittentin durch
schriftliche Mitteilung gegenüber der Zahlstelle und unter Einhaltung einer
Mitteilungsfrist von mindestens fünfundzwanzig (25) Kalendertagen vor dem letzten
Geschäftstag eines Kalenderquartals (jeweils ein "Vorzeitiger Verkaufstag") über
die Morgan Stanley Bank AG, Frankfurt am Main, Junghofstrasse 13-15, 60311
Frankfurt am Main, Bundesrepublik Deutschland, zum Ankauf anzudienen.
Der erste Vorzeitige Verkaufstag ist der 31. Dezember 2009 und der letzte Vorzeitige
Verkaufstag ist der 30. September 2022.
Im Fall des Vorzeitigen Verkaufs erhält der Zertifikatsinhaber am jeweiligen
Vorzeitigen Rückzahlungstag den Vorzeitigen Verkaufspreis ("Vorzeitiger
Verkaufspreis"). Dieser entspricht dem höheren Betrag der beiden folgenden
Beträge:
17
(i)
Vorzeitiger Mindestverkaufspreis und
(ii)
einem Betrag, der sich nach folgender Formel bestimmt:
[Nennwert*(Nullkuponanleihe(i) + Part*NAV(i)/NAV(Anfang))]*(100%-Gebühr)
Wobei:
"Nullkuponanleihe(i)" der in Prozent ausgedrückte Marktwert einer synthetischen
Nullkuponanleihe rückzahlbar zu 120% des Nennwerts am Fälligkeitstag und zu
jedem Bankgeschäftstag bewertet. Dieser Marktwert wird von der Berechnungsstelle
auf der Basis der EUR-Zins-kurve unter Zugrundelegung eines Zinssatzes von
1‑Monats EURIBOR plus 0,30% festgesetzt,
"Part" die Partizipation bezeichnet,
"NAV(i)" dem Nettoinventarwert der Fonds-Komponente am jeweiligen Vorzeitigen
Verkaufstag entspricht, und
"Gebühr" die Vorzeitige Verkaufsgebühr bezeichnet. Die Vorzeitige Verkaufsgebühr
("Vorzeitige Verkaufsgebühr") entspricht im Hinblick auf den jeweiligen Zeitraum
folgenden Prozentsätzen:
Zeitraum
Vorzeitige
Verkaufsgebühr
31. Dezember 2009 (einschließlich) bis zum 30. Juni 2010
(einschließlich)
4%
30. September 2010 (einschließlich) bis zum 30. Juni 2012
(einschließlich)
3%
(einschließlich)
1%
Bei einem Vorzeitigen Verkauf nach dem 30. Juni 2014 wird keine Vorzeitige
Verkaufsgebühr erhoben.
18
"Vorzeitiger Rückzahlungstag" im Fall des Vorzeitigen Verkaufs durch den
Zertifikatsinhaber gemäß § 9, spätestens den sechsunddreissigsten (36.) Geschäftstag,
der auf den jeweils maßgeblichen Vorzeitigen Verkaufstag folgt, bezeichnet.
"Vorzeitiger Mindestverkaufspreis" im Hinblick auf den jeweiligen Zeitraum
folgenden Beträgen entspricht:
Zeitraum
Vorzeitiger
Mindestverkaufspreis
Ausgabetag (einschließlich) bis zum 29. Juni 2019
(einschließlich)
30. Juni 2019 (einschließlich) bis zum 29. Juni 2021
(einschließlich)
30. Juni 2021 (einschließlich) bis zum 14. Februar 2023
(einschließlich)
0
Nennwert
Nennwert * 110%
Kündigung
Bei Vorliegen eines der in den Zertifikatsbestimmungen beispielhaft beschriebenen
Kündigungsereignisse ist die Emittentin berechtigt, aber nicht verpflichtet, die
Zertifikate durch Bekanntmachung unter Angabe eines Kündigungsereignisses zu
kündigen.
Im Fall der Kündigung zahlt die Emittentin am Rückzahlungstag bei Kündigung an
jeden Zertifikatsinhaber bezüglich jedes von ihm gehaltenen Zertifikats einen
Geldbetrag, der von der Emittentin gemäß § 315 BGB nach billigem Ermessen und
unter Berücksichtigung der im Hinblick auf den jeweiligen Kündigungstag
maßgeblichen Kündigungsgebühr sowie gegebenenfalls unter Berücksichtigung des
dann maßgeblichen Nettoinventarwerts der Fonds-Komponente und der durch die
Kündigung bei der Emittentin angefallenen Kosten, als angemessener Marktpreis
eines Zertifikats bei Kündigung festgelegt wird.
Der "Rückzahlungstag bei Kündigung" ist spätestens der sechsunddreissigste (36.)
Geschäftstag, der unmittelbar auf den Kündigungstag folgt.
Die "Kündigungsgebühr" im Hinblick auf den jeweiligen Zeitraum entspricht
19
Zeitraum
Kündigungsgebühr
(einschließlich)
4 % des Nennwerts
1. Juli 2010 (einschließlich) bis zum 30. Juni 2012
(einschließlich)
3 % des Nennwerts
(einschließlich)
1 % des Nennwerts
Bei Kündigung nach dem 30. Juni 2014 wird keine Kündigungsgebühr erhoben.
Status; Garantie
Die Zertifikate begründen unbesicherte und nicht nachrangige Verbindlichkeiten der
Emittentin, die untereinander und mit allen gegenwärtigen und zukünftigen
unbesicherten und nicht nachrangigen Verbindlichkeiten der Emittentin, abgesehen
von solchen Verbindlichkeiten, denen auf Grund zwingender gesetzlicher
Bestimmungen der Vorrang zukommt, gleichrangig sind.
Morgan Stanley als Garantin hat eine unbedingte und unwiderrufliche Garantie (die
"Garantie") für die vertragsgemäße Zahlung auf die Zertifikate zahlbarer Beträge
übernommen. Die Garantie begründet unmittelbar gegen die Garantin bestehende und
durchsetzbare Ansprüche der Zertifikatsinhaber. Die Garantie begründet unmittelbare,
unbedingte, nichtnachrangige und unbesicherte Verbindlichkeiten der Garantin, die
jederzeit zumindest gleichrangig sind mit allen sonstigen gegenwärtigen und
zukünftigen unmittelbaren, unbedingten, nicht-nachrangigen und unbesicherten
Verbindlichkeiten der Garantin, mit Ausnahme solcher Verbindlichkeiten, die kraft
zwingender gesetzlicher Bestimmungen vorrangig sind.
Zahlstelle
Zahlstelle ist die Deutsche Bank Aktiengesellschaft, Große Gallusstrasse 10-14,
60272 Frankfurt am Main, Deutschland.
20
Wertpapierkennummer / ISIN der Zertifikate
WKN: MS5DHK
ISIN: DE000MS5DHK0
Verwendung der Emissionserlöse
Die Erlöse aus der Ausgabe der Zertifikate (ohne Agio) in Höhe von bis zu
75.000.000 Euro werden ausschließlich für die Erfüllung der Zahlungsverpflichtungen
der Emittentin und zu Zwecken der üblichen Geschäftstätigkeit der Emittentin
verwendet.
Die Fonds-Komponente
Die Fonds-Komponente ist nicht zum öffentlichen Vertrieb in der
Bundesrepublik Deutschland zugelassen. Die in diesem Prospekt enthaltenen
Angaben zur Fonds-Komponente dienen allein der Information von Anlegern,
die Zertifikate erwerben wollen und stellen kein Angebot von Anteilen der
Fonds-Komponente dar.
Die hier enthaltenen Informationen in Bezug auf die Fonds-Komponente bestehen
lediglich aus Auszügen oder Zusammenfassungen von Informationen über die FondsKomponente. Die Emittentin und die Garantin übernehmen die Verantwortung, dass
die Informationen richtig wiedergegeben bzw. zusammengefasst wurden. Soweit es
der Emittentin und der Garantin bekannt ist und soweit sie dies aus den
veröffentlichten Informationen ableiten kann, wurden keine Tatsachen ausgelassen,
die dazu führen würden, dass die wiedergegebenen Informationen falsch oder
irreführend würden. Neben diesen Zusicherungen wird keine weitergehende oder
sonstige Gewähr von der Emittentin bzw. von der Garantin für die Informationen
übernommen. Insbesondere übernehmen die Emittentin und die Garantin keine
Verantwortung für die Vollständigkeit und Richtigkeit der dieser Darstellung
zugrundeliegenden Angaben oder dafür, dass kein Umstand eingetreten ist, der deren
Richtigkeit und Vollständigkeit beeinträchtigen könnte.
Fonds-Komponente:
Die Fonds-Komponente ist jeweils eine stimmrechtslose
rückzahlbare gewinnbeteiligte Aktie der Aktienklasse T2
der Gesellschaft. Die Gesellschaft ist eine steuerbefreite
Gesellschaft (exempted company) mit beschränkter
Haftung in Bermuda und ist amtlich eingetragen als eine
Gesellschaft
mit
zugriffsbeschränkten
Konten
(segregated accounts company) gemäß dem Segregated
Accounts Companies Act 2000 of Bermuda und als ein
offener Publikumsfonds gemäß dem Companies Act
1981 of Bermuda. Die Gesellschaft ist als ein Bermuda
standard scheme eingestuft worden. Als solcher
21
unterliegt die Gesellschaft der Aufsicht und den
Vorschriften nach Maßgabe der Bermuda Monetary
Authority (Collective Investment Scheme Classification)
Regulations 1998. Die Gesellschaft kann Aktien
ausgeben und zurückkaufen zu Preisen auf der Grundlage
des Nettoinventarwerts je Aktie.
Investmentziel und
Investmentstrategie:
Das Investmentziel der Gesellschaft in Bezug auf die
Aktienklasse besteht darin, eher Kursgewinne als Zinsen
zu erwirtschaften. Die Fonds-Komponenten sind so
gestaltet, dass sie auf wesentliches mittelfristiges
Wachstum
abzielen
und
Diversifikationsvorteile
innerhalb
eines
traditionellen
Aktienund
Anleihenportfolios bieten, indem die in Verbindung mit
den Fonds-Komponenten vereinnahmten Erträge in das
AHL Institutional Programme und das MGS Style
Portfolio ("Anlagestrategien") investiert werden. Die
Investitionen in die Anlagestrategien unterliegen
vollständig dem Ermessen des Investment Managers, und
dieser kann jederzeit auch andere Anlagestrategien
hinzufügen.
Investment Manager:
Man Investments Ltd., Großbritannien
Bewertungsstelle:
Man Valuations Ltd., Großbritannien
22
RISIKOFAKTOREN DER ZERTIFIKATE
Potenzielle Käufer der Zertifikate sollten die nachstehenden Risikoinformationen
in Verbindung mit sonstigen in diesem Prospekt enthaltenen Informationen
sorgfältig prüfen, bevor sie sich zu einem Kauf der Zertifikate entschließen.
Die im Folgenden dargestellten Risikofaktoren können sich negativ auf die Wertentwicklung der Zertifikate auswirken. Dabei können mehrere Risikofaktoren die
Wertentwicklung der Zertifikate gleichzeitig beeinflussen, ohne dass über deren
Zusammenwirken eine verbindliche Aussage getroffen werden könnte. Darüber
hinaus können sich weitere, zum jetzigen Zeitpunkt unbekannte oder unvorhersehbare
Risiken ebenfalls negativ auf den Wert der Zertifikate auswirken.
Anleger müssen Risikofaktoren in Bezug auf die Emittentin, die Garantin, die
Zertifikate, die den Zertifikaten zugrundeliegende Fonds-Komponente und sonstige
Risiken beachten.
Die in diesem Prospekt genannten Risiken der Zertifikate stellen die wesentlichen mit
den Zertifikaten verbundenen Risiken dar. Jeder potenzielle Käufer von Zertifikaten
sollte sorgfältig prüfen, ob vor dem Hintergrund seiner Finanzlage sowie der in
diesem Prospekt enthaltenen Angaben eine Anlage in die Zertifikate geeignet
erscheint. Potenzielle Käufer von Zertifikaten sollten mit ihren Rechts- und
Steuerberatern, Wirtschaftsprüfern und sonstigen Beratern klären, ob eine Anlage in
Zertifikaten unter Berücksichtigung ihrer individuellen Verhältnisse geeignet ist.
Mehrere Risikofaktoren können im Hinblick auf die Zertifikate gleichzeitig auftreten,
so dass die Auswirkungen des Eintritts eines bestimmten Risikos unvorhersehbar
sind. Darüber hinaus kann mehr als ein Risikofaktor einen möglicherweise
unvorhersehbaren, verstärkenden Effekt ausüben. Es kann keine Garantie
dahingehend abgegeben werden, wie sich der Eintritt einer Kombination von
Risikofaktoren auf den Wert der Zertifikate auswirkt.
Mit der Emittentin verbundene Risiken
Keine Ansprüche gegen Gesellschafter, Geschäftsführer oder Angestellte der
Emittentin
Die Zertifikate begründen keine Ansprüche der Zertifikatsinhaber gegen
Gesellschafter, Geschäftsführer oder Angestellte der Morgan Stanley B.V.
("Gesellschafter, Geschäftsführer oder Angestellte der Morgan Stanley B.V." oder die
"Emittentin").
23
Verlustrisiko der Inhaber von Wertpapieren, die MSBV ausgegeben hat
Alle wesentlichen Aktiva der MSBV stellen Verpflichtungen von (oder Wertpapiere
ausgegeben von) einer oder mehreren Gesellschaften der Morgan Stanley Gruppe dar.
Die Verpflichtungen von MSBV aus solchen Transaktionen sind von Morgan Stanley
garantiert. Entstehen einer dieser Gesellschaften der Morgan Stanley Gruppe Verluste
im Zusammenhang mit ihren Aktivitäten (unabhängig davon, ob sich diese
Aktivitäten auf MSBV beziehen oder nicht), so könnten diese nur noch eingeschränkt
in der Lage sein, ihre Verpflichtungen gegenüber MSBV zu erfüllen, und die Inhaber
von Wertpapieren, die MSBV ausgegeben hat, wären einem Verlustrisiko ausgesetzt.
Mit der Garantin verbundene Risiken
Liquiditätsrisiko
Das Liquiditäts- und Finanzierungsrisiko betrifft das Risiko, das Morgan Stanley
nicht mehr in der Lage ist, seine Geschäftstätigkeit zu finanzieren, wenn der Zugang
zu den Kapitalmärkten nicht mehr möglich ist oder Schwierigkeiten bei der
Liquidierung
der
Vermögenswerte
bestehen.
Zum
Liquiditätsund
Finanzierungsrisiko gehört auch, dass Morgan Stanley in der Lage ist, seine
finanziellen Verpflichtungen zu erfüllen, ohne dass hiermit eine erhebliche Störung
des Geschäftsbetriebs oder eine Rufschädigung einhergeht, durch die Gefahr für die
Lebensfähigkeit des Unternehmens im laufenden Betrieb droht.
Für das Geschäft von Morgan Stanley ist Liquidität ein herausragendes
Merkmal, und Morgan Stanley hängt bei der Finanzierung eines erheblichen
Teils seiner Geschäftstätigkeit von externen Quellen ab.
Liquidität ist von überragender Bedeutung für die Aktivitäten von Morgan Stanley.
Die Liquidität von Morgan Stanley könnte in erheblichem Maße eingeschränkt
werden, wenn das Unternehmen nicht mehr in der Lage ist, sich an den
Anleihemärkten im langen oder kurzen Laufzeitenbereich zu refinanzieren, oder
keinen Zugang mehr zu Kreditsicherungsmärkten hat. Hierbei könnten Faktoren, auf
die Morgan Stanley keinen Einfluss hat – wie eine Störung an den Finanzmärkten
oder negative Einschätzungen der Finanzdienstleistungsbranche insgesamt – die
Refinanzierungsmöglichkeiten einschränken. Zudem könnten sich die Möglichkeiten
für Refinanzierungen seitens Morgan Stanley verschlechtern, wenn Kreditgeber die
lang- oder kurzfristigen finanziellen Aussichten des Unternehmens negativ beurteilen.
Solche negativen Erwartungen könnten entstehen, wenn Morgan Stanley
Handelsverluste ausweist, im Rating herabgestuft wird oder von den Ratingagenturen
auf eine entsprechenden "negative Watchliste" gesetzt wird, das Niveau der
Geschäftstätigkeit zurückgeht, Aufsichtsbehörden wesentliche Maßnahmen gegen das
Unternehmen einleiten oder erhebliches Fehlverhalten der Mitarbeiter oder illegale
Aktivitäten aufgedeckt werden, usw. Wenn sich Morgan Stanley nicht mit den oben
beschriebenen Maßnahmen refinanzieren kann, muss das Unternehmen aller
Wahrscheinlichkeit nach unbelastete Vermögenswerte, wie beispielsweise ihre
24
Anlage- und Handelsportfolios liquidieren, um Verbindlichkeiten bei Fälligkeit zu
begleichen. Morgan Stanley ist möglicherweise nicht in der Lage, einen Teil seiner
Vermögenswerte zu verkaufen, oder muss diese mit einem Abschlag vom Marktwert
verkaufen. Beides könnte sich negativ auf das operative Ergebnis auswirken.
Die Kreditkosten von Morgan Stanley und der Zugang zu den Anleihemärkten
hängen in hohem Maße vom Rating ab.
Die Kosten und Verfügbarkeit unbesicherter Finanzierungsmittel hängen
grundsätzlich von den kurz- und langfristigen Ratings für Morgan Stanley ab. Bei der
Festlegung der Ratings oder im Zusammenhang mit der Fähigkeit, kurz- oder
langfristige Finanzmittel zu erhalten, spielen unter anderem die folgenden Faktoren
eine wesentliche Rolle: Höhe und Volatilität der Erträge, relative
Wettbewerbsposition von Morgan Stanley in den Märkten, in denen das Unternehmen
aktiv ist, Diversifikation über Regionen und Produkte, die Fähigkeit, wichtige
Mitarbeiter
zu
halten,
das
Risikoprofil
des
Unternehmens,
die
Risikomanagementpolitik, die Liquidität an Bargeld, angemessene Kapitalausstattung,
das Kreditrisiko für seine Unternehmensanleihen sowie rechtliche und
aufsichtsrechtliche Entwicklungen. Eine Verschlechterung bei einem einzelnen oder
einer Kombination dieser Faktoren kann dazu führen, dass die Ratingagenturen die
Kreditratings von Morgan Stanley herabstufen und somit die Kosten des
Unternehmens für unbesicherte Finanzierungsmittel erhöhen.
Die Anleihe-Ratings von Morgan Stanley können sich ferner erheblich auf bestimmte
Handelserträge auswirken, dies gilt insbesondere in den Geschäftsbereichen, in denen
eine längerfristige Kontrahentenperformance wichtig ist, wie beispielsweise bei OTCDerivatetransaktionen, einschließlich Kreditderviaten und Zinsswaps. Im
Zusammenhang mit bestimmten OTC-Handelsvereinbarungen und bestimmten
anderen Vereinbarungen, die mit dem Bereich Institutional Securities verbunden sind,
müsste Morgan Stanley bestimmten Kontrahenten im Falle einer Herabstufung durch
Moody's Investors Service oder Standard & Poor's zusätzliche Sicherheiten zur
Verfügung stellen.
Morgan Stanley ist als Holdinggesellschaft von Zahlungen der Tochtergesellschaften abhängig.
Im Rahmen der Finanzierung von Dividendenzahlungen und aller Zahlungen im
Rahmen von Verpflichtungen, einschließlich der Verpflichtungen aus
Schuldverschreibungen, ist Morgan Stanley abhängig von Dividenden,
Ausschüttungen
und
sonstigen
Zahlungen
der
Tochtergesellschaften.
Aufsichtsrechtliche und sonstige rechtliche Beschränkungen können das
Unternehmen in seiner Fähigkeit einschränken, Mittel frei an die oder von den
Tochtergesellschaften zu übertragen. Insbesondere unterliegen zahlreiche
Tochtergesellschaften, einschließlich der Tochtergesellschaften, die Broker-Dealer
25
sind, Gesetzen und Vorschriften, nach denen Aufsichtsbehörden befugt sind,
Mittelflüsse an die Muttergesellschaften zu blockieren oder einzuschränken oder nach
denen solche Übertragungen unter bestimmten Umständen insgesamt untersagt sind.
Diese Gesetze und Vorschriften können Morgan Stanley darin behindern, auf Mittel
zuzugreifen, die sie für Zahlungen im Zusammenhang mit ihren Verpflichtungen
benötigten könnte.
Wenn Morgan Stanley keine angemessene Liquiditäts- und Finanzierungspolitik
betreibt, kann das Unternehmen möglicherweise nicht auf ausreichende
Finanzierungsmittel zurückgreifen.
Die Liquiditäts- und Finanzierungspolitik von Morgan Stanley wurde so konzipiert,
dass hierüber ausreichend liquide Finanzmittel bereitgestellt werden, so dass auch in
einem angespannten Liquiditätsumfeld die Fortführung der Geschäfte für einen
ausgedehnten Zeitraum gewährleistet ist. Wenn Morgan Stanley keine angemessene
Liquiditäts- und Finanzierungspolitik hat oder befolgt, ist Morgan Stanley
möglicherweise nicht in der Lage, auf ausreichende Finanzmittel für die Bedienung
ihrer finanziellen Verpflichtungen bei Fälligkeit zuzugreifen; dies könnte sich
erheblich nachteilig auf das Geschäft oder die Aktivitäten auswirken.
Marktrisiko
Unter dem Marktrisiko ist die Gefahr zu verstehen, dass eine Änderung eines oder
mehrerer Rohstoff- oder Wertpapierpreise am Markt, der Zinssätze, Indizes,
impliziten Volatilitäten (Preisschwankungen des Basisinstruments, die von den
Optionskursen herrühren), Korrelationen oder anderer Marktfaktoren wie die
Liquidität einer Position oder eines Portfolios Verluste mit sich bringt.
Das operative Ergebnis von Morgan Stanley wird möglicherweise in wesentlichem
Maße von Marktschwankungen, konjunkturellen Faktoren und anderen
Ereignissen beeinflusst.
Die Höhe, die Investitionsdauer und das Spektrum von Morgan Stanleys
Engagements mit Marktrisiko haben sich in den vergangenen Jahren erhöht, und
dieser Trend kann sich fortsetzen. Das operative Ergebnis von Morgan Stanley wird
möglicherweise in wesentlichem Maße von Marktschwankungen infolge
konjunktureller und anderer Faktoren beeinflusst. Das operative Ergebnis wurde in
der Vergangenheit – und wird möglicherweise auch in Zukunft – in wesentlichem
Maße beeinflusst von zahlreichen Faktoren globalen Charakters, wie beispielsweise
dem politischen Umfeld, der Konjunktur- und Marktsituation, der Verfügbarkeit und
den Kosten von Kapital, der Liquidität des globalen Marktes, dem Kurs- und
Volatilitätsniveau an den Aktienmärkten, den Rohstoffpreisen und Zinssätzen, den
26
Wechselkursen und anderen Marktindizes, technologischen Veränderungen und
Ereignissen, der Verfügbarkeit und den Kosten von Fremdkapital, der Inflation,
Naturkatastrophen, Terroranschlägen sowie der Verbraucherstimmung und dem
Vertrauen in die Finanzmärkte. Zudem können Entwicklungen in der Gesetzgebung,
der Rechtsprechung und dem aufsichtsrechtlichen Umfeld im Zusammenhang mit den
Aktivitäten von Morgan Stanley die Kosten erhöhen und sich damit auf das künftige
operative Ergebnis auswirken. Diese Faktoren können sich auch darauf auswirken, ob
Morgan Stanley seine strategischen Ziele erreichen kann.
Das Ergebnis des Bereichs Institutional Securities von Morgan Stanley, und hier
insbesondere das Ergebnis im Zusammenhang mit Engagements an Primär- und
Sekundärmärkten in alle Arten von Finanzprodukten ist aus mehreren Gründen,
einschließlich der oben genannten, starken Schwankungen ausgesetzt, die Morgan
Stanley nicht mit hoher Sicherheit beeinflussen oder vorhersagen kann. Diese
Fluktuationen wirken sich auf Ergebnis aus, indem sie zu Abweichungen bei der
Generierung von Neugeschäft und beim Fair Value von Wertpapieren und anderen
Finanzprodukten führen. Schwankungen treten auch aufgrund des Niveaus der
globalen Marktaktivitäten auf, und wirken sich unter anderem aus auf die Größe, die
Zahl und das zeitliche Aufkommen von Investment-Banking-Mandaten und
-Transaktionen sowie auf die Realisierung von Erträgen in Morgan Stanleys
Eigenhandel.
In Zeiten einer ungünstigen Markt- oder Konjunkturlage beteiligen sich zudem
möglicherweise einzelne Anleger weniger stark an den globalen Märkten, was sich
wiederum negativ auf das Ergebnis des Bereichs Global Wealth Management Group
auswirken würde.
Morgan Stanley könnte weitere Abschreibungen seiner Finanzinstrumente und
Verluste wegen volatiler und illiquider Marktverhältnisse vornehmen müssen.
Morgan Stanley musste im vierten Quartal des Geschäftsjahres 2007 Abschreibungen
in Höhe von USD 9,4 Milliarden, inklusive USD 7,8 Millarden aufgrund ihrer U.S.
Subprime Handelspositionen und USD 1,6 Milliarden aufgrund anderer
Hypothekengeschäfte vornehmen. Diese Geschäfte beinhalten etwa Commercial
Mortgage Backed Securities, Alt-A und andere Darlehen, notleidende Kredite (Non
Performing Loans) und europäische Non-Conforming Loans und eine
Ausgleichszahlung für Hypothekenportfolios heimischer Tochtergesellschaften.
Morgan Stanley ist weiterhin in diesen Märkten und Produkten aktiv und, soweit die
Marktbedingungen voranschreiten, könnte der Wert hypothekenbezogener
Instrumente weiter sinken. Daneben erschwert die hohe Volatilität der aktuellen
Marktbedingungen eine Bewertung einzelner Wertpapiere von Morgan Stanley.
Spätere Bewertungen unter Berücksichtigung dieser Faktoren können zu einer
signifikanten Änderung der Bewertung einzelner Wertpapiere in der Zukunft führen.
Daneben hängt der am Verkaufstag von Morgan Stanley erzielbare Preis von
Wertpapieren von der Nachfrage und der Liquidität am Markt ab, welcher durchaus
erheblich niedriger als der gegenwärtige eigentliche Preis sein kann. Sämtliche dieser
Faktoren können dazu führen, dass Morgan Stanley weitere Abschreibungen in Bezug
auf den Wert ihres Wertpapierportfolios vornehmen muss und dies einen negativen
Einfluss auf das Ergebnis in der Zukunft haben kann. Das Ergebnis des
27
Geschäftsjahres 2007 beinhaltete weitere Verluste, die vor allem auf die Illiquidität
des Marktes in der zweiten Hälfte des Geschäftsjahres 2007 zurückzuführen sind.
Diese Verluste spiegelten die Marktbewertungen bezüglich Darlehen und
Darlehnsengagements im Zusammenhang mit der Akquisitionsfinanzierung von
Nicht-Banken wieder. Morgan Stanleys Leveraged Finance-Geschäft beinhaltet die
Konsortialführerschaft und den Weitervertrieb von Darlehen und Verpflichtungen und
zielt darauf ab, die gegenwärtigen Positionen weiter zu veräußern. Dennoch könnte
dies wegen der Liquidität des Marktes länger als in der Vergangenheit dauern und zu
weiteren Abschreibungen solcher Darlehen und Verpflichtungen führen. Die
Bewertung dieser Verpflichtungen könnte sich in der Zukunft ändern, was unter
anderem davon abhängt, ob neue Absprachen auch bezüglich des Preises getroffen
werden und ob die zugrundeliegende Transaktion stattfindet.
Andere Geschäftsbereiche von Morgan Stanley, die bis heute nicht von der Illiquidität
des Hypotheken- und Kreditgeschäfts betroffen waren, können im Falle einer
Ausweitung der gegenwärtigen Bedingungen auf andere Bereiche negativ beeinflusst
werden.
Das Halten großer und stark konzentrierter Positionen könnte Verluste für Morgan
Stanley bringen.
Mit einer Risikokonzentration könnten geringere Erträge oder Verluste in den
Bereichen Market Making, Eigenhandel, Anlage, Block-Trading, Underwriting und
Kreditvergabe verbunden sein, wenn sich der Markt unvorteilhaft entwickelt. Morgan
Stanley hat in diesen Bereichen hohe Kapitalbeträge gebunden und ist dadurch häufig
gezwungen, große Positionen von Wertpapieren eines bestimmten Emittenten oder
bestimmter Emittenten in einer bestimmten Branche, einem bestimmten Land oder
einer bestimmten Region zu übernehmen oder Kredite an diese auszureichen. Zudem
geht die Tendenz in allen wichtigen Kapitalmärkten hin zu größeren und häufigeren
Kapitalzusagen im Rahmen vieler solcher Aktivitäten, und Morgan Stanley rechnet
mit einer Fortsetzung dieses Trends.
Die Märkte können zeitweise hochvolatil sein und zusätzlich eine beschränkte
Liquitität aufweisen.
Die Finanzmärkte sind anfällig für schwerwiegende Ereignisse, die zu einer
Abwertung von Vermögensgegenständen führen können, und von einer Abnahme der
Liquidität begleitet werden, wie etwa der Preisverfall im U.S. Hypothekenmarkt für
Subprime Baufinanzierungen. Unter diesen extremen Bedingungen könnten
Absicherungsgeschäfte und andere Strategien zur Vermeidung von Risiken weniger
wirksam sein, Verluste aus dem Handel auszugleichen, als unter normalen
Bedingungen. Vielmehr sind unter diesen Bedingungen die Marktteilnehmer den
Handelstrategien ausgesetzt, die viele Teilnehmer zur selben Zeit ausführen, wie etwa
Massenverkäufe.
Morgan
Stanleys
Risikomanagement
und
andere
28
Kontrollmechanismen versuchen das Risiko zu quantifizieren und die Verluste
aufgrund extremer Martbewegungen zu verringern. Solche schwerwiegenden
Ereignisse waren in der Vergangenheit schwer vorauszusehen, auch Morgan Stanley
könnte erhebliche Verluste aufgrund unvorhergesehener extremer Marktbedingungen,
wie auf dem aktuellen U.S. Hypothekenmarkt für Subprime Baufinanzierungen,
erleiden.
Die Profitabilität bestimmter Rohstoff-Marketing-Aktiväten von Morgan Stanley
hängt von der Angebotslage bei Erdölprodukten ab. Ein deutlicher Rückgang des
Angebots aus egal welchem Grund kann sich erheblich nachteilig auf Umsatz und
operatives Ergebnis bestimmter Geschäftssparten des Rohstoffbereichs auswirken.
Morgan Stanleys Erfolg bei Vermarktung und Absatz im Rohstoffgeschäft hängt von
der Fähigkeit ab, positive Margen mit dem Verkauf von veredelten Erdölprodukten zu
erzielen. Zudem ist das Terminal-, Schlepp- und Lastfrachtgeschäft von Morgan
Stanley darauf angewiesen, dass ein aktiver Markt für veredelte Erdölprodukte eine
ausreichende Nachfrage nach Terminal-Dienstleistungen gewährleistet. Ein
angemessenes Angebot an veredelten Erdölprodukten ist für Morgan Stanleys
Pipeline-, Transport- und Terminalgeschäft von wesentlicher Bedeutung. Eine
erhebliche Störung auf der Angebotsseite bei veredelten Erdölprodukten könnte die
Erlöse aus Geschäften am Kassamarkt (rack spot) und beim Handel auf Basis
längerfristiger Lieferverträge (contract sales) sowie die Einnahmen aus Durchsatzund Lagergebühren beeinträchtigen. Zu solchen Risiken gehören Umstände "höherer
Gewalt", die durch Naturkatastrophen, Unwetter, Terroranschläge und andere
Ereignisse hervorgerufen werden, die sich dem Einfluss von Morgan Stanley
entziehen. Derartige Umstände können sich ebenfalls negativ auswirken auf das
Pipeline- und Schifffahrtsgeschäft sowie das Transport- und Terminalgeschäft, das
von den mit Rohstoffen befassten Geschäftssparten von Morgan Stanley betrieben
wird.
Morgan Stanley könnten erhebliche Verluste im Immobiliensektor entstehen.
Morgan Stanley finanziert und erwirbt eigene Positionen in unterschiedlichen
Immobilien und immobiliennahen Produkten auf eigene Rechnung, für
Investmentvehikel, die von verbundenen Unternehmen verwaltet werden, an denen
Morgan Stanley ebenfalls eine erhebliche Beteiligung halten könnte sowie für separat
verwaltete Konten, die von verbundenen Unternehmen für wichtige Teilnehmer der
Gewerbe- und Wohnbauimmobilienmärkte verwaltet werden, und reicht Kredite aus,
die durch Gewerbe- und Wohnbauimmobilien gesichert sind. Ferner ist Morgan
Stanley im Verbriefungsgeschäft und Handel mit einem weiten Spektrum von
Gewerbe- und Wohnbauimmobilien sowie immobilienbezogenen Finanzforderungen
(so genannte Whole Loans), Hypotheken und anderen Vermögenswerten und
Produkten in Form von Immobilien und gewerblichen Aktiva, einschließlich durch
Wohnbau- und Gewerbeimmobilienhypotheken gesicherter Wertpapiere, aktiv. Von
29
einem Konjunkturabschwung des Immobiliensektors können diese Aktivitäten negativ
beeinflusst werden.
Kreditrisiko
Mit Kreditrisiko wird das Verlustrisiko im Zusammenhang mit dem Ausfall eines
Kreditnehmers, eines Kontrahenten oder anderen Schuldners bezeichnet, wenn dieser
nicht in der Lage oder nicht Willens ist, seine Verpflichtungen gegenüber Morgan
Stanley zu erfüllen. Morgan Stanley ist drei unterschiedlichen Arten von Kreditrisiken
in seinem Geschäft ausgesetzt.
Morgan Stanley trägt das Risiko, dass Dritte, die Schulden gegenüber Morgan
Stanley haben, ihren Verpflichtungen nicht nachkommen.
Morgan Stanley entsteht durch den Bereich Institutional Securities ein bedeutendes
Kreditrisiko gegenüber einzelnen Adressen. Dieses Risiko kann sich beispielsweise
durch Abschluss von Swap- oder anderen Derivateverträgen ergeben, nach denen sich
Kontrahenten langfristig zu Zahlungen an Morgan Stanley verpflichten, oder daraus,
dass Morgan Stanley über unterschiedliche Kreditarrangements Kredite an ihre
Kunden ausreicht. Durch die Ausreichung von jeweils grundsätzlich mit Sicherheiten
unterlegten Effekten-Krediten an einzelne Anleger und kleine Unternehmen ist
Morgan Stanley im Bereich Global Wealth Managment Group Kreditrisiken
"einzelner Verbraucher" ausgesetzt.
Die Höhe, die Investitionsdauer und das Spektrum von Morgan Stanleys
Kreditengagements haben sich in den vergangenen Jahren erhöht, und dieser Trend
kann sich fortsetzen. In den letzten Jahren hat Morgan Stanley den Einsatz von Swaps
und anderen Derivaten erheblich ausgeweitet und kann auch künftig weiter so
verfahren. Unternehmenskunden fragen im Zusammenhang mit dem Investment
Banking und anderen Mandaten verstärkt Darlehen oder Kreditzusagen von Morgan
Stanley nach. Zudem ist Morgan Stanley aus Gründen des Wettbewerbs verstärkt dem
Druck ausgesetzt, längerfristige Kreditrisiken zu übernehmen, Gegenparteien und
Kreditnehmern mit geringerer Bonität Swaps und Kreditverpflichtungen zu gewähren,
Kredite gegen weniger liquide Sicherheiten auszureichen und Derivate aggressiver
auf Basis der übernommen Kreditrisiken zu bewerten. Als Clearing Member
finanziert Morgan Stanley Kundenpositionen und kann für den Ausfall oder das
Fehlverhalten der Kunden verantwortlich gemacht werden. Zwar prüft Morgan
Stanley die Kreditrisiken regelmäßig. Das Ausfallrisiko kann jedoch auf Ereignissen
oder Umständen basieren, die schwer zu ergründen oder vorherzusehen sind.
30
Der Ausfall eines anderen größeren Finanzinstituts könnte die Finanzmärkte
insgesamt belasten.
Die wirtschaftliche Stabilität vieler Finanzinstitute kann wegen der Kredit-, Handels-,
Clearing- oder sonstiger Verhältnisse zwischen den Instituten eng verzahnt sein.
Daher könnten Bedenken hinsichtlich eines Instituts, oder der Ausfall oder drohende
Ausfall eines Instituts erhebliche Liquiditätsprobleme im gesamten Markt, Verlust
oder Ausfälle anderer Institute nach sich ziehen. Dies wird gelegentlich als
"systemisches Risiko" bezeichnet und kann Finanzintermediäre, wie ClearingAgenten, Clearing-Häuser, Banken, Wertpapierhandelsgesellschaften und Börsen, mit
denen Morgan Stanley täglich zu tun hat, beeinträchtigen, und somit auch Morgan
Stanley belasten.
Operatives Risiko
Das operative Risiko bezieht sich auf das Risiko eines finanziellen oder sonstigen
Verlusts oder möglicher Schäden für den Ruf eines Unternehmens, die aus
unzureichenden oder fehlerhaften internen Prozessen, menschlichen Handlungen,
Ressourcen und Systemen oder aus externen Ereignissen (z.B. externe oder interne
Betrugshandlungen, rechtliche und Compliance-Risiken, Schäden an physischen
Vermögenswerten, usw.) resultieren können. Für Morgan Stanley können operative
Risiken über das gesamte Spektrum ihrer Geschäftsaktivitäten, einschließlich der
ertragsgenerierenden Bereiche (z.B. Sales und Trading) und der Support-Funktionen
(z.B. Informationstechnologie und Gebäudemanagement) entstehen. Somit kann
Morgan Stanley in allen Bereichen sowie auch in den Kontrollgruppen operativen
Risiken ausgesetzt sein.
Morgan Stanley ist operativen Risiken ausgesetzt und ein operativer Zwischenfall
könnte die Aktivitäten belasten.
Die Aktivitäten von Morgan Stanley sind in hohem Maße davon abhängig, dass das
Unternehmen täglich eine hohe Zahl von Transaktionen über zahlreiche und
unterschiedliche Märkte in vielen Währungen verarbeiten kann. Insgesamt nimmt die
Komplexität der verarbeiteten Transaktionen immer mehr zu. Morgan Stanley
übernimmt die für den Betrieb der unterschiedlichen Aktivitäten erforderlichen
Funktionen selbst oder bewirkt die Ausführung der Funktionen über Verträge mit
Dritten. Morgan Stanley ist abhängig davon, dass die Mitarbeiter, die internen
Systeme und die Systeme der von Dritten betriebenen Technologiezentren in der Lage
sind, ein hohes Transaktionsvolumen zu verarbeiten. Morgan Stanley sieht sich ferner
dem Risiko operativer Fehler oder der Beendigung der Geschäftstätigkeit von
Clearing-Agenten, Börsen, Clearing-Häusern oder anderen Finanzintermediären, die
sie für die Umsetzung ihrer Wertpapiertransaktionen verwendet, ausgesetzt. Im Falle
31
eines Ausfalls oder des fehlerhaften Betriebs der eigenen Systeme oder der Systeme
Dritter oder im Falle des Fehlverhaltens von Dritten oder eigenen Mitarbeitern könnte
Morgan Stanley einen finanziellen Verlust, eine Verschlechterung der Liquidität, eine
Störung der Aktivitäten, aufsichtsrechtliche Sanktionen oder einen Schaden des Rufs
erleiden.
Trotz der Notfallpläne von Morgan Stanley könnte sich eine Störung der Infrastruktur,
die die Aktivitäten von Morgan Stanley und die Gemeinden, in denen Morgan Stanley
seinen Sitz hat, unterstützt, negativ auswirken auf die Fähigkeit, die Geschäftstätigkeit
fortzusetzen. Hierzu könnte zählen: die Nichtbegehbarkeit der Geschäftsräume,
Terror-Attacken, Epidemien sowie Störungen bei den von Morgan Stanley, seinen
Mitarbeitern oder Dritten, mit denen Morgan Stanley Geschäfte betreibt, eingesetzten
Strom- oder Kommunikationseinrichtungen oder sonstigen Diensten.
Rechtliches Risiko
Das rechtliche Risiko bezieht sich auf das Risiko, das geltende gesetzliche und
aufsichtsrechtliche Vorschriften und Standards nicht eingehalten werden. Das
rechtliche Risiko umfasst ferner vertragliche oder gewerbliche Risiken, wie das
Risiko, dass die Verpflichtungen zur Leistungserfüllung seitens des Kontrahenten
nicht durchsetzbar sind.
Die Finanzdienstleistungsbranche steht vor erheblichen Risiken im
Zusammenhang
mit
Rechtsstreitigkeiten
und
aufsichtsrechtlichen
Angelegenheiten, und Morgan Stanley könnte Schaden am Ruf nehmen und
gesetzliche Haftungspflichten auf sich ziehen.
Morgan Stanley wurde von Zeit zu Zeit als Beklagte in verschiedenen
Rechtsverfahren benannt, darunter Schiedsgerichtsverfahren, Sammelklagen (class
actions) und andere Rechtstreitigkeiten, die sich aus ihrer Tätigkeit als global
diversifizierter Finanzdienstleister ergeben. Manche dieser anhängigen oder
drohenden Rechtsverfahren machen erhebliche ausgleichende und/oder Strafe
einschließende Schadensersatzansprüche oder Ansprüche auf der Höhe nach noch
unbestimmte Schadensersatzbeträge geltend. In einigen Fällen sind Emittenten, die
ansonsten bei diesen Gerichtsfällen als Hauptbeklagte genannt worden wären,
insolvent oder in finanzieller Bedrängnis.
Von Zeit zu Zeit ist Morgan Stanley zudem Gegenstand anderer Untersuchungen,
Ermittlungen und Verfahren (formell und informell), die von staatlichen
Aufsichtsbehörden und selbst regulierenden Organisationen ausgehen und sich auf
das Geschäft der Gesellschaft beziehen (einschließlich, u.a. Angelegenheiten im
Zusammenhang mit der Rechnungslegung oder dem operativen Geschäft). Diese
können nachteilige Urteilssprüche, Vergleiche, Strafen, Geldstrafen, Verfügungen
oder andere Rechtsmittel nach sich ziehen. Die Anzahl dieser Ermittlungen und
32
Verfahren nahm in den letzten paar Jahren bei vielen Firmen der
Finanzdienstleistungsbranche einschließlich Morgan Stanley zu. Wie jede große
Kapitalgesellschaft ist auch Morgan Stanley dem Risiko eines möglichen
Fehlverhaltens von Mitarbeitern, einschließlich des Verstoßes gegen die
Unternehmenspolitik und der unzulässigen Verwendung oder Offenlegung von
vertraulichen Informationen, ausgesetzt. Die Aktivitäten sowie die Finanz- und
Ertragslage können erheblich beeinträchtigt werden durch wesentliche rechtliche
Haftungspflichten oder aufsichtsrechtliche Maßnehmen gegen Morgan Stanley, und
könnten eine erhebliche Rufschädigung nach sich ziehen, die das Geschäft von
Morgan Stanley ernsthaft schädigen könnte.
Morgan Stanley unterliegt in den Rechtsordnungen seiner Geschäftstätigkeit der
umfassenden Aufsicht.
Morgan Stanley unterliegt der umfassenden Aufsicht auf globaler Ebene und trägt das
Risiko, dass die Aufsichtsbehörden in den Rechtsordnungen, in denen das
Unternehmen aktiv ist, erhebliche Interventionsmaßnahmen ergreifen. Unter anderem
könnte Morgan Stanley mit Bußgeldern belegt werden, das Engagement in einem Teil
ihrer Geschäftstätigkeit könnte untersagt werden oder es könnten im Hinblick auf die
Geschäftstätigkeit Beschränkungen oder Auflagen eingeführt werden. Erhebliche
aufsichtsrechtliche Maßnahmen gegen Morgan Stanley könnten wesentliche
nachteilige finanzielle Folgen haben oder einen erheblichen Schaden für den Ruf oder
auch die Geschäftsaussichten nach sich ziehen. Neue Gesetze oder Vorschriften oder
Veränderungen in der Durchsetzung bestehender Gesetze oder Vorschriften, die für
die Kunden von Morgan Stanley gelten, können sich ebenso auf das Geschäft von
Morgan Stanley auswirken.
Die Rohstoffaktivitäten von Morgan Stanley ziehen weit reichende
aufsichtsrechtliche Konsequenzen nach sich, machen das Unternehmen angreifbar
im Falle von Katastrophen und unterwerfen es Umweltrisiken, die allesamt
erhebliche Kosten und Verbindlichkeiten für das Unternehmen zur Folge haben
können.
Im Zusammenhang mit den Rohstoff-Aktivitäten im Bereich Institutional Securities
von Morgan Stanley engagiert sich das Unternehmen in der Produktion, Lagerung,
dem Transport, der Vermarktung und dem Handel unterschiedlicher Rohstoffe wie
Metalle (Basis- und Edelmetalle), Rohöl, Erdölprodukte, Erdgas, elektrischer Strom,
Emissionsrechte, Frachtkohle, Flüssiggas und damit verbundene Produkte und
Indizes. Zudem hält Morgan Stanley das Eigentum an fünf Stromerzeugungsanlagen
in den USA und Europa, an TransMontagne Inc. und deren Tochtergesellschaften,
einer Gruppe von Gesellschaften, die im Vertrieb und Verkauf von raffinierten
Produkten tätig ist, und an der Heimar Group, einer Gruppe, die internationale
Seefracht und U.S. Seelogistik Service anbietet. Als Ergebnis dieser Aktivitäten
unterliegt Morgan Stanley umfassenden und in der Entwicklung befindlichen
Gesetzen und Vorschriften in den Bereichen Energie, Umwelt, Gesundheit und
33
Sicherheit sowie sonstigen staatlichen Gesetzen und Vorschriften. Beispielsweise
könnte daher eine Haftung nach bestimmten Umweltschutzgesetzen auch ohne
Verschulden eintreten. Das Rohstoffgeschäft von Morgan Stanley birgt ebenso das
Risiko unvorhergesehener Ereignisse, einschließlich Naturkatastrophen, Lecks,
auslaufender Stoffe, Explosionen mit Entweichen giftiger Substanzen, Feuer, Unfälle
auf dem Meer und auf dem Land, Kriege und Terrorattacken, welche zu
Körperverletzungen, Tod, Sachschäden und der Aussetzung von Aktivitäten führen
könnten.
Auch wenn Morgan Stanley sich bemüht hat, die Risiken aus Umweltverschmutzung
und sonstige Umweltrisiken, einschließlich der unten stehenden Risiken, unter
anderem dadurch zu minimieren, dass angemessene Maßnahmen und Verfahren für
den Betrieb von Stromanlagen eingeführt werden, die Qualität der
Erdöllagereinrichtungen
und
Transportfahrzeuge
überwacht
wird
und
Notfallprogramme umgesetzt werden, können diese Maßnahmen möglicherweise
nicht für alle Notfälle greifen. Zudem ist möglicherweise für einen Teil dieser Risiken
kein Versicherungsschutz verfügbar, und die Einnahmen aus den
Versicherungsleistungen sind möglicherweise nicht ausreichend, um die
Verpflichtungen in Bezug auf bestimmte Vorfälle abzudecken. All diese Ereignisse
können die Finanz- und Ertragslage von Morgan Stanley belasten.
Morgan Stanley rechnet ferner damit, dass die anderen Gesetze und Vorschriften, die
das Stromgeschäft betreffen, sowohl in Umfang als auch in Komplexität zunehmen.
Während der vergangenen Jahre haben genauere Prüfungen der Energiemärkte durch
Behörden in den USA auf Bundes-, Einzelstaaten- und kommunaler Ebene sowie im
Ausland und die Aufmerksamkeit der Öffentlichkeit dazu geführt, dass sich die
aufsichtsrechtlichen
und
rechtlichen
Durchsetzungs-,
Prozessund
Rechtsmittelverfahren in Bezug auf Unternehmen, die in denselben Bereichen tätig
sind, wie Morgan Stanley, zugenommen haben. So hat etwa die EU ihren Fokus auf
die Energiemärkte gelegt, was zu einer Einführung einer Regulierung für an den
Energiemärkten beteiligte Firmen führte. Davon umfasst werden auch
Stromproduzenten und solche Firmen, die am Handel mit flüssigem
Kohlenwasserstoff beteiligt sind. Mit der Einhaltung der aktuellen oder künftigen
Gesetze und Vorschriften können für Morgan Stanley erhebliche Kostenbelastungen
entstehen und die Geschäftstätigkeit insgesamt sowie der Ruf des Unternehmens
können durch die aktuellen rechtlichen Rahmenbedingungen Schaden nehmen.
Daneben kann ein Bruch dieser Gesetze und Regelungen zu ernsthaften
zivilrechtlichen und strafrechtlichen Sanktionen und Strafen führen.
Pipeline, Seeverkehr und Terminal-Aktiväten. Mit Pipelines, Seeverkehr und
Terminal-Aktivitäten ist das Risiko erheblicher Umweltkosten und –verbindlichkeiten
verbunden. Wie auch bei den anderen Rohstoffaktivitäten von Morgan Stanley gelten
die US- und internationalen Umweltgesetze tatsächlich oder möglicherweise; dies gilt
auch für die US- und sonstigen Umweltschutzgesetze im Zusammenhang mit
Ölkatastrophen. Nach den Bundesgesetzen und –vorschriften sowie entsprechenden
einzelstaatlichen Gesetzen kann sich eine verschuldensunabhängige Haftung für die
Wiederherstellung der verseuchten Bereiche ergeben.
34
Interessenkonflikte nehmen zu und das Unvermögen, Interessenkonflikten
angemessen zu begegnen, könnte Morgan Stanleys Aktivitäten belasten.
Einer der wichtigsten Vermögenswerte von Morgan Stanley ist der Ruf. Im Rahmen
der Ausweitung der Aktivitäten und Kundenbasis muss sich Morgan Stanley mit
möglichen Interessenkonflikten auseinander setzen, einschließen derjenigen im
Zusammenhang mit den Aktivitäten auf eigene Rechnung. So können Konflikte
beispielsweise daraus entstehen, dass Morgan Stanley einerseits Finanzberater bei
einer Fusion ist und andererseits eine wesentliche Beteiligung an einer der an der
Transaktion beteiligten Parteien hält. Zudem zählen zur Kundenbasis von Morgan
Stanley immer mehr Hedge Fonds und Private Equity Fonds, die jedoch bei vielen
Aktivitäten gleichzeitig als konkurrierende Marktteilnehmer auftreten. Morgan
Stanley hat Verfahren und Kontrollen zur Behandlung solcher Interessenkonflikte
eingerichtet. Die angemessene Behandlung von Interessenkonflikten ist komplex und
schwierig, und der Ruf von Morgan Stanley könnte Schaden nehmen, wenn die
angemessene Behandlung von Interessenskonflikten tatsächlich oder anscheinend fehl
schlägt. Zudem haben die SEC und andere Aufsichtsbehörden auf Ebene des Bundes
und der Einzelstaaten die Prüfungen bei möglichen Interessenkonflikten verschärft.
Mögliche oder mutmaßliche Interessenkonflikte können Prozesse oder
Durchsetzungsmaßnahmen nach sich ziehen. Es ist möglich, dass die
aufsichtsrechtlichen Prüfungen und Prozesse im Zusammenhang mit
Interessenkonflikten dazu führen, dass Kunden von Morgan Stanley nicht so
bereitwillig Transaktionen abschließen, die mit einem Konflikt verbunden sind, und
dass hierdurch das Geschäft von Morgan Stanley negativ beeinflusst wird.
Morgan Stanley unterliegt steuerlichen Eventualverpflichtungen, die das Ergebnis
belasten könnten.
Für Morgan Stanley gelten die Einkommensteuergesetze und Gesetze über indirekte
Steuer der USA, deren Einzelstaaten und Kommunen sowie die der ausländischen
Rechtsordnungen, in denen das Unternehmen wesentliche Geschäftsaktivitäten
unterhält. Diese Steuergesetze sind komplex und werden vom Steuerzahler und den
entsprechenden staatlichen Steuerbehörden unterschiedlich ausgelegt. Bei der Bildung
der Steuerrückstellungen und der Bestimmung der Aufwendungen für indirekte
Steuern muss Morgan Stanley die steuerliche Lage und Anwendung dieser inhärent
komplexen Steuergesetze beurteilen und auslegen und zudem Schätzungen
hinsichtlich der zeitlichen Auswirkung bestimmter Positionen auf das steuerpflichtige
Einkommen in den unterschiedlichen Steuerhoheiten treffen.
35
Wettbewerbsumfeld
Der harte Wettbewerb, in dem Morgan Stanley mit anderen Finanzdienstleistern
steht, könnte auf die Preise drücken und somit die Erträge und Profitabilität des
Unternehmens erheblich beeinträchtigen
Die Finanzdienstleistungsbranche und alle Aktivitäten von Morgan Stanley sind hart
umkämpft und Morgan Stanley rechnet damit, dass dies so bleibt. Morgan Stanley
steht im Wettbewerb mit Handelsbanken, Versicherungsgesellschaften, Sponsoren
von offenen Investmentfonds, Hedge Fonds, Energieversorgern und anderen
Gesellschaften, die in den USA, in der ganzen Welt und über das Internet
Finanzdienstleistungen anbieten. Im Wettbewerb spielen für Morgan Stanley
unterschiedliche Faktoren eine Rolle, einschließlich der Transaktionsausführung, des
Kapitals oder Zugangs zu Kapital, Produkten und Dienstleistungen, der
Innovationskraft, des Rufs und des Preises. Im Zeitverlauf waren in bestimmten
Bereichen der Finanzdienstleistungsbranche erhebliche Konsolidierungseffekte zu
beobachten, da breit aufgestellte Finanzdienstleister von anderen Unternehmen
übernommen oder mit diesen zusammengeschlossen wurden. Diese Konsolidierung
könnte dazu führen, dass die Mitbewerber von Morgan Stanley mehr Kapital und
sonstige Ressourcen, wie beispielsweise ein größeres Produkt- und
Dienstleistungsspektrum sowie eine höhere geografische Diversifikation, auf sich
vereinen können. Morgan Stanley kann infolge dieser Faktoren sowie auch im Zuge
von Preissenkungen, die Mitbewerber vornehmen, um ihre Marktanteile auszuweiten,
einem erhöhten Preisdruck ausgesetzt sein.
Die Fähigkeit von Morgan Stanley, qualifizierte Mitarbeiter zu halten und
anzuwerben ist für den Erfolg des Geschäfts von entscheidender Bedeutung, und
ein entsprechendes Unvermögen könnte die Performance erheblich belasten.
Die Mitarbeiter sind die wichtigste Ressource für Morgan Stanley, und qualifizierte
Mitarbeiter sind hart umkämpft. Um qualifizierte Mitarbeiter anzuwerben und zu
halten, muss Morgan Stanley diesen Mitarbeitern marktübliche Vergütungen zahlen.
Grundsätzlich haben die Marktstandards dazu geführt, dass die Mitarbeitervergütung
der größte Aufwandsposten von Morgan Stanley ist, da die Vergütungen stark
variieren und sich mit der Performance ändern. Wenn Morgan Stanley nicht in der
Lage ist, qualifizierte Mitarbeiter anzuwerben und zu halten, oder dies auf einem
Niveau zu tun, das erforderlich ist, um die Wettbewerbsposition aufrecht zu erhalten,
oder wenn die mit der Anwerbung und dem Halten von Mitarbeitern verbundenen
Personalkosten steigen, könnte dies die Performance wie auch die
Wettbewerbsposition von Morgan Stanley erheblich beeinträchtigen.
36
Automatisierte Handelsmärkte könnten das Geschäft von Morgan Stanley negativ
beeinflussen und den Wettbewerb erhöhen.
Morgan Stanley hat die Existenz eines intensiven Preiskampfs in einigen seiner
Geschäftszweige in den letzten Jahren erlebt. Insbesondere haben die Möglichkeit,
Wertpapierorder bei Börsen elektronisch auszuführen, und andere automatisierte
Handelsmärkte den Druck auf die Handelskomissionen erhöht. Der Trend in Richtung
eines direkten Zugangs zu automatisierten elektronischen Aktienmärkten wird
wahrscheinlich anhalten. Es ist möglich, dass Morgan Stanley in Zukunft einen
verschärften Wettbewerbsdruck in diesem oder anderen Bereichen erfährt, da einige
der Wettbewerber möglicherweise Marktanteile durch eine Reduktion der Preise
gewinnen wollen.
Internationales Risiko
Die internationale Geschäftstätigkeit unterwirft Morgan Stanley zahlreichen
politischen, konjunkturellen, rechtlichen, operativen und anderen Risiken, die sich
in vielerlei Hinsicht negativ auf die Aktivitäten auswirken können.
Morgan Stanley unterliegt politischen, wirtschaftlichen, rechtlichen, operativen und
sonstigen Risiken, die mit dem Engagement in einer Vielzahl von Ländern verbunden
sind, einschließlich der Risiken einer möglichen Verstaatlichung, Enteignung,
Preiskontrollen,
Kapitalsteuerung,
Devisenbewirtschaftung
und
sonstiger
beschränkender staatlicher Maßnahmen, sowie des Ausbruchs von Feindseligkeiten.
In vielen Ländern sind die für die Wertpapier- und Finanzdienstleistungsbranche
anwendbaren Gesetze und Vorschriften unsicher und in der Entwicklung befindlich,
und die Bestimmung der genauen Anforderungen der nationalen Gesetze in den
einzelnen Märkten könnte sich für Morgan Stanley schwierig gestalten. Ist Morgan
Stanley nicht in der Lage, die nationalen Gesetze eines bestimmten Marktes zu
befolgen, so könnte sich dies nicht nur auf Morgan Stanleys Geschäft in diesem Markt
sondern auch auf Morgan Stanleys Ruf insgesamt negativ auswirken. Morgan Stanley
unterliegt ferner dem erhöhten Risiko, dass seine strukturierten Transaktionen nicht in
allen Fällen rechtlich durchsetzbar sind.
Morgan Stanley hat in den Emerging Markets expandiert und sucht nach Chancen für
eine weitere Expansion. In zahlreichen Ländern der Emerging Markets waren
ernsthafte wirtschaftliche und finanzielle Störungen zu beobachten, einschließlich
erheblicher
Entwertungen
der
Währungen,
Kapitalsteuerungsund
Devisenbewirtschaftungsmaßnahmen, Hyperinflation sowie geringe oder negative
Wachstumsraten der Volkswirtschaften. Kriminalität und Korruption sowie Gefahren
hinsichtlich der generellen und persönlichen Sicherheit existieren ebenfalls in
manchen dieser Länder. Diese Umstände könnten sich auf die Geschäfte von Morgan
Stanley negativ auswirken und die Volatilität der Finanzmärkte insgesamt steigern.
Das
Ausbrechen
einer
Epidemie
oder
anderer
ausgedehnter
Gesundheitsnotstandssituationen oder Bedenken hinsichtlich der Möglichkeit eines
37
solchen Notstands könnte zu Störungen des wirtschaftlichen und finanziellen
Gleichgewichts in den Emerging Markets und anderen Regionen der Welt führen und
Probleme für das operative Geschäft (einschließlich Reisebeschränkungen) nach sich
ziehen, die Morgan Stanleys Fähigkeit, seine Aktivitäten in der gesamten Welt zu
steuern, einschränken könnten.
Übernahmerisiken
Morgan Stanley ist möglicherweise nicht in der Lage, den erwarteten Wert
künftiger Übernahmen, Joint Ventures oder Minderheitsbeteiligungen zu
realisieren.
Morgan Stanley will zum Teil durch Akquisitionen, Joint Ventures und
Minderheitsbeteiligungen wachsen. Soweit Morgan Stanley Unternehmen übernimmt
oder Zusammenschlüsse oder Joint Ventures umsetzt, sieht sich die Gesellschaft
zahlreichen Risiken und Unsicherheiten im Zusammenhang mit der Kombination und
Integration der entsprechenden Aktivitäten und Systeme ausgesetzt, einschließlich der
Notwendigkeit, Rechnungslegungs- und Datenverarbeitungssysteme sowie
Managementkontrollen zusammenzufassen und Beziehungen zu Kunden und
Geschäftspartnern zu integrieren. Im Fall von Joint Ventures und
Minderheitsbeteiligungen unterliegt Morgan Stanley insofern weiteren Risiken und
Unsicherheiten, als dass das Unternehmen von Haftungspflichten, Verlusten,
Rufschädigungen im Zusammenhang mit Systemen, Kontrollen und Mitarbeitern
abhängig sein kann oder diesen ausgesetzt sein kann, die nicht von Morgan Stanley
beeinflussbar sind. Zudem können Konflikte oder Uneinigkeiten zwischen Morgan
Stanley und den Joint Venture Partnern den mit dem Joint Venture angestrebten
Nutzen zunichte machen. Es kann nicht gewährleistet werden, dass die jüngsten
Übernahmen oder Aktivitäten, die Morgan Stanley erwirbt, in Zukunft erfolgreich
integriert werden und die beabsichtigten positiven Auswirkungen insgesamt
umgesetzt werden. Wenn Morgan Stanley nicht in der Lage ist, die in der
Vergangenheit oder in Zukunft übernommenen Aktivitäten zu integrieren, so besteht
das Risiko, dass das operative Ergebnis von Morgan Stanley wesentlich belastet
werden kann.
Risikomanagement
Morgan Stanleys Hedging-Strategien und andere Risikomanagement-Techniken
entfalten möglicherweise nicht ihre volle Wirksamkeit bei der Minderung der
Risiken in allen Marktsituationen bei allen Arten von Risiken.
Morgan Stanley hat erhebliche Ressourcen in die Entwicklung seiner
Risikomanagementverfahren und –methoden gesteckt und rechnet auch für die
Zukunft mit einer Fortsetzung dieses Trends. Trotzdem sind Morgan Stanleys
Hedging-Strategien und sonstigen Risikomanagement-Techniken möglicherweise
38
nicht voll wirksam bei der Minderung der Risiken in allen Marktsituationen bei allen
Arten von Risiken, einschließlich der noch nicht identifizierten oder prognostizierten
Risiken. Einige Risikomanagementmethoden von Morgan Stanley basieren auf dem
Einsatz des in der Vergangenheit beobachteten Marktverhaltens. Im Ergebnis können
diese Methoden keine künftigen Risiken vorhersagen, die sich erheblich von den
historischen Messgrößen unterscheiden können (z.B. die aktuellen Ereignisse auf dem
U.S. Subprime Baufinanzierungs-Hypothekenmarkt). Operative, rechtliche und
aufsichtsrechtliche Risiken müssen unter anderem mit Methoden und Verfahren
gesteuert werden, die eine große Zahl von Transaktionen und Ereignissen in
angemessener Art und Weise aufzeichnen und verifizieren. Diese Methoden und
Verfahren sind möglicherweise nicht vollständig wirksam.
Mit den Zertifikaten verbundene Risiken
Die nachfolgende Beschreibung von Risikofaktoren stellt keine abschließende
Darstellung aller mit einer Anlage in die Zertifikate verbundenen Risiken dar. Die
Emittentin und die Garantin lehnen jegliche Verantwortung hinsichtlich einer
Beratung interessierter Anleger in Bezug auf die Risiken ab, die zum Zeitpunkt der
Veröffentlichung dieses Prospekts oder auf Grund veränderter Umstände zu einem
späteren Zeitpunkt jeweils bestehen. Interessierte Anleger sollten sich hinsichtlich
der mit einer Anlage in die Zertifikate verbundenen Risiken von ihren eigenen
Rechts-, Finanz- und/oder Steuerberatern beraten lassen und auf dieser Grundlage
die Eignung einer Anlage unter Berücksichtigung ihrer individuellen Umstände
prüfen. Die Zertifikate sind nicht geeignet für unerfahrene Anleger.
Interessierte Anleger sollen die nachfolgenden Risikofaktoren zusammen mit den
anderen in diesem Prospekt enthaltenen Informationen sorgfältig lesen und bei
ihrer Anlageentscheidung berücksichtigen.
Allgemeine Risikofaktoren
Eine Veränderung des Wertes der Fonds-Komponente oder der Zinsverhältnisse kann
dazu führen, dass der Wert der Zertifikate erheblich unter den für das Zertifikat
gezahlten Kaufpreis sinkt und dadurch für den Inhaber der Zertifikate bei einem
vorzeitigen Verkauf der Zertifikate im Sekundärmarkt ein erheblicher Verlust
entsteht. Die Auszahlung eines Mindestbetrages von 120% des Nennwerts der
Zertifikate erfolgt nur bei Rückzahlung der Zertifikate am Ende ihrer Laufzeit. Dieses
Risiko besteht unabhängig von der finanziellen Leistungsfähigkeit der Emittentin oder
der Garantin.
Die Emittentin oder die Garantin bzw. mit ihnen verbundene Unternehmen können an
Transaktionen, die die Fonds-Komponente bzw. die der Fonds-Komponente zu
Grunde liegende Werte und die Gesellschaft betreffen, beteiligt sein. Insofern ist es
möglich, dass Aktien der Gesellschaft von einem mit der Emittentin bzw. der
39
Garantin verbundenen Unternehmen verkauft werden, während sie gleichzeitig von
einem anderen mit der Emittentin bzw. der Garantin verbundenen Unternehmen –
beispielsweise im Rahmen periodischer Umschichtungen – gekauft werden. Die
Berechnungsstelle und mit ihr verbundene Unternehmen können oder könnten ein
Eigeninteresse in den hier dargestellten Zertifikaten haben oder Market Maker für
diese Produkte sein.
Potenzielle Anleger sollte jede Entscheidung zur Anlage in die Zertifikate nur nach
ausführlicher
Prüfung
des
gesamten
Prospekts
einschließlich
der
Zertifikatsbedingungen treffen. Potenziellen Anlegern wird empfohlen, vor einer
Anlageentscheidung den Rat der Hausbank oder eines unabhängigen Finanz- und/oder
Steuerberaters einzuholen und allfällige lokale Verkaufsbeschränkungen zu beachten.
Provisionen und andere Transaktionskosten können zu einer zusätzlichen
Kostenbelastung führen. Potenzielle Anleger sollten sich vor Erwerb des Zertifikates
über alle eventuell anfallenden Kosten informieren.
Mögliche Interessenkonflikte
Die Berechnungsstelle der Zertifikate ist ein mit der Emittentin bzw. der Garantin
verbundenes Unternehmen. Daher kann bei der Berechnungsstelle ein potenzieller
Interessenkonflikt gegenüber den Zertifikatsinhabern entstehen, einschließlich bei der
Feststellung bestimmter Größen und die Vornahme bestimmter Beurteilungen, die
von der Berechnungsstelle in Bezug auf Zahlungen auf die Zertifikate gemäß der
Zertifikatsbedingungen vorzunehmen sind.
Darüber hinaus können sich die Emittentin und die Garantin bzw. verbundene
Unternehmen der Garantin im Rahmen des Eigenhandels oder auf Kundenrechnung
jeweils in Transaktionen engagieren oder sog. Prime Brokerage Dienstleistungen
erbringen, die die Fonds-Komponente bzw. die der Fonds-Komponente zu Grunde
liegende Werte und die Gesellschaft betreffen, involvieren. Solche Transaktionen
bzw. Dienstleistungen können sich negativ auf den Wert der Fonds-Komponente und
daher auch auf den Wert der Zertifikate auswirken.
Die Garantin und bestimmte verbundene Unternehmen der Garantin können ferner
Gegenparteien bei Hedging-Geschäften der Emittentin im Zusammenhang mit ihren
Verpflichtungen aus einer Zertifikatsemission sein. Entsprechend können sowohl bei
diesen Tochtergesellschaften der Garantin als auch zwischen den Interessen dieser
Tochtergesellschaften und den Interessen der Zertifikatsinhaber bestimmte
Interessenkonflikte entstehen.
40
Weitere mit den Zertifikaten verbundene Risiken
Abhängigkeit der Zahlungen von der Wertentwicklung der Fonds-Komponente
Die Zahlung eines über den Mindestbetrag von 120% des Nennwerts der Zertifikate
hinausgehenden Betrags ist abhängig von der an einen Partizipationsfaktor
geknüpften Wertentwicklung der Fonds-Komponente. Sollte sich der Wert der
Fonds-Komponente nicht entsprechend entwickeln, erhalten die Anleger unter
Umständen zum Laufzeitende lediglich den Mindestbetrag von 120% des
Nennwerts der Zertifikate und keine darüber hinausgehenden Beträge.
Der Kapitalschutz greift nur zum Ende der Laufzeit der Wertpapiere
Die Zertifikate sind zum Ende der Laufzeit im Umfang des Nennwerts (ohne
Berücksichtigung des Ausgabeaufschlags) kapitalgeschützt, das heißt der Anleger
erhält zum Ende der Laufzeit unabhängig von der Entwicklung der FondsKomponente jedenfalls 120% des Nennwert des Zertifikats. Erwirbt ein Investor die
Zertifikate nach Emission zu einem Preis, der über dem Nennwert liegt, so sollte dem
potenziellen Erwerber der Zertifikate bewusst sein, dass sich der Kapitalschutz nur
auf den kleineren Nennwert bezieht.
Dabei ist zudem zu beachten, dass der Kapitalschutz nur zum Ende der Laufzeit, das
heißt soweit die Zertifikate nicht gekündig worden sind, greift. Der Geldbetrag, der
bei einer Kündigung durch die Emittentin der Zertifikate geleistet wird, kann
erheblich geringer sein als der Betrag, der bei Greifen des Kapitalschutzes zum Ende
der Laufzeit mindestens zu zahlen wäre.
Potenziellen Erwerbern der Wertpapiere sollte zudem bewusst sein, dass sie trotz des
Kapitalschutzes im Umfang des Nennwerts, das Risiko der Verschlechterung der
finanziellen Leistungsfähigkeit der Emittentin bzw. der Garantin tragen. Potenzielle
Erwerber müssen deshalb bereit und in der Lage sein, Verluste des eingesetzten
Kapitals bis hin zum Totalverlust hinzunehmen. In jedem Falle sollten Erwerber der
Zertifikate ihre jeweiligen wirtschaftlichen Verhältnisse daraufhin überprüfen, ob sie
in der Lage sind, die mit dem Zertifikat verbundenen Verlustrisiken zu tragen.
Transaktionskosten oder Abzüge in Verbindung mit Transaktionen oder einer
vorzeitigen Rückzahlung von Zertifikaten können negative Auswirkungen auf den
wirtschaftlichen Erfolg einer Anlage in die Zertifikate haben
Für Anleger in Zertifikate können Transaktionskosten, wie z.B. das Agio und sonstige
Gebühren sowie Abzüge in Bezug auf den gegenwärtigen Zertifikats-Wert anfallen,
wenn Zertifikate vor ihrem ursprünglichen Fälligkeitstag (sei es auf dem Primär- oder
41
Sekundärmarkt) gekauft, verkauft oder vor Endfälligkeit eingelöst werden. Diese und
andere Transaktionskosten und Abzüge verringern die möglichen Erträge einer
Anlage in die Zertifikate. Potenzielle Erwerber sollten sich über die Höhe solcher
Transaktionskosten und Abzüge informieren, bevor sie Zertifikate kaufen oder
verkaufen.
Die Bestimmung des Werts des Zertifikats beruht auf Daten, auf deren Richtigkeit
die Emittentin keinen Einfluss hat
Die Bestimmung des Werts des Zertifikats beruht auf Daten und der Erbringung von
Dienstleistungen, deren Richtigkeit außerhalb des Einflussbereichs der Emittentin
liegt. Insbesondere unterliegt die Bewertung der Fonds-Komponente einem weiten
Ermessen des Investment Managers bzw. der Bewertungsstelle. Daher kann die
Emittentin nicht sicherstellen, dass die bekannt gegebenen Werte der FondsKomponente und der Wert des Zertifikats stets dem objektiven Verkehrswert der in
der Fonds-Komponente enthaltenen Bestandteile widerspiegeln und dass die Inhaber
der Zertifikate ordnungsgemäß informiert wurden.
Risikoausschließende oder -einschränkende Geschäfte
Anleger sollten nicht darauf vertrauen, dass sie während der Laufzeit der Zertifikate
Geschäfte abschließen können, durch die sie Ihre anfänglichen Risiken ausschließen
oder einschränken können; dies hängt von den Marktverhältnissen und den jeweils
zugrundeliegenden Bedingungen ab. Unter Umständen können solche Geschäfte nur
zu einem ungünstigen Marktpreis getätigt werden, so dass für sie ein entsprechender
Verlust entsteht.
Inanspruchnahme von Kredit
Wenn Anleger den Erwerb der Zertifikate mit Kredit finanzieren, müssen sie beim
Nichteintritt ihrer Erwartungen nicht nur den eingetretenen Verlust hinnehmen,
sondern auch den Kredit verzinsen und zurückzahlen. Dadurch erhöht sich ihr
Verlustrisiko erheblich. Zertifikatsinhaber sollten nie darauf setzen, den Kredit aus
Gewinnen eines Zertifikatsgeschäfts verzinsen und zurückzahlen zu können.
Vielmehr muss der Erwerber von Zertifikaten vorher seine wirtschaftlichen
Verhältnisse daraufhin überprüfen, ob er zur Verzinsung und gegebenenfalls zur
kurzfristigen Tilgung des Kredits auch dann in der Lage ist, wenn statt der erwarteten
Gewinne Verluste eintreten.
42
Die Bedeutung von Fristen im Zusammenhang mit dem Vorzeitigen Verkauf der
Zertifikate
Jeder Zertifikatsinhaber ist, vorbehaltlich der nachfolgenden Bestimmungen,
berechtigt, die von ihm gehaltenen Zertifikate insgesamt oder teilweise der Emittentin
durch schriftliche Mitteilung gegenüber der Zahlstelle und unter Einhaltung einer
Mitteilungsfrist von mindestens fünfundzwanzig (25) Kalendertagen vor dem letzten
Kalendertag eines Kalenderquartals über die Morgan Stanley Bank AG, Frankfurt am
Main, Bundesrepublik Deutschland, zum Ankauf anzudienen. Die Morgan Stanley
Bank AG, Frankfurt am Main, Bundesrepublik Deutschland, kann hierbei eine
zusätzliche Frist bestimmen, um den rechtzeitigen Eingang der Mitteilung bis
mindestens fünfundzwanzig Kalendertage vor dem jeweiligen Vorzeitigen Verkauftag
sicherzustellen. Wahrt der Zertifikatsinhaber die Frist nicht, ist seine Andienung
unbeachtlich. Dem Zertifikatsinhaber wird daher empfohlen, sich rechtzeitig bei der
Morgan Stanley Bank AG, Frankfurt am Main, Bundesrepublik Deutschland, über die
Länge dieser zusätzlichen Frist zu informieren.
Unabhängige Prüfung und Beratung
Jeder potenzielle Käufer der Zertifikate muss durch eine eigene unabhängige Prüfung
und eine sachverständige Beratung, die ihm unter den gegebenen Umständen als
geeignet erscheint, sicherstellen, dass der Erwerb der Zertifikate
(i)
mit seinen Anlagebedürfnissen und -zielen sowie seiner finanziellen Lage
(oder, falls er die Zertifikate treuhänderisch oder in anderer Weise für
einen Dritten erwirbt, mit den Anlagebedürfnissen und -zielen sowie der
finanziellen Lage des Begünstigten oder des maßgeblichen Dritten)
vollständig vereinbar ist;
(ii)
allen diesbezüglich anwendbaren Anlagegrundsätzen, -richtlinien und
-beschränkungen entspricht und vollständig mit diesen vereinbar ist
(unabhängig davon, ob der Käufer die Zertifikate in eigenem Namen oder
treuhänderisch oder auf andere Weise für einen Dritten erwirbt), und
(iii)
eine geeignete, angemessene und passende Anlage für ihn (oder, falls er
die Zertifikate treuhänderisch oder in anderer Weise für einen Dritten
erwirbt, für den Begünstigten oder den maßgeblichen Dritten) ist,
ungeachtet der offensichtlichen und wesentlichen Risiken, die mit einer
Anlage in den Zertifikaten bzw. mit dem Besitz der Zertifikate verbunden
sind.
43
Änderung der steuerlichen Behandlung der Zertifikate
Die in diesem Prospekt ausgeführten Überlegungen hinsichtlich der Besteuerung der
Wertpapiere geben die Ansicht der Emittentin auf Basis der zum Datum des Prospekts
geltenden Gesetzgebung wieder. Eine andere steuerliche Behandlung durch die
Finanzbehörden und Finanzgerichte kann jedoch nicht ausgeschlossen werden.
Darüber hinaus dürfen die in diesem Prospekt ausgeführten steuerlichen
Überlegungen nicht als alleinige Grundlage für die Beurteilung einer Anlage in die
Wertpapiere aus steuerlicher Sicht dienen, da die individuelle Situation eines jeden
Anlegers gleichermaßen berücksichtigt werden muss. Die in diesem Prospekt
enthaltenen steuerlichen Überlegungen sind daher nicht als eine Form der
maßgeblichen Information oder Steuerberatung bzw. als eine Form der Zusicherung
oder Garantie im Hinblick auf das Eintreffen bestimmter steuerlicher Konsequenzen
zu erachten. Folglich sollten Anleger vor der Entscheidung über einen Kauf der
Wertpapiere ihre persönlichen Steuerberater konsultieren.
Weder die Emittentin noch die Garantin übernehmen die Verantwortung für die
steuerlichen Konsequenzen einer Anlage in die Wertpapiere.
Rechtmäßigkeit des Erwerbs
Die Emittentin und die Garantin übernehmen keine Verantwortung für die
Rechtmäßigkeit des Erwerbs der Zertifikate durch einen potenziellen Erwerber, sei es
nach den Gesetzen des Sitzstaates, der Nationalität, des Wohnsitzes oder der
Geschäftstätigkeit (soweit sich diese unterscheiden), oder für die Einhaltung jeglicher
einschlägiger Gesetze, Regelungen oder Verordnungen durch den potenziellen
Erwerber.
Dieser Prospekt ersetzt nicht die in jedem individuellen Fall unerlässliche Beratung
vor der Kaufentscheidung durch Ihre Bank oder Ihren Finanzberater. Insbesondere
sollten Zertifikatsinhaber im Hinblick auf die individuellen steuerlichen
Auswirkungen der Anlage in die Zertifikate den eigenen steuerlichen Berater
konsultieren.
Mit der Fonds-Komponente verbundene Risiken
Man Global Strategies Investment Strategies Ltd. ist eine Gesellschaft mit
zugriffsbeschränkten Konten (segregated accounts company)
Die Man Global Strategies Investment Strategies Ltd. wurde als eine Gesellschaft mit
zugriffsbeschränkten Konten (segregated accounts company) gemäß dem Segregated
Accounts Companies Act 2000 of Bermuda (das "SAC-Gesetz") und als ein offener
Publikumsfonds gemäß dem Companies Act 1981 of Bermuda eingetragen. Als
Gesellschaft mit zugriffsbeschränkten Konten (segregated accounts) kann sie die
einer bestimmten Aktienklasse der Gesellschaft zurechenbaren Vermögenswerte und
44
Verbindlichkeiten separat von den jeder anderen Aktienklasse der Gesellschaft
zurechenbaren Vermögenswerten und Verbindlichkeiten sowie separat von den
allgemeinen Vermögenswerten und Verbindlichkeiten der Gesellschaft führen. Die
Vermögenswerte eines zugriffsbeschränkten Kontos sind ausschließlich für die
Erfüllung von Verbindlichkeiten gegenüber Gläubigern in Bezug auf dieses
bestimmte zugriffsbeschränkte Konto vorgesehen, und es ist nicht beabsichtigt, dass
auf sie zur Erfüllung von Verbindlichkeiten gegenüber Gläubigern in Bezug auf
andere zugriffsbeschränkte Konten oder die Gesellschaft allgemein zurückgegriffen
werden kann.
Nach Wissen der Gesellschaft wurde das SAC-Gesetz noch nicht von den Gerichten
in Bermuda oder einer anderen Rechtsordnung geprüft, und es ist möglich, dass das
SAC-Gesetz in einigen Rechtsordnungen nicht anerkannt wird oder entgegen der
Gesetzgebungsintention
ausgelegt
wird.
Sind
Vermögenswerte
eines
zugriffsbeschränkten Kontos der Gesellschaft in einer anderen Rechtsordnung als
Bermuda gelegen, und werden diesbezüglich in dieser Rechtsordnung Verfahren
angestrengt, so ist nicht bekannt, wie die Gerichte dieser Rechtsordnung die vom
SAC-Gesetz geregelte Struktur, die in dieser Rechtsordnung ungewohnt sein könnte,
behandeln werden. Insbesondere werden Gerichte anderer Rechtsordnungen als der
von Bermuda möglicherweise nicht anerkennen, dass Gläubiger in Bezug auf ein
bestimmtes zugriffsbeschränktes Konto nicht auf die Vermögenswerte der anderen
zugriffsbeschränkten Konten zurückgreifen können, oder dass allgemeine Gläubiger
der Gesellschaft insgesamt keinen Rückgriff auf die Vermögenswerte haben, die
speziell als Vermögenswerte zugriffsbeschränkter Konten ausgewiesen sind.
Dementsprechend ist nicht bekannt, wie Verbindlichkeiten, die der Gesellschaft durch
eine Behörde in Bermuda oder einem anderem Land auferlegt werden (z.B. eine
Strafe oder Steuer), von den Gerichten in Bermuda oder anderen Rechtsordnungen auf
Gesellschaft als Ganzes und die einzelnen zugriffsbeschränkten Konten aufgeteilt
werden würde. Die Nicht-Anerkennung der Struktur als Gesellschaft mit
zugriffsbeschränkten Konten kann sich wesentlich nachteilig auf den Wert der FondsKomponente und somit den Wert der Zertifikate auswirken.
Es können Änderungen der Besteuerung und der anwendbaren Gesetze in Bezug
auf die Man Global Strategies Investment Strategies Ltd. eintreten
Die Gesellschaft ist bestrebt, ihre Geschäfte so zu führen, dass sie nicht so behandelt
wird, als engagiere sie sich in Transaktionen oder Geschäften in einem anderen Land
als Bermuda, und sie dürfte daher in keinem anderen Land als Bermuda zur Steuer
veranlagt werden. Sollten ihre Aktivitäten doch so angesehen werden, als stellen sie
Transaktionen oder Geschäfte aus einem anderen Land als Bermuda dar, so ist
möglicherweise die steuerliche Veranlagung in diesem Landes erforderlich. Solche
Steuern würden die Wertentwicklung der Man Global Strategies Investment
Strategies Ltd. – Man AP Enhanced Garant 2 Class T2 EUR Shares belasten und sich
damit nachteilig auf den Wert der Fonds-Komponente und den Wert der Zertifikate
auswirken.
Die Gesellschaft ist zudem dem Risiko von Änderungen der auf sie anwendbaren
Gesetze oder Verordnungen bzw. der Besteuerung ausgesetzt. Diese Änderungen
45
können sich nachteilig auf den Wert der Fonds-Komponente und den Wert der
Zertifikate auswirken.
Man Global Strategies Investment Strategies Ltd. – Man AP Enhanced Garant 2
Class T2 EUR Shares unterliegen einer Diversifizierung, die nicht offen gelegt wird
Die Investitionen der Man Global Strategies Investment Strategies Ltd. – Man AP
Enhanced Garant 2 Class T2 EUR Shares umfassen eine breite Palette an
Anlagemöglichkeiten, darunter Investitionen in Hedgefonds (die "Hedgefonds").
Obwohl damit das Risiko einer Konzentration auf eine beschränkte Anzahl von
Vermögenswerten begrenzt werden soll, kann nicht sichergestellt werden, dass diese
Diversifizierung wirksamer ist als eine Konzentration auf eine geringe Anzahl von
Vermögenswerten. Außerdem ist nicht beabsichtigt, die jeweilige Zusammensetzung
des Portfolios der Man Global Strategies Investment Strategies Ltd. – Man AP
Enhanced Garant 2 Class T2 EUR Shares bekannt zu geben.
Die Anlagestrategie der Man Global Strategies Investment Strategies Ltd. – Man
AP Enhanced Garant 2 Class T2 EUR Shares unterliegt Änderungen durch den
Investment Manager
Das Portfolio der Man Global Strategies Investment Strategies Ltd. – Man AP
Enhanced Garant 2 Class T2 EUR Shares wird durch die Man Investments Limited
als Investment Manager verwaltet. Das Portfolio und die Strategie des Managements
des Portfolios können vom Investment Manager geändert werden, da die Man Global
Strategies Investment Strategies Ltd. – Man AP Enhanced Garant 2 Class T2 EUR
Shares grundsätzlich nicht auf die von ihm eingesetzten Anlagestrategien beschränkt
ist und der Investment Manager jederzeit neue Strategien entwickeln kann. Zudem
können Anlagestrategien von der Zusammensetzung des Mitarbeiterstabes des
Investment Managers abhängig sein, der ebenfalls Fluktuationen unterliegt. Da die
Anlagestrategie der Man Global Strategies Investment Strategies Ltd. – Man AP
Enhanced Garant 2 Class T2 EUR Shares auch Investitionen in Hedgefonds umfasst,
können Änderungen in deren Strategie und Personal ebenfalls den Wert der FondsKomponente beeinflussen. Strategieänderungen und Personalwechsel sowie die
Ergebnisse von Anlageentscheidungen des Investment Managers können sich
wesentlich nachteilig auf den Wert der Fonds-Komponente und somit den Wert der
Der Anlageansatz der Gesellschaft, sowie die Investitionen der Anlagestrategien
und Hedgefonds sind mit Risiken verbunden
Mit dem Anlageansatz der Man Global Strategies Investment Strategies Ltd. sind
insbesondere folgende Risiken verbunden, deren Realisierung sich wesentlich
nachteilig auf den Wert der Fonds-Komponente und somit den Wert der Zertifikate
auswirken kann:
(a)
Die Erträge der Aktien können während ihres Bestehens erheblich steigen
und auch sinken. Dies hängt von den Handels- und Anlagegewinnen ab. Die
Gesellschaft gibt keine Erklärung darüber ab, welche Erträge ein Aktionär
46
mit den Aktien erwirtschaften kann, und es ist nicht gewährleistet, dass in
diesem Prospekt dargestellten Informationen über den Investment Manager
oder die Anlagestile in irgendeiner Hinsicht indikativ für die künftige
Entwicklung der Aktien sind (hinsichtlich der Rentabilität oder der geringen
Korrelation mit anderen Anlageformen).
(b)
Die Aufgabe des Investment Managers oder der Anlageberater der
Anlagestrategien und Hedgefonds, in welche die Gesellschaft investiert (die
"Anlageberater"), die zu befolgende Anlagestrategie zu identifizieren und
tatsächlich Gewinn bringend einzusetzen, ist mit einem hohen Maß an
Unsicherheit verbunden,. Es kann nicht gewährleistet werden, dass der
Investment Manager oder ein Anlageberater in der Lage ist, geeignete
Anlagechancen auszumachen, in deren Rahmen alle zugewiesenen
Vermögenswerte genutzt werden.
(c)
Die Gesellschaft betreibt ihr operatives Geschäft erst seit begrenzter Zeit,
und die einzelnen zugriffsbeschränkten Konten verfügen möglicherweise
über keine oder nur begrenzte operative Erfahrung. Zwar können der
Investment Manager und die Anlageberater der Fonds und Strategien in die
die Gesellschaft investiert (auf eine operative Geschichte zurückblicken,
jedoch ist diese möglicherweise relativ kurz, und die verwendeten Strategien
wurden möglicherweise vorher nicht von Anlagegesellschaften eingesetzt,
die ihrer Art nach so aufgestellt sind wie die Gesellschaft. Erwerber der
Zertifikate sollten sich bewusst sein, dass die Entwicklung des operativen
Geschäfts der Gesellschaft (falls auf eine entsprechende Geschichte
zurückgeblickt werden kann) nicht notwendigerweise Aufschluss über die
wahrscheinliche künftige Entwicklung der Gesellschaft, der FondsKomponente und der Zertifikate gibt.
(d)
Anlagen der Gesellschaft und ein erheblicher Teil ihrer Vermögenswerte in
Bezug auf die Man Global Strategies Investment Strategies Ltd. – Man AP
Enhanced Garant 2 Class T2 EUR Shares können direkt oder indirekt
konzentriert sein auf Wertpapiere eines einzelnen Emittenten oder einer
einzelnen Emissionsstelle oder auf Anlagestrategien eines einzelnen
Anlageberaters. Soweit eine Konzentration in einer solchen Weise besteht,
könnten die Gesamtauswirkungen nachteiliger Entwicklungen des Geschäfts
eines solchen Emittenten oder einer solchen Emissionsstelle oder eines
solchen Anlageberaters oder einer Negativentwicklung der Währung, auf die
die Wertpapiere lauten, deutlich größer sein, als wenn eine Konzentration
der Anlagen in diesem Ausmaß nicht bestünde.
(e)
Die Gesellschaft kann Anlagen in Märkten tätigen, die volatil und/oder
illiquide sein können. Entsprechend ist es, auch wenn bestimmte Anlagen
mit einer höheren Liquidität ausgestattet sein können als eine Aktienanlage,
unter Umständen nicht möglich (im Falle der Einstellung des Handels oder
auf Grund von täglichen Kursschwankungsgrenzen an den gehandelten
Märkten oder aus anderen Gründen) oder sehr teuer für die Gesellschaft,
Positionen zu liquidieren die sich durch Bewegungen der Märkte negativ
entwickeln. Alternativ ist es unter bestimmten Umständen nicht möglich,
47
dass eine Position unmittelbar eingegangen oder liquidiert werden kann
(sofern in den jeweiligen Märkten keine ausreichenden Handelsaktivitäten
verzeichnet werden oder aus anderen Gründen). Entsprechend kann die
Gesellschaft in ihrer Fähigkeit, auf Marktschwankungen zu reagieren,
eingeschränkt sein. Diese Risikowirkung kann noch verstärkt werden, wenn
die Gesellschaft gezwungen ist, Positionen auf Grund der Erfüllung von
Margin- Bestimmungen, Margin-Einschüssen, Rücknahmeanträgen oder
Finanzierungserfordernissen zu liquidieren. Die Anlageberater können in
Bezug auf ihre Aktivitäten ähnlichen Risiken ausgesetzt sein.
(f)
Bei den Anlagestrategien können zum Teil Leerverkäufe eingesetzt werden,
wobei vereinbart wird, Wertpapiere zu einem künftigen Termin zu
verkaufen, unabhängig davon, ob der Verkäufer die zu verkaufenden
Wertpapiere im Zeitpunkt des Verkaufs besitzt. Der Verkäufer kann jeweils
gezwungen sein, für die Lieferung an den Käufer Wertpapiere derselben Art
auszuleihen, mit der gleichzeitigen Verpflichtung des Verkäufers, solche
ausgeliehenen Wertpapiere zu einem späteren Termin wieder
zurückzugeben. Mit Leerverkäufen können Anleger von rückläufigen
Marktpreisen
profitieren,
soweit
solche
Kursrückgänge
die
Transaktionskosten und Kosten für die Ausleihung der Wertpapiere
übersteigen. Müssen für die Schließung der Leerverkaufspositionen die
ausgeliehenen Wertpapiere jedoch durch Käufe zu Marktpreisen ersetzt
werden, so würde jegliche Kurssteigerung der ausgeliehenen Wertpapiere zu
einem Verlust führen. Kurssteigerungen können allein aus dem Kauf von
Wertpapieren zur Glattstellung von Shortpositionen resultieren und die
Verluste so weiter in die Höhe treiben. Es ist nicht garantiert, dass die zur
Deckung einer Shortposition notwendigen Wertpapiere gekauft werden
können. Zudem sind nach den Regelungen einiger Märkte Leerverkäufe
verboten, wenn diese nur zu einem Preis unter dem letzten Verkaufspreis
möglich sind, weshalb die Wertpapiere möglicherweise nicht zum am
stärksten favorisierten Zeitpunkt leerverkauft werden können.
Dementsprechend kann sich der Einsatz von Leerverkäufen wesentlich
nachteilig auf den Wert der Fonds-Komponente und somit auf den Wert der
(g)
Anlagen in Derivate sind mit erheblichen Risiken verbunden und können
Verluste nach sich ziehen. Die Preise von Futureskontrakten und derivativen
Instrumenten sind starken Schwankungen unterworfen. Einflussfaktoren für
diese Preise sind unter anderem das Zinsniveau, die implizite Volatilität, die
Dividendenrendite des Wertpapiers auf das sich das Derivat bezieht, eine
Änderung bei Angebot und Nachfrage, Handels- und Fiskalprogramme
sowie geld- und währungspolitische Programme und politische und
wirtschaftliche Ereignisse. Während der Investment Manager und die
Anlageberater möglicherweise bestrebt sind, diese Einflüsse zu
prognostizieren und zu überwachen, kann es keine Garantie geben, dass der
Investment Manager und der Anlageberater diese Einflüsse, die zu Verlusten
führen könnten, korrekt vorhersieht und überwacht.
48
(h)
Forwardkontrakte werden im Gegensatz zu Futureskontrakten nicht an
Börsen gehandelt und sind nicht standardisiert. Der Handel im Forward- und
Kassamarkt ist im Wesentlichen nicht reguliert. Es gibt keine Begrenzungen
für tägliche Kursschwankungen und spekulative Positionslimite kommen
nicht zur Anwendung. Für die Marktteilnehmer, die in den Forwardmärkten
handeln, besteht keine Verpflichtung, weiterhin als Market Maker für die
von ihnen gehandelten Währungen oder Commodities zu fungieren, und in
diesen Märkten können Phasen der Illiquidität herrschen, die im Einzelfall
über einen erheblichen Zeitraum andauern können. An jedem gehandelten
Markt können wegen ungewöhnlichen hoher Handelsvolumina, politischer
Interventionen und sonstiger Faktoren Störungen auftreten. Illiquidität oder
Störungen an den Märkten können zu Verlusten führen.
(i)
Die
von
bestimmten
Anlageberatern
eingesetzten
komplexen
Handelssysteme/-programme und das Tempo und Volumen von
Transaktionen führt zwangsweise gelegentlich dazu, dass Geschäfte
ausgeführt werden, die im Nachhinein betrachtet nicht für die
Handelssysteme/-programme erforderlich waren. Die mit jeglichen
unabsichtlichen Geschäften, die auf diese Art und Weise ausgeführt wurden,
verbundenen Verluste wirken sich nachteilig auf den Wert der FondsKomponente und damit der Zertifikate aus.
(j)
Die Gesellschaft und die zu Grunde liegenden Anlagevehikel, über die
Anlagen direkt oder indirekt getätigt werden, können bestimmte Strategien
einsetzen, die jeweils von der Zuverlässigkeit und Korrektheit der
analytischen Modelle des Investment Managers oder der Anlageberater
abhängen. Sofern solche Modelle (oder die ihnen zu Grunde liegenden
Annahmen) sich nicht als richtig erweisen, können die Anlagen der
Gesellschaft möglicherweise nicht die erwartete Performance erreichen.
Dies könnte zu erheblichen Verlusten der Gesellschaft und damit auch der
Fonds-Komponenten und der Zertifikate führen.
(k)
Der Nettoninventarwert der Man Global Strategies Investment Strategies
Ltd. – Man AP Enhanced Garant 2 Class T2 EUR Shares basiert teilweise
auf Bewertungen, die Schätzwerte enthalten, und unterliegt dem Risiko, dass
solche Schätzwerte und/oder zugrunde liegenden Annahmen sich als
unrichtig erweisen, sowie dem operativen Risiko, dass die Berechnungen
fehlerhaft sind.
(l)
Der Investment Manager verwaltet das Risiko für die Gesellschaft, indem er
bestrebt ist, sicherzustellen, dass sich das zugrunde liegende Risiko im
Zusammenhang mit jeder Aktienklasse, einschließlich der Man Global
Strategies Investment Strategies Ltd. – Man AP Enhanced Garant 2 Class T2
EUR Shares, in einem vorher bestimmten Rahmen hält. Dennoch muss die
Gesellschaft möglicherweise ihre Handelsaktivitäten in einigen oder allen
Anlagestrategien für eine oder mehrere Aktienklassen einstellen, wenn der
Nettoinventarwert eines oder mehrerer zugriffsbeschränkter Konten
(segregated accounts) auf ein Niveau sinkt, das nicht mehr ausreichend ist,
um den übliche diversifizierten Anlageansatz zu verfolgen.
49
(m) Der spezifische Anlageansatz des Investment Managers setzt zum Teil auf
die selbst verliehene Flexibilität, in unterschiedliche Strategien anzulegen,
wobei dies auch Strategien sein können, die heute noch nicht in Betracht
gezogen werden. Im Ergebnis können die Man Global Strategies Investment
Strategies Ltd. – Man AP Enhanced Garant 2 Class T2 EUR Shares deshalb
im Zuge der weiteren Entwicklung der Anlagestile, mit denen die Man
Global Strategies Investment Strategies Ltd. – Man AP Enhanced Garant 2
Class T2 EUR Shares verwaltet werden, Risiken ausgesetzt sein, die nicht in
diesem Abschnitt beschrieben sind.
Der Investment Manager hat weder Kontrolle noch Einfluss auf die
Investitionsentscheide der Anlagestrategien und der ihnen zugrunde liegenden
Hedgefondsmanager
Der Investment Manager überwacht die Wertentwicklung der Anlagestrategien, hat
jedoch weder Kontrolle noch Einfluss auf die Investitionsentscheide die von den
Anlagestrategien oder den ihnen zugrunde liegenden einzelnen Hedgefondsmanagern
getroffen werden. Die Hedgefonds und Anlagestrategien berücksichtigen bei ihren
Anlageentscheiden nicht die Interessen der Fonds-Komponente, der Gesellschaft oder
eines Hypothetischen Anteilsinhabers. Weiterhin können die Hedgefonds und
Anlagestrategien in einem Land mit eingeschränkter oder keiner regulatorischen
Aufsicht ansässig sein, und in illiquide, volatile Anlagen, in Emerging-Markets, sowie
in Anlagen mit keinem oder geringem Credit-Rating investieren. Bezüglich der
Investmentmöglichkeiten und –strategien, die von den Hedgefonds und
Anlagestrategien angewendet werden können, gibt es nur wenige Beschränkungen.
Die damit verbundenen Risiken können sich wesentlich nachteilig auf den Wert der
Fonds-Komponente und somit den Wert der Zertifikate auswirken.
Transaktionskosten und Gebühren der Man Global Strategies Investment
Strategies Ltd. – Man AP Enhanced Garant 2 Class T2 EUR Shares können sich
nachteilig auf den Wert der Zertifikate auswirken
Die Führung der Geschäfte des Man Global Strategies Investment Strategies Ltd. –
Man AP Enhanced Garant 2 Class T2 EUR Shares und der einzelnen Hedgefonds
bringt die Zahlung erheblicher Transaktionskosten und Gebühren für Dienstleistungen
mit sich, die für die Anlageentscheidungen von wesentlicher Bedeutung sind. Die
Höhe und die Zahlung derartiger Kosten und Gebühren können sich wesentlich
nachteilig auf den Wert der Fonds-Komponente und somit auf den Wert der
Zertifikate auswirken. So muss die Gesellschaft erhebliche Gebühren, einschließlich
Verwaltungsgebühren, Erfolgsvergütungen und Transaktionsgebühren der Broker,
zahlen. Diese Kosten wirken sich auf den Nettinventarwert der Man Global Strategies
Investment Strategies Ltd. – Man AP Enhanced Garant 2 Class T2 EUR Shares und
somit auch auf die Fähigkeit der Gesellschaft aus, in Bezug auf die Man Global
Shares eine positive Performance zu erzielen. Solche Gebühren und
Transaktionskosten sind im Wesentlichen an Unternehmen der Man Group plc (die
"Man Group") zahlbar.
50
Die Entwicklung der Fonds-Komponente wird insbesondere durch Belastungen
beeinflusst, die sich auf die Investitionen beziehen. Üblicherweise führt ein hoher
Portfolioumsatz zu entsprechend hohen Transaktionskosten und der genaue Betrag
der damit verbundenen Maklerprovisionen und dazugehörigen Transaktionskosten
hängt von einer Reihe von Faktoren ab, unter anderem Art und Häufigkeit der sich
bietenden Marktchancen, Umfang der Transaktion und den jeweils geltenden
Transaktionssätzen. Solche Gebühren und Transaktionskosten sind im Wesentlichen
an die Man Group zahlbar.
Diese Kosten und Gebühren sind von der jeweiligen Entwicklung der FondsKomponente unabhängig. Dementsprechend müssen sie auch gezahlt werden, wenn
die entsprechende Entwicklung negativ ist. Zudem werden Erfolgsvergütungen
separat für jede Anlagestrategie berechnet und belastet. Werden zwischen den
Anlagestrategien Umschichtungen vorgenommen, so wird die Berechnungsgrundlage
für die Erfolgsvergütung neu festgelegt, und dies kann bedeuten, dass ein
Erfolgshonorar zahlbar ist, das nicht zahlbar wäre, wenn eine solche Umschichtung
nicht stattgefunden hätte. Das Erfolgshonorar kann für den Investment Manager und
die Anlageberater einen Anreiz darstellen, risikoreichere Anlagen zu tätigen, als sie
ansonsten, ohne eine Gebühr auf Basis der Wertentwicklung, tätigen würden.
Die von der Gesellschaft und/oder den zugrunde liegenden Anlageinstrumenten
zahlbaren Gebühren und Transaktionskosten können während des Bestehens der
Gesellschaft der Neuverhandlung unterliegen.
Es wird zudem Situationen geben, in denen ein Unternehmen der Man Group an
Gebühren und Aufwendungen beteiligt ist, die von oder im Zusammenhang mit
Investmentfonds oder Managed Accounts erhoben werden, in die die Man Global
Shares direkt oder indirekt investieren, oder in denen ein solches Unternehmen an den
zugrunde liegenden Anlageverwaltern selbst beteiligt ist. Die vom Investment
Manager eingerichteten Verfahren sind so konzipiert, dass mit ihnen sichergestellt ist,
dass die von einem einzelnen zugrunde liegenden Anlageberatern berechneten
Gebühren grundsätzlich in einem marktüblichen Rahmen liegen und berücksichtigen
hierbei alle relevanten einschlägigen Umstände dieses Beraters. In diesem
Zusammenhang bezeichnet der Begriff "Beteiligung" insbesondere, jedoch nicht nur,
eine Geschäftsbeziehung, eine finanzielle Beziehung oder eine andere gewerbliche
Struktur, die dazu führt, dass eine Beteiligung an einem Geschäft, einem Gewerbe,
einem Finanzkonstrukt oder eine sonstige wesentliche Beteiligung geschaffen wird.
Der Einsatz von Leverage-Techniken durch die Man Global Strategies Investment
Strategies Ltd. kann die Wertentwicklung der Fonds-Komponente nachteilig
beeinflussen
Die Man Global Strategies Investment Strategies Ltd. – Man AP Enhanced Garant 2
Class T2 EUR Shares, und Hedgefonds, in die sie investieren, sind in der Lage,
signifikant und zum Teil auch unbeschränkt Fremdkapital aufzunehmen und
verschiedene Kreditlinien und andere Formen der Fremdfinanzierung, unter anderem
auch Swaps und Wertpapierpensionsgeschäfte zu nutzen. Während die
51
Fremdfinanzierung eine Möglichkeit zur Steigerung des Gesamtertrages eines
Hedgefonds darstellt, birgt sie zugleich die Gefahr potenziell höherer Verluste.
Mit dem Einsatz von Leverage-Techniken durch die Gesellschaft sind insbesondere
folgende Risiken verbunden, deren Realisierung sich wesentlich nachteilig auf den
Wert der Fonds-Komponente und somit den Wert der Zertifikate auswirken kann:
(a)
Die Aufnahme von Fremdkapital sorgt für eine zusätzliche Hebelwirkung,
die im Falle rückläufigen Handelskapitals und negativer Renditen die
Wertentewicklung der Man Global Strategies Investment Strategies Ltd. –
Man AP Enhanced Garant 2 Class T2 EUR Shares negativ beeinflussen
können.
(b)
Die Gesellschaft kann für die Man Global Strategies Investment Strategies
Ltd. – Man AP Enhanced Garant 2 Class T2 EUR Shares Darlehen
aufnehmen und Swaps und andere außerbilanzielle Derivatetransaktionen
sowie andere Fremdkapitalmittel einsetzen. Die zugrunde liegenden
Instrumente, über die die Gesellschaft direkt oder indirekt anlegt (wie
beispielsweise die Hedgefonds), können ebenfalls die Hebelwirkung von
Fremdkapital nutzen. Während der Einsatz von Leverage-Methoden die
Chance auf höhere Gesamterträge bietet, steigt hiermit gleichzeitig das
Potenzial höherer Verluste. Wenn Erträge und Wertsteigerungen von
Anlagen, die mit geliehenen Mitteln erzielt wurden, die Kosten der
Fremdkapitalstrategie jedoch nicht decken, so wird der Wert des
Nettovermögens der zugriffsbeschränkten Konten der Gesellschaft sowie
auch der Nettoinventarwert der Fonds-Komponente sinken. Entsprechend
würde jedes Ereignis, das sich negativ auf den Wert einer Anlage der
Gesellschaft oder einer der zugrunde liegenden Anlagestrategien und
Hedgefonds, über die sie direkt oder indirekt Anlagen tätigt, auswirkt, in
Höhe der eingesetzten Hebelwirkung um ein Vielfaches verstärkt werden.
Durch ein eventuell hohes Maß an Fremdfinanzierung kann die Gesellschaft
dem Risiko ausgesetzt sein, dass die zugrunde liegenden Investments in
einem frühen Stadium Verluste ausweisen.
(c)
Der kumulative Effekt von Leverage-Methoden in Märkten, die sich anders
als erwartet entwickeln, könnte in erheblichen Verlusten resultieren, die
größer wären, als wenn keine Leverage-Methoden eingesetzt worden wären.
(d)
In der Regel involvieren Leverage-Transaktionen die Hinterlegung von
Sicherheitsleistungen. Höhere Margin- oder ähnliche Zahlungen könnten
dazu führen, dass Geschäfte zu Zeitpunkten oder Preisen getätigt werden
müssen, die für die Gesellschaft oder die zugrunde liegenden Anlagevehikel,
über die direkt oder indirekt Anlagen getätigt werden, nachteilig sein
könnten und in erheblichen Verlusten resultieren könnten.
(e)
Die Anlagestrategien können zum Teil den Einsatz von umfangreichen
Leverage-Methoden vorsehen. Es gibt keine Garantie, dass diese
Fremdkapitalvereinbarungen jederzeit zur Verfügung stehen, und ein Verlust
oder die Einschränkung der Fremdkapitalvereinbarungen in Bezug auf eine
Aktienklasse dürfte möglicherweise zur Folge haben, dass die Gesellschaft
52
ihr gesamtes Anlage-Engagement reduzieren muss. Die Bedingungen, zu
denen Leverage-Möglichkeiten genutzt werden können, unterliegen
Veränderungen.
(f)
Als Folge der Fremdfinanzierungen können die Zinsaufwendungen einen
erheblichen Prozentsatz der Vermögenswerte eines zugriffsbeschränkten
Kontos ausmachen. Zinsaufwendungen könnten bedingen, dass eine
Aktienklasse ihr Engagement in der entsprechenden Anlagestrategie
reduzieren muss. Selbst wenn relativ geringe Verluste erzielt werden oder
die Gewinne nicht ausreichen, um die Aufwendungen zu decken, könnte das
für die Man Global Strategies Investment Strategies Ltd. – Man AP
Enhanced Garant 2 Class T2 EUR Shares verfügbare Handelskapital durch
den Einsatz von Leverage schnell erschöpft oder das Gewinnpotenzial einer
solchen Klasse ausgelöscht werden.
(g)
Es ist nicht gewährleistet, dass eine Fremdkapitalvereinbarung verlängert
wird. Insbesondere ist es möglich, dass keine Dritten als Fremdkapitalgeber
zur Verfügung stehen und die Man Group selbst aufsichtsrechtlichen,
geschäftlichen oder sonstigen Beschränkungen unterliegt, die dazu führen,
dass eine Fremdkapitalvereinbarung nicht angeboten oder erneuert wird.
Zudem sind Fremdkapitalvereinbarungen möglicherweise gemäß ihren
Bedingungen vorzeitig kündbar und können von einem Kontrahenten
gekündigt werden. Ein Verlust, eine Beendigung oder eine Herabsetzung
einer Fremdkapitalvereinbarung kann zur Folge haben, dass die Gesellschaft
das Investment Exposure der Fond-Komponenten herunterfahren muss, was
eine entsprechende Verminderung der Renditeerwartungen der Anlagen der
Man Global Strategies Investment Strategies Ltd. – Man AP Enhanced
Garant 2 Class T2 EUR Shares zur Folge haben könnte. Bei der Erneuerung
einer Fremdkapitalvereinbarung werden möglicherweise geänderte
Bedingungen
für
diese
Fremdkapitalvereinbarung
ausgehandelt,
insbesondere, jedoch nicht nur, eine Veränderung der geltenden
Zinsspannen.
Anlagen der Man Global Strategies Investment Strategies Ltd. in äußerst volatile
Märkte können nachteilige Auswirkungen auf den Wert der Fonds-Komponente
haben
Class T2 EUR Shares und die Hedgefonds können in eine breite Palette an
Vermögenswerten investieren, unter anderem in Aktien anderer Gesellschaften,
Anleihen und Derivate. Die Preise dieser Vermögenswerte und insbesondere der
Derivate, darunter Futures, Forwards und Optionen auf Wertpapiere, Währungen und
Rohstoffe sind insgesamt höchst volatil. So werden zum Beispiel die
Preisbewegungen von Forward-Kontrakten, Futures-Kontrakten und anderen
Derivate-Kontrakten, in die die Fonds-Komponente direkt oder indirekt investieren
kann, unter anderem von Zinssätzen, wechselnden Angebots- und
Nachfrageverhältnissen, Handels-, Steuer-, fiskalischen, geldpolitischen und
Wechselkurs-Kontrollprogrammen und Politiken der Regierungen und internationalen
politischen und wirtschaftlichen Ereignissen und Regelungen beeinflusst. Zudem
53
intervenieren Regierungen gelegentlich direkt oder durch Rechtssetzungsakte in
bestimmte Märkte, insbesondere bei währungs- und zinssatzbezogenen Futures und
Optionen. Diese Interventionen sind häufig dazu bestimmt, Preise unmittelbar zu
beeinflussen und können zusammen mit anderen Faktoren zu einer raschen Bewegung
solcher Märkte in ein und dieselbe Richtung unter anderem aufgrund der
Schwankungen beim Zinssatz führen. Die Fonds-Komponente ist darüber hinaus dem
Risiko der Schließung einer der Börsen, an denen ihre Positionen gehandelt werden,
bzw. deren Clearingstellen ausgesetzt.
Die Konzentration von Anlagen der Man Global Strategies Investment Strategies
Ltd. kann nachteilige Auswirkungen auf den Wert der Fonds-Komponente haben
Class T2 EUR Shares und die Hedgefonds können ihre Investitionen auf wenige
Wertpapiere, Branchen oder Länder konzentrieren. Obwohl eine Risikostreuung über
eine Reihe von Hedgefonds-Strategien und –Arten durch eine große Anzahl von
unterschiedlichen Hedgefonds-Managern beabsichtigt ist, kann die Konzentration
durch einzelne Hedgefonds einen proportional höheren Verlust verursachen, als wenn
die Anlage über eine große Anzahl von Investitionen verteilt worden wäre. Darüber
hinaus können auf Anraten des Investment Managers Investitionen der Man Global
Shares konzentriert werden und ein erheblicher Teil der Vermögenswerte in
Wertpapieren eines einzelnen Emittenten oder eines einzelnen Landes angelegt
werden. In dem Umfang, in dem eine Konzentration in dieser Weise erfolgt, können
nachteilige Entwicklungen im Geschäft eines solchen Emittenten oder eines Landes
oder im Verhältnis zur Währung, auf welche die Wertpapiere lauten, erheblich
größere Gesamtfolgen auslösen, als wenn die Konzentration der Investitionen nicht in
diesem Umfang erfolgt wäre. Jeder Verlust auf Grund einer solchen Konzentration
kann sich wesentlich nachteilig auf den Wert der Fonds-Komponente und somit den
Wert der Zertifikate auswirken.
Das mit den Anlagen der Man Global Strategies Investment Strategies Ltd.
verbundene Gegenparteirisiko kann nachteilige Auswirkungen auf den Wert
Fonds-Komponente haben
(a)
Anlagen werden in Bezug auf die Man Global Strategies Investment
Strategies Ltd. – Man AP Enhanced Garant 2 Class T2 EUR Shares
grundsätzlich zwischen der Gesellschaft und dem Broker, der auf eigene
Rechnung handelt (und nicht als Vertreter), getätigt. Entsprechend ist diese
Aktienklasse der Gesellschaft dem Risiko ausgesetzt, das der Broker im
Falle der Insolvenz oder eines ähnlichen Ereignisses nicht in der Lage ist,
seine vertraglichen Verpflichtungen in Bezug auf diese Aktienklasse
gegenüber der Gesellschaft zu erfüllen. Die zugrunde liegenden
Anlageinstrumente, über die die Gesellschaft direkt oder indirekt Anlagen
tätigt, können hinsichtlich der eingesetzten Broker ähnliche oder größere
Risiken tragen.
(b)
Die Gesellschaft (und jegliche sonstigen zugrunde liegenden Anlagevehikel,
über die die Gesellschaft direkt oder indirekt Anlagen tätigt) trägt ein
54
Gegenparteirisiko in Bezug auf die von ihr gehaltenen Over-the-CounterInstrumente. Im Falle der Insolvenz einer Gegenpartei oder eines Brokers,
über den der Investment Manager oder ein Anlageberater auf Rechnung der
Gesellschaft handelt, rangiert die Gesellschaft möglicherweise als
unbesicherter Gläubiger in Bezug auf die aus einem Margin-Konto oder
anderweitig an den Teilfonds zahlbaren Gelder; jegliche derartige Verluste
trägt das entsprechende zugriffsbeschränkte Konto (segregated account) der
Gesellschaft.
(c)
Die Gesellschaft und die Anlageberater können auch Währungs-, Zins-,
Total-Return- oder andere Swaps abschließen, die als Ersatz für andere
Instrumente wie Devisen-Forwardkontrakte oder Zinsoptionen dienen
können. Der Wert dieser Instrumente hängt grundsätzlich von den
Preisbewegungen der zu Grunde liegenden Vermögenswerte sowie vom
Gegenparteirisiko ab. Die zugrunde liegenden Anlageinstrumente, über die
die Gesellschaft direkt oder indirekt Anlagen tätigt, können hinsichtlich ihrer
Anlagen ähnliche oder größere Risiken tragen.
Die mit den Anlagen der Man Global Strategies Investment Strategies Ltd.
verbundenen Zins- und Wechselkursrisiken können nachteilige Auswirkungen auf
den Wert des Zertifikats haben
Die Gesellschaft ist bei ihren Aktivitäten Zins- und/oder Wechselkursrisiken
ausgesetzt. Soweit sich die geltenden Wechselkurse oder Zinsen ändern, könnte sich
dies negativ auf den Nettoinventarwert je Fonds-Komponente auswirken. Auch wenn
die Gesellschaft bestrebt ist, Zins- und/oder Wechselkursrisiken auszuschalten,
können solche Risiken weiter bestehen. Die komplexen Systeme und Programme, die
zur Reduzierung des Zins- und/oder Wechselkursrisikos eingesetzt werden, können
dazu führen, dass Geschäfte ausgeführt werden, die im Nachhinein nicht notwendig
waren und/oder zu einer verzögerten Ausführung oder der Nichtausführung von
Transaktionen, die im Nachhinein doch angemessen gewesen wären. Unter solchen
Umständen mindern die entstehenden Verluste den Wert der Fonds-Komponente und
damit den Wert der Zertifikate. Zudem können die zugrunde liegenden
Anlageinstrumente, über die die Gesellschaft direkt oder indirekt Anlagen tätigt,
hinsichtlich ihrer Anlagen ähnliche oder größere Risiken tragen.
Die Bewertung der Vermögenswerte, auf denen die Fonds-Komponente basiert,
spiegelt nicht unbedingt den Marktwert der Vermögenswerte wieder
Die Bewertung von Wertpapieren, in welche die Man Global Strategies Investment
Strategies Ltd. – Man AP Enhanced Garant 2 Class T2 EUR Shares oder die
Hedgefonds investieren können, werden gemäß den Regelungen des jeweiligen
Hedgefonds für solche Bewertungen vorgenommen. Im Allgemeinen sehen die
geltenden Bestimmungen von Hedgefonds vor, dass Wertpapiere oder Investments,
die illiquide sind, nicht an Börsen oder auf einem etablierten Markt gehandelt werden
oder für die nicht ohne Weiteres ein Wert bestimmt werden kann, ein solcher
angemessener Wert beigemessen wird, den der jeweiliger Investmentmanager nach
seiner Beurteilung auf Basis verschiedener Faktoren bestimmt. Zu diesen Faktoren
gehören, insbesondere Händler- Quotierungen oder unabhängige Bewertungen.
55
Solche Bewertungen geben unter Umständen nicht den tatsächlichen Verkehrswert
wieder, der sich in einem aktiven, liquiden oder etablierten Markt ergeben würde.
Der Wert der Fonds-Komponente kann überholt sein
Der Wert der Fonds-Komponente für einen bestimmten Tag wird jeweils in Bezug auf
einen bestimmten Tag berechnet, jedoch nicht an diesem Tag veröffentlicht. Daher
bestehen immer erhebliche Verzögerung zwischen der entsprechenden Bewertung und
Berechnung und der Veröffentlichung der entsprechenden Daten. Somit kann nicht
ausgeschlossen werden, dass wesentliche Informationen einschließlich des Werts der
Fonds-Komponente zum Zeitpunkt ihrer Veröffentlichung wesentlich veraltet sind.
Da sich der Wert der Fonds-Komponente zudem fortlaufend ändert, kann nicht
sichergestellt werden, dass die veröffentlichten Informationen den tatsächlichen Wert
der Fonds-Komponente zu einem Tag nach einer solchen Veröffentlichung richtig
wiedergeben. Die Bewertung der Fonds-Komponente kann zudem unter Umständen
ausgesetzt werden.
56
ALLGEMEINE INFORMATIONEN ÜBER DAS ANGEBOT
UND DIE ZERTIFIKATE
Gegenstand des Prospekts
Gegenstand dieses Prospekts sind die von Morgan Stanley B.V. als "Emittentin"
begebenen bis zu 75.000 kapitalgeschützte apano AP Enhanced Garant 2
Garantiezertifikate bezogen auf eine Aktie der Klasse T2 (Man AP Enhanced Garant
2 Class T2 EUR Shares) (die "Fonds-Komponente") der Man Global Strategies
Investment Strategies Ltd. (die "Gesellschaft"), deren Rückzahlung werden von der
Morgan Stanley & Co. International plc, 25 Cabot Square, Canary Wharf, London,
E 14 4 QA, Großbritannien berechnet.
Die Laufzeit der Zertifikate beginnt mit ihrer Ausgabe am 15. Mai 2008 (der
"Ausgabetag") und endet, vorbehaltlich eines vorzeitigen Verkaufs oder dem Eintritt
eines Kündigungsereignisses, am 15. Februar 2023 (der "Fälligkeitstag").
Die Zertifikate begründen unbesicherte und nicht nachrangige Verbindlichkeiten der
Emittentin, die untereinander und mit allen gegenwärtigen und zukünftigen
unbesicherten und nicht nachrangigen Verbindlichkeiten der Emittentin, abgesehen
von solchen Verbindlichkeiten, denen auf Grund zwingender gesetzlicher
Bestimmungen der Vorrang zukommt, gleichrangig sind.
Morgan Stanley (die "Garantin") hat eine unbedingte und unwiderrufliche Garantie
(die "Garantie") für die vertragsgemäße Zahlung auf die Zertifikate zahlbarer
Beträge übernommen. Die Garantie begründet unmittelbar gegen die Garantin
bestehende und durchsetzbare Ansprüche der Zertifikatsinhaber. Die Garantie
begründet unmittelbare, unbedingte, nichtnachrangige und unbesicherte
Verbindlichkeiten der Garantin, die jederzeit zumindest gleichrangig sind mit allen
sonstigen gegenwärtigen und zukünftigen unmittelbaren, unbedingten, nichtnachrangigen und unbesicherten Verbindlichkeiten der Garantin, mit Ausnahme
solcher Verbindlichkeiten, die kraft zwingender gesetzlicher Bestimmungen vorrangig
sind.
Wertpapierkennummer ("WKN") / ISIN der Zertifikate
WKN: MS5DHK
ISIN: DE000MS5DHK0
57
Billigung des Prospekts
Der
vorliegende
Prospekt
wurde
von
der
Bundesanstalt
für
Finanzdienstleistungsaufsicht ("BaFin") als Wertpapieraufsichtsbehörde der
Bundesrepublik Deutschland gemäß dem Wertpapierprospektgesetz vom
22. Juni 2005 ("WpPG"), das die Richtlinie 2003/71/EG (die "Prospektrichtlinie")
in der Bundesrepublik Deutschland in geltendes Recht umsetzt, gebilligt.
EWR-Pass
Die Emittentin behält sich vor, für bestimmte Länder des Europäischen
Wirtschaftsraums ("EWR") die Bescheinigung der Billigung des Prospekts nach dem
WpPG bei der BaFin zu beantragen, um die Zertifikate auch in diesen Ländern
öffentlich anbieten zu können und/oder dort ggf. auch eine Zulassung zum Handel an
einem organisierten Markt (im Sinne der Richtlinie 93/22/EWG) zu erreichen (der
"EWR-Pass"). Eine besondere Erlaubnis zum Angebot der Zertifikate oder zum
Verteilen des Prospekts in einer Rechtsordnung außerhalb der Länder, für die ein
EWR-Pass möglich und in der eine Erlaubnis erforderlich ist, wurde nicht eingeholt.
Ausgabe der Zertifikate und öffentliches Angebot
Im Zeitraum vom 15. Februar 2008 bis zum 8. April 2008, 16:00 Uhr Frankfurter
Zeit, werden die Zertifikate im Rahmen eines öffentlichen Angebots in der
Bundesrepublik Deutschland von der Emittentin zum anfänglichen Ausgabepreis von
1.000 Euro (zuzüglich eines Agios von bis zu 60 Euro) angeboten. Die Emittentin
behält sich das Recht vor die Angebotsfrist gegebenenfalls bis zum 18. April 2008,
16:00 Uhr Frankfurter Zeit, zu verlängern. Eine Zeichnung der Zertifikate ist nur mit
einem Mindestzeichnungsbetrag in Höhe von 10.000 Euro (dies entspricht
10 Zertifikaten) möglich. Anschließend werden sie während der gesamten Laufzeit
zum freibleibenden Verkauf zu den vorherrschenden Marktpreisen weiterhin
öffentlich angeboten.
Die Emittentin ist nicht verpflichtet, gezeichnete Zertifikate auch zu emittieren.
Die Emissionswährung ist Euro.
Die Lieferung der verkauften Zertifikate erfolgt gemäß den anwendbaren örtlichen
Marktusancen über Clearstream Banking AG, Frankfurt.
58
Verkaufsbeschränkungen
Verkaufsbeschränkungen innerhalb des EWR
In einem Mitgliedstaat des Europäischen Wirtschaftsraums, der die Prospektrichtlinie
umgesetzt hat (jeweils ein "maßgeblicher Mitgliedstaat"), dürfen die Zertifikate ab
dem Tag der Umsetzung der Prospektrichtlinie in dem maßgeblichen Mitgliedstaat
(der "maßgebliche Umsetzungstag") (einschließlich) nicht mehr öffentliche
angeboten werden, es sei denn, ab dem maßgeblichen Umsetzungstag (einschließlich)
ist in dem maßgeblichen Mitgliedstaat ein öffentliches Angebot der Zertifikaten nach
Maßgabe des Nachstehenden zulässig:
(a)
sofern nach den Zertifikatsbedingungen ein Angebot der Zertifikate außerhalb
des Anwendungsbereichs des Art. 3 Abs. 2 der Prospektrichtlinie zulässig ist
(ein sog. "Nicht–befreites Angebot"), darf ein Angebot in dem Zeitraum
erfolgen der in dem Prospekt oder den Zertifikatsbedingungen genannt ist.
Dieser Zeitraum beginnt frühestens am Tag nach der Veröffentlichung eines
Prospekts für die Zertifikate, welcher von der zuständigen Behörde dieses
maßgeblichen Mitgliedstaats gebilligt wurde bzw. in einem anderen
Mitgliedstaat gebilligt wurde und von dessen Billigung die zuständige
Behörde des maßgeblichen Mitgliedstaats unterrichtet wurde und
vorausgesetzt, daß ein solcher Prospekt (jeweils nach Maßgabe der
Prospektrichtlinie), nachfolgend durch die endgültigen Bedingungen unter
Berücksichtigung des "Nicht–befreiten Angebots" vervollständigt wurde;
(b)
das öffentliche Angebot darf jederzeit erfolgen, wenn es gegenüber
juristischen Personen erfolgt, die in Bezug auf ihre Tätigkeit auf den
Finanzmärkten zugelassen sind bzw. beaufsichtigt werden oder, sofern sie
weder zugelassen sind noch beaufsichtigt werden, deren einziger
Geschäftszweck in der Wertpapieranlage besteht;
(c)
das öffentliche Angebot darf jederzeit erfolgen, wenn es gegenüber
juristischen Personen erfolgt, die zwei oder mehr der folgenden Kriterien
erfüllen: (1) eine durchschnittliche Beschäftigtenzahl im letzten Geschäftsjahr
von mindestens 250, (2) eine Gesamtbilanzsumme von mindestens
43.000.000 Euro und (3) ein Jahresnettoumsatz, ausgewiesen im letzten
Jahres- oder Konzernabschluß, von über 50.000.000 Euro;
(d)
das öffentliche Angebot darf jederzeit erfolgen, wenn es gegenüber weniger
als 100 natürlichen oder juristischen Personen erfolgt die keine qualifizierten
Investoren im Sinne der Prospektrichtlinie sind; oder
(e)
das öffentliche Angebot darf jederzeit unter anderen Umständen erfolgen,
unter denen die Emittentin oder der für die Emittentin handelnde Platzeur
nicht gemäß Art. 3 Abs. 2 der Prospektrichtlinie wie in (b) bis (e) beschrieben,
verpflichtet ist, einen Prospekt entsprechend Art. 3 oder eines Nachtrags nach
Art. 16 der Prospektrichtlinie zu veröffentlichen.
59
Für die Zwecke dieser Bestimmung bezeichnet der Ausdruck "öffentliches Angebot
von Zertifikaten" in Bezug auf Zertifikate in einem maßgeblichen Mitgliedstaat eine
Mitteilung in jedweder Form und auf jedwede Art und Weise, die ausreichende
Informationen über die Angebotsbedingungen und die anzubietenden Zertifikate
enthält, um einen Anleger in die Lage zu versetzen, sich für den Kauf oder die
Zeichnung der Zertifikate zu entscheiden, wobei diese Bestimmungen in dem
betreffenden Mitgliedstaat aufgrund einer Maßnahme zur Umsetzung der
Prospektrichtlinie durch den Mitgliedstaat geändert werden können, und
"Prospektrichtlinie" bezeichnet die Richtlinie 2003/71/EG und schließt jede
maßgebliche Umsetzungsmaßnahme in jedem maßgeblichen Mitgliedstaat ein.
Verkaufsbeschränkungen außerhalb des EWR
In einem Staat außerhalb des EWR dürfen die Zertifikate innerhalb dessen
Rechtsordnung oder mit Ausgangspunkt in dessen Rechtsordnung nur öffentlich
angeboten, verkauft oder geliefert werden, wenn dies gemäß der anwendbaren
Gesetze und sonstigen Rechtsvorschriften zulässig ist und der Emittentin keinerlei
Verpflichtungen entstehen. Die Emittentin hat keine Maßnahmen ergriffen und wird
keinerlei Maßnahmen ergreifen, um das öffentliche Angebot der Zertifikate oder ihren
Besitz oder den Vertrieb von Angebotsunterlagen in Bezug auf die Zertifikate in
dieser Rechtsordnung zulässig zu machen, falls zu diesem Zweck besondere
Maßnahmen ergriffen werden müssen.
Die Zertifikate (oder Rechte hieran) sind nicht unter dem United States Securities Act
of 1933 in seiner jeweiligen Fassung (der "Securities Act") registriert worden und
werden nicht entsprechend registriert werden; ferner ist der Handel in den Zertifikaten
durch die United States Commodity Futures Trading Commission nicht nach dem
United States Commodity Exchange Act in seiner jeweiligen Fassung genehmigt
worden, noch wird er entsprechend genehmigt werden. Die Zertifikate (oder jedes
Recht hieran) werden nur außerhalb der Vereinigten Staaten und nur Personen
angeboten, die keine U.S.-Personen im Sinne der entsprechenden Definition der
Regulation S des Securities Act sind.
Verbriefung
Die Zertfikate werden im Sinne der U.S. Treasury Regulation § 1.163-5(c) (2) (i) (D)
anfänglich
durch
eine
vorläufige
Globalurkunde
(die
"Vorläufige
Dauerglobalurkunde") verbrieft, die gegen eine die Zertifikate verbriefende
Dauerglobalurkunde (die "Dauerglobalurkunde") nicht früher als 40 Tage und nicht
später als 180 Tage nach dem Abschluss der Platzierung der Zertifikate gegen
Nachweis des Nichtbestehens einer U.S.-Inhaberschaft (certification of non U.S.
beneficial ownership) ausgetauscht wird.
Die Vorläufige Dauerglobalurkunde bzw. die Dauerglobalurkunde werden jeweils bei
Clearstream Banking AG, Frankfurt am Main, Neue Börsenstraße 1, 60487 Frankfurt
am Main, Bundesrepublik Deutschland (das "Clearingsystem") hinterlegt. Ansprüche
auf Lieferung effektiver Stücke werden ausgeschlossen. Die Zertifikate sind nach dem
60
jeweils anwendbaren Recht und gegebenenfalls den jeweils geltenden Vorschriften
und Verfahren des Clearingsystems übertragbar.
Zahlstelle
Zahlstelle ist die Deutsche Bank Aktiengesellschaft, Große Gallusstrasse 10-14,
60272 Frankfurt am Main, Deutschland.
Verwendung der Emissionserlöse
Die Erlöse aus der Ausgabe der Zertifikate (ohne Agio) in Höhe von bis zu
Euro 75.000.000 werden ausschließlich für die Erfüllung der Zahlungsverpflichtungen
der Emittentin und zu Zwecken der üblichen Geschäftstätigkeit der Emittentin
verwendet.
Verantwortung
Die Emittentin übernimmt die Verantwortung für den Inhalt dieses Prospekts und
erklärt, dass ihres Wissens die im Prospekt genannten Angaben richtig sind und keine
wesentlichen Umstände ausgelassen wurden.
Sofern Angaben von Seiten Dritter übernommen wurden, bestätigt die Emittentin,
dass diese Angaben korrekt wiedergegeben wurden und dass — soweit es der
Emittentin bekannt ist und sie aus den von dieser dritten Partei veröffentlichten
Informationen ableiten konnte — keine Tatsachen unterschlagen wurden, die die
wiedergegebenen Informationen unkorrekt oder irreführend gestalten würden.
Im Zusammenhang mit der Ausgabe und dem Verkauf der Zertifikate ist niemand
berechtigt, irgendwelche Informationen zu verbreiten oder Erklärungen abzugeben,
die nicht in diesem Prospekt enthalten sind. Für Informationen, die nicht in diesem
Prospekt enthalten sind, lehnt die Emittentin jegliche Haftung ab. Die hierin
enthaltenen Informationen beziehen sich auf das Datum des Prospekts und können
aufgrund später eingetretener Veränderungen unrichtig und/oder unvollständig
geworden sein. Im Falle von wesentlichen Änderungen des Prospekts wird die
Emittentin einen Nachtrag zum Prospekt erstellen.
Beschluss des Board of Directors
Die Emittentin wird die Begebung der bis zu 75.000 kapitalgeschützte apano AP
Enhanced Garant 2 Garantiezertifikate bezogen auf eine Aktie der Klasse T2 (Man AP
61
Enhanced Garant 2 Class T2 EUR Shares) der Man Global Strategies Investment
Strategies Ltd. am 8. Februar 2008 beschliessen.
Bereithaltung des Prospekts und sonstiger Unterlagen
Dieser Prospekt wird gemäß § 14 des Wertpapierprospektgesetzes veröffentlicht und
ist in dieser Form von der Bundesanstalt für Finanzdienstleistungsaufsicht gebilligt
worden. Die Bundesanstalt für Finanzdienstleistungsaufsicht hat neben der formellen
Vollständigkeit dieses Prospekts die Kohärenz und Verständlichkeit der vorgelegten
Informationen überprüft. Die Bundesanstalt für Finanzdienstleistungsaufsicht hat
keine Prüfung der inhaltlichen Richtigkeit vorgenommen.
Die folgenden Dokumente werden in physischer und elektronischer Form während
der gewöhnlichen Geschäftszeiten an jedem Werktag zur Einsicht bei Morgan Stanley
in 1585 Broadway, New York, New York 10036, U.S.A. Tel: +1 (212) 761 4000 und
bei Morgan Stanley B.V. in Locatellikade 1, 1076 AZ Amsterdam, The Netherlands,
Tel: +31 20 57 55 600 bereitgehalten:
•
dieser Prospekt einschließlich möglicher Nachträge,
•
in Bezug auf die Emittentin: die Satzung der Emittentin, der Jahresbericht
(Annual Report and Accounts) der Emittentin zum 30. November 2006 und
der Jahresbericht (Annual Report and Accounts) der Emittentin zum
30. November 2006,
•
in Bezug auf die Garantin: die Satzung der Garantin, die Garantie (die Satzung
und die Garantie sind nicht bei der obigen Adresse von Morgan Stanley B.V.
erhältlich), der Jahresbericht (Annual Report, Form 10-K) der Garantin zum
30. November 2006 und der Jahresbericht (Annual Report, Form 10-K) der
Garantin zum 30. November 2007 in englischer Sprache.
Der Nettoinventarwert der Fonds-Komponente kann bei der Man Capital Markets
AG, Distribution Germany, Huobstrasse 3, 8808 Pfäffikon SZ, Schweiz,
Tel: +41 (0)55 417 6350, Fax: +41 (0)55 417 6351 erfragt werden, bei der zudem
Informationen über die Wertentwicklung und Volatilität der Fonds-Komponente
erhältlich sind.
Ausgabe von Berichten im Anschluss an die Emission
Die Emittentin beabsichtigt, mit Ausnahme der in den Zertifikatsbedingungen
genannten Bekanntmachungen, keine Veröffentlichung von Informationen nach
erfolgter Emission.
62
BESCHREIBUNG DER EMITTENTIN
Wirtschaftsprüfer
Die Wirtschaftsprüfer von Morgan Stanley B.V. ("MSBV" oder die "Emittentin") für
die Berichtszeiträume 1. Dezember 2005 bis 30. November 2006 und
1. Dezember 2006 bis 30. November 2007 waren Deloitte Accountants B.V,
Orlyplein 10,
1043
DP
Amsterdam,
Niederlande,
eine
eingetragene
Wirtschaftsprüfungsgesellschaft (die "Wirtschaftsprüfer").
Die Wirtschaftsprüfer von MSBV sind Mitglied des niederländischen
Wirtschaftsprüferverbands Nederlands Instituut van Registeraccountants.
Ausgewählte Finanzinformationen
Die Netto-Umsatzerlöse zu den jeweiligen Bilanzstichtagen am 30. November 2007
und 2006 beliefen sich auf 2.962.000 Euro bzw. 1.075.000 Euro, und setzten sich
zusammen aus Provisionen für die Ausgabe von Finanzinstrumenten abzüglich der
Verbindlichkeiten für Garantiegebühren. In den Geschäftsjahren mit Bilanzstichtag
30. November 2007 und 2006 wurde ein Ergebnis vor Steuern in Höhe von
2.197.000 Euro bzw. 775.000 Euro Gewinn ausgewiesen. Im Berichtszeitraum
wurden keine Dividenden ausgeschüttet.
Das Umlaufvermögen von MSBV stieg von 3.893.257.000 Euro in 2006 auf
10.182.479.000 Euro in 2007, und die gesamten Verbindlichkeiten von
3.893.257.000 Euro in 2006 auf 10.182.479.000 Euro in 2007. Hauptgrund für diesen
Verschuldungsanstieg war eine höhere Kundennachfrage nach Finanzinstrumenten.
Geschichte und Entwicklung
Morgan Stanley B.V. wurde am 6. September 2001 nach dem Recht der Niederlande
als Gesellschaft mit beschränkter Haftung auf unbegrenzte Dauer errichtet. MSBV ist
beim Handelsregister der Industrie- und Handelskammer Amsterdam unter
Registernummer 34161590 eintragen, mit Sitz in Locatellikade 1, 1076 AZ
Amsterdam, Niederlande, Telefon: + 31 205755600.
MSBV ist nach den Gesetzen der Niederlande gegründet und diese sind für sie
anwendbar.
63
Investitionen
Alle wesentlichen Aktiva von MSBV sind Verpflichtungen von (oder Wertpapiere
ausgegeben von) einer oder mehreren Gesellschaften der Morgan Stanley Gruppe.
MSBV hat seit dem Datum des zuletzt veröffentlichten Abschlusses keine
wesentlichen Anlagen getätigt.
Hauptaktivitäten
Die wesentliche Haupttätigkeit von MSBV liegt in der Ausgabe von Anleihen,
Optionsscheinen und anderen Wertpapieren.
Hauptmärkte
MSBV agiert aus den Niederlanden heraus und gibt Anleihen, Optionsscheinen und
andere Wertpapiere im Wesentlichen für den europäischen Markt aus.
Organisatorische Struktur
MSBV hat keine Tochtergesellschaften. Oberstes beherrschendes Unternehmen ist
Morgan Stanley.
Morgan Stanley ist eine Holdinggesellschaft, die ihre Produkte und Dienstleistungen
über ihre Tochtergesellschaften und verbundenen Unternehmen einer großen Gruppe
verschiedener Kunden anbietet, darunter Unternehmen, Regierungen, Finanzinstitute
und Privatpersonen.
Zu Morgan Stanleys US-amerikanischen und internationalen Tochtergesellschaften
gehören Morgan Stanley & Co. International plc (früher "Morgan Stanley & Co.
International Limited"), Morgan Stanley Japan Securities Co., Ltd. (früher "Morgan
Stanley Japan Limited") und Morgan Stanley Investment Advisors Inc. Am
1. April 2007 verschmolz Morgan Stanley Morgan Stanley DW Inc. in Morgan
Stanley & Co. Incorporated. Nach Vollendung der Fusion, wurde die fortbestehende
Gesellschaft Morgan Stanley & Co. Incorporated der wichtigste US-Broker-Dealer
von Morgan Stanley.
Trend Informationen
MSBV plant weiterhin die Ausgabe von Wertpapieren und den Abschluss von HedgeTransaktionen im Hinblick auf solche Wertpapieremissionen.
Seit dem 30. November 2007 hat es keine wesentlichen negativen Veränderungen in
den Aussichten der Emittentin gegeben.
64
Verwaltungs-, Geschäftsführungs- und Aufsichtsorgane
Die derzeitigen Directors von MSBV, ihre Ämter bei MSBV und ihre wichtigste
externe Tätigkeit sind jeweils gegebenenfalls nachstehend angegeben. Die
Geschäftsadresse jedes Directors ist Locatellikade 1, 1076 AZ Amsterdam,
Niederlande.
Name
Titel
Charles
Edward Managing Director
Crossley Hood
Joe Solan
Executive Director
Ger De Boer
Managing Director
TMF Management B.V.
Managing Director
Wichtigste externe Tätigkeit
Managing
Director,
Morgan
Stanley
Executive
Director,
Morgan
Stanley
Executive Director und Sales
Director,
Morgan
Stanley
Investment Management
Directors von TMF Management B.V.
Robert
Willem
de Managing Director
Koning
Franciscus
Adrianus Managing Director
Josephus van Oers
Timo Johannes van Rijn Managing Director
Maria Christina van der Managing Director
Sluijs-Plantz
Jan Reint de Vos van Managing Director
Steenwijk
Johan Versluis
Managing Director
Mitarbeiter
B.V.
Mitarbeiter
B.V.
Mitarbeiter
B.V.
Mitarbeiter
B.V.
Mitarbeiter
B.V.
Mitarbeiter
B.V.
von TMF Nederland
von TMF Nederland
von TMF Nederland
von TMF Nederland
von TMF Nederland
von TMF Nederland
Es gibt keine bestehenden oder potenziellen Interessenkonflikte zwischen den der
MSBV geschuldeten Pflichten (wie oben beschrieben) und den privaten Interessen
und/oder externen Pflichten der vorgenannten Personen.
Board Practice
Nach eigener Einschätzung erfüllt MSBV alle für sie geltenden niederländischen
Corporate-Governance-Gesetze.
65
Zum Datum dieses Prospekts hat MSBV keinen Prüfungsausschuss eingesetzt. Der
Abschluss von MSBV wird vom Board of Directors genehmigt.
Anteilinhaber
Oberstes beherrschendes Unternehmen von MSBV ist Morgan Stanley. MSBV sind
keine Kontrollmaßnahmen in Bezug auf diese Beherrschung durch den Gesellschafter
bekannt. Alle Entscheidungen über die Ausgabe von Wertpapieren trifft das Board of
Directors, und MSBV vereinnahmt einen Spread auf alle Wertpapieremissionen.
Stammkapital
Das genehmigte Stammkapital von MSBV setzt sich aus 900 Stammanteilen in Höhe
von 100 Euro zusammen.
Das ausgegebene, zugeteilte und voll eingezahlte Stammkapital von MSBV setzt sich
aus 180 Stammanteilen in Höhe von 100 Euro zusammen.
Gesellschaftsurkunde und Satzung
Ziel und Zweck von MSBV sind in Artikel 3 der Satzung festgelegt und versetzen das
Unternehmen
in
die
Lage,
Optionsscheine,
Derivate,
Zertifikate,
Schuldverschreibungen, Aktien und/oder ähnliche Wertpapiere oder Instrumente
auszugeben, zu verkaufen, zu kaufen, zu übertragen und entgegenzunehmen, und
Hedging-Vereinbarungen im Zusammenhang mit solchen Wertpapieren und
Instrumenten abzuschließen. Ferner liegen die Unternehmensziele in der Finanzierung
von Aktivitäten und Gesellschaften, der Kreditaufnahme und –ausreichung und
Mittelbeschaffung, sowie im Abschluss von Verträgen im Zusammenhang mit dem
Vorstehenden, in der Ausreichung von Garantien, dem Abschluss verbindlicher
Verträge für die Gesellschaft und der Verpfändung ihrer Vermögenswerte für
Verpflichtungen der Gesellschaften und Unternehmen, mit denen es im
Konzernverbund steht, sowie im Namen Dritter und im Handel mit Devisen,
Wertpapieren und Eigentumsanteilen allgemein.
Finanzinformationen über die Vermögens-, Finanz- und Ertragslage der
Emittentin
Hinsichtlich der Darstellung der Vermögens-, Finanz- und Ertragslage von MSBV als
Emittentin wird auf die Jahresberichte (Annual Reports and Account) der Emittentin
für die Geschäftsjahre 2006 und 2007 in englischer Sprache verwiesen. In diesem
66
Zusammenhang entspricht das Wirtschaftsjahr der Garantin jeweils dem Zeitraum
vom 1. Dezember bis zum 30. November eines Kalenderjahres.
Sämtliche diesbezüglich darin enthaltenen, von den Wirtschaftsprüfern der Emittentin
in Übereinstimmung mit United Kingdom Accounting Principles geprüften
Finanzinformationen und Erläuterungen bilden einen integralen Bestandteil dieses
Prospekts und sind damit inhaltlich in vollem Umfang in diesen Prospekt einbezogen.
Für das Geschäftsjahr vom 1. Dezember 2006 bis zum 30. November 2007 wird
verwiesen auf:
Balance Sheet, Seite 3 des Jahresberichts
Bilanz:
(Annual Report and Accounts) zum
30. November 2007
Income
Statement,
Seite 2
des
Gewinn und Verlustrechnung:
Accounts) zum 30. November 2007
Cash Flow Statement, Seite 5 des
Kapitalflussrechnung:
Notes to the Financial Statements,
Erläuternde Anmerkungen:
Seiten 6 ff. des Jahresberichts (Annual
Report
and
Accounts)
zum
30. November 2007
Für das Geschäftsjahr vom 1. Dezember 2005 bis zum 30. November 2006 wird
verwiesen auf:
Balance Sheet, Seite 3 des Jahresberichts
Bilanz:
(Annual Report and Accounts) zum
30. November 2006
Profit and Loss Account, Seite 2 des
Gewinn und Verlustrechnung:
Cash Flow Statement, Seite 4 des
Kapitalflussrechnung:
Notes to the Accounts, Seiten 5 ff. des
Erläuternde Anmerkungen:
Die Emittentin veröffentlicht keine Quartalsberichte.
Sämtliche in Hinblick auf die Emittentin durch Verweis einbezogenen Dokumente
sind Bestandteile des Basisprospekts vom 22. Juni 2007 (Program for the Issuance of
Notes, Series A and B) von Morgan Stanley als Emittentin und Garantin, Morgan
Stanley (Jersey) Limited als Emittentin und Morgan Stanley B.V. als Emittentin, der
von der Finanzdienstleistungsaufsicht in Großbritannien (Financial Services
Authority) in Übereinstimmung mit der Richtlinie 2003/71/EG vom
67
4. November 2003 bzw. deren
Großbritannien gebilligt worden ist.
maßgeblichen
Umsetzungsvorschriften
in
Seit dem 30. November 2007 hat sich die Finanz- oder Handelsposition von MSBV
nicht wesentlich geändert.
Prüfung der historischen jährlichen Finanzinformationen
Die Jahresberichte (Annual Reports and Accounts) der Emittentin für die
Geschäftsjahre 2006 und 2007 wurden durch Deloitte Accountants B.V. als
Wirtschaftsprüfer und in Übereinstimmung mit United Kingdom Accounting
Principles geprüft:
Der Prüfungsbericht (Auditor's Report) für das Geschäftsjahr vom 1. Dezember 2005
bis zum 30. November 2006 findet sich auf den Seiten 14 f. des Jahresberichts
(Annual Report and Accounts) zum 30. November 2006.
Der Prüfungsbericht (Auditor's Report) für das Geschäftsjahr vom 1. Dezember 2006
bis zum 30. November 2007 findet sich auf der Seite 18 des Jahresberichts (Annual
Report and Accounts) zum 30. November 2007.
Schieds- und Gerichtsverfahren
MSBV als Emittentin war während des Zwölfmonatszeitraums vor dem Datum dieses
Prospekts nicht an staatlichen Interventionen, Gerichts- oder Schiedsgerichtsverfahren
(einschließlich derjenigen Verfahren, die nach Kenntnis der Emittentin noch anhängig
sind oder eingeleitet werden könnten) beteiligt, die sich erheblich auf die Finanzlage
oder die Rentabilität der Emittentin und/oder der Gruppe auswirken bzw. in jüngster
Zeit ausgewirkt haben.
Wesentliche Verträge
Außerhalb des normalen Geschäftsverlaufs sind keine wesentlichen Verträge
abgeschlossen worden, die dazu führen könnten, dass jedwedes Mitglied der Gruppe
der Emittentin einer Verpflichtung ausgesetzt ist oder ein Recht erlangt, die bzw. das
für die Fähigkeit der Emittentin, ihren Verpflichtungen in Bezug auf die
ausgegebenen Wertpapiere nachzukommen, von wesentlicher Bedeutung wäre.
68
BESCHREIBUNG DER GARANTIN
Abschlussprüfer
vom 1. Dezember 2006 bis 30. November 2007 waren Deloitte & Touche LLP,
Two World Financial Center, New York, New York 10281, USA, eine unabhängige
registrierte Wirtschaftsprüfungsgesellschaft (die "Abschlussprüfer").
Am 12. Februar 2007 (in Verbindung mit der Anmerkung 1 - Eingestellte
Geschäftsaktivitäten-Discover - und der Anmerkung 30 des Berichtes 8-K vom
25. Oktober 2007 – wie nachstehend erläutert) haben die Abschlußprüfer im Hinblick
auf die nachstehenden Punkte (i), (ii) und (iii) einen uneingeschränkten
Bestätigungsvermerk erteilt:
(i)
die Bilanzen (Consolidated Statements of Financial Condition) von
Morgan Stanley vom 30. November 2006 und 2005 und die
entsprechenden Gewinn- und Verlustrechnungen (Consolidated
Statements of Income), die Kapitalflussrechnung (Consolidated
Statement of Cash Flows) und die Veränderungen des Eigenkapitals
für die Geschäftsjahre, die am 30. November 2004, 2005 bzw. 2006
endeten,
(ii)
den diesbezüglichen Bericht von Morgan Stanley und
(iii)
die Einschätzung des Vorstandes betreffend die Effektivität der
internen Kontrollmechanismen bezüglich des Rechnungswesens.
Am 28. Januar 2008 haben die Abschlussprüfer im Hinblick auf die nachstehenden
Punkte (i), (ii) und (iii) einen uneingeschränkten Bestätigungsvermerk erteilt:
(i)
endeten,
(ii)
(iii)
den Vorstandsbericht über die Effektivität der
Kontrollmechanismen bezüglich des Rechnungswesens.
internen
Morgan Stanley hat den vorgenannten Bericht auf Formular 8-K vom 25. Oktober
2007 hauptsächlich deshalb eingereicht, um bestimmte Informationen in den
historischen konsolidierten Bilanzen zu aktualisieren, welche auch im Hinblick auf
69
vorgenannte Anmerkungen 1 und 30 einer Aktualisierung aus folgenden Gründen
bedurften:
Am 30. Juni 2007 hat Morgan Stanley die Abspaltung (spin-off) der Discover
Financial Services ("DFS") abgeschlossen. Morgan Stanley verteilte alle
ausgegebenen Stammaktien der DFS (Nennbetrag von jeweils USD 0,01) an am
18. Juni 2007 eingetragene Aktionäre von Morgan Stanley. Dabei erhielten Morgan
Stanleys Aktionäre für zwei Morgan Stanley gehaltene Stammaktien jeweils eine DFS
Stammaktie. Die Aktionäre erhielten für Beträge, die geringer als eine ganze DFS
Aktie waren, einen Ausgleichsbetrag in Geld. Morgan Stanley erhielt von der
US-amerikanischen Finanzbehörde (Internal Revenue Service) einen Bescheid
dahingehend, dass vorstehende Zuteilung an Morgan Stanleys Aktionäre für diese,
unter Zugrundelegung gewöhnlicher Umstände, keine Steuerverpflichtung in
Ansehung der US-Bundeseinkommenssteuer (US federal income tax) begründe.
Das vollständige Formular 8-K vom 8. Oktober 2007 kann auf der Webseite der
United States Securities and Exchange Commission under “www.sec.gov” eingesehen
werden.
Die vorgenannten Bestätigungsvermerke (einschließlich erläuternder Anmerkungen
dazu) sind Teil von Morgan Stanleys Jahresabschlußberichte auf dem Formular 10-K
für die Geschäftsjahre mit Ende 30. November 2007 und 30. November 2006.
Die Abschlussprüfer sind beim Public Company Accounting Oversight Board (USA)
registriert.
Risikofaktoren
Informationen über die Risikofaktoren in Verbindung mit Morgan Stanley sind dem
Abschnitt "Risikofaktoren" in diesem Prospekt zu entnehmen.
Angaben zu Morgan Stanley
Geschichte und Entwicklung von Morgan Stanley
Morgan Stanley wurde ursprünglich am 1. Oktober 1981 nach dem Recht des USBundesstaates Delaware auf unbegrenzte Dauer mit Registernummer 0923632
gegründet. Die Vorgängergesellschaften gehen bis auf das Jahr 1924 zurück. Am
31. Mai 1997 schloss sich die Morgan Stanley Group, Inc. in einer Fusion unter
Gleichen mit Dean Witter Discover & Co. ("Dean Witter Discover") zusammen. Zu
diesem Zeitpunkt änderte Dean Witter Discover den Firmennamen in Morgan
Stanley, Dean Witter, Discover & Co. ("MSDWD"). Am 24. März 1998 wurde
MSDWD in Morgan Stanley Dean Witter & Co und am 20. Juni 2002 in Morgan
Stanley umbenannt.
Sitz von Morgan Stanley ist The Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801, USA, und die Hauptverwaltung befindet sich in 1585
Broadway, New York, New York 10036, USA, Telefonnummer +1 (212) 761-4000.
70
Zum Datum dieses Prospekts ist „Morgan Stanley“ der juristische und kommerzielle
Name von Morgan Stanley.
Gründungsstatut / Auf Morgan Stanley anwendbares Recht
Morgan Stanley unterliegt sowohl dem Recht der Vereinigten Staaten von Amerika
als auch dem Gesellschaftsrecht des US-Bundesstaates Delaware (Delaware General
Corporation Law, "DGCL"). Die US-Bundesgesetze haben Auswirkungen auf
zahlreiche Aspekte des Innen- und Außenverhältnisses von Gesellschaften und
befassen sich mit so unterschiedlichen Themen wie Kartellbildung,
Insolvenzverfahren, Arbeitgeber-Arbeitnehmer-Beziehungen, Veräußerung von
Wertpapieren und Besteuerung. Bestimmte Bundeswertpapiergesetze der USA
werden von der Securities and Exchange Commission (SEC) verwaltet und verbieten
grundsätzlich den Verkauf von Wertpapieren mit betrügerischen Mitteln und
verpflichten die meisten Kapitalgesellschaften, die öffentlich gehandelte Wertpapiere
begeben haben, darunter auch Morgan Stanley, der SEC und den Aktionären
regelmäßig Finanz- und andere Berichte vorzulegen.
In den USA erfolgen Unternehmensgründungen normalerweise nach dem Recht eines
der Bundesstaaten. Morgan Stanley wurde nach dem Recht des Bundesstaates
Delaware gegründet.
Mit Wirkung vom 1. Dezember 2005 wurde Morgan Stanley als „consolidated
supervised entity“ ("CSE") laut Definition der SEC zugelassen. Als solche unterliegt
Morgan Stanley einer gruppenweiten Aufsicht und Überprüfung durch die SEC und
Mindestkapitalanforderungen auf konsolidierter Basis.
Morgan Stanleys den europäischen Regelungen unterfallende Unternehmen haben die
Eigenkapital-Standards des Baseler Ausschusses für Bankenaufsicht ("Basel II") am
1. Januar 2008 umgesetzt. Morgan Stanley arbeitet mit den zuständigen
Aufsichtsbehörden weiter an der Umsetzung der CSE-Vorschriften und der Standards
von Basel II.
Jüngste Ereignisse
China Investment Corporation Ltd. Im Dezember 2007 veräusserte Morgan Stanley
aktienbezogene Rechte, welche vertragliche Ansprüche auf den Erwerb von Morgan
Stanely Aktien beinhalteten, an eine Tochtergesellschaft der China Investment
Corporation ("CIC") für circa USD 5.579 Millionen. Das Eigentum der CIC an
Morgan Stanley Stammaktien würde, im Falle einer Ausübung der vorgenannten
Ansprüche auf den Erwerb von Aktien einschließlich der höchstmöglichen Anzahl an
zu lieferenden Morgan Stanley Stammaktien, 9,9 % oder weniger aller am
30. November 2007 ausstehenden Aktien betragen. Die CIC wird ein passiver
Investor sein und keine besonderen Mitgliedschaftsrechte oder eine besondere Rolle
im Management von Morgan Stanley wahrnehmen. Ein bedeutender Anteil der
Investitionssumme wird für aufsichtsrechtliche Zwecke als Tier-1 Kapital behandelt.
Morgan Stanley Wealth Management S.V., S.A.U. Am 28. Januar 2008 gab Morgan
Stanley bekannt, dass es eine Einigung erzielt hätte im Hinblick auf den Verkauf von
71
Morgan Stanley Wealth Management S.V., S.A.U. ("MSWM"), seine in Spanien
aktive
Vermögensverwaltung.
Vorbehaltlich
üblicher
Voraussetzungen
(einschliesslich behördlicher Genehmigungen) wird ein Abschluss des Verkaufs für
die erste Hälfte des Geschäftsjahres 2008 erwartet.
Investitionen
Soweit Morgan Stanley davon Kenntnis hat, haben seit dem 30. November 2007 keine
wesentlichen Investitionen stattgefunden, und es gibt keine zukünftigen
Hauptinvestitionen, zu denen die Geschäftsleitung von Morgan Stanley sich bereits
fest verpflichtet hat.
Geschäftsüberblick
Haupttätigkeitsbereiche
Morgan Stanley ist ein weltweit operierendes Finanzdienstleistungsunternehmen, das
in allen Geschäftssegmenten – Institutional Securities, Global Wealth Management
Group und Asset Management – über bedeutende Marktpositionen verfügt. Durch
seine Tochtergesellschaften und verbundene Unternehmen bietet Morgan Stanley eine
Vielfalt von Produkten und Dienstleistungen für eine breite und diversifizierte Gruppe
von Klienten und Kunden an (einschliesslich Gesellschaften, Regierungen,
Finanzinstitute und Einzelpersonen).
Es folgt ein Überblick über die Tätigkeiten der einzelnen Geschäftssegmente:
Institutional Securities umfasst die Bereiche Kapitalaufnahme; Finanzberatung,
einschließlich Beratung in Bezug auf Fusionen und Übernahmen, Restrukturierungen,
Immobilien- und Projektfinanzierungen; Unternehmenskredite; Verkauf, Handel,
Finanzierung und Market Making in Zusammenhang mit Aktien sowie
festverzinslichen Wertpapieren und verwandten Produkten, einschließlich Devisen
und Rohstoffe; Analyse der Leitindizes und Risikomanagement-Analyse; Research
und Investmenttätigkeit.
Global Wealth Management Group liefert Broker- und Anlageberatungsleistungen für
verschiedene Investmentalternativen; Finanz- und Vermögensplanung; Renten- und
andere Versicherungsprodukte; Darlehen und andere Kreditprodukte; CashManagement-Dienstleistungen; Altersvorsorge und Treuhandtätigkeit.
Asset Management beinhaltet weltweite Vermögensverwaltungsprodukte und
-dienstleistungen in Aktien, festverzinslichen Wertpapieren und alternativen
Anlageformen, wie Hedgefonds, Dachfonds und das Remboursgeschäft, was
Immobilien, Private Equity und Infrastruktur umfasst, die institutionellen Anlegern
und Privatkunden über eigene und externe Einzelhandelsvertriebswege, Vermittler
und Morgan Stanleys institutionellen Vertriebsweg angeboten werden. Das Segment
Asset Management nimmt außerdem Investmenttätigkeiten wahr.
72
Eingestellte Geschäftsaktivitäten
Discover. Am 30. Juni 2007 hat Morgan Stanley die Ausgliederung von DFS
abgeschlossen. Die Ergebnisse von DFS werden als eingestellte Geschäftsaktivitäten
in allen Zeiträumen dargestellt.
Quilter Holding Ltd. Die Ergebnisse der Quilter Holding Ltd. ("Quilter") werden
wegen ihres Verkaufs am 28. Februar 2007 für alle Zeiträume als eingestellte
Geschäftsaktivität dargestellt. Die Ergebnisse von Quilter waren Teil des Global
Wealth Management.
Aircraft Leasing. Die Ergebnisse des Morgan Stanleys Flugzeug Leasing
Geschäftsbereichs (aircraft leasing business) werden wegen des Verkaufs am
24. März 2006 für alle Zeiträume als eingestellte Geschäftsaktivität dargestellt. Die
Ergebnisse des Flugzeug Leasing Geschäftsbereichs waren Teil der Institutional
Securities.
Wichtigste Märkte
Morgan Stanley leitet das Geschäft von seinem Hauptsitz in New York City, den
regionalen Niederlassungen und Filialen in den USA und seinen
Hauptniederlassungen in London, Tokio, Hongkong und anderen Finanzzentren der
Welt.
Wettbewerb
Alle Aspekte der Geschäftstätigkeit von Morgan Stanley sind äußerst
wettbewerbsintensiv, und Morgan Stanley geht davon aus, dass dies so bleiben wird.
In allen Aspekten seiner Geschäftssegmente steht Morgan Stanley in den USA und
weltweit im Wettbewerb um Kunden, Marktanteile und qualifizierte Mitarbeiter. Die
Wettbewerbsposition von Morgan Stanley ist von seiner Reputation, der Qualität
seiner Produkte, Dienstleistungen und Beratung abhängig. Morgan Stanleys
Fähigkeit, seine Wettbewerbsposition aufrecht zu erhalten oder zu verbessern, hängt
auch maßgeblich von seiner Fähigkeit ab, weiterhin qualifizierte Mitarbeiter zu
gewinnen und zu halten und gleichzeitig die Personal- und andere Kosten
einzudämmen. Zu den Wettbewerbern gehören Handelsbanken, Versicherungsunternehmen, Fondsvertriebsgesellschaften, Hedgefonds, Energieunternehmen und
andere Unternehmen, die in den USA und über das Internet Finanzdienstleistungen
anbieten.
Institutional Securities und Global Wealth Management Group: Die
Wettbewerbsposition von Morgan Stanley wird von den Faktoren Innovation,
Ausführungskapazität und relativer Preis bestimmt. Morgan Stanley steht in den USA
und weltweit in direktem Wettbewerb mit anderen Wertpapierhäusern,
Finanzdienstleistungsunternehmen und Broker-Dealern sowie regional oder
produktbezogen mit anderen Anbietern.
73
Die Fähigkeit von Morgan Stanley, Kapital zu günstigen Konditionen aufzunehmen
(was im Allgemeinen von den Bonitätseinstufungen abhängig ist) und auf effiziente
Weise bereitzustellen – was vor allem für die kapitalintensiven Emissionsübernahme-,
Verkaufs-, Handels-, Finanzierungs- und Market Making-Tätigkeiten gilt – wirkt sich
ebenfalls auf die Wettbewerbsposition aus. Unternehmenskunden wünschen in
Zusammenhang mit bestimmten Investmentbankgeschäften weiterhin Darlehen oder
Kreditzusagen von Morgan Stanley.
Im Laufe der Zeit fand in bestimmten Sektoren der Finanzdienstleistungsbranche eine
Konzentration statt, da Finanzinstitute, die ein breites Spektrum von
Finanzdienstleistungen angeboten haben, von anderen Unternehmen übernommen
oder mit ihnen fusioniert wurden. Diese Konvergenz könnte dazu führen, dass die
Wettbewerber von Morgan Stanley mehr Kapital und andere Ressourcen erlangen,
wie beispielsweise eine breitere Produkt- und Dienstleistungspalette und geografische
Vielfalt. Der Wettbewerb könnte sich sogar intensivieren, wenn Morgan Stanley
weiter mit Finanzinstituten im Wettbewerb steht, die möglicherweise größer oder mit
mehr Kapital ausgestattet sind oder in bestimmten Bereichen über eine stärkere lokale
Präsenz und längere geschäftliche Erfahrungen verfügen. Viele dieser Unternehmen
haben mehr Kapital als Morgan Stanley und sind in der Lage, ein breites Spektrum
von Produkten anzubieten, die ihre Wettbewerbsposition stärken und einen Preisdruck
auf die Geschäftsbereiche von Morgan Stanley ausüben könnten. Die sich
ergänzenden Trends in der Finanzdienstleistungsbranche – Konsolidierung und
Globalisierung – sind unter anderem mit technologischen, Risikomanagement-,
aufsichtsrechtlichen und anderen infrastrukturellen Herausforderungen verbunden, die
Morgan Stanley nur bei einer effektiven Ressourcenaufteilung konkurrenzfähig
meistern kann.
Einige Geschäftsbereiche von Morgan Stanley sind in den letzten Jahren durch einen
intensiven Preiswettbewerb gekennzeichnet. Insbesondere die Möglichkeit,
Transaktionen elektronisch bei Börsen und andere alternative Handelsmärkte
abzuwickeln, hat den Druck auf die Handelsprovisionen erhöht. Der Trend zur
Nutzung direkten Zugangs zu automatisierten, elektronischen Aktienmärkten wird
voraussichtlich anhalten. Möglicherweise wird der Wettbewerbsdruck auf Morgan
Stanley künftig in diesen und anderen Bereichen zunehmen, wenn einige
Wettbewerber versuchen, Marktanteile durch niedrigere Preise zu erlangen.
Asset Management: Der Wettbewerb in der Vermögensverwaltungsbranche wird
durch mehrere Faktoren beeinflusst, wie der Reputation von Morgan Stanley, seinen
Anlagezielen, der Kompetenz der Anlagespezialisten, der Wertentwicklung der
Investmentprodukte gegenüber der Vergleichsgruppe und einem angemessenen
Benchmark-Index,
Werbeund
Verkaufsförderungsmaßnahmen,
der
Gebührenstruktur, der Wirksam- und Verfügbarkeit von Vertriebswegen sowie der
Art und Qualität der angebotenen Produkte. Die alternativen Anlageprodukte von
Morgan Stanley wie Private Equity Fonds, Immobilien und Hedgefonds stehen im
Wettbewerb zu ähnlichen Produkten, welche sowohl von alternativen wie von
traditionellen Vermögensverwaltern angeboten werden.
74
Organisationsstruktur
Morgan Stanley ist eine Holdinggesellschaft, die durch ihre Tochtergesellschaften und
verbundenen Unternehmen ihre Produkte und Dienstleistungen einer großen und breit
gefächerten Mandanten- und Kundengruppe anbietet, darunter Unternehmen,
Regierungen, Finanzinstituten und Einzelpersonen.
Die US-amerikanischen und internationalen Tochtergesellschaften von Morgan
Stanley umfassen Morgan Stanley & Co. Incorporated, Morgan Stanley & Co.
International plc (ehemals "Morgan Stanley & Co. International Limited"), Morgan
Stanley Japan Securities Co., Ltd. (ehemals "Morgan Stanley Japan Limited") und
Morgan Stanley Investment Advisors Inc. Am 1. April 2007 wurde Morgan Stanley
DW Inc. mit Morgan Stanley & Co. Incorporated zusammengeschlossen. Nach
Abschluss der Fusion wurde das übernehmende Unternehmen, Morgan Stanley & Co.
Incorporated, Morgan Stanleys wichtigster Broker-Dealer in den USA.
Trendinformationen
Seit dem 30. Januar 2008 hat es keine wesentlichen negativen Veränderungen in den
Aussichten von Morgan Stanley und seinen konsolidierten Tochtergesellschaften
gegeben.
Geschäftsleitung
Directors
Nachfolgend sind die Directors von Morgan Stanley zum Zeitpunkt des vorliegenden
Prospekts, ihre Funktion innerhalb von Morgan Stanley und ihre externe
Haupttätigkeit angegeben. Ihre Geschäftsadresse lautet jeweils 1585 Broadway, New
York, New York 10036, USA.
Name
Funktion innerhalb von
Morgan Stanley
John J. Mack
Vorsitzender des Board of John J. Mack übt außerhalb
Directors
und
Chief von Morgan Stanley keine
Executive Officer
anderen
relevanten
Management-Funktionen aus.
75
Externe Haupttätigkeit
Roy J. Bostock
Director
Vorsitzender der Partnership
for a Drug-Free America.
Mitglied des Board of
Directors der Northwest
Airlines Corporation und
Yahoo! Inc.
Erskine B. Bowles
Director
Präsident der University of
North Carolina und Präsident
der North Carolina Mutual
Life Insurance Company.
Director der General Motors
Corporation und Cousins
Properties Incorporated
Howard J. Davies
Director
Director der London School
of Economics and Political
Science,
Director
der
Paternoster plc.
C. Robert Kidder
Director
Vorsitzender und CEO von
3 Stone
Advisors
LLC.
Director der Schering-Plough
Corporation
Donald T. Nicolaisen
Director
Director
der
MGIC
Investment Corporation, von
Verizon
Communications
Inc. und Zurich Financial
Services
Charles H. Noski
Director
Director
der
Microsoft
Corporation und Air Products
and Chemicals Inc.
Hutham S. Olayan
Director
Präsident
und
Chief
Executive Officer der Olayan
America Corporation
Charles E. Phillips, Jr.
Director
Präsident und Director der
Oracle Corporation und
Director der Viacom, Inc.
76
O. Griffith Sexton
Director
Advisory
Director
von
Morgan Stanley, Adjunct
Professor für Finanzwesen an
der
Columbia
Business
School; Gastlektor an der
Princeton
University,
Director von Investor AB
und Hamilton Lane
Laura D. Tyson
Director
Professor, Walter A. Haas
School
of
Business,
University of California in
Berkeley.
Director
der
Eastman Kodak Company
und AT&T Inc. und 24/7
Customer Inc.
Klaus Zumwinkel
Director
Vorstandsvorsitzender
der
Deutsche Post AG, Mitglied
des
Aufsichtsrates
der
Deutsche Lufthansa AG,
Vorsitzender
des
Aufsichtsrates der Deutsche
Telekom AG, Mitglied des
Aufsichtsrates der Karstadt
Quelle AG und Vorsitzender
des
Aufsichtsrates
der
Deutsche Postbank AG
Geschäftsvorfälle mit nahe stehenden Unternehmen und Personen
Im Geschäftsjahr 2007 vergaben Morgan Stanleys Tochtergesellschaften im Rahmen
ihrer gewöhnlichen Geschäftstätigkeit Kredite an bestimmte Directors, leitende
Angestellte und Mitarbeiter von Morgan Stanley sowie deren unmittelbare
Angehörige. Diese Kreditgewährungen erfolgten in Zusammenhang mit
Effektenkrediten, Hypothekendarlehen, Kreditkartentransaktionen, revolvierenden
Kreditlinien und anderen Kreditvergaben durch die Tochtergesellschaften von
Morgan Stanley. Die Kredite wurden im Wesentlichen zu den selben Konditionen,
einschließlich Zinssätzen und Besicherungsanforderungen, ausgereicht, wie sie zu
diesem Zeitpunkt für vergleichbare Geschäftsvorfälle mit anderen Personen üblich
waren. Die gewährten Kredite waren mit keinem größeren Risiko als dem normalen
Einbringlichkeitsrisiko verbunden oder durch andere nachteilige Merkmale
gekennzeichnet. Directors, leitende Angestellte und Mitarbeiter sowie deren
unmittelbare Angehörige, die Wertpapiere, Derivate, Finanzprodukte und
Finanzdienstleistungen kaufen möchten, können dies über die Tochtergesellschaften
von Morgan Stanley tun. Diese Tochtergesellschaften können ihnen Ermäßigungen
auf die normalen Provisionssätze oder Gebühren anbieten. Außerdem kaufen oder
verkaufen sie von Zeit zu Zeit im gewöhnlichen Geschäftsverlauf als Eigenhändler
77
Wertpapiere und Derivate, an denen Directors, leitende Angestellte und Mitarbeiter
von Morgan Stanley und deren unmittelbare Angehörige beteiligt sind. Diese Käufe
und Verkäufe können zu einem ermäßigten Aufschlag bzw. Abschlag des Händlers
getätigt werden, der sonst bei nicht verbundenen Dritten erhoben wird. Bestimmte
Mitarbeiter, darunter auch die Mitglieder der Geschäftsleitung von Morgan Stanley,
können zu den gleichen Konditionen wie andere Anleger in Investmentfonds anlegen,
die von Morgan Stanley hauptsächlich für Kundenanlagen aufgelegt und verwaltet
werden, wobei Morgan Stanley bei Mitarbeitern auf bestimmte Gebühren und Kosten
verzichten oder diese ermäßigen kann. Außerdem steht es Morgan Stanley frei, in
Übereinstimmung mit den jeweils gültigen Aktienrückkaufgenehmigungen
Stammaktien von Morgan Stanley auf dem freien Markt oder in nicht öffentlich
verhandelten Transaktionen zurückzukaufen oder zu erwerben. Dabei kann es sich
auch um Geschäftsvorfälle mit Directors, leitenden Angestellten und Mitarbeitern
handeln. Diese Transaktionen werden im Rahmen der gewöhnlichen
Geschäftstätigkeit zu den jeweils gültigen Marktpreisen durchgeführt.
Im Geschäftsjahr 2007 führte Morgan Stanley im gewöhnlichen Geschäftsverlauf
Transaktionen mit State Street und Barclays und bestimmten mit ihnen verbundenen
Unternehmen durch. State Street und Barclays waren am 23. Februar 2007 jeweils
wirtschaftliche Eigentümer von mehr als 5 % der im Umlauf befindlichen
Stammaktien von Morgan Stanley. Diese Geschäftsvorfälle fanden im Wesentlichen
zu den gleichen Konditionen statt, wie sie zu diesem Zeitpunkt bei vergleichbaren
Geschäftsvorfällen mit unabhängigen Dritten üblich waren. Morgan Stanley führt
auch Transaktionen, einschließlich Finanzdienstleistungen (z. B. Handel mit
Wertpapieren, Rohstoffen oder Derivaten) mit bzw. für Unternehmen durch, in denen
seine Directors und deren unmittelbare Angehörige eine Führungsposition bekleiden,
und erbringt für solche Unternehmen Dienstleistungen in den Bereichen
Investmentbanking, Finanzberatung, Maklergeschäfte, Anlageverwaltung u. a. und
kann diesen Unternehmen Kredite gewähren oder Kreditzusagen machen. Die
Durchführung von Transaktionen, Erbringung von Dienstleistungen und Gewährung
von Krediten und Kreditzusagen erfolgen im Rahmen der gewöhnlichen
Geschäftstätigkeit im Wesentlichen zu den selben Konditionen, einschließlich
Zinssätzen und Besicherungsanforderungen, wie sie zu diesem Zeitpunkt für
vergleichbare Geschäftsvorfälle mit anderen Personen üblich sind. Die Kredite sind
mit keinem größeren Risiko als dem normalen Einbringlichkeitsrisiko verbunden oder
durch andere nachteilige Merkmale gekennzeichnet.
Es gibt keine vorhandenen oder potenziellen Interessenkonflikte zwischen den
Pflichten, die Morgan Stanleys Directors oder Mitglieder der Hauptausschüsse
gegenüber dem Unternehmen haben, und den privaten Interessen und/oder anderen
externen Pflichten dieser Personen.
Arbeitsweise des Board of Directors
Morgan Stanley erfüllt seiner Ansicht nach alle für das Unternehmen geltenden USGesetze zur Corporate Governance.
78
Das Board of Directors kommt regelmäßig zusammen; zwischen den Sitzungen
erhalten die Directors Informationen über die Tätigkeit der Ausschüsse und die
geschäftliche Entwicklung von Morgan Stanley. Alle Directors haben vollständigen
und zeitnahen Zugang zu allen relevanten Informationen und können bei Bedarf
unabhängigen fachlichen Rat einholen.
Lead Director ist C. Robert Kidder.
Das Board of Directors hat nachstehende ständige Ausschüsse gebildet. Sämtliche
Mitglieder der Ausschüsse sind Mitglieder der Geschäftsleitung. Insofern wird
hinsichtlich ihrer externen Haupttätigkeit bzw. Haupttätigkeiten auf die Angaben auf
Seite 73 f. dieses Prospektes verwiesen.
Ausschuss
Derzeitige Mitglieder
Hauptaufgaben
Audit Committee
Charles H. Noski
(Vorsitzender)
Überwachung der Integrität des
Konzernabschlusses von Morgan
Stanley,
des
internen
Kontrollsystems,
des
Risikomanagements
und
der
Einhaltung
gesetzlicher
und
aufsichtsrechtlicher Vorschriften.
Howard J. Davies
Charles E. Phillips, Jr.
Auswahl, Festlegung
Beurteilung und
Ersetzung
des
Abschlussprüfers
Vorabgenehmigung
und
zulässigen
Leistungen.
der Vergütung,
gegebenenfalls
unabhängigen
sowie
der Prüfungsprüfungsfernen
Überwachung der Qualifikationen
und
Unabhängigkeit
des
unabhängigen Abschlussprüfers und
der Leistung der internen und
unabhängigen Abschlussprüfer von
Morgan Stanley.
Nach Überprüfung Abgabe einer
Empfehlung an das Board, den
geprüften
Konzernabschluss
anzunehmen und in Morgan Stanleys
Geschäftsbericht auf Formular 10-K
aufzunehmen.
79
Compensation,
Management,
Development and
Succession
Committee
C. Robert Kidder
(Vorsitzender)
Erskine B. Bowles
Jährliche
Überprüfung
und
Genehmigung der für die Vergütung
des
Vorsitzenden
und
CEO
maßgeblichen Vorgaben und Ziele
und Beurteilung seiner Leistung
anhand dieser Vorgaben und Ziele.
Festlegung der Vergütung der
Führungskräfte von Morgan Stanley
und anderer leitender Angestellte,
wie dies für angemessen erachtet
wird.
Verwaltung der aktienbasierten
Vergütungsprogramme von Morgan
Stanley.
Aufsicht über die Programme für
Managemententwicklung
und
Nachfolgeplanung.
Nominating and
Governance
Committee
Laura D. Tyson
(Vorsitzende)
Identifizierung und Empfehlung von
Kandidaten für die Wahl in das
Board of Directors.
Roy J. Bostock
Festlegung von Verfahren für seine
Aufsicht über die Beurteilung des
Board.
Hutham S. Olayan
Klaus Zumwinkel
Empfehlung der Vergütung und
Leistungen für Directors.
Jährliche Überprüfung der Corporate
Governance-Richtlinien von Morgan
Stanley.
Mitarbeiter
Zum 30. November 2007 beschäftigte Morgan Stanley weltweit 48.256 Mitarbeiter.
Hauptaktionäre
Nach den für Morgan Stanley maßgeblichen SEC-Vorschriften beträgt der Grenzwert
für die Offenlegungspflicht von Beteiligungen an börsennotierten Unternehmen 5 %
des Grundkapitals. Deshalb sind nur diese Angaben öffentlich verfügbar.
80
Morgan Stanley hat keine Informationen über Aktionäre mit einer Beteiligung
zwischen 2 % und 5 %. Gemäß den jüngsten bei der SEC eingereichten Unterlagen
vom 23. Februar 2007 hielten die folgenden Aktionäre mehr als 5 % der Stammaktien
von Morgan Stanley:
Im wirtschaftlichem Eigentum
befindliche Stammaktien
Name und Anschrift
Stückzahl
Prozent(1)
State Street Bank and Trust Company(2)
225 Franklin Street, Boston, MA 02110, USA
127.887.564
12,01 %
Barclays
Global
Investors,
N.A.,
und andere berichtende Unternehmen
(Barclays)(3)
45 Fremont Street, San Francisco, CA
94105, USA
64.442.639
6,05 %
(1)
Berechnung der Prozentsätze auf Basis der am 9. Februar 2007 im Umlauf
befindlichen Stammaktien und dem in Schedule 13G Information Statements
angegebenen Stammaktienbesitz, der in den Fußnoten 2-3 unten näher ausgeführt
wird. Laut diesen Information Statements waren State Street und Barclays zum
31. Dezember 2006 wirtschaftliche Eigentümer von 12,1 % bzw. 6,15 % der
Stammaktien von Morgan Stanley.
(2)
Auf Grundlage des am 12. Februar 2007 von State Street eingereichten Schedule 13G
Information Statement, wobei das Unternehmen verschiedene treuhänderische
Funktionen ausübte. Gemäß den Angaben in Schedule 13G hatte State Street das
alleinige Stimmrecht an 47.230.411 Aktien, ein gemeinsames Stimmrecht an
80.657.153 Aktien und ein gemeinsames Verfügungsrecht an 127.887.564 Aktien; die
Anteile, die State Street im Namen des Trusts und des vom Unternehmen finanzierten
aktienbasierten Vergütungsprogramms hielt, beliefen sich am 31. Dezember 2006 auf
7,6 % des Grundkapitals; und State Street war nach eigenen Angaben bei allen hierin
angegebenen Aktien nicht wirtschaftlicher Eigentümer.
(3)
Auf Grundlage des am 23. Januar 2007 von Barclays Global Investors, N.A., Barclays
Global Fund Advisors, Barclays Global Investors, Ltd, Barclays Global Investors
Japan Trust and Banking Company Limited und Barclays Global Investors Japan
Limited eingereichten Schedule 13G Information Statement (mit Datum vom
31. Januar 2007). In Schedule 13G bestätigten die berichtenden Unternehmen nicht
die Existenz eines Konzerns. Schedule 13G zufolge hatten die berichtenden
Unternehmen insgesamt das alleinige Stimm- und Verfügungsrecht an 56.284.434
Aktien und das alleinige Verfügungsrecht an 64.442.639 Aktien und besaßen für
keine Aktien ein gemeinsames Recht.
81
Folglich gibt es kein Unternehmen, das Morgan Stanley direkt oder indirekt besitzt
oder beherrscht.
Grundkapital
Zum 30. November 2007 umfasste das genehmigte Grundkapital von Morgan Stanley
3.500.000.000 Stammaktien im Nennwert von USD 0,01 und 30.000.000
Vorzugsaktien im Nennwert von USD 0,01.
Das ausgegebene, nicht nachschusspflichtige und voll eingezahlte Grundkapital von
Morgan Stanley betrug am 30. November 2007 1.211.701.552 Stammaktien im
Nennwert von USD 0,01.
Gründungsurkunde
Ziele und Geschäftsgegenstand von Morgan Stanley sind auf Seite 1 der
Gründungsurkunde dargelegt und ermöglichen dem Unternehmen, alle gesetzlich
zulässigen Handlungen und Tätigkeiten auszuführen, zu denen nach dem DGCL
gegründete Gesellschaften berechtigt sind.
Ausgewählte Finanzinformationen
In diesen Abschnitt werden in Form eines Verweises die historischen Finanzdaten
aufgenommen, die im aktuellen Bericht auf Formular 10-K vom 28. Januar 2008 für
die Geschäftsjahre zum 30. November 2007 und 30. November 2006 enthalten sind,
einschließlich der Konzernaufstellung über die Vermögens- und Finanzlage, der
Konzern-Gewinn- und -Verlustrechnung, der Konzern-Kapitalflussrechnung und des
Anhangs zum Konzernabschluss.
1.
"Bilanz" (Consolidated Statements of Financial Condition):
Seiten 101 f. des Jahresberichts (Annual Report, Form 10-K)
2.
"Gewinn und Verlustrechnung" (Consolidated Statements of Income):
Seite 103 des Jahresberichts (Annual Report, Form 10-K)
3.
"Kapitalflussrechnung" (Consolidated Statement of Cash Flows):
4.
"Rechnungslegungsstrategien und erläuternde Anmerkungen" (Notes to the
Consolidated Financial Statements):
Seiten 107 ff. des Jahresberichts (Annual Report, Form 10-K)
5.
Prüfungsbericht (Report of the Independent Registered Public Accounting Firm):
Der Geschäftsbericht auf Formular 10-K für das Geschäftsjahr zum 30. November
2007 wurde am 29. Januar 2008 bei der SEC eingereicht.
82
Seit dem 30. November 2007 gab es keine wesentlichen Veränderungen in der
Finanzlage oder der Handelsposition von Morgan Stanley und seinen konsolidierten
Tochtergesellschaften.
Prüfung historischer Finanzdaten
vom 1. Dezember 2006 bis 30. November 2007 waren Deloitte & Touche LLP,
Two World Financial Center, New York, New York 10281, USA, eine unabhängige
registrierte Wirtschaftsprüfungsgesellschaft (die "Abschlussprüfer").
Am 12. Februar 2007 (in Verbindung mit der Anmerkung 1 - Eingestellte
Geschäftsaktivitäten-Discover - und der Anmerkung 30 des Berichtes 8-K vom
25. Oktober 2007 – wie nachstehend erläutert) haben die Abschlußprüfer im Hinblick
auf die nachstehenden Punkte (i), (ii) und (iii) einen uneingeschränkten
Bestätigungsvermerk erteilt:
(i)
endeten,
(ii)
(iii)
die Einschätzung des Vorstandes betreffend die Effektivität der
internen Kontrollmechanismen bezüglich des Rechnungswesens.
Am 28. Januar 2008 haben die Abschlussprüfer im Hinblick auf die nachstehenden
Punkte (i), (ii) und (iii) einen uneingeschränkten Bestätigungsvermerk erteilt:
(i)
endeten,
(ii)
(iii)
den Vorstandsbericht über die Effektivität der
Kontrollmechanismen bezüglich des Rechnungswesens.
internen
Morgan Stanley hat den vorgenannten Bericht auf Formular 8-K vom 25. Oktober
2007 hauptsächlich deshalb eingereicht, um bestimmte Informationen in den
83
historischen konsolidierten Bilanzen zu aktualisieren, welche auch im Hinblick auf
vorgenannte Anmerkungen 1 und 30 einer Aktualisierung aus folgenden Gründen
bedurften:
Am 30. Juni 2007 hat Morgan Stanley die Abspaltung (spin-off) der Discover
Financial Services ("DFS") abgeschlossen. Morgan Stanley verteilte alle
ausgegebenen Stammaktien der DFS (Nennbetrag von jeweils USD 0,01) an am
18. Juni 2007 eingetragene Aktionäre von Morgan Stanley. Dabei erhielten Morgan
Stanleys Aktionäre für zwei Morgan Stanley gehaltene Stammaktien jeweils eine DFS
Stammaktie. Die Aktionäre erhielten für Beträge, die geringer als eine ganze DFS
Aktie waren, einen Ausgleichsbetrag in Geld. Morgan Stanley erhielt von der
US-amerikanischen Finanzbehörde (Internal Revenue Service) einen Bescheid
dahingehend, dass vorstehende Zuteilung an Morgan Stanleys Aktionäre für diese,
unter Zugrundelegung gewöhnlicher Umstände, keine Steuerverpflichtung in
Ansehung der US-Bundeseinkommenssteuer (US federal income tax) begründe.
Das vollständige Formular 8-K vom 8. Oktober 2007 kann auf der Webseite der
United States Securities and Exchange Commission under “www.sec.gov” eingesehen
werden.
Die vorgenannten Bestätigungsvermerke (einschließlich erläuternder Anmerkungen
dazu) sind Teil von Morgan Stanleys Jahresabschlußberichte auf dem Formular 10-K
für die Geschäftsjahre mit Ende 30. November 2007 und 30. November 2006.
Gerichts- und Schiedsgerichtsverfahren
Neben den nachfolgend beschriebenen Sachverhalten war Morgan Stanley im
Rahmen seiner gewöhnlichen Geschäftstätigkeit gelegentlich beklagte Partei in
verschiedenen Rechtsstreitigkeiten, wie Schiedsverfahren, Sammelklagen und
anderen Prozessen, die sich in Zusammenhang mit seiner Tätigkeit als weltweites,
diversifiziertes Finanzdienstleistungsunternehmen ergeben. Einige der tatsächlichen
oder angedrohten Klagen betreffen wesentliche kompensatorische und/oder
Strafschadensersatzansprüche oder Schadenersatzforderungen in nicht bezifferter
Höhe. In einigen Fällen sind die Emittenten, die ansonsten die Hauptbeklagte in
diesen Verfahren wären, zahlungsunfähig oder befinden sich in finanziellen
Schwierigkeiten.
Darüber hinaus ist Morgan Stanley gelegentlich Gegenstand von weiteren
Untersuchungen, Ermittlungen und Verfahren (sowohl offiziell als auch inoffiziell)
durch Regierungs- und Selbstregulierungsorgane, die Morgan Stanleys
Geschäftstätigkeit, darunter das Rechnungswesen und betriebliche Angelegenheiten,
betreffen. Einige davon können nachteilige Urteile, Vergleiche, Strafen, Bußgelder,
einstweilige Verfügungen oder sonstige Rechtsbehelfe zur Folge haben. Die Anzahl
solcher Untersuchungen, Ermittlungen und Verfahren hat in den letzten Jahren bei
vielen Unternehmen der Finanzdienstleistungsbranche, so auch bei Morgan Stanley,
zugenommen.
84
Morgan Stanley bestreitet die Haftpflicht und/oder den Betrag des Schadenersatzes,
wie im jeweils anhängigen Fall angemessen. Da es naturgemäß schwierig ist, den
Ausgang solcher Verfahren vorherzusagen, insbesondere in Fällen, in denen die
Kläger bedeutende oder unbestimmte Schadenersatzforderungen stellen oder die
Ermittlungen und Verfahren noch in der Anfangsphase sind, kann Morgan Stanley
nicht mit Gewissheit vorhersagen, wie hoch (wenn überhaupt) der Verlust oder die
Verlustspanne in Verbindung mit diesen Verfahren sein wird, wie oder ob sie
entschieden werden, wann dies letztendlich der Fall sein wird oder wie ein etwaiger
Vergleich, eine etwaige Strafe, ein etwaiges Bußgeld oder ein anderer Rechtsbehelf
schließlich aussehen könnte. Vorbehaltlich der vorstehenden Ausführungen und mit
Ausnahme des nachfolgend beschriebenen Coleman-Rechtsstreits geht Morgan
Stanley nach seinem derzeitigen Kenntnisstand und nach Rücksprache mit seinem
Anwalt davon aus, dass der Ausgang dieser anhängigen Verfahren keine wesentlichen
nachteiligen Auswirkungen auf die konsolidierte Finanz- und Vermögenslage von
Morgan Stanley haben wird, wobei der Ausgang dieser Verfahren jedoch wesentlich
für das betriebliche Ergebnis und den Kapitalfluss von Morgan Stanley in einer
bestimmten künftigen Periode sein könnte, was u. a. vom Umsatz- und Ertragsniveau
in dieser Periode abhängig sein wird.
Coleman-Rechtsstreit
Im Mai 2003 reichte Coleman (Parent) Holdings Inc. ("CPH") beim Circuit Court of
the Fifteenth Judicial Circuit for Palm Beach County, Florida, eine Klage gegen
Morgan Stanley ein. Gegenstand der Klage ist die Fusion zwischen The Coleman
Company, Inc. und Sunbeam, Inc. ("Sunbeam") von 1998. In der geänderten Fassung
der Klageschrift heißt es, dass CPH auf der Grundlage bestimmter finanzieller
Falschdarstellungen veranlasst wurde, der Transaktion mit Sunbeam zuzustimmen,
und es wurden Ansprüche gegen Morgan Stanley wegen Beihilfe zu Betrug,
unrechtmäßigem kollusiven Zusammenwirken und Strafschadenersatz geltend
gemacht. Kurz vor der Hauptverhandlung, die im April 2005 begann, gab das
erstinstanzliche Gericht teilweise einem Antrag auf Verhängung eines
Versäumnisurteils gegen Morgan Stanley statt und ordnete an, dass Teile der
Klageschrift von CPH, einschließlich der Passagen, in der seine
Hauptanschuldigungen gegen Morgan Stanley dargelegt werden, der Jury vorgelesen
werden und für alle Zwecke des Prozesses als gültig zu betrachten sind. Im Mai 2005
fällte die Jury ein Urteil zugunsten von CPH und sprach CPH USD 604 Mio.
kompensatorischen Schadenersatz und USD 850 Mio. Strafschadenersatz zu. Im Juni
2005 erließ das erstinstanzliche Gericht ein Endurteil zugunsten von CPH in Höhe
von USD 1.578 Mio. In diesem Betrag waren die bis zur Urteilsverkündigung
angefallenen Zinsen enthalten, nicht jedoch bestimmte Zahlungen, die CPH zur
Abfindung ähnlicher Ansprüche gegen andere Parteien erhalten hat.
Im März 2007 gab das District Court of Appeal for the Fourth District of Florida eine
Urteilsbegründung ab, in der es das erstinstanzliche Urteil in Bezug auf die
Zubilligung von kompensatorischen und Strafschadenersatz aufhob und die
Angelegenheit an das untere Gericht mit der Anordnung zurückverwies, ein Urteil
zugunsten von Morgan Stanley einzutragen. Im Juni 2007 wurde die
Urteilsbegründung endgültig, nachdem der Court of Appeal die Anträge von CPH auf
eine erneute Anhörung, eine en banc Anhörung und auf Zulassung bestimmter Fragen
85
zur Überprüfung durch den Florida Supreme Court (dem "Supreme Court")
abgelehnt hat. Am 12. Dezember 2007 hat der Supreme Court das Begehren von
CPH, eine Überprüfung der Entscheidung des Court of Appeal zuzulassen abgelehnt,
was ein Urteil zugunsten Morgan Stanleys bedeutet.
Rechtsstreitigkeiten wegen Konsortialprovisionen
Ab Ende 1998 wurden beim U.S. District Court for the Southern District of New York
("SDNY") angebliche Sammelklagen, die später in der Rechtssache In re Public
Offering Fee Antitrust Litigation (die "Käuferklage ") und in der Rechtssache In re
Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation (die
"Emittentenklage") zusammengefasst wurden, gegen Morgan Stanley und zahlreiche
andere Konsortialmitglieder erhoben. In den konsolidierten Verfahren – das eine im
Namen der Käufer und das andere im Namen der Emittenten bestimmter Aktien in
öffentlichen Erstemissionen ("IPOs") – wird den Beklagten vorgeworfen, durch
Festsetzung der Konsortialprovision auf 7 % in Börsengängen von US-Gesellschaften
mit einem Gesamtemissionsvolumen zwischen USD 20 bis 80 Mio. gegen Section 1
des Sherman Act verstoßen zu haben. Die Klage umfasst Schadenersatzforderungen
in dreifacher Höhe (treble damages) und Unterlassungsansprüche. Die
Schadenersatzforderungen der Kläger der Käuferklage wurden abgewiesen, die
Unterlassungsansprüche bestehen jedoch weiterhin. Die Schadenersatz- und
Unterlassungsansprüche der Kläger der Emittentenklage werden weiter
aufrechterhalten. Die Kläger beider Klagen haben eine Zertifizierung als
Klägergruppe (class certification) in die Wege geleitet, gegen die die Beklagten im
Mai 2005 Einspruch eingelegt haben. Im Oktober 2005 stellten die Kläger einen
Antrag beim SDNY auf "Summary Judgment" (Urteil im abgekürzten Verfahren),
gegen den die Beklagten Einspruch einlegten. Im Mai 2006 stellten die Kläger gemäß
Rule 23(f) der Federal Rules of Civil Procedure einen Antrag auf Zulassung einer
Revision gegen die Ablehnung der Zertifizierung als Klägergruppe.
Im September 2007 hob das U.S. Court of Appeal in der Rechtssache In re Issuer
Plaintiff Initial Public Offering Fee Antitrust Litigation die Ablehnung der
Klassifizierung der Klägergruppe durch das U.S. District Court for the Southern
District of New York auf und verwies den Fall zur weiteren Erwägung der „class
certification“ an das unterinstanzliche Gericht zurück. Daraufhin stellten die Kläger
bei dem unterinstanzlichen Gericht am 17. Oktober 2007 einen Antrag auf
Zertifizierung als Klägergruppe.
Verfahren in Verbindung mit der Wertpapierzuteilung in IPOs
Ab März 2001 wurde beim SDNY angeblich im Namen von Käufern, die in
Börsengängen oder auf dem Sekundärmarkt Aktien erworben hatten, eine Reihe
mutmaßlicher Sammelklagen gegen bestimmte Emittenten von IPO-Wertpapieren,
bestimmte einzelne leitende Angestellte dieser Emittenten, Morgan Stanley und
andere Konsortialmitglieder dieser Börsengänge eingereicht, die inzwischen in der
Rechtssache In re Initial Public Offering Securities Litigation zusammengefasst
wurden. Dabei wird behauptet, dass die Beklagten von ihren Kunden für
Aktienzuteilungen bei "Hot IPOs" verlangt hätten, eine nicht angegebene, überhöhte
Vergütung in Form von höheren Maklerprovisionen zu zahlen und nach Abschluss
86
der Börsengänge weitere Aktienkäufe ("tie in purchases") zu stufenweise steigenden
Preisniveaus zu tätigen, die über dem Ausgabepreis lagen (eine Vorgehensweise, den
die Kläger als "laddering" bezeichnen) und gegen die Bundeswertpapiergesetze,
einschließlich Sections 11 und 12(a)(2) des Securities Act 1933 ("Securities Act")
und Section 10(b) des Exchange Act verstoßen haben. In einigen Klageschriften wird
auch vorgebracht, dass laufende Kaufempfehlungen durch die Analysten der
Beklagten die Kurse, zu dem die Wertpapiere nach dem Börsengang gehandelt
wurden, auf unlautere Weise in die Höhe getrieben oder auf hohem Niveau gehalten
hätten. Im Februar 2003 wurde der gemeinsame Antrag der beklagten
Konsortialmitglieder auf Abweisung der Klage außer in Bezug auf bestimmte
Emissionen abgelehnt. Im Dezember 2006 hob der Second Circuit die vom SDNY
gewährte Zertifizierung der Klägergruppe auf und entschied, dass diese Fälle nicht für
eine Behandlung als Sammelklage in Betracht kommen.
Im August reichten die Kläger eine zweite konsolidierte geänderte
Sammelklageschrift ein, in denen die Klagepunkte angeblich in Anbetracht der vom
Berufungsgericht aufgehobenen unterinstanzlichen Entscheidung, die Fälle als
Sammelklagen zuzulassen, geändert wurden. Die Kläger beantragen erneut eine
Zertifizierung als Klägergruppe.
Im Oktober 2007 wurden zahlreiche Klagen in Prozesstandschaft vor dem
U.S. District Court des Western District of Washington gegen Morgan Stanley im
Auftrag bestimmter Emittenten von Wertpapieren und anderer an den Börsengängen
beteiligter Personen erhoben. Mit den Klagen werden sog. "short swing" Gewinne
zurückverlangt, welche angeblich durch einen Verstoß gegen Section 16(b) des
Börsengesetzes (Exchange Act) ermöglicht wurden.
Sog. "Late Trading" und "Market Timing"
Ab Juli 2003 erhielt Morgan Stanley Ladungen und Auskunftsersuchen von
verschiedenen Aufsichts- und Regierungsbehörden, darunter der SEC, der NYSE und
mehreren Bundesstaaten, in Zusammenhang mit branchenweiten Untersuchungen von
Broker-Händlern und Investmentfondsgesellschaften im Hinblick auf ein mögliches
Late-Trading und Marketing-Timing von Fondsanteilen. Im Dezember 2007 schloss
Morgan Stanley mit der SEC einen Vergleich, der alle Streitigkeiten mit der SEC
hinsichtlich Late Trading und Market Timing von Mutual Funds im
Endkundensystem zwischen Januar 2002 und August 2003 beendet. Nach den
Bestimmungen des Vergleichs wird Morgan Stanley unter anderem verwarnt und
muss ein Bußgeld zahlen.
Angelegenheiten im Zusammenhang mit Subprimekrediten
Morgan Stanley hat Ladungen und Auskunftsersuchen von verschiedenen Aufsichtsund Regierungsbehörden hinsichtlich der Anbahnung, des Kaufs, der Verbriefung und
Abwicklung von Baufinanzierungsdarlehen an Kunden mit schlechter Bonität
("Subprime") und guter Bonität ("Prime") und damit im Zusammengang stehenden
Fragen erhalten. Morgan Stanley wurde auch als mögliche Beklagte in verschiedenen
zivilrechtlichen Verfahren im Zusammenhang mit dem Baufinanzierungsgeschäft im
Subprime und Prime Segment bezeichnet, einschließlich einer Sammelklage, welche
87
die Rolle Morgan Stanleys als Konsortialbank bei der Emission bestimmter
Vorzugsaktien der New Century Financial Corp. und der Countrywide Financial
Corp. und der Emission von mit Hypotheken unterlegten Zertifikaten für eine
Tochtergesellschaft der Countrywide Corp. und weiterer Streitgegenstände in diesem
Zusammenhang zum Inhalt hatte.
Im November 2007 wurde eine Aktionärsklage in Prozessstandschaft bei dem SDNY
erhoben, worin Ansprüche hauptsächlich wegen Verlusten aus bestimmten Subprime
Handelspositionen und damit in Zusammenhang stehende Fragen erhoben wurden,
wobei eine Klagebegründung bisher nicht eingereicht wurde. Im Dezember 2007
wurden gegen Morgan Stanley und andere (auch bestimmte amtierende und
ehemalige Direktoren und Vorstände von Morgan Stanley) weitere Sammelklagen
beim SDNY eingereicht, die Ansprüche von Teilnehmer der Morgan Stanley 401(k) Pensionskasse und Teilnehmern des Mitarbeiter Aktien-Beteiligungsprogramms nach
dem Employee Retirement Income Security Act von 1974 beinhalten. Die Anprüche
beziehen sich hauptsächlich auf Verluste im Zusammenhang mit Subprime Darlehen
und werfen Morgan Stanley unter anderem vor, dass eine Investition in Morgan
Stanley Aktien keine kluge Enscheidung war und dass die Risiken im Zusammenhang
mit einer solchen Investition und die finanzielle Situation von Morgan Stanley nicht
ausreichend offengelegt wurden.
Die folgenden Anlegegenheiten wurden mit Abschluß des Quartals zum
30. November 2007 geklärt:
Personelle Angelegenheiten in der Global Wealth Management Group
Gehälter und Arbeitszeiten. Im Namen bestimmter derzeitiger und ehemaliger
Mitarbeiter wurden gegen Morgan Stanley in New Jersey, New York, Connecticut,
Texas, Florida, Illinois, Kalifornien und Ohio Klagen wegen angeblicher unbezahlter
Überstunden
und
gesetzeswidriger
Gehaltsabzüge
mit
entsprechenden
Schadenersatzforderungen eingereicht.
Im Oktober 2006 erzielte Morgan Stanley eine Einigung in Bezug auf diese
Ansprüche womit alle Ansprüche der Kläger sowie aller anderen potenziellen
Mitglieder der Klägergruppe in den USA abgegolten wurden. Im November 2006
wurde zur Durchführung des Vergleichs beim U.S. Ditstrict Court des Southern
District of California ("SDC") eine konsolidierte geänderte Klage mit der
Bezeichnung Steinberg, et al. v. Morgan Stanley eingereicht. Im Dezember 2006
erließ das Judicial Panel für "district"-übergreifende Rechtssachen den Beschluss, die
Verfahren zusammenzuführen.
Geschlechterbehandlung. Im Juni 2006 wurde Morgan Stanley auch in zwei
mutmaßlichen Sammelklagen wegen angeblicher Geschlechterdiskriminierung nach
Bundes- und bundesstaatlichem Recht als Beklagter benannt. Am 24. Oktober 2007
hat der U.S. District Court in der Rechtssache Joanne Augst-Johnson et al. v. Morgan
Stanley & Co. Inc. den Vergleich über die Sammelklage genehmigt. Der Vergleich
beinhaltetet eine Zahlung an den Ausgleichsfonds und bestimmte andere
programmatische Rechtsbehelfe (programmatic relief) und beendet alle Streitigkeiten
der Teilnehmer der Sammeklage und individueller Antragsteller. Alle ähnlichen
88
Sammelansprüche der zweiten Sache Daisy Jaffe et al. v. Morgan Stanley wurden in
den Vergleich miteinbezogen.
Mit Ausnahme der in diesem Abschnitt beschriebenen ist Morgan Stanley in den
zwölf letzten Monaten vor dem Datum dieses Prospekts nicht in staatlichen
Verfahren, Gerichts- oder Schiedsgerichtsverfahren (einschließlich Verfahren, die
eingeleitet oder nach Kenntnis von Morgan Stanley angedroht sind) involviert
gewesen, die sich erheblich auf die Vermögens- und Finanzlage oder Rentabilität von
Morgan Stanley auswirken oder in jüngster Vergangenheit ausgewirkt haben.
Art und Anwendungsbereich der Garantie
Morgan Stanley wird bis zum 15. Mai 2008 eine unbedingte und unwiderrufliche
Garantie (die "Garantie") für die vertragsgemäße Zahlung auf die Zertifikate
zahlbarer Beträge übernehmen.
Die Garantie begründet unmittelbar gegen die Garantin bestehende und durchsetzbare
Ansprüche der Zertifikatsinhaber. Die Garantie begründet unmittelbare, unbedingte,
nichtnachrangige und unbesicherte Verbindlichkeiten der Garantin, die jederzeit
zumindest gleichrangig sind mit allen sonstigen gegenwärtigen und zukünftigen
unmittelbaren, unbedingten, nicht-nachrangigen und unbesicherten Verbindlichkeiten
der Garantin, mit Ausnahme solcher Verbindlichkeiten, die kraft zwingender
gesetzlicher Bestimmungen vorrangig sind.
Die Garantie wird in physischer und elektronischer Form während der gewöhnlichen
Geschäftszeiten an jedem Werktag zur Einsicht bei Morgan Stanley in 1585
Broadway, New York, New York 10036, U.S.A. Tel: +1 (212) 761 4000 und bei
Morgan Stanley B.V. in Locatellikade 1, 1076 AZ Amsterdam, The Netherlands, Tel:
+31 20 57 55 600 bereitgehalten.
89
Wortlaut der Garantie (in englischer Sprache):
Guarantee of Morgan Stanley
Morgan Stanley (the "Guarantor") hereby guarantees unconditionally and
irrevocably the payment obligations of Morgan Stanley B.V. (the "Issuer") in respect
of the issue of capital protected apano AP Enhanced Garant 2 Garantiezertifikate (the
"Certificates") issued by the Issuer pursuant to a stand alone prospectus dated
14 February 2008 established by the Issuer to the holders of Certificates (the
"Certificateholders") from time to time (together with any additional amounts
payable in accordance with, and subject to, the terms and conditions of the
Certificates).
As long as the Certificates are held by Clearstream Banking AG, Frankfurt am Main
("Clearstream Frankfurt"), the Guarantor covenants to each person who is for the
time being shown in the records of Clearstream Frankfurt or in the records of any
other clearing system through which the Certificates may be held from time to time,
as the holder of the economic value of the Certificates (the "Accountholders") that it
shall make such payments under this Guarantee and acknowledges that the
Accountholders may take proceedings to enforce this Guarantee directly against the
Guarantor. The Certificateholders from time to time and the Accountholders are
referred to herein as the Holders. References to Clearstream Frankfurt shall include
its respective successors and assigns and any other clearing system designated by the
Issuer and notified to holders of the Certificates in accordance with Condition 8 of the
terms and conditions of the Certificates.
The Guarantor hereby agrees that it shall not be necessary, as a condition to enforce
this Guarantee, that suit be first instituted against the Issuer or that any rights or
remedies against the Issuer be first exhausted. Rather, it is understood and agreed
that the liability of the Guarantor hereunder shall be primary, direct, and in all
respects, unconditional. The obligations of the Guarantor under this Guarantee
constitute direct, unconditional and unsecured obligations of the guarantor and rank
without preference among themselves and, subject as aforesaid, pari passu with all
other outstanding unsecured and unsubordinated obligations of the Guarantor,
present and future, but, in the event of insolvency, only to the extent permitted by laws
relating to creditors' rights.
The Guarantor shall be fully liable as if it were the principal debtor under the
Certificates whether any time has been granted to the Issuer, whether the obligations
of the Issuer under the Certificates have ceased to exist pursuant to bankruptcy,
corporate reorganisation or other similar event, whether the Issuer has been
dissolved or liquidated or consolidated or has changed or lost its corporate identity
and whether or not any other circumstances have occurred which might otherwise
constitute a legal or equitable discharge of or defence to a guarantor.
90
If any moneys shall become payable by the Guarantor under this Guarantee, the
Guarantor shall not for so long as the same remain unpaid in respect of any amount
paid by it under this Guarantee, exercise any right of subrogation in relation to the
Issuer or any other right or remedy which may accrue to it in respect of or as a result
of any such payment. All payments pursuant to this Guarantee will be made without
withholding or deduction for any taxes, duties, assessments, or governmental charges
of whatsoever nature imposed, levied, collected, withheld or assessed by the United
States of America, or any political subdivision or any authority thereof having power
to tax unless such withholding or deduction is required by law. The Guarantor shall
not be required to make any additional payments on account of such withholding or
deduction. If the Guarantor becomes subject at any time to any taxing jurisdiction
other than the United States of America, references in the Guarantee to the United
States shall be construed as references to such other jurisdiction.
This guarantee shall be governed and construed in accordance with New York law,
without regard to the conflict of law principles.
This guarantee shall expire and is no longer effective once all amounts payable on or
in respect of the Certificates have been paid in full.
MORGAN STANLEY
By: ______________________________
Authorised Signatory
91
KOSTEN, GEBÜHREN UND SONSTIGE AUSLAGEN
Gebühren
Bei vorzeitigem Verkauf ("Vorzeitigem Verkauf") der Zertifikate fällt eine
Vorzeitige Verkaufsgebühr ("Vorzeitige Verkaufsgebühr") an, welche im Hinblick
auf den jeweiligen Zeitraum den folgenden Prozentsätzen entspricht:
Zeitraum
Vorzeitige
Verkaufsgebühr
(einschließlich)
4%
(einschließlich)
3%
(einschließlich)
1%
Die "Kündigungsgebühr" im Hinblick auf den jeweiligen Zeitraum entspricht
Zeitraum
Kündigungsgebühr
(einschließlich)
4 % des Nennwerts
(einschließlich)
3 % des Nennwerts
(einschließlich)
1 % des Nennwerts
Bei Kündigung nach dem 30. Juni 2014 wird keine Kündigungsgebühr erhoben.
92
Sonstige Kosten, Gebühren, Provisionen und Aufwendungen im Zusammenhang
mit der Fonds-Komponente
Zudem fallen auf Ebene der Gesellschaft bzw. Fonds-Komponente weitere Kosten
und Gebühren, die mit der Verwaltung der Fonds-Komponente verbunden sind, wie
beispielsweise Kosten für die Registrierungsstelle der Gesellschaft oder Provisionen
und Aufwendungen, wie im Abschnitt mit der Überschrift "Provisionen und
Aufwendungen" in der Beschreibung der Fonds-Komponente in diesem Prospekt
beschrieben, an.
Insbesondere wird eine Zertifikatsgebühr in Höhe von 0,35 % p.a. vom Nennbetrag
erhoben, welche von der Fonds-Komponente abgezogen wird und an die Emittentin
gezahlt wird.
Sämtliche dieser Kosten, Gebühren, Provisionen und Aufwendungen werden dem
Netto-Fondsvermögen der Fonds-Komponente belastet und mindern so den jeweils
ermittelten Nettoinventarwert der Fonds-Komponente bzw., vorbehaltlich der
Rückzahlung des Nennwerts je Zertifikat, die Höhe des Rückzahlungsbetrags.
93
BESCHREIBUNG DER FONDS-KOMPONENTE
Die Fonds-Komponente ist nicht zum öffentlichen Vertrieb in der
Bundesrepublik Deutschland zugelassen. Die in diesem Prospekt enthaltenen
Angaben zur Fonds-Komponente dienen allein der Information von Anlegern,
die Zertifikate erwerben wollen und stellen kein Angebot von Anteilen an der
Fonds-Komponente dar.
Die hier enthaltenen Informationen in Bezug auf die Fonds-Komponente bestehen
lediglich aus Auszügen oder Zusammenfassungen von Informationen über der FondsKomponente. Die Emittentin und die Garantin übernehmen die Verantwortung, dass
die Informationen richtig wiedergegeben bzw. zusammengefasst wurden. Soweit es
der Emittentin und der Garantin bekannt ist und soweit sie dies aus den
veröffentlichten Informationen ableiten kann, wurden keine Tatsachen ausgelassen,
die dazu führen würden, dass die wiedergegebenen Informationen falsch oder
irreführend würden. Neben diesen Zusicherungen wird keine weitergehende oder
sonstige Gewähr von der Emittentin bzw. von der Garantin für die Informationen
übernommen. Insbesondere übernehmen die Emittentin und die Garantin keine
Verantwortung für die Vollständigkeit und Richtigkeit der dieser Darstellung
zugrundeliegenden Angaben oder dafür, dass kein Umstand eingetreten ist, der deren
Richtigkeit und Vollständigkeit beeinträchtigen könnte.
1. Allgemeine Beschreibung der Aktienklasse Man Global Strategies
Investment Strategies Limited: Man AP Enhanced Garant 2 Class T2 EUR
Shares
Die Aktienklasse Man AP Enhanced Garant 2 Class T2 EUR Shares (die
"Aktienklasse", eine Aktie der Aktienklasse T2 stellt die "Fonds-Komponente" dar)
ist eine Aktienklasse von stimmrechtslosen rückzahlbaren gewinnbeteiligten Aktien
(jede eine "Aktie" oder "Fonds-Komponente" und zusammen die "Aktien" oder die
"Fonds-Komponenten") der Man Global Strategies Investment Strategies Ltd. (die
"Gesellschaft"). Die Gesellschaft ist eine steuerbefreite Gesellschaft (exempted
company) mit beschränkter Haftung in Bermuda und ist amtlich eingetragen als eine
Gesellschaft mit zugriffsbeschränkten Konten (segregated accounts company) gemäß
dem Segregated Accounts Companies Act 2000 of Bermuda und als ein offener
Publikumsfonds gemäß dem Companies Act 1981 of Bermuda. Die Gesellschaft ist
als ein Bermuda standard scheme eingestuft worden. Als solcher unterliegt die
Gesellschaft der Aufsicht und den Vorschriften nach Maßgabe der Bermuda Monetary
Authority (Collective Investment Scheme Classification) Regulations 1998. Die
Gesellschaft kann Aktien ausgeben und zurückkaufen zu Preisen auf der Grundlage
des Nettoinventarwerts je Aktie.
Die Gesellschaft wird für die Aktienklasse Finanzanlagen tätigen, indem sie in das
AHL Institutional Programme (das "AHL Institutional Programme") investiert,
wobei die in diesem diversifizierten Portfolio gehandelten Finanzinstrumente Futures,
Optionen, Terminkontrakte, Swaps und anderen Derivaten umfassen können, sowie
auch in das Man Global Strategies Style Portfolio, bei dem es sich um einen Hedge
Dachfonds mit einem diversifizierten Multi-Strategy-Ansatz handelt (das "MGS Style
Portfolio").
94
2. Bewertung der Aktienklasse
Der Nettovermögenswert der Aktienklasse wird durch die Man Valuation Services
Limited (die "Bewertungsstelle") zum letzten Kalendertag eines jeden
Kalendermonats (jeweils ein "Aktienklassebewertungstag") ermittelt. Der
Nettoinventarwert (net asset value) der Aktienklasse (der "NAV") pro sich im Umlauf
befindender Aktie wird dem Wert des Vermögens der Aktienklasse minus der
Aktienklasse zugeordneter Verbindlichkeiten, dividiert durch die Anzahl der sich im
Umlauf befindenden Aktien an dem entsprechenden Bewertungstag entsprechen. Die
Bewertungsstelle wird den NAV auf Grundlage der Informationen ermitteln, die ihr
von den Direktoren der Gesellschaft in Bezug auf den jeweiligen
Aktienklassebewertungstag zur Verfügung gestellt werden. Es wird erwartet, dass die
Gesellschaft ihre Vermögenswerte und Verbindlichkeiten im Einklang mit den
folgenden Prinzipien bewertet:
(a)
Finanzanlagen in anderen gepoolten Sondervermögen werden zu den Preisen
bewertet, die von diesen Sondervermögen zur Verfügung gestellt werden;
(b)
alle Berechnungen, die auf der Bewertung von Finanzanlagen beruhen, die
(i) an einer Futures-Börse notiert, zugelassen oder gehandelt werden, werden
auf der Grundlage des Schlusskurses an der entsprechenden Futures-Börse
zum Geschäftsschluss desjenigen Tages ermittelt, für den eine solche
Berechnung vorzunehmen ist; (ii) an einer anderen Börse (d.h. nicht einer
Futures-Börse) notiert, zugelassen oder gehandelt werden, werden auf der
Grundlage der letzten Notierung (oder, sofern kein Handel stattfindet, zum
letzten Geldkurs für gedeckte Positionen (long positions) oder zum letzten
Briefkurs für ungedeckte Positionen (short positions)) an der Hauptbörse für
die jeweilige Finanzanlage zum Geschäftsschluss desjenigen Tages ermittelt,
für den eine solche Berechnung vorzunehmen ist; und (iii) auf einem
ungeregelten Markt (over-the-counter-market) gehandelt werden, der für
diese den Hauptmarkt darstellt, werden durch Bezugnahme auf den
Mittelwert zwischen dem letzten Geld- und Briefkurs, der für sie notiert
wurde, ermittelt, vorausgesetzt, dass (aa) wenn die Direktoren der
Gesellschaft nach ihrem freien Ermessen begründeterweise davon ausgehen
können, dass die an einer anderen Börse oder ungeregeltem Markt als der
Hauptbörse geltenden Preise einen in Anbetracht aller Umstände
angemesseneren Bewertungsansatz für die Finanzanlagen darstellen, so
können sie diese Preise übernehmen, und (bb) die Direktoren der
Gesellschaft nach ihrem freien Ermessen eine andere Bewertungsmethode
verwenden können, falls sie begründeterweise eine solche Bewertung für die
Finanzanlagen für geeigneter halten, einen angemessenen Wert zu
bestimmen;
(c)
Termingeschäfte über Fremdwährungen werden unter Bezugnahme auf den
Preis am Indexbewertungstag bewertet, an dem ein neues Termingeschäft
gleicher Größe und Fälligkeit eingegangen werden könnte;
(d)
Barmittel oder Einlagen und Forderungen, Vorauszahlungen und
Bardividenden, die aufgelaufen aber noch nicht ausgezahlt wurden, werden
95
mit ihrer vollen Höhe bewertet, ausser die Direktoren entscheiden, dass es
unwahrscheinlich ist, dass diese in voller Höhe erhalten oder gezahlt
werden, in welchem Fall die Direktoren in ihrem freien Ermessen einen
angemessenen Abschlag zur Bestimmung des tatsächlichen Wertes festlegen
können;
(e)
falls keine der oben bezeichneten Preisnotierungen verfügbar sein sollte,
wird der Wert von Zeit zu Zeit nach einer von den Direktoren der
Gesellschaft in begründeter Weise festgelegten Methode ermittelt;
(f)
sofern angemessen, werden Bewertungen (sei es für Wertpapiere oder
liquide Mittel), welche auf eine andere Währung als Euro lauten, zu einem
amtlichen oder einem sonstigen Kurs in Euro umgerechnet, den die
Direktoren der Gesellschaft nach ihrem freien Ermessen in begründeter
Weise für als den Umständen angemessen halten, unter anderem im Hinblick
auf relevante Auf- oder Abschläge und Umtauschkosten; und
(g)
Verbindlichkeiten werden mit ihrem Zeitwert bewertet.
Die Berechnung des Nettoinventarwerts der Fonds-Komponente kann von den
Direktoren für den gesamten Zeitraum oder eines Teils davon ausgesetzt werden
während dem:
(a)
eine Börse, an der ein wesentlicher Teil der Anlagen der Aktienklasse
notiert, zugelassen oder gehandelt wird, geschlossen ist (ausser
Wochenenden oder amtliche Feiertage), oder der Handel beschränkt ist;
(b)
Umstände vorliegen, durch die es nach Meinung der Direktoren für die
Gesellschaft nicht in vernünftiger Weise möglich ist Anlagen der
Aktienklasse zu veräussern, oder durch die eine Veräusserung einen
wesentlichen Nachteil für die Inhaber der Fonds-Komponente zur Folge
hätte;
(c)
ein Ausfall derjenigen Systeme vorliegt und diejenigen Mittel nicht zur
Verfügung stehen mit denen unter normalen Umständen die Bewertung der
Anlagen der Fonds-Komponente vorgenommen wird, oder ein anderer
Grund vorliegt der eine faire und vernünftige Bewertung der Anlagen nicht
möglich macht;
(d)
es der Gesellschaft unmöglich ist, die für die Auszahlung aufgrund einer
teilweisen oder vollständigen Veräusserung der Fonds-Komponenten durch
die Inhaber benötigten finanziellen Mittel zu repatriieren;
(e)
Zahlungsverpflichtungen oder Anlagen nach Meinung der Direktoren nicht
zu einem sich unter normalen Umständen bildenden Wechselkurs ausgeführt
werden können;
(f)
im Fall einer Auflösung der Gesellschaft oder zwangsweisen Rückgabe der
Fonds-Komponenten die erste Meldung über eine derartige Entscheidung an
die Inhaber veröffentlicht wird;
96
(g)
die Anlagen der Gesellschaft von einer freiwilligen oder unfreiwilligen
Liquidation, einem Konkurs, einer Zahlungsunfähigkeit oder einem
sonstigen ähnlichen Vorfall betroffen sind, oder die Anlagen Gegenstand
einer Enteignung sind oder anderweitig an eine staatliche Behörde oder
Gesellschaft übertragen werden müssen;
(h)
die Direktoren der Meinung sind, dass die Änderung oder Übernahme eines
Gesetzes, einer Verordnung oder Vorschrift durch eine staatliche Behörde,
Zentralbank oder vergleichbare Institution oder eine Anweisung oder
Verfügung einer dieser Institutionen den Kauf, Verkauf oder Übertrag der
Anlagen einschränkt; oder
(i)
jeder andere Zeitraum den die Direktoren in ihrem freien Ermessen festlegen
können falls dies ihrer Meinung nach im Interesse der gesamten
Anteilsinhaber der Gesellschaft oder der Anteilsinhaber der Aktienklasse ist.
Während die Bewertung der Aktienklasse ausgesetzt ist können keine FondsKomponenten zurückgegeben oder neu ausgegeben werden. Die Direktoren behalten
sich das Recht vor Zahlungen in Verbindung mit einer Rückgabe von FondsKomponenten vor einer Aussetzung der Bewertung solange zurückzuhalten bis diese
Aussetzung wieder aufgehoben wird. Bei der Andienung von Fonds-Komponenten
wird jeder Inhaber von einer eventuell bestehenden Aussetzung der Bewertung
unterrichtet. Falls der Antrag auf Rückgabe der Fonds-Komponenten daraufhin nicht
zurückgenommen wird, wird die Rückgabe am ersten Tag nach Aufhebung der
Aussetzung an dem dies möglich ist, oder jedem anderen Tag den die Direktoren
bestimmen können, ausgeführt. Die Direktoren haben das Recht den Handel mit den
Fonds-Komponenten auszusetzen an den Investment Manager delegiert.
3. Geschäftsaktivitäten von Man Global Strategies Investment Strategies Ltd,
Aktienklasse Man AP Enhanced Garant 2 Class T2 EUR Shares
Das Investmentziel der Gesellschaft in Bezug auf die Aktienklasse besteht darin, eher
Kursgewinne als Zinsen zu erwirtschaften. Die Fonds-Komponenten sind so gestaltet,
dass
sie
auf
wesentliches
mittelfristiges
Wachstum
abzielen
und
Diversifikationsvorteile innerhalb eines traditionellen Aktien- und Anleihenportfolios
bieten, indem die in Verbindung mit den Fonds-Komponenten vereinnahmten Erträge
in das AHL Institutional Programme und das MGS Style Portfolio
("Anlagestrategien") investiert werden. Als Gesellschaft mit zugriffsbeschränkten
Konten (segregated accounts company) wird die Gesellschaft in Bezug auf die Aktien
ein gesondertes zugriffsbeschränktes Konto (segregated account) einrichten. Das
Guthaben dieses zugriffbeschränkten Kontos darf nur zum Ausgleich von
Verbindlichkeiten gegenüber Gläubigern dieses zugriffbeschränkten Kontos
verwendet werden und darf nicht zur Begleichung von Verbindlichkeiten gegenüber
Gläubigern anderer zugriffsbeschränkter Konten oder, vorbehaltlich einer
abweichenden Vereinbarung, gegenüber den allgemeinen Gläubigern der Gesellschaft
herangezogen werden.
Die Gesellschaft wird die MGSIS Man AP Enhanced Garant 2 Class T2 EUR Trading
Ltd. gründen, die als handelnde Tochtergesellschaft für die Gesellschaft in Bezug auf
die Aktienklasse fungieren wird ("Handelnde Tochtergesellschaft"). Die Handelnde
97
Tochtergesellschaft ist eine steuerbefreite Gesellschaft (exempted company) nach dem
Recht von Bermuda und wird voraussichtlich im April 2008 mit beschränkter Haftung
gegründet. Zum Zeitpunkt der Gründung beträgt das Stammkapital der Handelnden
Tochtergesellschaft USD 12.000,00, aufgeteilt in 12.000 Stammaktien jeweils mit
einem Nennwert von USD 1,00.
Nach dem Abzug der vorläufigen Kosten (wie im Abschnitt mit der Überschrift
"Provisionen und Aufwendungen" beschrieben), wird der Saldo der Erlöse der
Aktienemission zur Finanzierung der Handelnden Tochtergesellschaft verwendet und
der gesamte Handel der Gesellschaft in Bezug auf die Anlagestrategien durch die
Handelnde Tochtergesellschaft abgewickelt. Die Beteiligung der Gesellschaft an der
Handelnden Tochtergesellschaft wird bei der Gesellschaft als ein Vermögenswert der
Aktienklasse erfasst.
Das Portfolio der Aktienklasse wird durch Man Investments Limited (der
"Investment Manager") verwaltet. Der Investment Manager wird die Marktsituation
beobachten und kann regelmäßig Vermögenswerte der Aktienklasse zwischen dem
AHL Institutional Programme und dem MGS Style Portfolio umverteilen oder andere
Anlagestrategien für das Portfolio der Aktienklasse einführen, um die Anlageziele zu
erreichen.
Neben den Aktien und anderen Aktienklassen hat die Gesellschaft 100 Manager
Shares mit einem jeweiligen Nennwert von USD 1,00 ausgegeben, die zu 25 Prozent
der Man Holdings Limited gehören, einer auf Bermuda errichteten
Tochtergesellschaft der Man Group Holdings Limited. Die übrigen 75 Prozent der
Manager Shares stehen im Eigentum der Albany Management Company Limited,
einer auf Bermuda errichteten Gesellschaft. Die Manager Shares sind mit 100 Prozent
der Stimmrechte in der Gesellschaft ausgestattet. Die Inhaber der Manager Shares
sind insgesamt berechtigt, Dividenden bis zu einem Gegenwert von USD 5.000,00 pro
Jahr zu erhalten. Die Gesellschaft ist auch berechtigt, andere Klassen
stimmrechtsloser rückzahlbarer gewinnbeteiligter Aktien zu emittieren, für die jeweils
ein gesondertes Konto eröffnet werden wird.
4. Investment Exposure und Fremdkapitalaufnahme
Der Investment Manager wird in Bezug auf eine Fonds-Komponente ein Ziel
Investment Exposure von etwa 150% des folgenden Wertes anstreben
("Referenzwert(t)"):
(1 / PartRate) * (Barwert der hypothetischen Nullkuponanleihe(t) + PartRate *
NAV(t) / NAV(Anfang))
Wobei:
"Barwert" der in Prozent ausgedrückte Marktwert einer synthetischen
Nullkuponanleihe rückzahlbar zu EUR 1.200 am Fälligkeitstag und zu jedem
Bankgeschäftstag bewertet. Dieser Marktwert wird auf der Basis der EUR-Zinskurve
unter Zugrundelegung eines Zinssatzes von 1-Monats EURIBOR plus 0,22%
festgesetzt.
98
"Barwert der hypothetischen Nullkuponanleihe(t)" der in Prozent ausgedrückte
theoretische Wert einer synthetischen Nullkuponanleihe rückzahlbar zu EUR 1,20 am
Fälligkeitstag und zu jedem Bankgeschäftstag bewertet ist. Dieser theoretische Wert
wird unter Zugrundelegung eines Zinssatzes von 1-Monats EURIBOR plus 0,30%
festgesetzt.
"Fälligkeitstag" der 15. Februar 2023 ist.
"Festlegungstag" der 13. Mai 2008 ist.
"NAV(t)" den Nettoinventarwert
Aktienklassebewertungstag darstellt.
der
Fonds-Komponente
am
jeweiligen
"NAV(Anfang)" EUR 1 beträgt.
"PartRate" die Differenz zwischen 100% und dem Barwert am Festlegungstag
beträgt.
Zu Beginn ist dabei vorgesehen etwa je 75% Investment Exposure in das AHL
Institutional Programme und in das MGS Style Portfolio zu investieren. Diese
Aufteilung des Investment Exposures auf die Anlagestrategien sowie die Allokation
zu einzelnen Anlagestrategien unterliegen jedoch vollständig dem Ermessen des
Investment Managers und können sich – auch in der Zukunft - je nach Einschätzung
der Chancen der einzelnen Anlagestrategien verändern. Weiterhin kann der
Investment Manager künftig auch andere Anlagestrategien hinzufügen, vorhandene
Anlagestrategien ersetzen oder je nach Marktumfeld in eigenem Ermessen das Ziel
Investment Exposure anpassen. Es ist jedoch nicht vorgesehen das Ziel Investment
Exposure auf mehr als 180% zu erhöhen.
Die Handelnde Tochtergesellschaft kann Vereinbarungen zur Fremdkapitalaufnahme
treffen. Es wird erwartet, dass der ausstehende Kreditbetrag pro Fonds-Komponente
gemäß den Vereinbarungen zur Fremdkapitalaufnahme sich stets maximal auf 75%
des aktuellen Referenzwerts oder einen solchen anderen Betrag belaufen wird, den die
Direktoren von Zeit zu Zeit festlegen können. Neben der Befriedigung kurzfristigen
Liquiditätsbedarfs können die Vereinbarungen zur Fremdkapitalaufnahme durch den
Investment Manager genutzt werden, um es der Aktienklasse zu ermöglichen, das
gewünschte Investment Exposure zu erreichen. Neben der Bereitstellung des
Fremdkapitals durch unabhängige Dritte kann das Fremdkapital (ganz oder teilweise)
von einer oder mehreren Gesellschaften der Man Group bereitgestellt werden.
5. Beschreibung der Anlagestrategien
Die folgenden Anlagestrategien stellen die Investitionen dar, die die Handelnde
Tochtergesellschaft voraussichtlich am 1. Juni 2008 tätigen wird. Danach kann der
Investment Manager auch weitere Anlagestrategien hinzufügen.
Das AHL Institutional Programme
AHL verwendet quantitative Handelsstrategien die darauf ausgerichtet sind,
Preistendenzen zu erkennen und auszunutzen, und sich die Marktineffizienzen in etwa
99
100 Finanzmärkten weltweit zu Nutze zu machen. AHL bietet Anlegern Zugang zu
einem über verschiedene Märkte diversifizierten Portfolio, das derzeit Aktienindizes,
Anleihen, Währungen, kurzfristige Zinssätze und Energie- und Metallkontrakte
beinhaltet. Der Spielraum, in ein diversifiziertes Portfolio von Währungen bis zu
Rohstoffen zu investieren, vergrößert die vorhandenen Möglichkeiten und hilft das
Anlagerisiko zu verringern. Da sich das Programm ausschließlich auf
computerbetriebenen Handel stützt, ist es zu 100% systematisch.
Das AHL Institutional Programme zeichnet sich durch Stabilität und Skalierbarkeit
aus. Es verwendet eine Vielzahl von Handelsfrequenzen und hat somit die
Möglichkeit, von kurz- oder langfristigen Markttendenzen zu profitieren.
Die Allokation der Vermögenswerte in die bestimmten Märkte berücksichtigt:
− Korrelationen zwischen spezifischen Sektoren und Märkten,
− Zielrenditen und Volatilitätsniveaus,
− Marktzugangskosten, und
− die Marktliquidität.
Die Methode der Portfoliostrukturierung und Vermögensallokation konzentriert sich
auf Diversifizierung und die Bedeutung des Einsatzes von Anlagekapital über die
gesamte Palette von Märkten. Die Instrumente, die in dem diversifizierten Portfolio
gehandelt werden, können Futures, Optionen, Terminkontrakte, Swaps und andere
Derivate umfassen. Die Anzahl und die Vielfalt der Märkte und Instrumente, die
direkt oder indirekt durch das AHL Institutional Programme gehandelt werden,
können sich ändern.
Die MGS Style Portfolios
Daneben strebt die Aktienklasse die Erschließung weiteren Potenzials durch eine
Anlage in die MGS Style Portfolios an, welche sich aus mittelbaren oder
unmittelbaren Beteiligungen an MGS Arbitrage Strategies N Ltd., MGS Directional
Strategies Ltd., MGS Equity Hedge Strategies Ltd., Man Long/Short Equities NF
Style Series Class A, und/oder anderen Gesellschaften zusammensetzen können, von
denen jede ein diversifizierter Hedge-Dachfonds mit einem diversifizierten MultiStrategy-Ansatz ist oder in solche investiert. Die Gesellschaften, die Teil der MGS
Style Portfolios sind, verwirklichen ihre Strategien durch Verteilung der Gelder auf
Investmentmanager. Die Investmentmanager verwenden verschiedene alternative
Investmentstrategien und wenden eine Reihe komplementärer quantitativer und
qualitativer Anlagemethoden passend zu jedem Anlagestil an.
Arbitrage
Der
Arbitrage-Stil
schließt
Anlagestrategien
ein,
die
typischerweise
Preisabweichungen bei verwandten Wertpapieren innerhalb eines oder zwischen
verschiedenen Märkten ausnutzen. Durch die Bildung von gedeckten Positionen in
unterbewerteten Anlagewerten und ungedeckten Positionen in überbewerteten
100
Anlagewerten versuchen diese Strategien Profitmöglichkeiten zu nutzen, die aus der
sich verändernden Preisbeziehung zwischen den betroffenen Anlagewerten entstehen.
Die Strategien sind üblicherweise ihrer Natur nach relativwert- oder ereignisorientiert
und umfassen Wandelanleihen, festverzinsliche Wertpapiere, Fusionen, besondere
Situationen und Multi-Strategy Arbitrage-Ansätze. Unabhängig von der
Entwicklungsrichtung der allgemeinen Marktpreise sollen sie mit einer relativ
geringen Volatilität in allen Marktlagen Gewinne erwirtschaften.
Direktional
Der direktionale Stil beinhaltet Anlagestrategien, die die Top-Down-Analyse der
makroökonomischen und finanziellen Bedingungen verwenden, um Preisineffizienzen
aufzudecken, die in Ländern als Folge politischer oder wirtschaftlicher
Veränderungen auf regionaler und nationaler Ebene entstehen. Sie konzentrieren sich
vor allem auf globale Handelsmethoden mit Macro-, opportunistischen und frei
ermessensbasierten
Ansätzen,
was
auch
Relative
Value-Anlagen
in
Wachstumsmärkten beinhalten kann. Der Stil kann erhebliche gedeckte oder
ungedeckte Netto-Positionen in Wertpapieren, Zinssätzen, Rohstoffen und
Währungen innerhalb von Ländern oder Gruppen von Ländern involvieren. Die
Strategien erzeugen Erträge, die im Allgemeinen unkorreliert zu traditionellen
Anlageklassen und anderen Anlagestilen von Hedge-Fonds sind.
Equity Hedge
Der Anlagestil Equity Hedge beinhaltet Anlagestrategien, die relativwert- und
marktneutral sind (entweder Dollar oder Beta) oder von Natur aus eine hohe
Absicherung darstellen. Er zielt darauf ab, von der Identifizierung von Aktien zu
profitieren, die in Beziehung zu anderen Aktien oder Gruppen von Aktien, oft
innerhalb eines Sektors, für unter- oder überbewertet gehalten werden.
Anlageentscheidungen werden häufig innerhalb systematischer Rahmenbedingungen
getroffen. Die Aktienauswahl basiert üblicherweise entweder auf einer preisbasierten
Analyse, was die gewöhnliche Vorgehensweise im Fall von statistischen ArbitrageModellen ist, oder auf verschiedenen Messwerten für den zugrunde liegenden Wert.
Gelegentlich werden auch Mehrfaktorenmodelle verwendet, die sowohl technische als
auch grundlegende Messwerte kombinieren. Im Allgemeinen wird erwartet, dass die
Performance dieser Strategien relative geringe Korrelation und Beta zu den
gehandelten Märkten aufweist. Equity Hedge-Strategien sind oft durch eine relative
hohe Handelsfrequenz gekennzeichnet. Strategien innerhalb dieser Kategorien zielen
darauf ab, beständige Erträge in allen Marktlagen mit relativ geringer Volatilität zu
erreichen.
Long/Short Equities
Der Anlagestil Long/Short Equities beinhaltet Anlagestrategien, die ohne notwendige
Beschränkungen gedeckte und ungedeckte Positionen eingehen und deshalb variable
oder konstante Nettotendenzen aufweisen können. Sie zielen darauf ab, von der
Identifizierung von und Anlage in solche Aktien zu profitieren, die für unter- oder
überbewertet gehalten werden – ein Ansatz der häufig als „Stock-Picking“ bezeichnet
wird. Im Allgemeinen wird erwartet, dass die Performance dieser Strategien eine
höhere Korrelation und Beta zu den gehandelten Märkten aufweist als Equity Hedge-
101
Strategien. Auch die Volatilität ist üblicherweise höher als bei Equity HedgeStrategien. Das Ziel der Portfoliostrukturierung in diesem Gebiet liegt darin,
Anlagefachwissen in komplementären Bereichen zum Tragen zu bringen, über
geografische und/oder Sektorengrenzen hinweg.
Diese Anlagestile sind nicht abschließend und der Investment Manager kann, im
Rahmen der Bemühung um die Erreichung des Anlageziels der Aktienklasse, Mittel
auch neuen Ansätzen zuweisen, die nicht in die oben beschriebenen Kategorien fallen.
Der Investment Manager kann die Strukturierung und Verwaltung individueller
Portfolios oder anderer Anlagestrategien auch an assoziierte oder externe Manager
übertragen. Auch die Zusammensetzung und Beschreibung dieser Kategorien können
sich im Laufe der Zeit ändern.
6. Provisionen und Aufwendungen
Der Handelnden Tochtergesellschaft wird monatlich nachträglich eine
Managementprovision zu einem Satz von 0,8% pro Jahr auf das Investment Exposure
der Mittelzuteilung bezogen auf jede Anlagestrategie (d.h. auf das Investment
Exposure, das mit dem Betrag der Anlagemittel, der von der Handelnden
Tochtergesellschaft durch den Investment Manager im Laufe der Zeit mittelbar oder
unmittelbar jeder Anlagestrategie zugewiesen wird, erreicht wird) berechnet. Auf der
Ebene des Dachfonds wird keine Erfolgsprämie in Rechnung gestellt. Die gesamten
Provisionen oder ein Teil davon können von Man Investments oder ihren
verbundenen Unternehmen vereinnahmt werden.
Es ist eine Risikotransfer- und Verwaltungsgebühr von einem Zwölftel von 1% pro
Monat (circa 1% pro Jahr) vom Wert der Zertifikate zu berechnen und monatlich
nachträglich an den Investment Manager zu zahlen, sowie eine Liquiditäts- und
Finanzverwaltungsgebühr von einem Zwölftel von 0,6% pro Monat (circa 0,6% pro
Jahr) auf das Investment Exposure der Mittelzuteilung bezogen auf jede
Anlagestrategie, zahlbar an den Investment Manager. Beide Gebühren werden
monatlich errechnet und sind nachträglich zu zahlen.
Ferner ist an den Emittenten der apano AP Enhanced Garant 2 Garanertifikate eine
Emittentengebühr von einem Zwölftel von 0,35% des Gesamtnennwertes der zu
jedem Monatsende noch ausstehenden Zertifikate zu zahlen. Die Emittentin ist in der
Verwendung dieser Gelder frei und kann diese insbesondere im Zusammenhang mit
dem Angebot der Zertifikate verwenden.
Im Rahmen der Umsetzung der Anlagestrategien werden die Mittelallokationen durch
eine Reihe von Methoden erfolgen, wie z. B. durch die Anlage in andere
Investmentfonds, Treuhandkonten oder durch beauftragte Investment-Manager. Auf
dieser Ebene werden daher, bezogen auf das Investment Exposure des so zugeteilten
Teils der Mittel, weitere Provisionen und Aufwendungen, einschließlich
gegebenenfalls Verwaltungs- und Erfolgsprovisionen, anfallen. Beauftragte Manager
werden im Allgemeinen durch eine Kombination von Verwaltungs- und
Erfolgsprovisionen entschädigt. Eine typische Gebührenstruktur besteht aus einer
jährlichen Verwaltungsgebühr von bis zu 2% auf das Investment Exposure der
Mittelzuteilung und einer Erfolgsprovision von 20%, berechnet auf der Basis des
Netto-Wertzuwachses der Anlage für jeden der beauftragten Manager. Nicht alle
102
Vergütungsvereinbarungen mit beauftragten Managern sind auf diese Weise
aufgebaut oder fallen in diese Spannen.
Es wird eine Beratungs- und Verwaltungsprovision von 0,5% pro Jahr auf das
Investment Exposure der Mittelzuteilung an bestimmte Investment Manager
berechnet werden, wobei die Provision monatlich nachträglich bezahlt wird. Die
Handelnde Tochtergesellschaft hat alle Kosten und Maklerprovisionen im
Zusammenhang
mit
den
Handelsgeschäften
zu
zahlen,
die
eine
Einführungsmaklerprovision für den einführenden Broker von bis zu 2% pro Jahr auf
das Investment Exposure der Mittelzuteilung zu bestimmten Anlagestrategien, Zinsen
für Finanzierungen und damit verbundene Gebühren beinhalten werden.
Die Aktienklasse zahlt eine Bewertungsgebühr von bis zu 0,15% pro Jahr des
Nettovermögenswertes der Aktien (vorbehaltlich eines Minimums von USD 50.000
pro Jahr) an die Bewertungsstelle und ersetzt die bei ihr entstandenen Ausgaben in
Bezug auf die Aktien.
Jede Fremdkapitalaufnahme gemäß den Vereinbarungen zur Fremdkapitalaufnahme
wird voraussichtlich mit Zinsen in Höhe der LIBOR plus einer Marge verbunden sein
(wobei diese Marge Änderungen unterworfen sein kann, aber voraussichtlich 2%
nicht übersteigen wird), welche quartalsweise nachträglich zahlbar ist und auf den
Kapitalbetrag der ausstehenden Fremdkapitalaufnahme gemäß den Vereinbarungen
zur Fremdkapitalaufnahme berechnet wird. Voraussichtlich wird nach dem Ende der
Erstausgabe der Aktienklasse von der Handelnden Tochtergesellschaft eine
Bereitstellungsgebühr in Bezug auf die Fremdkapitalaufnahme zu zahlen sein und im
Fall der Verlängerung wird für die Fremdkapitalaufnahme gemäß den
Vereinbarungen zur Fremdkapitalaufnahme voraussichtlich eine jährliche
Verlängerungsgebühr anfallen.
Im Zusammenhang mit der Vermittlung von freien Handelsvereinbarungen wird die
Handelnde Tochtergesellschaft dem Investment Manager eine Provision von 0,05%
pro Jahr (monatlich anfallend und monatlich nachträglich zahlbar) auf das Investment
Exposure der Mittelzuteilung zu jeder Anlagestrategie zahlen.
Die vorläufigen Aufwendungen, die im Zusammenhang mit der Schaffung der
Aktienklasse, einschließlich der Gründung der Handelnden Tochtergesellschaft,
entstanden sind, die juristischen Kosten der Aktienklasse, der Handelnden
Tochtergesellschaft und von Man Investments sowie der Erstausgabe der Aktien
werden im Ergebnis von der Aktienklasse beglichen. Diese Aufwendungen werden
während der ersten drei Jahre amortisiert, der Aktienklasse berechnet und werden
voraussichtlich nicht mehr als USD 100.000 betragen.
Die vorstehende Beschreibung ist allgemeiner Art und erhebt keinen Anspruch
auf Vollständigkeit. Potentielle Anleger müssen sich bewusst sein, dass allen
Beschreibungen von Investmentprozessen aufgrund ihrer Komplexität,
Vertraulichkeit und Subjektivität naturgemäß Grenzen gesetzt sind. Darüber
hinaus wird die Beschreibung praktisch jeder Handelsstrategie durch die
Tatsache eingeschränkt, dass Handelsstrategien ebenso wie die Märkte, an denen
die Fonds-Komponente anlegt, einem ständigen Wandel unterworfen sind.
103
ZERTIFIKATSBEDINGUNGEN
§1
Zertifikatsrecht; Rückzahlungsbetrag
(1)
Die Morgan Stanley B.V. (die "Emittentin") gewährt hiermit dem Inhaber
(der "Zertifikatsinhaber") von je einem kapitalgeschützten apano AP Garant
2 Garantiezertifikat (das "Zertifikat") bezogen auf Aktien der Klasse T2 (die
"Aktienklasse", eine Aktie der Klasse Man AP Enhanced Garant 2 Class
T2 EUR Shares stellt die "Fonds-Komponente" dar) der Man Global
Strategies Investment Strategies Ltd. (die "Gesellschaft") das Recht,
vorbehaltlich eines Vorzeitigen Verkaufs durch den Zertifikatsinhaber gemäß
§ 9 bzw. einer Kündigung durch die Emittentin gemäß § 10, nach Maßgabe
dieser Zertifikatsbedingungen am Fälligkeitstag (§ 2) den Rückzahlungsbetrag
(§ 1 (2)), bzw. am Vorzeitigen Rückzahlungstag (§ 2) den Vorzeitigen
Verkaufspreis (§ 9 (2)) zu beziehen (das "Zertifikatsrecht").
(2)
Der am Fälligkeitstag durch die Emittentin zu zahlende Rückzahlungsbetrag
pro Zertifikat (der "Rückzahlungsbetrag") entspricht dem höheren Betrag
von:
(i)
Nennwert * 120% und
(ii) Nennwert * (120%+Partizipation * NAV(Ende) / NAV(Anfang))
Wobei:
"Barwert der Nullkuponanleihe" der in Prozent ausgedrückte Marktwert
einer synthetischen Nullkuponanleihe rückzahlbar zu 120% des Nennwerts am
Fälligkeitstag (§ 2) und zu jedem Bankgeschäftstag (§ 2) bewertet. Dieser
Marktwert wird von der Berechnungsstelle (§ 6) auf der Basis der EURZinskurve unter Zugrundelegung eines Zinssatzes von 1-Monats EURIBOR
plus 0,22% festgesetzt.
"NAV(Ende)" dem Nettoinventarwert der Fonds-Komponente am Letzten
Bewertungstag (§ 2) entspricht.
"NAV(Anfang)" Euro 1 entspricht.
"Nennwert" Euro 1.000 entspricht.
104
"Nettoinventarwert" ("NAV") der Nettoinventarwert der Fonds-Komponente
ist, wie er durch Man Valuations Ltd. (die "Bewertungsstelle") ermittelt und
durch Man Investments bekannt gegeben wird.
"Partizipation" voraussichtlich 43%* beträgt (*indikativ, die Partizipation
wird am Festlegungstag auf Basis der Differenz aus 100% und dem Barwert
der Nullkuponanleihe von der Berechnungsstelle festgelegt).
§2
Weitere Definitionen
"Allokationstag" ist der 1. Juni 2008.
"Festlegungstag" ist der 13. Mai 2008.
"Bankgeschäftstag" ist jeder Tag (außer Samstag und Sonntag) an dem die
Banken in Frankfurt am Main, Bundesrepublik Deutschland, Amsterdam,
Niederlande und in London, Großbritannien, für den Geschäftsverkehr
geöffnet sind , das Trans-European Automated Real-time Gross settlement
Express Transfer System ("TARGET-System") geöffnet ist und das
Clearingsytem (§ 3) Wertpapiergeschäfte abwickelt.
"Bewertungstag" ist der jeweils der letzte Tag eines Kalendermonats, oder
jeder andere Tag, der von den Direktoren der Fonds-Komponente festgelegt
werden kann.
"Fälligkeitstag" ist der 15. Februar 2023.
"Fonds-Geschäftstag" ist jeder Tag (außer Samstag und Sonntag), der in
Bermuda, Dublin, London, Zürich, Jersey, Isle of Man und New York als
Werktag gilt.
"Geschäftstag" ist
Bankgeschäftstag ist.
jeder
Fonds-Geschäftstag,
der
zugleich
ein
"Letzter Bewertungstag" ist der 31. Dezember 2022.
"Vorzeitiger Rückzahlungstag" im Fall des Vorzeitigen Verkaufs durch den
Zertifikatsinhaber gemäß § 9, ist spätestens der sechsunddreissigste (36.)
Geschäftstag, der auf den jeweils maßgeblichen Vorzeitigen Verkaufstag folgt.
§3
Status; Garantie; Form der Zertifikate;
Girosammelverwahrung; Übertragbarkeit
(1)
Die Zertifikate begründen unbesicherte und nicht nachrangige Verbindlichkeiten der Emittentin, die untereinander und mit allen gegenwärtigen und
zukünftigen unbesicherten und nicht nachrangigen Verbindlichkeiten der
105
Emittentin, abgesehen von solchen Verbindlichkeiten, denen auf Grund
zwingender gesetzlicher Bestimmungen der Vorrang zukommt, gleichrangig
sind.
(2)
Morgan Stanley (die "Garantin") hat eine unbedingte und unwiderrufliche
Garantie (die "Garantie") für die vertragsgemäße Zahlung auf die Zertifikate
zahlbarer Beträge übernommen. Die Garantie begründet unmittelbar gegen die
Garantin bestehende und durchsetzbare Ansprüche der Zertifikatsinhaber. Die
Garantie begründet unmittelbare, unbedingte, nichtnachrangige und
unbesicherte Verbindlichkeiten der Garantin, die jederzeit zumindest
gleichrangig sind mit allen sonstigen gegenwärtigen und zukünftigen
unmittelbaren, unbedingten, nicht-nachrangigen und unbesicherten
Verbindlichkeiten der Garantin, mit Ausnahme solcher Verbindlichkeiten, die
kraft zwingender gesetzlicher Bestimmungen vorrangig sind.
(3)
Die Zertfikate werden im Sinne der U.S. Treasury Regulation § 1.163-5(c) (2)
(i) (D) anfänglich durch eine vorläufige Globalurkunde (die "Vorläufige
Dauerglobalurkunde") verbrieft, die gegen eine die Zertifikate verbriefende
Dauerglobalurkunde (die "Dauerglobalurkunde") nicht früher als 40 Tage
und nicht später als 180 Tage nach dem Abschluss der Platzierung der
Zertifikate gegen Nachweis des Nichtbestehens einer U.S.-Inhaberschaft
(certification of non U.S. beneficial ownership) ausgetauscht wird.
Die Vorläufige Dauerglobalurkunde bzw. die Dauerglobalurkunde werden
jeweils bei Clearstream Banking AG, Frankfurt am Main, Neue Börsenstraße
1, 60487 Frankfurt am Main, Bundesrepublik Deutschland (das
"Clearingsystem") hinterlegt. Ansprüche auf Lieferung effektiver Stücke
werden ausgeschlossen. Die Zertifikate sind nach dem jeweils anwendbaren
Recht und gegebenenfalls den jeweils geltenden Vorschriften und Verfahren
des Clearingsystems übertragbar.
(4)
Im Effektengiroverkehr sind die Zertifikate einzeln oder einem ganzzahligen
Vielfachen davon übertragbar.
§4
Aussetzungen und Verschiebungen
(1)
Bei Eintritt oder dem wahrscheinlichen Eintritt eines Aussetzunggrundes
(§ 4 (2)) in Bezug auf die Fonds-Komponente kann die Berechnungsstelle,
wenn sie nach billigem Ermessen (gemäß § 317 BGB) der Ansicht ist, dass
dieser Grund wesentlich ist und sich nachteilig auf die Fonds-Komponente
oder die Berechnung des Nettoinventarwerts der Fonds-Komponente auswirkt,
die Bewertung der Zertifikate, den Vorzeitigen Verkaufstag sowie den
jeweiligen Vorzeitigen Rückzahlungstag für den Zeitraum des Vorliegens
dieses Grundes verschieben oder aussetzen. Bei einer Verschiebung des
Letzten Bewertungstags verschiebt sich der Fälligkeitstag entsprechend.
106
(2)
"Aussetzungsgrund" bezeichnet einen der folgenden Umstände:
(a)
Die Bewertungsstelle versäumt es, den Nettoinventarwert der
Fondskomponente wie vorgesehen zu ermitteln oder bekannt zu geben
oder versäumt es, andere Informationen bezüglich der Gesellschaft zu
veröffentlichen, die nach den Regeln oder den Fonds-Dokumenten zu
veröffentlichen wären.
(b)
Wenn die Berechnungsstelle nach Ausübung billigen Ermessens (gemäß
§ 317 BGB) berechtigten Grund zu der Annahme besitzt, dass der
bekannt gegebene Nettoinventarwert der Fonds-Komponente einen
offenkundigen Fehler enthält oder unrichtig ist, kann sie die Berechnung
und Bekanntmachung des Nettoinventarwerts der Fonds-Komponente
als zum Zweck aller in Zusammenhang mit den Zertifikaten stehenden
Berechnungen als "nicht bekannt gegeben" ansehen, bis der Investment
Manager ihr einen überarbeiteten Nettoinventarwert der FondsKomponente vorlegt, welcher zur Zufriedenheit der Berechnungsstelle
angemessen begründet werden kann (die "Bekanntmachungsaussetzungszeit"). Die Berechnungsstelle ersucht beim Investment
Manager innerhalb von fünf (5) Bankgeschäftstagen nach dem
maßgeblichen Geschäftstag schriftlich (das "Ersuchen") um einen überarbeiteten Nettoinventarwert der Fonds-Komponente.
(c)
Der Hypothetischer Aktieninhaber erhält bei einer Rückgabe der Aktien
der Gesellschaft nicht den vollen Erlös (Rückkaufwert) innerhalb der
üblichen, unter den in den Dokumenten dargelegten normalen
Marktbedingungen anwendbaren, Zahlungsfrist für Rücknahmen.
(3)
Verschiebungen und Aussetzungen nach den vorstehenden Absätzen werden
von der Berechnungsstelle nach billigem Ermessen (gemäß § 317 BGB), vorgenommen und von der Emittentin nach § 7 dieser Bedingungen bekannt
gemacht. Verschiebungen und Aussetzungen sind (sofern nicht ein offensichtlicher Fehler vorliegt) für alle Beteiligten endgültig und bindend.
(4)
Die Berechnungsstelle kann den maßgeblichen Nettoinventarwert der FondsKomponente nach billigem Ermessen (gemäß § 317 BGB) und unter
Berücksichtigung des Marktstandards unter Verwendung der gleichen
Berechnungsformel und –methode, die in den Fonds-Dokumenten zur
Bestimmung des Nettoinventarwerts vorgeschrieben ist, und unter
Berücksichtigung der zur Berechnung des Nettoinventarwerts der FondsKomponente notwendigen Daten schätzen, sofern
(a)
es der Bewertungsstelle nicht gelingt, der Berechnungsstelle innerhalb
von fünf (5) Bankgeschäftstagen nach Erhalt des Ersuchens nach
§ 4 (2) (b) einen überarbeiteten Nettoinventarwert der FondsKomponente vorzulegen, oder falls die Berechnungsstelle nachweist,
dass der überarbeitete Nettoinventarwert der Fonds-Komponente immer
noch einen offenkundigen Fehler enthält oder unrichtig ist; oder
107
(b)
die Bewertungsstelle den Nettoinventarwert der Fonds-Komponente
nicht wie vorgesehen ermittelt oder bekannt gegeben hat (§ 4 (2) (b))
und die Suspendierung oder das Ausbleiben der Bekanntgabe des
massgeblichen Nettoinventarwerts der Fondskomponente für mehr als
zwanzig (20) Fonds-Geschäftstage nach dem für die Veröffentlichung
des Nettoinventarwerts massgeblichen Fonds-Geschäftstags nicht
behoben ist.
Im Falle nicht ausreichender Daten kann die Berechnungsstelle den
Nettoinventarwert der Fonds-Komponente nach billigem Ermessen (gemäß
§ 317 BGB) unter Berücksichtigung der herrschenden Marktbedingungen, des
zuletzt gemeldeten Nettoinventarwerts, der der Bewertungsstelle abgegebenen
Schätzungen und sonstiger Konditionen bzw. Faktoren, von denen sie
angemessenerweise entscheidet, dass sie von Bedeutung sind, berechnen.
(5)
Das Recht der Emittentin zur Kündigung gemäß § 10 dieser Bedingungen
bleibt hiervon unberührt.
§5
Berechnungen; Zahlung von Geldbeträgen
(1)
Die jeweils gemäß diesen Bedingungen zahlbaren Beträge werden durch die
Berechnungsstelle berechnet. Sämtliche Beträge werden auf die
2. Dezimalstelle abgerundet. Die Berechnungen sind (sofern nicht ein
offensichtlicher Fehler vorliegt) endgültig und für alle Beteiligten bindend.
(2)
Die Emittentin wird die Überweisung der gemäß diesen Bedingungen
zahlbaren Beträge über die Zahlstelle (§ 6) an das Clearingsystem zur
Gutschrift auf die Konten der Hinterleger der Zertifikate bei dem
Clearingsystem veranlassen.
(3)
Alle im Zusammenhang mit der Zahlung von Geldbeträgen anfallenden
Steuern, Gebühren oder anderen Abgaben sind von dem Zertifikatsinhaber zu
tragen und zu zahlen. Die Emittentin bzw. die Zahlstelle sind berechtigt, von
Geldbeträgen etwaige Steuern, Gebühren oder Abgaben einzubehalten, die
von dem Zertifikatsinhaber gemäß vorstehendem Satz zu zahlen sind.
(4)
Die in § 801 Absatz 1 BGB bestimmte Vorlegungsfrist wird für die Zertifikate
auf 10 Jahre abgekürzt.
§6
Zahl- und Berechnungsstelle
(1)
Deutsche
Bank
Aktiengesellschaft,
Große
Gallusstrasse 10-14,
60272 Frankfurt am Main, Deutschland, ist die Zahlstelle (die "Zahlstelle").
Die Emittentin ist berechtigt, jederzeit die Zahlstelle durch ein anderes
Kreditinstitut oder Finanzdienstleistungsinstitut mit vergleichbarer Bonität
(das "Institut"), das seine Hauptniederlassung oder eine Zweigniederlassung
108
in der Bundesrepublik Deutschland unterhält, zu ersetzen, eine oder mehrere
zusätzliche Zahlstellen zu bestellen und deren Bestellung zu widerrufen.
Ersetzung, Bestellung und Widerruf werden unverzüglich gemäß § 7 bekannt
gemacht.
(2)
Die Zahlstelle ist berechtigt, jederzeit ihr Amt als Zahlstelle niederzulegen.
Die Niederlegung wird nur wirksam mit der Bestellung eines anderen Instituts,
das seine Hauptniederlassung oder eine Zweigniederlassung in der
Bundesrepublik Deutschland unterhält, zur Zahlstelle durch die Emittentin.
Niederlegung und Bestellung werden unverzüglich gemäß § 7 bekannt
gemacht.
(3)
Morgan Stanley & Co. International plc ist die Berechnungsstelle (die
"Berechnungsstelle"). Die Emittentin ist berechtigt, jederzeit die
Berechnungsstelle durch ein verbundenes Unternehmen zu ersetzen.
(4)
Die Zahlstelle und die Berechnungsstelle handeln ausschließlich als
Erfüllungsgehilfen der Emittentin und haben keinerlei Pflichten gegenüber den
Zertifikatsinhabern. Die Zahlstelle ist von den Beschränkungen des
§ 181 BGB befreit.
(5)
Weder die Emittentin noch die Zahlstelle sind verpflichtet, die Berechtigung
der Einreicher von Zertifikaten zu prüfen.
§7
Bekanntmachungen
(1)
Alle die Zertifikate betreffenden Mitteilungen sind in einer führenden
Tageszeitung mit allgemeiner Verbreitung in Deutschland zu veröffentlichen.
Diese Tageszeitung wird voraussichtlich die Börsen-Zeitung sein. Jede
derartige Mitteilung gilt mit dem fünften Tag nach dem Tag der
Veröffentlichung (oder bei mehreren Veröffentlichungen mit dem fünften Tag
nach dem Tag der ersten solchen Veröffentlichung) als wirksam erfolgt.
(2)
Die Emittentin ist berechtigt, eine Veröffentlichung nach Absatz 1 durch eine
Mitteilung an das Clearingsystem zur Weiterleitung an die Zertifikatsinhaber
zu ersetzen. Jede derartige Mitteilung gilt am fünften Tag nach dem Tag der
Mitteilung an das Clearingsystem als den Zertifikatsinhabern mitgeteilt.
§8
Aufstockung; Ankauf; Entwertung
(1)
Die Emittentin ist berechtigt, jederzeit ohne Zustimmung der
Zertifikatsinhaber weitere Zertifikate mit gleicher Ausstattung in der Weise zu
begeben, dass sie mit diesen Zertifikaten eine einheitliche Serie bilden, wobei
in diesem Fall der Begriff "Zertifikate" entsprechend auszulegen ist.
109
(2)
Die Emittentin und jedes ihrer Tochterunternehmen ist berechtigt, Zertifikate
im Markt oder anderweitig zu jedem beliebigen Preis zu kaufen. Sofern diese
Käufe durch öffentliches Angebot erfolgen, muss dieses Angebot allen
Zertifikatsinhabern gegenüber erfolgen. Die von der Emittentin erworbenen
Zertifikate können nach Wahl der Emittentin von ihr gehalten, weiterverkauft
oder entwertet werden.
(3)
Sämtliche vollständig zurückgezahlten Zertifikate sind unverzüglich zu
entwerten und können nicht wiederbegeben oder wiederverkauft werden.
§9
Vorzeitiger Verkauf durch die Zertifikatsinhaber
(1)
Jeder Zertifikatsinhaber ist, vorbehaltlich der nachfolgenden Bestimmungen,
berechtigt, die von ihm gehaltenen Zertifikate insgesamt oder teilweise der
Emittentin durch schriftliche Mitteilung gegenüber der Zahlstelle und unter
Einhaltung einer Mitteilungsfrist von mindestens fünfundzwanzig (25)
Kalendertagen vor dem letzten Kalendertag eines Kalenderquartals (jeweils
ein "Vorzeitiger Verkaufstag") über die Morgan Stanley Bank AG, Frankfurt
am Main, Bundesrepublik Deutschland, zum Ankauf anzudienen
("Vorzeitiger Verkauf").
Der erste Vorzeitige Verkaufstag ist der 31. Dezember 2009 und der letzte
Vorzeitige Verkaufstag ist der 30. September 2022.
(2)
Im Fall des Vorzeitigen Verkaufs erhält der Zertifikatsinhaber am jeweiligen
Vorzeitigen Rückzahlungstag den Vorzeitigen Verkaufspreis. Dieser
entspricht dem höheren Betrag der beiden folgenden Beträge:
(i)
Vorzeitiger Mindestverkaufspreis und
(ii)
einem Betrag, der sich nach folgender Formel bestimmt:
[Nennwert*(Nullkuponanleihe(i) + Part*NAV(i)/NAV(Anfang))]*(100%-Gebühr)
Wobei:
"Nullkuponanleihe(i)" der in Prozent ausgedrückte Marktwert einer
synthetischen Nullkuponanleihe rückzahlbar zu 120% des Nennwerts am
Fälligkeitstag und zu jedem Bankgeschäftstag bewertet. Dieser Marktwert
wird von der Berechnungsstelle auf der Basis der EUR-Zinskurve unter
Zugrundelegung eines Zinssatzes von 1‑Monats EURIBOR plus 0,30%
festgesetzt,
"Part" die Partizipation bezeichnet, die am Festlegungstag auf Basis der
Differenz aus 100% und dem Barwert der Nullkuponanleihe von der
Berechnungsstelle festgelegt wird,
110
"NAV(i)" dem Nettoinventarwert der Fonds-Komponente am jeweiligen
Vorzeitigen Verkaufstag entspricht, und
"Gebühr" die Vorzeitige Verkaufsgebühr bezeichnet. Die Vorzeitige
Verkaufsgebühr ("Vorzeitige Verkaufsgebühr") entspricht im Hinblick auf
den jeweiligen Zeitraum folgenden Prozentsätzen:
Zeitraum
Vorzeitige
Verkaufsgebühr
31. Dezember 2009 (einschließlich)
30. Juni 2010 (einschließlich)
bis
zum
4%
30. September 2010 (einschließlich)
bis
zum
3%
30. September 2012 (einschließlich)
bis
zum
1%
"Vorzeitiger Mindestverkaufspreis" im Hinblick auf den jeweilige Zeitraum
folgenden Beträgen entspricht:
Zeitraum
Vorzeitiger
Mindestverkaufspreis
Ausgabetag (einschließlich) bis zum 29. Juni 2019
(einschließlich)
0
30. Juni 2019
(einschließlich)
bis
zum
Nennwert
30. Juni 2021
(einschließlich)
14. Februar 2023 (einschließlich)
bis
zum
Nennwert * 110%
§ 10
Kündigung durch die Emittentin
(1)
Bei Vorliegen eines der nachstehend beispielhaft beschriebenen
"Kündigungsereignisse" ist die Emittentin berechtigt, aber nicht verpflichtet,
die Zertifikate durch Bekanntmachung gemäß § 7 dieser Bedingungen unter
Angabe des Kündigungsereignisses zu kündigen (die "Kündigung"), sofern
das Kündigungsereignis nicht innerhalb von dreissig (30) FondsGeschäftstagen (die "Heilungsfrist") (nach Aufforderung durch die Emittentin
innerhalb von fünf (5) Bankgeschäftstagen nach dem Vorliegen des
Kündigungsereignisses) behoben worden ist:
111
(a)
Die Ermittlung und/oder Bekanntmachung des Nettoinventarwerts der
Fonds-Komponente wird endgültig eingestellt, oder der Emittentin
oder der Berechnungsstelle wird eine entsprechende Absicht bekannt.
(b)
Die Liquidität, mit welcher die Fonds-Komponente gehandelt werden
kann (die "Handelsfrequenz") wird wesentlich zu Lasten der
Hypothetischen Aktieninhaber geändert und weicht nun wesentlich
von der Handelsfrequenz am Allokationstag oder wesentlich von der
Handelsfrequenz, die in den Fonds-Dokumenten beschrieben wird,
oder von den sonstigen Regeln in Bezug auf die Gesellschaft ab. Die
Änderung oder Abweichung der Handelsfrequenz ist nicht wesentlich,
sofern eine zumindest quarteilsweise Rückgabemöglichkeit der FondsKomponente gegeben ist.
(c)
Die Währung, in der der Nettoinventarwert der Fonds-Komponente
veröffentlicht wird, (die "Währungseinheit") wird geändert und weicht
nun von der Währung am Allokationstag bzw. an dem Tag, zu dem die
Fonds-Komponente nach diesen Bestimmungen angepasst wurde, oder
von der Währungseinheit, die in den Fonds-Dokumenten beschrieben
wird, oder von den sonstigen Regeln in Bezug auf die Gesellschaft ab.
(d)
Die Frequenz der Bekanntmachung oder der Zeitraum zwischen
Ermittlung und Bekanntmachung oder die Berechnungsmethode, jeweils
in Bezug auf den Nettoinventarwert (oder einen vorläufigen oder
geschätzten Nettoinventarwert) (die "NAV-Frequenz") wird wesentlich
geändert und weicht nun wesentlich von der NAV-Frequenz am
Allokationstag bzw. an dem Tag, zu dem die Fonds-Komponente nach
diesen Bestimmungen angepasst wurde, oder von der NAV-Frequenz,
die in den Fonds-Dokumenten beschrieben wird, von oder den sonstigen
Regeln in Bezug auf die Gesellschaft ab.
(e)
Die Gesellschaft führt
Rücknahmegebühr ein.
(f)
Die Anzahl von Aktien der Gesellschaft, ihrer Teilfonds oder Aktienklassen, die ein Hypothetischer Aktieninhaber halten darf, wird
aufgrund Gesetzes oder behördlicher Maßnahmen beschränkt.
(g)
Jede Aussetzung oder Beschränkung des Handels in der FondsKomponente (wegen Liquiditätsbeschränkungen oder aus anderen
Gründen), soweit diese nicht bereits zuvor an dem Allokationstag bzw.
zu dem Tag, zu dem die Fonds-Komponente nach diesen Bestimmungen
angepasst wurde, bestanden, wie in den Regeln in Bezug auf die
Gesellschaft beschrieben.
(h)
Die Gesellschaft verlangt, dass ein Hypothetischer Aktieninhaber seine
Aktien ganz oder teilweise zurückgibt.
einen
112
Ausgabeaufschlag
oder
eine
(i)
Ein Hypothetischer Aktieninhaber erhält bei einer Rückgabe der Aktien
der Gesellschaft nicht den vollen Erlös (Rückkaufwert) innerhalb der
üblichen, unter den in den Dokumenten dargelegten normalen
Marktbedingungen anwendbaren, Zahlungsfrist für Rücknahmen
zurück.
(j)
Die Gesellschaft unterliegt der Liquidation, Auflösung oder Einstellung,
oder der Investment Manager beabsichtigt, empfiehlt oder initiiert die
Liquidation, Auflösung oder Einstellung der Gesellschaft.
(k)
Die Bewertungsstelle hat den Nettoinventarwert der Fonds-Komponente
nicht wie vorgesehen ermittelt oder bekannt gegeben (§ 4 (2) (b)) und
die Suspendierung oder das Ausbleiben der Bekanntgabe des
massgeblichen Nettoinventarwerts der Fondskomponente ist für mehr
als zwanzig (20) Fonds-Geschäftstage nach dem für die
Veröffentlichung des Nettoinventarwerts massgeblichen FondsGeschäftstags nicht behoben worden.
(2)
Die Kündigung hat innerhalb von fünf (5) Bankgeschäftstagen nach Ablauf
der Heilungsfrist und unter Angabe des Bankgeschäftstags, zu dem die
Kündigung wirksam wird (der "Kündigungstag"), zu erfolgen. In Zweifelsfällen über das Vorliegen des Kündigungsereignisses entscheidet die
Emittentin gemäß § 315 BGB nach billigem Ermessen.
(3)
Im Fall der Kündigung zahlt die Emittentin am Rückzahlungstag bei
Kündigung (§ 10 (4)) an jeden Zertifikatsinhaber bezüglich jedes von ihm
gehaltenen Zertifikats einen Geldbetrag, der von der Emittentin gemäß
§ 315 BGB nach billigem Ermessen und unter Berücksichtigung der im
Hinblick auf den jeweiligen Kündigungstag maßgeblichen Kündigungsgebühr
(§ 10 (5)) sowie gegebenenfalls unter Berücksichtigung des dann
maßgeblichen Nettoinventarwerts der Fonds-Komponente und der durch die
Kündigung bei der Emittentin angefallenen Kosten, als angemessener
Marktpreis eines Zertifikats bei Kündigung festgelegt wird (der
"Kündigungsbetrag").
(4)
Der
"Rückzahlungstag
sechsunddreissigste (36.)
Kündigungstag folgt.
(5)
Die "Kündigungsgebühr" entspricht im Hinblick auf den jeweiligen Zeitraum
bei
Kündigung"
Geschäftstag, der
ist
spätestens
unmittelbar auf
der
den
Zeitraum
Kündigungsgebühr
31. Dezember 2009 (einschließlich) bis zum
4 % des Nennwerts
113
1. Juli 2010 (einschließlich) bis zum
3 % des Nennwerts
1. Juli 2012 (einschließlich) bis zum
1 % des Nennwerts
Bei Kündigung nach dem 30. Juni 2014 wird keine Kündigungsgebühr
erhoben.
§ 11
Ersetzung der Emittentin
(1)
Die Emittentin (oder jede Schuldnerin, welche die Emittentin ersetzt) ist
jederzeit berechtigt, ohne weitere Zustimmung der Zertifikatsinhaber ein von
ihr kontrolliertes, sie kontrollierendes oder gemeinsam mit ihr von einem
dritten Unternehmen kontrolliertes Unternehmen (mit Geschäftssitz in
irgendeinem Land weltweit) oder irgendeines ihrer Tochterunternehmen an
ihrer Stelle als Hauptschuldnerin (die "Nachfolgeschuldnerin") für alle
Verpflichtungen aus und im Zusammenhang mit den Zertifikaten einzusetzen,
und die Zertifikatsinhaber stimmen dieser Einsetzung hiermit unwiderruflich
zu, vorausgesetzt, dass:
(a) alle für die Wirksamkeit der Ersetzung notwendigen Dokumente (die
"Dokumente") von der Emittentin und der Nachfolgeschuldnerin
unterzeichnet werden, entsprechend denen die Nachfolgeschuldnerin zu
Gunsten jedes Zertifikatsinhabers alle Verpflichtungen aus diesen
Zertifikatsbedingungen übernimmt, als sei sie von Anfang an Stelle der
Emittentin Partei dieser Vereinbarungen gewesen, und entsprechend
denen die Emittentin und die Garantin (falls die Garantin nicht die
Nachfolgeschuldnerin ist) zu Gunsten jedes Zertifikatsinhabers unbedingt
und unwiderruflich die Zahlung aller fälligen und durch die Nachfolgeschuldnerin als Hauptschuldner zahlbaren Beträge garantiert (wobei diese
Garantie im Folgenden als "Ersetzungs-Garantie") bezeichnet wird),
und
(b) die Dokumente ein unselbstständiges Garantieversprechen der
Nachfolgeschuldnerin und der Emittentin enthalten, wonach die
Nachfolgeschuldnerin und die Emittentin alle für die Ersetzung und die
Abgabe der Ersetzungs-Garantie durch die Emittentin notwendigen
Genehmigungen und Einverständniserklärungen von Regierungsstellen
und Aufsichtsbehörden erhalten haben, wonach ferner die
Nachfolgeschuldnerin alle für die Erfüllung ihrer Verpflichtungen aus
den
Dokumenten
notwendigen
Genehmigungen
und
Einverständniserklärungen von Regierungsstellen und Aufsichtsbehörden
erhalten hat und wonach weiterhin sämtliche dieser Genehmigungen und
Einverständniserklärungen in vollem Umfang gültig und wirksam sind
und wonach zudem die Verpflichtungen der Nachfolgeschuldnerin und
114
die Ersetzungs-Garantie jeweils gemäß ihren Bestimmungen wirksam
und rechtsverbindlich und durch jeden Zertifikatsinhaber durchsetzbar
sind und wonach schließlich, wenn die Nachfolgeschuldnerin ihre
Verbindlichkeiten an den Zertifikaten durch eine Niederlassung erfüllt,
die Nachfolgeschuldnerin selbst verpflichtet bleibt
(2)
Nachdem die Dokumente für die Emittentin und die Nachfolgeschuldnerin
wirksam und rechtsverbindlich geworden sind und eine Mitteilung gemäß
Absatz 4 dieser Bestimmung erfolgt ist, gilt die Nachfolgeschuldnerin als in
den Zertifikaten an Stelle der Emittentin als Hauptschuldnerin verzeichnet und
die Zertifikate gelten als dementsprechend ergänzt, um der Ersetzung zur
Durchsetzung zu verhelfen. Die Unterzeichnung der Dokumente und die
Mitteilung gemäß Absatz 4 dieser Bestimmung befreien, im Fall der
Einsetzung einer anderen Gesellschaft als Hauptschuldnerin, die Emittentin
von allen Verbindlichkeiten, die sie als Hauptschuldnerin unter den
Zertifikaten hatte.
(3)
Die Dokumente werden so lange bei der Zahlstelle hinterlegt und von dieser
verwahrt werden, als noch Forderungen bezüglich des Zertifikats von
irgendeinem Zertifikatsinhaber gegen die Nachfolgeschuldnerin oder die
Emittentin erhoben werden können oder Forderungen aus den Dokumenten
noch nicht endgültig zugesprochen, ausgeglichen oder erfüllt worden sind.
(4)
Spätestens fünfzehn (15) Bankgeschäftstage nach Unterzeichnung der
Dokumente wird die Nachfolgeschuldnerin dies den Zertifikatsinhabern
mitteilen.
(5)
Für die Zwecke dieses § 11 bedeutet 'Kontrolle' direkten oder indirekten
Einfluss auf die Geschäftsleitung und Geschäftspolitik einer Gesellschaft oder
die Möglichkeit, deren Richtung zu bestimmen, sei es kraft Vertrages oder
kraft direkten oder indirekten Besitzes einer solchen Zahl stimmberechtigter
Anteile, die es deren Inhaber ermöglichen, die Mehrheit der Geschäftsführer
zu bestimmen, wobei jede Gesellschaft als darin einbezogen gilt, die eine
ähnliche
Beziehung
zur
erstgenannten
Gesellschaft
aufweist.
'Stimmberechtigte Anteile' sind zu diesem Zweck Kapitalanteile an einer
Gesellschaft, die üblicherweise zur Wahl der Geschäftsführer berechtigen. Die
Begriffe 'kontrolliert', 'kontrollierend' und 'gemeinsam kontrolliert' sind
entsprechend auszulegen.
§ 12
Verschiedenes
(1)
Die Zertifikate unterliegen deutschem Recht.
(2)
Ausschließlich zuständig für sämtliche im Zusammenhang mit den
Zertifikaten
entstehenden
Klagen
oder
sonstige
Verfahren
("Rechtsstreitigkeiten") ist das Landgericht Frankfurt/Main. Die
Zertifikatsinhaber können ihre Ansprüche jedoch auch vor anderen
115
zuständigen Gerichten geltend machen. Die Emittentin unterwirft sich den in
diesem Absatz bestimmten Gerichten.
(3)
Für etwaige Rechtsstreitigkeiten vor deutschen Gerichten bestellen die
Emittentin und die Garantin Morgan Stanley Bank AG, Junghofstraße 13-15,
60311 Frankfurt am Main zu ihrem Zustellungsbevollmächtigten in
Deutschland.
(4)
Die Emittentin ist berechtigt, in diesen Zertifikatsbedingungen
a) offensichtliche Schreib- oder Rechenfehler oder ähnliche offenbare
Unrichtigkeiten sowie b) widersprüchliche oder lückenhafte Bestimmungen
ohne Zustimmung der Zertifikatsinhaber zu ändern bzw. zu ergänzen, wobei in
den unter b) genannten Fällen nur solche Änderungen bzw. Ergänzungen
zulässig sind, die unter Berücksichtigung der Interessen der Emittentin für die
Zertifikatsinhaber zumutbar sind, d.h. die die finanzielle Situation der
Zertifikatsinhaber nicht wesentlich verschlechtern. Änderungen bzw.
Ergänzungen dieser Zertifikatsbedingungen werden unverzüglich gemäß § 7
bekannt gemacht.
§ 13
Sprache
Diese Zertifikatsbedingungen sind ausschließlich in deutscher Sprache abgefasst.
116
BESTEUERUNG IN DER BUNDESREPUBLIK DEUTSCHLAND
Die nachstehenden Ausführungen enthalten allgemeine Angaben zu deutschen steuerrechtlichen
Vorschriften, die im Zeitpunkt der Drucklegung dieser Zertifikatsbedingungen in Kraft waren
und nach Auffassung der Emittentin für die Besteuerung von Zertifikatsinhabern bedeutsam
werden können. Diese Vorschriften können kurzfristig geändert werden, unter gewissen Grenzen
auch mit Rückwirkung. Die Besteuerung der Zertifikate wird sich insbesondere durch die
Einführung einer allgemeinen Abgeltungsteuer ändern (vgl. nachfolgend unter
"Steuerrechtsänderungen"). Die nachfolgenden Informationen erheben keinen Anspruch auf
Vollständigkeit und berücksichtigen insbesondere nicht individuelle Aspekte, die für die
Besteuerung eines Zertifikatsinhabers bedeutsam werden können.
Es wird jedem potentiellen Anleger empfohlen, sich vor dem Kauf der Zertifikate von
seinem persönlichen Steuerberater über die sich in seinem Einzelfall ergebenden
Steuerfolgen beraten zu lassen; nur dieser ist in der Lage, die individuellen Umstände des
jeweiligen Anlegers in Betracht zu ziehen.
Steuerinländer
Zinszahlungen auf die Zertifikate (dazu gehört bei diesem Typ der Zertifikate der
Unterschiedsbetrag zwischen dem Ausgabebetrag und dem Rückzahlungsbetrag bei Fälligkeit)
an Personen, die in Deutschland steuerlich ansässig sind (d.h. Personen, deren Wohnsitz,
gewöhnlicher Aufenthalt, Sitz oder Ort der Geschäftsleitung sich in Deutschland befindet),
unterliegen
der
deutschen
Einkommenbzw.
Körperschaftsteuer
(zuzüglich
Solidaritätszuschlag). Wenn die Zertifikate Betriebsvermögen eines in Deutschland betriebenen
Gewerbebetriebs sind, unterliegen die Zinsen auch der Gewerbesteuer.
Werden die Zertifikate während ihrer Laufzeit veräußert oder bei Endfälligkeit zurückgezahlt, so
unterliegt bei natürlichen Personen der Unterschied zwischen dem Erlös aus der Veräußerung,
Abtretung oder Einlösung und dem Ausgabe- bzw. Kaufpreis für das Zertifikat im Jahr der
Veräußerung, Abtretung oder Einlösung der Einkommensteuer (zuzüglich Solidaritätszuschlag).
Gewinne aus der Veräußerung von Zertifikate, die von einer in Deutschland ansässigen
Körperschaft erzielt werden, unterliegen der Körperschaftsteuer (zuzüglich Solidaritätszuschlag)
und der Gewerbesteuer.
Wenn die Zertifikate in einem Depot verwahrt werden, das der Inhaber bei einer deutschen
Zweigstelle eines deutschen oder ausländischen Kredit- oder Finanzdienstleistungsinstituts
(nachfolgend "auszahlende Stelle") unterhält, wird Zinsabschlag in Höhe von 30 % (zuzüglich
5,5 % Solidaritätszuschlag darauf), insgesamt also ein Steuerabzug von 31,65 %, auf die
Zinszahlungen erhoben. Zinsabschlag in der genannten Höhe wird auch von dem Unterschied
zwischen dem Erlös aus der Veräußerung, Abtretung oder Einlösung und dem Ausgabe- bzw.
Kaufpreis der Zertifikate einbehalten, wenn die Zertifikate seit der Zeichnung bzw. dem Erwerb
in einem Depot dieser auszahlenden Stelle verwahrt worden sind. Wurden sie erst später in das
Depot der auszahlenden Stelle überführt, so wird Zinsabschlag in der genannten Höhe pauschal
auf 30 % des Erlöses auf der Veräußerung, Abtretung oder Einlösung der Zertifikate einbehalten.
117
Im Allgemeinen wird kein Zinsabschlag erhoben, wenn der Inhaber der Zertifikate eine
natürliche Person ist und (i) die Zertifikate weder im Betriebsvermögen hält, noch die Erträge
daraus zu den Einkünften aus Vermietung und Verpachtung gehören und (ii) er der auszahlenden
Stelle einen Freistellungsauftrag erteilt hat, soweit die auf die Zertifikate entfallenden
Zinserträge zusammen mit anderen Kapitalerträgen den im Freistellungsauftrag angegebenen
Höchstbetrag nicht übersteigen. Entsprechend wird kein Zinsabschlag einbehalten, wenn der
Inhaber der Zertifikate der auszahlenden Stelle eine vom zuständigen Wohnsitzfinanzamt
ausgestellte Nichtveranlagungsbescheinigung eingereicht hat.
Der Zinsabschlag und der Solidaritätszuschlag darauf werden auf die deutsche Einkommen- oder
Körperschaftsteuer und den Solidaritätszuschlag der in Deutschland steuerlich ansässigen
Personen angerechnet. Übersteigen die Steuerabzugsbeträge die geschuldete Steuer, so wird die
Differenz dem Inhaber der Zertifikate bei der Steuerveranlagung erstattet.
Steuerausländer
Zinsen und Veräußerungsgewinne unterliegen bei Steuerausländern, d.h. Personen, die nicht in
Deutschland steuerlich ansässig sind, nicht der deutschen Besteuerung, es sei denn, (i) die
Zertifikate gehören zum Betriebsvermögen einer Betriebsstätte (einschließlich eines ständigen
Vertreters) oder festen Einrichtung, die der Inhaber der Zertifikate in Deutschland unterhält, oder
(ii) die Zinseinkünfte gehören aus anderen Gründen zu den steuerpflichtigen inländischen
Einkünften (z.B. als Einkünfte aus der Vermietung oder Verpachtung bestimmten in Deutschland
belegenen Vermögens). Wenn der Steuerausländer mit den Erträgen aus den Zertifikaten der
deutschen Besteuerung unterliegt, gelten ähnliche Regeln wie oben unter "Steuerinländer"
erläutert.
Steuerausländer sind im Allgemeinen von dem deutschen Zinsabschlag und dem
Solidaritätszuschlag darauf befreit. Sind die Zinsen jedoch nach Maßgabe des vorstehenden
Absatzes in Deutschland steuerpflichtig und werden die Zertifikate in einem Depot bei einer
auszahlenden Stelle verwahrt, so wird Zinsabschlag erhoben wie oben unter "Steuerinländer"
erläutert.
Steuerrechtsänderungen
Im Rahmen des Unternehmensteuerreformgesetzes 2008 hat der deutsche Gesetzgeber die
Einführung einer allgemeinen Abgeltungsteuer mit genereller Wirkung für nach dem 31.
Dezember 2008 zufließende Kapitalerträge beschlossen. Im Folgenden werden die wesentlichen
Änderungen für die Besteuerung der Zertifikate dargestellt, die sich durch das
Unternehmensteuerreformgesetz 2008 ergeben.
Das Unternehmensteuerreformgesetz 2008 sieht unter anderem vor, dass Erträge und Gewinne
aus der Veräußerung von Kapitalanlagen einem Steuerabzug an der Quelle zu einem
einheitlichen Steuersatz von 26,375 % (einschließlich Solidaritätszuschlag, gegebenenfalls
zuzüglich Kirchensteuer) unterliegen. Dies gilt sowohl für im Privat- als auch im
Betriebsvermögen gehaltene Zertifikate. Bei privaten Anlegern ist mit dem Steuerabzug die
Einkommensteuer in Bezug auf diese Kapitaleinkünfte zukünftig grundsätzlich abgegolten
(Abgeltungsteuer). Betriebliche Anleger können die Quellensteuer im Rahmen der Veranlagung
anrechnen oder erstatten lassen.
118
Verluste aus der Veräußerung von Zertifikaten, die dem neuen Recht unterliegen, können nur mit
positiven Einkünften aus Kapitalvermögen verrechnet werden. Sind im Veranlagungszeitraum
des Verlusts keine ausreichenden positiven Einkünfte vorhanden, können die Verluste in die
folgenden Jahre vorgetragen werden; ein Verlustrücktrag ist nicht möglich.
Bei steuerpflichtigen Kapitalerträgen, die einem privaten Anleger nach dem 31. Dezember 2008
zufließen, kann ein Sparer-Pauschbetrag in Höhe von EUR 801 (EUR 1.602 bei
Zusammenveranlagung) von den Erträgen abgezogen werden. Die im Zusammenhang mit
Kapitaleinkünften stehenden tatsächlichen Werbungskosten, die nach dem 31. Dezember 2008
entstehen, finden keine steuerliche Berücksichtigung.
EU Zinsrichtlinie
Am 3. Juni 2003 hat der Rat der Europäischen Union die Richtlinie im Bereich der Besteuerung
von Zinserträgen (2003/48/EG) erlassen. Nach den Regelungen der Richtlinie ist jeder
Mitgliedstaat verpflichtet, den zuständigen Behörden eines anderen Mitgliedstaates Auskünfte
über Zinszahlungen und gleichgestellte Zahlungen zu erteilen, die im jeweiligen Mitgliedstaat an
eine Person gezahlt werden, die in einem anderen Mitgliedstaat ansässig ist. Österreich, Belgien
und Luxemburg sind anstelle der Auskunftserteilung verpflichtet, während einer Übergangszeit
eine Quellensteuer zu erheben, deren Satz schrittweise auf 35% angehoben wird. Die Richtlinie
wurde in Deutschland durch die am 1. Juli 2005 in Kraft getretene Zinsinformationsverordnung
durch Einführung eines Meldeverfahrens für Zinszahlungen an in anderen EU-Staaten (bzw.
bestimmten abhängigen und assoziierten Gebieten) ansässige natürliche Personen nach § 9 der
Zinsinformationsverordnung (ZIV) eingeführt. Dieses Verfahren erfasst, abhängig von der
Ausgestaltung, auch Zertifikate. Das Meldeverfahren sieht vor, dass eine inländische Zahlstelle
dem Bundeszentralamt für Steuern Auskünfte zu erteilen verpflichtet ist, insbesondere im
Hinblick auf Identität und Wohnsitz des wirtschaftlichen Eigentümers, Name und Anschrift der
Zahlstelle, Kontonummer des wirtschaftlichen Eigentümers oder, in Ermangelung einer solchen,
Kennzeichen der Forderung aus der die Zinsen herrühren sowie den Gesamtbetrag der Zinsen
oder Erträge und den Gesamtbetrag des Erlöses aus der Abtretung, Rückzahlung oder Einlösung.
Das Bundeszentralamt für Steuern leitet diese Auskünfte an die zuständige Behörde des
Mitgliedstaats, in dem der wirtschaftliche Eigentümer ansässig ist, weiter.
119
ANLAGE:
JAHRESBERICHT DER EMITTENTIN
ZUM 30. NOVEMBER 2007
(in englischer Sprache)
MORGAN STANLEY B.V.
Annual Report and Accounts
30 November 2007
F-1
DIRECTORS' REPORT
The Directors present their report and accounts for Morgan Stanley B.V. (the “Company”) for the year ended 30
November 2007.
RESULTS AND DIVIDENDS
The profit for the year, after tax, was €2,197,000 (2006: €775,000 profit).
During the year, no dividends were paid (2006: €nil).
PRINCIPAL ACTIVITY AND BUSINESS REVIEW
The principal activity of the Company is the issuance of financial instruments and the hedging of the obligations
arising pursuant to such issuances.
The Company’s ultimate parent undertaking and controlling entity is Morgan Stanley, which, together with the
Company and Morgan Stanley’s other subsidiary undertakings, form the Morgan Stanley Group (the "Group").
The income statement for the year is set out on page 2. The profit for the year rose by €1,422,000 over the prior
year. The Company’s operating profit has increased by €1,887,000. This was primarily driven by fees earned from
increased issuances of financial instruments to other Morgan Stanley Group undertakings following increased
activity over prior year.
The balance sheet on page 3 of the financial statements shows that the Company’s net assets at the end of the year
were €5,368,000 an increase of 69.3% from the prior year. This was primarily driven by increased fees earned from
issuances of financial instruments to other Morgan Stanley Group undertakings following increased activity over
prior year not yet received and presented within receivables.
The Directors have voluntarily opted for the financial statements to be prepared under International Financial
Reporting Standards (‘IFRS’) as adopted by the European Union effective 1 December 2006. An explanation of
how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the
Company is provided in Note 14.
There have been no significant events after the balance sheet date.
The Group manages its key performance indicators on a global basis. For this reason, the Company's Directors
believe that providing performance indicators for the Company itself would not enhance an understanding of the
development, performance or position of the business of the Company.
Detailed information regarding the financial risk management of the Company is set out in note 10 to the accounts.
FUTURE OUTLOOK
There have not been any significant changes in the Company's principal activity in the year under review and no
significant change in the Company's principal business is expected.
DIRECTORS
The following Directors held office throughout the year:
G.C.De Boer
C.E.C. Hood
TMF Management B.V.
J.A. Solan
AUDITORS
Deloitte Accountants B.V. have expressed their willingness to continue in office as auditors of the Company and a
resolution to re-appoint them will be proposed at the forthcoming annual general meeting.
By order of the Board on 1 February 2008.
Directors
G.C.De Boer
C.E.C. Hood
TMF Management B.V.
J.A. Solan
F-2
INCOME STATEMENT
Year ended 30 November 2007
Note
Net gains on financial instruments designated at fair
value through profit or loss
Interest income
Other operating income
4
Other operating expense
5
OPERATING PROFIT BEFORE INCOME TAX
Income tax expense
PROFIT FOR THE YEAR
6
2007
€'000
2006
€'000
-
-
397
176
2,573
908
(8)
(9)
2,962
1,075
(765)
(300)
2,197
775
All operations were continuing in the current and prior year.
The notes on page 6 to 16 form an integral part of the accounts.
F-3
BALANCE SHEET
30 November 2007
(Including Proposed Appropriation of Results)
2007
€'000
2006
€'000
12
14
13
31,229
-
13
46,356
1,736
7
10,104,646
3,890,053
236
1,454
10,182,479
3,893,257
13
(119,030)
-
13
-
(33)
7
(10,058,081)
(3,890,053)
(10,177,111)
(3,890,086)
(18)
(18)
(5,350)
(3,153)
(5,368)
(3,171)
(10,182,479)
(3,893,257)
Note
ASSETS
Loans and receivables:
Cash at bank
Trade receivables
Other receivables
Financial assets designated at fair value through profit or
loss
Current tax
TOTAL ASSETS
LIABILITIES AND EQUITY
Financial liabilities at amortised cost:
Trade payables
Other payables
Financial liabilities designated at fair value through profit
or loss
TOTAL LIABILITIES
EQUITY ATTRIBUTABLE TO SHAREHOLDERS
8
Share capital
Retained earnings
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
These accounts were approved by the Board and authorised for issue on 1 February 2008
Signed on behalf of the Board on 1 February 2008.
Directors
G.C.De Boer
C.E.C. Hood
TMF Management B.V.
J.A. Solan
The notes on pages 6 to 16 form an integral part of the accounts.
F-4
STATEMENT OF CHANGES IN EQUITY
At 1 December 2005
Profit for the year
Balance at 30 November 2006
At 1 December 2006
Profit for the year
Balance at 30 November 2007
Share Capital
€'000
Retained
Earnings
€'000
Total
€'000
18
2,378
2,396
-
775
775
18
3,153
3,171
18
3,153
3,171
-
2,197
2,197
18
5,350
5,368
F-5
CASH FLOW STATEMENT
2007
€'000
2006
€'000
2,962
1,075
(75,847)
(1,160)
(6,229,258)
(3,250,780)
(5)
(1)
(6,305,110)
(3,251,941)
118,997
(272)
6,182,693
3,250,780
6,301,690
3,250,508
(458)
(358)
982
358
(524)
-
458
358
-
-
Currency translation differences on FX currency cash
balances
(2)
(1)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR
14
15
CASH AND CASH EQUIVALENTS AT THE END
OF THE YEAR
12
14
OPERATING ACTIVITIES
Profit for the year
Change in operating assets
Net increase in loans and receivables
Net increase in financial assets designated at fair value
through profit or loss
Net increase in current tax
Change in operating liabilities
Net increase /(decrease) in financial liabilities at
amortised cost
Net increase in financial liabilities designated at fair
value through profit or loss
Cash used in operating activities
Income tax received
Income tax paid
NET CASH FLOWS FROM OPERATING
ACTIVIES
F-6
NOTES TO THE FINANCIAL STATEMENTS
1.
CORPORATE INFORMATION
The Company is incorporated and domiciled in The Netherlands, at the following address:
Locatellikade 1, Parnassustoren, 1076 AZ, Amsterdam, The Netherlands.
The Company is engaged in the issuance of financial instruments and the hedging of obligations pursuant to
such issuances.
2.
BASIS OF PREPARATION
Statement of compliance
The Company has prepared its annual financial statements in accordance with International Financial
Reporting Standards (‘IFRSs’) as adopted by the European Union. The primary financial statements in this
document are presented in accordance with International Accounting Standard (‘IAS’) 1 ‘Presentation of
Financial Statements’.
This is the Company’s first set of financial statements prepared in accordance with IFRS and IFRS 1 ‘Firsttime Adoption of International Financial Reporting Standards’ (‘IFRS 1’) has been applied. An explanation
of how the transition to IFRS has affected the reported financial position, financial performance and cash
flows of the Company is provided in Note 14.
New Standards and interpretations adopted during the year
IFRS 7 ‘Financial Instruments: Disclosures’ (‘IFRS 7’) was issued by the International Accounting Standards
Board (‘IASB’) in August 2005 for application for annual periods beginning on or after 1 January 2007. The
Company has chosen to early adopt IFRS 7 with effect from 1 December 2006, ahead of its effective date.
The impact of the new Standard has been to expand the disclosures provided in these financial statements
regarding the Company’s financial instruments.
New Standards and Interpretations not yet adopted
At the date of authorisation of these financial statements, the following Standards and Interpretations relevant
to the Company’s operations were in issue by the IASB but not yet effective:
Amendment to IAS 1 ‘Presentation of Financial Statements’ on capital disclosures. This was issued by the
IASB in August 2005 for application in accounting periods beginning on or after 1 January 2007. The
Standard will be adopted by the Company for the year ended 30 November 2008.
IFRS 8 ‘Operating Segments’. This was issued by the IASB in November 2006 for application in accounting
periods beginning on or after 1 January 2009. This Standard will be adopted by the Company for the year
ended 30 November 2008.
The Company expects that the adoption of these Standards will have no material impact on the financial
statements.
Basis of measurement
The financial statements of the Company are prepared under the historical cost convention modified by the
inclusion of financial instruments at fair value.
Use of estimates
The preparation of financial information requires the Company to make estimates and assumptions regarding
the valuation of certain financial instruments and other matters that affect the financial statements and related
disclosures. The Company believes that the estimates utilised in preparing the financial statements are
prudent and reasonable. Actual results could differ materially from these estimates.
F-7
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Functional currency
Items included in the financial statements are measured and presented in Euros, the currency of the primary
economic environment in which the Company operates.
All currency amounts in the annual report are rounded to the nearest thousand Euros.
b. Foreign currencies
Any monetary assets and liabilities denominated in currencies other than Euros are translated into Euros at
the rates ruling at the balance sheet date. Transactions in currencies other than Euros are recorded at the rates
ruling at the dates of the transactions. All translation differences are taken through the income statement.
c. Recognition of income and expenses
i)
Net gains and losses on financial instruments designated at fair value through profit or loss
Net gains and losses on financial instruments designated at fair value through profit or loss includes all
related realised and unrealised fair value changes, interest income and expense and foreign exchange
differences.
ii)
Interest
Interest income and interest expense on financial assets and financial liabilities not at fair value is
recognised in the income statement using the effective interest method. The effective interest method is a
method of calculating the amortised cost of a financial asset or a financial liability (or group of financial
assets or financial liabilities) and of allocating the interest income or interest expense over the expected life
of the financial asset or financial liability. The effective interest rate is the rate that exactly discounts the
estimated future cash payments and receipts through the expected life of the financial asset or liability (or,
where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective
interest rate is established on initial recognition of the financial asset and liability and is not revised
subsequently.
The calculation of the effective interest rate includes all fees and commissions paid or received transaction
costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are
incremental costs that are directly attributable to the acquisition, issue or disposal or a financial asset or
liability.
iii)
Fees and commissions
Fees and commissions classified within other operating income include fees earned from issuances of
financial instruments to other Morgan Stanley Group undertakings. These amounts are recognised as the
related services are performed.
d. Fair value of financial instruments
Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties, in an arm’s length transaction.
The price transparency of a particular product will determine the degree of judgment involved in determining
the fair value of the financial instrument. Price transparency is affected by a wide range of factors,
including, for example, the type of product, whether it is a new product and not yet established in the
marketplace and the characteristics particular to the product. Products for which actively quoted prices or
market data are available or for which fair value is derived from actively quoted prices or market data will
generally have a higher degree of price transparency. By contrast, products that are thinly traded or not
quoted will generally have little or no price transparency.
A substantial percentage of the fair value of the Company’s financial instruments held at fair value is based
on observable market prices, observable market data, or is derived from such prices or data. The availability
of observable market prices and market data can vary from product to product. Where available, observable
market prices and market data in a product (or a related product) may be used to derive a price without
requiring significant judgment.
F-8
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In certain markets, observable market prices or market data are not available for all products, and fair value is
determined using valuation techniques appropriate for each particular product. These valuation techniques
involve some degree of judgement.
The transparency of market prices and/or market data will determine the degree of judgement involved in
determining the fair value of the Company’s financial instruments.
The fair values of many financial instruments, including over-the-counter (OTC) financial instruments, are
derived primarily using valuation techniques, which may require multiple market data as inputs. The
Company also uses valuation techniques to manage the risks introduced by OTC financial instruments.
Depending on the product and the terms of the valuation technique the fair value of the OTC financial
instrument can be modelled using a series of techniques, including closed-form analytic formulae such as the
Black-Scholes option pricing model, simulation models or a combination thereof, applied consistently. In the
case of more established financial instruments, the valuation techniques used by the Company are widely
accepted by the financial services industry. Valuation techniques take into account the contract terms
including the maturity, as well as market data such as interest rates, volatility and the creditworthiness of the
counterparty.
In the normal course of business, the fair value of a financial instrument on initial recognition is the
transaction price (i.e. the fair value of the consideration given or received). In certain circumstances,
however, the fair value will be based on other observable current market transactions in the same instrument,
without modification or repacking, or on a valuation technique whose variables include only data from
observable markets. When such evidence exists, the Company recognises a gain or loss on inception of the
transaction.
When unobservable market data has a significant impact on determining fair value at the inception of the
transaction, the entire initial change in fair value, as at the transaction date, indicated by the valuation
technique is not recognised immediately in the income statement. It is recognised instead when the market
data becomes observable.
e. Financial instruments designated at fair value
The Company has designated financial assets and financial liabilities at fair value through profit and loss
when either:
•
the financial assets or financial liabilities are managed, evaluated and reported internally on a fair
value basis;
•
the designation at fair value eliminates or significantly reduces an accounting mismatch which
would otherwise arise; or
•
the financial asset or financial liability contains an embedded derivative that significantly modifies
the cash flows that would otherwise be required under the contract.
Financial instruments designated at fair value are recorded on settlement date at fair value. From the date the
transaction is entered into (trade date) until settlement date the Company recognises any unrealised fair value
changes of the contract in ‘Net gains from financial instruments designated at fair value through profit or
loss’. On settlement date the financial instrument is recognised or derecognised from the balance sheet at fair
value of the consideration given or received, plus or minus the change in fair value of the contract since the
trade date. Subsequent changes in fair value are reflected in the income statement in ‘Net gains from financial
instruments designated at fair value through profit or loss’.
f. Loans and Receivables
Financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active
market are categorised as loans and receivables. These financial assets are initially recognised on trade date
at fair value. Subsequent measurement is at amortised cost, using the effective interest rate method, less
allowance for impairment.
F-9
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
g. Offsetting of financial assets and financial liabilities
Where there is a current legally enforceable right to set off the recognised amounts and an intention to settle
on a net basis or to realise the asset and the liability simultaneously, financial assets and financial liabilities
are offset and the net amount is presented on the balance sheet. In the absence of such conditions, financial
assets and financial liabilities are presented on a gross basis.
h. Income Tax
The tax expense represents the sum of the tax paid and currently payable.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as
reported in the income statement because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never taxable or deductible. The Company’s
liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the
balance sheet date.
4.
OTHER OPERATING INCOME
Other operating income
2007
€'000
2006
€'000
2,573
908
Operating income relates to fees earned from issuances of financial instruments to other Morgan Stanley
Group undertakings.
5.
OTHER OPERATING EXPENSE
2007
€'000
2006
€'000
8
9
Audit Fees
Audit of the annual accounts
The Company employed no staff during the year.
F-10
6.
TAX EXPENSE
Dutch corporation tax at 25.84% (2006: 29.76%)
Current year
Adjustments in respect of prior years
Tax expense
Reconciliation of effective tax rate
Profit before income tax
Income tax using the standard rate of corporation
tax in the Netherlands of 25.84% (2006: 29.76%)
Impact on tax of:
Adjustments to the tax charge in respect of previous periods
Total income tax expense in the income statement
7.
2007
€’000
2006
€’000
765
765
320
(20)
300
2007
€’000
2006
€’000
2,962
1,075
765
320
765
(20)
300
FINANCIAL ASSETS AND LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT
OR LOSS
Financial instruments designated at fair value through profit and loss consist primarily of the following
classes of assets and liabilities:
Issued structured notes - These instruments contain an embedded derivative which significantly modifies the
cash flows of the issuance. The return on the instrument is linked to an underlying that is not clearly and
closely related to the debt host including, but not limited to, equity, credit or commodity-linked notes. Using
the fair value option, the entire instrument is measured at fair value through profit or loss.
Prepaid equity securities contracts - These contracts involve derivatives for which an initial payment is paid
at inception. These financial instruments hedge the obligations arising pursuant to the issuance of the
structured notes. Using the fair value option, the entire instrument is measured at fair value through profit or
loss.
2007
Assets
€'000
Prepaid equity securities
contracts
Issued notes
10,104,646
10,104,646
2006
Liabilities
€'000
Assets
€'000
Liabilities
€'000
-
3,890,053
-
(10,058,081)
-
(3,890,053)
(10,058,081)
3,890,053
(3,890,053)
F-11
7.
FINANCIAL ASSETS AND LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT
OR LOSS (CONTINUED)
Included within financial assets designated at fair value is an amount of €2,331,580,000 (2006
€110,842,000) and within financial liabilities designated at fair value is an amount of €2,331,580,000 (2006
€110,842,000) that is expected to be settled after more than twelve months.
The carrying amount at 30 November 2007 and 30 November 2006 of financial liabilities designated at fair
value is equal to the contractual value at maturity.
The change in the fair value of financial liabilities designated at fair value attributable to changes in credit
risk is a gain of €104,980,000 and the change in the fair value of financial assets designated at fair value
attributable to changes in credit risk is a loss of €104,980,000. This represents a change of estimate from the
prior period when the equivalent amount would have been €14,664,000 in respect of both financial assets and
liabilities. Included within the income statement is a gain of €104,980,000 attributable to changes in own
credit risk for financial liabilities designated at fair value and a loss of €104,980,000 attributable to
counterparty credit for financial assets designated at fair value.
The above change in the fair value of financial assets designated at fair value through profit or loss and
financial liabilities designated at fair value through profit or loss that is attributable to changes in the credit
risk is determined as the amount of change in its fair value that is not attributable to changes in market
conditions that give rise to market risk.
8.
EQUITY
Ordinary Shares
Authorised
Issued and fully paid
2007
Number
2006
Number
900
900
2007
€’000
2006
€’000
18
18
At 30 November 2007 the authorised share capital comprised 900 ordinary shares (2006: 900) with a par
value of €100 each, of these 180 ordinary shares (2006: 180) were issued and fully paid.
9.
SEGMENTAL REPORTING
The Company structures its business segments primarily based upon the nature of the financial products and
services provided to the Company’s internal management structure.
The Company has only one business segment as described in the Directors’ Report and operates in one
geographic market, Europe. The balance sheet and income statement reflect the financial position and results
of this segment.
F-12
10.
FINANCIAL RISK MANAGEMENT
Risk Management Procedures
The principal activity of the Company continues to be the issuance of financial instruments and the economic
hedging of the obligations arising pursuant to such issuances. It is the policy and objective of the Company
not to be exposed to market risk. On issuance of each financial instrument, the Company enters into
economic hedges of its obligations by purchasing financial instruments from another Morgan Stanley Group
entity.
Credit risk
Credit risk refers to the risk of loss arising from borrower or counterparty default.
The Morgan Stanley Group manages credit risk exposure on a global basis, but in consideration of each
individual legal entity, including those of the Company. The credit risk management policies and procedures
of the Morgan Stanley Group include ensuring transparency of material credit risks, ensuring compliance
with established limits, approving material extensions of credit, and escalating risk concentrations to
appropriate senior management. Credit risk management policies and procedures for the Company are
consistent with those of the Morgan Stanley Group and include escalation to appropriate key management
personnel of the Company.
The maximum exposure to credit risk of the Company at the reporting date is the carrying amount of the
financial assets held in the balance sheet.
As the Company enters into all of its financial asset transactions with Morgan Stanley Group entities, the
Company's credit risk related to this concentration is mitigated as both the Company and Morgan Stanley
Group entities are wholly owned indirect subsidiaries of the same Group parent company, Morgan Stanley.
Liquidity risk
Liquidity is the risk that the entity may encounter difficulty in realising financial assets or otherwise raising
funds to meet commitments associated with financial instruments.
Morgan Stanley Group’s senior management establishes the overall liquidity and funding policies of the
Morgan Stanley Group and the liquidity risk management policies and procedures conducted within the
Company are consistent with those of the Morgan Stanley Group. The Morgan Stanley Group’s liquidity and
funding risk management policies are designed to mitigate the potential risk that entities within the Morgan
Stanley Group, including those of the Company, may be unable to access adequate financing to service their
financial liabilities when they become payable without material, adverse franchise or business impact. The
key objective of the liquidity and funding risk management framework is to support the successful execution
of both the Company’s and the Morgan Stanley Group’s business strategies while ensuring ongoing and
sufficient liquidity through the business cycle and during periods of financial difficulty.
The Company hedges all of its fair value financial liability transactions with Group companies. The
Company's liquidity risk related to this concentration is mitigated as both the Company and its Morgan
Stanley Group companies are wholly owned subsidiaries of the same group parent company, Morgan
Stanley.
F-13
10.
FINANCIAL RISK MANAGEMENT (CONTINUED)
In the following contractual maturity analysis, derivative contracts are disclosed as on demand; financial
liabilities designated at fair value are disclosed according to their earliest contractual maturity. All such
amounts are presented at their fair value. All other amounts represent the undiscounted cash flows payable by
the Company arising from its financial liabilities to contractual maturities as at 30 November 2007. Repayments
that are subject to notice are treated as if notice were given immediately and are classified as on demand. This
presentation is considered by the Company to appropriately reflect the liquidity risk arising from those financial
liabilities, presented in a way that is consistent with how the liquidity risk on these financial liabilities is
managed by the Company.
In less than one In more than
year one year but
not more
than two
years
€'000
€'000
More than two
years but less
than five years
More than five
years
Total
€'000
€'000
€'000
2007
Financial liabilities
Financial liabilities at
amortised cost:
Trade payables
designated at fair
value through profit
or loss
Total financial
liabilities
2006
Financial liabilities at
amortised cost:
- Other payables
designated at fair
value through profit
or loss
Total financial
liabilities
119,030
-
-
-
119,030
7,726,501
21,267
2,070,542
239,771
10,058,081
7,845,531
21,267
2,070,542
239,771
10,177,111
33
-
-
-
33
3,779,211
54,027
41,719
15,096
3,890,053
3,779,244
54,027
41,719
15,096
3,890,086
Market Risk
a.
Price risk
The Structured notes primarily expose the Company to the risk of changes in market prices of the underlying
securities. The Company’s price risk arising on the issuance of each financial instrument is economically
hedged by the purchase of corresponding hedging contracts from other Group companies.
b. Interest rate risk
The Company’s interest rate risk arising on issuance of each financial instrument is economically hedged by the
purchase of the corresponding hedging contracts from other Group companies.
F-14
10.
FINANCIAL RISK MANAGEMENT (CONTINUED)
c.
Foreign currency risk
If denominated in currencies other than Euros, the structured notes may expose the Company to the risk of
changes in rates of exchange between the Euro and the other relevant currencies. The Company uses the
hedging contracts that it purchases from other Group companies to hedge any foreign currency risk associated
with the issuance of the structured notes, consistent with the Company’s risk management strategy.
11.
FINANCIAL INSTRUMENTS VALUED USING UNOBSERVABLE MARKET DATA
a.
Sensitivity of fair values to changing significant assumptions to reasonably possible alternatives
Fair values of financial instruments recognised in the financial statements may be determined in whole or in
part using valuation techniques based on assumptions that are not supposed by prices from current market
transactions or observable market data.
For fair values that are recognised in the financial statements where valuation techniques use unobservable
market inputs, changing one or more assumptions used in these valuation techniques to reasonably possible
alternative assumptions has no material impact to the net assets of the Company. This is due to the fact that
the Company issues notes to other Group undertakings and currently offsets the risks arising from these
financial liabilities by entering into corresponding hedging contracts with other Group undertakings.
b. Financial instruments valued using unobservable market data
The Company does not recognise initially gains/losses arising from unobservable market inputs.
Subsequently, gains or losses arising from the valuation of the financial instruments using valuation
techniques with unobservable market inputs are recognised in the income statement.
c.
Fair value changes estimated using valuation techniques
The total amount of the change in fair value estimated using a valuation technique has resulted in a
recognition in the income statement of €nil for the year (2006: €nil). This is due to the fact that the Company
issues notes to other Group undertakings and currently offsets the risks arising from these financial liabilities
by entering into mirroring contracts with other Group undertakings.
12.
FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE
For all financial assets and financial liabilities not recognised at fair value, the carrying amount is considered
to be a reasonable approximation of fair value due to the short term nature of these financial assets and
liabilities.
13.
RELATED PARTY DISCLOSURES
Parent and ultimate controlling entity
The ultimate parent undertaking and controlling entity and the smallest and largest group of which the
Company is a member and for which group accounts are prepared is Morgan Stanley. Morgan Stanley is
incorporated in Delaware, the United States of America and copies of its accounts can be obtained from 25
Cabot Square, Canary Wharf, London E14 4QA.
F-15
13.
RELATED PARTY DISCLOSURES (CONTINUED)
Key Management Compensation
Key management personnel is defined as those persons having authority and responsibility for planning,
directing and controlling the activities of the Company. Key management personnel includes the Board of
Directors plus key business unit management.
Compensation paid to key management personnel in respect of their services rendered to the Company is:
Short-term employee benefits
Post-employment benefits
Share-based payment
Other long-term employee benefits
Termination benefits
Management fees
2007
€’000
2006
€’000
40
5
1
118
164
87
1
20
99
207
There were no other transactions with key management personnel in the year.
Transactions with related parties
The Morgan Stanley Group conducts business for clients globally through a combination of both functional
and legal entity organisational structures. Accordingly, the Company is closely integrated with the
operations of the Morgan Stanley Group and enters into transactions with other Morgan Stanley Group
undertakings for the purposes of utilising financing, trading and risk management, and infrastructure services.
The nature of these relationships along with information about the transactions and outstanding balances is
given below. The Company has made no provision for bad and doubtful debts related to the amount of
outstanding balances from related parties (2006: nil).
Financing
The Company receives financing from and provides financing to other Morgan Stanley Group undertakings
in the following forms:
General funding
General funding is undated, unsecured, floating rate lending. Funding may be received or provided for
specific transaction related financing requirements, or for general intra group financing purposes. The
interest rates are established by the Morgan Stanley Group Treasury function for all entities within the
Morgan Stanley group and approximate the market rate of interest that the Morgan Stanley Group incurs in
financing its business.
Details of the outstanding balances on these financing arrangements and interest receivable/payable during
the year are shown in the table below:
2007
2006
Interest
€’000
Balance
€’000
Interest
€’000
Balance
€’000
Amounts due from other Morgan Stanley
Group undertakings
248
46,356
176
1,736
Amounts due to other Morgan Stanley
Group undertakings
-
-
-
33
F-16
13.
RELATED PARTY DISCLOSURES (CONTINUED)
Trading and risk management
The Company enters into purchases and sales of securities and derivative transactions with other Morgan
Stanley Group undertakings to manage the market risks associated with such business. All its transactions
are entered into on an arm’s length basis. These transactions may give rise to credit risk either for the
Company, or to a related party towards the Company. The total amounts receivable and payable on securities
transactions not yet settled and the fair value of derivatives contracts outstanding at the year end were as
follows:
Amounts due from other Morgan Stanley Group undertakings on
unsettled securities and derivatives transactions
Amounts due to other Morgan Stanley Group undertakings
2007
€’000
2006
€’000
31,229
-
(119,030)
-
The management and execution of business strategies on a global basis results in many Morgan Stanley
transactions impacting a number of Morgan Stanley Group entities. The Morgan Stanley Group operates a
number of intra-group policies to ensure that, where possible, revenues and related costs are matched. For
the year ended 30 November 2007, a net income of €2,573,000 (2006: €908,000) was recognised in the
income statement arising from such policies.
Infrastructure services
The Company uses infrastructure services, including the provision of office facilities, operated by other
Group undertakings at no charge.
14.
TRANSITION TO IFRS
As stated in note 2, these are the Company’s first financial statements prepared in accordance with IFRS. The
transition to IFRS is accounted for in accordance with IFRS 1 ‘First-time Adoption of International Financial
Reporting Standards’ (‘IFRS 1’), with 1 December 2006 as the date of transition. The transition from UK
GAAP to IFRS has had no material effect on the income statement, balance sheet or cash flows of the
Company, and has not affected the underlying economics of its business.
At 30 November 2007, financial assets designated at fair value totalling €10,104,646,000 and financial
liabilities designated at fair value totalling €10,058,081,000 were disclosed on the balance sheet. At 30
November 2006, the assets were disclosed as financial instruments with a value of €3,890,053,000 and the
liabilities were disclosed as financial instruments with a value of €3,890,053,000. These have been
reclassified to financial assets designated at fair value and financial liabilities designated at fair value. The
financial instruments were held at fair value in the prior year and so the transition from UK GAAP to IFRS
has had no material effect on the valuation of these instruments. Therefore the reconciliation of changes to
equity at 30 November 2006 and 30 November 2007 and the reconciliation of profit or loss under UK GAAP
and IFRS is not required.
F-17
Auditors’ report
The auditors’ report is recorded on the next page.
Statutory rules concerning appropriation of the net result
The Articles of Incorporation of the Company provide that the net result for the year is at the
disposition of the Annual General Meeting of Shareholders.
Appropriation of the net result for the period
The balance sheet is presented after the proposed appropriation of the net result for the period
ended 30 November 2007. The directors propose to add profit to the profit and loss account as part
of the equity shareholders’ funds.
Subsequent events
No events have occurred since the balance sheet date, which would change the financial position of
the Company and which would require adjustment of disclosure in the annual report now
presented.
F-18
To the shareholders of
Error! Reference source not found.Morgan Stanley B.V.
Amsterdam
February 4, 2008
Auditor's report
Report on the financial statements
We have audited the accompanying financial statements for the year ended November
30, 2007 of Morgan Stanley B.V., Amsterdam, which comprise the balance sheet as at
November 30, 2007, the profit and loss account, statement of changes in equity and cash
flow statement for the year then ended and a summary of significant accounting policies
and other explanatory notes.
Management’s responsibility
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with International Financial Reporting Standards as adopted
by the European Union and with Part 9 of Book 2 of the Netherlands Civil Code, and for
the preparation of the management board report in accordance with Part 9 of Book 2 of
the Netherlands Civil Code. This responsibility includes: designing, implementing and
maintaining internal control relevant to the preparation and fair presentation of the
financial statements that are free from material misstatement, whether due to fraud or
error; selecting and applying appropriate accounting policies; and making accounting
estimates that are reasonable in the circumstances.
Auditor’s responsibility
Our responsibility is to express an opinion on the financial statements based on our
audit. We conducted our audit in accordance with Dutch law. This law requires that we
comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of the
financial statements, whether due to fraud or error. In making those risk assessments,
the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the
financial statements.
F-19
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the financial position
of Morgan Stanley B.V. as at November 30, 2007, and of its result and its cash flows for
the year then ended in accordance with International Financial Reporting Standards as
adopted by the European Union and with Part 9 of Book 2 of the Netherlands Civil
Code.
Report on other legal and regulatory requirements
Pursuant to the legal requirement under 2:393 sub 5 part e of the Netherlands Civil
Code, we report, to the extent of our competence, that the directors’ report is consistent
with the financial statements as required by 2:391 sub 4 of the Netherlands Civil Code.
Deloitte Acccountants B.V.
G.J.W. Ros
F-20
ANLAGE:
JAHRESBERICHT (FORM 10-K) DER GARANTIN
ZUM 30. NOVEMBER 2007
(in englischer Sprache)
G-1
G-2
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended November 30, 2007
Commission File Number 1−11758
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1585 Broadway
New York, NY 10036
36−3145972
(212) 761−4000
(I.R.S. Employer Identification No.)
(Registrant’s telephone number,
including area code)
(Address of principal executive
offices, including zip code)
Title of each class
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Floating Rate Non−Cumulative Preferred Stock, Series A, $0.01 par value
6¼% Capital Securities of Morgan Stanley Capital Trust III (and Registrant’s guaranty with respect thereto)
6¼% Capital Securities of Morgan Stanley Capital Trust IV (and Registrant’s guaranty with respect thereto)
5¾% Capital Securities of Morgan Stanley Capital Trust V (and Registrant’s guaranty with respect thereto)
6.60% Capital Securities of Morgan Stanley Capital Trust VI (and Registrant’s guaranty with respect thereto)
6.60% Capital Securities of Morgan Stanley Capital Trust VII (and Registrant’s guaranty with respect thereto)
6.45% Capital Securities of Morgan Stanley Capital Trust VIII (and Registrant’s guaranty with respect thereto)
SPARQS® due March 20, 2008; SPARQS due April 20, 2008; SPARQS due May 20, 2008; SPARQS due June 20, 2008 (3 issuances); SPARQS
due July 20, 2008; SPARQS due August 20, 2008; SPARQS due September 20, 2008; SPARQS due October 20, 2008; SPARQS due January 20,
2009 (2 issuances); SPARQS due February 20, 2009
Exchangeable Notes due December 30, 2008; Exchangeable Notes due December 30, 2010; Exchangeable Notes due June 30, 2011
Callable Index−Linked Notes due December 30, 2008
BRIDGESSM due August 30, 2008; BRIDGES due December 30, 2008; BRIDGES due February 28, 2009; BRIDGES due March 30, 2009;
BRIDGES due June 30, 2009; BRIDGES due July 30, 2009; BRIDGES due August 30, 2009; BRIDGES due October 30, 2009; BRIDGES due
December 30, 2009; BRIDGES due June 15, 2010
Capital Protected Notes due June 30, 2008; Capital Protected Notes due September 30, 2008; Capital Protected Notes due December 30, 2008;
Capital Protected Notes due December 30, 2009; Capital Protected Notes due April 20, 2010; Capital Protected Notes due July 20, 2010 (2
issuances); Capital Protected Notes due August 30, 2010; Capital Protected Notes due October 30, 2010; Capital Protected Notes due January 30,
2011; Capital Protected Notes due February 20, 2011; Capital Protected Notes due March 30, 2011 (2 issuances); Capital Protected Notes due
June 30, 2011; Capital Protected Notes due August 20, 2011; Capital Protected Notes due October 30, 2011 (2 issuances); Capital Protected Notes
due December 30, 2011; Capital Protected Notes due September 30, 2012
Capital Protected Notes due September 1, 2010
HITSSM due February 20, 2008; HITS due March 20, 2008; HITS due April 20, 2008
MPSSM due December 30, 2008; MPS due December 30, 2009; MPS due February 1, 2010; MPS due June 15, 2010; MPS due December 30,
2010 (2 issuances); MPS due March 30, 2012
MPS due March 30, 2009
Stock Participation Notes due September 15, 2010; Stock Participation Notes due December 30, 2010
Bear Market PLUS due February 20, 2008; Bear Market PLUS due April 20, 2008; Bear Market PLUS due July 20, 2008
Outperformance PLUS due December 20, 2008
PLUSSM due March 20, 2008 (3 issuances); PLUS due April 30, 2008 (2 issuances); PLUS due May 20, 2008; PLUS due October 20, 2008;
PLUS due December 20, 2008 (4 issuances); PLUS due January 20, 2009 (3 issuances); PLUS due February 20, 2009; PLUS due June 30, 2009
PLUS due June 20, 2008; PLUS due August 20, 2008; PLUS due November 20, 2008; PLUS due December 20, 2008; PLUS due January 20,
2009; PLUS due September 30, 2009
PROPELSSM due December 30, 2011 (3 issuances)
Protected Absolute Return Barrier Notes due December 20, 2008; Protected Absolute Return Barrier Notes due July 20, 2008; Protected Absolute
Return Barrier Notes due September 20, 2008; Protected Absolute Return Barrier Notes due October 20, 2008; Protected Absolute Return Barrier
Notes due June 20, 2009 (2 issuances); Protected Absolute Return Barrier Notes due July 20, 2009
Strategic Total Return Securities due December 17, 2009; Strategic Total Return Securities due March 30, 2010; Strategic Total Return Securities
due July 30, 2011(2 issuances); Strategic Total Return Securities due January 15, 2012
Strategic Total Return Securities due October 30, 2011
BOXESSM due October 30, 2031; BOXES due January 30, 2032
Name of exchange on
which registered
New York Stock Exchange
American Stock Exchange
The NASDAQ Stock Market LLC
Philadelphia Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Targeted Income Strategic Total Return Securities due October 30, 2011
MPS SM due March 30, 2009
Indicate by check mark if Registrant is a well−known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ⌧ NO ¨
Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ¨ NO ⌧
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ⌧ NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S−K is not contained herein, and will not be contained, to the best of Registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10−K or any amendment to this Form 10−K. ⌧
Indicate by check mark whether Registrant is a large accelerated filer, an accelerated filer, or a non−accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in
Exchange Act Rule 12b−2. Large accelerated filer ⌧ Accelerated filer ¨ Non−accelerated filer ¨
Indicate by check mark whether Registrant is a shell company (as defined in Exchange Act Rule 12b−2). YES ¨ NO ⌧
As of May 31, 2007, the aggregate market value of the common stock of Registrant held by non−affiliates of Registrant was approximately $88,843,773,992.03. This calculation does not
reflect a determination that persons are affiliates for any other purposes.
As of January 11, 2008, there were 1,104,587,663 shares of Registrant’s common stock, $0.01 par value, outstanding.
Documents Incorporated By Reference: Portions of Registrant’s definitive proxy statement for its annual stockholders’ meeting to be held on April 8, 2008 are incorporated by reference
in Part III of this Form 10−K.
G-3
Table of Contents
ANNUAL REPORT ON FORM 10−K
for the fiscal year ended November 30, 2007
Table of Contents
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Page
Business
Overview
Available Information
Business Segments
Institutional Securities
Global Wealth Management Group
Asset Management
Competition
Regulation
Executive Officers of Morgan Stanley
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
1
1
1
2
2
5
6
7
8
12
13
20
21
22
24
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Results of Operations
Impact of Credit Market Events
Other Matters
Critical Accounting Policies
Certain Factors Affecting Results of Operations
Liquidity and Capital Resources
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
i
25
28
30
30
31
51
56
60
66
67
83
100
100
101
103
104
105
G-4
Table of Contents
Item 9.
Item 9A.
Item 9B.
Consolidated Statements of Changes in Shareholders’ Equity
Notes to Consolidated Financial Statements
Note 1.
Introduction and Basis of Presentation
Note 2.
Summary of Significant Accounting Policies
Note 3.
Fair Value Disclosures
Note 4.
Collateralized Transactions
Note 5.
Securitization Activities and Variable Interest Entities
Note 6.
Sales and Trading Activities
Note 7.
Consumer Loans
Note 8.
Other Investments
Note 9.
Investments in Unconsolidated Investees
Note 10. Goodwill and Net Intangible Assets
Note 11. Deposits
Note 12. Commercial Paper and Other Short−Term Borrowings
Note 13. Long−Term Borrowings
Note 14. Capital Units
Note 15. Commitments, Guarantees and Contingencies
Note 16. Shareholders’ Equity
Note 17. Earnings per Common Share
Note 18. Employee Stock−Based Compensation Plans
Note 19. Employee Benefit Plans
Note 20. Income Taxes
Note 21. Segment and Geographic Information
Note 22. Discontinued Operations
Note 23. Business and Other Acquisitions and Dispositions and Sale of Minority Interest
Note 24. Staff Accounting Bulletin No. 108
Note 25. Insurance Settlement
Note 26. Lease Adjustment
Note 27. Quarterly Results (unaudited)
Note 28. Subsequent Event
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
ii
Page
106
107
107
109
122
127
128
132
136
137
137
138
140
141
142
144
144
150
152
153
157
164
167
170
172
174
176
177
178
178
182
182
185
G-5
Table of Contents
Page
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
186
186
187
188
188
Part IV
Item 15.
Exhibits and Financial Statement Schedules
189
Signatures
190
Index to Financial Statements and Financial Statement Schedules
S−1
Exhibit Index
E−1
iii
G-6
Table of Contents
Forward−Looking Statements
We have included or incorporated by reference into this report, and from time to time may make in our public filings, press releases or other public
statements, certain statements, including (without limitation) those under “Legal Proceedings” in Part I, Item 3, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Part II, Item 7 and “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A, that
may constitute “forward−looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In
addition, our management may make forward−looking statements to analysts, investors, representatives of the media and others. These forward−looking
statements are not historical facts and represent only Morgan Stanley’s beliefs regarding future events, many of which, by their nature, are inherently
uncertain and beyond our control.
The nature of Morgan Stanley’s business makes predicting the future trends of our revenues, expenses and net income difficult. The risks and uncertainties
involved in our businesses could affect the matters referred to in such statements and it is possible that our actual results may differ from the anticipated
results indicated in these forward looking statements. Important factors that could cause actual results to differ from those in the forward−looking statements
include (without limitation):
• the credit ratings assigned to Morgan Stanley;
• the effect of political and economic conditions and geopolitical events;
• the effect of market conditions, including in the global equity and credit markets and with respect to corporate, commercial and residential lending;
• the availability and cost of capital;
• the level and volatility of equity prices, commodity prices and interest rates, currency values and other market indices;
• the actions and initiatives of current and potential competitors;
• the impact of current, pending and future legislation, regulation and regulatory and legal actions in the U.S. and worldwide;
• our reputation;
• investor sentiment;
• the potential effects of technological changes; and
• other risks and uncertainties detailed under “Competition” and “Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A, and elsewhere
throughout this report.
Accordingly, you are cautioned not to place undue reliance on forward−looking statements, which speak only as of the date on which they are made.
Morgan Stanley undertakes no obligation to update publicly or revise any forward−looking statements to reflect the impact of circumstances or events that
arise after the dates they are made, whether as a result of new information, future events or otherwise except as required by applicable law. You should,
however, consult further disclosures Morgan Stanley may make in future filings of its Annual Reports on Form 10−K, Quarterly Reports on Form 10−Q and
Current Reports on Form 8−K and any amendments thereto or in future press releases or other public statements.
iv
G-7
Table of Contents
Part I
Item 1.
Business.
Overview.
Morgan Stanley is a global financial services firm that, through its subsidiaries and affiliates, provides its products and services to a large and diversified
group of clients and customers, including corporations, governments, financial institutions and individuals. Morgan Stanley was originally incorporated
under the laws of the State of Delaware in 1981, and its predecessor companies date back to 1924. Morgan Stanley conducts its business from its
headquarters in and around New York City, its regional offices and branches throughout the U.S. and its principal offices in London, Tokyo, Hong Kong
and other world financial centers. At November 30, 2007, Morgan Stanley had 48,256 employees worldwide. Unless the context otherwise requires, the
terms “Morgan Stanley,” the “Company,” “we,” “us” and “our” mean Morgan Stanley and its consolidated subsidiaries.
Financial information concerning Morgan Stanley, our business segments and geographic regions for each of the fiscal years ended November 30,
2007, November 30, 2006 and November 30, 2005 is included in the consolidated financial statements and the notes thereto in “Financial Statements and
Supplementary Data” in Part II, Item 8.
Available Information.
Morgan Stanley files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the
“SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549.
Please call the SEC at 1−800−SEC−0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly
and current reports, proxy and information statements and other information that issuers (including Morgan Stanley) file electronically with the SEC.
Morgan Stanley’s electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.
Morgan Stanley’s internet site is www.morganstanley.com. You can access Morgan Stanley’s Investor Relations webpage at
www.morganstanley.com/about/ir. Morgan Stanley makes available free of charge, on or through our Investor Relations webpage, its proxy statements,
Annual Reports on Form 10−K, Quarterly Reports on Form 10−Q, Current Reports on Form 8−K and any amendments to those reports filed or furnished
pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically
filed with, or furnished to, the SEC. Morgan Stanley also makes available, through its Investor Relations webpage, via a link to the SEC’s internet site,
statements of beneficial ownership of Morgan Stanley’s equity securities filed by its directors, officers, 10% or greater shareholders and others under
Section 16 of the Exchange Act.
Morgan Stanley has a Corporate Governance webpage. You can access information about Morgan Stanley’s corporate governance at
www.morganstanley.com/about/company/governance. Morgan Stanley posts the following on its Corporate Governance webpage:
• Composite Certificate of Incorporation;
• Bylaws;
• Charters for our Audit Committee, Compensation, Management Development and Succession Committee and Nominating and Governance
Committee;
• Corporate Governance Policies;
• Policy Regarding Communication with the Board of Directors;
1
G-8
Table of Contents
• Policy Regarding Director Candidates Recommended by Shareholders;
• Policy Regarding Corporate Political Contributions;
• Policy Regarding Shareholder Rights Plan;
• Code of Ethics and Business Conduct; and
• Integrity Hotline.
Morgan Stanley’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including its Chief Executive Officer, its Chief
Financial Officer and its Controller and Principal Accounting Officer. Morgan Stanley will post any amendments to the Code of Ethics and Business
Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, Inc. (“NYSE”) on its internet
site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036
(212−761−4000). The information on Morgan Stanley’s internet site is not incorporated by reference into this report.
Business Segments.
Morgan Stanley is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities,
Global Wealth Management Group and Asset Management. A summary of the activities of each of the business segments follows.
Institutional Securities includes capital raising; financial advisory services, including advice on mergers and acquisitions, restructurings, real estate and
project finance; corporate lending; sales, trading, financing and market−making activities in equity and fixed income securities and related products,
including foreign exchange and commodities; benchmark indices and risk management analytics; research; and investment activities.
Global Wealth Management Group provides brokerage and investment advisory services covering various investment alternatives; financial and wealth
planning services; annuity and other insurance products; credit and other lending products; cash management services; retirement services; and trust and
fiduciary services.
Asset Management provides global asset management products and services in equity, fixed income, alternative investments, which includes hedge funds
and fund of funds, and merchant banking, which includes real estate, private equity and infrastructure, to institutional and retail clients through proprietary
and third−party retail distribution channels, intermediaries and Morgan Stanley’s institutional distribution channel. Asset Management also engages in
investment activities.
On June 30, 2007, the Company completed the spin−off of Discover Financial Services (the “Discover Spin−off”).
Institutional Securities.
Morgan Stanley provides financial advisory and capital−raising services to a diverse group of corporate and other institutional clients globally, primarily
through wholly owned subsidiaries that include Morgan Stanley & Co. Incorporated (“MS&Co.”), Morgan Stanley & Co. International plc, Morgan Stanley
Japan Securities Co., Ltd. and Morgan Stanley Asia Limited. These and other subsidiaries also conduct sales and trading activities worldwide, as principal
and agent, and provide related financing services on behalf of institutional investors.
Investment Banking.
Capital Raising. Morgan Stanley manages and participates in public offerings and private placements of debt, equity and other securities worldwide.
Morgan Stanley is a leading underwriter of common stock, preferred stock and other equity−related securities, including convertible securities and
American Depositary Receipts (“ADRs”).
2
G-9
Table of Contents
Morgan Stanley is a leading underwriter of fixed income securities, including investment grade debt, non−investment grade instruments, mortgage−related
and other asset−backed securities, tax−exempt securities and commercial paper and other short−term securities.
Financial Advisory Services. Morgan Stanley provides corporate and other institutional clients globally with advisory services on key strategic matters,
such as mergers and acquisitions, divestitures, corporate defense strategies, joint ventures, privatizations, recapitalizations, spin−offs, corporate
restructurings, shareholder relations, tender offers, exchange offers and leveraged buyouts. Morgan Stanley also provides advice concerning rights offerings,
dividend policy, valuations, foreign exchange exposure, financial risk management strategies and financial planning. In addition, Morgan Stanley furnishes
advice and services regarding project financings and provides advisory services in connection with the purchase, sale, leasing and financing of real estate.
Corporate Lending. Morgan Stanley provides to selected corporate clients through subsidiaries (including Morgan Stanley Bank) loans or lending
commitments, including bridge financing. These loans and commitments have varying terms, may be senior or subordinated and/or secured or unsecured,
are generally contingent upon representations, warranties and contractual conditions applicable to the borrower and may be syndicated, hedged or traded by
Morgan Stanley.* The borrowers may be rated investment grade or non−investment grade.
Sales and Trading Activities.**
Morgan Stanley conducts sales, trading, financing and market−making activities on securities and futures exchanges and in over−the−counter (“OTC”)
markets around the world. Morgan Stanley’s Institutional Securities business includes Equity and Proprietary Trading; Interest Rates, Credit and Currencies;
Commodities and Clients and Services.
Equity and Proprietary Trading. Morgan Stanley acts as principal (including as a market maker) and agent in executing transactions globally in equity
and equity−related products, including common stock, ADRs, global depositary receipts and exchange−traded funds.
Morgan Stanley’s equity derivatives sales, trading and market−making activities cover equity−related products globally, including equity swaps, options,
warrants and futures overlying individual securities, indices and baskets of securities and other equity−related products. Morgan Stanley also issues and
makes a principal market in equity−linked products to institutional and individual investors, including principal−protected securities.
Morgan Stanley has several dedicated trading groups which engage in proprietary trading and investing activities utilizing multiple strategies across various
cash and derivative asset classes including, among others, equity securities, quantitative and program driven strategies, commodities, currencies, interest
rates, emerging markets, bonds, loans, corporate credit, as well as mortgage−related and other asset−backed securities.
Interest Rates, Credit and Currencies. Morgan Stanley trades, makes markets and takes long and short proprietary positions in fixed income securities
and related products globally, including, among other products, investment and non−investment grade corporate debt, distressed debt, bank loans, U.S. and
other sovereign securities, emerging market bonds and loans, convertible bonds, collateralized debt obligations and securities issued by structured
investment vehicles, mortgage−related and other asset−backed securities and real estate loan products, municipal securities, preferred stock and commercial
paper, money market and other short−term securities. Morgan Stanley is a primary dealer of U.S. government securities and a member of the selling groups
*
**
Revenues and expenses associated with the trading of syndicated loans are included in “Sales and Trading Activities.”
The description set forth under “Sales and Trading Activities” reflects organizational changes implemented since December 2007. See also “Risk Management” in Part II, Item 7A
for a description of Morgan Stanley’s trading risk management structure, policies and procedures.
3
G-10
Table of Contents
that distribute various U.S. agency and other debt securities. Morgan Stanley is a primary dealer or market−maker of government securities in numerous
European, Asian and emerging market countries.
Morgan Stanley trades, makes markets and takes long and short proprietary positions in listed futures and OTC swaps, forwards, options and other
derivatives referencing, among other things, interest rates, currencies, investment grade and non−investment grade corporate credits, loans, bonds, U.S. and
other sovereign securities, emerging market bonds and loans, credit indexes, asset−backed security indexes, property indexes, mortgage−related and other
asset−backed securities and real estate loan products.
Morgan Stanley is a market−maker in foreign currencies. Most of Morgan Stanley’s foreign exchange business relates to major foreign currencies such as
Yen, Euro, Sterling, Swiss francs and Canadian dollars. Morgan Stanley trades on a principal basis in the spot, forward, option and futures markets and
takes proprietary positions in such currencies.
Through the use of repurchase and reverse repurchase agreements, Morgan Stanley acts as an intermediary between borrowers and lenders of short−term
funds and provides funding for various inventory positions. Morgan Stanley also provides financing to customers for commercial and residential real estate
loan products and other securitizable asset classes.
Morgan Stanley advises on investment and liability strategies and assists corporations in their debt repurchases and tax planning. Morgan Stanley structures
debt securities and derivatives with risk/return factors designed to suit client objectives, including using repackaged asset and other structured vehicles
through which clients can restructure asset portfolios to provide liquidity or reconfigure risk profiles.
Commodities. Morgan Stanley trades as principal and maintains long and short proprietary trading positions in the spot, forward and futures markets in
several commodities, including metals (base and precious), agricultural products, crude oil, oil products, natural gas, electric power, emission credits, coal,
freight, liquefied natural gas (“LNG”) and related products and indices. Morgan Stanley is a market−maker in exchange−traded options and futures and
OTC options and swaps on commodities, and offers counterparties hedging programs relating to production, consumption, reserve/inventory management
and structured transactions, including energy−contract securitizations. Morgan Stanley is an electricity power marketer in the U.S. and owns five electricity
generating facilities in the U.S. and Europe.
Morgan Stanley owns TransMontaigne Inc. and its subsidiaries, a group of companies operating in the refined petroleum products marketing and
distribution business, and the Heidmar Group of companies, which provide international marine transportation and U.S. marine logistics services.
Clients and Services. Morgan Stanley provides financing services, including prime brokerage, which offers, among other services, consolidated clearance,
settlement, custody, financing and portfolio reporting services to clients trading multiple asset classes. Morgan Stanley also engages in principal securities
lending with clients, institutional lenders and other broker−dealers. In addition, Morgan Stanley’s institutional distribution and sales activities are overseen
and coordinated through Clients and Services.
Other Activities.
®
Benchmark Indices and Risk Management Analytics. As of November 30, 2007, Morgan Stanley’s majority−owned subsidiary,
MSCI Inc. (“MSCI ”),
®
calculates and distributes over 100,000 international and U.S. equity benchmark indices (including the MSCI World and EAFE Indices) covering 56
countries, and has a historical database spanning over 35 years that includes fundamental and valuation data on thousands of equity securities in developed
and emerging market countries. MSCI also calculates and distributes over 200 hedge fund indices. MSCI’s subsidiary, Barra, Inc., is a leading provider of
risk analytic tools and services to investors to help them
4
G-11
Table of Contents
analyze, measure and manage portfolio and firm−wide investment risk. The initial public offering of shares of MSCI began trading on the New York Stock
Exchange on November 15, 2007. After this offering, Morgan Stanley continues to own in excess of 80 percent of MSCI.
Research. Morgan Stanley’s global research department (“Research”) consists of economists, strategists and industry analysts. Research engages in equity
and fixed income research activities and produces reports and studies on the U.S. and global economy, financial markets, portfolio strategy, technical
market analyses, individual companies and industry developments. Research examines worldwide trends covering numerous industries and individual
companies, the majority of which are located outside of the U.S. Research provides analysis and forecasts relating to economic and monetary developments
that affect matters such as interest rates, foreign currencies, securities, derivatives and economic trends. Research provides analytical support and publishes
reports on asset−backed securities and the markets in which such securities are traded. Research reports and data are disseminated to investors through third
party distributors, proprietary internet sites such as Client Link and Morgan Stanley’s sales forces.
Investments. Morgan Stanley from time to time makes investments that represent business facilitation or principal investing activities. Business
facilitation investments are strategic investments undertaken by Morgan Stanley to facilitate core business activities. Principal investing activities are capital
commitments provided to public and private companies, funds and other entities generally for proprietary purposes to maximize total returns to Morgan
Stanley. Morgan Stanley expects to make additional principal investments over time. These principal investment activities are conducted within the
investment banking and sales and trading areas in Institutional Securities.
Morgan Stanley sponsors and manages investment vehicles and separate accounts for clients seeking exposure to private equity, real estate−related and
other alternative investments. Morgan Stanley may also invest in and provide capital to such investment vehicles. See also “Asset Management.”
Operations and Information Technology.
Morgan Stanley’s Operations and Information Technology departments provide the process and technology platform that supports Institutional Securities
sales and trading activity, including post−execution trade processing and related internal controls over activity from trade entry through settlement and
custody, such as asset servicing. This is done for proprietary and customer transactions in listed and OTC transactions in commodities, equity and fixed
income securities, including both primary and secondary trading, as well as listed, OTC and structured derivatives in markets around the world. This activity
is undertaken through Morgan Stanley’s own facilities, through membership in various clearing and settlement organizations, and through agreements with
unaffiliated third parties.
Global Wealth Management Group.
Morgan Stanley’s Global Wealth Management Group provides comprehensive financial services to clients through a network of approximately 8,400 global
representatives in approximately 500 locations globally, including over 450 U.S. locations at fiscal year end. As of November 30, 2007, Morgan Stanley had
$758 billion in client assets. On April 1, 2007, Morgan Stanley merged its primary broker−dealer for Global Wealth Management Group, Morgan Stanley
DW Inc., into MS&Co. Upon completion of the merger, MS&Co. became Morgan Stanley’s principal U.S. broker−dealer.
Clients.
Global Wealth Management Group professionals serve individual investors and small−to−medium size businesses and institutions with an emphasis on ultra
high net worth, high net worth and affluent investors. In the U.S., products and services are delivered through three principal channels. Specialized private
wealth management
5
G-12
Table of Contents
investment representative teams located in dedicated offices provide sophisticated investment solutions and services for ultra high net worth individuals,
families and foundations. Financial advisors located in branches across the U.S. provide solutions designed to accommodate individual investment
objectives, risk tolerance and liquidity needs for ultra high net worth, high net worth and affluent investors. Call centers are available to meet the needs of
emerging affluent clients. Outside the U.S., Morgan Stanley offers financial services to clients in Europe, the Middle East, Asia and Latin America.
Products and Services.
Morgan Stanley’s Global Wealth Management Group provides clients with a comprehensive array of financial solutions, including Morgan Stanley’s
products and services, and products and services from third party providers, such as insurance companies and mutual fund families. Morgan Stanley offers
brokerage and investment advisory services covering various investment alternatives, including equities, options, futures, foreign currencies, precious
metals, fixed income securities, mutual funds, structured products, alternative investments, unit investment trusts, managed futures, separately managed
accounts and mutual fund asset allocation programs. Morgan Stanley also offers financial and wealth planning services, including education savings
programs, as well as annuity and other insurance products. In addition, Morgan Stanley offers several cash management services, including cash sweeps,
debit cards and checkwriting, as well as lending products, including securities based lending and a mortgage referral program, which
provides residential
SM
mortgages and home equity lines of credit originated through Morgan Stanley’s affiliated entities. Morgan Stanley’s BusinesScape program offers cash
management and commercial credit solutions to qualified small and medium businesses in the U.S. Morgan Stanley provides individual and corporate
retirement solutions, including IRAs and 401(k) plans and U.S. stock plan services to corporate executives and businesses. Morgan Stanley also offers trust
and fiduciary services to individual and corporate clients.
Morgan Stanley’s Global Wealth Management Group offers its clients a variety of ways to establish a relationship and conduct business, including
®
brokerage accounts with transaction−based pricing and investment advisory accounts with asset−based fee pricing. The Active Assets Account offers
clients brokerage and cash management services in one account. Clients can also choose a fee−based, separately managed account managed by affiliated or
unaffiliated professional asset managers.
Morgan Stanley’s Operations and Information Technology departments provide the process and technology platform that supports the activities of Morgan
Stanley’s Global Wealth Management Group from trade capture through clearance, settlement and custody, including asset servicing as well as bank deposit
and loan processing through Morgan Stanley’s affiliated banks. These activities are undertaken through Morgan Stanley’s own facilities, through
memberships in various clearing and settlement organizations, and through agreements with unaffiliated third parties.
Asset Management.
Morgan Stanley Investment Management is one of the largest global asset management organizations of any full−service securities firm and offers
individual and institutional clients a diverse array of equity, fixed income and alternative investments and merchant banking strategies. Morgan Stanley had
$597 billion of assets under management or supervision as of November 30, 2007. Morgan Stanley’s asset management activities are principally conducted
under the Morgan Stanley and Van Kampen brands. Portfolio managers located in the U.S., Europe, Japan, Singapore and India manage investment
products ranging from money market funds to equity, taxable and tax−exempt fixed income funds and alternative investment and merchant banking
products in developed and emerging markets. Morgan Stanley offers clients various investment styles, such as value, growth, core, fixed income and asset
allocation; global investments; active and passive management; and diversified and concentrated portfolios.
6
G-13
Table of Contents
Morgan Stanley offers a range of alternative investment and merchant banking products for institutional investors and high net worth individuals. Morgan
Stanley’s alternative investments platform includes hedge funds, funds of hedge funds, funds of private equity funds and portable alpha overlays, including
FrontPoint Partners LLC, a leading provider of absolute return strategies with approximately $8.5 billion in assets under management, and minority stakes
in Lansdowne Partners and Avenue Capital Group. Morgan Stanley’s Merchant Banking Division, formed in 2007, includes Morgan Stanley’s real estate
investing business, private equity funds and infrastructure investing group. Morgan Stanley typically acts as general partner of, and investment adviser to, its
alternative investment and merchant banking funds and typically commits to invest a minority of the capital of such funds with subscribing investors
contributing the majority.
Institutional Investors.
Morgan Stanley provides asset management products and services to institutional investors worldwide, including pension plans, corporations, private funds,
non−profit organizations, foundations, endowments, governmental agencies, insurance companies and banks. Products and services are available to
institutional investors primarily through separate accounts, U.S. mutual funds and other pooled vehicles. Morgan Stanley Investment Management also
sub−advises funds for various unaffiliated financial institutions and intermediaries. A global sales force and a team dedicated to covering the investment
consultant industry serve institutional investors.
Individual Investors.
Morgan Stanley offers open−end and alternative investment funds and separately managed accounts to individual investors through affiliated and
unaffiliated broker−dealers, banks, insurance companies and financial planners. Closed−end funds managed by Morgan Stanley or Van Kampen are
available to individual investors through affiliated and unaffiliated broker−dealers. A small number of unaffiliated broker−dealers account for a substantial
portion of Van Kampen open−end fund sales. Morgan Stanley also sells Van Kampen funds through numerous retirement plan platforms. Internationally,
Morgan Stanley distributes traditional investment products to individuals outside the U.S. through non−proprietary distributors, and alternative investment
products are distributed through affiliated broker−dealers.
Morgan Stanley’s Operations and Information Technology departments provide or oversee the process and technology platform required to support its asset
management business. Support activities include transfer agency, mutual fund accounting and administration, transaction processing and certain fiduciary
services, on behalf of institutional, retail and intermediary clients. These activities are undertaken through Morgan Stanley’s own facilities, through
membership in various clearing and settlement organizations, and through agreements with unaffiliated third parties.
Competition.
All aspects of Morgan Stanley’s businesses are highly competitive and Morgan Stanley expects them to remain so. Morgan Stanley competes in the U.S.
and globally for clients, market share and human talent in all aspects of its business segments. Morgan Stanley’s competitive position depends on its
reputation and the quality of its products, services and advice. Morgan Stanley’s ability to sustain or improve its competitive position also depends
substantially on its ability to continue to attract and retain qualified employees while managing compensation and other costs. Morgan Stanley competes
with commercial banks, insurance companies, sponsors of mutual funds, hedge funds, energy companies and other companies offering financial services in
the U.S., globally and through the internet.
Institutional Securities and Global Wealth Management Group.
Morgan Stanley’s competitive position depends on innovation, execution capability and relative pricing. Morgan Stanley competes directly in the U.S. and
globally with other securities and financial services firms and broker−dealers, and with others on a regional or product basis.
7
G-14
Table of Contents
Morgan Stanley’s ability to access capital at competitive rates (which is generally dependent on Morgan Stanley’s credit ratings) and to commit capital
efficiently, particularly in its capital−intensive underwriting and sales, trading, financing and market−making activities, also affects its competitive position.
Corporate clients continue to request that Morgan Stanley provide loans or lending commitments in connection with certain investment banking activities.
Over time, certain sectors of the financial services industry have become more concentrated, as financial institutions involved in a broad range of financial
services industries have been acquired by or merged into other firms. This convergence could result in Morgan Stanley’s competitors gaining greater capital
and other resources, such as the ability to offer a broader range of products and services and geographic diversity. It is possible that competition may
become even more intense as Morgan Stanley continues to compete with financial institutions that may be larger, or better capitalized, or may have a
stronger local presence and longer operating history in certain areas. Many of these firms have greater capital than Morgan Stanley and have the ability to
offer a wide range of products and services that may enhance their competitive position and could result in pricing pressure in our businesses. The
complementary trends in the financial services industry of consolidation and globalization present, among other things, technological, risk management,
regulatory and other infrastructure challenges that require effective resource allocation in order for Morgan Stanley to remain competitive.
Morgan Stanley has experienced intense price competition in some of its businesses in recent years. In particular, the ability to execute securities trades
electronically on exchanges and through other automated trading markets has increased the pressure on trading commissions. The trend toward direct access
to automated, electronic stock markets will likely continue. It is possible that Morgan Stanley will experience competitive pressures in these and other areas
in the future as some of its competitors may seek to obtain market share by reducing prices.
Asset Management.
Competition in the asset management industry is affected by several factors, including Morgan Stanley’s reputation, investment objectives, quality of
investment professionals, performance of investment products relative to peers and an appropriate benchmark index, advertising and sales promotion efforts,
fee levels, the effectiveness of and access to distribution channels, and the types and quality of products offered. Morgan Stanley’s alternative investment
products, such as private equity funds, real estate and hedge funds, compete with similar products offered by both alternative and traditional asset managers.
Regulation.
Most aspects of Morgan Stanley’s business are subject to stringent regulation by U.S. federal and state regulatory agencies and securities exchanges and by
non−U.S. government agencies or regulatory bodies and securities exchanges. Aspects of Morgan Stanley’s public disclosure, corporate governance
principles, internal control environment and the roles of auditors and counsel are subject to the Sarbanes−Oxley Act of 2002 and related regulations and
rules of the SEC and the NYSE.
New laws or regulations or changes to existing laws and regulations (including changes in the interpretation or enforcement thereof) either in the U.S. or
elsewhere could materially adversely affect Morgan Stanley’s financial condition or results of operations. As a global financial institution, to the extent that
different regulatory regimes impose inconsistent or iterative requirements on the conduct of its business, Morgan Stanley faces complexity and additional
costs in its compliance efforts.
Consolidated Supervision and Revised Capital Standards.
Effective December 1, 2005, Morgan Stanley became a consolidated supervised entity (“CSE”) as defined by the SEC. As such, Morgan Stanley is subject
to group−wide supervision and examination by the SEC and to minimum capital requirements on a consolidated basis. Morgan Stanley’s European
regulated entities implemented Basel II capital standards on January 1, 2008. Morgan Stanley continues to work with its regulators on the implementation of
the CSE rules and Basel II capital standards.
8
G-15
Table of Contents
Anti−Money Laundering.
Morgan Stanley’s Anti−Money Laundering (“AML”) program is coordinated on an enterprise−wide basis. In the U.S., for example, the USA PATRIOT Act
of 2001 (the “USA PATRIOT Act”) imposes significant obligations on financial institutions to detect and deter money laundering and terrorist financing
activity, including requiring banks, broker−dealers and mutual funds to identify and verify customers that maintain accounts. The USA PATRIOT Act also
mandates that certain types of financial institutions monitor and report suspicious activity to appropriate law enforcement or regulatory authorities. An
institution subject to the USA PATRIOT Act also must designate an AML compliance officer, provide employees with training on money laundering
prevention, and undergo an annual, independent audit to assess the effectiveness of its AML program. Outside the U.S., applicable laws and regulations
similarly subject designated types of financial institutions to AML requirements. Morgan Stanley has implemented policies, procedures and internal controls
that are designed to comply with these AML requirements.
Protection of Client Information.
Many aspects of Morgan Stanley’s business are subject to increasingly comprehensive legal requirements concerning the use and protection of certain client
information, including those adopted pursuant to the Gramm−Leach−Bliley Act of 1999 and the Fair and Accurate Credit Transactions Act of 2003 in the
U.S., the European Union Data Protection Directive in the EU and various laws in Asia, including the Japanese Personal Information (Protection) Law, the
Hong Kong Personal Data (Protection) Ordinance and the Australian Privacy Act. Morgan Stanley has adopted measures in response to such requirements.
Institutional Securities and Global Wealth Management Group.
Broker−Dealer Regulation. MS&Co. is registered as a broker−dealer with the SEC and in all 50 states, the District of Columbia, Puerto Rico and the U.S.
Virgin Islands, and is a member of self−regulatory organizations, including the Financial Industry Regulatory Authority (“FINRA”) and securities
exchanges, including the NYSE. Broker−dealers are subject to laws and regulations covering all aspects of the securities business, including sales and
trading practices, securities offerings, publication of research reports, use of customers’ funds and securities, capital structure, record−keeping and retention
and the conduct of their directors, officers, representatives and other associated persons. Broker−dealers are also regulated by securities administrators in
those states where they do business. Violations of the laws and regulations governing a broker−dealer’s actions could result in censures, fines, the issuance
of cease−and−desist orders, revocation of licenses or registrations, the suspension or expulsion from the securities industry of such broker−dealer or its
officers or employees, or other similar consequences by both federal and state securities administrators.
Margin lending by broker−dealers is regulated by the Federal Reserve Board’s restrictions on lending in connection with customer and proprietary
purchases and short sales of securities, as well as securities borrowing and lending activities. Broker−dealers are also required by the National Association
of Securities Dealers, Inc. and NYSE rules to impose maintenance requirements on the value of securities contained in margin accounts. In many cases,
Morgan Stanley’s broker−dealer subsidiaries’ margin policies are more stringent than these rules.
Morgan Stanley conducts some of its government securities activities through Morgan Stanley Market Products Inc., a FINRA member registered as a
government securities broker−dealer with the SEC and in certain states. The Department of Treasury has promulgated regulations concerning, among other
things, capital adequacy, custody and use of government securities and transfers and control of government securities subject to repurchase transactions. The
rules of the Municipal Securities Rulemaking Board, which are enforced by FINRA, govern the municipal securities activities of Morgan Stanley.
As registered U.S. broker−dealers, certain subsidiaries of Morgan Stanley, including MS&Co., are subject to the SEC’s net capital rule and the net capital
requirements of various securities exchanges. Many non−U.S. securities exchanges and regulatory authorities either have imposed or are proposing rules
relating to capital requirements
9
G-16
Table of Contents
applicable to Morgan Stanley’s non−U.S. broker−dealer subsidiaries. These rules, which specify minimum capital requirements, are generally designed to
measure general financial integrity and liquidity and require that at least a minimum amount of net assets be kept in relatively liquid form. See also
“Consolidated Supervision and Revised Capital Standards” above and Note 16 in “Notes to Consolidated Financial Statements” in Part II, Item 8. Rules of
FINRA and other self−regulatory organizations also impose limitations and requirements on the transfer of member organizations’ assets.
Compliance with the capital requirements may limit Morgan Stanley’s operations requiring the intensive use of capital. Such requirements restrict Morgan
Stanley’s ability to withdraw capital from its broker−dealer subsidiaries, which in turn may limit its ability to pay dividends, repay debt or redeem or
purchase shares of its own outstanding stock. Any change in such rules or the imposition of new rules affecting the scope, coverage, calculation or amount
of capital requirements, or a significant operating loss or any unusually large charge against capital, could adversely affect Morgan Stanley’s ability to pay
dividends or to expand or maintain present business levels. In addition, such rules may require Morgan Stanley to make substantial capital infusions into one
or more of its broker−dealer subsidiaries in order for such subsidiaries to comply with such rules, either in the form of cash or subordinated loans made in
accordance with the requirements of the SEC’s net capital rule.
Regulation of Certain Commodities Activities. The commodities activities in the Institutional Securities business segment are subject to extensive and
evolving energy, commodities, environmental, health and safety, and other governmental laws and regulations in the U.S. and abroad. Intensified scrutiny of
certain energy markets by U.S. federal, state and local authorities in the U.S. and abroad and the public has resulted in increased regulatory and legal
enforcement and remedial proceedings involving energy companies, including those engaged in power generation and liquid hydrocarbons trading. The EU
has increased its focus on the energy markets, which has resulted in increased regulation of companies participating in the energy markets, including those
engaged in power generation and liquid hydrocarbons trading.
Terminal facilities and other assets relating to Morgan Stanley’s commodities activities are also subject to environmental laws both in the U.S. and abroad.
In addition, pipeline, transport and terminal operations are subject to state laws in connection with the cleanup of hazardous substances that may have been
released at properties currently or previously owned or operated by us or locations to which we have sent wastes for disposal.
Additional Regulation of U.S. Entities. As a registered futures commission merchant, MS&Co. is subject to the net capital requirements of, and its
activities are regulated by, the Commodity Futures Trading Commission (the “CFTC”) and various commodity exchanges. Certain subsidiaries of Morgan
Stanley are registered with the CFTC as commodity trading advisors and/or commodity pool operators. Morgan Stanley’s futures and options−on−futures
businesses are also regulated by the National Futures Association (the “NFA”), a registered futures association, of which MS&Co. and certain of its
affiliates are members. Violations of the rules of the CFTC, the NFA or the commodity exchanges could result in remedial actions including fines,
registration restrictions or terminations, trading prohibitions or revocations of commodity exchange memberships.
Morgan Stanley Bank, through which Morgan Stanley conducts certain financing and lending activities, is an industrial bank chartered under the laws of the
State of Utah. It has deposits that are eligible for insurance by the Federal Deposit Insurance Corporation (“FDIC”) in accordance with FDIC rules and is
subject to comprehensive regulation and periodic examination by the Utah Department of Financial Institutions and the FDIC. Morgan Stanley Bank is not
considered a “bank” under the Bank Holding Company Act of 1956, as amended (the “BHCA”).
Morgan Stanley Trust National Association, a wholly owned subsidiary, is a federally chartered national bank whose activities are limited to fiduciary
activities, primarily personal trust services. It is subject to comprehensive regulation and periodic examination by the Office of the Comptroller of the
Currency. Morgan Stanley Trust National Association is not FDIC−insured and is not considered a “bank” for purposes of the BHCA.
10
G-17
Table of Contents
Morgan Stanley Trust, a wholly owned subsidiary which conducts certain transfer agency, sub−accounting and other activities, is a federally chartered
savings bank whose activities are subject to comprehensive regulation and periodic examination by the Office of Thrift Supervision (“OTS”). As a result of
its ownership of Morgan Stanley Trust, Morgan Stanley is registered with the OTS as a unitary savings and loan holding company (“SLHC”) and subject to
regulation and examination by the OTS as a SLHC. Subsidiaries of Morgan Stanley, including Morgan Stanley Trust, are registered transfer agents subject
to regulation and examination by the SEC. Morgan Stanley Trust has deposits that are eligible for insurance by the FDIC.
Non−U.S. Regulation. Morgan Stanley’s businesses are also regulated extensively by non−U.S. regulators, including governments, securities exchanges,
commodity exchanges, self−regulatory organizations, central banks and regulatory bodies, especially in those jurisdictions in which Morgan Stanley
maintains an office. As Morgan Stanley continues to expand its business internationally, including in Europe, Latin America, Asia and the Middle East, it
will become subject to regulation in the jurisdictions in which it conducts business. Certain Morgan Stanley subsidiaries are regulated as broker−dealers
under the laws of the jurisdictions in which they operate. Subsidiaries engaged in banking and trust activities outside the U.S. are regulated by various
government agencies in the particular jurisdiction where they are chartered, incorporated and/or conduct their business activity. For instance, the Financial
Services Authority and several U.K. securities and futures exchanges, including the London Stock Exchange and Euronext.liffe regulate the Company’s
activities in the U.K.; the Deutsche Borse AG and the Bundesanstalt für Finanzdienstleistungsaufsicht (the Federal Financial Supervisory Authority)
regulate its activities in the Federal Republic of Germany; the Swiss Federal Banking Commission regulates its activities in Switzerland; the Comisión
Nacional del Mercado del Valores (C.N.M.V.) regulates its activities in Spain; the Financial Services Agency, the Bank of Japan, the Japanese Securities
Dealers Association and several Japanese securities and futures exchanges, including the Tokyo Stock Exchange, the Osaka Securities Exchange and the
Tokyo International Financial Futures Exchange, regulate its activities in Japan; the Hong Kong Securities and Futures Commission, the Hong Kong
Exchanges and Clearing Limited regulate its operations in Hong Kong; and the Monetary Authority of Singapore and the Singapore Exchange Limited
regulate its business in Singapore.
Research. Both U.S. and non−U.S. regulators continue to focus on research conflicts of interest. Research−related regulations have been implemented in
many jurisdictions and are proposed or under consideration in other jurisdictions. New and revised requirements resulting from these regulations and the
global research settlement with U.S. Federal and state regulators (to which Morgan Stanley is a party) have necessitated the development or enhancement of
corresponding policies and procedures.
Asset Management.
The majority of subsidiaries related to Morgan Stanley’s asset management activities and others, including MS&Co., are registered as investment advisers
with the SEC, and, in certain states, some employees or representatives of subsidiaries are registered as investment adviser representatives. Many aspects of
Morgan Stanley’s asset management activities are subject to federal and state laws and regulations primarily intended to benefit the investor or client. These
laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict Morgan Stanley
from carrying on its asset management activities in the event that it fails to comply with such laws and regulations. Sanctions that may be imposed for such
failure include the suspension of individual employees, limitations on Morgan Stanley engaging in various asset management activities for specified periods
of time, the revocation of registrations, other censures and fines.
Morgan Stanley’s Asset Management business is also regulated outside the U.S. For example, the Financial Services Authority regulates Morgan Stanley’s
business in the U.K.; the Financial Services Agency regulates Morgan Stanley’s business in Japan; the Securities and Exchange Board of India regulates
Morgan Stanley’s business in India; and the Monetary Authority of Singapore regulates Morgan Stanley’s business in Singapore.
11
G-18
Table of Contents
Executive Officers of Morgan Stanley.
The executive officers of Morgan Stanley and their ages and titles as of January 28, 2008 are set forth below. Business experience for the past five years is
provided in accordance with SEC rules.
John J. Mack (63). Chairman of the Board of Directors and Chief Executive Officer (since June 2005). Chairman of Pequot Capital Management (June
2005). Co−Chief Executive Officer of Credit Suisse Group (January 2003 to June 2004). President, Chief Executive Officer and Director of Credit Suisse
First Boston (July 2001 to June 2004). President and Chief Operating Officer of Morgan Stanley (May 1997 to March 2001).
Walid Chammah (53). Co−President (since December 2007). Chairman and Chief Executive Officer of Morgan Stanley International (since July 2007).
Head of Investment Banking (August 2005 to July 2007) and Head of Global Capital Markets (July 2002 to August 2005).
James Gorman (49). Co−President (since December 2007). Co−Head of Strategic Planning (since October 2007) and President and Chief Operating
Officer of the Global Wealth Management Group (since February 2006). Head of Corporate Acquisitions Strategy & Research at Merrill Lynch & Co., Inc.
(“Merrill Lynch”) (July 2005 to August 2005) and President of the Global Private Client business at Merrill Lynch (December 2002 to July 2005).
Colm Kelleher (50). Executive Vice President and Chief Financial Officer and Co−Head of Strategic Planning (since October 2007). Head of Global
Capital Markets (February 2006 to October 2007). Co−Head of Fixed Income Europe (May 2004 to February 2006). Head of Fixed Income Sales Europe
(December 2000 to May 2004).
Gary G. Lynch (57). Executive Vice President and Chief Legal Officer (since October 2005). Global General Counsel (October 2001 to October 2005)
of Credit Suisse First Boston. Executive Vice Chairman (July 2004 to October 2005) and Vice Chairman (December 2002 to July 2004) of Credit Suisse
First Boston and member of the Executive Board (July 2004 to July 2005) of Credit Suisse Group. Partner at the law firm of Davis Polk & Wardwell
(September 1989 to October 2001).
Thomas R. Nides (46). Executive Vice President, Chief Administrative Officer and Secretary (since September 2005). Worldwide President and Chief
Executive Officer of Burson−Marsteller (November 2004 to August 2005). Chief Administrative Officer of Credit Suisse First Boston (June 2001 to June
2004).
12
G-19
Table of Contents
Item 1A.
Risk Factors.
Liquidity Risk.
Liquidity and funding risk refers to the risk that Morgan Stanley will be unable to finance its operations due to a loss of access to the capital markets or
difficulty in liquidating its assets. Liquidity and funding risk also encompasses the ability of Morgan Stanley to meet its financial obligations without
experiencing significant business disruption or reputational damage that may threaten its viability as a going concern. For more information on how we
monitor and manage liquidity and funding risk, see “Management’s Discussion and Analysis of Results of Operations—Liquidity and Capital Resources” in
Part II, Item 7 below.
Liquidity is essential to our businesses and we rely on external sources to finance a significant portion of our operations.
Liquidity is essential to our businesses. Our liquidity could be substantially negatively affected by an inability to raise funding in the long−term or
short−term debt capital markets or the equity capital markets or an inability to access the secured lending markets. Factors that we cannot control, such as
disruption of the financial markets or negative views about the financial services industry generally, could impair our ability to raise funding. In addition,
our ability to raise funding could be impaired if lenders develop a negative perception of our long−term or short−term financial prospects. Such negative
perceptions could be developed if we incur large trading losses, we are downgraded or put on negative watch by the rating agencies, we suffer a decline in
the level of our business activity, regulatory authorities take significant action against us, or we discover serious employee misconduct or illegal activity,
among other reasons. If we are unable to raise funding using the methods described above, we would likely need to liquidate unencumbered assets, such as
our investment and trading portfolios, to meet maturing liabilities. We may be unable to sell some of our assets, or we may have to sell assets at a discount
from market value, either of which could adversely affect our results of operations.
Our borrowing costs and access to the debt capital markets depend significantly on our credit ratings.
The cost and availability of unsecured financing generally are dependent on our short−term and long−term credit ratings. Factors that are significant to the
determination of our credit ratings or otherwise affect our ability to raise short−term and long−term financing include the level and volatility of our
earnings; our relative competitive position in the markets in which we operate; our geographic and product diversification; our ability to retain key
personnel; our risk profile; our risk management policies; our cash liquidity; our capital adequacy; our corporate lending credit risk; and legal and regulatory
developments. A deterioration in any of these factors or combination of these factors may lead rating agencies to downgrade our credit ratings, thereby
increasing our cost of obtaining unsecured funding.
Our debt ratings also can have a significant impact on certain trading revenues, particularly in those businesses where longer term counterparty performance
is critical, such as OTC derivative transactions, including credit derivatives and interest rate swaps. In connection with certain OTC trading agreements and
certain other agreements associated with the Institutional Securities business segment, we may be required to provide additional collateral to certain
counterparties in the event of a credit ratings downgrade.
We are a holding company and depend on payments from our subsidiaries.
We depend on dividends, distributions and other payments from our subsidiaries to fund dividend payments and to fund all payments on our obligations,
including debt obligations. Regulatory and other legal restrictions may limit our ability to transfer funds freely, either to or from our subsidiaries. In
particular, many of our subsidiaries, including our broker−dealer subsidiaries, are subject to laws and regulations that authorize regulatory bodies to block or
reduce the flow of funds to the parent holding company, or that prohibit such transfers altogether in certain circumstances. These laws and regulations may
hinder our ability to access funds that we may need to make payments on our obligations.
13
G-20
Table of Contents
If our liquidity and funding policies are not adequate, we may be unable to access sufficient financing.
Our liquidity and funding policies have been designed to ensure that we maintain sufficient liquid financial resources to continue to conduct our business for
an extended period in a stressed liquidity environment. If our liquidity and funding policies are not adequate or we do not adhere to the policies, we may be
unable to access sufficient financing to service our financial obligations when they come due, which could have a material adverse franchise or business
impact.
Market Risk.
Market risk refers to the risk that a change in the level of one or more market prices of commodities or securities, rates, indices, implied volatilities (the
price volatility of the underlying instrument imputed from option prices), correlations or other market factors, such as liquidity, will result in losses for a
position or portfolio. For more information on how we monitor and manage market risk, see “Market Risk” in Part II, Item 7A herein.
Our results of operations may be materially affected by market fluctuations and by economic and other factors.
The amount, duration and range of our market risk exposures have been increasing over the past several years, and may continue to do so. Our results of
operations may be materially affected by market fluctuations due to economic and other factors. Results of operations in the past have been, and in the
future may continue to be, materially affected by many factors of a global nature, including political, economic and market conditions; the availability and
cost of capital; the liquidity of global markets; the level and volatility of equity prices, commodity prices and interest rates; currency values and other
market indices; technological changes and events; the availability and cost of credit; inflation; natural disasters; acts of war or terrorism; investor sentiment
and confidence in the financial markets; or a combination of these or other factors. In addition, legislative, legal and regulatory developments related to our
businesses potentially could increase costs, thereby affecting results of operations. These factors also may have an impact on our ability to achieve our
strategic objectives.
The results of our Institutional Securities business segment, particularly results relating to our involvement in primary and secondary markets for all types of
financial products, are subject to substantial fluctuations due to a variety of factors, such as those enumerated above that we cannot control or predict with
great certainty. These fluctuations impact results by causing variations in new business flows and in the fair value of securities and other financial products.
Fluctuations also occur due to the level of global market activity, which, among other things, affects the size, number and timing of investment banking
client assignments and transactions and the realization of returns from our principal investments. During periods of unfavorable market or economic
conditions, the level of individual investor participation in the global markets may also decrease, which would negatively impact the results of our Global
Wealth Management Group business segment. In addition, fluctuations in global market activity could impact the flow of investment capital into or from
assets under management or supervision and the way customers allocate capital among money market, equity, fixed income or other investment alternatives,
which could negatively impact our Asset Management business segment.
We may experience further writedowns of our financial instruments and other losses related to volatile and illiquid market conditions.
The Company recorded $9.4 billion in mortgage−related writedowns in the fourth quarter of fiscal 2007, including $7.8 billion relating to our U.S. subprime
trading positions and $1.6 billion relating to other mortgage−related products, such as commercial mortgage−backed securities, ALT−A and other loans,
conduit and non−performing loans and European non−conforming loans, and an impairment charge related to mortgage−related securities portfolios in our
domestic subsidiary banks. We continue to have exposure to these markets and products and as market conditions continue to evolve the fair value of these
mortgage−related instruments could further deteriorate. In addition, recent market volatility has made it extremely difficult to value certain of our
14
G-21
Table of Contents
securities. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these securities in future periods. In
addition, at the time of any sales and settlements of these securities, the price we ultimately realize will depend on the demand and liquidity in the market at
that time and may be materially lower than their current fair value. Any of these factors could require us to take further writedowns in the value of our
securities portfolio, which may have an adverse effect on our results of operations in future periods.
The results for fiscal 2007 included other losses primarily related to the illiquid market conditions that existed during the second half of fiscal 2007. These
included losses reflecting mark−to−market valuations associated with loans and loan commitments largely related to acquisition financing to
non−investment grade companies. The Company’s leveraged finance business originates and distributes loans and commitments, and intends to distribute its
current positions; however, this may take longer than in the past and is dependent on liquidity reentering the market and additional writedowns of these
loans and commitments may occur. The valuation of these commitments could change in future periods depending on, among other things, the extent that
they are renegotiated or repriced or the associated acquisition transaction does not occur.
Other areas of our business which to date have not been adversely affected by the illiquidity in our mortgage and lending businesses could be adversely
affected if the current conditions in the credit market spread to other sectors.
Holding large and concentrated positions may expose us to losses.
Concentration of risk may reduce revenues or result in losses in our market−making, proprietary trading, investing, block trading, underwriting and lending
businesses in the event of unfavorable market movements. We commit substantial amounts of capital to these businesses, which often results in us taking
large positions in the securities of, or make large loans to, a particular issuer or issuers in a particular industry, country or region. Moreover, the trend in all
major capital markets is towards larger and more frequent commitments of capital in many of these activities, and we expect this trend to continue.
Markets may experience periods of high volatility accompanied by reduced liquidity.
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity, such as the
asset price deterioration in the U.S. subprime residential mortgage market. Under these extreme conditions, hedging and other risk management strategies
may not be as effective at mitigating trading losses as they would be under more normal market conditions. Moreover, under these conditions market
participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large scale, such as crowded
trades. Morgan Stanley’s risk management and monitoring processes seek to quantify and mitigate risk to more extreme market moves. Severe market
events have historically been difficult to predict, however, and Morgan Stanley could realize significant losses if unprecedented extreme market events were
to occur, as illustrated by recent results in our subprime mortgage−related proprietary trading.
We may incur significant losses in the real estate sector.
We finance and acquire principal positions in a number of real estate and real estate−related products for our own account, for investment vehicles managed
by affiliates in which we also may have a significant investment, for separate accounts managed by affiliates and for major participants in the commercial
and residential real estate markets, and originate loans secured by commercial and residential properties. We also securitize and trade in a wide range of
commercial and residential real estate and real estate−related whole loans, mortgages and other real estate and commercial assets and products, including
residential and commercial mortgage−backed securities. These businesses could be adversely affected by a downturn in the real estate sector.
15
G-22
Table of Contents
Credit Risk.
Credit risk refers to the risk of loss arising from borrower or counterparty default when a borrower, counterparty or obligor does not meet its obligations.
For more information on how we monitor and manage credit risk, see “Credit Risk” in Part II, Item 7A herein.
We are exposed to the risk that third parties that are indebted to us will not perform their obligations.
We incur significant, “single−name” credit risk exposure through the Institutional Securities business segment. This risk may arise, for example, from
entering into swap or other derivative contracts under which counterparties have long−term obligations to make payments to us and by extending credit to
our clients through various credit arrangements. We incur “individual consumer” credit risk in the Global Wealth Management Group business segment
through margin and non−purpose loans to individual investors, which are collateralized by securities.
The amount, duration and range of our credit exposures have been increasing over the past several years, and may continue to do so. In recent years, we
have significantly expanded our use of swaps and other derivatives and we may continue to do so. Corporate clients are increasingly seeking loans or
lending commitments from us in connection with investment banking and other assignments. In addition, we have experienced, due to competitive factors,
increased pressure to assume longer−term credit risk, to provide swaps and lending commitments to counterparties and borrowers with lower credit quality,
to extend credit against less liquid collateral and to price derivatives instruments more aggressively based on the credit risks that we take. As a clearing
member firm, we finance our customer positions and we could be held responsible for the defaults or misconduct of our customers. Although we regularly
review our credit exposures, default risk may arise from events or circumstances that are difficult to detect or foresee.
Defaults by another larger financial institution could adversely affect financial markets generally.
The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships between the
institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market−wide liquidity problems, losses
or defaults by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing
agencies, clearing houses, banks, securities firms and exchanges, with which we interact on a daily basis, and therefore could adversely affect Morgan
Stanley.
Operational Risk.
Operational risk refers to the risk of financial or other loss, or potential damage to a firm’s reputation, arising from inadequate or failed internal processes,
people, resources, systems or from external events (e.g., external or internal fraud, legal and compliance risks, damage to physical assets, etc.). Morgan
Stanley may incur operational risk across its full scope of business activities, including revenue−generating activities (e.g., sales and trading) and support
functions (e.g., information technology and facilities management). As such, Morgan Stanley may incur operational risk in each of its businesses, as well as
within the control groups. For more information on how we monitor and manage operational risk, see “Operational Risk” in Part II, Item 7A herein.
We are subject to operational risk and an operational event could adversely affect our businesses.
Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many
currencies. In general, the transactions we process are increasingly complex. We perform the functions required to operate our different businesses either by
ourselves or through agreements with third parties. We rely on the ability of our employees, our internal systems and systems at technology centers operated
by third parties to process a high volume of transactions. We also face the risk of operational failure or termination of any of the clearing agents, exchanges,
clearing houses or other financial
16
G-23
Table of Contents
intermediaries we use to facilitate our securities transactions. In the event of a breakdown or improper operation of our or third party’s systems or improper
action by third parties or employees, we could suffer financial loss, an impairment to our liquidity, a disruption of our businesses, regulatory sanctions or
damage to our reputation.
Despite the business contingency plans we have in place, our ability to conduct business may be adversely affected by a disruption in the infrastructure that
supports our business and the communities where we are located. This may include a disruption involving physical site access, terrorist activities, disease
pandemics, electrical, communications or other services used by Morgan Stanley, its employees or third parties with whom we conduct business.
Legal Risk.
Legal risk refers to the risk of non−compliance with applicable legal and regulatory requirements and standards. Legal risk also includes contractual and
commercial risk such as the risk that a counterparty’s performance obligations will be unenforceable. For more information on how we monitor and manage
legal risk, see “Legal Risk” in Part II, Item 7A herein.
The financial services industry faces substantial litigation and regulatory risks, and we may face damage to our reputation and legal liability.
We have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in
connection with our activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for
substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the issuers that would otherwise be the
primary defendants in such cases are bankrupt or in financial distress.
We are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self−regulatory
agencies regarding our business, including, among other things, accounting and operational matters, certain of which may result in adverse judgments,
settlements, fines, penalties, injunctions or other relief. The number of these investigations and proceedings has increased in recent years with regard to
many firms in the financial services industry, including us. Like any large corporation, we are also subject to risk from potential employee misconduct,
including non−compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory
action against us could materially adversely affect our business, financial condition or results of operations or cause us significant reputational harm, which
could seriously harm our business. For more information regarding legal proceedings in which we are involved see “Legal Proceedings” in Part I, Item 3
herein.
We are subject to extensive regulation in the jurisdictions in which we conduct our businesses.
We are subject to extensive regulation globally and face the risk of significant intervention by regulatory authorities in the jurisdictions in which we conduct
our businesses. Among other things, we could be fined, prohibited from engaging in some of our business activities or subject to limitations or conditions on
our business activities. Significant regulatory action against us could have material adverse financial effects, cause significant reputational harm to us, or
harm our business prospects. New laws or regulations or changes in the enforcement of existing laws or regulations applicable to our clients may also
adversely affect our business. For more information regarding the regulatory environment in which we operate, see “Regulation” in Part I, Item 1 herein.
Our commodities activities subject us to extensive regulation, potential catastrophic events and environmental risks and regulation that may expose us to
significant costs and liabilities.
In connection with the commodities activities in our Institutional Securities business segment, we engage in the production, storage, transportation,
marketing and trading of several commodities, including metals (base and precious), agricultural products, crude oil, oil products, natural gas, electric
power, emission credits, coal, freight,
17
G-24
Table of Contents
LNG and related products and indices. In addition, we own five electricity generating facilities in the U.S. and Europe; TransMontaigne Inc. and its
subsidiaries, a group of companies operating in the refined petroleum products marketing and distribution business; and the Heidmar Group of companies,
which provide international marine transportation and U.S. marine logistics services. As a result of these activities, we are subject to extensive and evolving
energy, commodities, environmental, health and safety, and other governmental laws and regulations. For example, liability may be incurred without regard
to fault under certain environmental laws and regulations for the remediation of contaminated areas. Our commodities business also exposes us to the risk of
unforeseen and catastrophic events, including natural disasters, leaks, spills, explosions, release of toxic substances, fires, accidents on land and at sea, wars,
and terrorist attacks that could result in personal injuries, loss of life, property damage, and suspension of operations.
Although we have attempted to mitigate our pollution and other environmental risks by, among other measures, adopting appropriate policies and
procedures for power plant operations, monitoring the quality of petroleum storage facilities and transport vessels and implementing emergency response
programs, these actions may not prove adequate to address every contingency. In addition, insurance covering some of these risks may not be available, and
the proceeds, if any, from insurance recovery may not be adequate to cover liabilities with respect to particular incidents. As a result, our financial condition
and results of operations may be adversely affected by these events.
We also expect the other laws and regulations affecting our commodities business to increase in both scope and complexity. During the past several years,
intensified scrutiny of certain energy markets by federal, state and local authorities in the U.S. and abroad and the public has resulted in increased regulatory
and legal enforcement, litigation and remedial proceedings involving companies engaged in the activities in which we are engaged. For example, the EU has
increased its focus on the energy markets which has resulted in increased regulation of companies participating in the energy markets, including those
engaged in power generation and liquid hydrocarbons trading. We may incur substantial costs in complying with current or future laws and regulations and
our overall businesses and reputation may be adversely affected by the current legal environment. In addition, failure to comply with these laws and
regulations may result in substantial civil and criminal fines and penalties.
Potential conflicts of interest are increasing and a failure to appropriately deal with conflicts of interest could adversely affect our businesses.
Our reputation is one of our most important assets. As we have expanded the scope of our businesses and our client base, we increasingly have to address
potential conflicts of interest, including those relating to our proprietary activities. For example, conflicts may arise between our position as a financial
advisor in a merger transaction and a principal investment we hold in one of the parties to the transaction. In addition, hedge funds and private equity funds
are an increasingly important portion of our client base, and also compete with us in a number of our businesses. We have procedures and controls that are
designed to address various conflicts of interest. However, identifying and managing potential conflicts of interest can be complex and difficult and our
reputation could be damaged if we fail, or appear to fail, to deal appropriately with conflicts of interest. In addition, the SEC and other federal and state
regulators have increased their scrutiny of potential conflicts of interest. It is possible that potential or perceived conflicts could give rise to litigation or
enforcement actions, which may lead to our clients being less willing to enter into transactions in which such a conflict may occur, which will adversely
affect our businesses.
Competitive Environment.
We face strong competition from other financial services firms, which could lead to pricing pressures that could materially adversely affect our revenue
and profitability.
The financial services industry and all of our businesses are intensely competitive, and we expect them to remain so. We compete with commercial banks,
insurance companies, sponsors of mutual funds, hedge funds, energy companies and other companies offering financial services in the U.S., globally and
through the internet. We
18
G-25
Table of Contents
compete on the basis of several factors, including transaction execution, capital or access to capital, products and services, innovation, reputation and price.
Over time, certain sectors of the financial services industry have become considerably more concentrated, as financial institutions involved in a broad range
of financial services have been acquired by or merged into other firms. This convergence could result in our competitors gaining greater capital and other
resources, such as a broader range of products and services and geographic diversity. We may experience pricing pressures as a result of these factors and as
some of our competitors seek to increase market share by reducing prices. For more information regarding the competitive environment in which we
operate, see “Competition” in Part I, Item 1 herein.
Our ability to retain and attract qualified employees is critical to the success of our business and the failure to do so may materially adversely affect our
performance.
Our people are our most important resource and competition for qualified employees is intense. In order to attract and retain qualified employees, we must
compensate such employees at market levels. Typically, those levels have caused employee compensation to be our greatest expense as compensation is
highly variable and changes with performance. If we are unable to continue to attract and retain qualified employees, or do so at rates necessary to maintain
our competitive position, or if compensation costs required to attract and retain employees become more expensive, our performance, including our
competitive position, could be materially adversely affected.
Automated trading markets may adversely affect our business and may increase competition.
We have experienced intense price competition in some of our businesses in recent years. In particular, the ability to execute securities trades electronically
on exchanges and through other automated trading markets has increased the pressure on trading commissions. The trend toward direct access to automated,
electronic stock markets will likely continue. It is possible that we will experience competitive pressures in these and other areas in the future as some of our
competitors may seek to obtain market share by reducing prices.
International Risk.
We are subject to numerous political, economic, legal, operational, franchise and other risks as a result of our international operations which could
adversely impact our businesses in many ways.
We are subject to political, economic, legal, operational, franchise and other risks that are inherent in operating in many countries, including risks of
possible nationalization, expropriation, price controls, capital controls, exchange controls and other restrictive governmental actions, as well as the outbreak
of hostilities or political and governmental instability. In many countries, the laws and regulations applicable to the securities and financial services
industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market. Our inability to
remain in compliance with local laws in a particular market could have a significant and negative effect not only on our business in that market but also on
our reputation generally. We are also subject to the enhanced risk that transactions we structure might not be legally enforceable in all cases.
We have expanded, and continue to look at opportunities to expand, in the emerging markets. Various emerging market countries have experienced severe
economic and financial disruptions, including significant devaluations of their currencies, capital and currency exchange controls, high rates of inflation and
low or negative growth rates in their economies. Crime and corruption, as well as issues of security and personal safety, also exist in certain of these
countries. These conditions could adversely impact our businesses and increase volatility in financial markets generally.
The emergence of a pandemic or other widespread health emergency, or concerns over the possibility of such an emergency, could create economic and
financial disruptions in emerging markets and other areas throughout the world, and could lead to operational difficulties (including travel limitations) that
could impair our ability to manage our businesses around the world.
19
G-26
Table of Contents
Acquisition Risk.
We may be unable to fully capture the expected value from acquisitions, joint ventures and minority stakes.
We expect to grow in part through acquisitions, joint ventures and minority stakes. To the extent we make acquisitions or enter into combinations or joint
ventures, we face numerous risks and uncertainties combining or integrating the relevant businesses and systems, including the need to combine accounting
and data processing systems and management controls and to integrate relationships with clients and business partners. In the case of joint ventures and
minority stakes, we are subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage
relating to, systems, controls and personnel that are not under our control. In addition, conflicts or disagreements between us and our joint venture partners
may negatively impact the benefits to be achieved by the joint venture. There is no assurance that our recent acquisitions or any business we acquire in the
future will be successfully integrated and result in all of the positive benefits anticipated. If we are not able to integrate successfully our past and future
acquisitions, there is a risk that our results of operations may be materially and adversely affected.
Risk Management.
Our hedging strategies and other risk management techniques may not be fully effective in mitigating our risk exposure in all market environments or
against all types of risk.
We have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future. Nonetheless,
our hedging strategies and other risk management techniques may not be fully effective in mitigating our risk exposure in all market environments or
against all types of risk, including risks that are unidentified or unanticipated. Some of our methods of managing risk are based upon our use of observed
historical market behavior. As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical
measures indicate (e.g., recent events in the U.S. subprime residential mortgage market). Management of operational, legal and regulatory risks requires,
among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may
not be fully effective. For more information on how we monitor and manage market and certain other risks, see “Risk Management—Market Risk” in Part
II, Item 7A herein.
Item 1B.
Unresolved Staff Comments.
Morgan Stanley, like other well−known seasoned issuers, from time to time receives written comments from the staff of the SEC regarding its periodic or
current reports under the Exchange Act. There are no comments that remain unresolved that Morgan Stanley received not less than 180 days before the end
of its fiscal year to which this report relates that Morgan Stanley believes are material.
20
G-27
Table of Contents
Item 2.
Properties.
Morgan Stanley has offices, operations and processing centers and warehouse facilities located throughout the U.S., and certain subsidiaries maintain offices
and other facilities in international locations. Morgan Stanley’s properties that are not owned are leased on terms and for durations that are reflective of
commercial standards in the communities where these properties are located. Morgan Stanley believes the facilities it owns or occupies are adequate for the
purposes for which they are currently used and are well maintained. Our principal offices consist of the following properties:
Location
Owned/
Leased
Approximate Square Footage
as of November 30, 2007*
Lease Expiration
U.S. Locations
1585 Broadway
New York, New York
(Global Headquarters and Institutional Securities
Headquarters)
Owned
N/A
894,390 square feet
522 Fifth Avenue
New York, New York
(Asset Management Headquarters)
Owned
N/A
581,242 square feet
2000 Westchester Avenue
Purchase, New York
(Global Wealth Management Group Headquarters)
Owned
N/A
590,303 square feet
New York, New York
(Several locations)
Leased
2008 – 2018
One Pierrepont Plaza
Brooklyn, New York
Leased
2013
456,686 square feet
Jersey City, New Jersey
(Several locations)
Leased
2008 – 2012
499,350 square feet
N/A
450,150 square feet
2,238,726 square feet
International Locations
25 Cabot Square, Canary Wharf
(London Headquarters)
Owned**
Canary Wharf
(Several locations)
Leased
2013 – 2038
957,378 square feet
1 Austin Road
Kowloon Station, West Kowloon
(Hong Kong Headquarters)
Leased
2019
356,630 square feet
Sapporo’s Yebisu Garden Place,
Ebisu, Shibuya−ku
(Tokyo Headquarters)
Leased
Option to cancel in 2008,
or at any time thereafter
396,314 square feet
*
**
The indicated total aggregate square footage leased does not include space occupied by Morgan Stanley securities branch offices.
Morgan Stanley holds the freehold interest in the land and building.
21
G-28
Table of Contents
Item 3.
Legal Proceedings.
In addition to the matters described below, in the normal course of business, Morgan Stanley has been named, from time to time, as a defendant in various
legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services
institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate
amounts of damages. In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or in financial distress.
Morgan Stanley is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and
self−regulatory agencies regarding Morgan Stanley’s business, including, among other matters, accounting and operational matters, certain of which may
result in adverse judgments, settlements, fines, penalties, injunctions or other relief.
Morgan Stanley contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the
outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the
early stages, Morgan Stanley cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved,
when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, Morgan
Stanley believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse
effect on the consolidated financial condition of Morgan Stanley, although the outcome of such matters could be material to Morgan Stanley’s operating
results and cash flows for a particular future period, depending on, among other things, the level of Morgan Stanley’s revenues or income for such period.
Coleman Litigation.
In May 2003, Coleman (Parent) Holdings Inc. (“CPH”) filed a complaint against Morgan Stanley in the Circuit Court of the Fifteenth Judicial Circuit for
Palm Beach County, Florida relating to the 1998 merger between The Coleman Company, Inc. and Sunbeam, Inc. (“Sunbeam”). The complaint, as
amended, alleged that CPH was induced to agree to the transaction with Sunbeam based on certain financial misrepresentations, and it asserted claims
against Morgan Stanley for aiding and abetting fraud, conspiracy and punitive damages. Shortly before trial, which commenced in April 2005, the trial court
granted, in part, a motion for entry of a default judgment against Morgan Stanley and ordered that portions of CPH’s complaint, including those setting forth
CPH’s primary allegations against Morgan Stanley, be read to the jury and deemed established for all purposes in the action. In May 2005, the jury returned
a verdict in favor of CPH and awarded CPH $604 million in compensatory damages and $850 million in punitive damages. In June 2005, the trial court
issued a final judgment in favor of CPH in the amount of $1,578 million, which included prejudgment interest and excluded certain payments received by
CPH in settlement of related claims against others.
In March 2007, the District Court of Appeal for the Fourth District of Florida (the “Court of Appeal”) issued an opinion reversing the trial court’s award for
compensatory and punitive damages and remanding the matter to the trial court for entry of judgment for Morgan Stanley. In June 2007, the Court of
Appeal’s opinion became final when the Court of Appeal issued an order denying CPH’s motions for rehearing, rehearing en banc and for certification of
certain questions for review by the Florida Supreme Court (“the Supreme Court”). On December 12, 2007, the Supreme Court denied CPH’s request for
review of the Court of Appeal’s decision, directing judgment in favor of Morgan Stanley.
IPO Fee Litigation.
Starting in late 1998, purported class actions, later captioned In re Public Offering Fee Antitrust Litigation (the “purchaser actions”) and In re Issuer
Plaintiff Initial Public Offering Fee Antitrust Litigation (the “issuer actions”), were initiated in the U.S. District Court for the Southern District of New York
(the “SDNY”) against
22
G-29
Table of Contents
Morgan Stanley and numerous other underwriters. The consolidated proceedings, one on behalf of purchasers and the other on behalf of issuers of certain
shares in initial public offerings (“IPOs”), allege that defendants conspired to fix the underwriters’ spread at 7% in IPOs of U.S. companies in the $20
million to $80 million range in violation of Section 1 of the Sherman Act. The complaints seek treble damages and injunctive relief. Plaintiffs’ claims for
damages in the purchaser actions have been dismissed, but the claims for injunctive relief remain and plaintiffs’ claims in the issuer actions for damages and
injunctive relief remain. Plaintiffs moved for class certification in both actions, and defendants opposed that motion in May 2005. In October 2005,
plaintiffs moved for summary judgment, which defendants opposed. In May 2006, plaintiffs filed a petition pursuant to Federal Rule of Civil Procedure
23(f) for leave to appeal the SDNY’s denial of class certification and in September 2007, the U.S. Court of Appeals for the Second Circuit (the “Second
Circuit”) reversed the SDNY’s decision and remanded the case back to the district court for further consideration of class certification issues. On remand,
plaintiffs filed a motion for class certification on October 17, 2007.
IPO Allocation Matters.
Beginning in March 2001, numerous purported class actions, now captioned In re Initial Public Offering Securities Litigation, were filed in the SDNY
against certain issuers of IPO securities, certain individual officers of those issuers, Morgan Stanley and other underwriters of those IPOs, purportedly on
behalf of purchasers of stock in the IPOs or the aftermarket. These complaints allege that defendants required customers who wanted allocations of “hot”
IPO securities to pay undisclosed and excessive underwriters’ compensation in the form of increased brokerage commissions and to buy shares of securities
offered in the IPOs after the IPOs were completed at escalating price levels higher than the IPO price (a practice plaintiffs refer to as “laddering”), and claim
violations of the federal securities laws, including Sections 11 and 12(a)(2) of the Securities Act of 1933 (the “Securities Act”) and Section 10(b) of the
Exchange Act. Some of the complaints also allege that continuous “buy” recommendations by the defendants’ research analysts improperly increased or
sustained the prices at which the securities traded after the IPOs. In February 2003, the underwriter defendants’ joint motion to dismiss was denied, except
as to certain specified offerings. In December 2006, the Second Circuit reversed the SDNY’s grant of class certification, and ruled that these cases could not
be certified for class treatment. In August 2007, plaintiffs filed second consolidated amended class action complaints, which purport to amend the
allegations in light of the Second Circuit’s reversal of the SDNY’s decision approving the cases to proceed as class actions. Plaintiffs again seek
certification of classes.
In October 2007, numerous derivative actions, purportedly brought on behalf of certain issuers of IPO securities, were filed in the U.S. District Court for the
Western District of Washington against Morgan Stanley and other underwriters of those IPOs. The actions seek to recover “short swing” profits allegedly
generated in violation of Section 16(b) of the Exchange Act.
Late Trading and Market Timing.
Starting in July 2003, Morgan Stanley received subpoenas and requests for information from various regulatory and governmental agencies, including the
SEC, the NYSE and various states, in connection with industry−wide investigations of broker−dealers and mutual fund complexes relating to possible late
trading and market timing of mutual funds. In December 2007, Morgan Stanley settled all claims with the SEC concerning late trading and market timing of
mutual funds in the retail system over the period from January 2002 to August 2003. Under the terms of the settlement, Morgan Stanley will, among other
things, be censured and pay a monetary fine.
Subprime−related Matters.
Morgan Stanley is responding to subpoenas and requests for information from certain regulatory and governmental entities concerning the origination,
purchase, securitization and servicing of subprime and non−subprime residential mortgages and related issues. Morgan Stanley has also been named as a
defendant in various civil litigation matters related to the subprime and non−subprime residential mortgage business, including
23
G-30
Table of Contents
purported class actions related to Morgan Stanley’s role as an underwriter of certain preferred stock offerings for New Century Financial Corp. and
Countrywide Financial Corp. and certain offerings of mortgage pass through certificates for a subsidiary of Countrywide Financial Corp., and other related
matters.
A shareholder derivative lawsuit was filed in the SDNY during November 2007 asserting claims related in large part to losses caused by certain
subprime−related trading positions and related matters, but no complaint has been served. In December 2007, several purported class action complaints
were filed in SDNY asserting claims on behalf of participants in Morgan Stanley’s 401(k) plan and employee stock ownership plan against Morgan Stanley
and other parties, including certain present and former directors and officers, under the Employee Retirement Income Security Act of 1974. The complaints
relate in large part to subprime−related losses, and allege, among other things, that Morgan Stanley stock was not a prudent investment and that risks
associated with Morgan Stanley stock and Morgan Stanley’s financial condition were not adequately disclosed.
The following matters were terminated during the quarter ended November 30, 2007:
Global Wealth Management Group Employment Matters.
Wage and Hour Matters. Complaints raising allegations of unpaid overtime and unlawful wage deductions were filed against Morgan Stanley in New
Jersey, New York, Connecticut, Texas, Florida, Illinois, California and Ohio seeking damages on behalf of certain current and former employees. In
October 2006, Morgan Stanley reached agreement to resolve these claims on behalf of the individual claimants as well as other potential class members
nationwide. In November 2006, for purposes of executing the settlement, a consolidated amended complaint captioned Steinberg, et al. v. Morgan Stanley
was filed in the U.S. District Court for the Southern District of California (“SDC”). In December 2006, the Judicial Panel on Multi−District Litigation
issued an order centralizing the various matters pending across the country in the SDC.
Gender Matters. In June 2006, Morgan Stanley was named in two purported class actions alleging gender discrimination under state and federal law. On
October 24, 2007, the U.S. District Court for the District of Columbia granted final approval to the settlement reached in Joanne Augst−Johnson v. Morgan
Stanley. The approved settlement resolved all of the class−wide and individual plaintiffs’ claims and included, among other things, a payment to the
settlement fund and certain programmatic relief. All similar class wide claims raised in the second purported gender class action captioned Daisy Jaffe et al.
v. Morgan Stanley were subsumed by the Augst−Johnson settlement.
Item 4.
Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the fourth quarter of our fiscal year ended November 30, 2007.
24
G-31
Table of Contents
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Morgan Stanley’s common stock trades on the NYSE under the symbol “MS.” At January 23, 2008, Morgan Stanley had approximately 94,469 holders of
record; however, Morgan Stanley believes the number of beneficial owners of common stock exceeds this number.
The table below sets forth, for each of the last eight fiscal quarters, the low and high sales prices per share of Morgan Stanley’s common stock as reported
by Bloomberg Financial Markets and the amount of any cash dividends declared per share of Morgan Stanley’s common stock.
Fiscal 2007:
Fourth Quarter
Third Quarter*
Second Quarter
First Quarter
Fiscal 2006:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
*
Low
Sale Price
High
Sale Price
Dividends
$
$
$
$
47.56
54.90
70.30
73.04
$
$
$
$
69.87
90.95
87.44
84.66
$
$
$
$
0.27
0.27
0.27
0.27
$
$
$
$
65.26
54.52
57.58
55.89
$
$
$
$
80.00
69.50
66.00
62.15
$
$
$
$
0.27
0.27
0.27
0.27
On June 30, 2007, Morgan Stanley completed the Discover Spin−off. Prior to the Discover Spin−off, the Low Sale Price and the High Sale Price for the Third Quarter were $82.73
and $90.95, respectively.
25
G-32
Table of Contents
The table below sets forth the information with respect to purchases made by or on behalf of Morgan Stanley of its common stock during the fourth quarter
of our fiscal year ended November 30, 2007.
Issuer Purchases of Equity Securities
(dollars in millions, except per share amounts)
Period
Month #1 (September 1, 2007—September 30, 2007)
Share Repurchase Program (A)
Employee Transactions (B)
Month #2 (October 1, 2007—October 31, 2007)
Month #3 (November 1, 2007—November 30, 2007)
Total
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
Total
Number of
Shares
Purchased
Average
Price
Paid Per
Share
Total Number of
Shares Purchased
As Part of Publicly
Announced Plans
or Programs (C)
—
2,348,230
N/A
$ 62.89
—
N/A
$
2,787
N/A
2,830,092
29,705
$ 63.32
$ 66.34
2,830,092
N/A
$
2,608
N/A
6,364,081
98,592
$ 52.93
$ 53.65
6,364,081
N/A
$
2,271
N/A
9,194,173
2,476,527
$ 56.13
$ 62.56
9,194,173
N/A
$
2,271
N/A
(A) On December 19, 2006, Morgan Stanley announced that its Board of Directors authorized the repurchase of up to $6 billion of Morgan Stanley’s outstanding stock under a new share
repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business
segment capital needs, as well as equity−based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date.
(B) Includes: (1) shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options (granted under employee
stock compensation plans) who exercised options; (2) restricted shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding
obligations that occur upon vesting and release of restricted shares; and (3) shares withheld (under the terms of grants under employee stock compensation plans) to offset tax
withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units. Morgan Stanley’s employee stock compensation plans provide that the
value of the shares delivered or attested, or withheld, shall be valued using the fair market value of Morgan Stanley common stock on the date the relevant transaction occurs, using a
valuation methodology established by Morgan Stanley.
(C) Share purchases under publicly announced programs are made pursuant to open−market purchases, Rule 10b5−1 plans or privately negotiated transactions (including with employee
benefit plans) as market conditions warrant and at prices Morgan Stanley deems appropriate.
***
26
G-33
Table of Contents
Stock performance graph. The following graph compares the cumulative total shareholder return (rounded to the nearest whole dollar) of our common
stock, the S&P 500 Stock Index (“S&P 500”) and the S&P 500 Diversified Financials Index (“S5DIVF”) for our last five fiscal years. The graph assumes a
$100 investment at the closing price on November 30, 2002 and reinvestment of dividends on the respective dividend payment dates without commissions.
Historical prices are adjusted to reflect the Discover Spin−off completed on June 30, 2007. This graph does not forecast future performance of our common
stock.
27
G-34
Table of Contents
Item 6.
Selected Financial Data.
MORGAN STANLEY
SELECTED FINANCIAL DATA
(dollars in millions, except share and per share data)
2007
2006
Fiscal Year
2005
2004
2003
$ 6,368
$ 4,755
$ 3,843
$ 3,341
$ 2,440
3,206
3,262
4,682
6,519
60,083
1,208
11,805
1,807
3,770
5,238
42,776
585
7,377
1,128
3,331
4,915
25,987
496
5,512
721
3,235
4,436
16,719
332
6,262
170
2,861
3,784
13,685
245
85,328
57,302
70,736
40,897
47,077
23,552
34,296
13,977
29,447
11,826
28,026
29,839
23,525
20,319
17,621
16,552
8,033
—
13,986
6,750
—
10,749
6,711
(251)
9,320
5,482
—
7,892
4,659
—
24,585
20,736
17,209
14,802
12,551
Income from continuing operations before losses from unconsolidated investees, income
taxes, dividends on preferred securities subject to mandatory redemption and cumulative
effect of accounting change, net
Losses from unconsolidated investees
Provision for income taxes
Dividends on preferred securities subject to mandatory redemption
3,441
47
831
—
9,103
40
2,728
—
6,316
311
1,473
—
5,517
328
1,384
45
5,070
279
1,305
154
Income from continuing operations before cumulative effect of accounting change, net
2,563
6,335
4,532
3,760
3,332
Discontinued operations:
Net gain from discontinued operations
1,024
378
1,666
529
559
201
1,129
403
696
241
646
—
1,137
—
358
49
726
—
455
—
Net income
$ 3,209
$ 7,472
$ 4,939
$ 4,486
$ 3,787
Preferred stock dividend requirements
$
$
$
$
$
Earnings applicable to common shareholders(1)
$ 3,141
Income Statement Data:
Revenues:
Investment banking
Principal transactions:
Trading
Investments
Commissions
Asset management, distribution and administration fees
Interest and dividends
Other
Total revenues
Interest expense
Net revenues
Non−interest expenses:
Compensation and benefits
Other
th
September 11 related insurance recoveries, net
Total non−interest expenses
Net gain on discontinued operations
Cumulative effect of accounting change, net
28
68
19
$ 7,453
—
$ 4,939
—
$ 4,486
—
$ 3,787
G-35
Table of Contents
2007
Per Share Data:
Earnings per basic common share:
Income from continuing operations
Gain on discontinued operations
Cumulative effect of accounting
change, net
Earnings per basic common
share
Earnings per diluted common share:
Cumulative effect of accounting
change, net
Earnings per diluted common
share
Book value per common share
Dividends per common share
Balance Sheet and Other Operating Data:
Total assets
Consumer loans, net
Total capital(2)
Long−term borrowings(2)
Shareholders’ equity
Return on average common shareholders’
equity
Average common and equivalent shares(1)
(1)
(2)
$
Fiscal Year
2005
2006
2.49
0.64
$
6.25
1.13
—
$
—
4.32
0.33
2004
2003
$
3.48
0.67
0.05
$
—
3.10
0.42
—
$
3.13
$
7.38
$
4.70
$
4.15
$
3.52
$
2.37
0.61
$
5.99
1.08
$
4.19
0.33
$
3.40
0.66
$
3.04
0.41
—
—
0.05
—
—
$
2.98
$
7.07
$
4.57
$
4.06
$
3.45
$
$
28.56
1.08
$
$
32.67
1.08
$
$
27.59
1.08
$
$
25.95
1.00
$
$
22.93
0.92
$
1,045,409
—
191,085
159,816
31,269
$
1,121,192
22,915
162,134
126,770
35,364
$
898,835
21,966
125,891
96,709
29,182
$
747,578
19,166
110,793
82,587
28,206
$
603,022
18,362
82,769
57,902
24,867
8.9%
1,001,878,651
23.5%
1,010,254,255
17.3%
1,049,896,047
16.8%
1,080,121,708
Amounts shown are used to calculate earnings per basic common share.
These amounts exclude the current portion of long−term borrowings and include Capital Units and junior subordinated debt issued to capital trusts.
29
16.5%
1,076,754,740
G-36
Table of Contents
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction.
Morgan Stanley (the “Company”) is a global financial services firm that maintains significant market positions in each of its business
segments—Institutional Securities, Global Wealth Management Group and Asset Management. The Company, through its subsidiaries and affiliates,
provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial
institutions and individuals. A summary of the activities of each of the segments follows.
Institutional Securities includes capital raising; financial advisory services, including advice on mergers and acquisitions, restructurings, real estate
and project finance; corporate lending; sales, trading, financing and market−making activities in equity and fixed income securities and related
products, including foreign exchange and commodities; benchmark indices and risk management analytics; research; and investment activities.
Global Wealth Management Group provides brokerage and investment advisory services covering various investment alternatives; financial and
wealth planning services; annuity and other insurance products; credit and other lending products; cash management services; retirement services; and
trust and fiduciary services.
Asset Management provides global asset management products and services in equity, fixed income, alternative investments, which includes hedge
funds and fund of funds, and merchant banking, which includes real estate, private equity and infrastructure, to institutional and retail clients through
proprietary and third−party retail distribution channels, intermediaries and the Company’s institutional distribution channel. Asset Management also
engages in investment activities.
The Company’s results of operations for the 12 months ended November 30, 2007 (“fiscal 2007”), November 30, 2006 (“fiscal 2006”) and November 30,
2005 (“fiscal 2005”) are discussed below.
Discontinued Operations.
On June 30, 2007, the Company completed the spin−off (the “Discover Spin−off”) of Discover Financial Services (“DFS”) to its shareholders. DFS’ results
are included within discontinued operations for all periods presented through the date of the Discover Spin−off. The results of Quilter Holdings Ltd.
(“Quilter”), Global Wealth Management Group’s former mass affluent business in the U.K., are reported as discontinued operations for all periods
presented through its sale on February 28, 2007. The results of the Company’s aircraft leasing business, which was sold on March 24, 2006, are also
reported as discontinued operations through its date of sale. See Note 22 to the consolidated financial statements.
30
G-37
Table of Contents
Results of Operations.
Executive Summary.
Financial Information.
2007
Fiscal Year
2006
2005
$16,149
6,625
5,493
(241)
$21,110
5,512
3,453
(236)
$15,497
5,047
3,219
(238)
$28,026
$29,839
$23,525
$
817
1,155
1,467
2
$ 7,721
508
851
23
$ 4,609
591
1,030
86
$ 3,441
$ 9,103
$ 6,316
Consolidated net income (dollars in millions)
$ 3,209
$ 7,472
$ 4,939
Earnings applicable to common shareholders (dollars in millions)(2)
$ 3,141
$ 7,453
$ 4,939
$
2.49
0.64
—
$
6.25
1.13
—
$
4.32
0.33
0.05
$
3.13
$
7.38
$
4.70
$
2.37
0.61
—
$
5.99
1.08
—
$
4.19
0.33
0.05
$
2.98
$
7.07
$
4.57
Net revenues (dollars in millions):
Asset Management
Intersegment Eliminations
Consolidated net revenues
Income before taxes (dollars in millions)(1):
Asset Management
Intersegment Eliminations
Consolidated income before taxes
Earnings per basic common share
Earnings per diluted common share
Regional net revenues (dollars in millions)(3):
Americas
Europe, Middle East and Africa
Asia
Consolidated net revenues
$12,150
10,008
5,868
$18,803
7,762
3,274
$15,375
5,711
2,439
$28,026
$29,839
$23,525
$ 28.56
$ 32.67
$ 27.59
$
$
$
Statistical Data.
Book value per common share(4)
Average common equity (dollars in billions)(5):
Asset Management
Unallocated capital
Total from continuing operations
Discontinued operations
23.9
1.7
3.5
2.9
32.0
3.2
Total
$
31
35.2
18.0
3.0
2.4
3.1
26.5
5.2
$
31.7
14.6
3.4
1.8
2.9
22.7
5.8
$
28.5
G-38
Table of Contents
Statistical Data (Continued).
2007
Return on average common equity(5):
Consolidated
Asset Management
Effective income tax rate from continuing operations
Worldwide employees (excluding DFS employees of 13,186 in 2006 and 13,495 in 2005)
Consolidated assets under management or supervision by asset class (dollars in billions):
Equity
Fixed income
Money market
Alternatives(6)
9%
4%
41%
26%
24.5%
48,256
$
Subtotal
Unit trusts
Other(7)
Total assets under management or supervision(8)
Share of minority interest assets(9)
Total
$
Institutional Securities (dollars in billions):
Mergers and acquisitions completed transactions(10):
Global market volume
Market share
Rank
Mergers and acquisitions announced transactions(10):
Market share
Rank
Global equity and equity−related issues(10):
Market share
Rank
Global debt issues(10):
Market share
Rank
Global initial public offerings(10):
Market share
Rank
Pre−tax profit margin(11)
32
Fiscal Year
2006
355
127
108
109
2005
23%
30%
11%
21%
30.1%
43,124
$
307
111
89
61
17%
24%
11%
36%
24.5%
39,723
$
272
105
83
43
699
15
61
568
14
63
503
12
48
775
7
645
4
563
—
782
$
649
$
563
$1,280.6
35.4%
1
$ 730.5
25.4%
3
$ 522.7
24.3%
3
$1,339.4
31.8%
2
$ 973.9
28.9%
2
$ 726.0
29.5%
2
$
$
$
64.7
7.4%
5
57.2
8.0%
4
45.9
8.7%
3
$ 361.2
5.4%
6
$ 409.9
5.8%
6
$ 347.2
5.7%
5
$
$
$
24.1
7.8%
3
5%
22.6
8.4%
2
37%
14.7
8.9%
2
30%
G-39
Table of Contents
Statistical Data (Continued).
Global Wealth Management Group:
Global representatives
Annualized net revenue per global representative (dollars in thousands)(12)
Client assets by segment (dollars in billions):
$10 million or more
$1 million – $10 million
Subtotal $1 million or more
$100,000 – $1 million
Less than $100,000
Client assets excluding corporate and other accounts
Corporate and other accounts
Total client assets
Fee−based assets as a percentage of total client assets(13)
Client assets per global representative (dollars in millions)(14)
Bank deposits (dollars in billions)(15)
Asset Management:
Assets under management or supervision (dollars in billions)(16)
Percent of fund assets in top half of Lipper rankings(17)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
2007
Fiscal Year
2006
2005
8,429
$ 811
7,944
$ 651
9,434
$ 502
$ 247
275
$ 199
243
$ 156
215
522
179
23
442
177
27
371
177
32
724
34
646
30
580
29
$ 758
$ 676
$ 609
27%
$ 90
$ 26.2
17%
29%
$ 85
$ 13.3
9%
$
$
$ 597
49%
27%
$ 496
40%
25%
$ 443
61%
32%
27%
65
1.7
12%
Amounts represent income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net.
Earnings applicable to common shareholders are used to calculate earnings per share information. Fiscal 2007 and fiscal 2006 include a preferred stock dividend of $68 million and
$19 million, respectively.
Reflects the regional view of the Company’s consolidated net revenues, on a managed basis, based on the following methodology:
Institutional Securities: investment banking—client location, equity capital markets—client location, debt capital markets—revenue recording location, sales and trading—trading
desk location. Global Wealth Management Group: global representative location. Asset Management: client location, except for the merchant banking business, which is based on
asset location.
Book value per common share equals common shareholders’ equity of $30,169 million at November 30, 2007, $34,264 million at November 30, 2006 and $29,182 million at
November 30, 2005, divided by common shares outstanding of 1,056 million at November 30, 2007, 1,049 million at November 30, 2006 and 1,058 million at November 30, 2005.
The computation of average common equity for each business segment is based upon an economic capital model that estimates the amount of equity capital required to support the
businesses and their risk−generating activities through the business cycle while simultaneously satisfying regulatory, rating agency and investor minimum requirements. The
economic capital model will evolve over time in response to changes in the business and regulatory environment and to improvements in modeling techniques in order to reflect the
capital required to support business activities. The effective tax rates used in the computation of segment return on average common equity were determined on a separate entity
basis.
Amounts reported for Alternatives reflect the Company’s invested equity in those funds and include a range of alternative investment products such as real estate funds, hedge funds,
private equity funds, funds of hedge funds and funds of private equity funds.
Amounts include assets under management or supervision associated with the Global Wealth Management Group business segment.
Revenues and expenses associated with these assets are included in the Company’s Asset Management, Global Wealth Management Group and Institutional Securities business
segments.
Amounts represent Asset Management’s proportional share of assets managed by entities in which it owns a minority interest.
Source: Thomson Financial, data as of January 8, 2008—The data for fiscal 2007, fiscal 2006 and fiscal 2005 are for the periods from January 1 to December 31, 2007, January 1 to
December 31, 2006 and January 1 to December 31, 2005, respectively, as Thomson Financial presents these data on a calendar−year basis.
Percentages represent income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net, as a percentage
of net revenues.
Annualized net revenue per global representative amounts equal Global Wealth Management Group’s net revenues divided by the quarterly average global representative headcount
for the periods presented.
The decline in fee−based assets as a percent of total client assets largely reflected the termination on October 1, 2007 of the Company’s fee−based (fee in lieu of commission)
brokerage program pursuant to a court decision vacating a Securities and Exchange Commission (“SEC”) rule that permitted fee−based brokerage. Client assets that were in the
fee−based program primarily moved to commission−based brokerage accounts, or at the election of some clients, into other fee−based advisory programs, including Morgan Stanley
Advisory, a new nondiscretionary account launched in August 2007.
Client assets per global representative equal total period−end client assets divided by period−end global representative headcount.
Bank deposits are held at certain of the Company’s Federal Deposit Insurance Corporation (the “FDIC”) insured depository institutions for the benefit of retail clients through their
accounts.
Amounts include Asset Management’s proportional share of assets managed by entities in which it owns a minority interest.
Source: Lipper, one−year performance excluding money market funds as of November 30, 2007, November 30, 2006 and November 30, 2005, respectively.
33
G-40
Table of Contents
Fiscal 2007 Performance.
Company Results. The Company recorded net income of $3,209 million in fiscal 2007, a 57% decrease from $7,472 million in the prior year. Net
revenues (total revenues less interest expense) declined 6% to $28,026 million in fiscal 2007. During the fourth quarter of fiscal 2007, the Company
recorded $9.4 billion in mortgage−related writedowns resulting from an unfavorable subprime mortgage−related trading strategy and the continued
deterioration and lack of market liquidity for subprime and other mortgage−related instruments. Included in the $9.4 billion were writedowns of $7.8 billion
related to U.S. subprime trading positions, principally super senior derivative positions in collateralized debt obligations (“CDOs”). These derivative
positions were entered into primarily by the Company’s proprietary trading group. The remaining writedowns of $1.6 billion related to other
mortgage−related instruments, which included $1.2 billion relating to commercial mortgage−backed securities (“CMBS”), ALT−A (a residential mortgage
loan categorization that falls between prime and subprime) and other loans, conduit and non−performing loans, European non−conforming loans and an
impairment charge of $437 million related to mortgage−related securities portfolios in the Company’s domestic subsidiary banks. The results for fiscal 2007
also included losses of approximately $700 million that reflected mark−to−market valuations associated with loans and loan commitments largely related to
acquisition financing to non−investment grade companies (see “Impact of Credit Market Events” herein).
Non−interest expenses increased 19% to $24,585 million from the prior year primarily due to higher compensation costs. Diluted earnings per share were
$2.98 compared with $7.07 a year ago. Compensation and benefits expense increased 18%, primarily reflecting higher incentive−based compensation
accruals due to higher net revenues in certain of the Company’s businesses. Diluted earnings per share from continuing operations were $2.37 compared
with $5.99 last year. The return on average common equity in fiscal 2007 was 8.9% compared with 23.5% in the prior year. The return on average common
equity from continuing operations for fiscal 2007 was 7.8% compared with 23.8% last year.
Results for fiscal 2007 also included a gain of $168 million ($109 million after−tax) in discontinued operations related to the sale of Quilter on February 28,
2007. Results for fiscal 2006 included a loss of $125 million ($75 million after−tax) related to the sale of the Company’s aircraft leasing business (see Note
22 to the consolidated financial statements). In addition, pre−tax results for fiscal 2007 included the $360 million reversal of the Coleman litigation reserve
(see “Other Matters—Coleman Litigation” herein). Results for fiscal 2006 included non−cash incremental compensation expenses of approximately $260
million for stock−based awards granted to retirement−eligible employees (see Note 2 to the consolidated financial statements).
The Company’s effective income tax rate from continuing operations was 24.5% in fiscal 2007 compared with 30.1% in fiscal 2006. The decrease primarily
reflected lower earnings that increased the effect of permanent differences. Fiscal 2006’s income tax provision included an income tax benefit of $242
million resulting from the resolution of a federal tax audit. Excluding the benefits from the federal tax audit, the Company’s effective income tax rate from
continuing operations in fiscal 2006 would have been 32.8%.
At fiscal year−end, the Company had 48,256 employees worldwide compared with 43,124 (excluding DFS employees) at the prior year−end.
Subsequent to the 2007 fiscal year−end, in December 2007, the Company sold equity units (the “Equity Units”) to a wholly owned subsidiary of the China
Investment Corporation Ltd. (“CIC”) for approximately $5,579 million (see “Liquidity and Capital Resources—China Investment Corporation Investment”
herein).
Institutional Securities. Institutional Securities recorded income from continuing operations before losses from unconsolidated investees and income
taxes of $817 million, an 89% decrease from a year ago. Net revenues declined 24% to $16,149 million as record results in equity sales and trading,
advisory and underwriting were more than offset by lower results in fixed income sales and trading. Non−interest expenses increased 15% to $15,332
million, reflecting higher compensation costs and non−compensation expenses. Non−compensation expenses increased 24% as higher costs associated with
higher levels of business activity, business investment
34
G-41
Table of Contents
and operating expenses associated with TransMontaigne Inc. (“TransMontaigne”), the Heidmar Group of companies (“Heidmar”) and Saxon Capital, Inc.
(“Saxon”) were partially offset by the reversal of the Coleman Litigation reserve.
Investment banking revenues rose 31% from last year to $5,538 million. Underwriting revenues rose 21% from last year to $2,997 million. Advisory fees
from merger, acquisition and restructuring transactions were $2,541 million, an increase of 45% from fiscal 2006.
Fixed income sales and trading revenues were $650 million, down 93% from a year ago. The decrease was driven by significant losses in credit products
and lower results in commodities, partially offset by record results in interest rate and currency products. The decline in credit product revenues primarily
reflected the mortgage−related writedowns (see “Impact of Credit Market Events” herein). Commodity revenues decreased primarily due to lower trading
results from oil liquids, electricity and natural gas products. Fiscal 2006 also benefited from revenue recognized on structured transactions. Interest rate and
currency product revenues benefited from stronger revenues in interest rate, emerging markets and foreign exchange products.
Equity sales and trading revenues increased 38% to a record $8,658 million. Record international results contributed to record revenues from derivative
products and prime brokerage and strong results in cash products.
Sales and trading revenues also benefited in fiscal 2007 from the widening of the Company’s credit spreads on financial instruments that are accounted for
at fair value.
In fiscal 2007, other sales and trading losses of approximately $1,242 million reflected loans and loan commitments largely related to event−driven lending
to non−investment grade companies and the impairment charge related to mortgage−related securities portfolios in the Company’s domestic subsidiary
banks (see “Impact of Credit Market Events—Subsidiary Banks” herein).
Principal transaction net investment revenues increased 35% to $1,459 million in fiscal 2007. Fiscal 2007’s results primarily related to realized and
unrealized net gains associated with certain of the Company’s investments and higher revenues from the Company’s investments in passive limited
partnership interests associated with the Company’s real estate funds. The increase also reflected higher revenues primarily related to the appreciation of
investments related to certain employee deferred compensation plans.
Global Wealth Management Group. Global Wealth Management Group recorded income from continuing operations before income taxes of $1,155
million, up 127% from the prior year. Net revenues were $6,625 million, a 20% increase over a year ago, primarily reflecting higher revenues from
increased underwriting activity, higher asset management revenues reflecting growth in fee−based products and higher net interest revenue from growth in
the bank deposit program. Total non−interest expenses were $5,470 million, a 9% increase from a year ago. Compensation and benefits expense increased
15%, primarily reflecting higher incentive−based compensation accruals due to higher net revenues. Non−compensation costs decreased 2%, primarily
reflecting lower charges for legal and regulatory matters and continued cost discipline across the business. Total client assets increased to $758 billion, up
12% from the prior fiscal year−end. In addition, client assets in fee−based accounts increased 3% from a year ago to $201 billion and decreased as a
percentage of total client assets to 27% from last year’s 29%. The decline in fee−based assets as a percent of total client assets largely reflected the
termination on October 1, 2007 of the Company’s fee−based (fee in lieu of commission) brokerage program pursuant to a court decision vacating an SEC
rule that permitted fee−based brokerage. At fiscal year−end, the number of global representatives was 8,429, an increase of 485 from a year ago.
Asset Management. Asset Management recorded income before income taxes of $1,467 million, a 72% increase from last year. Net revenues of $5,493
million increased 59% from the prior year, reflecting significantly higher investment revenues, primarily in the merchant banking business, which includes
the real estate, private equity and infrastructure businesses. The increase primarily reflected higher revenues associated with the appreciation of investments
related to employee deferred compensation and co−investment plans. The
35
G-42
Table of Contents
increase was also due to higher asset management, distribution and administration fees primarily due to an increase in assets under management, a more
favorable asset mix and higher performance fees due to growth in the alternatives business, including FrontPoint Partners (“FrontPoint”), which was
acquired in December 2006. Principal transaction net investment gains for the year were $1,774 million compared with $669 million a year ago.
Non−interest expenses increased 55% from the prior year to $4,026 million. Compensation and benefits expense increased, primarily due to expenses
associated with certain deferred compensation plans, higher levels of business investment and higher incentive−based compensation accruals associated
with increased net revenues. Non−compensation expenses increased primarily due to increased business activity, including activity from FrontPoint. Assets
under management or supervision within Asset Management of $597 billion were up $101 billion, or 20%, from last year, primarily due to market
appreciation and positive net customer inflows.
Global Market and Economic Conditions in Fiscal 2007.
In the U.S., the moderate pace of economic growth that occurred during the first half of fiscal 2007 slowed during the second half of fiscal 2007, primarily
reflecting the significant and broad−based illiquidity in the residential real estate and credit markets. Concerns about the impact of subprime loans caused
the subprime−related and broader credit markets to deteriorate considerably over the course of the third and fourth quarters of fiscal 2007, with increased
volatility, significant spread widening and lower levels of liquidity and price transparency for certain products. The U.S. unemployment rate at the end of
fiscal 2007 increased to 4.7% from 4.5% at the end of fiscal 2006. Conditions in the U.S. equity markets were also volatile, and major equity market indices
rose during the first half of fiscal 2007 while declining during the second half of fiscal 2007, primarily as a result of mixed corporate earnings and the
developments in the credit markets. The Federal Reserve Board (the “Fed”) left rates unchanged during the first half of the year. In the third quarter, the Fed
lowered the discount rate by 0.50%, and in the fourth quarter, the Fed lowered both the benchmark interest rate and discount rate by an aggregate of 0.75%.
The Fed acted in order to provide additional liquidity and stability to the financial markets and to contain the negative economic impact related to the
residential real estate and credit markets. The Fed had not changed the benchmark interest rate since June 2006. In December 2007, the Fed lowered both
the benchmark interest rate and the discount rate by 0.25% and the U.S. unemployment rate increased to 5.0%. In January, the Fed lowered both the
benchmark interest rate and the discount rate by 0.75%.
In Europe, economic growth continued to be strong, reflecting momentum in domestic demand and exports. Corporate business surveys indicated, however,
that growth in Europe may be slowing. Major equity market indices in Europe increased during fiscal 2007, primarily due to strong corporate earnings,
merger and acquisition activity and generally favorable economic conditions, which more than offset the difficult conditions in the credit markets in the
second half of fiscal 2007. The European Central Bank raised the benchmark interest rate by an aggregate of 0.75% in fiscal 2007. The Bank of England
raised the benchmark interest rate by an aggregate of 0.75% in fiscal 2007 but subsequently reduced the benchmark interest rate by 0.25% in December
2007.
In Japan, moderate economic growth continued to be driven by exports and domestic demand. The level of unemployment also remained relatively low.
Japanese equity market indices decreased during fiscal 2007 primarily due to tighter global credit conditions. The Bank of Japan raised the benchmark
interest rate from 0.25% to 0.50% during fiscal 2007. Economies elsewhere in Asia expanded, particularly in China, which benefited from strength in
exports, domestic demand for capital projects and continued globalization. In China, equity market indices rose during fiscal 2007. The People’s Bank of
China raised the benchmark lending rate by an aggregate of 1.17% in fiscal 2007.
Business Segments.
The remainder of “Results of Operations” is presented on a business segment basis before discontinued operations. Substantially all of the Company’s
operating revenues and operating expenses can be directly attributed to its business segments. Certain revenues and expenses have been allocated to each
business segment, generally in proportion to its respective revenues or other relevant measures.
36
G-43
Table of Contents
As a result of treating certain intersegment transactions as transactions with external parties, the Company includes an Intersegment Eliminations category
to reconcile the segment results to the Company’s consolidated results. Income before taxes in Intersegment Eliminations represents the effect of timing
differences associated with the revenue and expense recognition of commissions paid by Asset Management to Global Wealth Management Group
associated with sales of certain products and the related compensation costs paid to Global Wealth Management Group’s global representatives. Income
before income taxes recorded in Intersegment Eliminations was $2 million, $23 million and $86 million in fiscal 2007, fiscal 2006 and fiscal 2005,
respectively. Included in the results of Intersegment Eliminations for fiscal 2007 is a $25 million advisory fee related to the Discover Spin−off that was
eliminated in consolidation. In addition, the results in Institutional Securities for fiscal 2006 included a $30 million advisory fee related to the Company’s
sale of the aircraft leasing business that was eliminated in consolidation.
37
G-44
Table of Contents
INSTITUTIONAL SECURITIES
INCOME STATEMENT INFORMATION
Revenues:
Investment banking
Trading
Investments
Commissions
Other
Fiscal
2007
Fiscal
2006
(dollars in millions)
Fiscal
2005
$ 5,538
$ 4,228
$ 3,394
2,740
1,459
3,262
103
59,131
983
11,326
1,081
2,606
73
42,106
444
6,915
593
2,160
20
25,439
334
73,216
57,067
61,864
40,754
38,855
23,358
16,149
21,110
15,497
15,332
13,389
10,888
7,721
40
2,212
4,609
311
852
$ 5,469
$ 3,446
Total revenues
Interest expense
Net revenues
Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative
Income tax (benefit) provision
817
47
(170)
$
940
Investment Banking. Investment banking revenues are derived from the underwriting of securities offerings and fees from advisory services. Investment
banking revenues were as follows:
Fiscal
2007
Advisory fees from merger, acquisition and restructuring transactions
Equity underwriting revenues
Fixed income underwriting revenues
Total investment banking revenues
Fiscal
Fiscal
2006
2005
$2,541
1,570
1,427
$1,753
1,059
1,416
$1,395
905
1,094
$5,538
$4,228
$3,394
Investment banking revenues increased 31% in fiscal 2007 and reached record levels. The increase was due to higher revenues from merger, acquisition and
restructuring activities and equity underwriting transactions. In fiscal 2006, investment banking revenues increased 25%, primarily reflecting higher
revenues from merger, acquisition and restructuring activities and fixed income and equity underwriting transactions.
In fiscal 2007, advisory fees from merger, acquisition and restructuring transactions increased 45% to a record $2,541 million. Advisory fees in fiscal 2007
reflected a strong volume of transaction activity, particularly during the first half of fiscal 2007. In fiscal 2006, advisory fees from merger, acquisition and
restructuring transactions increased 26% to $1,753 million, primarily reflecting a strong volume of transaction activity.
Equity underwriting revenues increased 48% to a record $1,570 million in fiscal 2007. Equity underwriting revenues increased 17% to $1,059 million in
fiscal 2006. Both periods reflected higher global industry−wide equity and equity−related activity. Fiscal 2006 reflected a strong volume of initial public
offerings.
38
G-45
Table of Contents
Fixed income underwriting revenues increased 1% to $1,427 in fiscal 2007 and increased 29% to $1,416 million in fiscal 2006. Fiscal 2007 revenues
reflected strong revenues from underwriting investment grade corporate products, as corporate issuers sought longer−term financings due to market turmoil
in the fixed income credit markets. The increase in fiscal 2006 was primarily due to an increase in underwriting revenues from non−investment grade and
investment grade products as the level of issuer refinancings rose due to record levels of maturing debt. Acquisition−related financing resulting from a
strong market for merger and acquisition activity contributed to the increase in both fiscal 2007 and fiscal 2006.
At the end of fiscal 2007, the backlog of merger, acquisition and restructuring transactions and equity underwriting transactions remained relatively strong
despite current market conditions. The backlog of fixed income underwriting transactions was lower for non−investment grade products while the backlog
of fixed income underwriting transactions was higher for investment−grade products, as compared with the end of fiscal 2006. The backlog of merger,
acquisition and restructuring transactions and equity and fixed income underwriting transactions is subject to the risk that transactions may not be completed
due to challenging or unforeseen economic and market conditions, adverse developments regarding one of the parties to the transaction, a failure to obtain
required regulatory approval or a decision on the part of the parties involved not to pursue a transaction.
Sales and Trading Revenues. Sales and trading revenues are composed of principal transaction trading revenues, commissions and net interest revenues
(expenses). In assessing the profitability of its sales and trading activities, the Company views principal trading, commissions and net interest revenues in
the aggregate. In addition, decisions relating to principal transactions are based on an overall review of aggregate revenues and costs associated with each
transaction or series of transactions. This review includes, among other things, an assessment of the potential gain or loss associated with a transaction,
including any associated commissions, dividends, the interest income or expense associated with financing or hedging the Company’s positions, and other
related expenses.
The components of the Company’s sales and trading revenues are described below:
Principal Transactions–Trading. Principal transaction trading revenues include revenues from customers’ purchases and sales of financial instruments in
which the Company acts as principal and gains and losses on the Company’s positions. The Company also engages in proprietary trading activities for its
own account.
Commissions.
Commission revenues primarily arise from agency transactions in listed and over−the−counter (“OTC”) equity securities and options.
Net Interest. Interest and dividend revenues and interest expense are a function of the level and mix of total assets and liabilities, including financial
instruments owned and financial instruments sold, not yet purchased, reverse repurchase and repurchase agreements, trading strategies, customer activity in
the Company’s prime brokerage business, and the prevailing level, term structure and volatility of interest rates. Reverse repurchase and repurchase
agreements and securities borrowed and securities loaned transactions may be entered into with different customers using the same underlying securities,
thereby generating a spread between the interest revenue on the reverse repurchase agreements or securities borrowed transactions and the interest expense
on the repurchase agreements or securities loaned transactions.
Total sales and trading revenues decreased 47% in fiscal 2007 and increased 37% in fiscal 2006. The decrease in fiscal 2007 reflected lower fixed income
revenues and other sales and trading losses, partially offset by higher equity sales and trading revenues. Sales and trading revenues were adversely
affected by the difficult market conditions that existed during the second half of fiscal 2007. The credit markets deteriorated considerably over the course of
the latter half of the year with increased volatility, significant spread widening, lower levels of liquidity and reduced price transparency. These factors
affected the subprime mortgage markets, including the market for collateralized debt obligations, and other structured credit product markets, leveraged
lending
39
G-46
Table of Contents
markets and the effectiveness of hedging strategies. This credit environment adversely impacted the Company’s credit sales and trading and
corporate lending activities. In addition, such conditions contributed to increased volatility and systematic risk reduction in the equity markets, which
adversely affected the Company’s quantitative trading strategies.
Sales and trading revenues included the following:
Fiscal
2007(1)
Equity
Fixed income
Other
Total sales and trading revenues
(1)
Fiscal
Fiscal
2006(1)
2005(1)
$ 8,658
650
(1,242)
$ 6,281
9,291
(288)
$ 4,810
6,571
(225)
$ 8,066
$15,284
$11,156
Amounts include Principal transactions−trading, Commissions and Net interest revenues. Equity and fixed income sales and trading revenues include certain funding costs that were
not previously allocated to those businesses. Other sales and trading net revenues primarily include net losses from loans and closed pipeline commitments related to investment
banking, corporate lending and other corporate activities. All prior−year amounts have been reclassified to conform to the current year’s presentation.
Equity sales and trading revenues increased 38% to a record $8,658 million in fiscal 2007, benefiting from record international revenues. The increase was
driven by record revenues from derivative products and prime brokerage and higher revenues from equity cash and financing products, partially offset by
trading losses in quantitative strategies resulting from unfavorable positioning. Revenues from derivative products benefited from strong customer flows.
Prime brokerage generated record revenues, reflecting continued growth in global client asset balances. Higher revenues from financing products were
primarily due to higher commission revenues driven by strong market volumes. Equity sales and trading revenues also benefited from the widening of the
Company’s credit spreads on financial instruments that are accounted for at fair value, including, but not limited to, those for which the fair value option
was elected pursuant to the Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”) on December 1, 2006 (see Note 3 to the consolidated financial statements). Revenues increased by approximately $390
million due to the widening of the Company’s credit spreads during the year resulting from the decrease in the fair value of certain of the Company’s
long−term and short−term borrowings, such as structured notes, for which the fair value option was elected.
Equity sales and trading revenues increased 31% to a then record $6,281 million in fiscal 2006. The increase was broad based and included higher revenues
from derivatives and equity cash products, financing products, prime brokerage and principal trading strategies. Derivative revenues increased due to strong
customer flows, although volatility in the global equity markets continued to be generally low. Revenues from equity cash products reflected higher market
volumes, particularly in Europe and Asia. Financing product revenues also benefited from increased client activity. Prime brokerage generated record
revenues, reflecting continued growth in global client asset balances. Global equity markets generally trended higher and created favorable opportunities for
principal trading strategies. Although commission revenues increased, revenues continued to be affected by intense competition, particularly in the U.S., and
a continued shift toward electronic trading.
Fixed income sales and trading revenues decreased 93% to $650 million in fiscal 2007. Fiscal 2007 results reflected significant losses in credit products and
lower results in commodities, partially offset by record results in interest rate and currency products. Credit product revenues decreased $9.4 billion,
primarily reflecting mortgage−related writedowns of $7.8 billion, reflecting the deterioration in value of U.S. subprime trading positions, principally super
senior derivative positions in CDOs entered into primarily by the Company’s proprietary trading group. Spread widening, lower liquidity and higher
volatility resulted in lower origination, securitization and trading results across most credit product groups and also adversely affected the performance
40
G-47
Table of Contents
of the Company’s hedging strategies. The Company’s residential and commercial mortgage loan activities contributed to the significant decline in credit
product revenues, reflecting the difficult market conditions referred to above, as well as continued concerns in the subprime mortgage loan sector. See
“Impact of Credit Market Events” herein, detailing the Company’s direct U.S. subprime mortgage−related exposures at November 30, 2007.
Interest rate and currency product revenues increased 63% in fiscal 2007, reflecting higher revenues from interest rate, emerging markets and foreign
exchange products. Commodity revenues decreased 33%, primarily due to lower trading results from oil liquids, electricity and natural gas products and
lower revenues recognized on structured transactions. Fixed income sales and trading revenues also benefited from the widening of the Company’s credit
spreads on financial instruments that are accounted for at fair value, including, but not limited to, those for which the fair value option was elected (see Note
3 to the consolidated financial statements). The decrease in the fair value of certain of the Company’s long−term and short−term borrowings, such as
structured notes, for which the fair value option was elected, which was attributable to the widening of the Company’s credit spreads during the year,
increased revenues by approximately $450 million (see Note 3 to the consolidated financial statements). Fixed income sales and trading revenues also
benefited from gains on interest rate derivatives.
Fixed income sales and trading revenues increased 41% to a record $9,291 million in fiscal 2006. The increase was driven by record results from
commodities, credit products, and interest rate and currency products. Commodities revenues increased 112% due to strong results from electricity, natural
gas products and oil liquids. Credit product revenues increased 52%, primarily due to significantly improved corporate credit trading and strength in
residential and commercial securitized products. Interest rate and currency products decreased 1%. Both commodity and interest rate and currency products
benefited from revenues recognized on structured transactions as a result of increased observability of market value in accordance with Emerging Issues
Task Force (“EITF”) Issue No. 02−3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities” (“EITF Issue No. 02−3”). With the adoption of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”)
on December 1, 2006, the Company no longer applies the revenue recognition criteria of EITF Issue No. 02−3 (see Note 2 to the consolidated financial
statements).
In addition to the equity and fixed income sales and trading revenues discussed above, sales and trading revenues include the net revenues from the
Company’s corporate lending activities. In fiscal 2007, other sales and trading losses of approximately $1.2 billion primarily reflected approximately $700
million of mark−to−market valuations associated with loans and commitments largely related to acquisition financing to non−investment grade companies
and the impairment charge related to securities in the Company’s domestic subsidiary banks (see “Impact of Credit Market Events—Subsidiary Banks”
herein). The losses included markdowns of leveraged loan commitments associated with acquisition financing transactions that were accepted by the
borrower but not yet closed. These losses were primarily related to the illiquid market conditions that existed during third quarter of fiscal 2007. The
valuation of these commitments could change in future periods depending on, among other things, the extent that they are renegotiated or repriced or if the
associated acquisition transaction does not occur. In addition, the Company’s leveraged finance business originates and distributes loans and commitments
and intends to distribute its current positions; however, this could take longer than in the past and is dependent on liquidity re−entering the market.
Subsequent to November 30, 2007, there has been further widening in credit spreads for non−investment grade loans that, if sustained, will result in
additional writedowns for these loans and commitments. The fair value measurement of loan commitments takes into account certain fee income that is
attributable to the contingent commitment contract. For further information about the Company’s corporate lending activities, see Item 7A, “Quantitative
and Qualitative Disclosures about Market Risk—Credit Risk.” In fiscal 2006, revenues from corporate lending activities decreased by approximately $50
million from fiscal 2005, reflecting the impact of mark−to−market valuations on a higher level of new loans made during the year.
Principal Transactions−Investments. The Company’s investments generally are held for appreciation and to facilitate other business activities. It is not
possible to determine when the Company will realize the value of such
41
G-48
Table of Contents
investments since, among other factors, such investments generally are subject to significant sales restrictions. Moreover, estimates of the fair value of the
investments may involve significant judgment and may fluctuate significantly over time in light of business, market, economic and financial conditions
generally or in relation to specific transactions.
Principal transaction net investment revenues aggregating $1,459 million were recognized in fiscal 2007 as compared with $1,081 million in fiscal 2006 and
$593 million in fiscal 2005. The increase in fiscal 2007 was primarily related to realized and unrealized net gains associated with certain of the Company’s
investments, including Grifols S.A. and Bovespa Holdings S.A., and higher revenues from the Company’s investments in passive limited partnership
interests associated with the Company’s real estate funds. The increase in fiscal 2007 also reflected higher revenues primarily due to the appreciation of
investments related to certain employee deferred compensation plans. The increase in fiscal 2006 was primarily related to net gains associated with the
Company’s investments.
Other. Other revenues consist primarily of revenues from providing benchmark indices and risk management analytics associated with MSCI Inc. (see
Note 23 to the consolidated financial statements). Other revenues also include revenues related to the operation of pipelines, terminals and barges and the
distribution of refined petroleum products associated with TransMontaigne, the marine transportation and logistics services associated with Heidmar,
revenues associated with Saxon, a servicer and originator of residential mortgages (see Note 23 to the consolidated financial statements) and
a commodities−related strategic investment.
Other revenues increased 121% in fiscal 2007 and 33% in fiscal 2006. The increase in both fiscal 2007 and fiscal 2006 was primarily attributable to
revenues related to the operation of pipelines, terminals and barges and the distribution of refined petroleum products associated with TransMontaigne and
higher sales of benchmark indices and risk management analytic products. The increase in fiscal 2007 was also due to higher revenues associated with
Saxon and from the sale of a commodities−related strategic investment.
Non−Interest Expenses. Non−interest expenses increased 15% in fiscal 2007. Compensation and benefits expense increased 10%, primarily reflecting
higher incentive−based compensation accruals for certain businesses. The increase also reflected higher costs associated with certain employee deferred
compensation plans, partially offset by Institutional Securities’ share ($190 million) of the incremental compensation expense related to equity awards to
retirement−eligible employees in the first quarter of fiscal 2006 (see Note 2 to the consolidated financial statements). Excluding compensation and benefits
expense, non−interest expenses increased 24%, reflecting increased levels of business activity and expenses associated with acquired businesses. Occupancy
and equipment expense increased 33%, primarily due to higher rent and occupancy costs in Europe, Asia and the U.S. Brokerage, clearing and exchange
fees increased 30%, primarily reflecting substantially increased equity and fixed income trading activity. Marketing and business development expense
increased 27%, primarily due to a higher level of business activity. Professional services expense increased 6%, primarily due to higher legal and consulting
costs related to increased business activity. Other expenses increased 50%, reflecting costs associated with TransMontaigne, Heidmar and Saxon, partially
offset by lower net litigation accruals. Fiscal 2007 results included a reversal of the $360 million legal accrual related to the Company’s favorable outcome
from the Coleman litigation. Fiscal 2006 included legal accruals related to the pending settlement of General American litigation, which was partially offset
by a favorable outcome related to the LVMH litigation.
Non−interest expenses increased 23% in fiscal 2006. Compensation and benefits expense increased 36%, primarily reflecting higher incentive−based
compensation costs resulting from higher net revenues. Fiscal 2006 also included Institutional Securities’ share ($190 million) of incremental compensation
expense related to equity awards to retirement−eligible employees while fiscal 2005 included Institutional Securities’ share ($193 million) of the costs
associated with senior management changes (see “Other Matters—Senior Management Compensation Charges” herein). Excluding compensation and
benefits expense, non−interest expenses remained relatively unchanged. Occupancy and equipment expense decreased 6%, primarily due to a $71 million
charge that was recorded in the first quarter of fiscal 2005 for the correction in the method of accounting for certain real
42
G-49
Table of Contents
estate leases (see Note 26 to the consolidated financial statements). Brokerage, clearing and exchange fees increased 32%, primarily reflecting increased
equity and fixed income trading activity. Professional services expense increased 18%, primarily due to higher legal and consulting costs, reflecting
increased levels of business activity. Other expenses decreased 48% due to lower charges for legal and regulatory matters. Fiscal 2006 reflected a net
reduction in legal accruals of approximately $40 million related to the IPO Allocation Matters litigation, the LVMH litigation and the settlement of the
General American litigation. Other expenses in fiscal 2005 included legal accruals of $360 million related to the Coleman litigation and approximately $170
million related to the Parmalat settlement and the IPO Allocation Matters litigation.
43
G-50
Table of Contents
GLOBAL WEALTH MANAGEMENT GROUP
Fiscal
2007
Revenues:
Investment banking
Trading
Investments
Commissions
Other
Fiscal
Fiscal
2006
2005
$ 625
$ 428
$ 320
598
29
1,433
3,067
1,221
163
487
57
1,168
2,757
1,004
130
467
2
1,196
2,601
650
143
7,136
511
6,031
519
5,379
332
6,625
5,512
5,047
5,470
5,004
4,456
Income from continuing operations before income taxes and cumulative effect of accounting change, net
1,155
459
508
167
591
199
$ 696
$ 341
$ 392
Total revenues
Interest expense
Net revenues
Investment Banking. Global Wealth Management Group investment banking includes revenues from the distribution of equity and fixed income
securities, including initial public offerings, secondary offerings, closed−end funds and unit trusts. Revenues also include fees earned from offerings
underwritten by the Institutional Securities business segment. Investment banking revenues increased 46% and 34% in fiscal 2007 and fiscal 2006,
respectively. The increase in fiscal 2007 was driven by strong underwriting activity across equity, fixed income and unit trust products. The increase in
fiscal 2006 was primarily due to higher revenues from equity−related offerings and unit trust products.
Principal Transactions–Trading. Principal transactions include revenues from customers’ purchases and sales of financial instruments in which the
Company acts as principal and gains and losses on the Company’s inventory positions held, primarily to facilitate customer transactions. Principal
transaction trading revenues increased 23% in fiscal 2007 primarily due to higher revenues from derivative products, municipal and corporate fixed income
securities and foreign exchange products. The increase was also due to higher revenues primarily associated with the appreciation of investments related to
certain employee deferred compensation plans. In fiscal 2006, principal transaction trading revenues increased 4%, primarily reflecting higher revenue from
foreign exchange products, equity linked notes and municipal fixed income securities, partially offset by lower revenues from corporate and government
fixed income products and other securities.
Principal Transactions–Investments. Principal transaction net investment revenues were $29 million in fiscal 2007 compared with $57 million in fiscal
2006 and $2 million in fiscal 2005. The results in fiscal 2007 reflected lower net gains from certain of the Company’s investments in exchanges and
memberships. The results in fiscal 2006 were primarily related to realized and unrealized gains on the Company’s investments in Bolsas y Mercados
Españoles and the New York Stock Exchange.
Commissions. Commission revenues primarily arise from agency transactions in listed and OTC equity securities and sales of mutual funds, futures,
insurance products and options. Commission revenues increased
44
G-51
Table of Contents
23% in fiscal 2007 and decreased 2% in fiscal 2006. The increase in fiscal 2007 reflected higher levels of client activity. The decrease in fiscal 2006 largely
reflected lower revenues from equity products, which was related to lower agency activity with customers due, in part, to growth in other product areas,
including investment banking and asset management.
Asset Management, Distribution and Administration Fees. Asset management, distribution and administration fees include revenues from individual
investors electing a fee−based pricing arrangement and fees for investment management, account services and administration. The Company also receives
shareholder servicing fees and fees for services it provides in distributing certain open−ended mutual funds and other products. Mutual fund distribution
fees are based on either the average daily fund net asset balances or average daily aggregate net fund sales and are affected by changes in the overall level
and mix of assets under management or supervision.
Asset management, distribution and administration fees increased 11% in fiscal 2007 and 6% in fiscal 2006. In both fiscal years, the increase was driven by
higher client asset balances in fee−based accounts. Client assets in fee−based accounts rose 3% to $201 billion at November 30, 2007 and represented 27%
of total client assets versus 29% at November 30, 2006. The decline in fee−based assets as a percent of total client assets largely reflected the termination on
October 1, 2007 of the Company’s fee−based (fee in lieu of commission) brokerage program pursuant to a court decision vacating an SEC rule that
permitted fee−based brokerage. Client assets that were in the fee−based program primarily moved to commission−based brokerage accounts, or, at the
election of some clients, into other fee−based advisory programs, including Morgan Stanley Advisory, a new nondiscretionary account launched in August
2007. Client assets in fee−based accounts rose 18% to $195 billion at November 30, 2006 and increased as a percentage of total client assets to 29% of total
client assets from 27% at November 30, 2005.
Total client asset balances increased to $758 billion at November 30, 2007 from $676 billion at November 30, 2006 primarily due to higher client inflows
and market appreciation. Client asset balances in households greater than $1 million increased to $522 billion at November 30, 2007 from $442 billion at
November 30, 2006 and $371 billion at November 30, 2005.
Net Interest. Interest and dividend revenues and interest expense are a function of the level and mix of total assets and liabilities, including customer bank
deposits and margin loans and securities borrowed and securities loaned transactions. Net interest revenues increased 46% and 53% in fiscal 2007 and fiscal
2006, respectively. The increase in both periods was primarily due to increased customer account balances in the bank deposit program that was launched in
November 2005. Balances in the bank deposit program rose to $26.2 billion at November 30, 2007 from $13.3 billion at November 30, 2006.
Other. Other revenues primarily include customer account service fees and other miscellaneous revenues. Other revenues increased 25% in fiscal 2007
and decreased 9% in fiscal 2006. In fiscal 2007, the increase primarily reflected higher service fees and higher other miscellaneous revenues. In fiscal 2006,
the decrease primarily reflected lower service fees.
Non−Interest Expenses. Non−interest expenses increased 9% in fiscal 2007, primarily reflecting an increase in compensation and benefits expense,
partially offset by lower non−compensation expenses primarily due to lower charges for legal and regulatory matters and continued cost discipline across
the business. Compensation and benefits expense increased 15%, primarily reflecting higher incentive−based compensation accruals due to higher net
revenues and investments in the business, partially offset by Global Wealth Management Group’s share ($50 million) of the incremental compensation
expense related to equity awards to retirement−eligible employees in the first quarter of fiscal 2006 (see Note 2 to the consolidated financial statements).
Excluding compensation and benefits expense, non−interest expenses decreased 2%. Occupancy and equipment expense increased 6% primarily due to
leasehold improvements and higher rental costs. Information processing and communications expense decreased 8% primarily due to lower computing
costs. Marketing and business development expense increased 39% primarily due to costs associated with the Company’s advertising campaign. Other
expenses
45
G-52
Table of Contents
decreased 20%, primarily resulting from a reduction in costs associated with legal and regulatory matters, which included an insurance reimbursement
related to a litigation matter.
Non−interest expenses increased 12% in fiscal 2006. Fiscal 2005 included a reduction in non−interest expenses related to Global Wealth Management
Group’s share ($198 million) of the insurance settlement related to the events of September 11, 2001 (see Note 25 to the consolidated financial statements).
Compensation and benefits expense increased 15%, primarily reflecting higher incentive−based compensation costs. In addition, fiscal 2006 expenses
included Global Wealth Management Group’s share ($50 million) of the incremental compensation expense related to equity awards to retirement−eligible
employees, including new hires (see Note 2 to the consolidated financial statements), while fiscal 2005 included Global Wealth Management Group’s share
($48 million) of the costs associated with senior management changes (see “Other Matters—Senior Management Compensation Charges” herein).
Excluding compensation and benefits expense and the insurance settlement, non−interest expenses decreased 4%. Occupancy and equipment expense
decreased 6% primarily due to a $29 million charge for the correction in the method of accounting for certain real estate leases that was recorded in the first
quarter of fiscal 2005 (see Note 26 to the consolidated financial statements). Professional services expense increased 15%, largely due to higher
sub−advisory fees associated with growth in fee−based assets and higher costs for outside legal counsel. Other expenses decreased 20%, primarily resulting
from lower costs associated with legal and regulatory matters. During fiscal 2006 and fiscal 2005, the Company recorded legal and regulatory expenses of
approximately $105 million and $170 million, respectively, related to ongoing regulatory, employment and branch litigation matters.
46
G-53
Table of Contents
ASSET MANAGEMENT
Fiscal
2007
Fiscal
2006
Fiscal
2005
$ 264
$ 138
$ 133
(129)
1,774
23
3,524
74
75
—
669
25
2,574
48
26
—
533
29
2,462
87
26
5,605
112
3,480
27
3,270
51
5,493
3,453
3,219
4,026
2,602
2,189
Income before income taxes and cumulative effect of accounting change, net
1,467
541
851
340
1,030
391
$ 926
$ 511
$ 639
Revenues:
Investment banking
Trading
Investments
Commissions
Other
Total revenues
Interest expense
Net revenues
Income before cumulative effect of accounting change, net
Investment Banking. Asset Management generates investment banking revenues primarily from the acquisition of investments in real estate funds and the
underwriting of unit trust products. Investment banking revenues increased 91% in fiscal 2007 and 4% in fiscal 2006. The increase in fiscal 2007 primarily
reflected higher revenues from certain real estate products. The increase in fiscal 2006 primarily reflected higher revenues from real estate products and
higher equity unit trust sales, partially offset by a lower volume of fixed income unit trust sales.
Principal Transactions−Trading. In fiscal 2007, the Company recognized losses of $129 million related to structured investment vehicles. See “Impact of
Credit Market Events—Structured Investment Vehicles” herein for further discussion.
Principal Transactions−Investments. Asset Management principal transaction investment revenues consist primarily of gains and losses on the
Company’s investments in alternative investment products.
Principal transaction net investment gains aggregating $1,774 million were recognized in fiscal 2007 as compared with $669 million in fiscal 2006. The
results in both fiscal years were primarily related to investments associated with the Company’s real estate products and private equity portfolio, including
employee deferred compensation plans and co−investment plans.
Real estate and private equity investments generally are held for appreciation. It is not possible to determine when the Company will realize the value of
such investments since, among other factors, such investments generally are subject to significant sales restrictions. Moreover, estimates of the fair value of
the investments involve significant judgment and may fluctuate significantly over time in light of business, market, economic and financial conditions
generally or in relation to specific transactions.
Asset Management, Distribution and Administration Fees. Asset Management, distribution and administration fees include revenues generated from the
management and supervision of assets, performance−
47
G-54
Table of Contents
based fees relating to certain funds, and separately managed accounts and fees relating to the distribution of certain open−ended mutual funds. Asset
Management fees arise from investment management services the Company provides to investment vehicles pursuant to various contractual arrangements.
The Company receives fees primarily based upon mutual fund daily average net assets or based on monthly or quarterly invested equity for other vehicles.
Performance−based fees are earned on certain funds as a percentage of appreciation earned by those funds and, in certain cases, are based upon the
achievement of performance criteria. These fees are normally earned annually and are recognized on a monthly or quarterly basis.
Asset management, distribution and administration fees increased 37% in fiscal 2007 and 5% in fiscal 2006. The increase in fiscal 2007 was primarily due
to higher fund management and administration fees resulting from an increase in assets and a more favorable asset mix. The increase was also due to higher
performance fees from the alternatives business, including those associated with FrontPoint, which the Company acquired in December 2006 (see Note 23
to the consolidated financial statements). The increase in fiscal 2006 was due to higher fund management and administration fees, partially offset by lower
distribution fees. The higher management and administration fees in fiscal 2007 and fiscal 2006 were associated with increases in average assets under
management of 20% and 6%, respectively.
Asset Management’s year−end and average assets under management or supervision were as follows:
At November 30,
Assets under management or supervision by distribution channel:
Americas Retail Morgan Stanley brand
Americas Retail Van Kampen brand
Americas Intermediary(1)
U.S. Institutional
Non−U.S.
Total long−term assets under management or supervision
Institutional money markets/liquidity
Retail money markets
Total money markets
Total assets under management or supervision
Total
Assets under management or supervision by asset class:
Equity
Fixed income
Money market
Alternatives(3)
Subtotal
Unit trusts
Total assets under management or supervision
Total
(1)
(2)
(3)
Average for
2007
Fiscal
Fiscal
2006
2005
2007
2006
(dollars in billions)
Fiscal
2005
$ 64
99
68
128
132
$ 63
94
58
100
93
$ 63
88
48
96
69
$ 64
99
65
116
111
$ 64
90
51
97
80
$ 64
84
45
97
64
491
408
364
455
382
354
68
31
49
35
33
46
57
33
39
40
33
49
99
84
79
90
79
82
590
7
492
4
443
—
545
6
461
—
436
—
$597
$496
$443
$551
$461
$436
$265
102
99
109
$239
94
84
61
$218
91
79
43
$256
97
90
87
$228
91
79
50
$207
96
82
40
575
15
478
14
431
12
530
15
448
13
425
11
590
7
492
4
443
—
545
6
461
—
436
—
$597
$496
$443
$551
$461
$436
Americas Intermediary channel primarily represents client flows through defined contribution, insurance and bank trust platforms.
Amounts represent Asset Management’s proportional share of assets managed by entities in which it owns a minority interest.
The alternatives asset class includes a range of investment products, such as real estate funds, hedge funds, private equity funds, funds of hedge funds and funds of private equity
funds.
48
G-55
Table of Contents
Activity in Asset Management’s assets under management or supervision during fiscal 2007 and fiscal 2006 were as follows:
Fiscal
Fiscal
2007
2006
Balance at beginning of period
Net flows by distribution channel:
Americas Retail Morgan Stanley brand
Americas Retail Van Kampen brand
Americas Intermediary(1)
U.S. Institutional
Non−U.S.
$ 496
(4)
—
4
3
22
(9)
(2)
8
(13)
6
25
(10)
15
(5)
13
(12)
10
1
Market appreciation/other
56
58
Total net increase
Acquisitions
Net increase in share of minority interest assets(2)
91
7
3
49
—
4
$ 597
$ 496
Net inflows/(outflows) excluding money markets
Money market net flows:
Institutional
Retail
Total money market net flows
Balance at end of period
(1)
(2)
$ 443
Americas Intermediary channel primarily represents client flows through defined contribution, insurance and bank trust platforms.
Amount represents Asset Management’s proportional share of assets managed by entities in which it owns a minority interest.
Net inflows (excluding money markets) in fiscal 2007 were primarily associated with positive flows from non−U.S. clients. Money market net flows for
fiscal 2007 were primarily associated with positive flows into institutional liquidity assets, partially offset by outflows from certain money market funds that
were impacted by the growth of Global Wealth Management Group’s bank deposit program.
Other. Other revenues increased 188% in fiscal 2007 primarily due to revenues associated with Lansdowne Partners (“Lansdowne”), a London−based
investment manager, and Avenue Capital Group (“Avenue”), a New York−based investment manager, which the Company acquired minority stakes in the
fourth quarter of fiscal 2006 (see Note 23 to the consolidated financial statements). Other revenues remained flat in fiscal 2006.
Non−Interest Expenses. Non−interest expenses increased 55% in fiscal 2007, primarily reflecting an increase in compensation and benefits expense.
Compensation and benefits expense increased 81% in fiscal 2007, primarily reflecting higher incentive−based compensation accruals due to higher net
revenues. The increase in fiscal 2007 was also due to expenses associated with certain employee deferred compensation plans, partially offset by Asset
Management’s share ($20 million) of the incremental compensation expense related to equity awards to retirement−eligible employees that was recorded in
the first quarter of fiscal 2006 (see Note 2 to the consolidated financial statements). Excluding compensation and benefits expense, non−interest expenses
increased 24%. Occupancy and equipment expenses increased 29% primarily due to higher rental costs associated with business growth. Brokerage,
clearing and exchange fees increased 10% primarily due to increased fee sharing, increased assets under management and higher commission expenses
associated with the launching of new products. These increases were offset by a decrease in the deferred commission amortization. Information processing
and communications expense increased 21% primarily due to higher licensing fees associated with the acquisition of FrontPoint. Professional services
expense increased 47% primarily due to higher sub−advisory fees related to the acquisition of FrontPoint. Other expenses increased 47% primarily due to an
insurance reimbursement received in fiscal 2006 related to certain legal matters and an increase in other miscellaneous expenses.
49
G-56
Table of Contents
Non−interest expenses increased 19% in fiscal 2006. Fiscal 2005 included a reduction in non−interest expenses from Asset Management’s share ($43
million) of the insurance settlement related to the events of September 11, 2001 (see Note 25 to the consolidated financial statements). Compensation and
benefits expense increased 37% in fiscal 2006, primarily reflecting higher incentive−based compensation costs as well as the impact of new hires. In
addition, fiscal 2006 included Asset Management’s share ($20 million) of the incremental compensation expense related to equity awards to
retirement−eligible employees (see Note 2 to the consolidated financial statements), while fiscal 2005 included Asset Management’s share ($41 million) of
the costs associated with senior management changes (see “Other Matters—Senior Management Compensation Charges” herein). Excluding compensation
and benefits expense and the insurance settlement, non−interest expenses were unchanged. Brokerage, clearing and exchange fees decreased 14%, primarily
reflecting lower amortization expense associated with certain open−ended funds. The decrease in amortization expense reflected a lower level of deferred
costs in recent periods due to a decrease in sales of certain open−ended funds. Marketing and business development expense increased 11% primarily due to
higher advertising and marketing costs.
50
G-57
Table of Contents
Impact of Credit Market Events.
Overview.
The Company recorded $9.4 billion in mortgage−related writedowns in the fourth quarter of fiscal 2007 resulting from an unfavorable subprime
mortgage−related trading strategy and the continued deterioration and lack of market liquidity for subprime and other mortgage−related instruments.
Included in the $9.4 billion were writedowns of $7.8 billion related to U.S. subprime trading positions, principally super senior derivative positions in
CDOs. These derivative positions were entered into primarily by the Company’s proprietary trading group (see “U.S. ABS CDO Exposures”). As the credit
markets in general, and the mortgage markets in particular, declined dramatically in the fourth quarter, increases in the implied cumulative losses in the
subprime mortgage market, coupled with the illiquid nature of the Company’s trading positions, led to a significant deterioration in value in its
subprime−related trading positions. A summary of the Company’s U.S. subprime trading positions, writedowns and remaining net exposures is further
detailed in the table on page 53 and is discussed in “U.S. Subprime Mortgage−Related Exposures” herein.
The $9.4 billion of fourth quarter writedowns also included an impairment charge of $437 million related to mortgage−related securities portfolios in the
Company’s domestic subsidiary banks (see “Subsidiary Banks” herein) and $1.2 billion related to CMBS, ALT−A (a residential mortgage loan
categorization that falls between prime and subprime) and other loans, conduit and non−performing loans and European non−conforming loans. The
Company continues to have exposure to these markets and instruments, and, as market conditions continue to evolve, the fair value of these other
mortgage−related instruments could further deteriorate.
The valuation methodology used for these instruments incorporated a variety of inputs, including prices observed from the execution of a limited number of
trades in the marketplace; ABX and similar indices that track the performance of a series of credit default swaps based on subprime mortgages; and other
market information, including data on remittances received and updated cumulative loss data on the underlying mortgages. For a further discussion of the
Company’s risk management policies and procedures see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II,
Item 7A.
For further discussion regarding the Company’s involvement with other U.S. subprime−related activities, see “Special Purpose Entities and Variable Interest
Entities” and “Other Exposures to Subprime Lenders.”
The results for fiscal 2007 also included losses of approximately $700 million primarily recorded in the third quarter of fiscal 2007 that reflected
mark−to−market valuations associated with loans and loan commitments largely related to acquisition financing to non−investment grade companies. The
losses included markdowns of leveraged loan commitments associated with acquisition financing transactions that were accepted by the borrower but not
yet closed. These losses were primarily related to the illiquid market conditions that existed during the second half of fiscal 2007. The valuation of these
commitments could change in future periods depending on, among other things, the extent that they are renegotiated or repriced or the associated acquisition
transaction does not occur. In addition, the Company’s leveraged finance business originates and distributes loans and commitments, and intends to
distribute its current positions; however, this could take longer than in the past and is dependent on liquidity re−entering the market. Subsequent to
November 30, 2007, there has been further widening in credit spreads for non−investment grade loans that, if sustained, will result in additional writedowns
for these loans and commitments. For further information about the Company’s corporate lending activities, see Item 7A, “Quantitative and Qualitative
Disclosures about Market Risk—Credit Risk.”
The Company also recognized losses of $129 million in the fourth quarter of fiscal 2007 related to structured investment vehicles (see “Structured
Investment Vehicles” herein).
U.S. Subprime Mortgage−Related Exposures.
The Company’s U.S. subprime mortgage−related trading positions consist of those related to U.S. ABS CDOs and other mortgage−related exposures arising
from investments in subprime loans, from asset−backed securities
51
G-58
Table of Contents
that, in whole or in part, are backed by subprime mortgage loans, and from derivatives referencing subprime mortgages or subprime mortgage−backed
securities.
Subprime mortgages are loans secured by real property made to a borrower (or borrowers) with a diminished or impaired credit rating or with a limited
credit history. A borrower’s credit history is reflected in his credit report and routinely converted into a numerical credit score often referred to as a Fair
Isaac Corporation (or “FICO”) score. Generally, a loan made to a borrower with a low FICO score or other credit score has historically been considered as
subprime. Loans to borrowers with higher FICO scores may be subprime if the loan exhibits other high−risk factors. Such risk factors may include loans
where: (a) the loan has a high loan−to−value ratio or combined loan−to−value ratios; (b) the borrower has reduced or limited income documentation; (c) the
borrower has a high debt−to−income ratio; (d) the occupancy type for the loan is other than the borrower’s primary residence. There are many other risk
factors, including borrowers who have purchased multiple properties or have taken previous equity withdrawal (cash out) refinancings within the last 12 to
24 month period, non−arm’s length purchase transactions and unsupported or high−risk collateral properties, among others. Subprime mortgage−related
securities are those securities that derive a significant portion of their value from subprime loans.
U.S. ABS CDO Exposures.
The Company purchases interests in and enters into derivatives with ABS CDOs. CDOs provide credit risk exposure to a portfolio of asset−backed
securities (“cash CDOs”) or a reference portfolio of securities (“synthetic CDOs”). The underlying or reference portfolios consist primarily of residential
mortgage−backed securities. The CDOs to which the Company has exposure are primarily structured and underwritten by third parties, although the
Company also structures and underwrites CDOs, for which it receives structuring and/or distribution fees, and does from time to time retain interests in such
CDOs.
The Company’s primary exposure to ABS CDOs is to synthetic CDOs that hold or are referenced to collateral with ratings of BBB+, BBB or BBB−
(“mezzanine CDOs”). The majority of the Company’s writedowns in the fourth quarter related to super senior credit default swaps referencing such
mezzanine CDOs that were entered into primarily by the Company’s proprietary trading group. Under these credit default swap arrangements, the Company
can be required to make payments in the event that securities in the referenced portfolios default or experience other credit events such as rating agency
downgrades. (The characterization of these credit default swaps as “super senior” derives from their seniority in the capital structure of the synthetic CDO.)
The Company also has exposure to ABS CDOs via other types of credit default swaps, direct investments in CDO securities, and retained interests in CDOs
that the Company has underwritten. In determining the fair value of the Company’s ABS CDO−related instruments the Company took into consideration
prices observed from the execution of a limited number of transactions and data for relevant benchmark instruments in synthetic subprime markets. Despite
the fact that actual defaults on swap obligations have not yet been realized, the fair value of such positions has experienced significant declines, as a result
of a deterioration of value in the benchmark instruments as well as market developments. These losses, as well as the Company’s net CDO exposures, are
quantified in the U.S. subprime−related exposures table below.
Other U.S. Subprime Mortgage−Related Exposures.
The Company also has exposure to the U.S. subprime mortgage market via investments in subprime mortgage loans and ABS that are backed in whole or in
part by subprime mortgage loans and via derivatives referencing subprime mortgages or subprime mortgage−backed securities. With respect to whole loans,
the Company purchases pools of mortgage loans from third−party originators and also originates mortgage loans through its retail, wholesale and conduit
channels and typically disposes of such loans by securitizing them. The Company typically retains certain lower−rated securities of such securitizations,
often referred to as residual tranche securities. The Company’s other subprime mortgage−related trading exposures are quantified in the table below.
The Company’s interests in U.S. subprime−related exposures are carried at fair value with changes recognized in earnings.
52
G-59
Table of Contents
The following table provides a summary of the Company’s direct U.S. subprime trading exposures (excluding amounts related to mortgage−related
securities portfolios in the Company’s domestic subsidiary banks (see “Subsidiary Banks” herein)) as of and for the fiscal year ended November 30, 2007.
The Company utilizes various methods of evaluating risk in its trading and other portfolios, including monitoring Net Exposure. Net Exposure is defined as
potential loss to the Company over a period of time in an event of 100% default of the referenced loan, assuming zero recovery. The value of these positions
remains subject to mark−to−market volatility. Positive net exposure amounts indicate potential loss (long position) in a default scenario. Negative net
exposure amounts indicate potential gain (short position) in a default scenario. Net Exposure does not take into consideration the risk of counterparty
default. See “Quantitative and Qualitative Disclosures about Market Risk—Credit Risk” in Part II, Item 7A for a further description of how credit risk is
monitored. Actual losses could exceed the amount of Net Exposure.
Statement
of
Financial
Condition
11/30/07(1)
November 30, 2007
Profit
and
Profit and
(Loss)
(Loss)
Three
12 Months
Months
Ended
Ended
Net
Exposure
11/30/07
Super Senior Derivative Exposure:
Mezzanine
CDO squared(3)
$
(8.7)
(0.1)
$ (7.1)
(0.1)
$
(9.3)
(0.1)
$
3.9
0.1
Total ABS CDO super senior derivative exposure
$
(8.8)
$ (7.2)
$
(9.4)
$
4.0
Other CDO Exposure:
ABS CDO CDS
ABS CDO bonds
$
2.7
1.1
$
$
2.3
(0.8)
$
(1.5)
1.1
Total other CDO exposure
$
3.8
Subtotal ABS CDO−related exposure(2)
$
(5.0)
$ (6.4)
$
(7.9)
$
3.6
$
0.6
—
2.7
7.8
$ (0.1)
—
(2.9)
1.6
$
(0.2)
0.1
(3.8)
5.0
$
0.6
—
2.7
(5.1)
Subtotal U.S. subprime mortgage−related exposure
$
11.1
$ (1.4)
$
1.1
$
(1.8)
Total U.S. subprime trading exposure
$
6.1
$ (7.8)
$
(6.8)
$
1.8
U.S. Subprime Mortgage−Related Exposure:
Loans
Total rate−of−return swaps
ABS bonds
ABS CDS
(1)
(2)
(3)
1.3
(0.5)
0.8
1.5
(0.4)
Statement of financial condition amounts are presented on a net asset/liability basis and do not take into account any netting of cash collateral against these positions. In addition,
these amounts reflect counterparty netting to the extent that there are positions with the same counterparty that are subprime−related; they do not reflect any counterparty netting to
the extent that there are positions with the same counterparty that are not subprime related. The $6.1 billion is reflected in the Company’s consolidated statement of financial
condition as follows: Financial instruments owned of $15.3 billion and Financial instruments sold, not yet purchased of $9.2 billion.
In determining the fair value of the Company’s ABS super senior CDO−related exposures the Company took into consideration prices observed from the execution of a limited
number of transactions and data for relevant benchmark instruments in synthetic subprime markets. Deterioration of value in the benchmark instruments as well as market
developments have led to significant declines in the estimates of fair value. These declines reflected increased implied losses across this portfolio. These implied loss levels are
consistent with losses in the range between 13% – 20% implied by the ABX indices. These cumulative loss levels, at a severity rate of 50%, imply defaults in the range of 43% – 50%
for 2005 and 2006 outstanding mortgages.
Refers to CDOs where the collateral is comprised entirely of another CDO security.
53
G-60
Table of Contents
Subsidiary Banks.
The securities portfolios of Morgan Stanley Bank (Utah) and Morgan Stanley Trust FSB (collectively, the “subsidiary banks”) include certain
subprime−related securities. The portfolios contain no subprime whole loans, subprime residuals or CDOs.
At November 30, 2007, the securities portfolios totaled $9.9 billion consisting primarily of AAA−rated ABS and residential mortgage−backed securities. Of
the total amount, $5.5 billion were subprime mortgage−related securities.
The securities in the subsidiary domestic banks’ portfolios were previously classified as securities available for sale in accordance with SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). In the fourth quarter of fiscal 2007, the Company determined that it
no longer intends to hold these securities until the fair value of the securities recovers to a level that exceeds their initial cost. Accordingly, the Company
recorded an other−than−temporary impairment charge of $437 million in Principal transactions−trading revenues in the consolidated statement of income on
its portfolio of securities available for sale in the fourth quarter of fiscal 2007 and reclassified the portfolios to Financial instruments owned in the
consolidated statement of financial condition effective November 30, 2007.
Special Purpose Entities and Variable Interest Entities.
The Company’s involvement with special purpose entities (“SPEs”) and variable interest entities (“VIEs”) is discussed in Note 5 to the consolidated
financial statements and “Critical Accounting Policies—Special Purpose Entities” herein. In relation to subprime loans and subprime−backed securities, the
Company’s involvement with SPEs/VIEs consists primarily of the following:
• Engaging in securitization activities related to subprime loans and subprime−backed securities;
• Acting as an underwriter of beneficial interests issued by securitization vehicles;
• Transferring whole loans into SPEs/VIEs;
• Holding one or more classes of securities issued by such securitization vehicles (including residual tranche securities) and possibly entering into
derivative agreements with such securitization vehicles;
• Purchasing and selling (in both a market−making and a proprietary−trading capacity) subprime−backed securities issued by SPEs/VIEs, whether
such vehicles are sponsored by the Company or not;
• Entering into derivative transactions with SPEs/VIEs (not sponsored by the Company) that hold subprime−related assets;
• Providing warehouse financing to CDOs and collateralized loan obligations (“CLOs”);
• Entering into derivative agreements with non−SPE/VIEs, whose value is derived from securities issued by SPEs/VIEs;
• Servicing assets held by SPEs/VIEs or holding servicing rights related to assets held by SPEs/VIEs that are serviced by others under subservicing
arrangements;
• Serving as an asset manager to various investment funds that may invest in securities that are backed, in whole or in part, by subprime loans.
Other Exposures to Subprime Lenders.
The Company provides warehouse financing to entities collateralized by residential mortgage loans. Under these lines of credit arrangements, the Company
requires those entities to provide collateral in excess of the monies advanced. The Company values the collateral on a regular basis to ensure that the value
of the collateral exceeds the value of the monies advanced in accordance with the collateral agreements. The Company does not carry amounts lent under
such arrangements at fair value but instead carries such amounts at amortized cost. In
54
G-61
Table of Contents
addition, the Company does not fair value its commitments under such arrangements. The Company evaluates its exposure and any potential impairment
under such arrangements, whether funded or committed, in accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS No. 5”).
In addition, the Company had entered into derivative and lending arrangements with a third−party−sponsored commercial paper conduit that provides
warehouse financing to subprime lenders, where such derivative and lending arrangements are linked to the performance of the conduit’s loans to the
subprime lenders. At November 30, 2007, exposure related to these arrangements was approximately $300 million. These arrangements were satisfactorily
settled and terminated in December 2007. The Company had no further subprime−related commitments to the third−party−sponsored commercial paper
conduit as of November 30, 2007. The Company does not sponsor any commercial paper conduits.
Structured Investment Vehicles.
Structured investment vehicles (“SIVs”) are unconsolidated entities that issue various capital notes and debt instruments to fund the purchase of assets.
While the Company does not sponsor or serve as asset manager to any unconsolidated SIVs, the Company does serve as investment advisor to certain
unconsolidated money market funds (“the Funds”) that have investments in securities issued by SIVs. In 2007, widespread illiquidity in the commercial
paper market led to market value declines and rating agency downgrades of many securities issued by SIVs, some of which were held by the Funds. As a
result, the Company purchased approximately $900 million of such securities from the Funds during the year at amortized cost, which resulted in losses to
the Company of $129 million. The carrying value of the purchased securities still held by the Company as of November 30, 2007 was $543 million. Such
positions are reflected at fair value, and presented in Financial instruments owned—Corporate and other debt in the consolidated statement of financial
condition. Subsequent to November 30, 2007, the Company purchased approximately $160 million of additional securities from the Funds and recorded
losses of approximately $40 million on these securities. The Company was not obligated to purchase any of these securities and has no obligation to
purchase any additional securities from the Funds in the future. The Funds continue to have investment in securities issued by SIVs, with an aggregate face
value of $8.2 billion as of November 30, 2007 ($5.4 billion as of January 18, 2008.) These securities have been issued by SIVs that are predominately
bank−sponsored, and meet the requirements and investment criteria to continue to be held by the Funds.
Monoline Insurers.
Monoline insurers (“Monolines”) provide credit enhancement to capital markets transactions. The current credit environment severely affected the capacity
of such financial guarantors. The Company’s exposure to Monolines is limited to bonds that are insured by Monolines and as counterparties to derivative
contracts. The aggregate direct exposure to Monolines at November 30, 2007 was $3.7 billion primarily including ABS bonds of $1.5 billion in the
Subsidiary Banks’ portfolio (see “Subsidiary Banks”) that are collateralized by first and second lien subprime mortgages enhanced by financial guarantees,
$1.3 billion in insurance municipal bond securities and $800 million in net counterparty exposure.
55
G-62
Table of Contents
Other Matters.
The following matters are discussed in the Company’s notes to the consolidated financial statements. For further information on these matters, please see
the applicable note:
Note
Accounting Developments:
Limited Partnerships
Accounting for Certain Hybrid Financial Instruments
Accounting for Servicing of Financial Assets
Accounting for Uncertainty in Income Taxes
Fair Value Measurements
Employee Benefit Plans
Fair Value Option
Offsetting of Amounts Related to Certain Contracts
Investment Company Accounting
Dividends on Share−Based Payment Awards
Business Combinations
Noncontrolling Interests
Tax Matters
Discontinued Operations
Business and Other Acquisitions and Dispositions and Sale of Minority Interest
Staff Accounting Bulletin No. 108
Insurance Settlement
Lease Adjustment
Stock−Based Compensation.
The Company early adopted SFAS No. 123R, “Share−Based Payment” (“SFAS No. 123R”) using the modified prospective approach as of December 1,
2004. For further information on SFAS No. 123R, see Note 2 to the consolidated financial statements.
Additionally, based on interpretive guidance related to SFAS No. 123R in the first quarter of fiscal 2006, the Company changed its accounting policy for
expensing the cost of anticipated fiscal 2006 year−end equity awards that were granted to retirement−eligible employees in the first quarter of fiscal 2007.
Effective December 1, 2005, the Company accrues the estimated cost of these awards over the course of the current fiscal year rather than expensing the
awards on the date of grant.
As a result, fiscal 2006 stock−based compensation expense primarily included the following costs:
• amortization of fiscal 2003 year−end awards;
• amortization of fiscal 2005 year−end awards to non−retirement eligible employees;
• the full cost of fiscal 2005 year−end awards to retirement eligible employees (made in December 2005); and
• the full cost of fiscal 2006 year−end awards to retirement eligible employees (made in December 2006).
Fiscal 2007 stock−based compensation expense primarily included the following costs:
• amortization of fiscal 2005 year−end awards to non−retirement eligible employees;
• amortization of fiscal 2006 year−end awards to non−retirement eligible employees; and
• the full cost of fiscal 2007 year−end awards to retirement eligible employees (made in December 2007).
56
2
2
2
2
2
2
2
2
2
2
2
2
20
22
23
24
25
26
G-63
Table of Contents
Fiscal 2003 and fiscal 2004 year−end awards are generally amortized over three and four years, while fiscal 2005 and fiscal 2006 year−end awards are
generally amortized over two and three years.
Senior Management Compensation Charges.
Compensation and benefits expense in fiscal 2005 included charges for certain members of senior management related to severance and new hires, which
increased non−interest expenses by approximately $282 million. These compensation charges were allocated to the Company’s business segments as
follows: Institutional Securities ($193 million), Global Wealth Management Group ($48 million) and Asset Management ($41 million).
Coleman Litigation.
In May 2003, Coleman (Parent) Holdings Inc. (“CPH”) filed a complaint against Morgan Stanley in the Circuit Court of the Fifteenth Judicial Circuit for
Palm Beach County, Florida relating to the 1998 merger between The Coleman Company, Inc. and Sunbeam, Inc. In June 2005, the trial court issued a final
judgment in favor of CPH in the amount of $1,578 million, which included prejudgment interest and excluded certain payments received by CPH in
settlement of related claims against others. In June 2005, Morgan Stanley filed a notice of appeal with the District Court of Appeal for the Fourth District of
Florida (the “Court of Appeal”) and posted a supersedeas bond, which automatically stayed execution of the judgment pending appeal.
In March 2007, the Court of Appeal issued an opinion reversing the trial court’s award for compensatory and punitive damages and remanding the matter to
the trial court for entry of judgment for Morgan Stanley. In June 2007, the Court of Appeal’s opinion became final when the Court of Appeal issued an
order denying CPH’s motions for rehearing, rehearing en banc and for certification of certain questions for review by the Florida Supreme Court (the
“Supreme Court”). In June 2007, the trial court issued an order cancelling the supersedeas bond that Morgan Stanley had posted. In July 2007, CPH filed a
petition with the Supreme Court asking that court to review the Court of Appeal’s decision (“Petition for Review”). On December 12, 2007, the Supreme
Court issued an order denying CPH’s Petition for Review.
The Company believes, after consultation with outside counsel, that the Supreme Court’s decision to deny the Petition for Review has effectively ended
CPH’s civil claim against the Company. Effective November 30, 2007, the Company reversed the $360 million reserve previously established for the
Coleman litigation under SFAS No. 5.
Defined Benefit Pension and Other Postretirement Plans.
Contributions. The Company made contributions of $131 million and $84 million (excluding $30 million in fiscal 2006 relating to DFS and Quilter) to its
U.S. and non−U.S. defined benefit pension plans in fiscal 2007 and fiscal 2006, respectively. These contributions were funded with cash from operations.
The Company determines the amount of its pension contributions to its funded plans by considering several factors including the level of plan assets relative
to plan liabilities, expected plan liquidity needs and expected future contribution requirements. The Company’s policy is to fund at least the amounts
sufficient to meet minimum funding requirements under applicable employee benefit and tax regulations (for example in the U.S., the minimum required
contribution under the Employee Retirement Income Security Act of 1974, or “ERISA”). At November 30, 2007, there were no minimum required ERISA
contributions for the Company’s U.S. pension plan that is qualified under Section 401(a) of the Internal Revenue Code (the “U.S. Qualified Plan”).
Liabilities for benefits payable under certain postretirement and unfunded supplementary plans are accrued by the Company and are funded when paid to
the beneficiaries.
Expense. In accordance with U.S. GAAP, the Company recognizes the compensation cost of an employee’s pension benefits (including prior−service
cost) over the employee’s estimated service period. This process involves making certain estimates and assumptions, including the discount rate and the
expected long−term rate of return on plan assets.
57
G-64
Table of Contents
The assumed discount rate, which is intended to reflect the rates at which pension benefits could be effectively settled, is used to measure the projected and
accumulated benefit obligations and to calculate the service cost and interest cost. For fiscal 2007, the assumed discount rate for all U.S. plans was selected
by the Company, in consultation with its independent actuaries, using a pension discount yield curve based on the characteristics of the U.S. Qualified Plan
liabilities. The pension discount yield curve represents spot discount yields based on duration implicit in a representative broad based Aa corporate bond
universe of high−quality fixed income investments. It includes only bonds of reasonable issue size and excludes certain types of bonds, such as callable
bonds. As of November 30, 2007, the Company’s U.S. Qualified Plan represented 82% of the total liabilities of its U.S. pension and postretirement plans
combined. The assumed discount rate for the defined benefit portion of its U.K. pension plan was selected by the Company using a pension discount yield
curve based on the characteristics of the U.K. defined benefit pension liabilities. As of November 30, 2007, the defined benefit portion of the Company’s
U.K. pension plan represented 59% of the total liabilities of its non−U.S. pension plans combined. For all other non−U.S. pension plans, the Company
set the assumed discount rates based on the nature of liabilities, local economic environments and available bond indices.
The expected long−term rate of return on assets represents the Company’s best estimate of the long−term return on plan assets and generally was estimated
by adjusting the previous year’s rate by the difference in the weighted average return of the underlying long−term expected returns on the different asset
classes, based on the target asset allocations, taking into consideration estimated expenses and the benefits of diversification and rebalancing the portfolio.
This rate is expected to remain the same from one year to the next unless there is a significant change in the target asset allocation, the fees and expenses
paid by the plan or market conditions.
As of November 30, 2007, the Company’s U.S. Qualified Plan represented 90% of the total assets of its U.S. and non−U.S. pension plans combined. The
Company, in consultation with its independent investment consultants and actuaries, determined the expected long−term rate of return on its U.S. Qualified
Plan assets would remain at 6.75% for fiscal 2007 (see Note 19 to the consolidated financial statements). There was no significant change in the fees paid by
the plan or the underlying market outlook since September 2006. To better align the duration of plan assets with the duration of plan liabilities, in May
2007, the U.S. Qualified Plan’s target asset allocation policy was changed from 45%/55% equity/fixed income to 30%/70% equity/fixed income. The effects
of this change will be reflected in fiscal 2008, and the impact is not expected to be material to the Company’s consolidated results of operations. The
preliminary expected long−term rate of return on U.S. Qualified Plan assets is 6.50% for fiscal 2008.
The Company’s expected long−term rate of return on assets for its U.S. Qualified Plan was based on the following target asset allocation:
Target Investment
Mix
Expected Annual
Return(1)
Domestic equity:
Large capitalization
Small capitalization
12%
3%
8.1%
8.4%
International equity
15%
8.4%
Fixed income:
Long−term government/corporate
70%
5.4%
(1)
These returns do not include the impact of diversification on the overall expected portfolio return.
Each year, the Company compares its initial estimate of the expected long−term rate of return on assets for the U.S. Qualified Plan (and adjusts, if
necessary) with a portfolio return calculator model (the “Portfolio Model”) that produces a range of expected returns for the portfolio. Return assumptions
used are forward−looking gross returns that are not developed solely by an examination of historical returns. The Portfolio Model begins with the current
U.S. Treasury yield curve, recognizing that expected returns on bonds are heavily influenced by the current level of yields. Corporate bond spreads and
equity risk premiums, based on current market conditions, are
58
G-65
Table of Contents
then added to develop the return expectations for each asset class. The resulting expected portfolio investment is then adjusted downward to reflect an
assumed load for expenses, which include investment and transaction fees that typically are paid from plan assets, added to the cost basis or subtracted from
sale proceeds, as well as administrative expenses paid from plan assets.
The Company uses the expected long−term rate of return on plan assets to compute the expected return on assets component of pension expense. For the
U.S. Qualified Plan, expected returns are computed based on a market−related value of assets. The market−related value of assets is a smoothed actuarial
value of assets equal to a moving average of market values in which investment income is recognized over a five−year period. The market−related value of
assets must be no greater than 120% and no less than 80% of the market value of assets. Investment income equal to the expected return on the plan’s assets
as calculated for the prior year’s expense is recognized immediately. Any difference between the actual investment income (on a market−value basis) and
the expected return is recognized over a five−year period in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS No. 87”).
Other assumptions, including mortality rates, long−term salary growth and employee turnover rates, are set by the Company in consultation with its
independent actuaries. These assumptions are tested every year by monitoring gains and losses, performing assumption studies as needed, and monitoring
Company objectives and actuarial trends. These assumptions are adjusted whenever necessary.
The Company amortizes (as a component of pension expense) unrecognized net gains and losses over the average future service of active participants (5 to
20 years depending upon the plan) to the extent that the gain/loss exceeds 10% of the greater of the projected benefit obligation or the market−related value
of plan assets. The loss amortization component for the U.S. and the non−U.S. pension plans was $41 million for fiscal 2007 (28% of pension expense) and
$51 million for fiscal 2006 (32% of pension expense).
Impact of SFAS No. 158. In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Among
other items, SFAS No. 158 required recognition of the overfunded or underfunded status of the Company’s defined benefit and postretirement plans as an
asset or liability in the consolidated financial statements for the fiscal year ending November 30, 2007. The Company recorded an after−tax charge of $208
million ($347 million pre−tax) to Shareholders’ equity upon the adoption of this requirement. SFAS No. 158 also requires the measurement of defined
benefit and postretirement plan assets and obligations as of the end of the fiscal year. SFAS No. 158’s requirement to use the fiscal year−end date as the
measurement date is effective for fiscal years ending after December 15, 2008. The Company expects to early adopt a fiscal year−end measurement date
for its fiscal year ending November 30, 2008 and currently expects to record an after−tax charge of approximately $15 million to Shareholders’ equity upon
adoption.
59
G-66
Table of Contents
Critical Accounting Policies.
The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP, which requires the Company to make estimates and
assumptions (see Note 1 to the consolidated financial statements). The Company believes that of its accounting policies (see Note 2 to the consolidated
financial statements), the following may involve a higher degree of judgment and complexity.
Fair Value.
Financial Instruments Measured at Fair Value. A significant number of the Company’s financial instruments are carried at fair value with changes in
fair value recognized in earnings each period. The Company makes estimates regarding valuation of assets and liabilities measured at fair value in preparing
the consolidated financial statements. These assets and liabilities include:
• Financial instruments owned and Financial instruments sold, not yet purchased;
• Securities received as collateral and Obligation to return securities received as collateral;
• Certain Commercial paper and other short−term borrowings, primarily structured notes;
• Certain Deposits;
• Other secured financings; and
• Certain Long−term borrowings, primarily structured debt.
Fair Value Measurement—Definition and Hierarchy. The Company adopted the provisions of SFAS No. 157, effective December 1, 2006. SFAS No. 157
defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between
market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches, including market, income and/or cost approaches. SFAS No. 157 establishes a
hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that
the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed
based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the
assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The
hierarchy is broken down into three levels based on the reliability of inputs as follows:
• Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and
regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Assets and liabilities utilizing Level 1 inputs include exchange−traded equity securities and listed derivatives that are actively traded, most U.S.
Government securities and certain other sovereign government obligations.
• Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly.
Assets and liabilities utilizing Level 2 inputs include: exchange−traded equity securities and listed derivatives that are not actively traded; most
OTC derivatives; restricted stock; corporate and municipal bonds; certain corporate loans and loan commitments; certain high−yield debt; certain
residential and commercial mortgage loans; certain mortgage−backed securities (“MBS”), asset−backed securities (“ABS”), and CDO securities;
retained interests in certain securitization transactions; structured notes; physical commodities; and mortgage servicing rights.
60
G-67
Table of Contents
• Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Assets and liabilities utilizing Level 3 inputs include: certain corporate loans and loan commitments; certain commercial whole loans; certain
mortgage loans; certain high−yield debt; distressed debt (i.e., securities of issuers encountering financial difficulties, including bankruptcy or
insolvency); certain MBS, ABS and CDO securities; retained interests in certain securitization transactions; investments in real estate funds;
private equity investments; and complex over−the−counter derivatives (including certain foreign currency options; long−dated commodity options
and swaps; certain mortgage−related credit default swaps; derivative interests in mortgage−related CDOs; and basket credit default swaps).
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of
product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that
valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.
Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases,
the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value
hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value
measurement in its entirety.
Fair value is a market−based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an
entity−specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that
market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the
measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced
for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3. See Note 3 to the
consolidated financial statements for further information about the Company’s financial assets and liabilities that are accounted for at fair value.
Valuation Techniques. Many cash and OTC contracts have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price
that the Company and others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an
asset. For financial instruments whose inputs are based on bid−ask prices, the Company does not require that fair value always be a predetermined point in
the bid−ask range. The Company’s policy is to allow for mid−market pricing and adjusting to the point within the bid−ask range that meets the Company’s
best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid−ask spread is used to measure both the
long and short positions.
Fair value for many cash and OTC contracts is derived using pricing models. Pricing models take into account the contract terms (including maturity) as
well as multiple inputs, including, where applicable, commodity prices, equity prices, interest rate yield curves, credit curves, creditworthiness of the
counterparty, option volatility and currency rates. In accordance with SFAS No. 157, the impact of the Company’s own credit spreads are also considered
when measuring the fair value of liabilities, including OTC derivative contracts. Where appropriate, valuation adjustments are made to account for various
factors, including bid−ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based upon observable
inputs where available.
OTC Derivative Contracts. OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit
standing of reference entities, equity prices or commodity prices.
Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be modeled using a series of techniques, including
closed−form analytic formulae, such as the Black−Scholes option−
61
G-68
Table of Contents
pricing model, and simulation models or a combination thereof. Many pricing models do not entail material subjectivity because the methodologies
employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, as is the case for generic interest rate
swap and option contracts. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the
financial services industry. A substantial majority of OTC derivative products valued by the Company using pricing models fall into this category and are
categorized within Level 2 of the fair value hierarchy.
Other derivative products, typically the newest and most complex products, will require more judgment in the implementation of the valuation technique
applied due to the complexity of the valuation assumptions and the reduced observability of inputs. This includes certain credit default swaps where direct
trading activity or quotes are unobservable. Derivative interests in mortgage−related CDOs, for which observability of external price data is extremely
limited, are valued based on an evaluation of the market for similar positions as indicated by secondary and primary market activity in the cash CDO and
synthetic CDO market. Each position is evaluated independently taking into consideration the underlying collateral performance and pricing, behavior of the
tranche under various cumulative loss and prepayment scenarios, deal structures (e.g., non−amortizing reference obligations, call features) and liquidity.
While these factors may be supported by historical and actual external observations, the determination of their value as it relates to specific positions
nevertheless requires significant judgment. Mortgage−related credit default swaps are valued based on data from comparable credit instruments in the cash
market and trades in comparable swaps as benchmarks, as prices and spreads for the specific credits subject to valuation tend to be of limited observability.
For basket credit default swaps and CDO−squared positions, the correlation between reference credits is often a significant input into the pricing model, in
addition to several other more observable inputs such as credit spread, interest and recovery rates. As the correlation input is unobservable for each specific
swap, it is benchmarked to standardized proxy baskets for which external data are available. These instruments involve significant unobservable inputs and
are categorized in Level 3 of the fair value hierarchy.
The Company trades various derivative structures with commodity underlyings. Depending on the type of structure, the model inputs generally include
interest rate yield curves, commodity underlier spread curves, volatility of the underlying commodities and, in some cases, the correlation between these
inputs. The fair value of these products is estimated using executed trades and broker and consensus data to provide values for the aforementioned inputs.
Where these inputs are unobservable, relationships to observable commodities and data points, based on historic and/or implied observations, are employed
as a technique to estimate the model input values. Commodity derivatives are generally categorized in Level 2 of the fair value hierarchy; in instances where
significant inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.
Prior to the adoption of SFAS No. 157, the Company followed the provisions of EITF Issue No. 02−3. Under EITF Issue No. 02−3, recognition of day one
profit at inception of an OTC derivative contract was prohibited unless the fair value of the contact was based on a valuation technique incorporating
observable market data. With the adoption of SFAS No. 157, the Company is no longer applying the revenue recognition criteria of EITF Issue No. 02−3.
Other Sovereign Government Obligations. The fair value of foreign sovereign government obligations is generally based on quoted prices in active
markets. When quoted prices are not available, fair value is determined based on a valuation model that has as inputs interest rate yield curves,
cross−currency basis index spreads, and country credit spreads for structures similar to the bond in terms of issuer, maturity and seniority. These bonds are
generally categorized in Levels 1 or 2 of the fair value hierarchy.
Municipal Bonds. The fair value of municipal bonds is estimated using recently executed transactions, market price quotations and pricing models that
factor in, where applicable, interest rates, bond or credit default swap spreads and volatility. These bonds are generally categorized in Level 2 of the fair
value hierarchy.
Corporate Bonds. The fair value of corporate bonds is estimated using recently executed transactions, market price quotations (where observable), bond
spreads or credit default swap spreads. The spread data used are for
62
G-69
Table of Contents
the same maturity as the bond. If the spread data do not reference the issuer, then data that reference a comparable issuer is used. When observable price
quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default swap spreads and
recovery rates based on collateral values as key inputs. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy; in instances where
significant inputs are unobservable, they are categorized in Level 3 of the hierarchy.
Corporate Loans and Loan Commitments. The fair value of corporate loans is estimated using recently executed transactions, market price quotations
(where observable) and market observable credit default swap levels along with proprietary valuation models and default recovery analysis where such
transactions and quotations are unobservable. The fair value of contingent corporate loan commitments is estimated by using executed transactions on
comparable loans and the anticipated market price based on pricing indications from syndicate banks and customers. The valuation of these commitments
also takes into account certain fee income. While certain corporate loans, closed loan commitments and revolving loans are Level 2 instruments, certain
other corporate loans and contingent corporate loan commitments are categorized in Level 3 of the fair value hierarchy.
Mortgage Loans. The valuation of mortgage loans depends upon the exit market for the loan. Loans not intended for securitization are valued based on the
analysis of the underlying collateral performance, capital structure and market spreads for comparable positions as prices and/or spreads for specific credits
tend to be unobservable. Where comparables do not exist, such loans are valued based on origination price and collateral performance (credit events) since
origination. These loans are classified in Levels 2 or 3 of the fair value hierarchy.
The Company also holds certain loan products and mortgage products with the intent to securitize them. When structuring of the related securitization is
substantially complete, such that the value likely to be realized in a current transaction is consistent with the price that a securitization entity will pay to
acquire these products, the Company marks them to the expected securitized value. Factors affecting the value of loan and mortgage products intended to be
securitized include, but are not limited to, loan type, underlying property type and geographic location, loan interest rate, loan to value ratios, debt service
coverage ratio, updated cumulative loan loss data, prepayment rates, yields, investor demand, any significant market volatility since the last securitization,
and credit enhancement. While these valuation factors may be supported by historical and actual external observations, the determination of their value as it
relates to specific positions may require significant judgment. These instruments are classified in Levels 2 or 3 of the fair value hierarchy.
U.S. Agency Securities. U.S. agency securities include To−be−announced (“TBA”) securities and mortgage pass−through certificates. TBA securities are
liquid and have quoted market prices. Fair value of mortgage pass−through certificates is determined via a simulation model, which considers different rate
scenarios and historical activity to calculate a spread to the comparable TBA security. U.S. agency securities are categorized in Level 2 of the fair value
hierarchy.
Commercial Mortgage−Backed Securities and Asset−Backed Securities (“ABS”). CMBS and ABS may be valued based on external price/spread data.
When position−specific external price data are not observable, the valuation is based on prices of comparable bonds. Included in this category are certain
interest−only securities, which, in the absence of market prices, are valued as a function of observable whole bond prices and cash flow values of
principal−only bonds using current market assumptions at the measurement date. CMBS and ABS are categorized in Level 3 if external prices are
unobservable; otherwise they are categorized in Level 2 of the fair value hierarchy.
Retained Interests in Securitization Transactions. The Company engages in securitization activities related to various types of loans and bonds. The
Company may retain interests in securitized financial assets as one or more tranches of the securitization. To determine fair values, observable inputs are
used if available. Observable inputs, however, may not be available for certain retained interests so the Company estimates fair value based on the present
value of expected future cash flows using its best estimates of the key assumptions, including forecasted credit losses, prepayment rates, forward yield
curves and discount rates commensurate with the risks
63
G-70
Table of Contents
involved. When there are no significant unobservable inputs, retained interests are categorized in Level 2 of the fair value hierarchy. When unobservable
inputs are significant to the fair value measurement, albeit generally supportable by historical and actual benchmark data, retained interests are categorized
in Level 3 of the fair value hierarchy.
Investments in Private Equity and Real Estate. The Company’s investments in private equity and real estate take the form of direct private equity
investments and investment in private equity and real estate funds. The transaction price is used as the best estimate of fair value at inception. When
evidence supports a change to the carrying value from the transaction price, adjustments are made to reflect expected exit values. Ongoing reviews by
Company management are based on an assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and
sale transactions with third parties, expected cash flows and market−based information, including comparable company transactions, performance multiples
and changes in market outlook, among other factors. These nonpublic investments are included in Level 3 of the fair value hierarchy because they trade
infrequently, and, therefore, the fair value is unobservable.
Physical Commodities. The Company trades various physical commodities, including crude oil and refined products, metals and agricultural products.
Fair value for physical commodities is determined using observable inputs, including broker quotations and published indices. Physical commodities are
categorized in Level 2 of the fair value hierarchy.
Deposits. The fair value of certificates of deposit is estimated using third−party quotations. These deposits are categorized in Level 2 of the fair value
hierarchy.
Structured Notes. The Company issues structured notes that have coupons or repayment terms linked to the performance of debt or equity securities,
indices, currencies or commodities. Fair value of structured notes is estimated using valuation models described in this section for the derivative and debt
features of the notes. These models incorporate observable inputs, including prices that the notes are linked to, interest rate yield curves, option volatility
and currency rates. The impact of the Company’s own credit spreads also is included based on the Company’s observed secondary bond market spreads.
Most structured notes are categorized in Level 2 of the fair value hierarchy.
Reclasses from Level 2 to Level 3. During the fourth quarter of fiscal 2007, the Company reclassified approximately $7.0 billion of funded assets and $279
million of net derivative contracts from Level 2 to Level 3 because certain significant inputs for the fair value measurement became unobservable. These
reclasses were primarily related to the continued market and liquidity deterioration in the mortgage markets. The most material transfers to Level 3 were in
commercial whole loans, residuals from residential securitizations, interest−only commercial mortgage and agency bonds as well as commercial and
residential credit default swaps.
Fair Value Control Processes. The Company employs control processes to validate the fair value of its financial instruments, including those derived from
pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible.
In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and
consistently applied and that the assumptions are reasonable. These control processes include reviews of the pricing model’s theoretical soundness and
appropriateness by Company personnel with relevant expertise who are independent from the trading desks. Additionally, groups independent from the
trading divisions within the Financial Control, Market Risk and Credit Risk Departments participate in the review and validation of the fair values generated
from pricing models, as appropriate. Where a pricing model is used to determine fair value, recently executed comparable transactions and other observable
market data are considered for purposes of validating assumptions underlying the model.
Consistent with market practice, the Company has individually negotiated agreements with certain counterparties to exchange collateral (“margining”)
based on the level of fair values of the derivative contracts they have executed. Through this margining process, one party or both parties to a derivative
contract provides the other party with information about the fair value of the derivative contract to calculate the amount of collateral required. This sharing
of fair value information provides additional support of the Company’s recorded fair value
64
G-71
Table of Contents
for the relevant OTC derivative products. For certain OTC derivative products, the Company, along with other market participants, contributes derivative
pricing information to aggregation services that synthesize the data and make it accessible to subscribers. This information is then used to evaluate the fair
value of these OTC derivative products.
Legal, Regulatory and Tax Contingencies.
In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class
actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened
legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the
issuers that would otherwise be the primary defendants in such cases are bankrupt or in financial distress.
The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and
self−regulatory agencies regarding the Company’s business, including, among other matters, accounting and operational matters, certain of which may
Reserves for litigation and regulatory proceedings are generally determined on a case−by−case basis and represent an estimate of probable losses after
considering, among other factors, the progress of each case, prior experience and the experience of others in similar cases, and the opinions and views of
internal and external legal counsel. Given the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek
substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot predict with certainty the loss or
range of loss, if any, related to such matters, how such matters will be resolved, when they will ultimately be resolved or what the eventual settlement, fine,
penalty or other relief, if any, might be.
The Company is subject to the income and indirect tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which the
Company has significant business operations. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant
governmental taxing authorities. The Company must make judgments and interpretations about the application of these inherently complex tax laws when
determining the provision for income taxes and the expense for indirect taxes and must also make estimates about when in the future certain items affect
taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be settled with the taxing authority upon examination or
audit. The Company regularly assesses the likelihood of assessments in each of the taxing jurisdictions resulting from current and subsequent years’
examinations, and tax reserves are established as appropriate.
The Company establishes reserves for potential losses that may arise out of litigation, regulatory proceedings and tax audits to the extent that such losses are
probable and can be estimated in accordance with SFAS No. 5. Once established, reserves are adjusted when there is more information available or when an
event occurs requiring a change. Significant judgment is required in making these estimates, and the actual cost of a legal claim, tax assessment or
regulatory fine/penalty may ultimately be materially different from the recorded reserves, if any.
See Notes 2, 15 and 20 to the consolidated financial statements for additional information on legal proceedings and tax examinations.
Special Purpose Entities.
The Company enters into a variety of transactions with special purpose entities, primarily in connection with securitization activities. The Company engages
in securitization activities related to commercial and residential mortgage loans, U.S. agency collateralized mortgage obligations, corporate bonds and loans,
municipal bonds
65
G-72
Table of Contents
and other types of financial instruments. In most cases, these SPEs are deemed to be variable interest entities. Unless a VIE is determined to be a qualifying
special purpose entity (“QSPE”), the Company is required under accounting guidance to perform an analysis of each VIE at the date upon which the
Company becomes involved with it to determine whether the Company is the primary beneficiary of the VIE, in which case the Company must consolidate
the VIE. QSPEs are not consolidated.
In accordance with accounting guidance, the Company reassesses whether it is the primary beneficiary of a VIE upon the occurrence of certain
reconsideration events. If the Company’s initial assessment results in a determination that it is not the primary beneficiary of a VIE, then the Company
reassesses this determination upon the occurrence of:
• Changes to the VIE’s governing documents or contractual arrangements in a manner that reallocates the obligation to absorb the expected losses or
the right to receive the expected residual returns of the VIE between the current primary beneficiary and the other variable interest holders,
including the Company.
• Acquisition by the Company of additional variable interests in the VIE.
If the Company’s initial assessment results in a determination that it is the primary beneficiary, then the Company reassesses this determination upon the
occurrence of:
• Changes to the VIE’s governing documents or contractual arrangements in a manner that reallocates the obligation to absorb the expected losses or
the right to receive the expected residual returns of the VIE between the current primary beneficiary and the other variable interest holders,
including the Company.
• A sale or disposition by the Company of all or part of its variable interests in the VIE to unrelated parties.
• The issuance of new variable interests by the VIE to parties unrelated to the Company.
The determination of whether an SPE meets the accounting requirements of a QSPE requires significant judgment, particularly in evaluating whether the
permitted activities of the SPE are significantly limited and in determining whether derivatives held by the SPE are passive and nonexcessive. In addition,
the analysis involved in determining whether an entity is a VIE, and in determining the primary beneficiary of a VIE, requires significant judgment (see
Note 5 to the consolidated financial statements).
Certain Factors Affecting Results of Operations.
The Company’s results of operations may be materially affected by market fluctuations and by economic factors. In addition, results of operations in the
past have been, and in the future may continue to be, materially affected by many factors of a global nature, including political, economic and market
conditions; the availability and cost of capital; the level and volatility of equity prices, commodity prices and interest rates; currency values and other
market indices; technological changes and events; the availability and cost of credit; inflation; and investor sentiment and confidence in the financial
markets. In addition, there continues to be a heightened level of legislative, legal and regulatory developments related to the financial services industry that
potentially could increase costs, thereby affecting future results of operations. Such factors also may have an impact on the Company’s ability to achieve its
strategic objectives on a global basis. For a further discussion of these and other important factors that could affect the Company’s business, see “Risk
Factors” in Part I, Item 1A.
66
G-73
Table of Contents
Liquidity and Capital Resources.
The Company’s senior management establishes the overall liquidity and capital policies of the Company. Through various risk and control committees, the
Company’s senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and
oversees the liquidity and interest rate and currency sensitivity of the Company’s asset and liability position. These committees, along with the Company’s
Treasury Department and other control groups, also assist in evaluating, monitoring and controlling the impact that the Company’s business activities have
on its consolidated balance sheet, liquidity and capital structure, thereby helping to ensure that its business activities are integrated with the Company’s
liquidity and capital policies. For a description of the Company’s other principal risks and how they are monitored and managed, see “Quantitative and
Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A.
The Company’s liquidity and funding risk management policies are designed to mitigate the potential risk that the Company may be unable to access
adequate financing to service its financial obligations when they come due without material, adverse franchise or business impact. The key objectives of the
liquidity and funding risk management framework are to support the successful execution of the Company’s business strategies while ensuring ongoing and
sufficient liquidity through the business cycle and during periods of financial distress. The principal elements of the Company’s liquidity management
framework are the Contingency Funding Plan, the Liquidity Reserve and the Cash Capital Policy. Comprehensive financing guidelines (collateralized
funding, long−term funding strategy, surplus capacity, diversification, staggered maturities and committed credit facilities) support the Company’s target
liquidity profile.
The Balance Sheet.
The Company monitors and evaluates the composition and size of its balance sheet. Given the nature of the Company’s market−making and customer
financing activities, the size of the balance sheet fluctuates from time to time. A substantial portion of the Company’s total assets consists of highly liquid
marketable securities and short−term receivables arising principally from its Institutional Securities sales and trading activities. The highly liquid nature of
these assets provides the Company with flexibility in financing and managing its business.
The Company’s total assets decreased to $1,045,409 million at November 30, 2007 from $1,121,192 million at November 30, 2006. The decrease was
primarily due to decreases in securities borrowed, securities purchased under agreements to resell and the completion of the Discover Spin−off (see Note 22
to the consolidated financial statements), partially offset by an increase in cash and securities deposited with clearing organizations and securities received
as collateral.
Within the sales and trading related assets and liabilities, there are transactions attributable to securities financing activities. Securities financing assets and
liabilities as of November 30, 2007 were $587 billion and $559 billion, respectively. Securities financing transactions include repurchase and resale
agreements, securities borrowed and loaned transactions, securities received as collateral and obligation to return securities received, customer
receivables/payables and related segregated customer cash.
Securities financing assets and liabilities include matched book transactions with minimal market, credit and/or liquidity risk. These matched book
transactions are to accommodate customers, as well as to obtain securities for the settlement and finance of inventory positions. The customer
receivable/payable portion of the securities financing transactions includes customer margin loans, collateralized by customer owned securities, and
customer cash, which is segregated in order to satisfy regulatory requirements. The Company’s exposure on these transactions is limited by collateral
maintenance policies, which in turn limits the Company’s credit exposure to customers. Included within securities financing assets was $82 billion that, in
accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”)
represented equal and offsetting assets and liabilities for fully collateralized non−cash loan transactions.
Balance sheet leverage ratios are one indicator of capital adequacy when viewed in the context of a company’s overall liquidity and capital policies. The
Company views the adjusted leverage ratio as a more relevant measure
67
G-74
Table of Contents
of financial risk when comparing financial services firms and evaluating leverage trends. The Company has adopted a definition of adjusted assets that
excludes certain self−funded assets considered to have minimal market, credit and/or liquidity risk. These low−risk assets generally are attributable to the
Company’s matched book and securities lending businesses. Adjusted assets are calculated by reducing gross assets by aggregate resale agreements and
securities borrowed less non−derivative short positions and assets recorded under certain provisions of SFAS No. 140 and FASB Interpretation No. 46
(revised December 2003) “Consolidation of Variable Interest Entities (“FIN 46R”). Gross assets are also reduced by the full amount of cash and securities
deposited with clearing organizations or segregated under federal and other regulations or requirements. The adjusted leverage ratio reflects the deduction
from shareholders’ equity of the amount of equity used to support goodwill and intangible assets (as the Company does not view this amount of equity as
available to support its risk capital needs). In addition, the Company views junior subordinated debt issued to capital trusts as a component of its capital base
given the inherent characteristics of the securities. These characteristics include the long−dated nature (e.g., some have final maturity at issuance of 30 years
extendible at the Company’s option by a further 19 years; others have a 60−year final maturity at issuance), the Company’s ability to defer coupon interest
for up to 20 consecutive quarters and the subordinated nature of the obligations in the capital structure. The Company also receives rating agency equity
credit for these securities. Excluding the $82 billion of assets and liabilities recorded in accordance with SFAS No. 140 would reduce the leverage ratio
from 32.6x to 30.0x.
The following table sets forth the Company’s total assets, adjusted assets and leverage ratios as of November 30, 2007 and November 30, 2006 and for the
average month−end balances during fiscal 2007 and fiscal 2006:
Balance at
Average Month−End Balance
November 30,
November 30,
2007
2006
Fiscal 2007(1)
Fiscal 2006(2)
(dollars in millions, except ratio data)
Total assets
Less: Securities purchased under agreements to resell
Securities borrowed
Add: Financial instruments sold, not yet purchased
Less: Derivative contracts sold, not yet purchased
$ 1,045,409
(126,887)
(239,994)
134,341
(71,604)
Subtotal
Less: Cash and securities deposited with clearing organizations or segregated
under federal and other regulations or requirements(3)
Assets recorded under certain provisions of SFAS No. 140 and FIN 46R
Goodwill and net intangible assets(4)
$ 1,121,192
(175,787)
(299,631)
183,119
(57,491)
$ 1,202,065
(176,973)
(279,729)
172,075
(59,869)
$ 1,022,269
(183,490)
(274,807)
157,678
(47,176)
741,265
771,402
857,569
674,474
(61,608)
(110,001)
(4,071)
(29,565)
(100,236)
(3,443)
(41,357)
(132,141)
(3,924)
(41,644)
(82,992)
(2,894)
Adjusted assets
$
565,585
$
638,158
$
680,147
$
546,944
Common equity
Preferred equity
$
30,169
1,100
$
34,264
1,100
$
35,235
1,100
$
31,740
423
Junior subordinated debt issued to capital trusts
31,269
4,876
35,364
4,884
36,335
4,878
32,163
3,875
Subtotal
Less: Goodwill and net intangible assets(4)
36,145
(4,071)
40,248
(3,443)
41,213
(3,924)
36,038
(2,894)
Tangible shareholders’ equity
$
32,074
$
36,805
$
37,289
$
33,144
Leverage ratio(5)
32.6x
30.5x
32.2x
30.8x
Adjusted leverage ratio(6)
17.6x
17.3x
18.2x
16.5x
68
G-75
Table of Contents
(1)
(2)
(3)
(4)
(5)
(6)
Average balances for fiscal 2007 were calculated based upon month−end balances from November 2006 through November 2007. Average common equity was adjusted for the
Discover Spin−off.
The results for the Company and for the Institutional Securities business segment for the first two quarters of fiscal 2006 were adjusted (see Note 24 to the consolidated financial
statements).
In the second quarter of fiscal 2007, the adjusted assets calculation was revised in order to reduce gross assets by the full amount of cash and securities deposited with clearing
organizations or segregated under federal and other regulations or requirements. All prior periods have been restated to conform with the current presentation.
Effective December 1, 2006, mortgage servicing rights have been included in net intangible assets. Amounts as of November 30, 2006 have been reclassified to conform with the
current presentation.
Leverage ratio equals total assets divided by tangible shareholders’ equity.
Adjusted leverage ratio equals adjusted assets divided by tangible shareholders’ equity.
Activity in Fiscal 2007.
The Company’s total capital consists of shareholders’ equity, long−term borrowings (debt obligations scheduled to mature in more than 12 months) and
junior subordinated debt issued to capital trusts. At November 30, 2007, total capital was $191,085 million, an increase of $28,951 million from
November 30, 2006. The Company redeemed all $66 million of its outstanding Capital Units on February 28, 2007.
During the 12 months ended November 30, 2007, the Company issued senior notes with a carrying value aggregating $76.1 billion, including non−U.S.
dollar currency notes aggregating $35.2 billion. In connection with the note issuances, the Company has entered into certain transactions to obtain floating
interest rates based primarily on short−term London Interbank Offered Rates (“LIBOR”) trading levels. At November 30, 2007, the aggregate outstanding
principal amount of the Company’s Senior Indebtedness (as defined in the Company’s senior debt indentures) was approximately $207 billion (including
guaranteed obligations of the indebtedness of subsidiaries). The weighted average maturity of the Company’s long−term borrowings, based upon stated
maturity dates, was approximately 5.5 years at November 30, 2007. Subsequent to fiscal year−end and through December 31, 2007, the Company’s
long−term borrowings (net of repayments) increased by approximately $10 billion. In addition, in December 2007, the Company sold Equity Units to a
wholly owned subsidiary of CIC for approximately $5,579 million. See “China Investment Corporation Investment” herein.
69
G-76
Table of Contents
China Investment Corporation Investment.
In December 2007, the Company sold Equity Units which include contracts to purchase Company common stock (see “Stock Purchase Contracts” herein) to
a wholly owned subsidiary of CIC for approximately $5,579 million. CIC’s ownership in the Company’s common stock, including the maximum number of
shares of common stock to be received by CIC upon settlement of the stock purchase contracts, will be 9.9% or less of the Company’s total shares
outstanding based on the total shares outstanding on November 30, 2007. CIC will be a passive financial investor and will have no special rights of
ownership nor a role in the management of the Company. A substantial portion of the investment proceeds will be treated as Tier 1 capital for regulatory
capital purposes.
Each stock purchase contract mandatorily settles in Company common stock at prices between $48.0700 and $57.6840. The maximum number of shares to
be issued upon settlement of the stock purchase contracts included in the Equity Units is approximately 116,063,000. The stock purchase contracts settle for
Company common stock on August 17, 2010, subject to adjustment. Each Equity Unit will pay a fixed annual payment rate of 9% payable quarterly.
As described below, the Equity Units consist of interests in trust preferred securities issued by Morgan Stanley Capital Trust A (“Series A Trust”), Morgan
Stanley Capital Trust B (“Series B Trust”) or Morgan Stanley Capital Trust C (“Series C Trust”) (each a “Morgan Stanley Trust” and, collectively, the
“Trusts”) and stock purchase contracts issued by the Company. The only assets held by the Series A Trust, Series B Trust and Series C Trust are junior
subordinated debentures issued by the Company.
Equity Units.
Each Equity Unit has a stated amount of $1,000 per unit consisting of:
(i)
an undivided beneficial ownership interest in a trust preferred security of Series A Trust, Series B Trust or Series C Trust with an initial liquidation
amount of $1,000; and
(ii) a stock purchase contract relating to the common stock, par value of $0.01 per share, of the Company.
Junior Subordinated Debentures Issued to Support Trust Common and Trust Preferred Securities.
In the first quarter of fiscal 2008, the Company issued junior subordinated debt securities due no later than February 17, 2042 for a total of $5,579,173,000
in exchange for $5,579,143,000 in aggregate proceeds from the sale of the trust preferred securities by the Trusts and $30,000 in trust common securities
issued equally by the Trusts. The Company elected to fair value the junior subordinated debentures pursuant to SFAS No. 159. The common and trust
preferred securities of the Trusts, totaling approximately $5,579 million, represent undivided beneficial ownership interests in the assets of the Trusts, have
no stated maturity and must be redeemed upon the redemption or maturity of the corresponding series of junior subordinated debt securities—the sole assets
of the respective Trusts. The Series A Trust, Series B Trust and Series C Trust will make quarterly distributions on the trust common and trust preferred
securities at an annual rate of 6%.
The trust common securities, which are held by the Company, represent an interest in the Trusts and are recorded as an equity method investment in the
Company’s consolidated statement of financial condition. The Trusts are VIEs in accordance with FIN 46R and the Company does not consolidate its
interests in the Trusts as it is not the primary beneficiary of any of the Trusts.
The Company has directly guaranteed the repayment of the trust preferred securities to the holders thereof to the extent that there are funds available in the
Trusts. If the Company does not make payments on the junior subordinated debentures owned by a Morgan Stanley Trust, such Morgan Stanley Trust will
not be able to pay any amounts payable in respect of the trust preferred securities issued by it and will not have funds legally available for that purpose. In
that event, holders of such series of trust preferred securities would not be able to
70
G-77
Table of Contents
rely upon the guarantee for payment of those amounts. The guarantee will remain in place until the redemption price of all of the trust preferred securities is
paid, the amounts payable with respect to the trust preferred securities upon liquidation of the Morgan Stanley Trusts are paid or the junior subordinated
debentures are distributed to the holders of all the trust preferred securities. The trust preferred securities held by the Equity Unit holders are pledged to the
Company to collateralize the obligations of the Equity Unit holders under the related stock purchase contracts. The Equity Unit holders may substitute
certain zero−coupon treasury securities in place of the trust preferred securities as collateral under the stock purchase contracts.
Stock Purchase Contracts.
Each stock purchase contract requires the holder to purchase, and the Company to sell, on the stock purchase date a number of newly issued or treasury
shares of the Company’s common stock, par value $0.01 per share, equal to the settlement rate. The settlement rate at the respective stock purchase date will
be calculated based on the arithmetic average of the volume−weighted average prices of the common stock during a specified 20−day period ending three
days immediately preceding the applicable stock purchase date (“applicable market value”). If the applicable market value of the Company’s common stock
is less than the threshold appreciation price of $57.6840 but greater than $48.0700, the reference price, the settlement rate will be a number of shares of the
Company’s common stock equal to $1,000 divided by the applicable market value. If the applicable market value is less than or equal to the reference price,
the settlement rate will be the number of shares of the Company’s common stock equal to $1,000 divided by the reference price. If the applicable market
value is greater than or equal to the threshold appreciation price, the settlement rate will be the number of shares of the Company’s common stock equal to
$1,000 divided by the threshold appreciation price. Accordingly, upon settlement in the aggregate, the Company will receive proceeds of approximately
$5,579 million and issue up to approximately 116,063,000 shares of its common stock. The stock purchase contract may be settled early at the option of the
holder at any time prior to the second business day immediately preceding the beginning of the first remarketing period. However, upon early settlement,
the holder will receive the minimum settlement rate, subject to adjustment.
The initial quarterly distributions on the Series A, Series B and Series C trust preferred securities of 6%, combined with the contract adjustment payments
on the stock purchase contracts of 3%, result in the 9% yield on the Equity Units.
If the Company defers any of the contract adjustment payments on the stock purchase contracts, then it will accrue additional amounts on the deferred
amounts at the annual rate of 9% until paid, to the extent permitted by law.
The present value of the future contract adjustment payments due under the stock purchase contracts was approximately $400 million and was recorded in
Other liabilities and accrued expenses with a corresponding decrease recorded in Shareholders’ equity in the Company’s consolidated statement of financial
condition in the first quarter of fiscal 2008. The other liability balance related to the stock purchase contracts will accrete over the term of the stock purchase
contract using the effective yield method with a corresponding charge to Interest expense. When the contract adjustment payments are made under the stock
purchase contracts, they will reduce the other liability balance.
Calculation of Impact on Average Diluted Common Shares Outstanding Prior to Settlement of Stock Purchase Contract.
Prior to the issuance of common stock upon settlement of the stock purchase contract, the impact of the Equity Units will be reflected in the Company’s
earnings per diluted common share using the treasury stock method, as defined by SFAS No. 128, “Earnings Per Share.” Under the treasury stock method,
the number of shares of common stock included in the calculation of earnings per diluted common share will be calculated as the excess, if any, of the
number of shares expected to be issued upon settlement of the stock purchase contract based on the
71
G-78
Table of Contents
average market price for the last 20 days of the reporting period, less the number of shares that could be purchased by the Company with the proceeds to be
received upon settlement of the contract at the average closing price for the reporting period.
Dilution of net income per share will occur (i) in reporting periods when the average closing price of common shares is over $57.6840 per share or (ii) in
reporting periods when the average closing price of common shares for a reporting period is between $48.0700 and $57.6840 and is greater than the average
market price for the last 20 days ending three days prior to the end of such reporting period.
Upon settlement of the Stock Purchase Contract, the amount of common shares issued in settlement of the contract will be included in the basic and diluted
earnings per share calculation of weighted average common shares outstanding for the reporting period.
Economic Capital.
The Company’s economic capital model estimates the amount of equity capital required to support the businesses and their risk−generating activities
through the business cycle while simultaneously satisfying regulatory, rating agency and investor minimum requirements. The economic capital model will
evolve over time in response to changes in the business and regulatory environment and to incorporate improvements in modeling techniques in order to
reflect the capital required to support business activities.
Economic capital requirements are allocated to each business segment and are sub−allocated to product lines as appropriate. Each business segment is
capitalized as if each were an independent operating entity. This process is intended to align equity capital with the risks in each business, provide business
managers with tools for measuring and managing risk and associated cost of required capital, and allow senior management to evaluate risk−adjusted
returns (such as return on equity and shareholder value added) to facilitate resource allocation decisions.
The Company’s methodology is based on a going−concern approach that assigns equity to each business based on regulatory capital usage plus additional
capital for stress losses, including principal investment risk. Regulatory capital, including additional capital assigned for certain goodwill, intangible assets
and net deferred tax assets, is a minimum requirement to ensure the Company’s access to funding and credibility in the market. The Company believes it
must be able to sustain stress losses and maintain capital substantially above regulatory minimums while supporting ongoing business activities. The
difference between the Company’s consolidated book equity and aggregate equity requirements denotes the Company’s unallocated capital position, which
is not currently reflected in business segment performance metrics.
The Company assesses stress loss capital across various dimensions of market, credit, business and operational risks. Market risk scenarios capture
systematic, idiosyncratic and random market risk through the use of internal market stress data. Credit risk is included in the form of idiosyncratic
counterparty default events. Business risk incorporates earnings volatility due to variability in revenue flows, with estimates on the mix of fixed versus
variable expenses at various points in the business cycle. Operational stress losses primarily reflect legal risk across the Company.
Beginning in fiscal 2007, economic capital requirements are met by regulatory Tier 1 equity (including common shareholders’ equity, certain preferred
stock, eligible hybrid capital instruments and deductions of certain goodwill, intangible assets and net deferred tax assets), subject to regulatory limits.
72
G-79
Table of Contents
The following table presents the Company’s allocated average Tier 1 equity (“economic capital”) for fiscal 2007 and average common equity for fiscal 2007
and fiscal 2006:
Fiscal Year Ended
2007
Average
Average
Common
Tier 1
Equity
Equity
Asset Management
Unallocated capital
$ 24.6
1.5
2.7
2.9
Total from continuing operations
Discontinued operations
$
31.7
2.7
Total
$ 34.4
23.9
1.7
3.5
2.9
2006
Average
Common
Equity
$
32.0
3.2
$
35.2
18.0
3.0
2.4
3.1
26.5
5.2
$
31.7
The increase in capital allocated to Institutional Securities from the prior−year period reflects the increased market and credit risk profile as well as capital
required for new acquisitions and investments. The Company expects to continue deploying capital, provided market opportunities continue to warrant such
investments. The decrease in the economic capital allocated to the Global Wealth Management Group was due to the Company’s reassessment of the
amount of capital required to support the market risks and credit risks in this business segment. The incremental equity capital allocated to Asset
Management primarily represents capital required for acquisitions and investments in asset management products.
The Company’s unallocated economic capital was $(2.7) billion at November 30, 2007 due to the loss recorded in the fourth quarter of fiscal 2007 and
increased capital assigned to the Institutional Securities business segment. In December 2007, the Company entered into an agreement with CIC as a
long−term financial investor and issued new capital of approximately $5,579 million through Equity Units. These Equity Units will help to further bolster
the Company’s capital position and enhance growth opportunities globally while also building on the Company’s deep historic ties and market leadership in
China (see “China Investment Corporation Investment” herein).
The Company continues to believe that it is adequately capitalized. The Company generally uses available unallocated capital for organic growth, additional
acquisitions, and other capital needs including repurchases of common stock while maintaining adequate internal capital ratios.
During fiscal 2007, the Company’s shareholders’ equity has been affected by the adoption of SFAS No. 158 (see Note 19 to the consolidated financial
statements), SFAS No. 157 and SFAS No. 159 (see Notes 2 and 3 to the consolidated financial statements), and the Discover Spin−off (see Note 22 to the
consolidated financial statements).
Equity Capital Management Policies. The Company’s senior management views equity capital as an important source of financial strength and, therefore,
pursues a strategy of ensuring that the Company’s equity capital base adequately reflects and provides protection from the economic risks inherent in its
businesses. Capital is required for, among other things, the Company’s inventories, underwritings, principal investments, bridge loans and other financings,
investments in fixed assets and for future uses. Capital for future uses will be included within unallocated capital until required by the business segments.
The Company also considers return on common equity to be an important measure of its performance, in the context of both the particular business
environment in which the Company is operating and its peer group’s results. In this regard, the Company actively manages its consolidated equity capital
position based upon, among other things, business opportunities, capital availability and rates of return together with internal capital policies, regulatory
requirements and rating agency guidelines
73
G-80
Table of Contents
and, therefore, in the future may expand or contract its equity capital base to address the changing needs of its businesses. The Company attempts to
maintain total equity, on a consolidated basis, at least equal to the sum of its operating subsidiaries’ equity.
At November 30, 2007, the Company’s equity capital (which includes shareholders’ equity and junior subordinated debt issued to capital trusts) was
$36,145 million, a decrease of $4,103 million from November 30, 2006, primarily due to the Discover Spin−off. The Company returns internally generated
equity capital that is in excess of the needs of its businesses to its shareholders through common stock repurchases and dividends. During fiscal 2007, the
Company purchased approximately $3.8 billion of its common stock (approximately 52 million shares) through open market purchases at an average cost of
$72.65 (see also “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5).
In December 2006, the Company announced that its Board of Directors had authorized the repurchase of up to $6 billion of the Company’s outstanding
common stock. This share repurchase authorization replaced the Company’s previous repurchase authorizations with one repurchase program for capital
management purposes that will consider, among other things, business segment capital needs, as well as equity−based compensation and benefit plan
requirements. As of November 30, 2007, the Company had approximately $2.3 billion remaining under its current share repurchase authorization.
The Board of Directors determines the declaration and payment of dividends on a quarterly basis. In December 2007, the Company announced that its
Board of Directors declared a quarterly dividend per common share of $0.27. The Company also announced that its Board of Directors declared a quarterly
dividend of $379.66 per share of Series A Floating Rate Non−Cumulative Preferred Stock (represented by depositary shares, each representing 1/1,000th
interest in a share of preferred stock and each having a dividend of $0.37966).
Liquidity Management Policies.
The primary goal of the Company’s liquidity management and financing activities is to ensure adequate funding over a wide range of market environments.
Given the highly liquid nature of the Company’s balance sheet, funding requirements are largely fulfilled through the use of collateralized financing. The
Company has centralized management of credit−sensitive unsecured funding sources in the Treasury Department. The Company maintains a liquidity
management framework in order to meet target liquidity requirements and withstand a contraction in credit availability. The framework components include
the Contingency Funding Plan (“CFP”), Liquidity Reserve and Cash Capital.
Contingency Funding Plan. The Company maintains a CFP to manage a potential prolonged liquidity contraction over a one−year time period and to
provide the ability to conduct business in an orderly manner. The CFP is produced on a parent, bank subsidiary and non−bank subsidiary level. The CFP
sets forth a course of action to ensure effective management of a liquidity event. Liquidity risk exposures are regularly evaluated and reported to the Firm
Risk Committee and appropriate business segment risk committees.
The Company’s CFP model incorporates a wide range of potential cash outflows during a liquidity stress event, including, but not limited to, the following:
(i) repayment of all unsecured debt maturing within one year; (ii) maturity roll−off of outstanding letters of credit with no further issuance and replacement
with cash collateral; (iii) return of unsecured securities borrowed and any cash raised against these securities; (iv) additional collateral that would be
required by counterparties in the event of a ratings downgrade; (v) higher haircuts on or lower availability of secured funding; (vi) client cash withdrawals;
(vii) drawdowns on unfunded commitments provided to third parties; and (viii) discretionary unsecured debt buybacks.
74
G-81
Table of Contents
The Company’s CFP is developed at the legal entity level in order to capture specific cash requirements and availability for the parent company and each of
its major operating subsidiaries. The CFP assumes that the parent company does not have access to cash that may be trapped at subsidiaries due to
regulatory, legal or tax constraints. In addition, the CFP assumes that the parent company does not draw down on its committed credit facilities.
Liquidity Reserve. The Company seeks to maintain a target liquidity reserve that is sized to cover daily funding needs and to meet strategic liquidity
targets as outlined in the CFP. This liquidity reserve is held in the form of cash deposits with banks and a pool of unencumbered securities. The Company
manages the pool of unencumbered securities, against which funding can be raised, on a global basis, and securities for the pool are chosen accordingly. The
U.S. and non−U.S. components, held in the form of a reverse repurchase agreement at the parent company, consists of U.S. and European government
bonds and other high−quality collateral. The Company believes that diversifying the form in which its liquidity reserve (cash and securities) is maintained
enhances its ability to quickly and efficiently source funding in a stressed environment. The Company’s funding requirements and target liquidity reserve
may vary based on changes in the level and composition of its balance sheet, timing of specific transactions, client financing activity, market conditions and
seasonal factors.
The table below summarizes the Company’s liquidity reserves on a parent, bank subsidiary and non−bank subsidiary level. The liquidity held on the bank
and non−bank subsidiary level is generally not available to the parent.
Liquidity Reserve
Parent
Bank subsidiaries
Non−bank subsidiaries
Total
Average Balance
For the Fiscal Year Ended
November 30, 2007
At
November 30, 2007
For the Quarter Ended
November 30, 2007
$
62
22
34
$
64
22
34
$
49
16
20
$
118
$
120
$
85
Cash Capital. The Company maintains a cash capital model that measures long−term funding sources against requirements. Sources of cash capital
include the parent company’s equity and the non−current portion of certain long−term borrowings. Uses of cash capital include the following: (i) illiquid
assets such as buildings, equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and principal investments; (ii) a portion of
securities inventory that is not expected to be financed on a secured basis in a credit−stressed environment (i.e., stressed haircuts); and (iii) expected
drawdowns on unfunded commitments.
The Company seeks to maintain a surplus cash capital position. The Company’s equity capital of $36,145 million (including junior subordinated debt issued
to capital trusts of $4,876 million) and long−term borrowings (debt obligations scheduled to mature in more than 12 months) of $154,940 million comprised
the Company’s total capital of $191,085 million as of November 30, 2007, which substantially exceeded cash capital requirements.
Committed Credit Facilities.
The maintenance of committed credit facilities serves to further diversify the Company’s funding sources. The Company values committed credit as a
secondary component of its liquidity management framework. The committed credit facilities include a diversification of lenders to the Company covering
geographic regions, including North America, Europe and Asia.
The Company maintains a senior revolving credit agreement with a group of banks to support general liquidity needs, including the issuance of commercial
paper, which consists of three separate tranches: a U.S. dollar
75
G-82
Table of Contents
tranche; a Japanese yen tranche; and a multicurrency tranche available in both euro and British pound, all of which exist with the Company as the sole
borrower. Under this combined facility (the “Credit Facility”), the banks are committed to provide up to $7.6 billion under the U.S. dollar tranche, 80 billion
Japanese yen under the Japanese yen tranche and $3.25 billion under the multicurrency tranche. The Credit Facility expires on April 16, 2008 and includes
a term−out feature that allows the Company, at its option, to extend borrowings under the Credit Facility for an additional one year beyond the expiration
date. At November 30, 2007, the Company had a $13.8 billion consolidated stockholders’ equity surplus as compared with the Credit Facility’s covenant
requirement.
The Company anticipates that it may utilize the Credit Facility for short−term funding from time to time. The Company does not believe that any of the
covenant requirements in its Credit Facility will impair its ability to obtain funding under the Credit Facility, pay its current level of dividends or obtain loan
arrangements, letters of credit and other financial guarantees or other financial accommodations. At November 30, 2007, no borrowings were outstanding
under the Credit Facility.
The Company also maintains a committed bilateral credit facility to support general liquidity needs. This facility is expected to be drawn from time to time
to cover short−term funding needs.
Capital Covenants.
In October 2006 and April 2007, the Company executed a replacement capital covenant in connection with offerings by Morgan Stanley Capital Trust VII
and Morgan Stanley Capital Trust VIII (the “Capital Securities”). Under the terms of the replacement capital covenant, the Company has agreed, for the
benefit of certain specified holders of debt, to limitations on its ability to redeem or repurchase any of the Capital Securities for specified periods of
time. For a complete description of the Capital Securities and the terms of the replacement capital covenant, see the Company’s Current Reports on Form
8−K dated October 12, 2006 and April 26, 2007.
Funding Management Policies.
The Company funds its balance sheet on a global basis through diverse sources. These sources include the Company’s equity capital; long−term debt;
repurchase agreements; U.S., Canadian, European, Japanese and Australian commercial paper; asset−backed securitizations; letters of credit; unsecured
bond borrowings; securities lending; buy/sell agreements; municipal reinvestments; promissory notes; master notes; and committed and uncommitted lines
of credit. Repurchase agreement transactions, securities lending and a portion of the Company’s bank borrowings are made on a collateralized basis and,
therefore, provide a more stable source of funding than short−term unsecured borrowings. The Company has active financing programs for both standard
and structured products in the U.S., European and Asian markets, targeting global investors and currencies such as the U.S. dollar, euro, British pound,
Australian dollar and Japanese yen.
The Company’s bank subsidiaries solicit deposits from consumers, purchase Federal Funds, issue short−term institutional certificates of deposits and issue
bank notes. Interest bearing deposits are classified by type as savings, brokered and other time deposits. Savings deposits consist primarily of money market
deposit accounts sold nationally and savings deposits obtained from individual securities clients. Brokered deposits consist primarily of certificates of
deposit issued by the Company’s bank subsidiaries. Other time deposits include individual and institutional certificates of deposit.
The Company’s funding management policies are designed to provide for financings that are executed in a manner that reduces the risk of disruption to the
Company’s operations that would result from an interruption in the availability of the Company’s funding sources. The Company pursues a strategy of
diversification of funding sources (by product, by investor and by region) and attempts to ensure that the tenor of the Company’s liabilities equals or
exceeds the expected holding period of the assets being financed. Maturities of financings are designed
76
G-83
Table of Contents
to manage exposure to refinancing risk in any one period. The Company maintains a surplus of unused short−term funding sources at all times to withstand
any unforeseen contraction in credit capacity. In addition, the Company attempts to maintain cash and unhypothecated marketable securities equal to at least
110% of its outstanding short−term unsecured borrowings. The Company also maintains committed credit facilities (described above) to support its ongoing
borrowing programs.
Secured Financing. A substantial portion of the Company’s total assets consists of highly liquid marketable securities and short−term receivables arising
principally from its Institutional Securities sales and trading activities. The highly liquid nature of these assets provides the Company with flexibility in
financing these assets with stable collateralized borrowings.
The Company’s goal is to encourage funding through collateralized borrowings in order to achieve an optimal mix of secured and unsecured financing. The
Institutional Securities business emphasizes the use of collateralized short−term borrowings to limit the growth of short−term unsecured funding, which is
more typically subject to disruption during periods of financial stress. As part of this effort, the Institutional Securities business segment continually seeks to
expand its global secured borrowing capacity.
In addition, the Company, through several of its subsidiaries, maintains funded and unfunded committed credit facilities to support various businesses,
including the collateralized commercial and residential mortgage whole loan, derivative contracts, warehouse lending, emerging market loan, structured
product, corporate loan, investment banking and prime brokerage businesses.
Unsecured Financing. The Company views long−term debt as a stable source of funding for core inventories and illiquid assets. In general, securities
inventories not financed by secured funding sources and the majority of current assets are financed with a combination of short−term funding, floating rate
long−term debt or fixed rate long−term debt swapped to a floating rate. The Company uses derivative products (primarily interest rate, currency and equity
swaps) to assist in asset and liability management, reduce borrowing costs and hedge interest rate risk (see Note 13 to the consolidated financial statements).
The Company issues long−term debt in excess of the amount necessary to meet the needs of its securities inventory and less liquid assets as determined by
its Cash Capital Policy. In addition to these needs, long−term debt funding is employed to enhance the Company’s liquidity position by reducing reliance on
short−term credit sensitive instruments (e.g., commercial paper and other unsecured short−term borrowings). Availability and cost of financing to the
Company can vary depending on market conditions, the volume of certain trading and lending activities, the Company’s credit ratings and the overall
availability of credit.
The Company has a portfolio approach for managing the unsecured debt issued by the parent company. This approach gives the Company flexibility to
manage the unsecured debt portfolio across maturities, currencies, investors and regions, taking into account market capacity and pricing. Down−lending to
subsidiaries is managed to ensure that intercompany borrowings mature before those of the parent company. Liquidity and funding policies recognize
potential constraints on the Company’s ability to transfer funds between regulated entities and the parent company.
During fiscal 2007, the Company’s long−term financing strategy was driven, in part, by its continued focus on improving its balance sheet strength
(evaluated through enhanced capital and liquidity positions), a significant factor in the maintenance of strong credit ratings. As a result, for fiscal 2007, a
principal amount of $53 billion of unsecured debt was issued (of which $22 billion of equity−linked and credit−linked notes were not considered to be a
component of the Company’s cash capital). Financing transactions were structured to ensure staggered maturities, thereby mitigating refinancing risk, and a
diversified investor base was targeted through sales to domestic as well as international institutional and retail clients. Unsecured debt issuance activity
resulted in a net increase in the long−term debt component of the cash capital portfolio of approximately $30 billion.
77
G-84
Table of Contents
Credit Ratings.
The Company’s reliance on external sources to finance a significant portion of its day−to−day operations makes access to global sources of financing
important. The cost and availability of unsecured financing generally are dependent on the Company’s short−term and long−term credit ratings. Factors that
are significant to the determination of the Company’s credit ratings or that otherwise affect its ability to raise short−term and long−term financing include
the Company’s level and volatility of earnings, relative positions in the markets in which it operates, geographic and product diversification, retention of key
personnel, risk profile, risk management policies, cash liquidity, capital structure, corporate lending credit risk, and legal and regulatory developments. A
deterioration in any of the previously mentioned factors or combination of these factors may lead rating agencies to downgrade the credit ratings of the
Company, thereby increasing the cost to the Company in obtaining unsecured funding. In addition, the Company’s debt ratings can have a significant impact
on certain trading revenues, particularly in those businesses where longer term counterparty performance is critical, such as OTC derivative transactions,
including credit derivatives and interest rate swaps.
In connection with certain OTC trading agreements and certain other agreements associated with the Institutional Securities business, the Company may be
required to provide additional collateral to certain counterparties in the event of a credit ratings downgrade. At November 30, 2007, the amount of additional
collateral that would be required in the event of a one−notch downgrade of the Company’s senior debt credit rating was approximately $746 million. Of this
amount, $677 million relates to bilateral arrangements between the Company and other parties where upon the downgrade of one party, the downgraded
party must deliver incremental collateral to the other. These bilateral downgrade arrangements are a risk management tool used extensively by the Company
as credit exposures are reduced if counterparties are downgraded.
As of January 22, 2008, the Company’s credit ratings were as follows:
Dominion Bond Rating Service Limited
Fitch Ratings(1)
Moody’s Investors Service(2)
Rating and Investment Information, Inc.(3)
Standard & Poor’s(4)
(1)
(2)
(3)
(4)
Commercial
Paper
Senior
Debt
R−1 (middle)
F1+
P−1
a−1+
A−1+
AA (low)
AA−
Aa3
AA
AA−
On December 19, 2006, Fitch Ratings changed the outlook on the Company’s senior debt ratings from Stable to Negative.
On November 8, 2007, Moody’s Investors Service changed the outlook on the Company’s senior debt ratings from Stable to Negative.
On December 20, 2007, Rating and Investment Information, Inc. changed the outlook on the Company’s senior debt from Stable to Negative.
On July 30, 2007, Standard & Poor’s upgraded the Company’s commercial paper rating from A−1 to A−1+ and upgraded the Company’s senior debt rating from A+ to AA−. On
November 8, 2007, Standard & Poor’s changed the outlook on the Company’s commercial paper and senior debt ratings from Stable to Negative. On December 19, 2007, Standard &
Poor’s placed the Company’s commercial paper and senior debt ratings on CreditWatch with Negative implications.
Off−Balance Sheet Arrangements with Unconsolidated Entities.
The Company enters into various arrangements with unconsolidated entities, including variable interest entities, primarily in connection with its Institutional
Securities businesses.
Institutional Securities Activities. The Company utilizes SPEs primarily in connection with securitization activities. The Company engages in
securitization activities related to commercial and residential mortgage loans, U.S. agency collateralized mortgage obligations, corporate bonds and loans,
municipal bonds and other types of financial assets. The Company may retain interests in the securitized financial assets as one or more tranches of the
securitization. These retained interests are included in the consolidated statements of financial condition at fair value. Any changes in the fair value of such
retained interests are recognized in the consolidated
78
G-85
Table of Contents
statements of income. Retained interests in securitized financial assets were approximately $5.3 billion at November 30, 2007, the majority of which were
related to residential mortgage loan, commercial mortgage loan and U.S. agency collateralized mortgage obligation securitization transactions. For further
information about the Company’s securitization activities, see Notes 2 and 5 to the consolidated financial statements as well as “Impact of Credit Market
Events” herein.
The Company has entered into liquidity facilities with SPEs and other counterparties, whereby the Company is required to make certain payments if losses
or defaults occur. The Company often may have recourse to the underlying assets held by the SPEs in the event payments are required under such liquidity
facilities (see Note 15 to the consolidated financial statements).
Guarantees. FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” (“FIN 45”), requires the Company to disclose information about its obligations under certain guarantee arrangements. FIN 45
defines guarantees as contracts and indemnification agreements that contingently require a guarantor to make payments to the guaranteed party based on
changes in an underlying measure (such as an interest or foreign exchange rate, a security or commodity price, an index, or the occurrence or
non−occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. FIN 45 also defines guarantees as contracts that
contingently require the guarantor to make payments to the guaranteed party based on another entity’s failure to perform under an agreement as well as
indirect guarantees of the indebtedness of others.
The table below summarizes certain information regarding derivative contracts, financial guarantees to third parties, market value guarantees and liquidity
facilities at November 30, 2007:
Maximum Potential Payout/Notional
Type of Guarantee
Notional amount of derivative contracts
Standby letters of credit and other financial
guarantees(1)
Market value guarantees
Liquidity facilities
(1)
Less than 1
Years to Maturity
1−3
3−5
Over 5
Total
Carrying
Amount
$ 999,552
$ 1,004,069
$ 2,546,374
$ 2,570,385
$ 7,120,380
$ 131,678
5,133
97
18,043
1,824
106
1,026
1,107
—
444
6,712
655
1,652
14,776
858
21,165
802
44
—
Collateral/
Recourse
$
59
2,396
145
20,281
Approximately $14 billion of standby letters of credit are also reflected in the “Commitments and Contractual Obligations” table below in the investment grade and non−investment
grade primary and secondary lending commitments and in the letters of credit issued by subsidiaries that are guaranteed by the Company.
In the ordinary course of business, the Company guarantees the debt and/or certain trading obligations (including obligations associated with derivatives,
foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and
are required by investors or trading counterparties. The activities of the subsidiaries covered by these guarantees (including any related debt or trading
obligations) are included in the Company’s consolidated financial statements.
See Note 15 to the consolidated financial statements for information on trust preferred securities, indemnities, exchange/clearinghouse member guarantees,
general partner guarantees, securitized asset guarantees and other guarantees.
79
G-86
Table of Contents
Commitments and Contractual Obligations.
The Company’s commitments associated with outstanding letters of credit, other financial guarantees, investment activities, and corporate lending and
financing arrangements as of November 30, 2007 are summarized below by period of expiration. Since commitments associated with letters of credit, other
financial guarantees, and lending and financing arrangements may expire unused, the amounts shown do not necessarily reflect the actual future cash
funding requirements:
Years to Maturity
Less
than 1
Letters of credit and other financial guarantees(1)
Letters of credit issued by subsidiaries that are guaranteed by the Company
Investment activities(2)
Investment grade primary lending commitments(3)(4)
Non−investment grade primary lending commitments(3)(4)
Investment grade secondary lending commitments(4)(5)
Non−investment grade secondary lending commitments(4)(5)
Commitments for secured lending transactions(6)
Commercial and residential mortgage−related commitments(7)
Other commitments(8)
Total
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
1−3
$10,790
197
318
19,656
789
—
81
3,824
5,680
964
$
4
1,186
238
5,791
1,072
—
27
4,095
—
19
$42,299
$12,432
3−5
Over 5
$
4
194
108
23,323
3,931
—
151
1,073
—
5
$28,789
$
Total
—
3,674
647
1,421
14,220
1,406
2,090
2,628
—
—
$ 10,798
5,251
1,311
50,191
20,012
1,406
2,349
11,620
5,680
988
$26,086
$109,606
This amount primarily represents the Company’s outstanding letters of credit and other financial guarantees issued by third−party banks to certain of the Company’s counterparties.
The Company is contingently liable for these letters of credit and other financial guarantees, which are primarily used to satisfy various collateral and margin requirements.
This amount represents commitments associated with the Company’s real estate, private equity and principal investment activities, which include alternative products.
The Company’s investment grade and non−investment grade primary lending commitments are made in connection with corporate lending and other business activities. Credit
ratings for commitments are determined by the Company’s Institutional Credit Department using methodologies generally consistent with those employed by external rating agencies.
Obligor credit ratings of BB+ or lower are considered non−investment grade.
The Company records these commitments at fair value within Financial instruments owned and Financial instruments sold, not yet purchased in the consolidated statement of
financial condition (see Note 3 to the consolidated financial statements).
This amount represents commitments associated with the Company’s Institutional Securities sales and trading activities.
This amount represents lending commitments extended by the Company to companies that are secured by real estate assets of the borrower. Loans made under these arrangements
typically are at variable rates and generally provide for over−collateralization based upon the creditworthiness of the borrower. This amount also includes commitments to
asset−backed commercial paper conduits of $1,246 million, which have maturities of less than four years.
These amounts represent the Company’s forward purchase contracts involving mortgage loans, residential mortgage loan commitments to individuals and residential home equity
lines of credit.
This amount includes commercial loan commitments to small businesses and commitments related to securities−based lending activities in connection with the Company’s Global
Wealth Management Group business.
At November 30, 2007, the Company had commitments to enter into reverse repurchase and repurchase agreements of approximately $107 billion and $26
billion, respectively.
80
G-87
Table of Contents
In the normal course of business, the Company enters into various contractual obligations that may require future cash payments. Contractual obligations at
November 30, 2007 include long−term borrowings, operating leases and purchase obligations. The Company’s future cash payments associated with its
contractual obligations as of November 30, 2007 are summarized below:
Payments Due in:
Operating leases – office facilities(2)
Operating leases – equipment(2)
Purchase obligations(3)
Total
(1)
(2)
(3)
Fiscal
2008
Fiscal
2009−2010
Fiscal
2011−2012
Thereafter
$30,808
549
650
268
$ 43,081
907
569
107
$ 39,701
676
210
8
$ 77,034
2,732
123
—
$190,624
4,864
1,552
383
$32,275
$ 44,664
$ 40,595
$ 79,889
$197,423
Total
See Note 13 to the consolidated financial statements.
See Note 15 to the consolidated financial statements.
Purchase obligations for goods and services include payments for, among other things, consulting, outsourcing, advertising, sponsorship, and computer and telecommunications
maintenance agreements. Purchase obligations at November 30, 2007 reflect the minimum contractual obligation under legally enforceable contracts with contract terms that are both
fixed and determinable. These amounts exclude obligations for goods and services that already have been incurred and are reflected on the Company’s consolidated statement of
financial condition.
Regulatory Requirements.
On April 1, 2007, the Company merged Morgan Stanley DW Inc. (“MSDWI”) into Morgan Stanley & Co. Incorporated (“MS&Co”). Upon completion of
the merger, the surviving entity, MS&Co., became the Company’s principal U.S. broker−dealer. MS&Co. is a registered broker−dealer and registered
futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the SEC, the Financial Industry Regulatory Authority
and the Commodity Futures Trading Commission. MS&Co. has consistently operated in excess of these requirements. MS&Co.’s net capital totaled $6,673
million at November 30, 2007, which exceeded the amount required by $4,950 million. Morgan Stanley & Co. International plc (“MSIP”), a London−based
broker−dealer subsidiary, is subject to the capital requirements of the Financial Services Authority, and Morgan Stanley Japan Securities Co., Ltd.
(“MSJS”), a Tokyo−based broker−dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSJS consistently
operated in excess of their respective regulatory capital requirements.
Under regulatory capital requirements adopted by the FDIC and other bank regulatory agencies, FDIC−insured financial institutions must maintain (a) 3%
to 4% of Tier 1 capital, as defined, to average assets (“leverage ratio”), (b) 4% of Tier 1 capital, as defined, to risk−weighted assets (“Tier 1 risk−weighted
capital ratio”) and (c) 8% of total capital, as defined, to risk−weighted assets (“total risk−weighted capital ratio”). At November 30, 2007, the leverage ratio,
Tier 1 risk−weighted capital ratio and total risk−weighted capital ratio of each of the Company’s FDIC−insured financial institutions exceeded these
regulatory minimums.
Certain other U.S. and non−U.S. subsidiaries are subject to various securities, commodities and banking regulations, and capital adequacy requirements
promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated in excess of
their local capital adequacy requirements.
Morgan Stanley Derivative Products Inc. (“MSDP”) and Cournot Financial Products LLC (“Cournot”), which are triple−A rated derivative products
subsidiaries, maintain certain operating restrictions that have been reviewed by various rating agencies. Both entities are operated such that creditors of the
Company should not expect to have
81
G-88
Table of Contents
any claims on either the assets of Cournot or the assets of MSDP, unless and until the obligations of such entity to its own creditors are satisfied in full.
Creditors of Cournot or MSDP, respectively, should not expect to have any claims on the assets of the Company or any of its affiliates, other than the
respective assets of Cournot or MSDP.
The Company is a consolidated supervised entity (“CSE”) as defined by the SEC. As such, the Company is subject to group−wide supervision and
examination by the SEC and to minimum capital requirements on a consolidated basis. During fiscal 2007, the Company was in compliance with CSE
capital requirements.
MS&Co. is required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit
risk standards of Appendix E of Rule 15c3−1. MS&Co. is also required to notify the SEC in the event that its tentative net capital is less than $5 billion. As
of November 30, 2007, MS&Co. had tentative net capital in excess of the minimum and the notification requirements.
Effects of Inflation and Changes in Foreign Exchange Rates.
The Company’s assets to a large extent are liquid in nature and, therefore, are not significantly affected by inflation, although inflation may result in
increases in the Company’s expenses, which may not be readily recoverable in the price of services offered. To the extent inflation results in rising interest
rates and has other adverse effects upon the securities markets and upon the value of financial instruments, it may adversely affect the Company’s financial
position and profitability.
A significant portion of the Company’s business is conducted in currencies other than the U.S. dollar, and changes in foreign exchange rates relative to the
U.S. dollar can therefore affect the value of non−U.S. dollar net assets, revenues and expenses. Potential exposures as a result of these fluctuations in
currencies are closely monitored, and, where cost−justified, strategies are adopted that are designed to reduce the impact of these fluctuations on the
Company’s financial performance. These strategies may include the financing of non−U.S. dollar assets with direct or swap−based borrowings in the same
currency and the use of currency forward contracts or the spot market in various hedging transactions related to net assets, revenues, expenses or cash flows.
82
G-89
Table of Contents
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
Risk Management.
Risk Management Policy and Control Structure.
Risk is an inherent part of the Company’s business and activities. The Company’s ability to properly and effectively identify, assess, monitor and manage
each of the various types of risk involved in its activities is critical to its soundness and profitability. The Company’s broad−based portfolio of business
activities helps reduce the impact that volatility in any particular area or related areas may have on its net revenues as a whole. The Company seeks to
identify, assess, monitor and manage, in accordance with defined policies and procedures, the following principal risks involved in the Company’s business
activities: market, credit, operational, legal, and liquidity and funding risk. Liquidity and funding risk is discussed in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Part II, Item 7. The Company’s currency exposure relating
to its net monetary investments in non−U.S. dollar functional currency subsidiaries is discussed in Note 16 to the consolidated financial statements.
The cornerstone of the Company’s risk management philosophy is protection of the Company’s franchise, reputation and financial standing. The
Company’s risk management philosophy is based on the following principles: comprehensiveness, independence, accountability, defined risk tolerance and
transparency. Given the importance of effective risk management to the Company’s reputation, senior management requires thorough and frequent
communication and appropriate escalation of risk matters.
Risk management at the Company requires independent Company−level oversight, accountability of the Company’s business segments, constant
communication, judgment, and knowledge of specialized products and markets. The Company’s senior management takes an active role in the
identification, assessment and management of various risks at both the Company and business segment level. In recognition of the increasingly varied and
complex nature of the global financial services business, the Company’s risk management philosophy, with its attendant policies, procedures and
methodologies, is evolutionary in nature and subject to ongoing review and modification.
The nature of the Company’s risks, coupled with this risk management philosophy, informs the Company’s risk governance structure. The Company’s risk
governance structure includes the Firm Risk Committee, the Capital Structure and Strategic Transactions Committee, the Chief Risk Officer, the Internal
Audit Department, independent control groups, and various other risk control managers, committees and groups located within and across business
segments.
The Firm Risk Committee, composed of the Company’s most senior officers, oversees the Company’s risk management structure. The Firm Risk
Committee’s responsibilities include oversight of the Company’s risk management principles, procedures and limits, and the monitoring of material
financial, operational and franchise risks. The Firm Risk Committee is overseen by the Audit Committee of the Board of Directors (the “Audit Committee”).
The Capital Structure and Strategic Transactions Committee (the “Capital Committee”) reviews strategic transactions for the Company and significant
changes to the Company’s capital structure. The Capital Committee’s responsibilities include reviewing measures of capital and evaluating capital resources
relative to the Company’s risk profile and strategy.
The Chief Risk Officer, a member of the Firm Risk Committee, oversees compliance with Company risk limits; approves certain excessions of Company
risk limits; reviews material market, credit and operational risks; and reviews results of risk management processes with the Audit Committee.
The Internal Audit Department provides independent risk and control assessment and reports to the Audit Committee and administratively to the Chief
Legal Officer. The Internal Audit Department examines the Company’s operational and control environment and conducts audits designed to cover all
major risk categories.
83
G-90
Table of Contents
The Market Risk, Credit Risk, Operational Risk, Financial Control, Treasury, and Legal and Compliance Departments (collectively, the “Company Control
Groups”), which are all independent of the Company’s business units, assist senior management and the Firm Risk Committee in monitoring and controlling
the Company’s risk through a number of control processes. The Company is committed to employing qualified personnel with appropriate expertise in each
of its various administrative and business areas to implement effectively the Company’s risk management and monitoring systems and processes.
Each business segment has a risk committee that is responsible for ensuring that the business segment, as applicable, adheres to established limits for
market, credit, operational and other risks; implements risk measurement, monitoring, and management policies and procedures that are consistent with the
risk framework established by the Firm Risk Committee; and reviews, on a periodic basis, its aggregate risk exposures, risk exception experience, and the
efficacy of its risk identification, measurement, monitoring and management policies and procedures, and related controls.
Each of the Company’s business segments also has designated operations officers, committees and groups, including operations and information technology
groups (collectively, “Segment Control Groups” and, together with the Company Control Groups, the “Control Groups”) to manage and monitor specific
risks and report to the business segment risk committee. The Control Groups work together to review the risk monitoring and risk management policies and
procedures relating to, among other things, the business segment’s market, credit and operational risk profile, sales practices, reputation, legal
enforceability, and operational and technological risks. Participation by the senior officers of the Control Groups helps ensure that risk policies and
procedures, exceptions to risk limits, new products and business ventures, and transactions with risk elements undergo a thorough review.
The following is a discussion of the Company’s risk management policies and procedures for its principal risks (other than funding and liquidity risk). The
discussion focuses on the Company’s securities activities (primarily its institutional trading activities) and corporate lending and related activities. The
Company believes that these activities generate a substantial portion of its principal risks. This discussion and the estimated amounts of the Company’s
market risk exposure generated by the Company’s statistical analyses are forward−looking statements. However, the analyses used to assess such risks are
not predictions of future events, and actual results may vary significantly from such analyses due to events in the markets in which the Company operates
and certain other factors described below.
Market Risk.
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied volatilities (the price volatility of the underlying
instrument imputed from option prices), correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio.
Generally, the Company incurs market risk as a result of trading and client facilitation activities, principally within the Institutional Securities business
where the substantial majority of the Company’s Value−at−Risk (“VaR”) for market risk exposures is generated. In addition, the Company incurs
trading−related market risk within the Global Wealth Management Group. Asset Management incurs non−trading market risk primarily from capital
investments in funds and investments in private equity vehicles.
Sound market risk management is an integral part of the Company’s culture. The various business units and trading desks are responsible for ensuring that
market risk exposures are well−managed and prudent. The Control Groups help ensure that these risks are measured and closely monitored and are made
transparent to senior management. The Market Risk Department is responsible for ensuring transparency of material market risks, monitoring compliance
with established limits, and escalating risk concentrations to appropriate senior management. To execute these responsibilities, the Market Risk Department
monitors the Company’s risk against limits on aggregate risk exposures, performs a variety of risk analyses, routinely reports risk summaries, and maintains
the Company’s VaR system. A variety of limits is designed to control price and market liquidity
84
G-91
Table of Contents
risk. Market risk is monitored through various measures: statistically (using VaR and related analytical measures); by measures of position sensitivity; and
through routine stress testing and scenario analyses conducted by the Market Risk Department in collaboration with the business units. The material risks
identified by these processes are summarized in reports produced by the Market Risk Department that are circulated to and discussed with senior
management.
Subprime and Related Risks.
During 2007, asset−backed products referencing subprime consumer mortgages experienced a significant increase in expected default rates, resulting in a
dramatic reduction in asset prices and market liquidity. Although other markets have also experienced periods of significant illiquidity in the past, the
combined magnitude and velocity of price depreciation, as well as the continuing nature of the event, place it among the most significant market shocks ever
realized. While such events may recur in the future, the timing and magnitude of recurrence are difficult to predict.
Events of this magnitude are outside of the loss estimates forecast by VaR models and are more commonly measured by alternative risk measures such as
stress tests and scenario analyses. However, the market moves associated with the subprime events of 2007 were significantly greater than those included in
the Company’s stress tests and scenario analyses at that time. The Company has since enhanced its stress test and scenario analyses to better incorporate the
levels of price volatility realized during the second half of fiscal 2007. Stress tests and scenario analyses represent estimates of future significant events.
Actual market moves may continue to be more dramatic than the estimates included in the Company’s VaR, stress tests and scenario analyses. Limitations
to VaR models are discussed further in “VaR Methodology, Assumptions and Limitations” below.
Sales and Trading and Related Activities.
Primary Market Risk Exposures and Market Risk Management. During fiscal 2007, the Company had exposures to a wide range of interest rates, equity
prices, foreign exchange rates and commodity prices—and the associated implied volatilities and spreads—related to the global markets in which it
conducts its trading activities.
The Company is exposed to interest rate and credit spread risk as a result of its market−making activities and proprietary trading in interest rate sensitive
financial instruments (e.g., risk arising from changes in the level or implied volatility of interest rates, the timing of mortgage prepayments, the shape of the
yield curve and credit spreads). The activities from which those exposures arise and the markets in which the Company is active include, but are not limited
to, the following: emerging market corporate and government debt, non−investment grade and distressed corporate debt, investment grade corporate debt
and asset−backed debt (including mortgage−related securities).
The Company is exposed to equity price and implied volatility risk as a result of making markets in equity securities and derivatives and maintaining
proprietary positions (including positions in non−public entities). Positions in non−public entities may include, but are not limited to, exposures to private
equity, venture capital, private partnerships, real estate funds and other funds. Such positions are less liquid, have longer investment horizons and are more
difficult to hedge than listed equities.
The Company is exposed to foreign exchange rate and implied volatility risk as a result of making markets in foreign currencies and foreign currency
derivatives, from maintaining foreign exchange positions and from holding non U.S. dollar−denominated financial instruments. The Company is exposed to
commodity price and implied volatility risk as a result of market−making activities and maintaining positions in physical commodities (such as crude and
refined oil products, natural gas, electricity, and precious and base metals) and related derivatives. Commodity exposures are subject to periods of high price
volatility as a result of changes in supply and demand. These changes can be caused by weather conditions; physical production, transportation and storage
issues; or geopolitical and other events that affect the available supply and level of demand for these commodities.
85
G-92
Table of Contents
The Company manages its trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures
and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative
products (e.g., futures, forwards, swaps and options). Hedging activities may not always provide effective mitigation against trading losses due to
differences in the terms, specific characteristics or other basis risks that may exist between the hedge instrument and the risk exposure that is being hedged.
The Company manages the market risk associated with its trading activities on a Company−wide basis, on a worldwide trading division level and on an
individual product basis. The Company manages and monitors its market risk exposures in such a way as to maintain a portfolio that the Company believes
is well−diversified in the aggregate with respect to market risk factors and that reflects the Company’s aggregate risk tolerance as established by the
Company’s senior management.
Aggregate market risk limits have been approved for the Company and for its major trading divisions worldwide (equity and fixed income, which includes
interest rate products, credit products, foreign exchange and commodities). Additional market risk limits are assigned to trading desks and, as appropriate,
products and regions. Trading division risk managers, desk risk managers, traders and the Market Risk Department monitor market risk measures against
limits in accordance with policies set by senior management.
The Market Risk Department independently reviews the Company’s trading portfolios on a regular basis from a market risk perspective utilizing VaR and
other quantitative and qualitative risk measures and analyses. The Company’s trading businesses and the Market Risk Department also use, as appropriate,
measures such as sensitivity to changes in interest rates, prices, implied volatilities and time decay to monitor and report market risk exposures.
Net exposure, defined as the potential loss to the Company over a period of time in the event of default of a referenced asset, assuming zero recovery, is one
key risk measure the Company employs to standardize the aggregation of market risk exposures across cash and derivative products. Stress testing, which
measures the impact on the value of existing portfolios of specified changes in market factors for certain products, is performed periodically and is reviewed
by trading division risk managers, desk risk managers and the Market Risk Department. The Market Risk Department also conducts scenario analyses,
which estimate the Company’s revenue sensitivity to a set of specific, predefined market and geopolitical events.
Value−at−Risk (VaR). The Company uses the statistical technique known as VaR as one of the tools used to measure, monitor and review the market risk
exposures of its trading portfolios. The Market Risk Department calculates and distributes daily VaR−based risk measures to various levels of management.
VaR Methodology, Assumptions and Limitations. The Company estimates VaR using a model based on historical simulation for major market risk
factors and Monte Carlo simulation for name−specific risk in certain equity and fixed income exposures. Historical simulation involves constructing a
distribution of hypothetical daily changes in the value of trading portfolios based on two sets of inputs: historical observation of daily changes in key market
indices or other market factors (“market risk factors”); and information on the sensitivity of the portfolio values to these market risk factor changes. The
Company’s VaR model uses approximately four years of historical data to characterize potential changes in market risk factors. The Company’s
95%/one−day VaR corresponds to the unrealized loss in portfolio value that, based on historically observed market risk factor movements, would have been
exceeded with a frequency of 5%, or five times in every 100 trading days, if the portfolio were held constant for one day.
The Company’s VaR model generally takes into account linear and non−linear exposures to price risk, interest rate risk and credit spread risk and linear
exposures to implied volatility risks. Market risks that are incorporated in the VaR model include equity and commodity prices, interest rates, credit spreads,
foreign exchange rates and associated implied volatilities. The VaR model also captures certain correlation risks associated with portfolio credit derivatives,
as well as certain basis risks between corporate debt and related credit derivatives. As a supplement to the use of historical simulation for major market risk
factors, the Company’s VaR model uses
86
G-93
Table of Contents
Monte Carlo simulation to capture name−specific risk in equities and credit products (i.e., corporate bonds, loans, and credit derivatives).
The Company’s VaR models evolve over time in response to changes in the composition of trading portfolios and to improvements in modeling techniques
and systems capabilities. The Company is committed to continuous review and enhancement of VaR methodologies and assumptions in order to capture
evolving risks associated with changes in market structure and dynamics. As part of regular process improvement, additional systematic and name−specific
risk factors may be added to improve the VaR model’s ability to more accurately estimate risks to specific asset classes or industry sectors. In response to
increased levels of market volatility realized during the second half of fiscal 2007, the Company has reviewed the appropriateness of the implementation of
its VaR models and has made certain changes to more accurately capture risks generated by certain fixed income products. These changes include additional
historical time series that provide broader product coverage of subprime consumer mortgage products as well as updated mappings of risk exposures to
historical price time series.
Among their benefits, VaR models permit estimation of a portfolio’s aggregate market risk exposure, incorporating a range of varied market risks; reflect
risk reduction due to portfolio diversification or hedging activities; and can cover a wide range of portfolio assets. However, VaR risk measures should be
interpreted carefully in light of the methodology’s limitations, which include the following: past changes in market risk factors may not always yield
accurate predictions of the distributions and correlations of future market movements; changes in portfolio value in response to market movements
(especially for complex derivative portfolios) may differ from the responses calculated by a VaR model; VaR using a one−day time horizon does not fully
capture the market risk of positions that cannot be liquidated or hedged within one day; the historical market risk factor data used for VaR estimation may
provide only limited insight into losses that could be incurred under market conditions that are unusual relative to the historical period used in estimating the
VaR; and published VaR results reflect past trading positions while future risk depends on future positions. VaR is most appropriate as a risk measure for
trading positions in liquid financial markets and will understate the risk associated with severe events, such as periods of extreme illiquidity. The Company
is aware of these and other limitations and, therefore, uses VaR as only one component in its risk management oversight process. As explained above, this
process also incorporates stress testing and scenario analyses and extensive risk monitoring, analysis, and control at the trading desk, division and Company
levels.
VaR for Fiscal 2007. The table below presents the Company’s Aggregate (Trading and Non−trading), Trading and Non−trading VaR for each of the
Company’s primary market risk exposures at November 30, 2007 and November 30, 2006, incorporating substantially all financial instruments generating
market risk that are managed by the Company’s trading businesses. This measure of VaR incorporates most of the Company’s trading−related market risks.
However, a small proportion of trading positions generating market risk is not included in VaR, and the modeling of the risk characteristics of some
positions relies upon approximations that, under certain circumstances, could produce significantly different VaR results from those produced using more
precise measures. For example, risks associated with residential mortgage−backed securities have been approximated as it is difficult to capture precisely
the relevant microeconomic factors that affect mortgage prices within a VaR context.
Aggregate Trading and Non−trading VaR also incorporates (a) the interest rate risk generated by funding liabilities related to institutional trading positions,
(b) public company equity positions recorded as investments by the Company and (c) corporate loan exposures that are awaiting distribution to the market.
Investments made by the Company that are not publicly traded are not reflected in the VaR results reported below. Aggregate Trading and Non−trading
VaR also excludes certain funding liabilities primarily related to fixed and other non−trading assets as well as the credit spread risk generated by the
Company’s funding liabilities. As of November 30, 2007, the notional amount of funding liabilities related to non−trading assets (including premises,
equipment and software, goodwill, deferred tax assets and intangible assets) was approximately $7.8 billion, with a duration of approximately 10 years. The
credit spread risk sensitivity generated by the Company’s funding
87
G-94
Table of Contents
liabilitiesth(i.e., those funding both trading and non−trading assets) corresponded to an increase in value of approximately $78 million for each +1 basis point
(or 1/100 of a percentage point) widening in the Company’s credit spread level as of November 30, 2007.
Since the VaR statistics reported below are estimates based on historical position and market data, VaR should not be viewed as predictive of the
Company’s future revenues or financial performance or of its ability to monitor and manage risk. There can be no assurance that the Company’s actual
losses on a particular day will not exceed the VaR amounts indicated below or that such losses will not occur more than five times in 100 trading days. VaR
does not predict the magnitude of losses which, should they occur, may be significantly greater than the VaR amount.
The table below presents 95%/one−day VaR for each of the Company’s primary risk exposures and on an aggregate basis at November 30, 2007 and
November 30, 2006.
Aggregate
(Trading and Non−trading)
95%/One−Day VaR
at November 30,
2007
2006
Table 1: 95% Total VaR
Primary Market Risk Category
Interest rate and credit spread
Equity price
Foreign exchange rate
Commodity price
$
Subtotal
Less diversification benefit(1)
Total VaR
(1)
52
40
24
34
$
150
67
$
41
58
9
31
$
139
50
83
$
89
Trading
Non−trading
95%/One−Day VaR
at November 30,
2007
2006
95%/One−Day VaR
at November 30,
2007
2006
45
39
25
34
$
143
65
$
78
38
55
9
31
$
133
48
$
85
33
4
1
—
$
13
5
—
—
38
5
$
33
18
3
$
15
Diversification benefit equals the difference between Total VaR and the sum of the VaRs for the four risk categories. This benefit arises because the simulated one−day losses for
each of the four primary market risk categories occur on different days; similar diversification benefits also are taken into account within each category.
The Company’s Aggregate VaR at November 30, 2007 was $83 million compared with $89 million at November 30, 2006. The decrease in Aggregate VaR
and Trading VaR at year−end was driven primarily by a decrease in equity exposures toward the end of the fiscal year.
The Company’s Trading VaR at November 30, 2007 was $78 million compared with $85 million at November 30, 2006. The decrease in Trading VaR at
year−end was driven primarily by a decrease in equity price VaR, partially mitigated by increases in foreign exchange rate VaR and interest rate and credit
spread VaR. The increase in foreign exchange rate VaR was driven by increased exposure to foreign currencies. The increase in interest rate and credit
spread VaR was driven primarily by two factors. First, at November 30, 2007 the Company reclassified the investment portfolio of its bank subsidiaries
from securities available for sale to Financial instruments owned in the consolidated statement of financial condition. (The total notional amount of
reclassified assets at November 30, 2007 was $8.1 billion, consisting entirely of ABS and residential mortgage−backed securities). Second, during fiscal
2007, the U.S. subprime market experienced a significant increase in price volatility. This increase in volatility drove an increase in VaR with respect to the
Company’s exposure to securities that reference subprime mortgage pools and related financial instruments, whose change in value is modeled as a function
of the underlying securities.
Non−trading VaR at November 30, 2007 increased to $33 million from $15 million at November 30, 2006 primarily due to an increase in interest rate and
credit spread non−trading VaR resulting from an increase in non−trading loan assets.
88
G-95
Table of Contents
The Company views average Trading VaR over the fiscal year as more representative of trends in the business than VaR at any single point in time. Table 2
below, which presents the high, low and average 95%/one−day Trading VaR during fiscal 2007 and fiscal 2006, represents substantially all of the
Company’s trading activities. Certain market risks included in the year−end Aggregate VaR discussed above are excluded from these measures (e.g., equity
price risk in public company equity positions recorded as principal investments by the Company and certain funding liabilities related to trading positions).
Average Trading VaR for fiscal 2007 increased to $87 million from $60 million in fiscal 2006, driven by increases across all four primary market risk
categories. Average Total VaR for fiscal 2007 increased to $92 million from $67 million in fiscal 2006, which was also driven by increases across all four
primary market risk categories. The increase in interest rate and credit spread VaR was predominately driven by increased volatility in securitized product
and corporate credit markets, which resulted in a higher VaR despite a reduction in risk exposures during the fiscal year. The increase in equity price VaR
was primarily driven by increased equity exposures. The increase in foreign exchange rate VaR was driven by increased exposure to foreign currencies. The
increase in commodity price VaR was predominately driven by increased exposure to electricity and natural gas products.
Daily 95%/One−Day VaR
Daily 95%/One−Day VaR
for Fiscal 2007
for Fiscal 2006
High
Low
Average
High
Low
Average
Table 2: 95% High/Low/Average Trading VaR
Equity price
Commodity price
Trading VaR
Non−trading VaR
Total VaR
$
88
61
33
48
108
61
$ 123
$ 34
29
10
28
69
11
$ 70
$
$
46
43
18
37
87
22
92
$
$
48
55
23
43
85
37
91
$ 29
21
5
23
49
10
$ 54
$
35
28
9
30
60
22
67
$
VaR Statistics under Varying Assumptions.
VaR statistics are not readily comparable across firms because of differences in the breadth of products included in each firm’s VaR model, in the statistical
assumptions made when simulating changes in market factors, and in the methods used to approximate portfolio revaluations under the simulated market
conditions. These differences can result in materially different VaR estimates for similar portfolios. As a result, VaR statistics are more reliable and relevant
when used as indicators of trends in risk taking within a firm rather than as a basis for inferring differences in risk taking across firms. Table 3 below
presents the VaR statistics that would result if the Company were to adopt alternative parameters for its calculations, such as the reported confidence level
(95% versus 99%) for the VaR statistic or a shorter historical time series (four years versus one year) for market data upon which it bases its simulations:
Table 3: Average 95% and 99% Trading VaR
with Four−Year/One−Year Historical Time Series
Equity price
Commodity price
Trading VaR
Average 95%/One−Day VaR
Average 99%/One−Day VaR
for Fiscal 2007
for Fiscal 2007
Four−Year
One−Year
Four−Year
One−Year
Factor History
Factor History
Factor History
Factor History
$
46
43
18
37
87
$
$
$
46
49
18
37
90
$
$
74
65
26
57
127
$
$
72
81
28
52
132
In addition, if the Company were to report Trading VaR (using a four−year historical time series) with respect to a 10−day holding period, the Company’s
95% and 99% Average Trading VaR for fiscal 2007 would have been $274 million and $402 million, respectively.
89
G-96
Table of Contents
Distribution of VaR Statistics and Net Revenues for Fiscal 2007.
As shown in Table 2 above, the Company’s average 95%/one−day Trading VaR for fiscal 2007 was $87 million. The histogram below presents the
distribution of the Company’s daily 95%/one−day Trading VaR for fiscal 2007. The most frequently occurring value was between $86 million and $89
million, while for approximately 90% of trading days during the fiscal year, VaR ranged between $71 million and $98 million.
One method of evaluating the reasonableness of the Company’s VaR model as a measure of the Company’s potential volatility of net revenue is to compare
the VaR with actual trading revenue. Assuming no intra−day trading, for a 95%/one−day VaR, the expected number of times that trading losses should
exceed VaR during the fiscal year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the accuracy of the VaR model
could be questioned. Accordingly, the Company evaluates the reasonableness of its VaR model by comparing the potential declines in portfolio values
generated by the model with actual trading results. For days where losses exceed the 95% or 99% VaR statistic, the Company examines the drivers of
trading losses to evaluate the VaR model’s accuracy relative to realized trading results.
The Company incurred daily trading losses in excess of the 95%/one−day Trading VaR on 15 days during fiscal 2007. These losses were incurred during a
period of exceptionally high volatility across equity, corporate credit and securitized product markets. Since the Company bases its VaR calculations on four
years of equally weighted historical data, clustering of VaR exceptions should occur during periods of exceptionally high market turbulence. An
examination of the 15 outliers incurred during the fiscal year revealed that these losses occurred on days when markets experienced unusually high price
volatility.
Over the longer term, trading losses are expected to exceed VaR an average of three times per quarter at the 95% confidence level. The Company bases its
VaR calculations on the long−term (or unconditional) distribution and, therefore, evaluates its risk from a longer term perspective, which avoids
understating risk during periods of relatively lower volatility in the market.
90
G-97
Table of Contents
The histogram below shows the distribution of daily net trading revenue during fiscal 2007 for the Company’s trading businesses (including net interest and
non−agency commissions but excluding certain non−trading revenues such as primary, fee−based and prime brokerage revenue credited to the trading
businesses). During fiscal 2007, the Company experienced net trading losses on 34 days. These loss days were driven predominately by increased market
volatility realized during the second half of the fiscal year.
Credit Risk.
Credit risk refers to the risk of loss arising from borrower or counterparty default when a borrower, counterparty or obligor does not meet its financial
obligations. The Company is exposed to two distinct types of credit risk in its businesses. The Company incurs significant, “single−name” credit risk
exposure through the Institutional Securities business and to a lesser extent through its commercial lending activity in its Global Wealth Management
Group. This type of risk requires credit analysis of specific counterparties, both initially and on an ongoing basis. The Company also incurs “individual
consumer” credit risk in the Global Wealth Management Group business through margin and non−purpose loans to individual investors, which are
collateralized by securities.
The Company has structured its credit risk management framework to reflect that each of these businesses generates unique credit risks that are
appropriately managed discretely. The Institutional Credit Department (“Institutional Credit”) evaluates and monitors credit risk exposure for the
Institutional Securities business. Institutional Credit is responsible for ensuring transparency of material credit risks, ensuring compliance with established
limits, approving material extensions of credit, and escalating risk concentrations to appropriate senior management. Credit risk exposure in the Global
Wealth Management Group business segment is managed through various credit risk committees, whose membership includes Institutional Credit. The
Global Wealth Management Group Risk Management Department is responsible for monitoring, measuring and analyzing credit risk exposures, including
margin loans and credit sensitive, higher risk transactions.
91
G-98
Table of Contents
Institutional Securities Activities.
Corporate Lending. In connection with certain of its Institutional Securities business activities, the Company provides loans or lending commitments
(including bridge financing) to selected clients. Such loans and commitments can generally be classified as either “event−driven” or “relationship−driven.”
“Event−driven” loans and commitments refer to activities associated with a particular event or transaction, such as to support client merger, acquisition or
recapitalization transactions. The commitments associated with these “event−driven” activities may not be indicative of the Company’s actual funding
requirements since funding is contingent upon a proposed transaction being completed. In addition, the borrower may not fully utilize the commitment or
the Company’s portion of the commitment may be reduced through the syndication process. The borrower’s ability to draw on the commitment is also
subject to certain terms and conditions, among other factors. The borrowers of “event−driven” lending transactions may be investment grade or
non−investment grade. The Company risk manages its exposures in connection with “event−driven” transactions through various means, including
syndication, distribution and/or hedging.
“Relationship−driven” loans and commitments are generally made to expand business relationships with select clients. The commitments associated with
“relationship−driven” activities may not be indicative of the Company’s actual funding requirements, as the commitment may expire unused or the borrower
may not fully utilize the commitment. The borrowers of “relationship−driven” lending transactions may be investment grade or non−investment grade. The
Company may hedge its exposures in connection with “relationship−driven” transactions.
Securitized Products. The Company also extends loans and lending commitments to clients that are secured by assets of the borrower and generally
provide for over−collateralization, including commercial real estate, loans secured by loan pools, corporate and operating company loans, and secured lines
of revolving credit. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms
of the loan agreement and a decline in collateral value.
Other. In addition to the activities performed by Institutional Credit, there are credit risks managed by various business areas within Institutional
Securities. For example, certain businesses with heightened settlement risk monitor compliance with established settlement risk limits. Certain risk
management activities as they pertain to establishing appropriate collateral amounts for the Company’s prime brokerage and securitized product businesses
are primarily monitored within those areas in that they determine the appropriate collateral level for each strategy or position. In addition, a collateral
management group monitors collateral levels against requirements and oversees the administration of the collateral function.
Derivative Contracts. In the normal course of business, the Company enters into a variety of derivative contracts related to financial instruments and
commodities. The Company uses these instruments for trading and investment purposes, as well as for asset and liability management. These instruments
generally represent future commitments to swap interest payment streams, exchange currencies, or purchase or sell commodities and other financial
instruments on specific terms at specified future dates. Many of these products have maturities that do not extend beyond one year, although swaps, options
and equity warrants typically have longer maturities.
The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the failure of a counterparty to
perform according to the terms of the contract. The Company’s exposure to credit risk at any point in time is represented by the fair value of the derivative
contracts reported as assets. The fair value of derivatives represents the amount at which the derivative could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale, and is further described in Note 2 to the consolidated financial statements. Future changes in
interest rates, foreign currency exchange rates, or the fair values of the financial instruments, commodities, or indices underlying these contracts ultimately
may result in cash settlements exceeding fair value amounts recognized in the consolidated statements of financial condition.
92
G-99
Table of Contents
Analyzing Credit Risk. Credit risk management takes place at the transaction, counterparty and portfolio levels. In order to help protect the Company
from losses resulting from these activities, Institutional Credit analyzes all material lending and derivative transactions and ensures that the creditworthiness
of the Company’s counterparties and borrowers is reviewed regularly and that credit exposure is actively monitored and managed. Institutional Credit
assigns obligor credit ratings to the Company’s counterparties and borrowers. These credit ratings are intended to assess a counterparty’s probability of
default and are derived using methodologies generally consistent with those employed by external rating agencies. Credit ratings of “BB+” or below are
considered non−investment grade. Additionally, for lending transactions, Institutional Credit evaluates the relative position of the Company’s particular
obligation in the borrower’s capital structure and relative recovery prospects, as well as collateral (if applicable) and other structural elements of the
particular transaction. The Company has credit guidelines that limit potential credit exposure to any one borrower or counterparty and to aggregates of
borrowers or counterparties. Institutional Credit administers these limits and monitors and reports credit exposure relative to limits.
Risk Mitigation. The Company may seek to mitigate credit risk from its lending and derivatives transactions in multiple ways. At the transaction level, the
Company seeks to mitigate risk through management of key risk elements such as size, tenor, seniority and collateral. The Company actively hedges its
lending and derivatives exposure through various financial instruments which may include single name, portfolio and structured credit derivatives.
Additionally, the Company may sell, assign or sub−participate funded loans and lending commitments to other financial institutions in the primary and
secondary loan market. In connection with its derivatives trading activities, the Company may enter into master netting agreements and collateral
arrangements with counterparties. These agreements may provide the Company with the ability to offset a counterparty’s rights and obligations, request
additional collateral when necessary or liquidate the collateral in the event of counterparty default.
Credit Exposure−Corporate Lending. The following table presents information about the Company’s corporate loans and commitments as of
November 30, 2007. The “total corporate lending exposure” column includes both lending commitments and funded loans. Funded loans represent loans
that have been drawn by the borrower and that were outstanding as of November 30, 2007. Lending commitments represent legally binding obligations to
provide funding to clients as of November 30, 2007 for both “relationship−driven” and “event−driven” transactions. As discussed above, these loans and
commitments have varying terms, may be senior or subordinated, may be secured or unsecured, are generally contingent upon representations, warranties
and contractual conditions applicable to the borrower, and may be syndicated, traded or hedged by the Company.
93
G-100
Table of Contents
At November 30, 2007 and November 30, 2006, the aggregate amount of investment grade loans was $13.0 billion and $6.4 billion, respectively, and the
aggregate amount of non−investment grade loans was $10.9 billion and $3.4 billion, respectively. At November 30, 2007 and November 30, 2006, the
aggregate amount of lending commitments outstanding was $70.2 billion and $53.5 billion, respectively. In connection with these business activities (which
include corporate funded loans and lending commitments), the Company had hedges with a notional amount of $37.6 billion and $26.5 billion at
November 30, 2007 and November 30, 2006, respectively. The table below shows the Company’s credit exposure from its corporate lending positions and
commitments as of November 30, 2007. Since commitments associated with these business activities may expire unused, they do not necessarily reflect the
actual future cash funding requirements:
Corporate Lending Commitments and Funded Loans
Years to Maturity
Credit Rating(1)
Less than 1
AAA
AA
A
BBB
$
Investment grade
Non−investment grade
Total
(1)
(2)
(3)
1−3
701
8,016
7,695
10,010
$
3−5
Total Corporate
Lending
Exposure(2)(3)
Over 5
Corporate
Funded
Loans
Total
Corporate
Lending
Commitments
$
$
$
462
457
3,451
3,954
$ 1,253
3,615
8,617
13,058
—
369
419
1,124
$
26,422
8,324
26,543
1,912
63,201
13,010
50,191
2,862
2,387
4,777
20,883
30,909
10,897
20,012
$ 29,284
$ 10,711
$ 31,320
$ 22,795
94,110
$ 23,907
$
2,416
12,457
20,182
28,146
380
1,941
3,120
7,569
$
2,036
10,516
17,062
20,577
70,203
Obligor credit ratings are determined by Institutional Credit using methodologies generally consistent with those employed by external rating agencies.
Total corporate lending exposure includes both lending commitments and funded loans. Amounts exclude approximately $38 billion of notional amount of hedges.
Total corporate lending exposure includes “event−driven” funded loans of $10.8 billion and “event−driven” lending commitments of $24.5 billion. Included in the $24.5 billion of
“event−driven” loan commitments were $12.2 billion of commitments to non−investment grade borrowers that were accepted by the borrower but not yet closed.
94
G-101
Table of Contents
Credit Exposure−Derivatives. The table below presents a summary by counterparty credit rating and remaining contract maturity of the fair value of OTC
derivatives in a gain position at November 30, 2007. Fair value represents the risk reduction arising from master netting agreements, where applicable, and,
in the final column, net of collateral received (principally cash and U.S. government and agency securities):
OTC Derivative Products—Financial Instruments Owned(1)
Years to Maturity
Credit Rating(2)
Less than 1
AAA
AA
A
BBB
Non−investment grade
Unrated(4)
$
Total
(1)
(2)
(3)
(4)
Cross−Maturity
and
Cash Collateral
Netting(3)
Over 5
Net Exposure
Post−Cash
Collateral
Net Exposure
Post−
Collateral
1−3
3−5
1,625
11,560
4,196
3,245
6,299
2,005
$ 1,572
9,686
3,212
3,444
3,954
664
$ 2,142
6,649
3,675
2,879
2,753
190
$ 8,219
23,231
8,234
2,566
3,016
691
$
(4,057)
(29,925)
(8,454)
(3,484)
(5,007)
(368)
$
9,501
21,201
10,863
8,650
11,015
3,182
$
9,287
18,011
10,203
6,387
6,505
710
$ 28,930
$ 22,532
$ 18,288
$ 45,957
$
(51,295)
$
64,412
$
51,103
Fair values shown present the Company’s exposure to counterparties related to the Company’s OTC derivative products. The table does not include the effect of any related hedges
utilized by the Company. The table also excludes fair values corresponding to other credit exposures, such as those arising from the Company’s lending activities.
Obligor credit ratings are determined by Institutional Credit using methodologies generally consistent with those employed by external rating agencies.
Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories. Receivable and payable balances with the same
counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right
of offset exists.
In lieu of making an individual assessment of the creditworthiness of unrated companies, the Company makes a determination that the collateral held with respect to such obligations
is sufficient to cover a substantial portion of its exposure.
The following tables summarize the fair values of the Company’s OTC derivative products recorded in Financial instruments owned and Financial
instruments sold, not yet purchased by product category and maturity at November 30, 2007, including on a net basis, where applicable, reflecting the fair
value of related non−cash collateral for financial instruments owned:
OTC Derivative Products—Financial Instruments Owned
Years to Maturity
Product Type
Interest rate and currency swaps, interest rate options, credit
derivatives and other fixed income securities contracts
Foreign exchange forward contracts and options
Equity securities contracts (including equity swaps, warrants
and options)
Commodity forwards, options and swaps
Total
(1)
Less than 1
Cross−Maturity
and
Cash Collateral
Netting(1)
Over 5
1−3
3−5
5,236
10,449
$ 10,704
1,133
$ 11,752
142
$ 42,911
67
6,875
6,370
3,157
7,538
872
5,522
764
2,215
$ 28,930
$ 22,532
$ 18,288
$ 45,957
$
$
(37,028)
(4,043)
Net Exposure
Post−Cash
Collateral
Net Exposure
Post−
Collateral
$
$
(3,493)
(6,731)
$
(51,295)
33,575
7,748
8,175
14,914
$
64,412
29,877
6,327
2,832
12,067
$
51,103
Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity and product categories. Receivable and payable balances with
the same counterparty in the same maturity category are netted within the maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided
legal right of offset exists.
95
G-102
Table of Contents
OTC Derivative Products—Financial Instruments Sold, Not Yet Purchased(1)
Years to Maturity
Product Type
Less than 1
Interest rate and currency swaps, interest rate options, credit derivatives and
other fixed income securities contracts
Equity securities contracts (including equity swaps, warrants and options)
$
Total
(1)
(2)
1−3
3−5
Over 5
Cross−Maturity
and
Cash Collateral
Netting(2)
Total
6,573
10,868
6,375
7,762
$ 8,749
1,043
4,952
7,821
$ 11,154
117
2,129
2,273
$ 29,487
380
1,746
1,743
$
(37,138)
(3,038)
(3,453)
(5,946)
$ 18,825
9,370
11,749
13,653
$ 31,578
$ 22,565
$ 15,673
$ 33,356
$
(49,575)
$ 53,597
Since these amounts are liabilities of the Company, they do not result in credit exposures.
Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity and product categories. Receivable and payable balances with
the same counterparty in the same maturity category are netted within the maturity category, where appropriate. Cash collateral paid is netted on a counterparty basis, provided legal
right of offset exists.
The Company’s derivatives (both listed and OTC) at November 30, 2007 and November 30, 2006 are summarized in the table below, showing the fair value
of the related assets and liabilities by product:
At November 30, 2007
Assets
Liabilities
Assets
Liabilities
Product Type
Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income
securities contracts
Total
$33,804
7,755
19,913
15,531
$ 19,515
9,372
27,887
14,830
$19,444
7,325
16,705
11,969
$ 15,688
7,725
23,155
10,923
$77,003
$ 71,604
$55,443
$ 57,491
Each category of derivative products in the above tables includes a variety of instruments, which can differ substantially in their characteristics. Instruments
in each category can be denominated in U.S. dollars or in one or more non−U.S. currencies.
The Company determines the fair values recorded in the above tables using various pricing models. For a discussion of fair value as it affects the
consolidated financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting
Policies” in Part I, Item 2 and Note 2 to the consolidated financial statements.
Country Exposure. The Company monitors its credit exposure to individual countries. Credit exposure to a country arises from the Company’s primary
lending activities and derivatives activities in a country. At November 30, 2007, based on the domicile of the counterparty, approximately 7% of the
Company’s credit exposure (for credit exposure arising from corporate loans and lending commitments as discussed above and current exposure arising
from the Company’s OTC derivatives contracts) was to emerging markets, and no one emerging market country accounted for more than 2% of the
Company’s credit exposure. The Company defines emerging markets to include generally all countries that are not members of the Organization for
Economic Co−operation and Development and includes as well the Czech Republic, Hungary, Korea, Mexico, Poland, the Slovak Republic and Turkey but
excludes countries rated AA and Aa2 or above by Standard & Poor’s and Moody’s Investors Service, respectively.
96
G-103
Table of Contents
Industry Exposure. The Company also monitors its credit exposure to individual industries. At November 30, 2007, the Company’s material credit
exposure (for credit exposure arising from corporate loans and lending commitments as discussed above and current exposure arising from the Company’s
OTC derivatives contracts) was to entities engaged in the following industries: utilities, financial institutions, consumer−related entities, banks,
telecommunications, sovereign and energy−related entities.
Global Wealth Management Group Activities.
Margin Lending. Customer margin accounts, the primary source of retail credit exposure, are collateralized in accordance with internal and regulatory
guidelines. The Company monitors required margin levels and established credit limits daily and, pursuant to such guidelines, requires customers to deposit
additional collateral, or reduce positions, when necessary. Factors considered in the review of margin loans are the amount of the loan, the intended purpose,
the degree of leverage being employed in the account, and overall evaluation of the portfolio to ensure proper diversification or, in the case of concentrated
positions, possible hedging strategies. Additionally, transactions relating to concentrated or restricted positions require a review of any legal impediments to
liquidation of the underlying collateral. Underlying collateral for margin loans is reviewed with respect to the liquidity of the proposed collateral positions,
valuation of securities, historic trading range, volatility analysis and an evaluation of industry concentrations. At November 30, 2007, there were
approximately $7.3 billion of customer margin loans outstanding.
Non−purpose Securities−Based Lending: Non−purpose securities−based lending allows clients to borrow money against the value of qualifying
securities for any suitable purpose other than purchasing, trading, or carrying marketable securities or refinancing margin debt. The
Company establishes approved lines and advance rates against qualifying securities and monitors limits daily and, pursuant to such guidelines, requires
customers to deposit additional collateral, or reduce debt positions, when necessary. Factors considered in the review of non−purpose securities−based
lending are amount of the loan, the degree of concentrated or restricted positions, and the overall evaluation of the portfolio to ensure proper diversification
or, in the case of concentrated positions, possible hedging strategies. Underlying collateral for non−purpose securities−based loans is reviewed with respect
to the liquidity of the proposed collateral positions, historic trading range, volatility analysis and an evaluation of industry concentrations.
Commercial Lending. Global Wealth Management Group provides structured credit facilities to high net worth individuals and their small and
medium−size domestic businesses through Morgan Stanley Commercial Financial Services, Inc. (“CFS”). CFS’ suite of products includes working capital
lines of credit, revolving lines of credit, standby letters of credit, term loans and commercial real estate mortgages. Clients are required to submit a credit
application and financial statements to CFS’ centralized credit processing platform. CFS’ underwriting professionals recommend a lending structure
following an analysis of the borrower, the guarantor, the collateral, cash flow, liquidity, leverage and credit history. For standard transactions, credit
requests are approved via signature of independent credit officers, and where transactions are of size and higher complexity, approval is secured through a
formal loan committee chaired by independent credit professionals. The facility is risk rated and upon credit approval is moved to the general portfolio
where it is monitored periodically through account management, covenants compliance certificates, and spot and cycle audits.
Consumer Lending Activities.
With respect to first mortgages and second mortgages within the Company’s Institutional Securities business segment, including home equity lines of credit
(“mortgage lending”), a loan evaluation process is adopted within a framework of credit underwriting policies and collateral valuation. The Company’s
underwriting policy is designed to ensure that all borrowers pass an assessment of capacity and willingness to pay, which includes an analysis of applicable
industry standard credit scoring models (e.g., FICO scores), debt ratios and reserves of the borrower. Loan−to−collateral value ratios are determined based
on independent third−party property appraisal/valuations, and security lien position is established through title/ownership reports. As part of the mortgage
97
G-104
Table of Contents
lending business strategy, almost all loans are sold in the secondary market through securitizations and whole loan sales, while almost all servicing rights
are retained. These sales and securitizations pass the risk of credit loss onto the purchaser/investor.
Operational Risk.
Operational risk refers to the risk of financial or other loss, or potential damage to a firm’s reputation, resulting from inadequate or failed internal processes,
people, systems or from external events (e.g., external or internal fraud, legal and compliance risks, damage to physical assets, etc.). The Company may
incur operational risk across the full scope of its business activities, including revenue generating activities (e.g., sales and trading) and support functions
(e.g., information technology and facilities management). Legal and compliance risk is included in the scope of operational risk and is discussed below
under “Legal Risk.”
The goal of the Company’s operational risk management framework is to establish firm−wide operational risk standards related to risk measurement,
monitoring and management. Operational risk policies are designed to reduce the likelihood and/or impact of operational incidents as well as to mitigate
legal, regulatory and reputational risks. As a foundation for the Basel II Advanced Measurement Approach, an enhanced risk−based capital model has been
developed for the calculation of capital related to operational risk. This model encompasses both quantitative and qualitative elements, including internal
and external operational incidents, metrics, risk and control self−assessments and scenario analysis. The Company will seek to obtain approval from the
SEC to implement the Advanced Measurement Approach for Operational Risk Capital requirements in 2008.
The Company’s Operational Risk Manager (“ORM”) oversees, monitors, measures, analyzes and reports on operational risk across the Company. The ORM
is independent of the business segments and is supported by the Firm−wide Operational Risk Department (“ORD”). The ORM is also responsible for
facilitating, designing, implementing and monitoring the Firm−wide operational risk program. The ORD works with the business segments and Control
Groups to help ensure a transparent, consistent and comprehensive framework for managing operational risk within each area and across the Company,
globally.
Primary responsibility for the management of operational risk is with the business segments, the Control Groups, and the business managers therein. The
business managers, generally, maintain processes and controls designed to identify, assess, manage, mitigate and report operational risk. As new products
and business activities are developed and processes are designed and modified, operational risks are considered. Each business segment has a designated
operational risk coordinator. In addition, business segment risk committees review operational risk matters and/or reports on a regular basis. Each Control
Group also has a designated operational risk coordinator, or equivalent, and a forum for discussing operational risk matters and/or reports with senior
management. Oversight of business segment operational risk is provided by business segment risk committees, a Firm−wide operational risk committee and,
ultimately, senior management through the Firm Risk Committee.
Business Continuity Management is an ongoing program of analysis and planning that ensures a recovery strategy and required resources for the resumption
of critical business functions following a disaster or other business interruption. Disaster recovery plans are in place for critical facilities and resources on a
Company−wide basis, and redundancies are built into the systems as deemed appropriate. The key components of the Company’s disaster recovery plans
include: crisis management; business segment recovery plans; applications/data recovery; work area recovery; and other elements addressing management,
analysis, training and testing.
The Company maintains an information security program that coordinates the management of information security risks and satisfies regulatory
requirements. Information security procedures are designed to protect the Company’s information assets against unauthorized disclosure, modification or
misuse. These procedures cover a broad range of areas, including: application system entitlement; data protection; internet and intranet access,
communications and usage; and mobile and portable information usage. The Company has also established policies, procedures and technologies to protect
its computer and other assets from unauthorized access.
98
G-105
Table of Contents
The Company utilizes the services of external vendors in connection with the Company’s ongoing operations. These may include, for example, outsourced
processing and support functions and consulting and other professional services. The Company manages its exposures to the quality of these services
through a variety of means, including service level and other contractual agreements, service and quality reviews, and ongoing monitoring of the vendors’
performance. It is anticipated that the use of these services will continue and possibly increase in the future.
Legal Risk.
Legal risk includes the risk of non−compliance with applicable legal and regulatory requirements and standards. Legal risk also includes contractual and
commercial risk such as the risk that a counterparty’s performance obligations will be unenforceable. The Company is generally subject to extensive
regulation in the different jurisdictions in which it conducts its business (see “Business—Regulation” in Part I, Item 1). The Company has established
procedures based on legal and regulatory requirements on a worldwide basis that are designed to foster compliance with applicable statutory and regulatory
requirements. The Company, principally through the Legal and Compliance Division, also has established procedures that are designed to require that the
Company’s policies relating to conduct, ethics and business practices are followed globally. In connection with its businesses, the Company has and
continuously develops various procedures addressing issues such as regulatory capital requirements, sales and trading practices, new products, potential
conflicts of interest, structured transactions, use and safekeeping of customer funds and securities, credit granting, money laundering, privacy and
recordkeeping. In addition, the Company has established procedures to mitigate the risk that a counterparty’s performance obligations will be
unenforceable, including consideration of counterparty legal authority and capacity, adequacy of legal documentation, the permissibility of a transaction
under applicable law and whether applicable bankruptcy or insolvency laws limit or alter contractual remedies. The legal and regulatory focus on the
financial services industry presents a continuing business challenge for the Company.
99
G-106
Table of Contents
Item 8.
Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Morgan Stanley:
We have audited the accompanying consolidated statements of financial condition of Morgan Stanley and subsidiaries (the “Company”) as of November 30,
2007 and 2006, and the related consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for each of the
three years in the period ended November 30, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Morgan Stanley and subsidiaries as of
November 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 2007, in
conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 and Note 18 to the consolidated financial statements, in fiscal 2005, the Company adopted Statement of Financial Accounting
Standards No. 123(R), “Share−Based Payment”, and effective December 1, 2005, Morgan Stanley changed its accounting policy for recognition of equity
awards granted to retirement−eligible employees.
As discussed in Note 24 to the consolidated financial statements, effective August 31, 2006, Morgan Stanley elected application of Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”.
As discussed in Note 2 and Note 3 to the consolidated financial statements, effective December 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 157, “Fair Value Measurement” and Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115”.
Also, as discussed in Note 2 and Note 19 to the consolidated financial statements, the Company adopted Statement Financial Accounting Standards No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)”.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control
over financial reporting as of November 30, 2007, based on the criteria established in “Internal Control—Integrated Framework” issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated January 28, 2008, expressed an unqualified opinion on the Company’s
internal control over financial reporting.
/s/ Deloitte & Touche LLP
New York, New York
January 28, 2008
100
G-107
Table of Contents
MORGAN STANLEY
Consolidated Statements of Financial Condition
(dollars in millions, except share data)
Assets
Cash and cash equivalents
Cash and securities deposited with clearing organizations or segregated under federal and other regulations or
requirements (including securities at fair value of $31,354 in 2007 and $8,648 in 2006)
Financial instruments owned, at fair value (approximately $131 billion in 2007 and $125 billion in 2006 were pledged
to various parties):
U.S. government and agency securities
Other sovereign government obligations
Corporate and other debt
Corporate equities
Derivative contracts
Investments
Physical commodities
Total financial instruments owned
Securities received as collateral, at fair value
Collateralized agreements:
Securities purchased under agreements to resell
Securities borrowed
Receivables:
Consumer loans (net of allowances of $831 in 2006)
Customers
Brokers, dealers and clearing organizations
Other loans
Fees, interest and other
Other investments
Premises, equipment and software costs, at cost (net of accumulated depreciation of $3,449 in 2007 and $3,645 in
2006)
Goodwill
Intangible assets (net of accumulated amortization of $175 in 2007 and $109 in 2006) (includes $428 at fair value in
2007)
Other assets
Total assets
See Notes to Consolidated Financial Statements.
101
November 30,
2007
November 30,
2006
$
$
25,598
20,606
61,608
29,565
23,887
21,606
147,724
87,377
77,003
14,270
3,096
39,352
27,305
158,864
86,058
55,443
4,725
3,031
374,963
82,229
374,778
64,588
126,887
239,994
175,787
299,631
—
76,352
16,011
11,629
8,320
4,524
22,915
82,923
7,633
11,908
8,937
3,232
4,372
3,024
4,086
2,792
1,047
8,851
651
11,160
$ 1,045,409
$ 1,121,192
G-108
Table of Contents
MORGAN STANLEY
Consolidated Statements of Financial Condition—(Continued)
Liabilities and Shareholders’ Equity
Commercial paper and other short−term borrowings (includes $3,068 at fair value in 2007)
Deposits (includes $3,769 at fair value in 2007)
Financial instruments sold, not yet purchased, at fair value:
Corporate equities
Derivative contracts
Total financial instruments sold, not yet purchased
Obligation to return securities received as collateral, at fair value
Collateralized financings:
Securities sold under agreements to repurchase
Securities loaned
Other secured financings, at fair value
Payables:
Customers
Brokers, dealers and clearing organizations
Other liabilities and accrued expenses
Long−term borrowings (includes $38,392 at fair value in 2007)
Capital Units
November 30,
2007
November 30,
2006
$
$
34,495
31,179
8,221
15,627
7,592
30,899
71,604
398
26,168
28,961
10,336
59,399
57,491
764
134,341
82,229
183,119
64,588
162,840
110,423
27,772
267,566
150,257
45,556
203,453
10,454
1,724
24,606
190,624
134,907
7,635
4,746
24,975
144,978
1,014,140
1,085,762
—
Commitments and contingencies
Shareholders’ equity:
Preferred stock
Common stock, $0.01 par value;
Shares authorized: 3,500,000,000 in 2007 and 2006;
Shares issued: 1,211,701,552 in 2007 and 2006;
Shares outstanding: 1,056,289,659 in 2007 and 1,048,877,006 in 2006
Paid−in capital
Retained earnings
Employee stock trust
Accumulated other comprehensive loss
Common stock held in treasury, at cost, $0.01 par value; 155,411,893 shares in 2007 and 162,824,546 shares
in 2006
Common stock issued to employee trust
Total shareholders’ equity
Total liabilities and shareholders’ equity
102
29,092
28,343
66
1,100
1,100
12
1,902
38,045
5,569
(199)
12
2,213
41,422
4,315
(35)
(9,591)
(5,569)
(9,348)
(4,315)
31,269
35,364
$ 1,045,409
$ 1,121,192
G-109
Table of Contents
MORGAN STANLEY
Consolidated Statements of Income
(dollars in millions, except share and per share data)
Fiscal Year
2006
2007
Revenues:
Investment banking
Trading
Investments
Commissions
Other
$
6,368
$
4,755
2005
$
3,843
3,206
3,262
4,682
6,519
60,083
1,208
11,805
1,807
3,770
5,238
42,776
585
7,377
1,128
3,331
4,915
25,987
496
85,328
57,302
70,736
40,897
47,077
23,552
28,026
29,839
23,525
Non−interest expenses:
Compensation and benefits
Occupancy and equipment
Brokerage, clearing and exchange fees
Information processing and communications
Marketing and business development
Professional services
Other
September 11 th related insurance recoveries, net
16,552
1,130
1,656
1,193
813
2,112
1,129
—
13,986
912
1,305
1,089
643
1,889
912
—
10,749
957
1,069
1,056
576
1,622
1,431
(251)
24,585
20,736
17,209
3,441
47
831
9,103
40
2,728
6,316
311
1,473
2,563
6,335
4,532
1,024
378
1,666
529
559
201
646
—
1,137
—
358
49
Total revenues
Interest expense
Net revenues
Income from continuing operations before losses from unconsolidated investees, income taxes
and cumulative effect of accounting change, net
Discontinued operations:
Net gain from discontinued operations
Net gain on discontinued operations
Net income
$
3,209
$
7,472
$
4,939
$
68
$
19
$
—
Earnings applicable to common shareholders
$
3,141
$
7,453
$
4,939
$
2.49
0.64
—
$
6.25
1.13
—
$
4.32
0.33
0.05
$
3.13
$
7.38
$
4.70
$
2.37
0.61
—
$
5.99
1.08
—
$
4.19
0.33
0.05
$
2.98
$
7.07
$
4.57
Average common shares outstanding:
Basic
Diluted
1,001,878,651
1,010,254,255
1,049,896,047
1,054,240,169
1,054,796,062
1,079,936,315
103
G-110
Table of Contents
MORGAN STANLEY
Consolidated Statements of Comprehensive Income
2007
Fiscal Year
2006
2005
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1)
Net change in cash flow hedges(2)
Minimum pension liability adjustment(3)
$3,209
$7,472
$4,939
Comprehensive income
$3,253
(1)
(2)
(3)
65
19
(40)
104
53
(2)
$7,627
Amounts are net of provision for (benefit from) income taxes of $35 million, $56 million and $(48) million for fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
Amounts are net of provision for (benefit from) income taxes of $10 million, $29 million and $(38) million for fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
Amounts are net of provision for (benefit from) income taxes of $(16) million, $(5) million and $11 million for fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
104
(89)
(70)
25
$4,805
G-111
Table of Contents
MORGAN STANLEY
Consolidated Statements of Cash Flows
2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash used for operating activities:
Deferred income taxes
Compensation payable in common stock and options
Depreciation and amortization
Provision for consumer loan losses
Lease adjustment
Insurance settlement
Gain on sale of Quilter Holdings Ltd.
Aircraft−related charges
Other−than−temporary impairment charge
Changes in assets and liabilities:
Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements
Financial instruments owned, net of financial instruments sold, not yet purchased
Securities borrowed
Securities loaned
Receivables and other assets
Payables and other liabilities
Securities purchased under agreements to resell
Securities sold under agreements to repurchase
$
3,209
47
—
(2,046)
1,941
475
478
—
(38)
(168)
—
437
Fiscal Year
2006
2005
$ 7,472
$ 4,939
40
—
111
1,923
876
756
—
—
—
125
—
311
(49)
(999)
820
815
878
109
(251)
—
509
—
(32,040)
(30,573)
59,637
(39,834)
1,786
71,057
48,900
(105,361)
10,592
(78,370)
(55,390)
29,803
(41,929)
33,971
(1,075)
30,292
(3,388)
(24,521)
(35,892)
23,308
(1,598)
(815)
(51,204)
55,676
Net cash used for operating activities
(22,093)
(60,803)
(31,352)
CASH FLOWS FROM INVESTING ACTIVITIES
Net (payments for) proceeds from:
Office facilities and aircraft under operating leases
Business acquisitions, net of cash acquired
Sale of Quilter Holdings Ltd.
Net principal disbursed on consumer loans
Sales of consumer loans
Sale of interest in POSIT
Insurance settlement
Purchases of securities available for sale
Sales of securities available for sale
(1,469)
(1,169)
476
(4,776)
5,301
—
—
(14,073)
4,272
993
(2,706)
—
(12,164)
11,532
—
—
—
—
(540)
(323)
—
(14,093)
10,525
90
220
—
—
Net cash used for investing activities
(11,438)
(2,345)
(4,121)
8,274
265
(859)
(24,231)
23,099
281
(2,422)
—
546
22,022
9,647
144
(5,183)
—
1,044
16,487
4,886
355
—
927
74,540
1,097
643
47,849
—
327
35,768
(33,120)
(66)
(3,753)
(5,615)
(1,219)
(20,643)
—
(3,376)
—
(1,167)
(16,735)
—
(3,693)
—
(1,180)
Net cash provided by financing activities
38,523
54,340
32,076
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, at beginning of period
4,992
20,606
(8,808)
29,414
(3,397)
32,811
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short−term borrowings
MSCI Inc. initial public offering
Derivatives financing activities
Other secured financings
Deposits
Tax benefits associated with stock−based awards
Net proceeds from:
Issuance of preferred stock
Issuance of common stock
Issuance of long−term borrowings
Payments for:
Repayments of long−term borrowings
Redemption of Capital Units
Repurchases of common stock
Cash distribution in connection with the Discover Spin−off
Cash dividends
Cash and cash equivalents, at end of period
$ 25,598
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest were $59,955 million, $39,667 million and $23,415 million for fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
Cash payments for income taxes were $3,404 million, $3,115 million and $1,536 million for fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
105
$ 20,606
$ 29,414
G-112
Table of Contents
MORGAN STANLEY
Consolidated Statements of Changes in Shareholders’ Equity
BALANCE AT
NOVEMBER 30, 2004
Net income
Dividends
Employee tax withholdings and other
Net change in cash flow hedges
Minimum pension liability adjustment
Foreign currency translation adjustments
Preferred
Stock
Common
Stock
Paid−in
Capital
Retained
Earnings
$
$
12
—
—
—
—
—
—
—
—
—
—
$ 2,088
—
—
(780)
—
669
317
95
—
—
—
$ 31,426
4,939
(1,180)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Common
Stock
Held in
Treasury
at Cost
Common
Stock
Issued to
Employee
Trust
(56)
—
—
—
—
—
—
—
(70)
25
(89)
$ (6,614)
—
—
1,107
(3,693)
1,437
—
(451)
—
—
—
$
Employee
Stock
Trust
Accumulated
Other
Comprehensive
Income (Loss)
$
$
3,824
—
—
—
—
(764)
—
—
—
—
—
Total
(2,474)
—
—
—
—
(586)
—
—
—
—
—
$28,206
4,939
(1,180)
327
(3,693)
756
317
(356)
(70)
25
(89)
BALANCE AT
NOVEMBER 30, 2005
Adjustment to opening shareholders’ equity
Net income
Dividends
—
—
—
—
1,100
—
—
—
—
—
—
—
—
12
—
—
—
—
—
—
—
—
—
—
—
—
2,389
34
—
—
—
(1,949)
—
1,486
72
181
—
—
—
35,185
(68)
7,472
(1,167)
—
—
—
—
—
—
—
—
—
3,060
—
—
—
—
—
—
1,255
—
—
—
—
—
(190)
—
—
—
—
—
—
—
—
—
53
(2)
104
(8,214)
—
—
—
—
2,592
(3,376)
5
—
(355)
—
—
—
(3,060)
—
—
—
—
—
—
(1,255)
—
—
—
—
—
29,182
(34)
7,472
(1,167)
1,100
643
(3,376)
1,491
72
(174)
53
(2)
104
BALANCE AT
NOVEMBER 30, 2006
Fair value adjustment
Net income
Dividends
SFAS No. 158 pension adjustment
Discover Spin−off
1,100
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,213
—
—
—
(1,555)
—
1,710
280
(15)
—
—
—
—
239
(970)
41,422
186
3,209
(1,219)
—
—
5
—
—
—
—
—
—
—
(5,558)
4,315
—
—
—
—
—
1,254
—
—
—
—
—
—
—
—
(35)
—
—
—
—
—
—
—
—
19
(40)
(208)
65
—
—
(9,348)
—
—
—
2,482
(3,753)
376
—
(318)
—
—
—
—
—
970
(4,315)
—
—
—
—
—
(1,254)
—
—
—
—
—
—
—
—
35,364
186
3,209
(1,219)
927
(3,753)
2,091
280
(333)
19
(40)
(208)
65
239
(5,558)
(199)
$ (9,591)
BALANCE AT
NOVEMBER 30, 2007
$
1,100
$
12
$ 1,902
$ 38,045
$
5,569
106
$
$
(5,569)
$31,269
G-113
Table of Contents
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Introduction and Basis of Presentation.
The Company. Morgan Stanley (the “Company”) is a global financial services firm that maintains significant market positions in each of its business
segments—Institutional Securities, Global Wealth Management Group and Asset Management.
A summary of the activities of each of the Company’s business segments is as follows:
Institutional Securities includes capital raising; financial advisory services, including advice on mergers and acquisitions, restructurings, real estate
and project finance; corporate lending; sales, trading, financing and market−making activities in equity and fixed income securities and related
products, including foreign exchange and commodities; benchmark indices and risk management analytics; research; and investment activities.
Global Wealth Management Group provides brokerage and investment advisory services covering various investment alternatives; financial and
wealth planning services; annuity and other insurance products; credit and other lending products; cash management services; retirement services; and
trust and fiduciary services.
Asset Management provides global asset management products and services in equity, fixed income, alternative investments, which includes hedge
funds and fund of funds, and merchant banking, which includes real estate, private equity and infrastructure, to institutional and retail clients through
proprietary and third−party retail distribution channels, intermediaries and the Company’s institutional distribution channel. Asset Management also
engages in investment activities.
Discover. On June 30, 2007, the Company completed the spin−off (the “Discover Spin−off”) of its business segment Discover Financial Services
(“DFS”). The results of DFS prior to the Discover Spin−off are reported as discontinued operations for all periods presented.
Quilter Holdings Ltd. The results of Quilter Holdings Ltd. (“Quilter”) are reported as discontinued operations for all periods presented through its sale on
February 28, 2007. The results of Quilter were formerly included in the Global Wealth Management Group business segment.
Aircraft Leasing. The results of the Company’s aircraft leasing business are reported as discontinued operations for all periods presented through its sale
on March 24, 2006. The results of the Company’s aircraft leasing business were formerly included in the Institutional Securities business segment.
See Note 22 for additional information on discontinued operations.
Basis of Financial Information. The consolidated financial statements for the 12 months ended November 30, 2007 (“fiscal 2007”), November 30, 2006
(“fiscal 2006”) and November 30, 2005 (“fiscal 2005”) are prepared in accordance with accounting principles generally accepted in the U.S., which require
the Company to make estimates and assumptions regarding the valuations of certain financial instruments, the outcome of litigation, tax and other matters
that affect the consolidated financial statements and related disclosures. The Company believes that the estimates utilized in the preparation of the
consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates.
The Company, in accordance with Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”), adjusted its opening retained earnings for fiscal 2006 and financial results for the first
two quarters of fiscal 2006 to reflect a
107
G-114
Table of Contents
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
change in its hedge accounting for certain securities under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivatives
Instruments and Hedging Activities,” as amended (“SFAS No. 133”). The same periods also reflect the adjustments of two compensation and benefit
accruals. See Note 24 for additional information on SAB 108.
All material intercompany balances and transactions have been eliminated.
Consolidation. The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, other entities in which the
Company has a controlling financial interest and certain variable interest entities (“VIE”).
For entities where (1) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (2) the equity holders
bear the economic residual risks of the entity and have the right to make decisions about the entity’s activities, the Company consolidates those entities it
controls through a majority voting interest or otherwise. For entities that do not meet these criteria, commonly known as variable interest entities, the
Company consolidates those entities where the Company is deemed to be the primary beneficiary when it absorbs a majority of the expected losses or a
majority of the expected residual returns, or both, of such entities.
Notwithstanding the above, certain securitization vehicles, commonly known as qualifying special purpose entities, are generally not consolidated by the
Company if they meet certain criteria regarding the types of assets and derivatives they may hold, the types of sales they may engage in and the range of
discretion they may exercise in connection with the assets they hold.
For investments in entities in which the Company does not have a controlling financial interest but has significant influence over operating and financial
decisions, the Company generally applies the equity method of accounting, except in instances where the Company has elected to fair value certain eligible
investments (see Note 3).
Equity and partnership interests held by entities qualifying for accounting purposes as investment companies are carried at fair value.
The Company’s U.S. and international subsidiaries include Morgan Stanley & Co. Incorporated (“MS&Co.”), Morgan Stanley & Co. International plc
(“MSIP”), Morgan Stanley Japan Securities Co., Ltd. (“MSJS”) and Morgan Stanley Investment Advisors Inc. On April 1, 2007, the Company merged
Morgan Stanley DW Inc. (“MSDWI”) into MS&Co. Upon completion of the merger, the surviving entity, MS&Co., became the Company’s principal U.S.
broker−dealer.
Income Statement Presentation. The Company, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and
diversified group of clients and customers, including corporations, governments, financial institutions and individuals. In connection with the delivery of the
various products and services to clients, the Company manages its revenues and related expenses in the aggregate. As such, when assessing the performance
of its businesses, the Company considers its principal trading, investment banking, commissions, and interest and dividend income, along with the
associated interest expense, as one integrated activity for each of the Company’s separate businesses.
The Company’s cost infrastructure supporting its businesses varies by activity. In some cases, these costs are directly attributable to one line of business,
and, in other cases, such costs relate to multiple businesses. As such, when assessing the performance of its businesses, the Company does not consider
these costs separately but rather assesses performance in the aggregate along with the related revenues.
108
G-115
Table of Contents
MORGAN STANLEY
Therefore, the Company’s pricing structure considers various items, including the level of expenses incurred directly and indirectly to support the cost
infrastructure, the risk it incurs in connection with a transaction, the overall client relationship and the availability in the market for the particular product
and/or service. Accordingly, the Company does not manage or capture the costs associated with the products or services sold or its general and
administrative costs by revenue line, in total or by product.
2. Summary of Significant Accounting Policies.
Revenue Recognition.
Investment Banking. Underwriting revenues and fees from mergers, acquisitions and advisory assignments are recorded when services for the transactions
are determined to be completed, generally as set forth under the terms of the engagement. Transaction−related expenses, primarily consisting of legal, travel
and other costs directly associated with the transaction, are deferred and recognized in the same period as the related investment banking transaction
revenue. Underwriting revenues are presented net of related expenses. Non−reimbursed expenses associated with advisory transactions are recorded within
Non−interest expenses.
Commissions. The Company generates commissions from executing and clearing customer transactions on stock, options and futures markets.
Commission revenues are recorded in the accounts on trade date.
Asset Management, Distribution and Administration Fees. Asset management, distribution and administration fees are recognized over the relevant
contract period, generally quarterly or annually. In certain management fee arrangements, the Company is entitled to receive performance−based fees (also
referred to as incentive fees) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such
arrangements, performance fee revenue is accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance
benchmark stated in the investment management agreement.
Financial Instruments and Fair Value.
A significant portion of the Company’s financial instruments is carried at fair value with changes in fair value recognized in earnings each period. A
description of the Company’s policies regarding fair value measurement and its application to these financial instruments follows.
Financial Instruments Measured at Fair Value. All of the instruments within Financial instruments owned and Financial instruments sold, not yet
purchased, are measured at fair value, either through the fair value option election (discussed below) or as required by other accounting
pronouncements. These instruments primarily represent the Company’s trading and investment activities and include both cash and derivative products. In
addition, Securities received as collateral and Obligation to return securities received as collateral are measured at fair value as required by other accounting
pronouncements. Additionally, certain Commercial paper and other short−term borrowings (primarily structured notes), certain Deposits, Other secured
financings and certain Long−term borrowings (primarily structured debt) are measured at fair value through the fair value option election. Gains and losses
on all of these instruments carried at fair value are reflected in Principal transactions—trading revenues or Principal transactions—investment revenues in
the consolidated statements of income. Interest income and expense and dividend income are recorded within the consolidated statements of income
depending on the nature of the instrument and related market conventions. When interest and dividends are included as a component of the instruments’
fair value, interest and dividends are included within Principal transactions—trading revenues. Otherwise, they are included within Interest and dividend
income or Interest expense.
Fair Value Option. The Company adopted the provisions of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS No. 159”), effective December 1, 2006. SFAS No. 159 provides entities the option to measure certain financial assets and financial liabilities at fair
value with changes
109
G-116
Table of Contents
MORGAN STANLEY
in fair value recognized in earnings each period. SFAS No. 159 permits the fair value option election on an instrument−by−instrument basis at initial
recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company applies the fair value
option for certain eligible instruments, including certain loans and loan commitments, certain equity method investments, certain structured notes, certain
certificates of deposits and other secured financings. See “Accounting Developments” herein for additional information regarding the Company’s adoption
of SFAS No. 159.
Fair Value Measurement—Definition and Hierarchy. The Company adopted the provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”), effective December 1, 2006. See “Accounting Developments” herein for additional information regarding the Company’s adoption of SFAS
No. 157. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches, including market, income and/or cost approaches. SFAS No. 157 establishes a
hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s
assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the
circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
• Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and
regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Assets and liabilities utilizing Level 1 inputs include exchange−traded equity securities and listed derivatives that are actively traded, most U.S.
Government securities and certain other sovereign government obligations.
• Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or
indirectly.
Assets and liabilities utilizing Level 2 inputs include: exchange−traded equity securities and listed derivatives that are not actively traded; most
over−the−counter (“OTC”) derivatives; restricted stock; corporate and municipal bonds; certain corporate loans and loan commitments; certain
high−yield debt; certain residential and commercial mortgage loans; certain mortgage−backed securities (“MBS”), asset−backed securities
(“ABS”), and collateralized debt obligation (“CDO”) securities; retained interests in certain securitization transactions; structured notes; physical
commodities; and mortgage servicing rights.
• Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Assets and liabilities utilizing Level 3 inputs include: certain corporate loans and loan commitments; certain commercial whole loans; certain
mortgage loans; certain high−yield debt, distressed debt (i.e., securities of issuers encountering financial difficulties, including bankruptcy or
insolvency); certain MBS, ABS and CDO securities; retained interests in certain securitization transactions; investments in real estate funds;
private equity investments; and complex over−the−counter derivatives (including certain foreign currency options; long−dated commodity options
and swaps; certain mortgage−related credit default swaps; derivative interests in mortgage−related CDOs; and basket credit default swaps).
110
G-117
Table of Contents
MORGAN STANLEY
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of
product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that
valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.
Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases,
the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value
hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value
measurement in its entirety.
Fair value is a market−based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an
entity−specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that
market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the
measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced
for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3 (see Note 3).
Valuation Techniques. Many cash and OTC contracts have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price
that the Company and others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an
asset. For financial instruments whose inputs are based on bid−ask prices, the Company does not require that fair value always be a predetermined point in
the bid−ask range. The Company’s policy is to allow for mid−market pricing and adjusting to the point within the bid−ask range that meets the Company’s
best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid−ask spread is used to measure both the
long and short positions.
Fair value for many cash and OTC contracts is derived using pricing models. Pricing models take into account the contract terms (including maturity) as
well as multiple inputs, including, where applicable, commodity prices, equity prices, interest rate yield curves, credit curves, creditworthiness of the
counterparty, option volatility and currency rates. In accordance with SFAS No. 157, the impact of the Company’s own credit spreads are also considered
when measuring the fair value of liabilities, including OTC derivative contracts. Where appropriate, valuation adjustments are made to account for various
factors, including bid−ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based upon observable
inputs where available.
OTC Derivative Contracts. OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit
standing of reference entities, equity prices or commodity prices.
Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be modeled using a series of techniques, including
closed−form analytic formulae, such as the Black−Scholes option−pricing model, and simulation models or a combination thereof. Many pricing models do
not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from
actively quoted markets, as is the case for generic interest rate swap and option contracts. In the case of more established derivative products, the pricing
models used by the Company are widely accepted by the financial services industry. A substantial majority of OTC derivative products valued by the
Company using pricing models fall into this category and are categorized within Level 2 of the fair value hierarchy.
Other derivative products, typically the newest and most complex products, will require more judgment in the implementation of the valuation technique
applied due to the complexity of the valuation assumptions and the reduced
111
G-118
Table of Contents
MORGAN STANLEY
observability of inputs. This includes certain credit default swaps where direct trading activity or quotes are unobservable. Derivative interests in
mortgage−related CDOs, for which observability of external price data is extremely limited, are valued based on an evaluation of the market for similar
positions as indicated by primary and secondary market activity in the cash CDO and synthetic CDO market. Each position is evaluated independently
taking into consideration the underlying collateral performance and pricing, behavior of the tranche under various cumulative loss and prepayment
scenarios, deal structures (e.g., non−amortizing reference obligations, call features) and liquidity. While these factors may be supported by historical and
actual external observations, the determination of their value as it relates to specific positions nevertheless requires significant judgment. Mortgage−related
credit default swaps are valued based on data from comparable credit instruments in the cash market and trades in comparable swaps as benchmarks, as
prices and spreads for the specific credits subject to valuation tend to be of limited observability. For basket credit default swaps and CDO−squared
positions, the correlation between reference credits is often a significant input into the pricing model, in addition to several other more observable inputs
such as credit spread, interest and recovery rates. As the correlation input is unobservable for each specific swap, it is benchmarked to standardized proxy
baskets for which external data are available. These instruments involve significant unobservable inputs and are categorized in Level 3 of the fair value
hierarchy.
The Company trades various derivative structures with commodity underlyings. Depending on the type of structure, the model inputs generally include
interest rate yield curves, commodity underlier spread curves, volatility of the underlying commodities and, in some cases, the correlation between these
inputs. The fair value of these products is estimated using executed trades and broker and consensus data to provide values for the aforementioned inputs.
Where these inputs are unobservable, relationships to observable commodities and data points, based on historic and/or implied observations, are employed
as a technique to estimate the model input values. Commodity derivatives are generally categorized in Level 2 of the fair value hierarchy; in instances where
significant inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.
Other Sovereign Government Obligations. The fair value of foreign sovereign government obligations is generally based on quoted prices in active
markets. When quoted prices are not available, fair value is determined based on a valuation model that has as inputs interest rate yield curves,
cross−currency basis index spreads, and country credit spreads for structures similar to the bond in terms of issuer, maturity and seniority. These bonds are
generally categorized in Levels 1 or 2 of the fair value hierarchy.
Municipal Bonds. The fair value of municipal bonds is estimated using recently executed transactions, market price quotations and pricing models that
factor in, where applicable, interest rates, bond or credit default swap spreads and volatility. These bonds are generally categorized in Level 2 of the fair
value hierarchy.
Corporate Bonds. The fair value of corporate bonds is estimated using recently executed transactions, market price quotations (where observable), bond
spreads or credit default swap spreads. The spread data used are for the same maturity as the bond. If the spread data do not reference the issuer, then data
that reference a comparable issuer is used. When observable price quotations are not available, fair value is determined based on cash flow models with
yield curves, bond or single name credit default swap spreads and recovery rates based on collateral values as key inputs. Corporate bonds are generally
categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the hierarchy.
Corporate Loans and Loan Commitments. The fair value of corporate loans is estimated using recently executed transactions, market price quotations
(where observable) and market observable credit default swap levels along with proprietary valuation models and default recovery analysis where such
transactions and quotations are unobservable. The fair value of contingent corporate loan commitments is estimated by using executed transactions on
comparable loans and the anticipated market price based on pricing indications from syndicate banks and customers. The valuation of these commitments
also takes into account certain fee income.
112
G-119
Table of Contents
MORGAN STANLEY
While certain corporate loans, closed loan commitments and revolving loans are Level 2 instruments, certain other corporate loans and contingent corporate
loan commitments are categorized in Level 3 of the fair value hierarchy.
Mortgage Loans. The valuation of mortgage loans depends upon the exit market for the loan. Loans not intended for securitization are valued based on the
analysis of the underlying collateral performance, capital structure and market spreads for comparable positions as prices and/or spreads for specific credits
tend to be unobservable. Where comparables do not exist, such loans are valued based on origination price and collateral performance (credit events) since
origination. These loans are classified in Levels 2 or 3 of the fair value hierarchy.
The Company also holds certain loan products and mortgage products with the intent to securitize them. When structuring of the related securitization is
substantially complete, such that the value likely to be realized in a current transaction is consistent with the price that a securitization entity will pay to
acquire these products, the Company marks them to the expected securitized value. Factors affecting the value of loan and mortgage products intended to be
securitized include, but are not limited to, loan type, underlying property type and geographic location, loan interest rate, loan to value ratios, debt service
coverage ratio, updated cumulative loan loss data, prepayment rates, yields, investor demand, any significant market volatility since the last securitization,
and credit enhancement. While these valuation factors may be supported by historical and actual external observations, the determination of their value as it
relates to specific positions may require significant judgment. These instruments are classified in Levels 2 or 3 of the fair value hierarchy.
U.S. Agency Securities. U.S. agency securities include To−be−announced (“TBA”) securities and mortgage pass−through certificates. TBA securities are
liquid and have quoted market prices. Fair value of mortgage pass−through certificates is determined via a simulation model, which considers different rate
scenarios and historical activity to calculate a spread to the comparable TBA security. U.S. agency securities are categorized in Level 2 of the fair value
hierarchy.
Commercial Mortgage−Backed Securities (“CMBS”) and Asset−Backed Securities (“ABS”). CMBS and ABS may be valued based on external
price/spread data. When position−specific external price data are not observable, the valuation is based on prices of comparable bonds. Included in this
category are certain interest−only securities, which, in the absence of market prices, are valued as a function of observable whole bond prices and cash flow
values of principal−only bonds using current market assumptions at the measurement date. CMBS and ABS are categorized in Level 3 if external prices are
unobservable; otherwise they are categorized in Level 2 of the fair value hierarchy.
Retained Interests in Securitization Transactions. The Company engages in securitization activities related to various types of loans and bonds. The
Company may retain interests in securitized financial assets as one or more tranches of the securitization. To determine fair values, observable inputs are
used if available. Observable inputs, however, may not be available for certain retained interests so the Company estimates fair value based on the present
value of expected future cash flows using its best estimates of the key assumptions, including forecasted credit losses, prepayment rates, forward yield
curves and discount rates commensurate with the risks involved. When there are no significant unobservable inputs, retained interests are categorized in
Level 2 of the fair value hierarchy. When unobservable inputs are significant to the fair value measurement, albeit generally supportable by historical and
actual benchmark data, retained interests are categorized in Level 3 of the fair value hierarchy.
Investments in Private Equity and Real Estate. The Company’s investments in private equity and real estate take the form of direct private equity
investments and investment in private equity and real estate funds. The transaction price is used as the best estimate of fair value at inception. When
evidence supports a change to the
113
G-120
Table of Contents
MORGAN STANLEY
carrying value from the transaction price, adjustments are made to reflect expected exit values. Ongoing reviews by Company management are based on an
assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and sale transactions with third parties,
expected cash flows and market−based information, including comparable company transactions, performance multiples and changes in market outlook,
among other factors. These nonpublic investments are included in Level 3 of the fair value hierarchy because they trade infrequently, and, therefore, the fair
value is unobservable.
Physical Commodities. The Company trades various physical commodities, including crude oil and refined products, metals and agricultural products.
Fair value for physical commodities is determined using observable inputs, including broker quotations and published indices. Physical commodities are
categorized in Level 2 of the fair value hierarchy.
Deposits. The fair value of certificates of deposit is estimated using third−party quotations. These deposits are categorized in Level 2 of the fair value
hierarchy.
Structured Notes. The Company issues structured notes that have coupons or repayment terms linked to the performance of debt or equity securities,
indices, currencies or commodities. Fair value of structured notes is estimated using valuation models described in this section for the derivative and debt
features of the notes. These models incorporate observable inputs, including prices that the notes are linked to, interest rate yield curves, option volatility
and currency rates. The impact of the Company’s own credit spreads also is included based on the Company’s observed secondary bond market spreads.
Most structured notes are categorized in Level 2 of the fair value hierarchy.
Fair Value Measurement—Other.
Prior to the adoption of SFAS No. 157, the Company followed the provisions of Emerging Issues Task Force (“EITF”) Issue No. 02−3, “Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (“EITF Issue
No. 02−3”). Under EITF Issue No. 02−3, recognition of day one profit at inception of an OTC derivative contract was prohibited unless the fair value of the
contract was based on a valuation technique incorporating observable market data. With the adoption of SFAS No. 157, the Company is no longer applying
the revenue recognition criteria of EITF Issue No. 02−3.
The fair value of OTC financial instruments, including derivative contracts related to financial instruments and commodities, is presented in the
accompanying consolidated statements of financial condition on a net−by−counterparty basis, when appropriate. Additionally, the Company nets fair value
of cash collateral paid or received against its derivatives inventory under credit support annexes, which the Company views as conditional contracts,
pursuant to legally enforceable master netting agreements.
Hedge Accounting.
The Company applies hedge accounting for hedges involving various derivative financial instruments and non−U.S. dollar−denominated debt used to hedge
interest rate, foreign exchange and credit risk arising from assets and liabilities not held at fair value. These derivative financial instruments are included
within Financial instruments owned—Derivative contracts or Financial instruments sold, not yet purchased—Derivative contracts in the consolidated
statements of financial condition.
The Company’s hedges are designated and qualify for accounting purposes as one of the following types of hedges: hedges of changes in fair value of assets
and liabilities due to the risk being hedged (fair value hedges), hedges of the variability of future cash flows from floating rate assets and liabilities due to
the risk being hedged (cash flow hedges) and hedges of net investments in foreign operations whose functional currency is different from the reporting
currency of the parent company (net investment hedges).
114
G-121
Table of Contents
MORGAN STANLEY
For all hedges where hedge accounting is being applied, effectiveness testing and other procedures to ensure the ongoing validity of the hedges are
performed at least monthly. The impact of hedge ineffectiveness on the consolidated statements of income, primarily related to fair value hedges, was a gain
of $132 million during fiscal 2007. The amount excluded from the assessment of hedge effectiveness was immaterial. If a derivative is de−designated as a
hedge, it is thereafter accounted for as a financial instrument used for trading.
Fair Value Hedges—Interest Rate Risk. In the first quarter of fiscal 2007, the Company began using regression analysis to perform an ongoing prospective
and retrospective assessment of the effectiveness of these hedging relationships (i.e., the Company applied the “long−haul” method of hedge accounting). A
hedging relationship is deemed effective if the fair values of the hedging instrument (derivative) and the hedged item (debt liability) change inversely within
a range of 80% to 125%.
Previously, the Company’s designated fair value hedges consisted primarily of interest rate swaps designated as fair value hedges of changes in the
benchmark interest rate of fixed rate borrowings, including both certificates of deposit and senior long−term borrowings. For these hedges, the Company
ensured that the terms of the hedging instruments and hedged items matched and that other accounting criteria were met so that the hedges were assumed to
have no ineffectiveness (i.e., the Company applied the “shortcut” method of hedge accounting). The Company also used interest rate swaps as fair value
hedges of the benchmark interest rate risk of host contracts of equity−linked notes that contained embedded derivatives. For these hedging relationships,
regression analysis was used for the prospective and retrospective assessments of hedge effectiveness.
For qualifying fair value hedges of benchmark interest rates, the changes in the fair value of the derivative and the changes in the fair value of the hedged
liability provide offset of one another and, together with any resulting ineffectiveness, are recorded in Interest expense. When a derivative is de−designated
as a hedge, any basis adjustment remaining on the hedged liability is amortized to Interest expense over the remaining life of the liability using the effective
interest method.
Fair Value Hedges—Credit Risk. Until the fourth quarter of 2007, the Company had designated a portion of a credit derivative embedded in a non−recourse
structured note liability as a fair value hedge of the credit risk arising from a loan receivable to which the structured note liability was specifically linked.
Regression analysis was used to perform prospective and retrospective assessments of hedge effectiveness for this hedge relationship. The changes in the
fair value of the derivative and the changes in the fair value of the hedged item provided offset of one another and, together with any resulting
ineffectiveness, were recorded in Principal transactions—trading revenues. This hedge was terminated in the fourth quarter of 2007 upon derecognition of
both the hedging instrument and the hedged item.
Cash Flow Hedges. Before the sale of the aircraft leasing business (see Note 22), the Company applied hedge accounting to interest rate swaps used to
hedge variable rate long−term borrowings associated with this business. Changes in the fair value of the swaps were recorded in Accumulated other
comprehensive income (loss) in Shareholders’ equity, net of tax effects, and then reclassified to Interest expense as interest on the hedged borrowings was
recognized.
In connection with the sale of the aircraft leasing business, the Company de−designated the interest rate swaps associated with this business effective
August 31, 2005 and no longer accounts for them as cash flow hedges. Amounts in Accumulated other comprehensive income (loss) related to those interest
rate swaps continue to be reclassified to Interest expense since the related borrowings remain outstanding. The Company estimates that approximately $22
million of the unrealized loss recognized in Accumulated other comprehensive income (loss) as of November 30, 2007 will be reclassified into earnings
within the next 12 months.
115
G-122
Table of Contents
MORGAN STANLEY
Net Investment Hedges. The Company utilizes forward foreign exchange contracts and non−U.S. dollar−denominated debt to manage the currency
exposure relating to its net investments in non−U.S. dollar functional currency operations. No hedge ineffectiveness is recognized in earnings since the
notional amounts of the hedging instruments equal the portion of the investments being hedged, and, where forward contracts are used, the currencies being
exchanged are the functional currencies of the parent and investee; where debt instruments are used as hedges, they are denominated in the functional
currency of the investee. The gain or loss from revaluing hedges of net investments in foreign operations at the spot rate is deferred and reported within
Accumulated other comprehensive income (loss) in Shareholders’ equity, net of tax effects. The forward points on the hedging instruments are recorded in
Interest and dividend revenues or expense.
Consolidated Statements of Cash Flows.
For purposes of these statements, cash and cash equivalents consist of cash and highly liquid investments not held for resale with maturities, when
purchased, of three months or less. In connection with business acquisitions, the Company assumed liabilities of $7,704 million, $1,377 million and $58
million in fiscal 2007, fiscal 2006 and fiscal 2005, respectively. In connection with the Discover Spin−off, net assets of approximately $5,558 million were
distributed to shareholders (see Note 22). At November 30, 2007, $8,086 million of securities were transferred from Securities available for sale to Financial
instruments owned (see Note 8).
Securitization Activities.
The Company engages in securitization activities related to commercial and residential mortgage loans, corporate bonds and loans, U.S. agency
collateralized mortgage obligations and other types of financial assets (see Note 5). Generally, such transfers of financial assets are accounted for as sales
when the Company has relinquished control over the transferred assets. The gain or loss on sale of such financial assets depends, in part, on the previous
carrying amount of the assets involved in the transfer allocated between the assets sold and the retained interests based upon their respective fair values at
the date of sale. Transfers that are not accounted for as sales are accounted for as secured borrowings.
Premises, Equipment and Software Costs.
Premises and equipment consist of buildings, leasehold improvements, furniture, fixtures, computer and communications equipment, power plants, tugs,
barges, terminals, pipelines and software (externally purchased and developed for internal use). Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided by the straight−line method over the estimated useful life of the asset. Estimated
useful lives are generally as follows: buildings—39 years; furniture and fixtures—7 years, computer and communications equipment—3 to 8 years; power
plants—15 years; tugs and barges—15 years; and terminals and pipelines—3 to 25 years. Estimated useful lives for software costs are generally 3 to 5
years.
Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or, where applicable, the remaining term of the lease, but
generally not exceeding: 25 years for building structural improvements and 15 years for other improvements.
Certain costs incurred in connection with internal−use software projects are capitalized and amortized over the expected useful life of the asset, generally 3
to 5 years.
Income Taxes.
Income tax expense is provided for using the asset and liability method, under which deferred tax assets and liabilities are determined based upon the
temporary differences between the financial statement and income tax bases of assets and liabilities using currently enacted tax rates.
116
G-123
Table of Contents
MORGAN STANLEY
Earnings per Common Share.
Basic earnings per common share (“EPS”) is computed by dividing income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities.
Stock−Based Compensation.
The Company early adopted SFAS No. 123R, “Share−Based Payment” (“SFAS No. 123R”), using the modified prospective approach as of December 1,
2004. SFAS No. 123R revised the fair value−based method of accounting for share−based payment liabilities, forfeitures and modifications of stock−based
awards and clarified guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation
cost to service periods. Upon adoption, the Company recognized an $80 million gain ($49 million after−tax) as a cumulative effect of a change in
accounting principle in the first quarter of fiscal 2005 resulting from the requirement to estimate forfeitures at the date of grant instead of recognizing them
as incurred. The cumulative effect gain increased both basic and diluted earnings per share in fiscal 2005 by $0.05.
SFAS No. 123R requires measurement of compensation cost for equity−based awards at fair value and recognition of compensation cost over the service
period, net of estimated forfeitures. The Company determines the fair value of restricted stock units based on the number of units granted and the grant date
fair value of the Company’s common stock, measured as the volume−weighted average price on the date of grant. The fair value of stock options is
determined using the Black−Scholes valuation model and the single grant life method. Under the single grant life method, option awards with graded
vesting are valued using a single weighted−average expected option life. Compensation expense for all stock−based payment awards is recognized using the
graded vesting attribution method. The Employee Stock Purchase Plan (the “ESPP”) allows employees to purchase shares of the Company’s common stock
at a 15% discount from market value. The Company expenses the 15% discount associated with the ESPP.
For stock−based awards issued prior to the adoption of SFAS No. 123R, the Company’s accounting policy for awards granted to retirement−eligible
employees is to recognize compensation cost over the service period specified in the award terms. The Company accelerates any unrecognized
compensation cost for such awards if and when a retirement−eligible employee leaves the Company.
For fiscal 2005 year−end stock−based compensation awards that were granted to retirement−eligible employees in December 2005, the Company
recognized the compensation cost for such awards at the date of grant instead of over the service period specified in the award terms. As a result, the
Company recorded non−cash incremental compensation expenses of approximately $260 million in fiscal 2006 for stock−based awards granted to
retirement−eligible employees as part of the fiscal 2005 year−end award process and for awards granted to retirement−eligible employees, including new
hires, in fiscal 2006. These incremental expenses were included within Compensation and benefits expense and reduced income before taxes within the
Institutional Securities ($190 million), Global Wealth Management Group ($50 million) and Asset Management ($20 million) business segments.
Additionally, based on interpretive guidance related to SFAS No. 123R in the first quarter of fiscal 2006, the Company changed its accounting policy for
expensing the cost of anticipated fiscal 2006 year−end equity awards that are granted to retirement−eligible employees in the first quarter of the following
year. Effective December 1, 2005, the Company accrues the estimated cost of these awards over the course of the current fiscal year. As such, the Company
accrued the estimated cost of fiscal 2007 year−end awards granted to retirement−eligible employees over the 2007 fiscal year rather than expensing the
awards on the date of grant (which occurred in December 2007). The Company believes that this method of recognition for retirement−eligible employees is
preferable because it better reflects the period over which the compensation is earned.
117
G-124
Table of Contents
MORGAN STANLEY
If the Company had accrued the estimated cost of equity awards granted to retirement−eligible employees over the course of the fiscal year ended
November 30, 2005 rather than expensing such awards at the grant date in December 2005, net income would have decreased during fiscal 2005. The
approximate resulting pro forma net income would have been $4,684 million rather than the reported amount of $4,939 million. The approximate resulting
impact on earnings per share for fiscal 2005 would have been a reduction in the reported amounts of earnings per basic share from $4.70 to $4.46 and
earnings per diluted share from $4.57 to $4.34.
Translation of Foreign Currencies. Assets and liabilities of operations having non−U.S. dollar functional currencies are translated at year−end rates of
exchange, and income statement accounts are translated at weighted average rates of exchange for the year. Gains or losses resulting from translating
foreign currency financial statements, net of hedge gains or losses and related tax effects, are reflected in Accumulated other comprehensive income (loss), a
separate component of Shareholders’ equity. Gains or losses resulting from remeasurement of foreign currency transactions are included in net income.
Goodwill and Intangible Assets. Goodwill and indefinite−lived assets are not amortized and are reviewed annually (or more frequently under certain
conditions) for impairment. Other intangible assets are amortized over their useful lives.
Investments in Unconsolidated Investees. The Company invests in unconsolidated investees that own synthetic fuel production plants and in certain
structured transactions not integral to the operations of the Company. The Company accounts for these investments under the equity method. The
Company’s share of the (losses) generated by these investments is recorded within (Losses) gains from unconsolidated investees, and the applicable tax
credits and the tax benefits associated with these operating losses are recorded within the Provision for income taxes.
Deferred Compensation Arrangements. The Company maintains trusts, commonly referred to as rabbi trusts, in connection with certain deferred
compensation plans. Assets of rabbi trusts are consolidated, and the value of the Company’s stock held in rabbi trusts is classified in Shareholders’ equity
and generally accounted for in a manner similar to treasury stock. The Company has included its obligations under certain deferred compensation plans in
Employee stock trust. Shares that the Company has issued to its rabbi trusts are recorded in Common stock issued to employee trust. Both Employee stock
trust and Common stock issued to employee trust are components of Shareholders’ equity. The Company recognizes the original amount of deferred
compensation (fair value of the deferred stock award at the date of grant—see Note 18) as the basis for recognition in Employee stock trust and Common
stock issued to employee trust. Changes in the fair value of amounts owed to employees are not recognized as the Company’s deferred compensation plans
do not permit diversification and must be settled by the delivery of a fixed number of shares of the Company’s common stock.
Accounting Developments.
Limited Partnerships. In June 2005, the Financial Accounting Standards Board (the “FASB”) ratified the consensus reached in EITF Issue No. 04−5,
“Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners
Have Certain Rights” (“EITF Issue No. 04−5”). Under the provisions of EITF Issue No. 04−5, a general partner in a limited partnership is presumed to
control that limited partnership and, therefore, should include the limited partnership in its consolidated financial statements, regardless of the amount or
extent of the general partner’s interest unless a simple majority of the limited partners can vote to dissolve or liquidate the partnership or otherwise remove
the general partner without having to show cause or the limited partners have substantive participating rights that can overcome the presumption of control
by the general partner. EITF Issue No. 04−5 was effective immediately for all newly formed limited partnerships and existing limited partnerships for which
the partnership agreements
118
G-125
Table of Contents
MORGAN STANLEY
have been modified. For all other existing limited partnerships for which the partnership agreements have not been modified, the Company adopted EITF
Issue No. 04−5 on December 1, 2006. The adoption of EITF Issue No. 04−5 on December 1, 2006 did not have a material impact on the Company’s
consolidated financial statements.
Accounting for Certain Hybrid Financial Instruments. In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial
Instruments” (“SFAS No. 155”), which amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities,” as amended (“SFAS No.
133”), and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 140”), and permits
hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation to irrevocably be accounted for at fair value, with
changes in fair value recognized in the statement of income. The fair value election may be applied on an instrument−by−instrument basis. SFAS No. 155
also eliminates a restriction on the passive derivative instruments that a qualifying special purpose entity may hold. The Company adopted SFAS No. 155
on December 1, 2006. Since SFAS No. 159 incorporates accounting and disclosure requirements that are similar to SFAS No. 155, the Company decided to
apply SFAS No. 159, rather than SFAS No. 155, to its fair value elections for hybrid financial instruments.
Accounting for Servicing of Financial Assets. In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS
No. 156”), which requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The
standard permits an entity to subsequently measure each class of servicing assets or servicing liabilities at fair value and report changes in fair value in the
statement of income in the period in which the changes occur. The Company adopted SFAS No. 156 on December 1, 2006 and elected to fair value
mortgage servicing rights (“MSRs”) held as of the date of adoption. This election did not have a material impact on the Company’s opening balance of
Retained earnings as of December 1, 2006. The Company also elected to fair value MSRs acquired after December 1, 2006.
Accounting for Uncertainty in Income Taxes. In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s
financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in an income tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The adoption of FIN 48 on December 1, 2007 did not have a material impact on the Company’s
consolidated financial statements.
Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair
value and enhances disclosures requirements for fair value measurements. In addition, SFAS No. 157 disallows the use of block discounts when measuring
financial instruments that trade with quoted prices in an active market. It also nullifies select guidance provided by EITF Issue No. 02−3, which prohibited
the recognition of trading gains or losses at the inception of a derivative contract, unless the fair value of such derivative is based on a valuation technique
that incorporates observable market data. SFAS No. 157 also requires the Company to consider its own credit spreads when measuring the fair value of
liabilities, including derivatives. Effective December 1, 2006, the Company elected early adoption of SFAS No. 157. In accordance with the provisions of
SFAS No. 157 related to block discounts and EITF Issue No. 02−3, the Company recorded a cumulative effect adjustment of approximately $84 million
after−tax as an increase to the opening balance of Retained earnings as of December 1, 2006, which was primarily associated with EITF Issue No. 02−3.
The impact of considering the Company’s own credit spreads when measuring the fair value of liabilities, including derivatives, did not have a material
impact on fair value measurements at the date of adoption. With the adoption of SFAS No. 157, the Company no longer applies the revenue recognition
criteria of EITF Issue No. 02−3.
119
G-126
Table of Contents
MORGAN STANLEY
Employee Benefit Plans. In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Among other items, SFAS No. 158 required
recognition of the overfunded or underfunded status of the Company’s defined benefit and postretirement plans as an asset or liability in the consolidated
financial statements for the fiscal year ending November 30, 2007. The Company recorded an after−tax charge of $208 million to Shareholders’ equity upon
the adoption of this requirement. SFAS No. 158 also requires the measurement of defined benefit and postretirement plan assets and obligations as of the
end of the fiscal year. SFAS No. 158’s requirement to use the fiscal year−end date as the measurement date is effective for fiscal years ending after
December 15, 2008. The Company expects to early adopt a fiscal year−end measurement date for its fiscal year ending November 30, 2008 and currently
expects to record an after−tax charge of approximately $15 million to Shareholders’ equity upon adoption.
Fair Value Option. In February 2007, the FASB issued SFAS No. 159, which provides entities the option to measure certain financial assets and financial
liabilities at fair value with changes in fair value recognized in earnings each period. SFAS No. 159 permits the fair value option election on an
instrument−by−instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.
Effective December 1, 2006, the Company elected early adoption of SFAS No. 159 for certain eligible instruments, including certain equity method
investments, certain loans and loan commitments, certain certificates of deposits and certain structured notes. Such instruments included loans and other
financial instruments held by subsidiaries that are not registered broker−dealers as defined in the American Institute of Certified Public Accountants
(“AICPA”) Audit and Accounting Guide, Brokers and Dealers in Securities, or that are not held by investment companies as defined in the AICPA Audit
and Accounting Guide, Investment Companies. A substantial portion of these positions, as well as the financial instruments included within Other secured
financings, had been accounted for by the Company at fair value prior to the adoption of SFAS No. 159. Financial instruments under the fair value option
election are primarily reflected within Financial instruments owned and Financial instruments sold, not yet purchased in the consolidated statement of
financial condition. As a result of the adoption of SFAS No. 159, the Company recorded a cumulative effect adjustment of approximately $102 million
after−tax as an increase to the opening balance of Retained earnings as of December 1, 2006.
Offsetting of Amounts Related to Certain Contracts. In April 2007, the FASB issued FASB Staff Position (“FSP”) No. FIN 39−1, “Amendment of FASB
Interpretation No. 39”, (“FSP FIN 39−1”). FSP FIN 39−1 amends certain provisions of FIN 39, “Offsetting of Amounts Related to Certain Contracts,” and
permits companies to offset fair value amounts recognized for cash collateral receivables or payables against fair value amounts recognized for net
derivative positions executed with the same counterparty under the same master netting arrangement. FSP FIN 39−1 is effective for fiscal years beginning
after November 15, 2007, with early application permitted. The adoption of FSP FIN 39−1 on December 1, 2007 did not have a material impact on the
Company’s consolidated financial statements.
Investment Company Accounting. In June 2007, the AICPA issued Statement of Position (“SOP”) 07–1, “Clarification of the Scope of the Audit and
Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies”
(“SOP 07−1”). SOP 07−1 provides guidance for determining whether an entity is within the scope of the AICPA “Audit and Accounting Guide Investment
Companies” (the “Guide”). SOP 07−1 addresses whether the specialized industry accounting principles of the Guide should be retained by a parent
company in consolidation. In addition, SOP 07−1 includes certain disclosure requirements for parent companies and equity method investors in investment
companies that retain investment company accounting in the parent company’s consolidated financial statements or the financial statements of an equity
method investor. SOP 07−1, as originally issued, was to be effective for the Company as
120
G-127
Table of Contents
MORGAN STANLEY
of December 1, 2008. In May 2007, the FASB issued FSP FIN 46R−7, “Application of FIN 46R to Investment Companies,” (“FSP FIN 46R−7”) which
amends FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities (“FIN 46R”) to make permanent the temporary
deferral of the application of FIN 46R to entities within the scope of the revised audit guide under SOP 07−1. FSP FIN 46R−7 is effective upon adoption of
SOP 07−1. The Company is currently evaluating the potential impact of adopting SOP 07−1 and FSP FIN 46R−7. In November 2007, the FASB issued a
proposed FSP SOP 07−1−a to delay indefinitely the effective date of SOP 07−1.
Dividends on Share−Based Payment Awards. In June 2007, the EITF reached consensus on Issue No. 06−11, “Accounting for Income Tax Benefits of
Dividends on Share−Based Payment Awards” (“EITF Issue No. 06−11”). EITF Issue No. 06−11 requires that the tax benefit related to dividend equivalents
paid on restricted stock units that are expected to vest be recorded as an increase to additional paid−in capital. The Company currently accounts for this tax
benefit as a reduction to its income tax provision. EITF Issue No. 06−11 is to be applied prospectively for tax benefits on dividends declared in fiscal years
beginning after December 15, 2007. The Company is currently evaluating the potential impact of adopting EITF Issue No. 06−11.
Business Combinations. In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). SFAS 141(R) requires
the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or
partial acquisition); establishes the acquisition−date fair value as the measurement objective for all assets acquired and liabilities assumed; requires
expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to
evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies to all transactions or other events in which
the Company obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations
achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or after December 1, 2009.
Noncontrolling Interests. In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an
amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160 requires reporting entities to present noncontrolling (minority)
interests as equity (as opposed to as a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and
noncontrolling interests. SFAS No. 160 applies prospectively as of December 1, 2009, except for the presentation and disclosure requirements which will be
applied retrospectively for all periods presented.
121
G-128
Table of Contents
MORGAN STANLEY
3. Fair Value Disclosures.
Fair Value Measurements.
The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with SFAS No. 157. See
Note 2 for a discussion of the Company’s policies regarding this hierarchy.
The following fair value hierarchy tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of
November 30, 2007:
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of November 30, 2007
Assets
Cash and securities deposited with clearing organizations or
segregated under federal and other regulations or requirements
Financial instruments owned:
Corporate equities
Derivative contracts(1)
Investments
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
$
$
Total financial instruments owned
Securities received as collateral
Intangible assets(2)
Liabilities
Commercial paper and other short−term borrowings
Deposits
Financial instruments sold, not yet purchased:
Corporate equities
Derivative contracts(1)
$
31,354
—
Significant
Unobservable
Inputs
(Level 3)
$
—
Counterparty
and Cash
Collateral
Netting
Balance
as of
November 30,
2007
$
$
—
31,354
11,038
15,834
223
82,592
4,526
953
—
12,189
5,743
110,443
3,549
90,654
249
3,096
660
29
37,058
1,236
21,601
13,068
—
—
—
—
—
(39,778)
—
—
23,887
21,606
147,724
87,377
77,003
14,270
3,096
115,166
68,031
—
225,923
14,191
428
73,652
7
—
(39,778)
—
—
374,963
82,229
428
—
—
$
3,068
3,769
$
—
—
$
—
—
$
3,068
3,769
8,208
9,633
16
29,948
7,031
—
13
5,994
6,454
935
86,968
398
—
—
1,122
16
15,663
—
—
—
—
—
(38,058)
—
8,221
15,627
7,592
30,899
71,604
398
Total financial instruments sold, not yet purchased
54,836
100,762
16,801
(38,058)
134,341
Obligation to return securities received as collateral
Long−term borrowings
68,031
—
—
14,191
25,451
37,994
7
2,321
398
(1)
(2)
—
—
—
82,229
27,772
38,392
Amounts represent the impact of counterparty netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included within that
level.
Amount represents MSRs accounted for at fair value (see Note 5).
122
G-129
Table of Contents
MORGAN STANLEY
The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis. Level 3 instruments may
be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains and losses for assets and liabilities
within the Level 3 category presented in the tables below do not reflect the related realized or unrealized gains and losses on hedging instruments that have
been classified by the Company within the Level 1 and/or Level 2 categories. Additionally, both observable and unobservable inputs may be used to
determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and losses for assets and
liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes
in market interest rates) and unobservable (e.g., changes in unobservable long−dated volatilities) inputs.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Fiscal Year Ended November 30, 2007
Total Realized and Unrealized Gains
or (Losses) Included in Income
Assets
U.S. government and agency
securities
Other sovereign government
obligations
Corporate and other debt(1)
Corporate equities
Net derivative contracts(1)(2)
Investments(3)
Securities received as collateral
Other assets(4)
Liabilities
Financial instruments sold, not yet
purchased:
Corporate and other debt(1)
Corporate equities
Obligation to return securities received
as collateral
(1)
Beginning
Balance
Principal
Transactions:
Trading
Principal
Transactions:
Investments
$
$
$
2
162
33,941
1,040
30
3,879
40
2,154
$
185
9
40
4,724
464
134
—
10
(5,999)
62
4,152
—
—
—
$
(1,242)
(58)
—
—
—
—
(114)
—
—
—
Purchases,
Sales,
Other
Settlements
and
Issuances,
net
Net
Transfers
In and/or
(Out) of
Level 3
Ending
Balance
$
$
$
$
Other
Revenues
$
—
—
—
—
2,538
—
—
$
Total
Realized
and
Unrealized
Gains or
(Losses)
—
—
—
—
—
—
—
32
$
134
10
(5,999)
62
4,152
2,538
—
32
—
—
$ (1,242)
(58)
—
—
—
—
—
(114)
524
(143)
3,664
(260)
913
6,651
(33)
(2,186)
$
(439)
(55)
(33)
(2,403)
(185)
$
—
660
—
5,452
394
843
—
—
—
29
37,058
1,236
5,938
13,068
7
—
134
4
$ 1,122
16
—
—
5
7
2,321
398
The net gains from Net derivative contracts and the net losses from Corporate and other debt resulted from market movements primarily associated with credit products and various
credit linked instruments, respectively. The net gains in Level 3 Net derivative contracts were primarily driven by certain credit default swaps and other instruments associated with
the Company’s credit products and securitized products activities. The net losses in Level 3 Corporate and other debt were primarily driven by certain asset−backed securities,
including residential and commercial mortgage loans, and by corporate loans and loan commitments.
123
G-130
Table of Contents
MORGAN STANLEY
These results are only a component of the overall trading strategies of these businesses and do not take into consideration any related financial instruments that have been classified
by the Company within the Level 1 and/or Level 2 categories. For example, the Company recorded offsetting net losses in Level 2 Net derivative contracts, which were primarily
associated with the Company’s credit products and securitized products activities.
(2)
(3)
(4)
The Company reclassified certain Corporate and other debt and Net derivative contracts from Level 2 to Level 3 because certain significant inputs for the fair value measurement
became unobservable. These reclassifications included transfers in the fourth quarter primarily related to the continued market and liquidity deterioration in the mortgage markets.
The most material transfers into Level 3 were in commercial whole loans, residuals from residential securitizations, and interest−only commercial mortgage and agency bonds as well
as commercial and residential credit default swaps.
Amounts represent Financial instruments owned—derivative contracts net of Financial instruments sold, not yet purchased—derivative contracts.
The net gains from Financial instruments owned—investments were primarily related to investments associated with the Company’s real estate products and private equity portfolio.
These assets were disposed of in connection with the Discover Spin−off.
The following table presents the amounts of unrealized gains or (losses) for the fiscal year ended November 30, 2007 relating to those assets and liabilities
for which the Company utilized significant Level 3 inputs to determine fair value and that were still held by the Company at November 30, 2007:
Fiscal 2007 Unrealized Gains (Losses) for Level 3 Assets and Liabilities Still Held at November 30, 2007
Fiscal Year Ended
November 30, 2007
Principal
Principal
Transactions:
Transactions:
Trading
Investments
Assets
Corporate equities
Investments
Net derivative contracts
Liabilities
Financial instruments sold, not yet purchased:
Corporate equities
124
$
49
2
(4,528)
515
—
(3,294)
$
—
—
—
—
1,492
—
$
(455)
(27)
(116)
$
—
—
—
G-131
Table of Contents
MORGAN STANLEY
Fair Value Option.
The following table presents information about the eligible instruments for which the Company elected the fair value option and for which a transition
adjustment was recorded as of December 1, 2006:
Transition
Adjustment
to Retained
Earnings
Gain/(Loss)
Carrying Value of
Instrument
at December 1, 2006
Corporate lending(1)
Mortgage lending(2)
Investments(3)
Commercial paper and other short−term borrowings(4)
Deposits(5)
$
8,587
1,258
1,305
946
3,143
14,354
$
Pre−tax cumulative effect of adoption of the fair value option
Deferred taxes
16
7
13
(1)
1
130
Carrying Value of
Instrument
at December 1, 2006
(after Adoption of
SFAS No. 159)
$
8,603
1,265
1,318
947
3,142
14,224
166
64
Cumulative effect of adoption of the fair value option
$
102
The transition adjustments were primarily related to the following:
(1)
Loans and loan commitments made in connection with Institutional Securities’ corporate lending activities. The fair value option was elected for these positions as they are generally
risk managed on a fair value basis.
(2) Certain mortgage lending products which are risk managed by the Institutional Securities business segment on a fair value basis. The Company did not elect the fair value option for
other eligible mortgage lending products that were managed by the Discover business segment prior to the Discover Spin−off.
(3) Certain investments that had been previously accounted for under the equity method, as well as certain interests in clearinghouses. The fair value option was elected only for positions
that are risk managed on a fair value basis.
(4) Structured notes and other hybrid long−term debt instruments. The fair value option was elected for these positions as they are risk managed on a fair value basis. The fair value
option was elected for all such instruments issued after December 1, 2006 and a portion of the portfolio of instruments outstanding as of December 1, 2006. The fair value option was
not elected for the remaining portion of the portfolio that existed as of December 1, 2006 due to cost−benefit considerations, including the operational effort involved.
(5) Brokered and callable certificates of deposit issued by certain of the Company’s bank subsidiaries. The fair value option was elected for these positions as they are risk−managed on a
fair value basis. The Company did not elect the fair value option for other eligible instruments within Deposits that were managed by the Discover business segment prior to the
Discover Spin−off.
The following table presents gains and (losses) due to changes in fair value for items measured at fair value pursuant to the fair value option election for
fiscal year ended November 30, 2007:
Principal
Transactions:
Trading
Fiscal year ended November 30, 2007
Deposits
(1)
$
(326)
(5)
(481)
Net
Interest
Revenue
$
(5)
—
(366)
Losses Included in
the Year Ended
November 30,
2007(1)
$
(331)
(5)
(847)
In addition to these amounts, as discussed in Note 2, all of the instruments within Financial instruments owned or Financial instruments sold, not yet purchased are measured at fair
value, either through the election of SFAS No. 159 or as required by other accounting pronouncements. Changes in the fair value of these instruments are recorded in Principal
transactions—trading and Principal transactions—investment revenues.
125
G-132
Table of Contents
MORGAN STANLEY
As of November 30, 2007, the aggregate contractual principal amount of loans for which the fair value option was elected exceeded the fair value of such
loans by approximately $28,880 million. The aggregate fair value of loans that were 90 or more days past due as of November 30, 2007 was $6,588 million.
The aggregate contractual principal amount of such loans 90 or more days past due exceeded their fair value by approximately $23,501 million. This
difference in amount primarily emanates from the Company’s distressed debt trading business, which purchases distressed debt at amounts well below par.
For the fiscal year ended November 30, 2007, changes in the fair value of loans for which the fair value option was elected that were attributable to changes
in instrument−specific credit spreads were losses of $2,258 million. Instrument−specific credit losses were determined by excluding the non−credit
components of gains and losses, such as those due to changes in interest rates.
For the fiscal year ended November 30, 2007, the estimated changes in the fair value of the Company’s short−term and long−term borrowings, including
structured notes, for which the fair value option was elected that were attributable to changes in instrument−specific credit spreads were gains of
approximately $840 million. This gain was attributable to the widening of the Company’s credit spreads and was determined based upon observations of the
Company’s secondary bond market spreads. As of November 30, 2007, the aggregate contractual principal amount of long−term debt instruments for which
the fair value option was elected exceeded the fair value of such instruments by approximately $1,572 million.
The estimated change in the fair value of other liabilities for which the fair value option was elected that was attributable to changes in instrument−specific
credit spreads was a loss of approximately $291 million in the fiscal year ended November 30, 2007. This loss was primarily related to leveraged loan
contingent commitments and was attributable to the illiquid market conditions that existed late in the year. It was generally determined based on the
differential between estimated expected client yields at November 30, 2007 and contractual yields.
Financial Instruments Not Measured at Fair Value.
Some of the Company’s financial instruments are not measured at fair value on a recurring basis but nevertheless are recorded at amounts that approximate
fair value due to their liquid or short−term nature. Such financial assets and financial liabilities include: Cash and cash equivalents, the cash component of
Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements, Securities purchased under
agreements to resell, Securities borrowed, Securities sold under agreements to repurchase, Securities loaned, Receivables—customers,
Receivables—brokers, dealers and clearing organizations, Payables—customers, Payables—brokers, dealers and clearing organizations, certain Commercial
paper and other short−term borrowings, and certain Deposits.
The Company’s long−term borrowings are recorded at historical amounts unless elected under the SFAS No. 159 fair value election or designated as a
hedged item in a fair value hedge under SFAS No. 133. The fair value of the Company’s long−term borrowings was estimated using either quoted market
prices or discounted cash flow analyses based on the Company’s current borrowing rates for similar types of borrowing arrangements. At November 30,
2007, the carrying value of the Company’s long−term borrowings was approximately $3.3 billion higher than fair value. At November 30, 2006, the
carrying value of the Company’s long−term borrowings was approximately $1.8 billion less than fair value.
126
G-133
Table of Contents
MORGAN STANLEY
4. Collateralized Transactions.
Securities purchased under agreements to resell (“reverse repurchase agreements”) and Securities sold under agreements to repurchase (“repurchase
agreements”), principally government and agency securities, are carried at the amounts at which the securities subsequently will be resold or reacquired as
specified in the respective agreements; such amounts include accrued interest. Reverse repurchase agreements and repurchase agreements are presented on a
net−by−counterparty basis, when appropriate. The Company’s policy is to take possession of securities purchased under agreements to resell. Securities
borrowed and Securities loaned are carried at the amounts of cash collateral advanced and received in connection with the transactions. Other secured
financings include the liabilities related to transfers of financial assets that are accounted for as financings rather than sales, consolidated variable interest
entities where the Company is deemed to be the primary beneficiary and certain equity−referenced securities and loans where in all instances these
liabilities are payable solely from the cash flows of the related assets accounted for as Financial instruments owned.
The Company pledges its financial instruments owned to collateralize repurchase agreements and other securities financings. Pledged securities that can be
sold or repledged by the secured party are identified as Financial instruments owned (pledged to various parties) in the consolidated statements of financial
condition. The carrying value and classification of securities owned by the Company that have been loaned or pledged to counterparties where those
counterparties do not have the right to sell or repledge the collateral were as follows:
At
At
November 30,
November 30,
2007
2006
Corporate equities
Total
$
7,134
333
32,530
1,133
$
12,111
893
44,237
6,662
$
41,130
$
63,903
The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions to, among other
things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance the Company’s
inventory positions. The Company also engages in securities financing transactions for customers through margin lending. Under these agreements and
transactions, the Company either receives or provides collateral, including U.S. government and agency securities, other sovereign government obligations,
corporate and other debt, and corporate equities. The Company receives collateral in the form of securities in connection with reverse repurchase
agreements, securities borrowed and derivative transactions, and customer margin loans. In many cases, the Company is permitted to sell or repledge these
securities held as collateral and use the securities to secure repurchase agreements, to enter into securities lending and derivative transactions or for delivery
to counterparties to cover short positions. At November 30, 2007 and November 30, 2006, the fair value of securities received as collateral where the
Company is permitted to sell or repledge the securities was $948 billion and $942 billion, respectively, and the fair value of the portion that had been sold or
repledged was $708 billion and $780 billion, respectively.
The Company additionally receives securities as collateral in connection with certain securities for securities transactions in which the Company is the
lender. In instances where the Company is permitted to sell or repledge these securities, the Company reports the fair value of the collateral received and the
related obligation to return the collateral in the consolidated statement of financial condition. At November 30, 2007 and November 30,
127
G-134
Table of Contents
MORGAN STANLEY
2006, $82 billion and $65 billion, respectively, were reported as Securities received as collateral and an Obligation to return securities received as collateral
in the consolidated statements of financial condition. Collateral received in connection with these transactions that was subsequently repledged was
approximately $72 billion and $45 billion at November 30, 2007 and November 30, 2006, respectively.
The Company manages credit exposure arising from reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned
transactions by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties that provide the
Company, in the event of a customer default, the right to liquidate collateral and the right to offset a counterparty’s rights and obligations. The Company
also monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and, as necessary,
requests additional collateral to ensure such transactions are adequately collateralized. Where deemed appropriate, the Company’s agreements with third
parties specify its rights to request additional collateral. Customer receivables generated from margin lending activity are collateralized by customer−owned
securities held by the Company. For these transactions, adherence to the Company’s collateral policies significantly limits the Company’s credit exposure in
the event of customer default. The Company may request additional margin collateral from customers, if appropriate, and, if necessary, may sell securities
that have not been paid for or purchase securities sold but not delivered from customers.
5. Securitization Activities and Variable Interest Entities.
Securitization Activities. The Company engages in securitization activities related to commercial and residential mortgage loans, U.S. agency
collateralized mortgage obligations, corporate bonds and loans, municipal bonds and other types of financial assets. Special purpose entities (“SPEs”), also
known as variable interest entities (“VIEs”) are typically used in such securitization transactions. Transferred assets are carried at fair value prior to
securitization, and any changes in fair value are recognized in the consolidated statements of income. The Company may act as underwriter of the beneficial
interests issued by securitization vehicles. Underwriting net revenues are recognized in connection with these transactions. The Company may retain
interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included in the consolidated statements
of financial condition at fair value. Any changes in the fair value of such retained interests are recognized in the consolidated statements of income.
Retained interests in securitized financial assets were approximately $5.3 billion at November 30, 2007, the majority of which were related to residential
mortgage loan, commercial mortgage loan and U.S. agency collateralized mortgage obligation securitization transactions. Net gains at the time of
securitization were not material in fiscal 2007.
128
G-135
Table of Contents
MORGAN STANLEY
The following table presents information on the Company’s residential mortgage loan, commercial mortgage loan and U.S. agency collateralized mortgage
obligation securitization transactions. Key economic assumptions and the sensitivity of the current fair value of the retained interests to immediate 10% and
20% adverse changes in those assumptions at November 30, 2007 were as follows (dollars in millions):
Residential
Mortgage
Loans
Investment grade retained interests
Non−investment grade retained interests
Total retained interests (carrying amount/fair value)
Weighted average life (in months)
Range
Weighted average discount rate (per annum)
Range
Impact on fair value of 10% adverse change
Weighted average credit losses (rate per annum)
Range
Weighted average prepayment speed assumption (“PSA”)(1)(2)
Range
(1)
(2)
U.S. Agency
Collateralized
Mortgage
Obligations
Commercial
Mortgage
Loans
$
2,048
1,167
$
678
406
$
826
—
$
3,215
$
1,084
$
826
49
1−322
12.55%
1.12−74.10%
$
(114)
$
(218)
4.52%
0.00−12.00%
$
(215)
$
(371)
1,173
188−2,250PSA
$
(118)
$
(194)
57
0.5−139
8.48%
3.00−16.83%
$
(14)
$
(28)
3.24%
0.00−13.69%
$
(5)
$
(10)
—
—
$
—
$
—
51
1−271
6.04%
0.75−18.12%
$
(16)
$
(31)
0.00%
0.00−0.00%
$
—
$
—
301
167−718PSA
$
(7)
$
(19)
Amounts for residential mortgage loans exclude positive valuation effects from immediate 10% and 20% changes.
Commercial mortgage loans typically contain provisions that either prohibit or economically penalize the borrower from prepaying the loan for a specified period of time.
The weighted average assumptions and parameters used initially to value retained interests in relation to securitizations that were still held by the Company
as of November 30, 2007 were as follows:
Residential
Mortgage
Loans
Weighted average life (in months)
Weighted average discount rate (rate per annum)
Weighted average credit losses (rate per annum)
Weighted average prepayment speed assumptions
45
9.51%
2.23%
1,842
Commercial
Mortgage
Loans
64
6.87%
1.54%
—
U.S. Agency
Collateralized
Mortgage
Obligations
72
5.79%
—
258
The tables above do not include the offsetting benefit of any financial instruments that the Company may utilize to hedge risks inherent in its retained
interests. In addition, the sensitivity analysis is hypothetical and should be used with caution. Changes in fair value based on a 10% or 20% variation in an
assumption generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the
effect of a variation in a particular assumption on the fair value of the retained interests is calculated independent of changes in any other assumption; in
practice, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. In addition, the sensitivity analysis
does not consider any corrective action that the Company may take to mitigate the impact of any adverse changes in the key assumptions.
129
G-136
Table of Contents
MORGAN STANLEY
During fiscal 2007, fiscal 2006 and fiscal 2005, the Company received proceeds from new securitization transactions of $64 billion, $68 billion and $65
billion, respectively, and cash flows from retained interests in securitization transactions of $6.0 billion, $6.0 billion and $7.1 billion, respectively.
Mortgage Servicing Rights. The Company may retain servicing rights to certain mortgage loans that are sold through its securitization activities. These
transactions create an asset referred to as MSRs, which are included within Intangible assets in the consolidated statements of financial condition.
The following table presents information about the Company’s MSRs, which relate to its mortgage loan business activities (dollars in millions):
Fiscal
2007
Fair value as of the beginning of the period
Additions:
Purchases of servicing assets(1)
Servicing assets that result from transfers of financial assets
$ 93
306
549
Total additions
Subtractions:
Sales/disposals
Changes in fair value(2)
855
(372)
(148)
Fair value as of the end of the period
$ 428
Amount of contractually specified(2):
Servicing fees
Late fees
Ancillary fees
$ 170
26
1
$ 197
(1)
(2)
Amount includes MSRs obtained in connection with the Company’s acquisition of Saxon Capital, Inc. (see Note 23).
These amounts are recorded within Other revenues in the Company’s consolidated statements of income.
Fiscal
2007
Assumptions Used in Measuring Fair Value:
Weighted average discount rate
Weighted average prepayment speed assumption
18.11%
713PSA
The Company generally utilizes information provided by third parties in order to determine the fair value of its MSRs. The valuation of MSRs consist
of projecting servicing cash flows and discounting such cash flows using an appropriate risk−adjusted discount rate. These valuations require estimation of
various assumptions, including future servicing fees, credit losses and other related costs, discount rates and mortgage prepayment speeds. The Company
also compares the estimated fair values of the MSRs from the valuations with observable trades of similar instruments or portfolios. Due to subsequent
changes in economic and market conditions, the actual rates of prepayments, credit losses and the value of collateral may differ significantly from the
Company’s original estimates. Such differences could be material. If actual prepayment rates and credit losses were higher than those assumed, the value of
the Company’s MSRs could be adversely affected. The Company may hedge a portion of its MSRs through the use of financial instruments, including
certain derivative contracts.
Variable Interest Entities. FASB Interpretation No. 46, as revised (“FIN 46R”), “Consolidation of Variable Interest Entities,” applies to certain entities in
which equity investors do not have the characteristics of a
130
G-137
Table of Contents
MORGAN STANLEY
controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support
from other parties. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected
residual returns or both, as a result of holding variable interests. The Company consolidates entities in which it is the primary beneficiary. For those entities
deemed to be qualifying special purpose entities (as defined in SFAS No. 140), the Company does not consolidate the entity. See Note 1 regarding the
characteristics of qualifying special purpose entities.
The Company is involved with various entities in the normal course of business that may be deemed to be VIEs. The Company’s variable interests in VIEs
include debt and equity interests, commitments, guarantees and derivative instruments. The Company’s involvement with VIEs arises primarily from:
• Purchased, sold and retained interests in connection with market making and securitization activities.
• Guarantees issued and residual interests retained in connection with municipal bond securitizations.
• Loans and investments made to VIEs that hold debt, equity, real estate or other assets.
• Derivatives entered into with variable interest entities.
• Structuring of credit linked notes or other asset−repackaged notes designed to meet the investment objectives of clients.
• Other structured transactions designed to provide enhanced, tax−efficient yields to the Company or its clients.
The following table sets forth the Company’s total assets and maximum exposure to loss associated with VIEs that the Company consolidated at
November 30, 2007. The Company accounts for the assets held by the entities as Financial instruments owned and the liabilities of the entities as Other
secured financings in the consolidated statement of financial condition (dollars in millions):
As of November 30, 2007
Maximum Exposure to Loss in Consolidated VIEs(1)
Mortgage and asset−backed securitizations
Municipal bond trusts
Credit and real estate(2)
Commodities financing
Other structured transactions
VIE Assets
That the
Company
Consolidates
Debt
and
Equity
Interests
Derivatives
Commitments
and
Guarantees
$
5,916
828
5,130
1,170
9,403
$ 1,746
1
2,515
—
8,868
$
$
—
827
—
—
9
$ 1,750
828
5,835
328
8,877
22,447
$13,130
$
$
836
$17,618
$
(1)
(2)
4
—
3,320
328
—
3,652
Total
The Company’s maximum exposure to loss often differs from the carrying value of the VIE’s assets. The maximum exposure to loss is dependent on the nature of the Company’s
variable interest in the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps, written put options, and the fair value of
certain other derivatives and investments the Company has made in the VIEs. Where notional amounts are utilized in quantifying maximum exposure related to derivatives, such
amounts do not reflect writedowns already recorded by the Company. The Company’s maximum exposure to loss does not include the offsetting benefit of any financial instruments
that the Company may utilize to hedge these risks associated with the Company’s variable interests.
The Company’s maximum exposure to loss associated with Credit and real estate VIEs exceeds the consolidated assets of these entities. This is due to the inclusion in this category of
certain VIEs that typically hold a limited amount of non−derivative security positions and instead obtain market exposure through the use of derivatives. Given the use of such
derivatives, the risk of loss associated with such entities typically exceeds the carrying value of their assets. The Company’s maximum exposure to loss associated with such
consolidated variable interest entities is generally limited to the notional amount of the Company’s derivatives entered into with the VIE and the fair value of any non−derivative
security positions held by the Company.
131
G-138
Table of Contents
MORGAN STANLEY
The following table sets forth the Company’s total assets and maximum exposure to loss associated with non−consolidated VIEs in which the Company had
significant variable interests at November 30, 2007 (dollars in millions):
Mortgage and asset−backed securitizations
Credit and real estate
Other structured transactions
VIE Assets
That the
Company
Does not
Consolidate
As of November 30, 2007
Maximum Exposure to Loss in Non−consolidated VIEs (1)
Commitments
Debt and
and
Equity
Guarantees
Total
Interests
Derivatives
$
$
7,234
20,265
10,218
$ 37,717
(1)
155
12,987
1,967
$
125
200
—
$
—
68
474
$
280
13,255
2,441
$ 15,109
$
325
$
542
$ 15,976
The Company’s maximum exposure to loss often differs from the carrying value of the VIE’s assets. The maximum exposure to loss is dependent on the nature of the Company’s
variable interest in the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps, written put options, and the fair value of
certain other derivatives and investments the Company has made in the VIEs. Where notional amounts are utilized in quantifying maximum exposure related to derivatives, such
amounts do not reflect writedowns already recorded by the Company. The Company’s maximum exposure to loss does not include the offsetting benefit of any financial instruments
that the Company may utilize to hedge these risks associated with the Company’s variable interests.
At November 30, 2006, in connection with its Institutional Securities business, the aggregate size of VIEs for which the Company was the primary
beneficiary of the entities was approximately $20.4 billion, which is the carrying amount of the consolidated assets recorded as Financial instruments owned
that are collateral for the entities’ obligations. At November 30, 2006, also in connection with its Institutional Securities business, the aggregate size of the
entities for which the Company holds significant variable interests was approximately $34.7 billion.
6. Sales and Trading Activities.
The Company’s institutional sales and trading activities are conducted through the integrated management of its client−driven and proprietary transactions
along with the hedging and financing of these positions. Sales and trading activities include revenues from customer purchases and sales of financial
instruments in which the Company acts as principal and gains and losses on the Company’s positions. The Company also engages in proprietary trading
activities for its own account. Revenues from sales and trading activities are reflected in Principal transactions—trading, Commissions, Interest and
dividends, and Interest expense in the consolidated statement of income.
The Company’s trading portfolios are managed with a view toward the risk and profitability of the portfolios. The following discussions of risk
management, market risk, credit risk, concentration risk and customer activities relate to the Company’s sales and trading activities.
Risk Management. The cornerstone of the Company’s risk management philosophy is protection of the Company’s franchise, reputation and financial
standing. The Company’s risk management philosophy is based on the following principles: comprehensiveness, independence, accountability, defined risk
tolerance and transparency. Given the importance of effective risk management to the Company’s reputation, senior management requires thorough and
frequent communication and appropriate escalation of risk matters.
132
G-139
Table of Contents
MORGAN STANLEY
Risk management at the Company requires independent Company−level oversight, accountability of the Company’s business segments, constant
communication, judgment, and knowledge of specialized products and markets. The Company’s senior management takes an active role in the
identification, assessment and management of various risks at both the Company and business segment level. In recognition of the increasingly varied and
complex nature of the global financial services business, the Company’s risk management philosophy, with its attendant policies, procedures and
methodologies, is evolutionary in nature and subject to ongoing review and modification.
The nature of the Company’s risks, coupled with this risk management philosophy, informs the Company’s risk governance structure. The Company’s risk
governance structure includes the Firm Risk Committee, the Capital Structure and Strategic Transactions Committee, the Chief Risk Officer, the Internal
Audit Department, independent control groups, and various risk control managers, committees and groups located within and across the business segments.
The Firm Risk Committee, composed of the Company’s most senior officers, oversees the Company’s risk management structure. The Firm Risk
Committee’s responsibilities include oversight of the Company’s risk management principles, procedures and limits, and the monitoring of material
financial, operational and franchise risks. The Firm Risk Committee is overseen by the Audit Committee of the Board of Directors (the “Audit Committee”).
The Capital Structure and Strategic Transactions Committee (the “Capital Committee”) reviews strategic transactions for the Company and significant
changes to the Company’s capital structure. The Capital Committee’s responsibilities include reviewing measures of capital and evaluating capital resources
relative to the Company’s risk profile and strategy.
The Chief Risk Officer, a member of the Firm Risk Committee, oversees compliance with Company risk limits; approves certain excessions of Company
risk limits; reviews material market, credit and operational risks; and reviews results of risk management processes with the Audit Committee.
The Internal Audit Department provides independent risk and control assessment and reports to the Audit Committee and administratively to the Chief
Legal Officer. The Internal Audit Department periodically examines the Company’s operational and control environment and conducts audits designed to
cover all major risk categories.
The Market Risk, Credit Risk, Operational Risk, Financial Control, Treasury, and Legal and Compliance Departments (collectively, the “Company Control
Groups”), which are all independent of the Company’s business units, assist senior management and the Firm Risk Committee in monitoring and controlling
the Company’s risk through a number of control processes. The Company is committed to employing qualified personnel with appropriate expertise in each
of its various administrative and business areas to implement effectively the Company’s risk management and monitoring systems and processes.
Each business segment has a risk committee that is responsible for ensuring that the business segment, as applicable, adheres to established limits for
market, credit, operational and other risks; implements risk measurement, monitoring, and management policies and procedures that are consistent with the
risk framework established by the Firm Risk Committee; and reviews, on a periodic basis, its aggregate risk exposures, risk exception experience, and the
efficacy of its risk identification, measurement, monitoring and management policies and procedures, and related controls.
Each of the Company’s business segments also has designated operations officers, committees and groups, including operations and information technology
groups (collectively, “Segment Control Groups” and, together
133
G-140
Table of Contents
MORGAN STANLEY
with the Company Control Groups, the “Control Groups”) to manage and monitor specific risks and report to the business segment risk committee. The
Control Groups work together to review the risk monitoring and risk management policies and procedures relating to, among other things, the business
segment’s market, credit and operational risk profile, sales practices, reputation, legal enforceability, and operational and technological risks. Participation
by the senior officers of the Control Groups helps ensure that risk policies and procedures, exceptions to risk limits, new products and business ventures,
and transactions with risk elements undergo a thorough review.
Market Risk. Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied volatilities (the price volatility of
the underlying instrument imputed from option prices), correlations or other market factors, such as liquidity, will result in losses for a position or portfolio.
The Company manages the market risk associated with its trading activities on a Company−wide basis, on a worldwide trading division level and on an
individual product basis. Aggregate market risk limits have been approved for the Company and for its major trading divisions worldwide (equity and fixed
income, which includes interest rate products, credit products, foreign exchange and commodities). Additional market risk limits are assigned to trading
desks and, as appropriate, products and regions. Trading division risk managers, desk risk managers, traders and the Market Risk Department monitor
market risk measures against limits in accordance with policies set by senior management.
The Market Risk Department independently reviews the Company’s trading portfolios on a regular basis from a market risk perspective utilizing
Value−at−Risk and other quantitative and qualitative risk measures and analyses. The Company’s trading businesses and the Market Risk Department also
use, as appropriate, measures such as sensitivity to changes in interest rates, prices, implied volatilities and time decay to monitor and report market risk
exposures. Stress testing, which measures the impact on the value of existing portfolios of specified changes in market factors for certain products, is
performed periodically and is reviewed by trading division risk managers, desk risk managers and the Market Risk Department. The Market Risk
Department also conducts scenario analyses, which estimate the Company’s revenue sensitivity to a set of specific, predefined market and geopolitical
events.
Credit Risk. Credit risk refers to the risk of loss arising from borrower or counterparty default when a borrower, counterparty or obligor does not meet its
financial obligations. The Company incurs significant, “single name” credit risk exposure through the Institutional Securities business. This type of risk
requires credit analysis of specific counterparties, both initially and on an ongoing basis.
The Institutional Credit Department (“Institutional Credit”) manages credit risk exposure for the Institutional Securities business. Institutional Credit is
responsible for ensuring transparency of material credit risks, ensuring compliance with established limits, approving material extensions of credit, and
escalating risk concentrations to appropriate senior management.
Concentration Risk. The Company is subject to concentration risk by holding large positions in certain types of securities, loans or commitments to
purchase securities of a single issuer, including sovereign governments and other entities, issuers located in a particular country or geographic area, public
and private issuers involving developing countries, or issuers engaged in a particular industry. Financial instruments owned by the Company include U.S.
government and agency securities and securities issued by other sovereign governments (principally Japan, United Kingdom, Germany and Brazil), which,
in the aggregate, represented approximately 4% of the Company’s total assets at November 30, 2007. In addition, substantially all of the collateral held by
the Company for resale agreements or bonds borrowed, which together represented approximately 19% of the Company’s total assets at November 30,
2007, consist of securities issued by the U.S. government, federal agencies or other
134
G-141
Table of Contents
MORGAN STANLEY
sovereign government obligations. Positions taken and commitments made by the Company, including positions taken and underwriting and financing
commitments made in connection with its private equity, principal investment and lending activities, often involve substantial amounts and significant
exposure to individual issuers and businesses, including non−investment grade issuers. In addition, the Company may originate or purchase certain
residential and commercial mortgage loans that could contain certain terms and features that may result in additional credit risk as compared with more
traditional types of mortgages. Such terms and features may include loans made to borrowers subject to payment increases or loans with high loan−to−value
ratios. The Company seeks to limit concentration risk through the use of the systems and procedures described in the preceding discussions of risk
management, market risk and credit risk.
Customer Activities. The Company’s customer activities involve the execution, settlement and financing of various securities and commodities
transactions on behalf of customers. Customer securities activities are transacted on either a cash or margin basis. Customer commodities activities, which
include the execution of customer transactions in commodity futures transactions (including options on futures), are transacted on a margin basis.
The Company’s customer activities may expose it to off−balance sheet credit risk. The Company may have to purchase or sell financial instruments at
prevailing market prices in the event of the failure of a customer to settle a trade on its original terms or in the event cash and securities in customer margin
accounts are not sufficient to fully cover customer losses. The Company seeks to control the risks associated with customer activities by requiring customers
to maintain margin collateral in compliance with various regulations and Company policies.
Derivative Contracts. The amounts in the following table represent the fair value of exchange traded and OTC options and other contracts (including
interest rate, foreign exchange, and other forward contracts and swaps). Derivatives included are held for trading and investment, as well as for asset and
liability management. Derivatives are disclosed net of offsetting positions in situations where netting is appropriate. The asset amounts are not reported net
of non−cash collateral, which the Company obtains with respect to certain of these transactions to reduce its exposure to credit losses.
Credit risk with respect to derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract. The Company’s
exposure to credit risk at any point in time is represented by the fair value of the contracts reported as assets. The Company monitors the creditworthiness of
counterparties to these transactions on an ongoing basis and requests additional collateral when deemed necessary.
The Company’s derivatives (both listed and OTC), net of cash collateral, at November 30, 2007 and November 30, 2006 are summarized in the table below,
showing the fair value of the related assets and liabilities by product:
Assets
Liabilities
Assets
Liabilities
Product Type
Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income
securities contracts
Total
135
$33,804
7,755
19,913
15,531
$ 19,515
9,372
27,887
14,830
$19,444
7,325
16,705
11,969
$ 15,688
7,725
23,155
10,923
$77,003
$ 71,604
$55,443
$ 57,491
G-142
Table of Contents
MORGAN STANLEY
7. Consumer Loans.
Consumer loans, which primarily related to general purpose credit card and consumer installment loans of DFS, were as follows:
At
November 30,
2006
General purpose credit card and consumer installment
Less:
Allowance for consumer loan losses
$
Consumer loans, net
$
23,746
831
22,915
Activity in the allowance for consumer loan losses was as follows:
Fiscal
Fiscal
2006
2005
Balance at beginning of period
Additions:
Provision for consumer loan losses(1)
Purchase of consumer loans(2)
Deductions:
Charge−offs
Recoveries(1)
$
$
943
756
55
Net charge−offs
Translation adjustments and other
Balance at end of period
(1)
(2)
838
$
878
—
(1,001)
174
(1,145)
167
(827)
9
(978)
(5)
831
$
838
Amounts included in discontinued operations.
Amounts relate to the Company’s acquisition of Goldfish (see Note 23) and other acquisitions.
At November 30, 2006, $5,570 million of the Company’s consumer loans had minimum contractual maturities of less than one year. Because of the
uncertainty regarding consumer loan repayment patterns, which historically had been higher than contractually required minimum payments, this amount
may not have necessarily been indicative of the Company’s actual consumer loan repayments.
The Company received net proceeds from consumer loan sales of $5,301 million in fiscal 2007 through the date of the Discover Spin−off. The Company
received net proceeds from consumer loan sales of $11,532 million and $10,525 million in fiscal 2006 and fiscal 2005, respectively.
The Company’s U.S. consumer loan portfolio as of November 30, 2006, including securitized loans, was geographically diverse, with a distribution
approximating that of the population of the U.S.
At November 30, 2006, $2.3 billion of the Company’s consumer loans were classified as held for sale. On June 30, 2007, the Company completed the
Discover Spin−off (see Note 22 for further information).
Credit Card Securitization Activities. The Company’s retained interests in Discover’s credit card asset securitizations included undivided seller’s
interests, accrued interest receivable on securitized credit card
136
G-143
Table of Contents
MORGAN STANLEY
receivables, cash collateral accounts, servicing rights, rights to any excess cash flows (“Residual Interests”) remaining after payments to investors in the
securitization trusts of their contractual rate of return and reimbursement of credit losses, and other retained interests. The undivided seller’s interests less an
applicable allowance for loan losses were recorded in Consumer loans. The Company’s undivided seller’s interests rank pari passu with investors’ interests
in the securitization trusts, and the remaining retained interests were subordinate to investors’ interests. Accrued interest receivable and certain other
subordinated retained interests were recorded in Other assets at amounts that approximated fair value. The Company received annual servicing fees of 2% of
the investor principal balance outstanding. The Company did not recognize servicing assets or servicing liabilities for servicing rights as the servicing
contracts provided just adequate compensation, as defined in SFAS No. 140 to the Company for performing the servicing. Residual Interests and cash
collateral accounts were recorded in Other assets and reflected at fair value. The retained interests were subject to credit, payment and interest rate risks on
the transferred credit card assets. The investors and the securitization trusts had no recourse to the Company’s other assets for failure of cardmembers to pay
when due.
The uncollected balances of securitized general purpose credit card loans were $26.7 billion at November 30, 2006.
The Company no longer has retained interests in Discover’s credit card asset securitizations after the completion of the Discover Spin−off on June 30, 2007.
8. Other Investments.
Other investments of $4,524 million and $3,232 million as of November 30, 2007 and November 30, 2006, respectively, primarily include investments in
unconsolidated investees that are accounted for under the equity method of accounting (see Note 9).
Beginning in the second quarter of fiscal 2007, the Company purchased certain debt securities that were classified as “securities available for sale” in
accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). During fiscal 2007, $4.3 billion of
securities available for sale were sold for a loss of $74 million. In the fourth quarter of fiscal 2007, the Company determined that it no longer intends to hold
the remaining securities in this portfolio until the fair value of the securities recover to a level that exceeds their initial cost. Accordingly, the Company
recorded an other−than−temporary impairment charge of $437 million in Principal transactions−trading revenues in the consolidated statement of income on
these securities in the fourth quarter of fiscal 2007 and reclassified $8.1 billion to Financial instruments owned in the consolidated statement of financial
condition effective November 30, 2007. This other−than−temporary impairment charge represented all unrealized losses for these securities.
9. Investments in Unconsolidated Investees.
The Company invests in unconsolidated investees that own synthetic fuel production plants and in certain structured transactions not integral to the
operations of the Company. The Company accounts for these investments under the equity method of accounting.
Losses from these investments were $47 million, $40 million and $311 million in fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
Synthetic Fuel Production Plants. The Company’s share of the operating losses generated by these investments is recorded within (Losses) gains from
unconsolidated investees, and the tax credits and the tax benefits associated with these operating losses are recorded within the Provision for income taxes.
137
G-144
Table of Contents
MORGAN STANLEY
The table below provides information regarding the losses from unconsolidated investees, tax credits and tax benefits on the losses:
Fiscal Year
2007
2006
2005
Tax credits
Tax benefits on losses
$140
113
55
$225
156
89
$311
336
124
Synthetic fuels tax credits were granted under Section 45K of the Internal Revenue Code. Synthetic fuels tax credits were available in full only when the
price of oil was less than a base price specified by the tax code, as adjusted for inflation (“Base Price”). The Base Price for each calendar year is determined
by the Secretary of the Treasury by April 1 of the following year. If the annual average price of a barrel of oil in 2007 exceeds the applicable Base Price, the
synthetic fuels tax credits generated by the Company’s synthetic fuel facilities will be phased out, on a ratable basis, over the phase−out range. Synthetic
fuels tax credits realized in prior years are not affected by this limitation. Based on fiscal year to date and futures prices at November 30, 2007, the
Company estimates that there will be a partial phase−out of tax credits earned in fiscal 2007. The impact of this anticipated partial phase−out is included
within (Losses) gains from unconsolidated investees and the Provision for income taxes for the fiscal year ended November 30, 2007. Under current tax
law, the Section 45K synthetic fuels tax credits expired on December 31, 2007.
The Company had entered into derivative contracts designed to reduce its exposure to rising oil prices and the potential phase−out of the synthetic fuels tax
credits. Changes in fair value relative to these derivative contracts are included within Principal transactions—trading revenues.
Structured Transactions. Gains from unconsolidated investees associated with investments in certain structured investments were $93 million in fiscal
2007 and $185 million in fiscal 2006.
10.
Goodwill and Net Intangible Assets.
The Company completed its annual goodwill impairment testing, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No.
142”), as of December 1, 2006 and December 1, 2005. During the quarter ended August 31, 2007, the Company changed the date of its annual goodwill
impairment testing to June 1 in order to move the impairment testing outside of the Company’s normal year−end reporting process to a date when resources
are less constrained. The Company believes that the resulting change in accounting principle related to the annual testing date will not delay, accelerate or
avoid an impairment charge. Goodwill impairment tests performed as of June 1, 2007 and December 1, 2006 and December 1, 2005 concluded that no
impairment charges were required as of those dates. The Company determined that the change in accounting principle related to the annual testing date is
preferable under the circumstances and does not result in adjustments to the Company’s financial statements when applied retrospectively. Additionally, due
to the deterioration in the Company’s subprime−related activities, the Company performed an interim impairment test of goodwill subsequent to its annual
testing date of June 1, which did not result in an impairment.
138
G-145
Table of Contents
MORGAN STANLEY
Changes in the carrying amount of the Company’s goodwill and intangible assets for fiscal 2007 and fiscal 2006 were as follows:
Goodwill:
Balance as of November 30, 2005
Goodwill acquired during the year(1)
Institutional
Securities
Global
Wealth
Management
Group
$
$
Goodwill acquired during the year(2)
Goodwill disposed of during the year(3)
Intangible assets:
Intangible assets acquired during the year and other(1)(4)
Amortization expense(5)
701
—
862
(8)
$
$
Intangible assets acquired during the year(2)
Intangible assets disposed of during the year(3)
Amortization expense(5)
(1)
(2)
(3)
(4)
(5)
444
—
257
1,555
227
253
—
(33)
814
$
589
18
3
(313)
966
—
2
Discover
$
968
—
207
(3)
256
31
247
534
2
—
(536)
Total
$2,206
80
506
2,792
20
1,072
(860)
$
297
$
1,172
$
—
$3,024
$
—
—
—
—
$
—
$
—
(1)
67
130
16
(12)
$ 294
387
16
(46)
3
242
(3)
(9)
201
5
(200)
(6)
651
720
(252)
(72)
447
473
(49)
(57)
$
540
49
—
Asset
Management
4
—
—
—
—
$
—
$
233
$
—
$1,047
Institutional Securities activity primarily represents goodwill and intangible assets acquired in connection with the Company’s acquisition of TransMontaigne Inc., Heidmar Group
and Morgan Stanley Bank International (China) Limited (formerly Nan Tung Bank Ltd. Zhuhai). Discover activity represents goodwill and intangible assets acquired in connection
with the Company’s acquisition of Goldfish and other acquisitions (see Note 23).
Institutional Securities activity primarily represents goodwill and intangible assets acquired in connection with the Company’s joint venture with JM Financial and the Company’s
acquisitions of Saxon Capital, Inc. and CityMortgage Bank. Asset Management activity primarily represents goodwill and intangible assets acquired in connection with the
Company’s acquisition of FrontPoint Partners (see Note 23).
Global Wealth Management Group activity primarily represents goodwill disposed of in connection with the Company’s sale of Quilter. Discover activity represents goodwill and
intangible assets disposed of in connection with the Discover Spin−off (see Note 22).
Effective December 1, 2006, mortgage servicing rights have been included in net intangible assets. During fiscal 2006 amounts were reclassified to conform with the current
presentation. See Note 5 for further information on the Company’s mortgage servicing rights.
Amortization expense for Discover is included in discontinued operations.
139
G-146
Table of Contents
MORGAN STANLEY
Amortizable intangible assets were as follows:
Gross Carrying
Accumulated
Gross Carrying
Accumulated
Amount
Amortization
Amount
Amortization
Amortizable intangible assets:
Trademarks
Technology−related
Customer relationships
Management contracts
Other
Total amortizable intangible assets
$
129
151
140
220
154
$
22
75
22
8
48
$
193
153
214
—
107
$
15
55
25
—
14
$
794
$
175
$
667
$
109
Amortization expense associated with intangible assets is estimated to be approximately $49 million per year over the next five fiscal years.
11.
Deposits.
Deposits were as follows:
At
At
November 30,
November 30,
2006
2007
Demand, passbook and money market accounts
Consumer certificate accounts(1)
$100,000 minimum certificate accounts
$
27,186
3,993
—
$
14,872
4,076
9,395
Total
$
31,179
$
28,343
(1)
Certain consumer certificate accounts are carried at fair value under the fair value option (see Note 3).
The weighted average interest rates of interest−bearing deposits outstanding during fiscal 2007 and fiscal 2006 were 3.6% and 4.4%, respectively.
At November 30, 2007, interest−bearing deposits maturing over the next five years were as follows:
Fiscal Year
2008
2009
2010
2011
2012
$
140
30,992
—
10
76
10
G-147
Table of Contents
MORGAN STANLEY
12.
Commercial Paper and Other Short−Term Borrowings.
The table below summarizes certain information regarding commercial paper and other short−term borrowings for fiscal 2007 and fiscal 2006:
At November 30,
2007
2006
Commercial paper:
Balance at year−end
$22,596
$22,433
Average amount outstanding
$25,362
$23,962
Weighted average interest rate on year−end balance
4.8%
4.6%
Other short−term borrowings(1)(2):
Balance at year−end
$11,899
$ 6,659
Average amount outstanding
$ 8,947
$ 7,773
(1)
(2)
These borrowings included bank loans, Federal Funds and bank notes.
Certain structured short−term borrowings are carried at fair value under the fair value option. See Note 3 for additional information.
The Company maintains a senior revolving credit agreement with a group of banks to support general liquidity needs, including the issuance of commercial
paper, which consists of three separate tranches: a U.S. dollar tranche; a Japanese yen tranche; and a multicurrency tranche available in both euro and
British pound, all of which exist with the Company as the sole borrower. Under this combined facility (the “Credit Facility”), the banks are committed to
provide up to $7.6 billion under the U.S. dollar tranche, 80 billion Japanese yen under the Japanese yen tranche and $3.25 billion under the multicurrency
tranche. The Credit Facility expires on April 16, 2008 and includes a term−out feature that allows the Company, at its option, to extend borrowings under
the Credit Facility for an additional one year beyond the expiration date. At November 30, 2007, the Company had a $13.8 billion consolidated
stockholders’ equity surplus as compared with the Credit Facility’s covenant requirement.
The Company anticipates that it may utilize the Credit Facility for short−term funding from time to time. The Company does not believe that any of the
covenant requirements in its Credit Facility will impair the ability to obtain funding under the Credit Facility, pay its current level of dividends, or obtain
loan arrangements, letters of credit and other financial guarantees or other financial accommodations. At November 30, 2007, no borrowings were
outstanding under the Credit Facility.
The Company also maintains a committed bilateral credit facility to support general liquidity needs. This facility is expected to be drawn from time to time
to cover short−term funding needs.
In addition, the Company, through several of its subsidiaries, maintains several funded committed credit facilities to support various businesses, including
the collateralized commercial and residential mortgage whole loan, derivative contracts, warehouse lending, emerging market loan, structured product,
corporate loan, investment banking and prime brokerage businesses.
141
G-148
Table of Contents
MORGAN STANLEY
13.
Long−Term Borrowings.
Maturities and Terms.
Long−term borrowings at fiscal year−end consisted of the following:
U.S. Dollar
Due in fiscal 2007
Due in fiscal 2008
Due in fiscal 2009
Due in fiscal 2010
Due in fiscal 2011
Due in fiscal 2012
Thereafter
Total
Weighted average coupon at fiscal year−end
(1)
(2)
(3)
(4)
$
Non−U.S. Dollar(1)
Fixed
Rate
Floating
Rate(2)
Index
Linked(3)
—
1,592
1,993
3,709
5,786
6,958
24,337
$
$
$44,375
5.6%
—
17,679
11,717
5,499
1,795
2,600
6,001
$45,291
—
5,305
2,923
3,204
1,119
1,658
3,227
$ 17,436
5.2%
n/a
$
At November 30,
Fixed
Floating
Rate
Rate(2)
Index
Linked(3)
—
1,339
3,134
2,309
1,930
5,118
14,467
$
$28,297
4.3%
$
—
4,136
1,041
1,538
728
6,262
17,024
$30,729
4.8%
—
757
2,735
3,279
1,696
4,051
11,978
$ 24,496
n/a
2007
Total(4)
$
2006
Total(4)
—
30,808
23,543
19,538
13,054
26,647
77,034
$ 18,274
33,758
11,907
11,597
11,123
13,660
44,659
$190,624
$144,978
5.0%
5.0%
Weighted average coupon was calculated utilizing non−U.S. dollar interest rates.
U.S. dollar contractual floating rate borrowings bear interest based on a variety of money market indices, including London Interbank Offered Rates (“LIBOR”) and Federal Funds
rates. Non−U.S. dollar contractual floating rate borrowings bear interest based primarily on Euribor floating rates.
Amounts include borrowings that are equity−linked, credit−linked, commodity−linked or linked to some other index.
Amounts include an increase of approximately $164 million at November 30, 2007 and a decrease of approximately $326 million at November 30, 2006 to the carrying amount of
certain of the Company’s long−term borrowings associated with fair value hedges under SFAS No. 133.
The Company’s long−term borrowings included the following components:
At November 30,
2007
2006
Senior debt
Subordinated debt
Junior subordinated debentures
Total
$ 181,733
4,015
4,876
$ 136,213
3,881
4,884
$ 190,624
$ 144,978
Senior debt securities often are denominated in various non−U.S. dollar currencies and may be structured to provide a return that is equity−linked,
credit−linked, commodity−linked or linked to some other index (e.g., the consumer price index). Senior debt also may be structured to be callable by the
Company or extendible at the option of holders of the senior debt securities. Debt containing provisions that effectively allow the holders to put or extend
the notes aggregated $6,736 million at November 30, 2007 and $16,016 million at November 30, 2006. Subordinated debt and junior subordinated
debentures typically are issued to meet the capital requirements of the Company or its regulated subsidiaries and primarily are U.S. dollar denominated.
Senior Debt—Structured Borrowings. The Company’s index−linked, equity−linked or credit−linked borrowings include various structured instruments
whose payments and redemption values are linked to the performance of a specific index (e.g., Standard & Poor’s 500), a basket of stocks, a specific equity
security, a credit exposure or basket of credit exposures. To minimize the exposure resulting from movements in the underlying index, equity,
142
G-149
Table of Contents
MORGAN STANLEY
credit or other position, the Company has entered into various swap contracts and purchased options that effectively convert the borrowing costs into
floating rates based upon LIBOR. These instruments are included in the preceding table at their redemption values based on the performance of the
underlying indices, baskets of stocks, or specific equity securities, credit or other position or index. The Company accounts for these structured borrowings
containing embedded derivatives which, prior to the adoption of SFAS No. 159, were bifurcated from the hybrid notes and accounted for at fair value.
Effective December 1, 2006, the Company applied the fair value election in certain cases to these hybrid notes. The swaps and purchased options used to
economically hedge the embedded features are derivatives, and also are carried at fair value. Changes in fair value related to the notes and economic hedges
are reported in Principal transactions trading revenues.
Subordinated Debt and Junior Subordinated Debentures. Included in the Company’s long−term borrowings are subordinated notes (including the Series
F notes issued by MS&Co. discussed below) of $4,015 million having a contractual weighted average coupon of 4.77% at November 30, 2007 and $3,881
million having a weighted average coupon of 4.77% at November 30, 2006. Junior subordinated debentures outstanding by the Company were $4,876
million at November 30, 2007 and $4,884 million at November 30, 2006 having a contractual weighted average coupon of 6.37% at November 30, 2007 and
6.51% at November 30, 2006. Maturities of the subordinated and junior subordinated notes range from fiscal 2011 to fiscal 2046. Maturities of certain
junior subordinated debentures can be extended to 2067 at the Company’s option.
At November 30, 2007, MS&Co. had a $25 million 7.82% fixed rate subordinated Series F note outstanding. The note matures in fiscal 2016. The terms of
the note contain restrictive covenants that require, among other things, MS&Co. to maintain specified levels of Consolidated Tangible Net Worth and Net
Capital, each as defined therein. As of November 30, 2007, MS&Co. was in compliance with these restrictive covenants.
Asset and Liability Management. In general, securities inventories not financed by secured funding sources and the majority of current assets are financed
with a combination of short−term funding, floating rate long−term debt or fixed rate long−term debt swapped to a floating rate. Fixed assets are financed
with fixed rate long−term debt. The Company uses interest rate swaps to more closely match these borrowings to the duration, holding period and interest
rate characteristics of the assets being funded and to manage interest rate risk. These swaps effectively convert certain of the Company’s fixed rate
borrowings into floating rate obligations. In addition, for non−U.S. dollar currency borrowings that are not used to fund assets in the same currency, the
Company has entered into currency swaps that effectively convert the borrowings into U.S. dollar obligations. The Company’s use of swaps for asset and
liability management affected its effective average borrowing rate as follows:
Fiscal
2007
Fiscal
2006
Fiscal
2005
Weighted average coupon of long−term borrowings at fiscal year−end(1)
5.0%
5.0%
4.6%
Effective average borrowing rate for long−term borrowings after swaps at fiscal
year−end(1)
5.1%
5.0%
4.1%
(1)
Included in the weighted average and effective average calculations are non−U.S. dollar interest rates.
Subsequent to fiscal year−end and through December 31, 2007, the Company’s long−term borrowings (net of repayments) increased by approximately $10
billion. In addition, the Company sold Equity Units to a wholly−owned subsidiary of China Investment Corporation Ltd. (“CIC”) for approximately $5,579
million.
143
G-150
Table of Contents
MORGAN STANLEY
14.
Capital Units.
The Company had Capital Units outstanding that were issued by the Company and Morgan Stanley Finance plc (“MSF”), a U.K. subsidiary. A Capital Unit
consisted of (a) a Subordinated Debenture of MSF guaranteed by the Company and maturing in 2017 and (b) a related Purchase Contract issued by the
Company, which may have been accelerated by the Company, requiring the holder to purchase one Depositary Share representing shares of the Company’s
Cumulative Preferred Stock. The aggregate amount of Capital Units outstanding was $66 million at November 30, 2006.
The Company redeemed all $66 million of the outstanding Capital Units on February 28, 2007.
15.
Commitments, Guarantees and Contingencies.
Commitments.
The Company’s commitments as of November 30, 2007 are summarized below by period of expiration. Since commitments may expire unused, the
amounts shown do not necessarily reflect the actual future cash funding requirements:
Years to Maturity
Less
than 1
Letters of credit and other financial guarantees(1)
Letters of credit issued by subsidiaries that are guaranteed by the Company
Investment activities(2)
Investment grade primary lending commitments(3)(4)
Non−investment grade primary lending commitments(3)(4)
Investment grade secondary lending commitments(4)(5)
Non−investment grade secondary lending commitments(4)(5)
Commitments for secured lending transactions(6)
Commercial and residential mortgage−related commitments(7)
Other commitments(8)
Total
(1)
(2)
(3)
(4)
(5)
1−3
$10,790
197
318
19,656
789
—
81
3,824
5,680
964
$
4
1,186
238
5,791
1,072
—
27
4,095
—
19
$42,299
$12,432
3−5
Over 5
$
4
194
108
23,323
3,931
—
151
1,073
—
5
$28,789
$
Total
—
3,674
647
1,421
14,220
1,406
2,090
2,628
—
—
$ 10,798
5,251
1,311
50,191
20,012
1,406
2,349
11,620
5,680
988
$26,086
$109,606
This amount primarily represents the Company’s outstanding letters of credit and other financial guarantees issued by third−party banks to certain of the Company’s counterparties.
The Company is contingently liable for these letters of credit and other financial guarantees, which are primarily used to satisfy various collateral and margin requirements.
This amount represents commitments associated with the Company’s real estate, private equity and principal investment activities, which include alternative products.
The Company’s investment grade and non−investment grade primary lending commitments are made in connection with corporate lending and other business activities. Credit
ratings for commitments are determined by the Company’s Institutional Credit Department using methodologies generally consistent with those employed by external rating agencies.
Obligor credit ratings of BB+ or lower are considered non−investment grade.
The Company records these commitments at fair value within Financial instruments owned and Financial instruments sold, not yet purchased in the consolidated statement of
financial condition (see Note 3).
This amount represents commitments associated with the Company’s Institutional Securities sales and trading activities.
144
G-151
Table of Contents
MORGAN STANLEY
(6)
(7)
(8)
This amount represents lending commitments extended by the Company to companies that are secured by real estate assets of the borrower. Loans made under these arrangements
typically are at variable rates and generally provide for over−collateralization based upon the creditworthiness of the borrower. This amount also includes commitments to
asset−backed commercial paper conduits of $1,246 million, which have maturities of less than four years.
These amounts represent the Company’s forward purchase contracts involving mortgage loans, residential mortgage loan commitments to individuals and residential home equity
lines of credit.
This amount includes commercial loan commitments to small businesses and commitments related to securities−based lending activities in connection with the Company’s Global
Wealth Management Group business.
At November 30, 2007, the Company had commitments to enter into reverse repurchase and repurchase agreements of approximately $107 billion and $26
billion, respectively.
Premises and Equipment. The Company has non−cancelable operating leases covering premises and equipment. At November 30, 2007, future minimum
rental commitments under such leases (net of subleases, principally on office rentals) were as follows (dollars in millions):
Fiscal Year
2008
2009
2010
2011
2012
Thereafter
$ 549
504
403
348
328
2,732
The total of minimum rentals to be received in the future under non−cancelable subleases as of November 30, 2007 was $96 million.
Occupancy lease agreements, in addition to base rentals, generally provide for rent and operating expense escalations resulting from increased assessments
for real estate taxes and other charges. Total rent expense, net of sublease rental income, was $604 million, $470 million and $571 million in fiscal 2007,
fiscal 2006 and fiscal 2005, respectively. The net rent expense for fiscal 2005 included $105 million related to the lease adjustment charge recorded in the
first quarter of fiscal 2005 (see Note 26).
In connection with its commodities business, the Company enters into operating leases for both crude oil and refined products storage and for vessel
charters. These operating leases are integral parts of the Company’s commodities risk management business. At November 30, 2007, future minimum rental
commitments under such leases were as follows (dollars in millions):
Fiscal Year
2008
2009
2010
2011
2012
Thereafter
$650
357
212
117
93
123
Guarantees.
The Company has certain obligations under certain guarantee arrangements, including contracts and indemnification agreements that contingently require a
guarantor to make payments to the guaranteed party based
145
G-152
Table of Contents
MORGAN STANLEY
on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index or the occurrence or
non−occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that
contingently require the guarantor to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as
indirect guarantees of the indebtedness of others. The Company’s use of guarantees is described below by type of guarantee:
Derivative Contracts. Certain derivative contracts meet the accounting definition of a guarantee, including certain written options, contingent forward
contracts and credit default swaps. Although the Company’s derivative arrangements do not specifically identify whether the derivative counterparty retains
the underlying asset, liability or equity security, the Company has disclosed information regarding all derivative contracts that could meet the accounting
definition of a guarantee. The maximum potential payout for certain derivative contracts, such as written interest rate caps and written foreign currency
options, cannot be estimated, as increases in interest or foreign exchange rates in the future could possibly be unlimited. Therefore, in order to provide
information regarding the maximum potential amount of future payments that the Company could be required to make under certain derivative contracts,
the notional amount of the contracts has been disclosed.
The Company records all derivative contracts at fair value. For this reason, the Company does not monitor its risk exposure to such derivative contracts
based on derivative notional amounts; rather, the Company manages its risk exposure on a fair value basis. Aggregate market risk limits have been
established, and market risk measures are routinely monitored against these limits. The Company also manages its exposure to these derivative contracts
through a variety of risk mitigation strategies, including, but not limited to, entering into offsetting economic hedge positions. The Company believes that
the notional amounts of the derivative contracts generally overstate its exposure.
Standby Letters of Credit and other Financial Guarantees. In connection with its corporate lending business and other corporate activities, the Company
provides standby letters of credit and other financial guarantees to counterparties. Such arrangements represent obligations to make payments to third parties
if the counterparty fails to fulfill its obligation under a borrowing arrangement or other contractual obligation.
Market Value Guarantees. Market value guarantees are issued to guarantee return of principal invested to fund investors associated with certain European
equity funds and to guarantee timely payment of a specified return to investors in certain affordable housing tax credit funds. The guarantees associated with
certain European equity funds are designed to provide for any shortfall between the market value of the underlying fund assets and invested principal and a
stipulated return amount. The guarantees provided to investors in certain affordable housing tax credit funds are designed to return an investor’s
contribution to a fund and the investor’s share of tax losses and tax credits expected to be generated by a fund.
Liquidity Facilities. The Company has entered into liquidity facilities with SPEs and other counterparties, whereby the Company is required to make certain
payments if losses or defaults occur. Primarily, the Company acts as liquidity provider to municipal bond securitization SPEs and for standalone municipal
bonds in which the holders of beneficial interests issued by these SPEs or the holders of the individual bonds have the right to tender their interests for
purchase by the Company on specified dates at a specified price. The Company often may have recourse to the underlying assets held by the SPEs in the
event payments are required under such liquidity facilities as well as make−whole or recourse provisions with the trust sponsors.
146
G-153
Table of Contents
MORGAN STANLEY
The table below summarizes certain information regarding these guarantees at November 30, 2007:
Maximum Potential Payout/Notional
Type of Guarantee
Notional amount of derivative contracts
Standby letters of credit and other financial
guarantees(1)
Market value guarantees
Liquidity facilities
(1)
Less than 1
Years to Maturity
1−3
3−5
Over 5
Total
Carrying
Amount
$ 999,552
$ 1,004,069
$ 2,546,374
$ 2,570,385
$ 7,120,380
$ 131,678
5,133
97
18,043
1,824
106
1,026
1,107
—
444
6,712
655
1,652
14,776
858
21,165
802
44
—
Collateral/
Recourse
$
59
2,396
145
20,281
Approximately $14 billion of standby letters of credit are also reflected in the “Commitments” table above in the investment grade and non−investment grade primary and secondary
lending commitments and in the letters of credit issued by subsidiaries that are guaranteed by the Company.
Trust Preferred Securities. The Company has established Morgan Stanley Trusts for the limited purpose of issuing trust preferred securities to third parties
and lending the proceeds to the Company in exchange for junior subordinated debentures. The Company has directly guaranteed the repayment of the trust
preferred securities to the holders thereof to the extent that the Company has made payments to a Morgan Stanley Trust on the junior subordinated
debentures. In the event that the Company does not make payments to a Morgan Stanley Trust, holders of such series of trust preferred securities would not
be able to rely upon the guarantee for payment of those amounts. The Company has not recorded any liability in the consolidated financial statements for
these guarantees and believes that the occurrence of any events (i.e., nonperformance on the part of the paying agent) that would trigger payments under
these contracts is remote. See Note 13 for details on the Company’s junior subordinated debentures.
Indemnities. In the normal course of its business, the Company provides standard indemnities to counterparties for certain contingent exposures and taxes,
including U.S. and foreign withholding taxes, on interest and other payments made on derivatives, securities and stock lending transactions, certain annuity
products and other financial arrangements. These indemnity payments could be required based on a change in the tax laws or change in interpretation of
applicable tax rulings or a change in factual circumstances. Certain contracts contain provisions that enable the Company to terminate the agreement upon
the occurrence of such events. The maximum potential amount of future payments that the Company could be required to make under these
indemnifications cannot be estimated. The Company has not recorded any contingent liability in the consolidated financial statements for these
indemnifications and believes that the occurrence of any events that would trigger payments under these contracts is remote.
Exchange/Clearinghouse Member Guarantees. The Company is a member of various U.S. and non−U.S. exchanges and clearinghouses that trade and
clear securities and/or futures contracts. Associated with its membership, the Company may be required to pay a proportionate share of the financial
obligations of another member who may default on its obligations to the exchange or the clearinghouse. While the rules governing different exchange or
clearinghouse memberships vary, in general the Company’s guarantee obligations would arise only if the exchange or clearinghouse had previously
exhausted its resources. In addition, any such guarantee obligation would be apportioned among the other non−defaulting members of the exchange or
clearinghouse. Any potential contingent liability under these membership agreements cannot be estimated. The Company has not recorded any contingent
liability in the consolidated financial statements for these agreements and believes that any potential requirement to make payments under these agreements
is remote.
147
G-154
Table of Contents
MORGAN STANLEY
General Partner Guarantees. As a general partner in certain private equity and real estate partnerships, the Company receives distributions from the
partnerships according to the provisions of the partnership agreements. The Company may, from time to time, be required to return all or a portion of such
distributions to the limited partners in the event the limited partners do not achieve a certain return as specified in various partnership agreements, subject to
certain limitations. The maximum potential amount of future payments that the Company could be required to make under these provisions at November 30,
2007 and November 30, 2006 was $472 million and $320 million, respectively. As of November 30, 2007 and November 30, 2006, the Company’s accrued
liability for distributions that the Company has determined is probable it will be required to refund based on the applicable refund criteria specified in the
various partnership agreements was $20 million and $25 million, respectively.
Securitized Asset Guarantees. As part of the Company’s Institutional Securities securitization activities, the Company provides representations and
warranties that certain securitized assets conform to specified guidelines. The Company may be required to repurchase such assets or indemnify the
purchaser against losses if the assets do not meet certain conforming guidelines. Due diligence is performed by the Company to ensure that asset guideline
qualifications are met, and, to the extent the Company has acquired such assets to be securitized from other parties, the Company seeks to obtain its own
representations and warranties regarding the assets. The maximum potential amount of future payments the Company could be required to make would be
equal to the current outstanding balances
of all assets subject to such securitization activities. Also, in connection with originations of residential mortgage
®
loans under the Company’s FlexSource program, the Company may permit borrowers to pledge marketable securities as collateral instead of requiring
cash down payments for the purchase of the underlying residential property. Upon sale of the residential mortgage loans, the Company may provide a surety
bond that reimburses the purchasers for shortfalls in the borrowers’ securities accounts up to certain limits if the collateral maintained in the securities
accounts (along with the associated real estate collateral) is insufficient to cover losses that purchasers experience as a result of defaults by borrowers on the
underlying residential mortgage loans. The Company requires the borrowers to meet daily collateral calls to ensure the marketable securities pledged in lieu
of a cash down payment are sufficient. At November 30, 2007 and November 30, 2006, the maximum potential amount of future payments the Company
may be required to make under its surety bond was $122 million and $121 million, respectively. The Company has not recorded any contingent liability in
the consolidated financial statements for these representations and warranties and reimbursement agreements and believes that the probability of any
payments under these arrangements is remote.
Other. The Company may, from time to time, in its role as investment banking advisor be required to provide guarantees in connection with certain
European merger and acquisition transactions. If required by the regulating authorities, the Company provides a guarantee that the acquirer in the merger
and acquisition transaction has or will have sufficient funds to complete the transaction and would then be required to make the acquisition payments in the
event the acquirer’s funds are insufficient at the completion date of the transaction. These arrangements generally cover the time frame from the transaction
offer date to its closing date and, therefore, are generally short term in nature. The maximum potential amount of future payments that the Company could
be required to make cannot be estimated. The Company believes the likelihood of any payment by the Company under these arrangements is remote given
the level of the Company’s due diligence associated with its role as investment banking advisor.
In the ordinary course of business, the Company guarantees the debt and/or certain trading obligations (including obligations associated with derivatives,
foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and
are required by investors or trading counterparties. The activities of the subsidiaries covered by these guarantees (including any related debt or trading
obligations) are included in the Company’s consolidated financial statements.
148
G-155
Table of Contents
MORGAN STANLEY
Contingencies.
Legal. In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations,
class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or
threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some
cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or in financial distress.
The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and
self−regulatory agencies regarding the Company’s business, including, among other matters, accounting and operational matters, certain of which may
The Company contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the
outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the
early stages, the Company cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved,
when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, the Company
believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect
on the consolidated financial condition of the Company, although the outcome of such matters could be material to the Company’s operating results and
cash flows for a particular future period, depending on, among other things, the level of the Company’s revenues or income for such period. Legal reserves
have been established in accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS No. 5”). Once established, reserves are adjusted when there
is more information available or when an event occurs requiring a change.
Coleman Litigation. In May 2003, Coleman (Parent) Holdings Inc. (“CPH”) filed a complaint against Morgan Stanley in the Circuit Court of the Fifteenth
Judicial Circuit for Palm Beach County, Florida relating to the 1998 merger between The Coleman Company, Inc. and Sunbeam, Inc. In June 2005, the trial
court issued a final judgment in favor of CPH in the amount of $1,578 million, which included prejudgment interest and excluded certain payments received
by CPH in settlement of related claims against others. In June 2005, Morgan Stanley filed a notice of appeal with the District Court of Appeal for the Fourth
District of Florida (the “Court of Appeal”) and posted a supersedeas bond, which automatically stayed execution of the judgment pending appeal.
In March 2007, the Court of Appeal issued an opinion reversing the trial court’s award for compensatory and punitive damages and remanding the matter to
the trial court for entry of judgment for Morgan Stanley. In June 2007, the Court of Appeal’s opinion became final when the Court of Appeal issued an
order denying CPH’s motions for rehearing, rehearing en banc and for certification of certain questions for review by the Florida Supreme Court (the
“Supreme Court”). In June 2007, the trial court issued an order cancelling the supersedeas bond that Morgan Stanley had posted. In July 2007, CPH filed a
petition with the Supreme Court asking that court to review the Court of Appeal’s decision (“Petition for Review”). On December 12, 2007, the Supreme
Court issued an order denying CPH’s Petition for Review.
The Company believes, after consultation with outside counsel, that the Supreme Court’s decision to deny the Petition for Review has effectively ended
CPH’s civil claim against the Company. Effective November 30, 2007, the Company reversed the $360 million reserve previously established for the
Coleman litigation under SFAS No. 5.
149
G-156
Table of Contents
MORGAN STANLEY
16.
Shareholders’ Equity.
Common Stock.
Changes in shares of common stock outstanding for fiscal 2007 and fiscal 2006 were as follows (share data in millions):
Fiscal
2007
Fiscal
2006
Shares outstanding at beginning of period
Net impact of stock option exercises and other share issuances
Treasury stock purchases
1,049
59
(52)
1,058
43
(52)
Shares outstanding at end of period
1,056
1,049
Treasury Shares. During fiscal 2007, the Company purchased $3.8 billion of its common stock through open market purchases at an average cost of
$72.65 per share. During fiscal 2006, the Company purchased $3.4 billion of its common stock through open market purchases at an average cost of $65.43
per share. In December 2006, the Company announced that its Board of Directors had authorized the repurchase of up to $6 billion of the Company’s
outstanding common stock. This share repurchase authorization considers, among other things, business segment capital needs, as well as equity−based
compensation and benefit plan requirements. As of November 30, 2007, the Company had approximately $2.3 billion remaining under its current share
repurchase authorization.
Rabbi Trusts. The Company has established rabbi trusts (the “Rabbi Trusts”) to provide common stock voting rights to certain employees who hold
outstanding restricted stock units. The number of shares of common stock outstanding in the Rabbi Trusts was approximately 107 million at November 30,
2007 and approximately 81 million at November 30, 2006. The assets of the Rabbi Trusts are consolidated with those of the Company, and the value of the
Company’s stock held in the Rabbi Trusts is classified in Shareholders’ equity and generally accounted for in a manner similar to treasury stock.
Preferred Stock. In July 2006, the Company issued 44,000,000 Depositary Shares, in an aggregate of $1,100 million. Each Depositary Share represents
1/1,000th of a Share of Floating Rate Non−Cumulative Preferred Stock, Series A, $0.01 par value (“Series A Preferred Stock”). The Series A Preferred
Stock is redeemable at the Company’s option, in whole or in part, on or after July 15, 2011 at a redemption price of $25,000 per share (equivalent to $25 per
Depositary Share). The Series A Preferred Stock also has a preference over the Company’s common stock upon liquidation. Subsequent to fiscal year−end,
the Company declared a quarterly dividend of $379.66 per share of Series A Preferred Stock that was paid on January 15, 2008 to preferred shareholders of
record on December 31, 2007.
Regulatory Requirements. On April 1, 2007, the Company merged MSDWI into MS&Co. Upon completion of the merger, the surviving entity, MS&Co.,
became the Company’s principal U.S. broker−dealer. MS&Co. is a registered broker−dealer and registered futures commission merchant and, accordingly,
is subject to the minimum net capital requirements of the Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority
and the Commodity Futures Trading Commission. MS&Co. has consistently operated in excess of these requirements. MS&Co.’s net capital totaled $6,673
million at November 30, 2007, which exceeded the amount required by $4,950 million. MSIP, a London−based broker−dealer subsidiary, is subject to the
capital requirements of the Financial Services Authority, and MSJS, a Tokyo−based broker−dealer subsidiary, is subject to the capital requirements of the
Financial Services Agency. MSIP and MSJS consistently operated in excess of their respective regulatory capital requirements.
150
G-157
Table of Contents
MORGAN STANLEY
Under regulatory capital requirements adopted by the Federal Deposit Insurance Corporation (the “FDIC”) and other bank regulatory agencies,
FDIC−insured financial institutions must maintain (a) 3% to 4% of Tier 1 capital, as defined, to average assets (“leverage ratio”), (b) 4% of Tier 1 capital, as
defined, to risk−weighted assets (“Tier 1 risk−weighted capital ratio”) and (c) 8% of total capital, as defined, to risk−weighted assets (“total risk−weighted
capital ratio”). At November 30, 2007, the leverage ratio, Tier 1 risk−weighted capital ratio and total risk−weighted capital ratio of each of the Company’s
FDIC−insured financial institutions exceeded these regulatory minimums.
Certain other U.S. and non−U.S. subsidiaries are subject to various securities, commodities and banking regulations, and capital adequacy requirements
promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated in excess of
their local capital adequacy requirements.
Morgan Stanley Derivative Products Inc. (“MSDP”) and Cournot Financial Products LLC (“Cournot”), which are triple−A rated derivative products
subsidiaries, maintain certain operating restrictions that have been reviewed by various rating agencies. Both entities are operated such that creditors of the
Company should not expect to have any claims on either the assets of Cournot or the assets of MSDP, unless and until the obligations of such entity to its
own creditors are satisfied in full. Creditors of Cournot or MSDP, respectively, should not expect to have any claims on the assets of the Company or any of
its affiliates, other than the respective assets of Cournot or MSDP.
The Company is a consolidated supervised entity (“CSE”) as defined by the SEC. As such, the Company is subject to group−wide supervision and
examination by the SEC and to minimum capital requirements on a consolidated basis. As of November 2007, the Company was in compliance with the
CSE capital requirements.
MS&Co. is required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit
risk standards of Appendix E of Rule 15c3−1. MS&Co. is also required to notify the SEC in the event that its tentative net capital is less than $5 billion. As
of November 30, 2007, MS&Co. had tentative net capital in excess of the minimum and the notification requirements.
The regulatory capital requirements referred to above, and certain covenants contained in various agreements governing indebtedness of the Company, may
restrict the Company’s ability to withdraw capital from its subsidiaries. At November 30, 2007, approximately $14.2 billion of net assets of consolidated
subsidiaries may be restricted as to the payment of cash dividends and advances to the Company.
Accumulated Other Comprehensive Income (Loss). As of November 30, 2007, the components of the Company’s Accumulated other comprehensive
loss are as follows:
At
At
November 30,
November 30,
2007
2006
Foreign currency translation adjustments, net of tax
Net change in cash flow hedges, net of tax
Minimum pension liability adjustment, net of tax
SFAS No. 158 pension adjustment, net of tax
$
114
(58)
(47)
(208)
$
49
(77)
(7)
—
Accumulated other comprehensive loss, net of tax
$
(199)
$
(35)
Cumulative Foreign Currency Translation Adjustments. Cumulative foreign currency translation adjustments include gains or losses resulting from
translating foreign currency financial statements from their respective
151
G-158
Table of Contents
MORGAN STANLEY
functional currencies to U.S. dollars, net of hedge gains or losses and related tax effects. The Company uses foreign currency contracts and designates
certain non−U.S. dollar currency debt as hedges to manage the currency exposure relating to its net monetary investments in non−U.S. dollar functional
currency subsidiaries. Increases or decreases in the value of the Company’s net foreign investments generally are tax deferred for U.S. purposes, but the
related hedge gains and losses are taxable currently. The Company attempts to protect its net book value from the effects of fluctuations in currency
exchange rates on its net monetary investments in non−U.S. dollar subsidiaries by selling the appropriate non−U.S. dollar currency in the forward market.
However, under some circumstances, the Company may elect not to hedge its net monetary investments in certain foreign operations due to market
conditions, including the availability of various currency contracts at acceptable costs. Information relating to the hedging of the Company’s net monetary
investments in non−U.S. dollar functional currency subsidiaries and their effects on cumulative foreign currency translation adjustments is summarized
below:
At November 30,
2007
2006
Net monetary investments in non−U.S. dollar functional currency subsidiaries
Cumulative foreign currency translation adjustments resulting from net investments in subsidiaries with a
non−U.S. dollar functional currency
Cumulative foreign currency translation adjustments resulting from realized or unrealized losses on hedges, net
of tax
Total cumulative foreign currency translation adjustments, net of tax
17.
$ 9,534
$6,195
$ 1,290
$ 741
(1,176)
$
114
(692)
$
49
Earnings per Common Share.
Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the assumed conversion of all dilutive securities. The following table presents the calculation of basic and diluted EPS (in
millions, except for per share data):
Basic EPS:
Gain on discontinued operations, net
Net income applicable to common shareholders
Fiscal 2007
Fiscal 2006
Fiscal 2005
$
2,563
646
—
(68)
$
6,335
1,137
—
(19)
$
4,532
358
49
—
$
3,141
$
7,453
$
4,939
Weighted average common shares outstanding
1,002
152
1,010
1,050
$
2.49
0.64
—
$
6.25
1.13
—
$
4.32
0.33
0.05
$
3.13
$
7.38
$
4.70
G-159
Table of Contents
MORGAN STANLEY
Diluted EPS:
Net income applicable to common shareholders
Fiscal 2007
Fiscal 2006
Fiscal 2005
$
$
$
Weighted average common shares outstanding
Effect of dilutive securities:
Stock options and restricted stock units
Weighted average common shares outstanding and common stock equivalents
3,141
7,453
4,939
1,002
1,010
1,050
52
45
30
1,054
1,055
1,080
$
2.37
0.61
—
$
5.99
1.08
—
$
4.19
0.33
0.05
$
2.98
$
7.07
$
4.57
The following securities were considered antidilutive and, therefore, were excluded from the computation of diluted EPS:
Fiscal
Fiscal
Fiscal
2007
2006
2005
(shares in millions)
Number of antidilutive securities (including stock options and restricted stock units) outstanding at end of period
18.
19
38
93
Employee Stock−Based Compensation Plans.
As of December 1, 2004, the Company early adopted SFAS No. 123R using the modified prospective method. SFAS No. 123R requires measurement of
compensation cost for equity−based awards at fair value and recognition of compensation cost over the service period, net of estimated forfeitures.
The components of the Company’s stock−based compensation expense (net of cancellations and a cumulative effect of a change in accounting principle in
fiscal 2005 associated with the adoption of SFAS No. 123R) are presented below:
Fiscal 2007(1)
Deferred stock
Stock options
Employee Stock Purchase Plan
Total
(1)
Fiscal 2006(1)
Fiscal 2005
$
1,592
241
9
$
1,763
152
8
$
589
143
8
$
1,842
$
1,923
$
740
Amounts for fiscal 2007 and fiscal 2006 include $345 million and $457 million, respectively, of accrued stock−based compensation expense primarily related to fiscal 2007 and fiscal
2006 year−end equity awards granted in December 2007 and December 2006, respectively, to employees who are retirement−eligible under the plan terms.
The table above excludes stock−based compensation expense included in discontinued operations, which was approximately $17 million, $32 million and
$16 million, for fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
153
G-160
Table of Contents
MORGAN STANLEY
The tax benefit for stock−based compensation expense related to deferred stock and stock options was $722 million, $737 million and $255 million for
fiscal 2007, fiscal 2006 and fiscal 2005, respectively. The tax benefit for stock−based compensation expense included in discontinued operations in fiscal
2007, fiscal 2006 and fiscal 2005 was approximately $6 million, $11 million and $5 million, respectively.
At November 30, 2007, the Company had approximately $1,376 million of compensation cost related to unvested stock−based awards not yet recognized
(excluding fiscal 2007 year−end awards granted in December 2007 to nonretirement−eligible employees, which will begin to be amortized in fiscal 2008).
The unrecognized compensation cost relating to unvested stock−based awards expected to vest will primarily be recognized over the next two years.
In connection with awards under its equity−based compensation and benefit plans, the Company is authorized to issue shares of its common stock held in
treasury or newly issued shares. At November 30, 2007, approximately 166 million shares were available for future grant under these plans.
The Company generally uses treasury shares to deliver shares to employees and has an ongoing repurchase authorization that includes repurchases in
connection with awards granted under its equity−based compensation plans.
As a result of the Discover Spin−off effective June 30, 2007, all outstanding options to purchase the Company’s common stock held by employees of
Discover were canceled and replaced with options to purchase Discover common stock. Outstanding options to purchase Morgan Stanley common stock
held by directors and employees who remained with the Company after the Discover Spin−off were adjusted to preserve the intrinsic value of the award
immediately prior to the spin−off using an adjustment ratio based on the Morgan Stanley closing market stock price immediately prior to the spin−off date
and the beginning market stock price at the date of the spin−off. Additional compensation cost recognized as a result of this modification was not material.
Similarly, restricted stock units awarded pursuant to equity incentive plans and held by employees of Discover were canceled and replaced with restricted
units of Discover stock. Outstanding deferred shares held by Morgan Stanley directors and employees who remained with the Company after the Discover
Spin−off were adjusted by multiplying the number of shares by an adjustment ratio in order to account for the impact of the spin−off on the value of the
Company’s shares at the time the spin−off was completed. No additional compensation cost was recognized as a result of this modification. Cash paid to the
holders of deferred shares in lieu of fractional shares was not material.
Deferred Stock Awards. The Company has made deferred stock awards pursuant to several equity−based compensation plans. The plans provide for the
deferral of a portion of certain key employees’ discretionary compensation with awards made in the form of restricted common stock or in the right to
receive unrestricted shares of common stock in the future (“restricted stock units”). Awards under these plans are generally subject to vesting over time
contingent upon continued employment and to restrictions on sale, transfer or assignment until the end of a specified period, generally two to five years
from date of grant. All or a portion of an award may be canceled if employment is terminated before the end of the relevant restriction period. All or a
portion of a vested award also may be canceled in certain limited situations, including termination for cause during the relevant restriction period.
Recipients of deferred stock awards generally receive dividend equivalents that are not subject to vesting and have voting rights.
154
G-161
Table of Contents
MORGAN STANLEY
The following table sets forth activity relating to the Company’s vested and unvested restricted stock units (share data in millions):
Fiscal 2007(1)
(1)
(2)
(3)
Fiscal 2006
Fiscal 2005
Restricted stock units at beginning of year
Granted
Conversions to common stock
Canceled(2)
95
31
(12)
(6)
60
38
(12)
(5)
78
4
(18)
(4)
Restricted stock units at end of year(3)
108
81
60
For fiscal 2007, the number of restricted stock units was adjusted to reflect the impact of the Discover Spin−off.
Amount includes approximately 1 million awards held by Discover employees that were canceled as a result of the Discover Spin−off.
Approximately 104 million awards were vested or expected to vest at the end of fiscal 2007.
The weighted average price of restricted stock units at the beginning and end of fiscal 2007 was $45.59 (as adjusted to reflect the impact of the Discover
Spin−off) and $51.95, respectively. During fiscal 2007, the weighted average price for granted, converted and canceled restricted stock units was $66.68,
$40.22 and $52.24, respectively (adjusted to reflect the impact of the Discover Spin−off). The weighted average price for restricted stock units granted
during fiscal 2006 and fiscal 2005 was $57.86 and $53.10, respectively (unadjusted for the Discover Spin−off).
The total fair value of restricted stock units converted to common stock during fiscal 2007, fiscal 2006 and fiscal 2005 was $817 million, $768 million and
$986 million, respectively.
The following table sets forth activity relating to the Company’s unvested restricted stock units (share data in millions):
Fiscal 2007
Number
of
Shares(1)
Unvested restricted stock units at beginning of period
Granted
Vested
Canceled(2)
Unvested restricted stock units at end of period(3)
(1)
(2)
(3)
Weighted
Average
Grant Date
Fair Value(1)
60
31
(27)
(5)
$
46.55
66.68
51.33
54.21
59
$
54.29
The number of shares and weighted average grant date fair value have been adjusted to reflect the impact of the Discover Spin−off based on the adjustment ratio discussed above.
Amount includes approximately 1 million awards held by Discover employees that were canceled due to the Discover Spin−off.
Unvested restricted stock units represent awards where recipients have yet to satisfy either the explicit vesting terms or retirement−eligible requirements. Approximately 56 million
unvested restricted stock units, with a weighted average grant date fair value of $53.81, were expected to vest at the end of fiscal 2007.
155
G-162
Table of Contents
MORGAN STANLEY
Stock Option Awards. The Company has granted stock option awards pursuant to several equity−based compensation plans. The plans provide for the
deferral of a portion of certain key employees’ discretionary compensation with awards made in the form of stock options generally having an exercise price
not less than the fair value of the Company’s common stock on the date of grant. Such stock option awards generally become exercisable over a three−year
period and expire 10 years from the date of grant, subject to accelerated expiration upon termination of employment. Stock option awards have vesting,
restriction and cancellation provisions that are generally similar to those in deferred stock awards.
The weighted average fair values of the Company’s options granted during fiscal 2007, fiscal 2006 and fiscal 2005 were $18.55 (as adjusted to reflect the
impact of the Discover Spin−off), $14.15 and $12.77 (unadjusted for the Discover Spin−off), respectively, utilizing the following weighted average
assumptions:
Fiscal 2007
Risk−free interest rate
Expected option life in years
Expected stock price volatility
Expected dividend yield
Fiscal 2006
4.4%
6.0
23.8%
1.4%
Fiscal 2005
4.8%
3.3
28.6%
1.7%
3.7%
3.1
34.3%
2.0%
The Company’s expected option life has been determined based upon historical experience. Beginning on December 1, 2006, the expected stock price
volatility assumption was determined using the implied volatility of exchange−traded options, consistent with the guidance in Staff Accounting Bulletin
(“SAB”) No. 107, “Share−Based Payment” (“SAB 107”). Prior to December 1, 2006, the expected stock price volatility was determined based upon the
Company’s historical stock price data over a time period similar to the expected option life. The Company believes that implied volatility is more reflective
of market conditions and a better indicator of expected volatility than historical volatility or a combined method of determining volatility.
The following table sets forth activity relating to the Company’s stock options (share data in millions):
Fiscal 2007
Weighted
Average
Exercise
Price(1)
Number
of
Options(1)
Fiscal 2006
Weighted
Average
Exercise
Price
Number
of
Options
Fiscal 2005
Weighted
Average
Exercise
Price
Number
of
Options
Options outstanding at beginning of period
Granted
Exercised
Canceled(2)
128.6
18.9
(24.7)
(4.7)
$ 44.15
66.90
39.86
55.19
125.8
2.1
(14.5)
(4.0)
$ 51.01
64.05
44.60
57.41
152.2
0.9
(19.5)
(7.8)
$ 47.09
54.73
18.13
57.01
Options outstanding at end of period(3)
118.1
$ 48.22
109.4
$ 51.88
125.8
$ 51.01
96.7
$ 45.22
92.6
$ 51.65
95.4
$ 50.10
Options exercisable at end of period
(1)
(2)
(3)
For fiscal 2007, the number and weighted average exercise price have been adjusted to reflect the impact of the Discover Spin−off based on the adjustment ratio discussed above.
Includes approximately 2 million awards held by DFS employees that were canceled due to the Discover Spin−off.
116.8 million awards, with a weighted average exercise price of $48.01, were vested or expected to vest at the end of fiscal 2007.
The total intrinsic value of stock options exercised during fiscal 2007, fiscal 2006 and fiscal 2005 was $707 million, $326 million and $722 million,
respectively.
156
G-163
Table of Contents
MORGAN STANLEY
As of November 30, 2007, the intrinsic value of in−the−money exercisable stock options was $826 million.
The following table presents information relating to the Company’s stock options outstanding at November 30, 2007 (number of options outstanding data in
millions):
Options Outstanding
Range of Exercise Prices
$22.00 – $29.99
$30.00 – $39.99
$40.00 – $49.99
$50.00 – $59.99
$60.00 – $69.99
$70.00 – $79.99
$80.00 – $91.99
Total
(1)
Number
Outstanding
5.3
23.6
44.3
24.9
18.9
0.7
0.4
Weighted Average
Exercise Price(1)
$
22.91
34.20
47.14
53.66
66.56
72.89
87.45
118.1
Options Exercisable
Average
Remaining
Life (Years)
Number
Exercisable
0.1
3.5
5.1
2.7
8.1
3.2
1.6
5.3
23.6
39.3
24.8
2.7
0.6
0.4
Weighted Average
Exercise Price(1)
$
Average
Remaining
Life (Years)
22.91
34.20
47.32
53.66
65.57
73.12
87.45
0.1
3.5
5.0
2.7
2.5
1.9
1.6
96.7
The weighted average exercise price has been adjusted to reflect the impact of the Discover Spin−off based on the adjustment ratio discussed above.
In November 2007, in connection with its initial public offering, MSCI Inc., a majority−owned subsidiary of Morgan Stanley, made a founders’ grant in the
form of restricted stock units (representing shares of MSCI Inc. common stock) and options to purchase MSCI Inc. common stock (such awards are not
reflected in the above disclosures). The aggregate value of the founders’ grant was $68 million of restricted stock units and options, subject to two− to
four−year vesting periods.
19.
Employee Benefit Plans.
The Company sponsors various pension plans for the majority of its U.S. and non−U.S. employees. The Company provides certain other postretirement
benefits, primarily health care and life insurance, to eligible U.S. employees. The Company also provides certain postemployment benefits other than
pension and postretirement benefits to certain former employees or inactive employees prior to retirement.
The Company’s defined benefit pension, postretirement and postemployment plans are accounted for in accordance with SFAS Nos. 87, 88, 106 and 112.
The Company adopted the provision of SFAS No. 158 to recognize the overfunded or underfunded status of the Company’s defined benefit and
postretirement plans as an asset or liability in the consolidated statement of financial condition at November 30, 2007. Accordingly, the Company recorded
a charge of $347 million ($208 million after−tax) to Accumulated other comprehensive income (loss), a component of Shareholders’ equity (see Note 2).
Prior to its adoption of SFAS No. 158, but after taking into account the effects of the Discover Spin−off, the Company recognized a final net minimum
pension liability of $68 million ($47 million after−tax) at November 30, 2007 and $13 million ($7 million after−tax with recognition of a $1 million
intangible asset) at November 30, 2006 for defined benefit pension plans whose accumulated benefit obligations exceeded plan assets.
157
G-164
Table of Contents
MORGAN STANLEY
The following table illustrates the incremental effect of the application of SFAS No. 158:
Before
Application of
SFAS No. 158
Other assets
Net deferred tax assets
Accumulated other comprehensive income (loss)
$
9,153
24,561
5,454
9
31,477
SFAS No. 158
Adjustments
$
(302)
45
139
(208)
(208)
After
Application of
SFAS No. 158
$
8,851
24,606
5,593
(199)
31,269
The Accumulated other comprehensive loss of $415 million pre−tax was composed of $(74) million in prior−year service credits and $489 million in net
actuarial losses. The estimated net loss for the defined benefit pension plans that will be amortized from Accumulated other comprehensive loss into net
periodic benefit cost over fiscal 2008 is approximately $32 million. The estimated prior−service credit that will be amortized from Accumulated other
comprehensive loss into net periodic benefit cost over fiscal 2008 is approximately $(8) million for defined benefit pension plans and $(2) million for
postretirement plans.
Pension and Other Postretirement Plans. Substantially all of the U.S. employees of the Company hired before July 1, 2007 and its U.S. affiliates are
covered by a non−contributory, defined benefit pension plan that is qualified under Section 401(a) of the Internal Revenue Code (the “Qualified Plan”).
Unfunded supplementary plans (the “Supplemental Plans”) cover certain executives. In addition, certain of the Company’s non−U.S. subsidiaries also have
pension plans covering substantially all of their employees. These pension plans generally provide pension benefits that are based on each employee’s years
of credited service and on compensation levels specified in the plans. The Company’s policy is to fund at least the amounts sufficient to meet minimum
funding requirements under applicable employee benefit and tax regulations. Liabilities for benefits payable under its Supplemental Plans are accrued by the
Company and are funded when paid to the beneficiaries. The Company’s U.S. Qualified Plan was closed to new participants effective July 1, 2007. In lieu
of a defined benefit pension plan, eligible employees who were first hired, rehired or transferred to a U.S. benefits eligible position will receive a retirement
contribution into their 401(k) plan. The amount of the retirement contribution is included in the Company’s 401(k) cost and will be equal to between 2% to
5% of eligible pay based on years of service as of December 31.
The Company also has unfunded postretirement benefit plans that provide medical and life insurance for eligible U.S. retirees and their dependents.
The Company uses a measurement date of September 30 to calculate obligations under its pension and postretirement plans. The Company expects to early
adopt a fiscal year−end measurement date for the fiscal year ending November 30, 2008.
In connection with the Discover Spin−off, the Company transferred assets and liabilities relating to certain current and former DFS employees to a new
defined benefit pension plan established by DFS. The Company remeasured the assets and projected benefit obligation of the separated pension plans as of
December 31, 2006. The impact of the remeasurement results on continuing operations for fiscal 2007 was not material.
158
G-165
Table of Contents
MORGAN STANLEY
The following tables present information for the Company’s pension and postretirement plans on an aggregate basis:
Net Periodic Benefit Expense.
The following table presents the components of the net periodic benefit expense:
Fiscal 2007
Pension
Fiscal 2006
Service cost, benefits earned during the year
Interest cost on projected benefit obligation
Expected return on plan assets
Net amortization—prior−service cost
Net amortization—actuarial loss
Special termination benefits
$
109
125
(124)
(8)
41
2
$
Net periodic benefit expense
$
145
$
159
Fiscal 2005
Fiscal 2007
111
119
(116)
(7)
51
2
$
160
$
101
110
(107)
(8)
41
—
$
137
$
7
8
Postretirement
Fiscal 2006
$
—
(1)
—
—
14
$
Fiscal 2005
8
10
—
(2)
2
—
$
18
$
7
9
—
(1)
2
—
17
G-166
Table of Contents
MORGAN STANLEY
Benefit Obligations and Funded Status.
The following table provides a reconciliation of the changes in the benefit obligation and fair value of plan assets for fiscal 2007 and fiscal 2006 as well as a
summary of the funded status at November 30, 2007 and November 30, 2006:
Pension
Reconciliation of benefit obligation:
Benefit obligation at beginning of year
Service cost(1)
Interest cost(2)
Plan amendments
Actuarial (gain) loss
Benefits paid
Plan settlements
Special termination benefits
Transfers/divestitures(3)
Other, including foreign currency exchange rate changes
Benefit obligation at end of year
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Plan settlements
Transfers/divestitures(3)
Other, including foreign currency exchange rate changes
Fair value of plan assets at end of year
Net amount recognized
Amounts recognized in the consolidated statements of financial condition consist
of:
Assets
Liabilities
Intangible asset
Accumulated other comprehensive income
Net amount recognized
(2)
(3)
Postretirement
Fiscal 2006
Fiscal 2007
Fiscal 2006
$
2,563
109
125
(9)
(46)
(102)
(1)
2
(400)
22
$
2,524
133
139
2
(88)
(169)
(21)
2
—
41
$
168
7
8
(4)
14
(8)
—
—
(23)
—
$
196
10
11
—
(40)
(9)
—
—
—
—
$
2,263
$
2,563
$
162
$
168
$
2,312
161
131
(102)
(1)
(405)
17
$
2,217
144
114
(169)
(21)
—
27
$
—
—
$
—
—
2,113
$
2,312
$
—
$
—
$
Funded status:
Unfunded status
Amount contributed to plan after measurement date
Unrecognized prior−service cost
Unrecognized loss
(1)
Fiscal 2007
8
(8)
—
—
—
9
(9)
—
—
—
$
(150)
24
—
—
$
(251)
4
(113)
708
$
(162)
—
—
—
$
(168)
—
(6)
9
$
(126)
$
348
$
(162)
$
(165)
$
162
(288)
—
—
$
598
(263)
1
12
$
—
(162)
—
—
$
—
(165)
—
—
$
(126)
$
348
$
(162)
$
(165)
The pension amount related to the Discover Spin−off and the sale of Quilter was $22 million during fiscal 2006. The postretirement amount related to the Discover Spin−off was $2
million during fiscal 2006. These amounts are included in discontinued operations (see Note 22).
The pension amount related to the Discover Spin−off and the sale of Quilter was $20 million during fiscal 2006. The postretirement amount related to DFS was $1 million during
fiscal 2006. These amounts are included in discontinued operations (see Note 22).
Transfers and divestitures primarily relate to the impact of the Discover Spin−off and non−U.S. subsidiary plans.
The accumulated benefit obligation for all defined benefit pension plans was $2,147 million and $2,385 million at November 30, 2007 and November 30,
2006, respectively.
160
G-167
Table of Contents
MORGAN STANLEY
The following table contains information for pension plans with projected benefit obligations in excess of the fair value of plan assets as of fiscal year−end:
November 30,
November 30,
2007
2006
Projected benefit obligation
Fair value of plan assets
$
511
216
$
338
36
The following table contains information for pension plans with accumulated benefit obligations in excess of the fair value of plan assets as of fiscal
year−end:
November 30,
November 30,
2007
2006
Accumulated benefit obligation
Fair value of plan assets
$
474
216
$
287
36
Assumptions.
The following table presents the weighted average assumptions used to determine benefit obligations at fiscal year−end:
Pension
Fiscal 2007
Discount rate
Rate of future compensation increases
Postretirement
Fiscal 2007
Fiscal 2006
Fiscal 2006
6.17%
5.08
5.79%
4.40
6.34%
n/a
5.97%
n/a
The following table presents the weighted average assumptions used to determine net periodic benefit costs for fiscal 2007, fiscal 2006 and fiscal 2005:
Fiscal 2007
Discount rate
Expected long−term rate of return on plan
assets
Rate of future compensation increases
Pension
Fiscal 2006
Fiscal 2005
5.79%
5.60%
5.90%
6.65
4.40
6.65
4.35
6.95
4.45
Fiscal 2007
Postretirement
Fiscal 2006
Fiscal 2005
5.97%
5.75%
6.05%
n/a
n/a
n/a
n/a
n/a
n/a
The expected long−term rate of return on assets represents the Company’s best estimate of the long−term return on plan assets and generally was estimated
by computing a weighted average return of the underlying long−term expected returns on the different asset classes, based on the target asset allocations.
For plans where there is no established target asset allocation, actual asset allocations were used. The expected long−term return on assets is a long−term
assumption that generally is expected to remain the same from one year to the next unless there is a significant change in the target asset allocation, the fees
and expenses paid by the plan or market conditions.
161
G-168
Table of Contents
MORGAN STANLEY
The following table presents assumed health care cost trend rates used to determine the postretirement benefit obligations at fiscal year−end:
November 30,
2007
Health care cost trend rate assumed for next year:
Medical
Prescription
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)
Year that the rate reaches the ultimate trend rate
November 30,
2006
8.33−8.61%
11.11%
5.00%
2012
9.00−9.33%
12.33%
5.00%
2012
Assumed health care cost trend rates can have a significant effect on the amounts reported for the Company’s postretirement benefit plans. A
one−percentage point change in assumed health care cost trend rates would have the following effects:
One−Percentage
One−Percentage
Point Increase
Point (Decrease)
Effect on total postretirement service and interest cost
Effect on postretirement benefit obligation
$
3
26
$
(2)
(21)
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted in December 2003. For 2008, Morgan Stanley
elected not to apply for the Medicare Retiree Drug Subsidy or take any other action related to the Act since Medicare prescription drug coverage was
deemed to have no material effect on the Company’s retiree medical program. No impact of the Act has been reflected in the Company’s results.
U.S. Qualified Plan Assets.
The U.S. Qualified Plan assets represent 90% of the Company’s total pension plan assets. The weighted average asset allocations for the U.S. Qualified Plan
at November 30, 2007 and November 30, 2006 and the targeted asset allocation for fiscal 2008 by asset class were as follows:
Fiscal 2008
Targeted
Equity securities
Fixed income securities
Other—primarily cash
Total
November 30,
2007
November 30,
2006
30%
70
—
31%
68
1
44%
51
5
100%
100%
100%
U.S. Qualified Pension Plan Asset Allocation. The Company, in consultation with its independent investment consultants and actuaries, determined the
asset allocation targets for its U.S. Qualified Plan based on its assessment of business and financial conditions, demographic and actuarial data, funding
characteristics and related risk factors. Other relevant factors, including industry practices and long−term historical and prospective capital market returns,
were considered as well. The expected long−term rate of return on U.S. Qualified Plan assets is 6.75% for fiscal 2007.
The U.S. Qualified Plan return objectives provide long−term measures for monitoring the investment performance against growth in the pension
obligations. The overall allocation is expected to help protect the plan’s funded status while generating sufficiently stable real returns (net of inflation) to
help cover current and future benefit payments. Total U.S. Qualified Plan portfolio performance is assessed by comparing actual returns with relevant
benchmarks, such as the S&P 500 Index, the Russell 2000 Index, the MSCI EAFE Index and, in the case of the fixed income portfolio, the U.S. Qualified
Plan’s liability profile.
162
G-169
Table of Contents
MORGAN STANLEY
Both the equity and fixed income portions of the asset allocation use a combination of active and passive investment strategies and different investment
styles. The fixed income asset allocation consists of longer duration fixed income securities in order to help reduce plan exposure to interest rate variation
and to better correlate assets with obligations. The longer duration fixed income allocation is expected to help maintain the stability of plan contributions
over the long run.
The asset mix of the Company’s U.S. Qualified Plan is reviewed by the Morgan Stanley Retirement Plan Investment Committee on a regular basis. When
asset class exposure reaches a minimum or maximum level, an asset allocation review process is initiated, and the portfolio is automatically rebalanced back
to target allocation levels unless the Investment Committee determines otherwise.
Under the current Investment Committee policy, no more than 10% of the U.S. Qualified Plan assets can be allocated to non−traditional “alternative” asset
classes and only to the extent that those alternatives provide attractive diversification benefits, absolute return enhancement and/or other potential benefit to
the plan. Allocations to alternative asset classes will be made based upon an evaluation of particular attributes and relevant considerations of each asset
class.
Derivative instruments are permitted in the U.S. Qualified Plan’s portfolio only to the extent that they comply with all of the plan’s policy guidelines and are
consistent with the plan’s risk and return objectives. In addition, any investment in derivatives must meet the following conditions:
• Derivatives may be used only if the vehicle is deemed by the investment manager to be more attractive than a similar direct investment in the
underlying cash market or if the vehicle is being used to manage risk of the portfolio.
• Derivatives may not be used in a speculative manner or to leverage the portfolio under any circumstances.
• Derivatives may not be used as short−term trading vehicles. The investment philosophy of the U.S. Qualified Plan is that investment activity is
undertaken for long−term investment rather than short−term trading.
• Derivatives may only be used in the management of the U.S. Qualified Plan’s portfolio when their possible effects can be quantified, shown to
enhance the risk−return profile of the portfolio, and reported in a meaningful and understandable manner.
As a fundamental operating principle, any restrictions on the underlying assets apply to a respective derivative product. This includes percentage allocations
and credit quality. Derivatives will be used solely for the purpose of enhancing investment in the underlying assets and not to circumvent portfolio
restrictions.
Cash Flows.
The Company expects to contribute approximately $115 million to its pension and postretirement benefit plans (U.S. and non−U.S.) in fiscal 2008 based
upon their current funded status and expected asset return assumptions for fiscal 2008, as applicable.
Expected benefit payments associated with the Company’s pension and postretirement benefit plans for the next five fiscal years and in aggregate for the
five fiscal years thereafter are as follows:
Fiscal 2008
Fiscal 2009
Fiscal 2010
Fiscal 2011
Fiscal 2012
Fiscal 2013−2017
163
Pension
Postretirement
$ 109
109
108
109
119
654
$
8
8
8
9
9
47
G-170
Table of Contents
MORGAN STANLEY
Morgan Stanley 401(k) and Profit Sharing Awards. Eligible U.S. employees receive 401(k) matching contributions that are invested in the Company’s
common stock. The retirement contribution granted in lieu of a defined benefit pension plan is included in the Company’s 401(k) expense. The Company
also provides discretionary profit sharing to certain Non−U.S. employees. The pre−tax expense associated with the 401(k) match and profit sharing for
fiscal 2007 was $128 million and $117 million for both fiscal 2006 and fiscal 2005. The impact of the Discover Spin−off and Quilter disposal on pre−tax
401(k) match and profit sharing expense in fiscal 2007, fiscal 2006 and fiscal 2005 was approximately $8 million, $15 million and $15 million, respectively.
The impact was reflected in discontinued operations (see Note 22).
Defined Contribution Pension Plans.
The Company maintains separate defined contribution pension plans that cover substantially all employees of certain non−U.S. subsidiaries. Under such
plans, benefits are determined based on a fixed rate of base salary with certain vesting requirements. In fiscal 2007, fiscal 2006 and fiscal 2005, the
Company’s expense related to these plans was $115 million, $87 million and $71 million, respectively.
Other Postemployment Benefits. Postemployment benefits include, but are not limited to, salary continuation, severance benefits, disability−related
benefits, and continuation of health care and life insurance coverage provided to former employees or inactive employees after employment but before
retirement. The postemployment benefit obligations were not material as of November 30, 2007 and November 30, 2006.
20.
Income Taxes.
The provision for (benefit from) income taxes from continuing operations consisted of:
Fiscal 2007
Current:
U.S. federal
U.S. state and local
Non−U.S.
$
302
147
2,428
Fiscal 2006
$
2,877
Deferred:
U.S. federal
U.S. state and local
Non−U.S.
1,084
254
1,279
Fiscal 2005
$
2,617
1,252
198
1,022
2,472
(1,861)
(69)
(116)
126
(20)
5
(873)
(68)
(58)
(2,046)
111
(999)
Provision for income taxes from continuing operations
$
831
$
2,728
$
1,473
Provision for income taxes from discontinued operations
$
378
$
529
$
201
164
G-171
Table of Contents
MORGAN STANLEY
The following table reconciles the provision for (benefit from) income taxes to the U.S. federal statutory income tax rate:
Fiscal 2007
Fiscal 2006
Fiscal 2005
U.S. federal statutory income tax rate
U.S. state and local income taxes, net of U.S. federal income tax benefits
Lower tax rates applicable to non−U.S. earnings
Domestic tax credits
Tax exempt income
Other
35.0%
1.5
(2.0)
(6.0)
(3.3)
(0.7)
35.0%
1.6
(2.4)
(2.3)
(0.9)
(0.9)
35.0%
1.4
(5.5)
(6.4)
(0.8)
0.8
Effective income tax rate(1)
24.5%
30.1%
24.5%
(1)
The fiscal 2006 effective tax rate includes the impact of a $242 million income tax benefit, or $0.23 per diluted share, related to the resolution of the Internal Revenue Service (the
“IRS”) examination of years 1994−1998. The fiscal 2005 effective tax rate includes the impact of a $309 million income tax benefit resulting from repatriation of foreign earnings
under the provisions of the American Jobs Creation Act of 2004.
As of November 30, 2007, the Company had approximately $5.8 billion of earnings attributable to foreign subsidiaries for which no provisions have been
recorded for income tax that could occur upon repatriation. Except to the extent such earnings can be repatriated tax efficiently, they are permanently
invested abroad. It is not practicable to determine the amount of income taxes payable in the event all such foreign earnings are repatriated.
The American Jobs Creation Act, adopted on October 22, 2004, provided for a special one−time tax deduction, or dividend received deduction, of 85% of
qualifying foreign earnings that are repatriated in either a company’s last tax year that began before the enactment date or the first tax year that begins
during the one−year period beginning on the enactment date. In the fourth quarter of fiscal 2005, the Company recorded an income tax benefit of $309
million, or $0.29 per diluted share, resulting from the Company’s repatriation of approximately $4.0 billion of qualifying foreign earnings under the
provisions of the American Jobs Creation Act. The $309 million tax benefit resulted from the reversal of net deferred tax liabilities previously provided
under SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), net of additional taxes associated with these qualifying earnings.
165
G-172
Table of Contents
MORGAN STANLEY
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Company’s
deferred tax assets and liabilities at November 30, 2007 and November 30, 2006 were as follows:
November 30,
November 30,
2007
2006
Deferred tax assets:
Employee compensation and benefit plans
Loan loss allowance
Valuation and liability allowances
Deferred expenses
Tax credit and loss carryforward
Other
$
$
2,965
321
553
26
—
806
Total deferred tax assets
Valuation allowance(1)
7,905
19
4,671
—
Deferred tax assets after valuation allowance
7,886
4,671
787
52
283
1,171
20
91
368
1,076
2,293
1,555
Deferred tax liabilities:
Valuation of inventory, investments and receivables
Prepaid commissions
Fixed assets
Other
Total deferred tax liabilities
Net deferred tax assets
(1)
4,789
—
498
38
1,729
851
$
5,593
$
3,116
The valuation allowance reduces the benefit of certain state net operating loss carryforwards to the amount that will more likely than not be realized.
During fiscal 2007, the valuation allowance was increased by $19 million related to the ability to utilize state net operating losses.
The Company had federal and state net operating loss carryforwards for which a deferred tax asset of $724 million and zero was recorded as of November
30, 2007 and November 30, 2006, respectively. These carryforwards are subject to annual limitations and will expire in 2027.
The Company had tax credit carryforwards for which a related deferred tax asset of $1,005 million and zero was recorded as of November 30, 2007 and
November 30, 2006, respectively. These carryforwards are subject to annual limitations on utilization and will expire in 2017.
The Company believes that the realization of the recognized net deferred tax asset of $5,593 million (after valuation allowance) is more likely than not
based on expectations as to future taxable income in the jurisdictions in which it operates.
The Company recorded income tax benefits to Paid−in capital of $280 million, $72 million and $317 million related to employee stock compensation
transactions in fiscal 2007, fiscal 2006 and fiscal 2005, respectively. Such benefits were credited to Paid−in capital.
166
G-173
Table of Contents
MORGAN STANLEY
Cash paid for income taxes was $3,404 million, $3,115 million and $1,536 million in fiscal 2007, fiscal 2006 and fiscal 2005, respectively. The Company
has requested a refund of $1,200 million for estimated taxes paid during fiscal 2007.
Income Tax Examinations. The Company is under continuous examination by the IRS and other tax authorities in certain countries, such as Japan and the
U.K., and states in which the Company has significant business operations, such as New York. The tax years under examination vary by jurisdiction; for
example, the current IRS examination covers 1999−2005. The Company regularly assesses the likelihood of additional assessments in each of the taxing
jurisdictions resulting from these and subsequent years’ examinations. The Company has established tax reserves that the Company believes are adequate in
relation to the potential for additional assessments. Once established, the Company adjusts tax reserves only when more information is available or when an
event occurs necessitating a change to the reserves. The Company believes that the resolution of tax matters will not have a material effect on the
consolidated financial condition of the Company, although a resolution could have a material impact on the Company’s consolidated statement of income
for a particular future period and on the Company’s effective income tax rate for any period in which such resolution occurs.
21.
Segment and Geographic Information.
The Company structures its segments primarily based upon the nature of the financial products and services provided to customers and the Company’s
management organization. The Company provides a wide range of financial products and services to its customers in each of its business segments:
Institutional Securities, Global Wealth Management Group and Asset Management. For further discussion of the Company’s business segments, see Note 1.
Revenues and expenses directly associated with each respective segment are included in determining their operating results. Other revenues and expenses
that are not directly attributable to a particular segment are allocated based upon the Company’s allocation methodologies, generally based on each
segment’s respective net revenues, non−interest expenses or other relevant measures.
As a result of treating certain intersegment transactions as transactions with external parties, the Company includes an Intersegment Eliminations category
to reconcile the business segment results to the Company’s consolidated results. Income before taxes in Intersegment Eliminations primarily represents the
effect of timing differences associated with the revenue and expense recognition of commissions paid by Asset Management to the Global Wealth
Management Group associated with sales of certain products and the related compensation costs paid to the Global Wealth Management Group’s global
representatives.
167
G-174
Table of Contents
MORGAN STANLEY
Selected financial information for the Company’s segments is presented below:
Institutional
Securities
Global Wealth
Management
Group
Net revenues excluding net interest
Net interest
$
14,085
2,064
$
5,915
710
$
5,531
(38)
$
(286)
45
$25,245
2,781
Net revenues
$
16,149
$
6,625
$
5,493
$
(241)
$28,026
817
47
(170)
$
1,155
—
459
$
1,467
—
541
$
940
$
696
$
926
$
Fiscal 2007
Income from continuing operations before losses from
unconsolidated investees and income taxes
Income tax (benefit) provision
$
Asset
Management
Intersegment
Eliminations(1)
2
Total
1
$ 3,441
47
831
1
$ 2,563
—
Income from continuing operations(2)
$
Fiscal 2006(3)
Institutional
Securities(2)
Global Wealth
Management
Group
Net interest
$
19,758
1,352
$
5,027
485
$
3,432
21
$
(257)
21
$27,960
1,879
Net revenues
$
21,110
$
5,512
$
3,453
$
(236)
$29,839
$
7,721
40
2,212
$
508
—
167
$
851
—
340
$
23
—
9
$ 9,103
40
2,728
Income from continuing operations(2)
$
5,469
$
341
$
511
$
14
$ 6,335
Fiscal 2005(3)
Institutional
Securities
Global Wealth
Management
Group
Net interest
$
13,416
2,081
$
4,729
318
$
3,183
36
$
(238)
—
$21,090
2,435
Net revenues
$
15,497
$
5,047
$
3,219
$
(238)
$23,525
unconsolidated investees, income taxes and cumulative
$
4,609
311
852
$
591
—
199
$
1,030
—
391
$
86
—
31
$ 6,316
311
1,473
$
3,446
$
392
$
639
$
55
$ 4,532
Income from continuing operations before cumulative
effect of accounting change, net(2)(4)
168
Asset
Management
Asset
Management
Intersegment
Eliminations(1)
Intersegment
Eliminations
Total
Total
G-175
Table of Contents
MORGAN STANLEY
Institutional
Securities
Global
Wealth
Management
Group
Fiscal 2007
Interest expense
$
59,131
57,067
$
1,221
511
$
74
112
$
(343)
(388)
$60,083
57,302
Net interest
$
2,064
$
710
$
(38)
$
45
$ 2,781
Fiscal 2006(3)
Interest expense
$
42,106
40,754
$
1,004
519
$
48
27
$
(382)
(403)
$42,776
40,897
Net interest
$
1,352
$
485
$
21
$
21
$ 1,879
Fiscal 2005(3)
Interest expense
$
25,439
23,358
$
650
332
$
87
51
$
(189)
(189)
$25,987
23,552
Net interest
$
2,081
$
318
$
36
$
—
$ 2,435
Net Interest
Asset
Management
Intersegment
Eliminations(1)
Total
Total Assets(5)
Institutional
Securities
Global Wealth
Management
Group
$ 1,005,452
$
27,518
$
12,439
At November 30, 2006(3)
$ 1,063,985
$
21,232
$
6,908
$ 29,067
$ 1,121,192
$ 848,555
$
19,290
$
4,046
$ 26,944
$ 898,835
(1)
(2)
(3)
(4)
(5)
Asset
Management
Discover
$
—
Total
$ 1,045,409
The results of the Institutional Securities business segment for fiscal 2007 included a $25 million advisory fee related to the Discover Spin−off that was eliminated in consolidation.
The results of the Institutional Securities business segment for fiscal 2006 included a $30 million advisory fee related to the Company’s sale of the aircraft leasing business that was
eliminated in consolidation.
See Note 22 for a discussion of discontinued operations.
Certain reclassifications have been made to prior−period amounts to conform to the current year’s presentation.
See Note 2 for a discussion of the cumulative effect of accounting change, net.
Corporate assets have been fully allocated to the Company’s business segments.
The Company operates in both U.S. and non−U.S. markets. The Company’s non−U.S. business activities are principally conducted through European and
Asian locations. The following table presents selected income statement information and the total assets of the Company’s operations by geographic area.
The net revenues and total assets disclosed in the following table reflect the regional view of the Company’s consolidated net revenues and total assets, on a
managed basis, based on the following methodology:
• Institutional Securities: investment banking—client location, equity capital markets—client location, debt capital markets—revenue recording
location, sales & trading—trading desk location.
• Global Wealth Management Group: global representative coverage location.
• Asset Management: client location, except for merchant banking business, which is based on asset location.
169
G-176
Table of Contents
MORGAN STANLEY
Net Revenues
Americas
Fiscal 2007
Fiscal 2006(1)
Fiscal 2005(1)
$ 12,150
18,803
15,375
Total Assets
(1)
22.
Americas
Europe,
Middle
East and
Africa
$ 705,728
708,129
613,361
$ 269,753
347,379
240,467
Europe,
Middle
East and
Africa
Asia
$10,008
7,762
5,711
$5,868
3,274
2,439
Asia
Eliminations
$ 83,328
83,315
66,527
$ (13,400)
(17,631)
(21,520)
Total
$28,026
29,839
23,525
Total
$ 1,045,409
1,121,192
898,835
Certain reclassifications have been made to prior−year amounts to conform to the current year’s presentation.
Fiscal 2007.
Discover. On June 30, 2007, the Company completed the Discover Spin−off. The Company distributed all of the outstanding shares of DFS common
stock, par value $0.01 per share, to the Company’s stockholders of record as of June 18, 2007. The Company’s stockholders received one share of DFS
common stock for every two shares of the Company’s common stock. Stockholders received cash in lieu of fractional shares for amounts less than one full
DFS share. The Company received a tax ruling from the IRS that, based on customary representations and qualifications, the distribution was tax−free to the
Company’s stockholders for U.S. federal income tax purposes.
The Discover Spin−off allows the Company to focus its efforts on more closely aligned firm−wide strategic priorities within its Institutional Securities,
Global Wealth Management Group and Asset Management business segments.
The results of DFS prior to the Discover Spin−off are included within discontinued operations for all periods presented.
170
G-177
Table of Contents
MORGAN STANLEY
The following is a summary of the assets and liabilities associated with DFS as of November 30, 2006 (dollars in millions):
Assets
Financial instruments owned—U.S. government and agency securities
Financial instruments owned—Derivative contracts
Consumer loans
Fees, interest and other
Office facilities and other equipment, at cost, net
Goodwill and net intangible assets
Other assets
$
Total
869
65
33
22,915
166
661
735
3,623
$ 29,067
Liabilities and Shareholders’ Equity
Deposits
Financial instruments sold, not yet purchased—Derivative contracts
Interest and dividends payables
$ 3,100
13,277
28
129
6,508
250
Total
23,292
Net assets
$ 5,775
The net assets that were distributed to shareholders on the date of the Discover Spin−off were $5,558 million, which was recorded as a reduction to the
Company’s retained earnings.
Net revenues included in discontinued operations related to DFS were $2,392 million, $4,290 million and $3,452 million in fiscal 2007, fiscal 2006 and
fiscal 2005, respectively.
The results of discontinued operations include interest expense that was allocated based upon borrowings that were specifically attributable to DFS’
operations through intercompany transactions existing prior to the Discover Spin−off. For fiscal 2007, fiscal 2006 and fiscal 2005, the amount of interest
expense reclassified to discontinued operations was approximately $159 million, $247 million and $145 million, respectively.
Quilter. On February 28, 2007, the Company sold Quilter, its standalone U.K. mass affluent business, which was formerly included within the Global
Wealth Management Group business segment. The results of Quilter are included within discontinued operations for all periods presented. The results for
discontinued operations in fiscal 2007 also included a pre−tax gain of $168 million ($109 million after−tax) on disposition.
Fiscal 2006 and Fiscal 2005.
Aircraft Leasing. On August 17, 2005, the Company announced that its Board of Directors had approved management’s recommendation to sell the
Company’s non−core aircraft leasing business. In connection with this action, the aircraft leasing business was classified as “held for sale” and reported as
discontinued operations in the Company’s consolidated financial statements. In addition, in the third quarter of fiscal 2005, the Company recognized a
charge of approximately $1.7 billion ($1.0 billion after−tax) to reflect the writedown of the aircraft
171
G-178
Table of Contents
MORGAN STANLEY
leasing business to its estimated fair value of approximately $2.0 billion. In determining the charge that was recorded in the third quarter of fiscal 2005, the
Company estimated the value to be realized in selling the aircraft leasing business as a whole. The estimated value of the business was based on the
appraised values of the aircraft portfolio, an evaluation of then current market conditions, recent transactions involving the sales of similar aircraft leasing
businesses, a detailed assessment of the portfolio and additional valuation analyses.
On January 30, 2006, the Company announced that it had signed a definitive agreement under which it would sell its aircraft leasing business to Terra
Firma, a European private equity group, for approximately $2.5 billion in cash and the assumption of liabilities. Based on the terms of the agreement and in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long−Lived Assets” (“SFAS No. 144”), the Company revised its estimate
of the fair value (less selling costs) of the aircraft leasing business and, as a result, in the fourth quarter, reduced the pre−tax charge recorded in the third
quarter of fiscal 2005 by approximately $1.1 billion. Full year results for fiscal 2005 reflected a charge of $509 million ($316 million after−tax).
The sale was completed on March 24, 2006. The results for discontinued operations in fiscal 2006 included a loss of $125 million ($75 million after−tax)
related to the impact of the finalization of the sales proceeds and balance sheet adjustments related to the closing. Gross revenues from the aircraft leasing
business included in discontinued operations was $137 million and $417 million in fiscal 2006 and fiscal 2005, respectively.
Summarized financial information for the Company’s discontinued operations for fiscal 2007, fiscal 2006 and fiscal 2005:
The table below provides information regarding amounts included within discontinued operations (dollars in millions):
Pre−tax gain (loss) on discontinued operations
DFS
Quilter
Aircraft leasing
23.
2007
Fiscal Year
2006
2005
$ 850
174
—
$1,681
27
(42)
$1,025
20
(486)
$1,024
$1,666
$ 559
Business and Other Acquisitions and Dispositions and Sale of Minority Interest.
Subsequent to Fiscal 2007.
Morgan Stanley Wealth Management S.V., S.A.U. On January 28, 2008, the Company announced that it had reached an agreement to sell Morgan
Stanley Wealth Management S.V., S.A.U. (“MSWM”), its Spanish onshore mass affluent wealth management business. The transaction is expected to close
during the first half of fiscal 2008 subject to customary closing conditions, including regulatory approvals. The results of MSWM have been included within
the Global Wealth Management Group business segment.
Fiscal 2007.
MSCI. On July 31, 2007, the Company announced that it would sell a minority interest in its subsidiary, MSCI Inc. (“MSCI”) in an initial public offering
(“IPO”). MSCI is a provider of investment decision support tools to investment institutions worldwide. MSCI is included within the Institutional Securities
business segment. In November 2007, MSCI completed its IPO of 16.1 million shares and received net proceeds of approximately $265 million, net of
underwriting discounts, commissions and offering expenses. As the IPO was part of a
172
G-179
Table of Contents
MORGAN STANLEY
broader corporate reorganization, contemplated by the Company at the IPO date, the increase in the carrying amount of the Company’s investment in MSCI
was recorded in Paid−in capital in the Company’s consolidated statement of financial condition and the Company’s consolidated statement of changes in
shareholders’ equity at November 30, 2007. Subsequent to the IPO, the Company maintains approximately 81% ownership of MSCI and consolidates MSCI
for financial reporting purposes.
JM Financial. In October 2007, the Company dissolved its India joint ventures with JM Financial. The Company purchased the joint venture’s
institutional equities sales, trading and research platform by acquiring JM Financial’s 49% interest and sold the Company’s 49% interest in the joint
venture’s investment banking, fixed income and retail operation to JM Financial.
CityMortgage Bank. On December 21, 2006, the Company acquired CityMortgage Bank (“CityMortgage”), a Moscow−based mortgage bank that
specializes in originating, servicing and securitizing residential mortgage loans in the Russian Federation. Since the acquisition date, the results of
CityMortgage have been included within the Institutional Securities business segment.
Olco Petroleum Group Inc. On December 15, 2006, the Company acquired a 60% equity stake in Olco Petroleum Group Inc. (“Olco”), a petroleum
products marketer and distributor based in eastern Canada. Since the acquisition date, the results of Olco have been included within the Institutional
Securities business segment.
Saxon Capital, Inc. On December 4, 2006, the Company acquired Saxon Capital, Inc. (“Saxon”), a servicer and originator of residential mortgages. Since
the acquisition date, the results of Saxon have been included within the Institutional Securities business segment.
FrontPoint Partners. On December 4, 2006, the Company acquired FrontPoint Partners (“FrontPoint”), a provider of absolute return investment
strategies. Since the acquisition date, the results of FrontPoint have been included within the Asset Management business segment.
Fiscal 2006.
Goldfish. On February 17, 2006, the Company acquired the Goldfish credit card business in the U.K. As a result of the Discover Spin−off, the results of
Goldfish have been included within discontinued operations (see Note 22). The acquisition price was $1,676 million, which was paid in cash in February
2006. The Company recorded goodwill and other intangible assets of approximately $370 million in connection with the acquisition.
The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of the acquisition:
At February 17, 2006
Consumer loans
Goodwill
Amortizable intangible assets
Other assets
$
Total assets acquired
Total liabilities assumed
1,316
247
123
20
1,706
30
Net assets acquired
$
1,676
The $123 million of acquired amortizable intangible assets includes customer relationships of $54 million (15−year estimated useful life) and trademarks of
$69 million (25−year estimated useful life).
173
G-180
Table of Contents
MORGAN STANLEY
Lansdowne Partners. On November 1, 2006, the Company acquired a 19% stake in Lansdowne Partners (“Lansdowne”), a London−based investment
manager. The investment in Lansdowne is accounted for under the equity method of accounting within the Asset Management business segment.
Avenue Capital Group. On October 30, 2006, the Company formed a strategic alliance with Avenue Capital Group (“Avenue”), a New York−based
investment manager with approximately $12 billion in assets under management. The Company acquired a minority interest in Avenue. The investment in
Avenue is accounted for under the equity method of accounting within the Asset Management business segment.
Morgan Stanley Bank International (China) Limited. On September 29, 2006, the Company acquired Morgan Stanley Bank International (China)
Limited (“China Bank”) (formerly Nan Tung Bank Ltd. Zhuhai), a bank in the People’s Republic of China. The acquisition enabled the Company to
strengthen its platform in China. Since the acquisition date, the results of China Bank have been included within the Institutional Securities business
segment.
TransMontaigne Inc. On September 1, 2006, the Company acquired TransMontaigne Inc. and its subsidiaries (“TransMontaigne”), a group of companies
operating in the refined petroleum products marketing and distribution business. The acquisition enabled the Company to expand its supply and distribution
of oil and refined oil products across a broader range of clients and regions across the U.S., as well as increase its oil storage capacity across the U.S. Since
the acquisition date, the results of TransMontaigne and its subsidiaries have been included within the Institutional Securities business segment.
Heidmar Group. On September 1, 2006, the Company acquired the Heidmar Group of companies that provides international shipping and U.S. marine
logistics services. The acquisition enabled the Company to expand its physical freight business across multiple vessel classes and geographies and provided
an opportunity to expand into international shipping and services. Since the acquisition date, the results of the Heidmar Group of companies have been
included within the Institutional Securities business segment.
Office Building. On June 19, 2006, the Company purchased a majority interest in a joint venture that indirectly owned title to 522 Fifth Avenue, a
23−floor office building in New York City (the “Building”), for approximately $420 million. On July 10, 2007, the Company purchased the balance of the
interest in the joint venture for approximately $37 million.
The pro forma impact of each of the above business acquisitions individually and in the aggregate was not material to the consolidated financial statements.
24.
Staff Accounting Bulletin No. 108.
In September 2006, the SEC released SAB 108. SAB 108 permits the Company to adjust for the cumulative effect of errors relating to prior years in the
carrying amount of assets and liabilities as of the beginning of the 2006 fiscal year, with an offsetting adjustment to the opening balance of retained earnings
in the year of adoption. SAB 108 also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of
such errors on the quarters when the information is next presented. Such adjustments do not require previously filed reports with the SEC to be amended.
Effective August 31, 2006, the Company elected early application of SAB 108. In accordance with SAB 108, the Company adjusted its opening retained
earnings for fiscal 2006 and its financial results for the first two quarters of fiscal 2006 for the items described below. The Company considers these
adjustments to be immaterial to prior annual periods.
174
G-181
Table of Contents
MORGAN STANLEY
Trust Preferred Securities. The Company adjusted its opening retained earnings for fiscal 2006 and its financial results for the first two quarters of fiscal
2006 to reflect a change in its hedge accounting under SFAS No. 133. The change is being made following a clarification by the SEC of its interpretation of
SFAS No. 133 related to the accounting for fair value hedges of fixed−rate trust preferred securities.
Since January 2005, the Company entered into various interest rate swaps to hedge the interest rate risk inherent in its trust preferred securities. The terms of
the interest rate swaps and the corresponding trust preferred securities mirrored one another, and the Company determined in the past that the changes in the
fair value of the swaps and hedged instruments were the same. The Company applied the commonly used “short−cut method” in accounting for these fair
value hedges and, therefore, did not reflect any gains or losses during the relevant periods. Based upon the SEC’s clarification of SFAS No. 133, the
Company determined that since it has the ability at its election to defer interest payments on its trust preferred securities, these swaps did not qualify for the
short−cut method. These swaps performed as expected as effective economic hedges of interest rate risk. The Company ended hedging of the interest rate
risk on these trust preferred securities effective August 2006 and adjusted its financial results as if hedge accounting was never applied. The Company
currently manages the interest rate risk on these securities as part of its overall asset liability management.
Compensation and Benefits. The Company also adjusted its opening retained earnings for fiscal 2006 and its financial results for the first two quarters of
fiscal 2006 for two compensation and benefits accruals. Such accruals are related to (i) the overaccrual of certain payroll taxes in certain non−U.S. locations,
primarily in the U.K., which arose in fiscal 2000 through fiscal 2006 and (ii) an adjustment to the amortization expense associated with stock−based
compensation awards, which arose in fiscal 2003 and fiscal 2004.
Impact of Adjustments. The impact of each of the items noted above on fiscal 2006 opening Shareholders’ equity and Retained earnings and on Net
income for the first and second quarters of fiscal 2006 is presented below (dollars in millions):
Cumulative effect on Shareholders’ equity as of December 1, 2005
Cumulative effect on Retained earnings as of December 1, 2005
Effect on:
Net income for the three months ended February 28, 2006
Net income for the three months ended May 31, 2006
Net income for the six months ended May 31, 2006
175
Non−U.S.
Payroll
Taxes
Amortization
of Stock−
Based
Compensation
Awards
Total
(84)
(84)
$
$
38
38
$
$
12
(22)
$ (34)
$ (68)
(1)
(116)
(117)
$
$
$
14
—
14
$
$
$
—
—
—
$ 13
$(116)
$(103)
Trust
Preferred
Securities
$
$
$
$
$
G-182
Table of Contents
MORGAN STANLEY
The aggregate impact of these adjustments is summarized below (dollars in millions, except per share data):
As of and for the Three Months Ended February 28, 2006
Previously
Reported
Adjustment
Other assets
Other liabilities
Principal transactions trading revenue
Compensation and benefits expense
Interest expense
Net income
Diluted EPS
$ 15,988
$ 14,984
$ 121,395
$ 30,124
$ 3,073
$ 4,032
$ 9,216
$ 1,561
$
1.47
$
$
$
$
$
$
$
$
$
As of and for the Three Months Ended May 31, 2006
Previously
Reported
Adjustment
Other assets
Other liabilities
Interest expense
Net income
Diluted EPS
$ 17,651
$ 18,159
$ 127,985
$ 32,255
$ 3,729
$ 3,587
$ 9,735
$ 1,957
$
1.86
$
$
$
$
$
$
$
$
$
For the Six Months Ended May 31, 2006
Previously
Reported
Adjustment
Interest expense
Net income
Diluted EPS
$ 6,802
$ 7,619
$ 18,951
$ 3,518
$
3.33
$
$
$
$
$
25.
12
(98)
131
(21)
13
(22)
15
13
0.01
12
(162)
311
(137)
(170)
—
9
(116)
(0.11)
(157)
(22)
24
(103)
(0.10)
As
Adjusted
$ 16,000
$ 14,886
$ 121,526
$ 30,103
$ 3,086
$ 4,010
$ 9,231
$ 1,574
$
1.48
As
Adjusted
$ 17,663
$ 17,997
$ 128,296
$ 32,118
$ 3,559
$ 3,587
$ 9,744
$ 1,841
$
1.75
As
Adjusted
$ 6,645
$ 7,597
$ 18,975
$ 3,415
$
3.23
Insurance Settlement.
On September 11, 2001, the U.S. experienced terrorist attacks targeted against New York City and Washington, D.C. The attacks in New York resulted in
the destruction of the World Trade Center complex, where approximately 3,700 of the Company’s employees were located, and the temporary closing of the
debt and equity financial markets in the U.S. Through the implementation of its business recovery plans, the Company relocated its displaced employees to
other facilities.
In the first quarter of fiscal 2005, the Company settled its claim with its insurance carriers related to the events of September 11, 2001. The Company
recorded a pre−tax gain of $251 million as the insurance recovery was in excess of previously recognized costs related to the terrorist attacks (primarily
write−offs of leasehold improvements and destroyed technology and telecommunications equipment in the World Trade Center complex, employee
relocation and certain other employee−related expenditures).
The pre−tax gain was recorded as a reduction to non−interest expenses and is included within the Global Wealth Management Group ($198 million), Asset
Management ($43 million) and Institutional Securities ($10 million) business segments. The insurance settlement was allocated to the respective segments
in accordance with the relative damages sustained by each segment.
176
G-183
Table of Contents
MORGAN STANLEY
26.
Lease Adjustment.
Prior to the first quarter of fiscal 2005, the Company did not record the effects of scheduled rent increases and rent−free periods for certain real estate leases
on a straight−line basis. In addition, the Company had been accounting for certain tenant improvement allowances as reductions to the related leasehold
improvements instead of recording funds received as deferred rent and amortizing them as reductions to lease expense over the lease term. In the first
quarter of fiscal 2005, the Company changed its method of accounting for these rent escalation clauses, rent−free periods and tenant improvement
allowances to properly reflect lease expense over the lease term on a straight−line basis. The impact of this correction resulted in the Company recording
$105 million of additional rent expense in the first quarter of fiscal 2005. The impact of this change was included within non−interest expenses and reduced
income before taxes within the Institutional Securities ($71 million), Global Wealth Management Group ($29 million) and Asset Management ($5 million)
business segments. The impact of this correction was not material to the pre−tax income of each of the segments or to the Company.
177
G-184
Table of Contents
MORGAN STANLEY
27.
Quarterly Results (unaudited).
First
Total revenues
Interest expense
$23,192
13,198
2007 Fiscal Quarter
2006 Fiscal Quarter
Second
Third
Fourth(1)
First(2)
Second(2)
Third
(dollars in millions, except per share data)
$26,195
$21,230
$ 14,711
$16,644
$ 17,257
$18,613
15,671
13,272
15,161
9,231
9,744
11,549
Net revenues
9,994
10,524
7,958
6,538
7,000
5,693
Income (losses) from continuing operations before (losses) gains from
(Losses) gains from unconsolidated investees
Provision for (benefit from) income taxes
3,456
(26)
1,116
3,524
(20)
1,141
2,314
2,363
Income (losses) from continuing operations
Discontinued operations(3):
Gain from discontinued operations
(450)
Fourth
$18,222
10,373
7,413
7,513
7,064
7,849
5,354
5,503
5,212
4,820
5,201
2,265
(19)
772
(5,804)
18
(2,198)
1,910
(19)
603
2,301
24
848
2,244
20
676
2,648
(65)
601
1,474
(3,588)
1,288
1,477
1,588
1,982
564
(206)
349
(130)
111
(42)
—
—
453
(167)
583
(219)
399
(136)
231
(7)
358
219
69
—
286
364
263
224
Net income
$ 2,672
$ 2,582
$ 1,543
$
$ 1,851
$ 2,206
$
$
$
17
$
$
$
$ 2,655
$ 2,565
$ 1,526
$
(3,605)
Earnings per basic common share(4):
$
2.28
0.35
$
2.35
0.22
$
1.45
0.07
$
$
2.63
$
2.57
$
1.52
Earnings per diluted common share(4):
$
2.17
0.34
$
2.24
0.21
$
$
2.51
$
2.45
$
Dividends to common shareholders
Book value
(1)
(2)
(3)
(4)
28.
17
$ 0.27
$ 34.71
17
$ 0.27
$ 36.52
(3,588)
$ 1,574
$
1,841
$
$
—
$ 1,574
$
1,841
(3.61)
—
$
1.26
0.28
$
$
(3.61)
$
1.54
1.38
0.06
$
(3.61)
—
$
1.44
$
(3.61)
$
$ 0.27
$ 32.14
$
$
0.27
28.56
17
—
—
19
$ 1,851
$ 2,187
1.46
0.36
$
1.57
0.26
$
1.97
0.22
$
1.82
$
1.83
$
2.19
1.21
0.27
$
1.40
0.35
$
1.50
0.25
$
1.87
0.21
1.48
$
1.75
$
1.75
$
2.08
$ 0.27
$ 28.12
$
$
0.27
29.97
$ 0.27
$ 31.24
$ 0.27
$ 32.67
Results for the Company in the fourth quarter of fiscal 2007 included $9.4 billion in mortgage−related writedowns.
Results for the Company for the first two quarters of fiscal 2006 were adjusted (see Note 24).
See Note 22 for a discussion of discontinued operations.
Summation of the quarters’ earnings per common share may not equal the annual amounts due to the averaging effect of the number of shares and share equivalents throughout the
year.
Subsequent Event.
China Investment Corporation Investment.
In December 2007, the Company sold Equity Units which include contracts to purchase Company common stock (see “Stock Purchase Contracts” herein) to
a wholly owned subsidiary of the CIC for approximately $5,579 million. CIC’s ownership in the Company’s common stock, including the maximum
number of shares of common stock to be received by CIC upon settlement of the stock purchase contracts, will be 9.9% or less of the Company’s total
shares outstanding based on the total shares outstanding on November 30, 2007. CIC will be a
178
G-185
Table of Contents
MORGAN STANLEY
passive financial investor and will have no special rights of ownership nor a role in the management of the Company. A substantial portion of the
investment proceeds will be treated as Tier 1 capital for regulatory capital purposes.
Each stock purchase contract mandatorily settles in Company common stock at prices between $48.0700 and $57.6840. The maximum number of shares to
be issued upon settlement of the stock purchase contracts included in the Equity Units is approximately 116,063,000. The stock purchase contracts settle for
Company common stock on August 17, 2010, subject to adjustment. Each Equity Unit will pay a fixed annual payment rate of 9% payable quarterly.
As described below, the Equity Units consist of interests in trust preferred securities issued by Morgan Stanley Capital Trust A (“Series A Trust”), Morgan
Stanley Capital Trust B (“Series B Trust”) or Morgan Stanley Capital Trust C (“Series C Trust”) (each a “Morgan Stanley Trust” and, collectively, the
“Trusts”) and stock purchase contracts issued by the Company. The only assets held by the Series A Trust, Series B Trust and Series C Trust are junior
subordinated debentures issued by the Company.
Equity Units.
Each Equity Unit has a stated amount of $1,000 per unit consisting of:
(i)
an undivided beneficial ownership interest in a trust preferred security of Series A Trust, Series B Trust or Series C Trust with an initial liquidation
amount of $1,000; and
(ii) a stock purchase contract relating to the common stock, par value of $0.01 per share, of the Company.
Junior Subordinated Debentures Issued to Support Trust Common and Trust Preferred Securities.
In the first quarter of fiscal 2008, the Company issued junior subordinated debt securities due no later than February 17, 2042 for a total of $5,579,173,000
in exchange for $5,579,143,000 in aggregate proceeds from the sale of the trust preferred securities by the Trusts and $30,000 in trust common securities
issued equally by the Trusts. The Company elected to fair value the junior subordinated debentures pursuant to SFAS No. 159. The common and trust
preferred securities of the Trusts, totaling approximately $5,579 million, represent undivided beneficial ownership interests in the assets of the Trusts, have
no stated maturity and must be redeemed upon the redemption or maturity of the corresponding series of junior subordinated debt securities—the sole assets
of the respective Trusts. The Series A Trust, Series B Trust and Series C Trust will make quarterly distributions on the trust common and trust preferred
securities at an annual rate of 6%.
The trust common securities, which are held by the Company, represent an interest in the Trusts and are recorded as an equity method investment in the
Company’s consolidated statement of financial condition. The Trusts are VIEs in accordance with FIN 46R and the Company does not consolidate its
interests in the Trusts as it is not the primary beneficiary of any of the Trusts.
The Company has directly guaranteed the repayment of the trust preferred securities to the holders thereof to the extent that there are funds available in the
Trusts. If the Company does not make payments on the junior subordinated debentures owned by a Morgan Stanley Trust, such Morgan Stanley Trust will
not be able to pay any amounts payable in respect of the trust preferred securities issued by it and will not have funds legally available for that purpose. In
that event, holders of such series of trust preferred securities would not be able to rely upon the guarantee for payment of those amounts. The guarantee will
remain in place until the redemption price of all of the trust preferred securities is paid, the amounts payable with respect to the trust preferred
179
G-186
Table of Contents
MORGAN STANLEY
securities upon liquidation of the Morgan Stanley Trusts are paid or the junior subordinated debentures are distributed to the holders of all the trust preferred
securities. The trust preferred securities held by the Equity Unit holders are pledged to the Company to collateralize the obligations of the Equity Unit
holders under the related stock purchase contracts. The Equity Unit holders may substitute certain zero−coupon treasury securities in place of the trust
preferred securities as collateral under the stock purchase contracts.
Stock Purchase Contracts.
Each stock purchase contract requires the holder to purchase, and the Company to sell, on the stock purchase date a number of newly issued or treasury
shares of the Company’s common stock, par value $0.01 per share, equal to the settlement rate. The settlement rate at the respective stock purchase date will
be calculated based on the arithmetic average of the volume−weighted average prices of the common stock during a specified 20−day period ending three
days immediately preceding the applicable stock purchase date (“applicable market value”). If the applicable market value of the Company’s common stock
is less than the threshold appreciation price of $57.6840 but greater than $48.0700, the reference price, the settlement rate will be a number of shares of the
Company’s common stock equal to $1,000 divided by the applicable market value. If the applicable market value is less than or equal to the reference price,
the settlement rate will be the number of shares of the Company’s common stock equal to $1,000 divided by the reference price. If the applicable market
value is greater than or equal to the threshold appreciation price, the settlement rate will be the number of shares of the Company’s common stock equal to
$1,000 divided by the threshold appreciation price. Accordingly, upon settlement in the aggregate, the Company will receive proceeds of approximately
$5,579 million and issue up to approximately 116,063,000 shares of its common stock. The stock purchase contract may be settled early at the option of the
holder at any time prior to the second business day immediately preceding the beginning of the first remarketing period. However, upon early settlement,
the holder will receive the minimum settlement rate, subject to adjustment.
The initial quarterly distributions on the Series A, Series B and Series C trust preferred securities of 6%, combined with the contract adjustment payments
on the stock purchase contracts of 3%, result in the 9% yield on the Equity Units.
If the Company defers any of the contract adjustment payments on the stock purchase contracts, then it will accrue additional amounts on the deferred
amounts at the annual rate of 9% until paid, to the extent permitted by law.
The present value of the future contract adjustment payments due under the stock purchase contracts was approximately $400 million and was recorded in
Other liabilities and accrued expenses with a corresponding decrease recorded in Shareholders’ equity in the Company’s consolidated statement of financial
condition in the first quarter of fiscal 2008. The other liability balance related to the stock purchase contracts will accrete over the term of the stock purchase
contract using the effective yield method with a corresponding charge to Interest expense. When the contract adjustment payments are made under the stock
purchase contracts, they will reduce the other liability balance.
Calculation of Impact on Average Diluted Common Shares Outstanding Prior to Settlement of Stock Purchase Contract.
Prior to the issuance of common stock upon settlement of the stock purchase contract, the impact of the Equity Units will be reflected in the Company’s
earnings per diluted common share using the treasury stock method, as defined by SFAS No. 128, “Earnings Per Share.” Under the treasury stock method,
the number of shares of common stock included in the calculation of earnings per diluted common share will be calculated as the excess, if any, of the
number of shares expected to be issued upon settlement of the stock purchase contract based on the
180
G-187
Table of Contents
MORGAN STANLEY
average market price for the last 20 days of the reporting period, less the number of shares that could be purchased by the Company with the proceeds to be
received upon settlement of the contract at the average closing price for the reporting period.
Dilution of net income per share will occur (i) in reporting periods when the average closing price of common shares is over $57.6840 per share or (ii) in
reporting periods when the average closing price of common shares for a reporting period is between $48.0700 and $57.6840 and is greater than the average
market price for the last 20 days ending three days prior to the end of such reporting period.
Upon settlement of the Stock Purchase Contract, the amount of common shares issued in settlement of the contract will be included in the basic and diluted
earnings per share calculation of weighted average common shares outstanding for the reporting period.
181
G-188
Table of Contents
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted
an evaluation of our disclosure controls and procedures, as such term is defined under Exchange Act Rule 13a−15(e). Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered
by this annual report.
Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Morgan Stanley’s internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
Morgan Stanley;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Morgan Stanley’s
management and directors; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Morgan Stanley’s internal control over financial reporting as of November 30, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control−Integrated
Framework. Based on management’s assessment and those criteria, management believes that Morgan Stanley maintained effective internal control over
financial reporting as of November 30, 2007.
Morgan Stanley’s independent registered public accounting firm has audited and issued a report on Morgan Stanley’s internal control over financial
reporting, which appears below.
182
G-189
Table of Contents
We have audited the internal control over financial reporting of Morgan Stanley and subsidiaries (the “Company”) as of November 30, 2007, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of November 30, 2007, based on the
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of
financial condition of the Company as of November 30, 2007 and the related consolidated statement of income, comprehensive income, cash flows and
changes in shareholders’ equity for the year ended November 30, 2007 and our report dated January 28, 2008 expressed an unqualified opinion on those
financial statements and includes an explanatory paragraph, in fiscal 2007, concerning the adoption of Statement of Financial Accounting Standards
No. 157, “Fair Value Measurement” and Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115” and, an explanatory paragraph, in fiscal
183
G-190
Table of Contents
2007, concerning the adoption of Statement of Financial Accounting Standards, No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).”
New York, New York
January 28, 2008
184
G-191
Table of Contents
Changes in Internal Control Over Financial Reporting.
No change in Morgan Stanley’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a−15(f)) occurred during the fiscal
quarter ended November 30, 2007 that materially affected, or is reasonably likely to materially affect, Morgan Stanley’s internal control over financial
reporting.
Item 9B.
Other Information.
Not applicable.
185
G-192
Table of Contents
Part III
Item 10.
Directors, Executive Officers and Corporate Governance.
Information relating to Morgan Stanley’s directors and nominees under the following captions in Morgan Stanley’s Proxy Statement is incorporated by
reference herein.
• “Item 1—Election of Directors”
• “Item 1—Election of Directors—Board Meetings and Committees”
Information relating to Morgan Stanley’s executive officers is contained in Part I, Item 1 of this report under “Executive Officers of Morgan Stanley.”
Morgan Stanley’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including its Chief Executive Officer, its Chief
Financial Officer and its Controller and Principal Accounting Officer. You can find our Code of Ethics and Business Conduct on our internet site,
www.morganstanley.com. We will post any amendments to the Code of Ethics and Business Conduct, and any waivers that are required to be disclosed by
the rules of either the SEC or the NYSE, on our internet site.
Because Morgan Stanley’s common stock is listed on the NYSE, its Chief Executive Officer made his annual certification to the NYSE on May 4, 2007
stating that he was not aware of any violation by Morgan Stanley of the NYSE’s corporate governance listing standards. In addition, Morgan Stanley has
filed, as exhibits to this Annual Report on Form 10−K, the certifications of its Chief Executive Officer and Chief Financial Officer required under
Section 302 of the Sarbanes−Oxley Act of 2002 to be filed with the SEC regarding the quality of Morgan Stanley’s public disclosure.
Item 11.
Executive Compensation.
Information relating to director and executive officer compensation under the following captions in Morgan Stanley’s Proxy Statement is incorporated by
reference herein.
• “Item 1—Election of Directors—Director Compensation”
• “Executive Compensation”
186
G-193
Table of Contents
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information.
The following table provides information about stock options outstanding and shares of common stock available for future awards under all of
Morgan Stanley’s equity compensation plans as of November 30, 2007. Morgan Stanley has not made any grants of common stock outside of its equity
compensation plans.
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
(1)
(2)
(3)
(a)
(b)
Number of securities to be issued
upon exercise of
outstanding options, warrants
and rights
Weighted−average exercise
price of outstanding options,
warrants and rights
118,130,600
$
—
48.2201
—
118,130,600
$
48.2201
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))(1)
149,206,247(2)
4,993,329(3)
154,199,576
This column does not include 11,694,388 shares available under the 401(k) Plan.
Includes the following:
•
42,582,283 shares available under the Employee Stock Purchase Plan (ESPP). Pursuant to this plan, which is qualified under Section 423 of the Internal Revenue Code,
eligible employees may purchase shares of common stock at a discount to market price through regular payroll deduction.
•
100,000,000 shares available under the 2007 Equity Incentive Compensation Plan (EICP). Awards may consist of stock options, stock appreciation rights, restricted stock,
restricted stock units to be settled by the delivery of shares of common stock (or the value thereof), other awards that are valued by reference to or otherwise based on the fair
market value of common stock, and other equity−based or equity−related awards approved by the Compensation, Management Development and Succession Committee.
•
5,621,592 shares available under the Employee Equity Accumulation Plan (EEAP). Awards may consist of stock options, stock appreciation rights, restricted stock, restricted
stock units to be settled by the delivery of shares of common stock (or the value thereof), other awards that are valued by reference to or otherwise based on the fair market
value of common stock, and other equity−based or equity−related awards approved by the Compensation, Management Development and Succession Committee.
•
415,716 shares available under the Tax Deferred Equity Participation Plan (TDEPP). Awards consist of restricted stock units which are settled by the delivery of shares of
common stock.
•
586,656 shares available under the Directors’ Equity Capital Accumulation Plan (DECAP). This plan provides for periodic awards of shares of common stock and stock units
to non−employee directors and also allows non−employee directors to defer the fees they earn from services as a director in the form of stock units.
22,957 shares available under the Branch Manager Compensation Plan (BMCP) and 4,970,372 shares available under the Financial Advisor and Investment Representative
Compensation Plan (FAIRCP). The material features of these plans are described below.
The material features of Morgan Stanley’s equity compensation plans that have not been approved by shareholders under SEC rules (BMCP and FAIRCP)
are described below. The following descriptions do not purport to be complete and are qualified in their entirety by reference to the plan documents. All
plans through which awards may currently be granted are included as exhibits to this report.
BMCP. Branch managers are eligible to receive awards under BMCP. Awards under BMCP may consist of cash awards, restricted stock and restricted
stock units to be settled by the delivery of shares of common stock.
187
G-194
Table of Contents
FAIRCP. Financial advisors and investment representatives are eligible to receive awards under FAIRCP. Awards under FAIRCP may consist of cash
awards, restricted stock and restricted stock units to be settled by the delivery of shares of common stock.
***
Other information relating to security ownership of certain beneficial owners and management is set forth under the caption “Beneficial Ownership of
Company Common Stock” in Morgan Stanley’s Proxy Statement and such information is incorporated by reference herein.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Information regarding certain relationships and related transactions under the following caption in Morgan Stanley’s Proxy Statement is incorporated by
reference herein.
• “Other Matters—Certain Transactions”
Item 14.
Principal Accountant Fees and Services.
Information regarding principal accountant fees and services under the following caption in Morgan Stanley’s Proxy Statement is incorporated by reference
herein.
• “Item 2—Ratification of Appointment of Morgan Stanley’s Independent Auditor” (excluding the information under the subheading “Audit
Committee Report”)
188
G-195
Table of Contents
Part IV
Item 15.
Exhibits and Financial Statement Schedules.
Documents filed as part of this report.
• The financial statements required to be filed hereunder are listed on page S−1.
• The financial statement schedules required to be filed hereunder are listed on page S−1.
• An exhibit index has been filed as part of this report beginning on page E−1 and is incorporated herein by reference.
189
G-196
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 28, 2008.
MORGAN STANLEY
(REGISTRANT)
By: /S/ JOHN J. MACK
(John J. Mack)
Chairman of the Board and
Chief Executive Officer
Power of Attorney
We, the undersigned, hereby severally constitute Colm Kelleher, Gary G. Lynch, and Martin M. Cohen, and each of them singly, our true and lawful
attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the Annual
Report on Form 10−K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our
said attorneys to any and all amendments to said Annual Report on Form 10−K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities indicated on the 28th day of January, 2008.
Signature
Title
JOHN J. MACK
(John J. Mack)
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/
COLM KELLEHER
(Colm Kelleher)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/
PAUL C. WIRTH
(Paul C. Wirth)
Controller and Principal Accounting Officer
(Principal Accounting Officer)
/s/
ROY J. BOSTOCK
(Roy J. Bostock)
Director
/s/
ERSKINE B. BOWLES
(Erskine B. Bowles)
Director
/s/
HOWARD J. DAVIES
(Howard J. Davies)
Director
/s/
C. ROBERT KIDDER
(C. Robert Kidder)
Director
DONALD T. NICOLAISEN
(Donald T. Nicolaisen)
Director
/s/
/s/
190
G-197
Table of Contents
Signature
Title
/s/
/s/
CHARLES H. NOSKI
(Charles H. Noski)
Director
/s/
HUTHAM S. OLAYAN
(Hutham S. Olayan)
Director
CHARLES E. PHILLIPS, JR.
(Charles E. Phillips, Jr.)
Director
O. GRIFFITH SEXTON
(O. Griffith Sexton)
Director
LAURA D’ANDREA TYSON
(Laura D’Andrea Tyson)
Director
KLAUS ZUMWINKEL
(Klaus Zumwinkel)
Director
/s/
/s/
/s/
191
G-198
Table of Contents
MORGAN STANLEY
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ITEMS (15)(a)(1) AND (15)(a)(2)
Page
Financial Statements
Consolidated Statements of Financial Condition at November 30, 2007 and November 30, 2006
Consolidated Statements of Income for Fiscal 2007, Fiscal 2006 and Fiscal 2005
Consolidated Statements of Comprehensive Income for Fiscal 2007, Fiscal 2006 and Fiscal 2005
Consolidated Statements of Cash Flows for Fiscal 2007, Fiscal 2006 and Fiscal 2005
Consolidated Statements of Changes in Shareholders’ Equity for Fiscal 2007, Fiscal 2006 and Fiscal 2005
Notes to Consolidated Financial Statements
100
101
103
104
105
106
107
Financial Statement Schedules
Schedule I—Condensed Financial Information of Morgan Stanley (Parent Company Only) at November 30, 2007 and November 30, 2006
and for each of the three fiscal years in the period ended November 30, 2007
S−1
S−2 − S−6
G-199
Table of Contents
SCHEDULE I
MORGAN STANLEY
(Parent Company Only)
Condensed Statements of Financial Condition
Assets:
Financial instruments owned
Securities purchased under agreement to resell with affiliate
Advances to subsidiaries
Investment in subsidiaries, at equity
Other assets
Total assets
Liabilities and Shareholders’ Equity:
Financial instruments sold, not yet purchased
Payables to subsidiaries
November 30,
2007
November 30,
2006
$
10,224
8,551
54,137
156,446
34,946
4,149
$
6,879
14,823
40,353
145,550
36,966
4,629
$
268,453
$
249,200
$
20,615
253
32,523
1,037
182,756
$
14,255
9,359
48,105
2,969
139,148
Commitments and contingencies
Shareholders’ equity:
Preferred stock
Common stock, $0.01 par value;
Shares authorized: 3,500,000,000 in 2007 and 2006;
Shares issued: 1,211,701,522 in 2007 and 2006;
Shares outstanding: 1,056,289,659 in 2007 and 1,048,877,006 in 2006
Paid−in capital
Retained earnings
Employee stock trust
Accumulated other comprehensive loss
Common stock held in treasury, at cost, $0.01 par value; 155,411,893 shares in 2007 and 162,824,546
shares in 2006
Common stock issued to employee trust
Total liabilities and shareholders’ equity
$
See Notes to Condensed Financial Statements.
S−2
237,184
213,836
1,100
1,100
12
1,902
38,045
5,569
(199)
12
2,213
41,422
4,315
(35)
(9,591)
(5,569)
(9,348)
(4,315)
31,269
35,364
268,453
$
249,200
G-200
Table of Contents
SCHEDULE I
MORGAN STANLEY
Condensed Statements of Income and Comprehensive Income
Revenues:
Principal transactions
Other
Fiscal
2007
Fiscal
2006
Fiscal
2005
$ 9,211
613
(2)
$ 6,036
(156)
3
$3,698
159
6
9,822
5,883
3,863
9,834
427
6,744
146
3,126
106
10,261
6,890
3,232
Total revenues
Expenses:
Interest expense
Non−interest expenses
Total expenses
(Loss) income before income tax benefit (provision) and equity in earnings of subsidiaries
Income tax benefit (provision)
(439)
173
(1,007)
296
(Loss) income before equity in earnings of subsidiaries
Equity in earnings of subsidiaries, net of tax (including a cumulative effect of accounting change of $49 in fiscal
2005)
(266)
(711)
Net income
631
(143)
488
3,475
8,183
4,451
$ 3,209
$ 7,472
$4,939
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
65
19
(40)
104
53
(2)
(89)
(70)
25
Comprehensive income
$ 3,253
$ 7,627
$4,805
Net income
$ 3,209
$ 7,472
$4,939
$
$
$ —
$ 3,141
S−3
68
19
$ 7,453
$4,939
G-201
Table of Contents
SCHEDULE I
MORGAN STANLEY
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change of subsidiaries
Compensation payable in common stock and stock options
Equity in subsidiaries’ earnings, net of dividends
Change in assets and liabilities:
Financial instruments owned, net of financial instruments sold, not yet purchased
Other assets
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Advances to and investments in subsidiaries
Securities purchased under agreement to resell with affiliate
Net cash used for investing activities
Fiscal
2007
Fiscal
2006
Fiscal
2005
$ 3,209
$ 7,472
$ 4,939
—
1,941
3,500
—
1,955
(6,345)
(49)
836
1,269
(2,625)
6,346
(23,855)
(1,857)
7,091
10,064
554
(4,123)
1,255
(11,484)
18,380
4,681
(12,376)
(13,784)
(32,837)
(16,055)
1,044
(14,297)
(26,160)
(48,892)
(13,253)
6,360
265
281
(3,375)
—
144
(11,179)
—
355
Cash flows from financing activities:
Net proceeds from (payments for) short−term borrowings
Net proceeds from:
Issuance of long−term borrowings
Payments for:
Repayments of long−term borrowings
Cash dividends
—
927
60,651
1,097
643
44,009
—
327
31,304
(3,753)
(22,523)
(1,219)
(3,376)
(14,363)
(1,167)
(3,693)
(14,579)
(1,180)
Net cash provided by financing activities
40,989
23,612
1,355
3,345
6,879
(6,900)
13,779
(7,217)
20,996
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, at beginning of period
Cash and cash equivalents, at end of period
$ 10,224
$ 6,879
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest were $8,590 million, $6,230 million and $2,928 million for fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
Cash payments for income taxes were $847 million, $1,517 million and $867 million for fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
S−4
$ 13,779
G-202
Table of Contents
MORGAN STANLEY
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Introduction and Basis of Presentation.
Basis of Financial Information. The accompanying condensed financial statements (the “Parent Company Financial Statements”), including the notes
thereto, should be read in conjunction with the consolidated financial statements of Morgan Stanley (the “Company”) and the notes thereto found on pages
101 to 181 in this Form 10−K.
The Parent Company Financial Statements for the 12 months ended November 30, 2007 (“fiscal 2007”), November 30, 2006 (“fiscal 2006”) and
November 30, 2005 (“fiscal 2005”) are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to
make estimates and assumptions regarding valuations of certain financial instruments, the potential outcome of litigation and other matters that affect the
Parent Company Financial Statements and related disclosures. The Company believes that the estimates utilized in the preparation of the Parent Company
Financial Statements are prudent and reasonable. Actual results could differ materially from these estimates.
2. Transactions with Subsidiaries.
The Company has transactions with its consolidated subsidiaries determined on an agreed−upon basis and has guaranteed certain unsecured lines of credit
and contractual obligations of certain of its consolidated subsidiaries.
The Company received cash dividends from its consolidated subsidiaries totaling $6,975 million, $1,838 million and $5,720 million in fiscal 2007, fiscal
2006 and fiscal 2005, respectively.
3. Guarantees.
In the normal course of its business, the Company guarantees certain of its subsidiaries’ obligations under derivative and other financial arrangements. The
Company records all derivative contracts and Financial instruments owned and Financial instruments sold, not yet purchased at fair value on its
consolidated statements of financial condition. For a discussion of the Company’s risk management activities, see Note 6 to the Company’s consolidated
financial statements.
The Company also, in the normal course of its business, provides standard indemnities to counterparties on behalf of its subsidiaries for taxes, including
U.S. and foreign withholding taxes, on interest and other payments made on derivatives, securities and stock lending transactions and certain annuity
products. These indemnity payments could be required based on a change in the tax laws or change in interpretation of applicable tax rulings. Certain
contracts contain provisions that enable the Company to terminate the agreement upon the occurrence of such events. The maximum potential amount of
future payments that the Company could be required to make under these indemnifications cannot be estimated. The Company has not recorded any
contingent liability in the condensed financial statements for these indemnifications and believes that the occurrence of any events that would trigger
payments under these contracts is remote.
The Company has issued guarantees on behalf of its subsidiaries to various U.S. and non−U.S. exchanges and clearinghouses that trade and clear securities
and/or futures contracts. Under these guarantee arrangements, the Company may be required to pay the financial obligations of its subsidiaries related to
business transacted on or with the exchanges and clearinghouses in the event of a subsidiary’s default on its obligations to the exchange or the
clearinghouse. The Company has not recorded any contingent liability in the condensed financial statements for these arrangements and believes that any
potential requirements to make payments under these arrangements is remote.
S−5
G-203
Table of Contents
The Company guarantees certain debt instruments and warrants issued by subsidiaries. The debt instruments totaled $11.8 billion and the warrants totaled
$0.1 billion at November 30, 2007. In connection with subsidiary lease obligations, the Company has issued guarantees to various lessors. At November 30,
2007, the Company had $2.2 billion outstanding under subsidiary lease obligations, primarily in the United Kingdom.
4. Commitments and Contingencies.
For a discussion of the Company’s commitments and contingencies, see Note 15 to the Company’s consolidated financial statements.
S−6
G-204
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the consolidated financial statements of Morgan Stanley and subsidiaries (the “Company”) as of November 30, 2007 and 2006, and for
each of the three years in the period ended November 30, 2007 and the effectiveness of the Company’s internal control over financial reporting as of
November 30, 2007, and have issued our reports thereon dated January 28, 2008 (such report on the consolidated financial statements expresses an
unqualified opinion and includes an explanatory paragraph, in fiscal 2005, concerning the adoption of Statement of Financial Accounting Standards
No. 123(R), “Share−Based Payment” (“SFAS No. 123(R)”) and, effective December 1, 2005, the change in accounting policy for recognition of equity
awards granted to retirement−eligible employees and, an explanatory paragraph, in fiscal 2006, concerning the application of Staff Accounting Bulletin
No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements” (“SAB No. 108”)
and, an explanatory paragraph, in fiscal 2007, concerning the adoption of Statement of Financial Accounting Standards No. 157, “Fair Value Measurement”
(“SFAS No. 157”) and Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities–Including an amendment of FASB Statement No. 115” (“SFAS No. 159”) and, an explanatory paragraph, in fiscal 2007, concerning the adoption
of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R)”); such consolidated financial statements and reports are included in this 2007 Annual Report
on Form 10−K. Our audits also included Schedule I listed in the Index to Financial Statements and Financial Statement Schedules. This financial statement
schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
In fiscal 2005, the Company adopted SFAS No. 123(R).
In fiscal 2006, the Company changed its accounting policy for recognition of equity awards granted to retirement eligible employees and the Company
elected application of SAB No. 108.
In fiscal 2007, the Company adopted SFAS No. 157, SFAS No. 158 and SFAS No. 159.
New York, New York
January 28, 2008
S−7
G-205
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS TO FORM 10−K
For the fiscal year ended November 30, 2007
Commission File No. 1−11758
G-206
Table of Contents
Exhibit Index
Certain of the following exhibits, as indicated parenthetically, were previously filed as exhibits to registration statements filed by Morgan Stanley or its
predecessor companies under the Securities Act or to reports or registration statements filed by Morgan Stanley or its predecessor companies under the
Exchange Act, respectively, and are hereby incorporated by reference to such statements or reports. Morgan Stanley’s Exchange
Act file number is
1
1−11758. The Exchange Act file number of Morgan Stanley Group Inc., a predecessor company (“MSG”), was 1−9085.
Exhibit
No.
3.1
3.2
3.3
4.1
4.2
4.3*
4.4
4.5*
4.6
4.7
4.8
4.9
(1)
Description
Amended and Restated Certificate of Incorporation of Morgan Stanley, as amended to date (Exhibit 3 to Morgan Stanley’s Quarterly Report
on Form 10−Q for the quarter ended February 28, 2007).
Certificate of Elimination of the 8.03% Cumulative Preferred Stock dated as of March 23, 2007 (Exhibit 3 to Morgan Stanley’s Current
Report on Form 8−K dated March 23, 2007).
By−Laws of Morgan Stanley, as amended to date (Exhibit 3 to Morgan Stanley’s Current Report on Form 8−K dated June 19, 2007).
Indenture dated as of February 24, 1993 between Morgan Stanley and The Bank of New York, as trustee (Exhibit 4 to Morgan Stanley’s
Registration Statement on Form S−3 (No. 33−57202)).
Amended and Restated Senior Indenture dated as of May 1, 1999 between Morgan Stanley and The Bank of New York, as trustee (Exhibit
4−e to Morgan Stanley’s Registration Statement on Form S−3/A (No. 333−75289)).
Fourth Supplemental Senior Indenture dated as of October 8, 2007 between Morgan Stanley and The Bank of New York as trustee
(Supplemental to Amended and Restated Senior Indenture dated as of May 1, 1999).
Senior Indenture dated as of November 1, 2004 between Morgan Stanley and The Bank of New York, as trustee (Exhibit 4−f to Morgan
Stanley’s Registration Statement on Form S−3/A (No. 333−117752)).
First Supplemental Senior Indenture dated as of September 4, 2007 between Morgan Stanley and The Bank of New York, as trustee
(Supplemental to Senior Indenture dated as of November 1, 2004).
Second Supplemental Senior Indenture dated as of January 4, 2008 between Morgan Stanley and The Bank of New York, as trustee (Exhibit
4.1 to Morgan Stanley Current Report on Form 8−K dated January 4, 2008).
Amended and Restated Subordinated Indenture dated as of May 1, 1999 between Morgan Stanley and The Bank of New York, as trustee
(Exhibit 4−f to Morgan Stanley’s Registration Statement on Form S−3/A (No. 333−75289)).
Subordinated Indenture dated as of October 1, 2004 between Morgan Stanley and The Bank of New York, as trustee (Exhibit 4−g to Morgan
Stanley’s Registration Statement on Form S−3/A (No. 333−117752)).
Junior Subordinated Indenture dated as of March 1, 1998 between Morgan Stanley and The Bank of New York, as trustee (Exhibit 4.1 to
Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended February 28, 1998).
For purposes of this Exhibit Index, references to “The Bank of New York” mean in some instances the entity successor to JPMorgan Chase Bank,
N.A. or J.P. Morgan Trust Company, National Association; references to “JPMorgan Chase Bank, N.A.” mean the entity formerly known as The
Chase Manhattan Bank, in some instances as the successor to Chemical Bank; references to “J.P. Morgan Trust Company, N.A.” mean the entity
formerly known as Bank One Trust Company, N.A., as successor to The First National Bank of Chicago.
E−1
G-207
Table of Contents
Exhibit
No.
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
10.1
Description
Junior Subordinated Indenture dated as of October 1, 2004 between Morgan Stanley and The Bank of New York, as trustee (Exhibit 4−ww to
Morgan Stanley’s Registration Statement on Form S−3/A (No. 333−117752)).
Junior Subordinated Indenture dated as of October 12, 2006 between Morgan Stanley and The Bank of New York, as trustee (Exhibit 4.1 to
Morgan Stanley’s Current Report on Form 8−K dated October 12, 2006).
Certificate representing the Series A Preferred Stock (Exhibit 4.2 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended
May 31, 2006).
Deposit Agreement dated as of July 6, 2006 among Morgan Stanley, JPMorgan Chase Bank, N.A. and the holders from time to time of the
depositary receipts described therein (Exhibit 4.3 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended May 31, 2006).
Depositary Receipt for Depositary Shares, representing Floating Rate Non−Cumulative Preferred Stock, Series A (included in Exhibit 4.13
hereto).
Amended and Restated Trust Agreement of Morgan Stanley Capital Trust III dated as of February 27, 2003 among Morgan Stanley, as
depositor, The Bank of New York, as property trustee, The Bank of New York (Delaware), as Delaware trustee, and the administrators named
therein (Exhibit 4 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended February 28, 2003).
Amended and Restated Trust Agreement of Morgan Stanley Capital Trust IV dated as of April 21, 2003 among Morgan Stanley, as depositor,
The Bank of New York, as property trustee, The Bank of New York (Delaware), as Delaware Trustee and the administrators named therein
(Exhibit 4 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended May 31, 2003).
Amended and Restated Trust Agreement of Morgan Stanley Capital Trust V dated as of July 16, 2003 among Morgan Stanley, as depositor,
The Bank of New York, as property trustee, The Bank of New York (Delaware), as Delaware trustee and the administrators named therein
(Exhibit 4 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended August 31, 2003).
Amended and Restated Trust Agreement of Morgan Stanley Capital Trust VI dated as of January 26, 2006 among Morgan Stanley, as
depositor, The Bank of New York, as property trustee, The Bank of New York (Delaware), as Delaware trustee and the administrators named
therein (Exhibit 4 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended February 28, 2006).
Amended and Restated Trust Agreement of Morgan Stanley Capital Trust VII dated as of October 12, 2006 among Morgan Stanley, as
therein (Exhibit 4.3 to Morgan Stanley’s Current Report on Form 8−K dated October 12, 2006).
Amended and Restated Trust Agreement of Morgan Stanley Capital Trust VIII dated as of April 26, 2007 among Morgan Stanley, as
therein (Exhibit 4.3 to Morgan Stanley’s Current Report on Form 8−K dated April 26, 2007).
Instruments defining the Rights of Security Holders, Including Indentures—Except as set forth in Exhibits 4.1 through 4.20 above, the
instruments defining the rights of holders of long−term debt securities of Morgan Stanley and its subsidiaries are omitted pursuant to Section
(b)(4)(iii) of Item 601 of Regulation S−K. Morgan Stanley hereby agrees to furnish copies of these instruments to the SEC upon request.
Amended and Restated Trust Agreement dated as of November 30, 2000 between Morgan Stanley and State Street Bank and Trust Company
(Exhibit T to Amendment No. 5 to the Schedule 13D dated as of November 30, 2000 filed by certain senior officers of Morgan Stanley) as
amended by Amendment No. 1 dated as of November 30, 2000 between Morgan Stanley and State Street Bank and Trust Company, effective
January 1, 2002 (Exhibit 10.10 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2001),
Amendment No. 2 dated as of November 30, 2000 between Morgan Stanley and State
E−2
G-208
Table of Contents
Exhibit
No.
10.2
10.3
10.4†
10.5†
10.6†*
10.7†
10.8†
10.9†*
10.10†
Description
Street Bank and Trust Company, effective January 1, 2003 (Exhibit 10.12 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year
ended November 30, 2002), Amendment No. 3 dated as of November 30, 2000 between Morgan Stanley and State Street Bank and Trust
Company, effective September 15, 2003 (Exhibit 10.11 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November
30, 2003), Amendment No. 4 dated as of March 21, 2006 between Morgan Stanley and State Street Bank and Trust Company (Exhibit 10.1 to
Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended February 28, 2006) and Amendment No. 5 dated as of June 25, 2007
between Morgan Stanley and State Street Bank and Trust Company (Exhibit 10.1 to Morgan Stanley’s Quarterly Report on Form 10−Q for the
quarter ended August 31, 2007).
Separation and Distribution Agreement dated as of June 29, 2007 by and between Morgan Stanley and Discover Financial Services (Exhibit 10
to Morgan Stanley’s Current Report on Form 8−K dated June 29, 2007).
Securities Purchase Agreement dated as of December 19, 2007 between Morgan Stanley and Best Investment Corporation, a wholly owned
subsidiary of China Investment Corporation (Exhibit 10.1 to Morgan Stanley’s Current Report on Form 8−K dated December 19, 2007).
Omnibus Equity Incentive Plan (Exhibit 4.1 to Morgan Stanley’s Registration Statement on Form S−8 (No. 33−63024)).
Morgan Stanley 401(k) Plan (f/k/a the Morgan Stanley DPSP/START Plan) amended and restated effective as of October 1, 2002 (Exhibit 10.17
to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2002) as amended by Amendment (Exhibit 10.18 to
Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2002), Amendment (Exhibit 10.18 to Morgan Stanley’s
Annual Report on Form 10−K for the fiscal year ended November 30, 2003), Amendment (Exhibit 10.19 to Morgan Stanley’s Annual Report on
Form 10−K for the fiscal year ended November 30, 2003), Amendment (Exhibit 10 to Morgan Stanley’s Quarterly Report on Form 10−Q for the
quarter ended May 31, 2004), Amendment (Exhibit 10.16 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended
November 30, 2004), Amendment (Exhibit 10.1 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended February 28, 2005),
Amendment (Exhibit 10.2 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended February 28, 2005), Amendment (Exhibit
10.1 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended May 31, 2005), Amendment (Exhibit 10.8 to Morgan Stanley’s
Annual Report on Form 10−K for the fiscal year ended November 30, 2005), Amendment (Exhibit 10 to Morgan Stanley’s Quarterly Report on
Form 10−Q for the quarter ended February 28, 2007) and Amendment (Exhibit 10.2 to Morgan Stanley’s Quarterly Report on Form 10−Q for
the quarter ended August 31, 2007).
Amendment to Morgan Stanley 401(k) Plan, dated as of November 20, 2007.
1993 Stock Plan for Non−Employee Directors (Exhibit 4.3 to Morgan Stanley’s Registration Statement on Form S−8 (No. 33−63024)) as
amended by Amendment (Exhibit 10.37 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended December 31, 1993) and
Amendment (Exhibit 10.4 to Morgan Stanley Quarterly Report on Form 10−Q for the quarter ended May 31, 2007).
1994 Omnibus Equity Plan as amended and restated (Exhibit 10.23 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended
November 30, 2003) as amended by Amendment (Exhibit 10.11 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended
November 30, 2006).
Tax Deferred Equity Participation Plan as amended and restated as of November 26, 2007.
Directors’ Equity Capital Accumulation Plan as amended through March 19, 2007 (Exhibit 10.2 to Morgan Stanley’s Quarterly Report on Form
10−Q for the quarter ended May 31, 2007).
E−3
G-209
Table of Contents
Exhibit
No.
10.11†
10.12†*
10.13†
10.14†
10.15†
10.16†
10.17†*
10.18†
10.19†*
10.20†
10.21†
10.22†*
10.23†
Description
Select Employees’ Capital Accumulation Program (Exhibit 10.2 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended
February 29, 2004).
Employees’ Equity Accumulation Plan as amended and restated as of November 26, 2007.
Employee Stock Purchase Plan amended as of November 27, 2006 (Exhibit 10.16 to Morgan Stanley’s Current Report on Form 10−K for the
fiscal year ended November 30, 2006) as amended by Amendment (Exhibit 10.3 to Morgan Stanley’s Quarterly Report on Form 10−Q for the
Form of Agreement under the Morgan Stanley & Co. Incorporated Owners’ and Select Earners’ Plan (Exhibit 10.1 to MSG’s Annual Report on
Form 10−K for the fiscal year ended January 31, 1993).
Form of Agreement under the Officers’ and Select Earners’ Plan (Exhibit 10.2 to MSG’s Annual Report on Form 10−K for the fiscal year ended
January 31, 1993).
Morgan Stanley & Co. Incorporated Excess Benefit Plan (Exhibit 10.31 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year
ended November 30, 1998) as amended by Amendment (Exhibit 10.32 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year
ended November 30, 2000), Amendment (Exhibit 10.2 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended August 31,
2002), Amendment (Exhibit 10.32 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2002),
Amendment (Exhibit 10.34 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2003), Amendment
(Exhibit 10.33 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2004) and Amendment (Exhibit 10.20
to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2005).
Amendment to Morgan Stanley & Co. Incorporated Excess Benefit Plan, dated as of November 20, 2007.
Supplemental Executive Retirement Plan (Exhibit 10.32 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended
November 30, 1998) as amended by Amendment (Exhibit 10.37 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended
November 30, 1999), Amendment (Exhibit 10.35 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30,
2000), Amendment (Exhibit 10.3 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended August 31, 2002), Amendment
(Exhibit 10.37 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2002), Amendment (Exhibit 10.40 to
Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2003) and Amendment (Exhibit 10.22 to Morgan
Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2005).
Amendment to Supplemental Executive Retirement Plan, dated as of November 20, 2007.
1988 Equity Incentive Compensation Plan as amended (Exhibit 10.12 to MSG’s Annual Report on Form 10−K for fiscal year ended January 31,
1993) as amended by Amendment (Exhibit 10.22 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30,
2006).
1995 Equity Incentive Compensation Plan (Annex A to MSG’s Proxy Statement for its 1996 Annual Meeting of Stockholders) as amended by
Amendment (Exhibit 10.39 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2000), Amendment
(Exhibit 10.5 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended August 31, 2005), Amendment (Exhibit 10.3 to
Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended February 28, 2006) and Amendment (Exhibit 10.24 to Morgan
Stanley’s Annual Report on Form 10−K for the fiscal year ended November 30, 2006).
Amendment to 1995 Equity Incentive Compensation Plan, dated as of November 26, 2007.
Form of Equity Incentive Compensation Plan Award Certificate (Exhibit 10.1 to Morgan Stanley’s Quarterly Report on Form 10−Q for the
E−4
G-210
Table of Contents
Exhibit
No.
10.24†
10.25†
10.26†
10.27†
10.28†
10.29†
10.30†
10.31†
10.32†
10.33†*
10.34†*
10.35†
10.36†
10.37†
10.38†
10.39†*
10.40†
10.41†*
Description
Form of Equity Incentive Compensation Plan Award Certificate (Exhibit 10.10 to Morgan Stanley’s Quarterly Report on Form 10−Q for the
Form of Chief Executive Officer Equity Award Certificate for Discretionary Retention Award of Stock Units under the EICP (Exhibit 10.2 to
Morgan Stanley’s Current Report on Form 8−K dated December 12, 2005).
Form of Chief Executive Officer Equity Award Certificate for Discretionary Retention Award of Stock Units and Stock Options (Exhibit 10.28
Form of Management Committee Award Certificate for Discretionary Retention Award of Stock Units under the EICP (Exhibit 10.3 to Morgan
Stanley’s Current Report on Form 8−K dated December 12, 2005).
Form of Management Committee Equity Award Certificate for Discretionary Retention Award of Stock Units and Stock Options (Exhibit 10.30
1988 Capital Accumulation Plan as amended (Exhibit 10.13 to MSG’s Annual Report on Form 10−K for the fiscal year ended January 31,
1993).
Form of Deferred Compensation Agreement under the Pre−Tax Incentive Program (Exhibit 10.12 to MSG’s Annual Report on Form 10−K for
the fiscal year ended January 31, 1994).
Form of Deferred Compensation Agreement under the Pre−Tax Incentive Program 2 (Exhibit 10.12 to MSG’s Annual Report for the fiscal year
ended November 30, 1996).
Key Employee Private Equity Recognition Plan (Exhibit 10.43 to Morgan Stanley’s Annual Report on Form 10−K for the fiscal year ended
November 30, 2000).
Morgan Stanley Branch Manager Compensation Plan as amended and restated as of November 26, 2007.
Morgan Stanley Financial Advisor and Investment Representative Compensation Plan as amended and restated as of November 26, 2007.
Morgan Stanley UK Share Ownership Plan (Exhibit 4.1 to Morgan Stanley’s Registration Statement on Form S−8 (No. 333−146954)).
Amended and Restated Employment Agreement dated as of September 20, 2005 between Morgan Stanley and Mr. John J. Mack (Exhibit 10 to
Morgan Stanley’s Current Report on Form 8−K dated September 19, 2005) as amended by Amendment dated December 13, 2005 (Exhibit 10.1
to Morgan Stanley’s Current Report on Form 8−K dated December 12, 2005) and Amendment dated February 14, 2006 (Exhibit 10.4 to Morgan
Stanley’s Quarterly Report on Form 10−Q for the quarter ended February 28, 2006).
Form of Restrictive Covenant Agreement (Exhibit 10 to Morgan Stanley’s Current Report on Form 8−K dated November 22, 2005).
Morgan Stanley Performance Formula and Provisions (Exhibit 10.3 to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended
May 31, 2006).
2007 Equity Incentive Compensation Plan as amended and restated as of November 26, 2007.
Morgan Stanley 2007 Notional Leveraged Co−Investment Plan (Exhibit 10.1 to Morgan Stanley’s Quarterly Report on Form 10−Q for the
quarter ended May 31, 2007).
Governmental Service Amendment to Outstanding Stock Option and Stock Unit Awards (replacing and superseding in its entirety Exhibit 10.3
to Morgan Stanley’s Quarterly Report on Form 10−Q for the quarter ended May 31, 2007).
E−5
G-211
Table of Contents
Exhibit
No.
11
12*
21*
23.1*
24
31.1**
31.2**
32.1**
32.2**
*
**
†
Description
Statement Re: Computation of Earnings Per Common Share (The calculation of per share earnings is in Part II, Item 8, Note 10 to the
Consolidated Financial Statements (Earnings per Share) and is omitted in accordance with Section (b)(11) of Item 601 of Regulation S−K).
Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.
Subsidiaries of Morgan Stanley.
Consent of Deloitte & Touche LLP.
Powers of Attorney (included on signature page).
Rule 13a−14(a) Certification of Chief Executive Officer.
Rule 13a−14(a) Certification of Chief Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Chief Financial Officer.
Filed herewith.
Furnished herewith.
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10−K pursuant to Item 15(b).
E−6
G-212
Table of Contents
G-213
Exhibit 4.3
FOURTH SUPPLEMENTAL SENIOR INDENTURE
BETWEEN
MORGAN STANLEY
(formerly known as MORGAN STANLEY DEAN WITTER & CO.)
AND
THE BANK OF NEW YORK
as successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase
Manhattan Bank), Trustee
Dated as of October 8, 2007
SUPPLEMENTAL TO AMENDED AND RESTATED SENIOR INDENTURE
DATED AS OF MAY 1, 1999, AS SUPPLEMENTED BY A FIRST
SUPPLEMENTAL SENIOR INDENTURE DATED AS OF SEPTEMBER 15,
2000, A SECOND SUPPLEMENTAL SENIOR INDENTURE DATED AS OF
OCTOBER 8, 2002 AND A THIRD SUPPLEMENTAL SENIOR INDENTURE
DATED AS OF AUGUST 29, 2003.
G-214
THIS FOURTH SUPPLEMENTAL SENIOR INDENTURE dated as of October 8, 2007 between MORGAN STANLEY (formerly known as Morgan
Stanley Dean Witter & Co.), a Delaware corporation (the “Issuer”), and THE BANK OF NEW YORK as successor to JPMorgan Chase Bank, N.A.
(formerly known as The Chase Manhattan Bank), as trustee (the “Trustee”),
WITNESSETH:
WHEREAS, the Issuer and the Trustee are parties to that certain Amended and Restated Senior Indenture dated as of May 1,1999, as supplemented
by a First Supplemental Senior Indenture dated as of September 15, 2000, a Second Supplemental Senior Indenture dated as of October 8, 2002 and a Third
Supplemental Senior Indenture dated as of August 29, 2003 (as so supplemented, the “Indenture”);
WHEREAS, the Issuer established and on July 22, 2004 issued its Medium−Term Notes, Series C, Senior Variable Rate Renewable Notes with an
initial maturity date of August 15, 2005 and a final maturity date of August 13, 2010 (the “Notes”);
WHEREAS, Section 8.01 of the Indenture provides that, without the consent of the Holders of any Securities, the Issuer, when authorized by a
resolution of its Board of Directors, and the Trustee may enter into indentures supplemental to the Indenture, subject to the conditions set forth therein, for
the purpose of, among other things, making any provisions as the Issuer may deem necessary or desirable, provided that no such action shall adversely
affect the interests of the Holders of the Securities;
WHEREAS, the Issuer desires to modify certain provisions of the Notes to increase the spread that will be used when calculating the interest payable
with respect to the Notes on Interest Reset Dates from and including September 15, 2007;
WHEREAS, the entry into this Fourth Supplemental Senior Indenture by the parties hereto is in all respects authorized by the provisions of the
Indenture; and
WHEREAS, all things necessary to make this Fourth Supplemental Senior Indenture a valid indenture and agreement according to its terms have been
done;
NOW, THEREFORE:
In consideration of the premises and the purchases of the Securities by the holders thereof, the Issuer and the Trustee mutually covenant and agree for
the equal and proportionate benefit of the respective holders from time to time of the Notes as follows:
2
G-215
ARTICLE 1
Section 1.01. Amendment of the Notes. (i) The definition of Spread (Plus or Minus) within the Notes is hereby amended by deleting the existing
definition in its entirety and inserting in lieu thereof the following:
SPREAD (PLUS OR MINUS):
Plus 0.000% per annum for the Interest Reset Dates occurring from the Original Issue Date to and including
August 14, 2005; plus 0.030% per annum for the Interest Reset Dates occurring from and including August 15,
2005 to and including August 14, 2006; plus 0.060% per annum for the Interest Reset Dates occurring from and
including August 15, 2006 to and including August 14, 2007; plus 0.080% per annum for the Interest Reset Dates
occurring from and including August 15, 2007 to and including September 14, 2007; plus 0.125% per annum for
the Interest Reset Dates occurring from and including September 15, 2007 to and including August 14, 2008; plus
0.150% per annum for the Interest Reset Dates occurring from and including August 15, 2008 to and including
August 14, 2009; plus 0.180% per annum for the Interest Reset Dates occurring from and including August 15,
2009 to but excluding August 13, 2010.
3
G-216
SECTION 1.02. Exchange of the Notes. The Trustee is authorized to exchange the original certificates dated July 22, 2004 evidencing the Notes for
the duly executed and authenticated certificates evidencing the amended terms of the Notes. Upon such exchange, the Trustee shall promptly cancel and
dispose of such original Notes in accordance with Section 2.10 of the Indenture. Failure to exchange such original Notes for such amended Notes in
accordance with this Section will not impair the validity of or otherwise affect the Notes, as amended.
ARTICLE 2
Miscellaneous Provisions
Section 2.01. Further Assurances. The Issuer will, upon request by the Trustee, execute and deliver such further instruments and do such further acts
as may reasonably be necessary or proper to carry out more effectively the purposes of this Fourth Supplemental Senior Indenture.
Section 2.02. Other Terms of Indenture. Except insofar as herein otherwise expressly provided, all provisions, terms and conditions of the Indenture
are in all respects ratified and confirmed and shall remain in full force and effect.
Section 2.03. Terms Defined. All terms defined elsewhere in the Indenture shall have the same meanings when used herein.
Section 2.04. Governing Law. This Fourth Supplemental Senior Indenture shall be deemed to be a contract under the laws of the State of New York,
and for all purposes shall be construed in accordance with the laws of such State, except as may otherwise be required by mandatory provisions of law.
Section 2.05. Counterparts. This Fourth Supplemental Senior Indenture may be executed in any number of counterparts, each of which shall be an
original; but such counterparts shall together constitute but one and the same instrument.
Section 2.06. Responsibility of the Trustee. The recitals contained herein shall be taken as the statements of the Issuer, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Fourth Supplemental Senior
Indenture.
4
G-217
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Supplemental Senior Indenture to be duly executed, and their respective
corporate seals to be hereunto affixed and attested, all as of October 8, 2007.
MORGAN STANLEY (formerly known as Morgan Stanley Dean
Witter & Co.)
By: /s/ Jai Sooklal
Name: Jai Sooklal
Title: Assistant Treasurer
Attest:
By: /s/ W. Gary Beeson
Name: W. Gary Beeson
Title: Assistant Secretary
THE BANK OF NEW YORK, as TRUSTEE
By: /s/ Francine Kincaid
Name: Francine Kincaid
Title: Vice President
Attest:
By: /s/ Geovanni Barris
Name: Geovanni Barris
5
G-218
STATE OF NEW YORK
COUNTY OF NEW YORK
)
) ss.:
)
th
On this 8 day of October 2007 before me personally came Jai Sooklal to me personally known, who, being by me duly sworn, did depose and say
that he resides at Chatham, N.J.; that he is the Assistant Treasurer of Morgan Stanley, one of the corporations described in and which executed the above
instrument; and that signed his name thereto by authority of the Board of Directors of said corporation.
[NOTARIAL SEAL]
/s/ Michael M. O’Brien
Notary Public
MICHAEL M. O’BRIEN
Notary Public, State of New York
No. 31−5003142
Qualified in New York County
Commission Expires Oct 19, 2010
G-219
STATE OF NEW YORK
COUNTY OF NEW YORK
)
) ss.:
)
th
On this 8 day of October 2007 before me personally came Francine Kincaid to me personally known, who, being by me duly sworn, did depose and
say that she resides at Deer Park, N.Y.; that she is a Vice President of The Bank of New York, one of the corporations described in and which executed the
above instrument; and that signed her name thereto by authority of the Board of Directors of said corporation.
[NOTARIAL SEAL]
/s/ Carlos R. Luciano
Notary Public
2
G-220
Exhibit 4.5
FIRST SUPPLEMENTAL SENIOR INDENTURE
BETWEEN
MORGAN STANLEY
AND
THE BANK OF NEW YORK
as successor to JPMorgan Chase Bank, N.A. (formerly known as JPMorgan Chase
Bank), Trustee
Dated as of September 4, 2007
SUPPLEMENTAL TO SENIOR INDENTURE DATED NOVEMBER 1, 2004.
G-221
THIS FIRST SUPPLEMENTAL SENIOR INDENTURE dated as of September 4, 2007 between MORGAN STANLEY, a Delaware corporation (the
“Issuer”), and THE BANK OF NEW YORK as successor to JPMorgan Chase Bank, N.A. (formerly known as JPMorgan Chase Bank), as trustee (the
“Trustee”),
WITNESSETH:
WHEREAS, the Issuer and the Trustee are parties to that certain Senior Indenture dated as of November 1, 2004 (the “Indenture”);
WHEREAS, the Issuer established and on January 12, 2005 issued its Medium−Term Notes, Series F, Senior Variable Rate Renewable Notes with an
initial maturity date of February 3, 2006 and a final maturity date of February 3, 2011 (the “Original Notes”) and on February 3, 2005 issued additional
notes with the same terms (the “Reopening Notes” and together with the Original Notes, the “Notes”);
WHEREAS, Section 8.01 of the Indenture provides that, without the consent of the Holders of any Securities, the Issuer, when authorized by a
resolution of its Board of Directors, and the Trustee may enter into indentures supplemental to the Indenture for the purpose of, among other things, making
any provisions as the Issuer may deem necessary or desirable, subject to the conditions set forth therein; provided that no such action shall adversely affect
the interests of the Holders of the Securities;
WHEREAS, the Issuer desires to modify certain provisions of the Notes to increase the spread that will be used when calculating the interest payable
with respect to the Notes on Interest Reset Dates from and including September 3, 2007;
WHEREAS, the entry into this First Supplemental Senior Indenture by the parties hereto is in all respects authorized by the provisions of the
Indenture; and
WHEREAS, all things necessary to make this First Supplemental Senior Indenture a valid indenture and agreement according to its terms have been
done;
NOW, THEREFORE:
In consideration of the premises and the purchases of the Securities by the holders thereof, the Issuer and the Trustee mutually covenant and agree for
the equal and proportionate benefit of the respective holders from time to time of the Notes as follows:
2
G-222
ARTICLE 1
Section 1.01. Amendment of the Notes. (i) The definition of Spread (Plus or Minus) within the Notes is hereby amended by deleting the existing
definition in its entirety and inserting in lieu thereof the following:
SPREAD (PLUS OR MINUS):
Minus 0.01% per annum for the Interest Reset Dates occurring from the Original Issue Date to and including
February 2, 2006; plus 0.02% per annum for the Interest Reset Dates occurring from and including February 3,
2006 to and including February 2, 2007; plus 0.04% per annum for the Interest Reset Dates occurring from and
including February 3, 2007 to and including September 2, 2007; plus 0.125% per annum for the Interest Reset
Dates occurring from and including September 3, 2007 to and including February 2, 2008; plus 0.15% per annum
for the Interest Reset Dates occurring from and including February 3, 2008 to and including February 2, 2009;
plus 0.18% per annum for the Interest Reset Dates occurring from and including February 3, 2009 to and
including February 2, 2010; plus 0.18% per annum for the Interest Reset Dates occurring from and including
February 3, 2010 to but excluding February 3, 2011
3
G-223
SECTION 1.02. Exchange of the Notes. The Trustee is authorized to exchange the original certificates dated January 12, 2005 evidencing the Original
Notes and the original certificates dated February 3, 2005 evidencing the Reopening Notes for the duly executed and authenticated certificates evidencing
the amended terms of the Notes. Upon such exchange, the Trustee shall promptly cancel and dispose of such original Notes in accordance with Section 2.10
of the Indenture. Failure to exchange such original Notes for such amended Notes in accordance with this Section will not impair the validity of or
otherwise affect the Notes, as amended.
ARTICLE 2
Miscellaneous Provisions
Section 2.01. Further Assurances. The Issuer will, upon request by the Trustee, execute and deliver such further instruments and do such further acts
as may reasonably be necessary or proper to carry out more effectively the purposes of this First Supplemental Senior Indenture.
Section 2.02. Other Terms of Indenture. Except insofar as herein otherwise expressly provided, all provisions, terms and conditions of the Indenture
are in all respects ratified and confirmed and shall remain in full force and effect.
Section 2.03. Terms Defined. All terms defined elsewhere in the Indenture shall have the same meanings when used herein.
Section 2.04. Governing Law. This First Supplemental Senior Indenture shall be deemed to be a contract under the laws of the State of New York, and
for all purposes shall be construed in accordance with the laws of such State, except as may otherwise be required by mandatory provisions of law.
Section 2.05. Counterparts. This First Supplemental Senior Indenture may be executed in any number of counterparts, each of which shall be an
original; but such counterparts shall together constitute but one and the same instrument.
Section 2.06. Responsibility of the Trustee. The recitals contained herein shall be taken as the statements of the Issuer, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this First Supplemental Senior
Indenture.
4
G-224
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Senior Indenture to be duly executed, and their respective corporate
seals to be hereunto affixed and attested, all as of September 4, 2007.
MORGAN STANLEY
By: /s/ Jai Sooklal
Name: Jai Sooklal
Title: Assistant Treasurer
Attest:
By: /s/ Gary Beeson
Name: Gary Beeson
Title: Assistant Secretary
THE BANK OF NEW YORK TRUSTEE,
By: /s/ Geovanni Barris
Name: Geovanni Barris
Attest:
By: /s/ Jeremy Finkelstein
Name: Jeremy Finkelstein
5
G-225
STATE OF NEW YORK
COUNTY OF NEW YORK
)
) ss.:
)
th
On this 4 day of September 2007 before me personally came Jai Sooklal to me personally known, who, being by me duly sworn, did depose and say
that he resides at Chatham, N.J.; that he is the Assistant Treasurer of Morgan Stanley, one of the corporations described in and which executed the above
instrument; and that signed his name thereto by authority of the Board of Directors of said corporation.
[NOTARIAL SEAL]
/s/ Michael M. O’Brien
Notary Public
G-226
STATE OF NEW YORK
COUNTY OF NEW YORK
)
) ss.:
)
th
On this 4 day of September 2007 before me personally came Geovanni Barris to me personally known, who, being by me duly sworn, did depose
and say that he resides at New York, N.Y.; that he is a Vice President of The Bank of New York, one of the corporations described in and which executed
the above instrument; and that signed his name thereto by authority of the Board of Directors of said corporation.
[NOTARIAL SEAL]
/s/ Carlos R. Luciano
Notary Public
2
G-227
Exhibit 10.6
AMENDMENT TO
401(k) PLAN
Morgan Stanley & Co. Incorporated (the “Corporation”) hereby amends the Morgan Stanley 401(k) Plan (the “401(k) Plan”) as follows:
1. Effective April 1, 2007, Section 2, Definitions, is amended by adding a new definition as follows:
““Broker−Dealer Merger” means the merger of Morgan Stanley DW Inc. with and into Morgan Stanley & Co. Incorporated as of April 1,
2007.”
2. Effective November 13, 2007, the definition of “Elective Deferrals” in Section 2 of the 401(k) Plan shall be amended by adding the following
sentence at the end thereof:
“Elective Deferrals shall also include any Roth Elective Deferrals made pursuant to Section 5(l).”
3. Effective April 1, 2007, Section 2, Definitions is amended by adding the following to the end of the definition of “Eligible IIG Employee”:
“Notwithstanding anything herein to the contrary, to the extent an Eligible Employee is an Eligible IIG Employee due to employment by
Morgan Stanley DW Inc. or a subsidiary thereof prior to the Broker−Dealer Merger, such Eligible Employee shall not cease to be treated as an
Eligible IIG Employee, nor become treated as an Eligible MS Employee, after the effective date of the Broker−Dealer Merger solely as a result
of such merger.”
4. Effective November 13, 2007, the first sentence of the definition of “Matched Contributions” in Section 2 of the 401(k) Plan shall be amended to
read as follows:
““Matched Contributions” means Pre−Tax Contributions, Roth Elective Deferrals and After−Tax Adjustment Contributions.”
5. Effective April 1, 2007, Section 2, Definitions, is amended by adding the following to the end of paragraph (a) of “Securities E

Prospekt - Hedgeconcept.de

Transcription

Similar documents

Deutsch - Englisch

Patente - Oiltanking

UNVERBINDLICHE, SINNGEMÄßE DEUTSCHE

Filmbestellung im Internet für Genealogie

DRITTES KAPITEL Stabilität des internationalen Finanzsystems

Supplement No. 3 - morganstanleyiq.eu.

Innen_Kowi_12_2011

Die Aufgaben bleiben

Magazin 1-2013

berlin real estate news

Einzelabschluss der bmp AG 2010