Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended February 29, 2008

OR

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

Commission File Number 1-11758

LOGO

(Exact Name of Registrant as Specified in its Charter)

 

       

Delaware

(State or other jurisdiction of incorporation or organization)

   1585 Broadway

New York, NY 10036
(Address of principal executive
offices, including zip code)

   36-3145972

(I.R.S. Employer Identification No.)

   (212) 761-4000

(Registrant’s telephone number,
including area code)

Indicate by check mark whether the 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 the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   x   Accelerated Filer   ¨
Non-Accelerated Filer   ¨   Smaller reporting company   ¨
(Do not check if a smaller reporting company)  

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of March 31, 2008, there were 1,107,158,003 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.


Table of Contents

LOGO

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended February 29, 2008

 

Table of Contents          Page
Part I—Financial Information   

Item 1.

   Financial Statements (unaudited)    1
  

Condensed Consolidated Statements of Financial Condition—February 29, 2008 and November 30, 2007

   1
  

Condensed Consolidated Statements of Income—Three Months Ended February 29, 2008 and February 28, 2007

   3
  

Condensed Consolidated Statements of Comprehensive Income—Three Months Ended February 29, 2008 and February 28, 2007

   4
  

Condensed Consolidated Statements of Cash Flows—Three Months Ended February 29, 2008 and February 28, 2007

   5
  

Notes to Condensed Consolidated Financial Statements

   6
  

Note 1.       Basis of Presentation and Summary of Significant Accounting Policies

   6
  

Note 2.       Fair Value Disclosures

   19
  

Note 3.       Collateralized Transactions

   24
  

Note 4.       Securitization Activities and Variable Interest Entities

   25
  

Note 5.       Derivative Contracts

   31
  

Note 6.       Goodwill and Net Intangible Assets

   32
  

Note 7.       Long-Term Borrowings

   32
  

Note 8.       Commitments, Guarantees and Contingencies

   33
  

Note 9.       Shareholders’ Equity

   38
  

Note 10.     Earnings per Common Share

   40
  

Note 11.     Employee Benefit Plans

   41
  

Note 12.     Income Taxes

   41
  

Note 13.     Segment Information

   42
  

Note 14.     Discontinued Operations

   44
  

Note 15.     Business Disposition

   45
  

Report of Independent Registered Public Accounting Firm

   46

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   47
  

Introduction

   47
  

Results of Operations

   48
  

Impact of Credit Market Events

   62
  

Other Matters

   68
  

Critical Accounting Policies

   69
  

Liquidity and Capital Resources

   72

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   82

Item 4.

  

Controls and Procedures

   91

 

  i   LOGO


Table of Contents
             Page
Part II—Other Information   

Item 1.

 

Legal Proceedings

   92

Item 1A.

 

Risk Factors

   93

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   93

Item 6.

 

Exhibits

   93

 

LOGO   ii  


Table of Contents

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;

 

   

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.

 

  iii   LOGO


Table of Contents

Part I—Financial Information.

Item 1.    Financial Statements.

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in millions, except share data)

 

     February 29,
2008
   November 30,
2007
     (unaudited)

Assets

     

Cash and cash equivalents

   $ 20,965    $ 25,598

Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements (including securities at fair value of $27,768 at February 29, 2008 and $31,354 at November 30, 2007)

     60,964      61,608

Financial instruments owned, at fair value (approximately $158 billion and $131 billion were pledged to various parties at February 29, 2008 and November 30, 2007, respectively):

     

U.S. government and agency securities

     41,028      23,887

Other sovereign government obligations

     37,290      21,606

Corporate and other debt

     160,773      147,724

Corporate equities

     89,006      87,377

Derivative contracts

     99,474      77,003

Investments

     14,821      14,270

Physical commodities

     3,445      3,096
             

Total financial instruments owned

     445,837      374,963

Securities received as collateral, at fair value

     49,119      82,229

Collateralized agreements:

     

Securities purchased under agreements to resell

     143,097      126,887

Securities borrowed

     243,695      239,994

Receivables:

     

Customers

     67,793      76,352

Brokers, dealers and clearing organizations

     16,219      16,011

Other loans

     9,575      11,629

Fees, interest and other

     9,223      8,320

Other investments

     5,257      4,524

Premises, equipment and software costs, at cost (net of accumulated depreciation of $3,152 at February 29, 2008 and $3,449 at November 30, 2007)

     4,548      4,372

Goodwill

     3,053      3,024

Intangible assets (net of accumulated amortization of $189 at February 29, 2008 and $175 at November 30, 2007) (includes $392 at fair value at February 29, 2008 and $428 at fair value at November 30, 2007)

     1,008      1,047

Other assets

     10,543      8,851
             

Total assets

   $ 1,090,896    $ 1,045,409
             

 

LOGO   1  


Table of Contents

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

(dollars in millions, except share data)

 

    February 29,
2008
    November 30,
2007
 
    (unaudited)  

Liabilities and Shareholders’ Equity

   

Commercial paper and other short-term borrowings (includes $2,750 at fair value at February 29, 2008 and $3,068 at fair value at November 30, 2007)

  $ 25,952     $ 34,495  

Deposits (includes $1,444 at fair value at February 29, 2008 and $3,769 at fair value at November 30, 2007)

    35,687       31,179  

Financial instruments sold, not yet purchased, at fair value:

   

U.S. government and agency securities

    9,530       8,221  

Other sovereign government obligations

    21,211       15,627  

Corporate and other debt

    9,041       7,592  

Corporate equities

    41,240       30,899  

Derivative contracts

    89,392       71,604  

Physical commodities

    697       398  
               

Total financial instruments sold, not yet purchased

    171,111       134,341  

Obligation to return securities received as collateral, at fair value

    49,119       82,229  

Collateralized financings:

   

Securities sold under agreements to repurchase

    160,492       162,840  

Securities loaned

    86,890       110,423  

Other secured financings (includes $34,821 at fair value at February 29, 2008 and $27,772 at fair value at November 30, 2007)

    40,753       27,772  

Payables:

   

Customers

    249,711       203,453  

Brokers, dealers and clearing organizations

    13,745       10,454  

Interest and dividends

    3,095       1,724  

Other liabilities and accrued expenses

    20,745       24,606  

Long-term borrowings (includes $42,784 at fair value at February 29, 2008 and $38,392 at fair value at November 30, 2007)

    200,316       190,624  
               
    1,057,616       1,014,140  
               

Commitments and contingencies

   

Shareholders’ equity:

   

Preferred stock

    1,100       1,100  

Common stock, $0.01 par value;

   

Shares authorized: 3,500,000,000 at February 29, 2008 and November 30, 2007;

   

Shares issued: 1,211,701,552 at February 29, 2008 and November 30, 2007;

   

Shares outstanding: 1,105,301,550 at February 29, 2008 and 1,056,289,659 at November 30, 2007

    12       12  

Paid-in capital

    —         1,902  

Retained earnings

    38,852       38,045  

Employee stock trust

    7,468       5,569  

Accumulated other comprehensive loss

    (138 )     (199 )

Common stock held in treasury, at cost, $0.01 par value;

   

106,400,002 shares at February 29, 2008 and 155,411,893 shares at November 30, 2007

    (6,546 )     (9,591 )

Common stock issued to employee trust

    (7,468 )     (5,569 )
               

Total shareholders’ equity

    33,280       31,269  
               

Total liabilities and shareholders’ equity

  $ 1,090,896     $ 1,045,409  
               

See Notes to Condensed Consolidated Financial Statements.

 

  2   LOGO


Table of Contents

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(dollars in millions, except share and per share data)

 

    Three Months Ended  
    February 29,
2008
    February 28,
2007
 
    (unaudited)  

Revenues:

   

Investment banking

  $ 1,109     $ 1,227  

Principal transactions:

   

Trading

    3,390       4,158  

Investments

    (346 )     880  

Commissions

    1,199       1,005  

Asset management, distribution and administration fees

    1,550       1,479  

Interest and dividends

    13,965       14,171  

Other

    317       272  
               

Total revenues

    21,184       23,192  

Interest expense

    12,862       13,198  
               

Net revenues

    8,322       9,994  
               

Non-interest expenses:

   

Compensation and benefits

    4,071       4,775  

Occupancy and equipment

    286       260  

Brokerage, clearing and exchange fees

    444       361  

Information processing and communications

    305       277  

Marketing and business development

    183       153  

Professional services

    379       419  

Other

    440       293  
               

Total non-interest expenses

    6,108       6,538  
               

Income from continuing operations before gains (losses) from unconsolidated investees and income taxes

    2,214       3,456  

Gains (losses) from unconsolidated investees

    2       (26 )

Provision for income taxes

    665       1,116  
               

Income from continuing operations

    1,551       2,314  

Discontinued operations:

   

Net gain from discontinued operations

    —         564  

Provision for income taxes

    —         206  
               

Net gain on discontinued operations

    —         358  
               

Net income

  $ 1,551     $ 2,672  
               

Preferred stock dividend requirements

  $ 17     $ 17  
               

Earnings applicable to common shareholders

  $ 1,534     $ 2,655  
               

Earnings per basic common share:

   

Income from continuing operations

  $ 1.50     $ 2.28  

Gain on discontinued operations

    —         0.35  
               

Earnings per basic common share

  $ 1.50     $ 2.63  
               

Earnings per diluted common share:

   

Income from continuing operations

  $ 1.45     $ 2.17  

Gain on discontinued operations

    —         0.34  
               

Earnings per diluted common share

  $ 1.45     $ 2.51  
               

Average common shares outstanding:

   

Basic

    1,020,802,234       1,009,186,993  
               

Diluted

    1,057,867,487       1,057,912,545  
               

See Notes to Condensed Consolidated Financial Statements.

 

LOGO   3  


Table of Contents

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

 

     Three Months Ended  
     February 29,
2008
    February 28,
2007
 
     (unaudited)  

Net income

   $ 1,551     $ 2,672  

Other comprehensive income (loss), net of tax:

    

Foreign currency translation adjustments(1)

     55       (102 )

Net change in cash flow hedges(2)

     4       8  

Minimum pension liability adjustment(3)

     —         2  

Net amortization of actuarial loss(4)

     5       —    

Net amortization of prior-service credit(5)

     (1 )     —    
                

Comprehensive income

   $ 1,614     $ 2,580  
                

 

(1) Amounts are net of provision for (benefit from) income taxes of $(54) million and $47 million for the quarters ended February 29, 2008 and February 28, 2007, respectively.
(2) Amounts are net of provision for income taxes of $2 million and $4 million for the quarters ended February 29, 2008 and February 28, 2007, respectively.
(3) Amount is net of provision for income taxes of $1 million for the quarter ended February 28, 2007.
(4) Amount is net of provision for income taxes of $3 million for the quarter ended February 29, 2008.
(5) Amount is net of (benefit from) income taxes of $(1) million for the quarter ended February 29, 2008.

See Notes to Condensed Consolidated Financial Statements.

 

  4   LOGO


Table of Contents

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

 

    Three Months Ended  
    February 29,
2008
    February 28,
2007
 
    (unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES

   

Net income

  $ 1,551     $ 2,672  

Adjustments to reconcile net income to net cash used for operating activities:

   

(Gains) losses from unconsolidated investees

    (2 )     26  

Compensation payable in common stock and options

    608       607  

Depreciation and amortization

    126       204  

Provision for consumer loan losses

    —         195  

Gain on sale of Quilter Holdings Ltd.

    —         (168 )

Changes in assets and liabilities:

   

Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements

    837       (6,171 )

Financial instruments owned, net of financial instruments sold, not yet purchased

    (30,893 )     (46,050 )

Securities borrowed

    (3,701 )     22,538  

Securities loaned

    (23,533 )     11,582  

Receivables and other assets

    7,108       (16,665 )

Payables and other liabilities

    47,366       (1,987 )

Securities purchased under agreements to resell

    (16,210 )     (17,375 )

Securities sold under agreements to repurchase

    (2,348 )     20,471  
               

Net cash used for operating activities

    (19,091 )     (30,121 )
               

CASH FLOWS FROM INVESTING ACTIVITIES

   

Net (payments for) proceeds from:

   

Premises, equipment and software costs

    (335 )     (295 )

Business acquisitions, net of cash acquired

    (174 )     (1,167 )

Net principal disbursed on consumer loans

    —         (623 )

Sales of consumer loans

    —         1,578  
               

Net cash used for investing activities

    (509 )     (507 )
               

CASH FLOWS FROM FINANCING ACTIVITIES

   

Net (payments for) proceeds from:

   

Short-term borrowings

    (8,543 )     4,523  

Derivatives financing activities

    549       (578 )

Other secured financings

    12,981       (409 )

Deposits

    4,508       8,950  

Tax benefits associated with stock-based awards

    226       110  

Net proceeds from:

   

Issuance of common stock

    241       332  

Issuance of long-term borrowings

    9,725       21,839  

Issuance of junior subordinated debentures related to China Investment Corporation

    5,579       —    

Payments for:

   

Repayments of long-term borrowings

    (10,330 )     (6,484 )

Redemption of Capital Units

    —         (66 )

Repurchases of common stock

    —         (1,210 )

Cash dividends

    (314 )     (305 )
               

Net cash provided by financing activities

    14,622       26,702  
               

Effect of exchange rate changes on cash and cash equivalents

    345       (44 )
               

Net decrease in cash and cash equivalents

    (4,633 )     (3,970 )

Cash and cash equivalents, at beginning of period

    25,598       20,606  
               

Cash and cash equivalents, at end of period

  $ 20,965     $ 16,636  
               

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $11,456 million and $12,899 million for the quarters ended February 29, 2008 and February 28, 2007, respectively.

Cash payments for income taxes were $60 million and $938 million for the quarters ended February 29, 2008 and February 28, 2007, respectively.

See Notes to Condensed Consolidated Financial Statements.

 

LOGO

  5  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. Basis of Presentation and Summary of Significant Accounting Policies.

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 funds of funds, and merchant banking, which includes real estate, private equity and infrastructure, to institutional and retail clients through proprietary and third-party distribution channels. Asset Management also engages in investment activities.

Discontinued Operations.

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.

See Note 14 for additional information on discontinued operations.

Basis of Financial Information.     The condensed consolidated financial statements 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 and tax matters, incentive-based compensation accruals and other matters that affect the condensed consolidated financial statements and related disclosures. The Company believes that the estimates utilized in the preparation of the condensed consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates.

All material intercompany balances and transactions have been eliminated.

Consolidation .     The condensed 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”).

 

  6   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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 (“QSPEs”), 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 2).

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.

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.

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.

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

 

LOGO

  7  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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. 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. Performance-based fees are recorded within Principal transactions—investments revenues or Asset management, distribution and administration fees depending on the nature of the arrangement.

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, certain Other secured financings and certain Long-term borrowings (primarily structured notes and certain junior subordinated debentures) 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—investments revenues in the condensed consolidated statements of income. Interest income and expense and dividend income are recorded within the condensed 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 or Principal transactions—investments revenues. Otherwise, they are included within Interest and dividend income or Interest expense.

Fair Value Option .    The Company adopted the provisions of Statement of Financial Accounting Standards (“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 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 and certain junior subordinated debentures, certain certificates of deposits and certain Other secured financings.

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. 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.

 

  8   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

In determining fair value, the Company uses various valuation 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.

Examples of assets and liabilities utilizing Level 1 inputs are: most U.S. Government securities; certain other sovereign government obligations; and exchange-traded equity securities and listed derivatives that are actively traded.

 

   

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.

Examples of assets and liabilities utilizing Level 2 inputs are: U.S. agency securities; municipal bonds; corporate bonds; certain corporate loans and loan commitments; certain residential and commercial mortgage-related instruments (including loans, securities and derivatives); most over-the-counter (“OTC”) derivatives; physical commodities; mortgage servicing rights; deposits; and most structured notes.

 

   

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Examples of assets and liabilities utilizing Level 3 inputs are: certain corporate loans and loan commitments; certain residential and commercial mortgage-related instruments (including loans, securities and derivatives); real estate and private equity investments; and long-dated or complex OTC derivatives.

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 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 2).

 

LOGO   9  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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 is 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, market liquidity and the unit of account. These adjustments are subject to judgment, are applied on a consistent basis and are based upon observable inputs where available. The Company subjects all valuations and models to a review process on a periodic basis.

U.S. Government Securities .    U.S. government securities are valued using quoted market prices. Valuation adjustments are not applied. Accordingly, U.S. government securities are categorized in Level 1 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 generally valued using quoted market prices or are benchmarked thereto. 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 generally categorized in Level 2 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.

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.

 

  10   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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.

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.

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.

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. Valuation levels of ABS and CMBS indices are used as an additional data point for benchmarking purposes or to price outright index positions. 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.

Exchange-Traded Equity Securities .    Exchange-traded equity securities are generally valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized in Level 1 of the fair value hierarchy.

 

LOGO   11  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Listed Derivative Contracts .    Listed derivatives that are actively traded are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Listed derivatives that are not actively traded are valued using the same approaches as those applied to OTC derivatives; they are generally categorized in Level 2 of the fair value hierarchy.

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, 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 derivative interests in certain mortgage-related collateralized debt obligation (“CDO”) securities, mortgage-related credit default swaps, basket credit default swaps and CDO-squared positions where direct trading activity or quotes are unobservable. These instruments involve significant unobservable inputs and are categorized in Level 3 of the fair value hierarchy.

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.

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.

 

  12   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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 investments in private equity and real estate funds. The transaction price is used as the best estimate of fair value at inception. Thereafter, valuation is 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 referencing identical or comparable securities, 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.

The fair value of OTC financial instruments, including derivative contracts related to financial instruments and commodities, is presented in the accompanying condensed 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 fair value amounts recognized for net derivative positions executed with the same counterparty under the same master netting arrangement.

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 condensed 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).

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

 

LOGO   13  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

condensed consolidated statements of income, primarily related to fair value hedges, was a gain of $16 million and $13 million for the quarters ended February 29, 2008 and February 28, 2007, respectively. 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 .    The Company applies cash flow hedge accounting to interest rate swaps designated as hedges of the variability of future cash flows from floating rate liabilities due to the benchmark interest rate. The Company uses regression analysis to perform an ongoing prospective and retrospective assessment of the effectiveness of these hedging relationships. Changes in fair value of these interest rate swaps are recorded to “Net change in cash flow hedges” as a component of Accumulated other comprehensive income (loss) in Shareholders’ equity, net of tax effects, to the extent they are effective. Amounts recorded to Accumulated other comprehensive income (loss) are then reclassified to Interest expense as interest on the hedged borrowings is recognized. Any ineffective portion of the change in fair value of these instruments is recorded to Interest expense.

Before the sale of the aircraft leasing business in 2006, 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.

 

  14   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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.

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.

Condensed 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 $77 million and $7,679 million in the first quarter of fiscal 2008 and fiscal 2007, respectively.

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 4). 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.

Gains (losses) from Unconsolidated Investees.

The Company invests in unconsolidated investees that provide funds to develop low income communities, renewable energy sources and other structured transactions. These structures provide the Company with tax benefits and are not integral to the operations of the Company. The Company accounts for these investments under the equity method with gains and losses from these investments recorded within Gains (losses) from unconsolidated investees and the applicable tax credits and benefits from tax losses recorded within Provision for income taxes.

Accounting Developments.

Accounting for Uncertainty in Income Taxes.     In July 2006, the Financial Accounting Standards Board (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,

 

LOGO

  15  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

accounting in interim periods, disclosure and transition. As a result of the adoption of FIN 48 on December 1, 2007, the Company recorded a cumulative effect adjustment of approximately $92 million as a decrease to the opening balance of Retained earnings as of December 1, 2007 (see Note 12).

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”). In fiscal 2007, the Company adopted SFAS No. 158’s requirement to recognize the overfunded or underfunded status of its defined benefit and postretirement plans as an asset or liability. In the first quarter of fiscal 2008, the Company recorded an after-tax charge of approximately $13 million ($21 million pre-tax) to Shareholders’ equity upon early adoption of SFAS No. 158’s other requirement to use the fiscal year-end date as the measurement date.

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. In accordance with the provisions of FSP FIN 39-1, the Company offset cash collateral receivables and payables against net derivative positions as of February 29, 2008. The adoption of FSP FIN 39-1 on December 1, 2007 did not have a material impact on the Company’s condensed 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 . In February 2008, the FASB issued a final FSP SOP 07-1-1 to delay indefinitely the effective date of SOP 07-1.

Dividends on Share-Based Payment Awards.     In June 2007, the Emerging Issues Task Force (“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

 

  16   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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.

ASF Framework.     In December 2007, the American Securitization Forum (“ASF”) issued the “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans” (the “ASF Framework”). The overall purpose of the ASF Framework is to provide recommended guidance for servicers to streamline borrower evaluation procedures and to facilitate the effective use of all forms of foreclosure and loss prevention efforts, including refinancings, forbearances, workout plans, loan modifications, deeds-in-lieu and short sales or short payoffs. The ASF Framework is focused on subprime first-lien adjustable rate residential mortgages loans that have an initial fixed rate period of 36 months or less, are included in securitized pools, were originated between January 1, 2005 and July 31, 2007, and have an initial interest rate reset date between January 1, 2008 and July 31, 2010 (“subprime ARM loans”).

The ASF Framework categorizes the population of subprime ARM loans into three segments. Segment 1 includes current loans, as defined, where the borrower is likely to be able to refinance into an available mortgage product. It is expected that borrowers in this category should refinance their loans, if they are unable or unwilling to meet their reset payment. Segment 2 includes current loans where the borrower is unlikely to be able to refinance and meet specific criteria related to Fair Isaac Corporation (or “FICO”) scores and expected payment increase due to the initial adjustment of the interest rate. Borrowers in this segment are eligible for a fast track loan modification under which the interest rate will be kept at the existing rate, generally for five years following the upcoming reset. The ASF Framework indicates that for Segment 2 loans, the servicer can presume that the borrower would be unable to pay pursuant to the original terms of the loan after the interest rate reset, and thus, borrower default on the loan is “reasonably foreseeable” in absence of a modification. Segment 3 includes loans where the borrower is not current or which do not otherwise qualify for Segment 1 or Segment 2. For loans in this category, the servicer will determine the appropriate loss mitigation approach in a manner consistent with the applicable servicing standard in the transaction documents, but without employing the fast track procedures described under Segment 2.

In January 2008, the SEC’s Office of Chief Accountant (the “OCA”) issued a letter (the “OCA Letter”) addressing accounting issues that may be raised by the ASF Framework. The OCA letter concluded that the SEC would not object to continuing off-balance sheet accounting treatment for QSPEs that hold Segment 2 subprime ARM loans modified pursuant to the ASF Framework.

For those current loans that are accounted for off-balance sheet that are modified, but not as part of the ASF Framework above, the servicer must perform on an individual basis an analysis of the borrower and the loan to provide sufficient evidence to demonstrate that default on the loan is imminent or reasonably foreseeable.

The Company adopted the ASF Framework during the first quarter of fiscal 2008, but has not yet modified a significant volume of loans using the ASF Framework. The Company does not expect that its application of the

 

LOGO

  17  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

ASF Framework will impact the off-balance sheet status of Company-sponsored QSPEs that hold Segment 2 subprime ARM loans and is currently evaluating the potential impact on its condensed consolidated statements of income. The total amount of assets owned by Company-sponsored QSPEs that hold subprime ARM loans (including those loans that are not serviced by the Company) as of February 29, 2008, was approximately $30.5 billion. Of this amount, approximately $11.8 billion relates to subprime ARM loans serviced by the Company. The Company’s retained interests in Company sponsored QSPEs that hold subprime ARM loans totaled approximately $272 million as of February 29, 2008.

Transfers of Financial Assets and Repurchase Financing Transactions.     In February 2008, the FASB issued FSP FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP SFAS No. 140-3”). The objective of FSP FAS 140-3 is to provide implementation guidance on accounting for a transfer of a financial asset and repurchase financing. Under the guidance in FSP FAS 140-3, there is a presumption that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement ( i.e., a linked transaction) for purposes of evaluation under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS No. 140”). If certain criteria are met, however, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under SFAS No. 140. FSP FAS 140-3 is effective for the Company on December 1, 2008. The Company is currently evaluating the potential impact of adopting FSP FAS 140-3.

Disclosures about Derivative Instruments and Hedging Activities .    In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and requires entities to provide enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 will be effective for the Company’s fiscal 2009 interim and annual consolidated financial statements.

 

  18   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

2. 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 1 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 February 29, 2008 and November 30, 2007:

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of February 29, 2008

 

    Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Counterparty
and Cash
Collateral
Netting
    Balance
as of
February 29,
2008
    (dollars in millions)

Assets

         

Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements

  $ 27,768   $ —     $ —     $ —       $ 27,768

Financial instruments owned:

         

U.S. government and agency securities

    8,916     31,531     581     —         41,028

Other sovereign government obligations

    30,116     7,159     15     —         37,290

Corporate and other debt

    84     129,067     31,622     —         160,773

Corporate equities

    84,801     2,248     1,957     —         89,006

Derivative contracts(1)

    3,319     120,911     31,910     (56,666 )     99,474

Investments

    927     1,824     12,070     —         14,821

Physical commodities

    —       3,445     —       —         3,445
                               

Total financial instruments owned

    128,163     296,185     78,155     (56,666 )     445,837

Securities received as collateral

    41,631     7,475     13     —         49,119

Intangible assets(2)

    —       392     —       —         392

Liabilities

         

Commercial paper and other short-term borrowings

  $ —     $ 2,750   $ —     $ —       $ 2,750

Deposits

    —       1,444     —       —         1,444

Financial instruments sold, not yet purchased:

         

U.S. government and agency securities

    8,318     1,212     —       —         9,530

Other sovereign government obligations

    12,940     8,271     —       —         21,211

Corporate and other debt

    3     8,434     604     —         9,041

Corporate equities

    40,215     473     552     —         41,240

Derivative contracts(1)

    7,600     110,107     16,069     (44,384 )     89,392

Physical commodities

    —       697     —       —         697
                               

Total financial instruments sold, not yet purchased

    69,076     129,194     17,225     (44,384 )     171,111

Obligation to return securities received as collateral

    41,631     7,475     13     —         49,119

Other secured financings

    —       33,205     1,616     —         34,821

Long-term borrowings

    —       36,820     5,964     —         42,784

 

(1) Amount represents 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.
(2) Amount represents MSRs accounted for at fair value (see Note 4).

 

LOGO

  19  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of November 30, 2007

 

    Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Counterparty
and Cash
Collateral
Netting
    Balance
as of
November 30,
2007
    (dollars in millions)

Assets

         

Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements

  $ 31,354   $ —     $ —     $ —       $ 31,354

Financial instruments owned:

         

U.S. government and agency securities

    11,038     12,189     660     —         23,887

Other sovereign government obligations

    15,834     5,743     29     —         21,606

Corporate and other debt

    223     110,443     37,058     —         147,724

Corporate equities

    82,592     3,549     1,236     —         87,377

Derivative contracts(1)

    4,526     90,654     21,601     (39,778 )     77,003

Investments

    953     249     13,068     —         14,270

Physical commodities

    —       3,096     —       —         3,096
                               

Total financial instruments owned

    115,166     225,923     73,652     (39,778 )     374,963

Securities received as collateral

    68,031     14,191     7     —         82,229

Intangible assets(2)

    —       428     —       —         428

Liabilities

         

Commercial paper and other short-term borrowings

  $ —     $ 3,068   $ —     $ —       $ 3,068

Deposits

    —       3,769     —       —         3,769

Financial instruments sold, not yet purchased:

         

U.S. government and agency securities

    8,208     13     —       —         8,221

Other sovereign government obligations

    9,633     5,994     —       —         15,627

Corporate and other debt

    16     6,454     1,122     —         7,592

Corporate equities

    29,948     935     16     —         30,899

Derivative contracts(1)

    7,031     86,968     15,663     (38,058 )     71,604

Physical commodities

    —       398     —       —         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

    68,031     14,191     7     —         82,229

Other secured financings

    —       25,451     2,321     —         27,772

Long-term borrowings

    —       37,994     398     —         38,392

 

(1) 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.
(2) Amount represents MSRs accounted for at fair value (see Note 4).

 

  20   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The following tables present 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 Three Months Ended February 29, 2008

 

    Beginning
Balance
  Realized
Gains
or (Losses)(1)
    Unrealized
Gains
or (Losses)(1)
    Total
Realized
and
Unrealized
Gains or
(Losses)(1)
    Purchases,
Sales,
Other
Settlements
and
Issuances,
net
    Net
Transfers
In and/or
Out of
Level 3
    Ending
Balance
    (dollars in millions)

Assets

             

Financial instruments owned:

             

U.S. government and agency securities

  $ 660   $ 6     $ 53     $ 59     $ (129 )   $ (9 )   $ 581

Other sovereign government obligations

    29     —         —         —         (1 )     (13 )     15

Corporate and other debt(2)

    37,058     1,207       (3,413 )     (2,206 )     (4,413 )     1,183       31,622

Corporate equities

    1,236     13       (2 )     11       819       (109 )     1,957

Net derivative contracts (2)(3)

    5,938     213       8,391       8,604       1,063       236       15,841

Investments(4)

    13,068     (20 )     (52 )     (72 )     778       (1,704 )     12,070

Securities received as collateral

    7     —         —         —         6       —         13

Liabilities

             

Financial instruments sold, not yet purchased:

             

Corporate and other debt(2)

  $ 1,122   $ (20 )   $ (499 )   $ (519 )   $ (1,036 )   $ (1 )   $ 604

Corporate equities

    16     (12 )     (92 )     (104 )     428       4       552

Obligation to return securities received as collateral

    7     —         —         —         6       —         13

Other secured financings

    2,321     —         —         —         (705 )     —         1,616

Long-term borrowings(5)

    398     —         (142 )     (142 )     5,556       (132 )     5,964

 

(1) Realized and unrealized gains (losses) are included in Principal transactions—trading in the condensed consolidated statements of income except for $(72) million related to Financial instruments owned—investments, which is included in Principal transactions—investments. Unrealized gains (losses) relate to Level 3 assets and liabilities still held by the Company at February 29, 2008.
(2) 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.

 

LOGO   21  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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.

The Company reclassified certain Corporate and other debt from Level 2 to Level 3 because certain significant inputs for the fair value measurement became unobservable. These reclassifications included transfers primarily related to loans and loan commitments, largely related to corporate lending transactions.

 

(3) Amounts represent Financial instruments owned—derivative contracts net of Financial instruments sold, not yet purchased—derivative contracts.
(4) The Company reclassified investments from Level 3 to Level 2 because certain significant inputs for the fair value measurement were identified and, therefore, became observable.
(5) Amounts included in the Purchases, sales, other settlements and issuances, net column primarily relates to the issuance of junior subordinated debentures related to China Investment Corporation investment (see Note 9).

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended February 28, 2007

 

    Beginning
Balance
  Realized
Gains
or (Losses)(1)
    Unrealized
Gains
or (Losses)(1)
    Total
Realized
and
Unrealized
Gains or
(Losses)(1)
    Purchases,
Sales,
Other
Settlements
and
Issuances,
net
    Net
Transfers
In and/or
Out of
Level 3
    Ending
Balance
    (dollars in millions)

Assets

             

Financial instruments owned:

             

U.S. government and agency securities

  $ 2   $ —       $ (6 )   $ (6 )   $ 152     $   —       $ 148

Other sovereign government obligations

    162     2       33       35       682       32       911

Corporate and other debt

    33,941     1       (6 )     (5 )     2,458       (43 )     36,351

Corporate equities

    1,040     (53 )     90       37       170       (8 )     1,239

Net derivative contracts (2)(3)

    30     (194 )     741       547       (335 )     34       276

Investments(4)

    3,879     27       553       580       1,730       (13 )     6,176

Securities received as collateral

    40     —         —         —         (40 )     —         —  

Other assets(5)

    2,154     (9 )     5       (4 )     118       —         2,268

Liabilities

             

Financial instruments sold, not yet purchased:

             

Corporate and other debt(2)

  $ 185   $ (10 )   $ 2     $ (8 )   $ (167 )   $ 42     $ 68

Corporate equities

    9     —         —         —         1       5       15

Obligation to return securities received as collateral

    40     —         —         —         (40 )     —         —  

Other secured financings

    4,724     —         —         —         1,364       —         6,088

Long-term borrowings

    464     —         (53 )     (53 )     27       —         544

 

(1) Realized and unrealized gains (losses) are included in Principal transactions—trading in the condensed consolidated statements of income except for amounts of $571 million and $9 million related to Financial instruments owned—investments, which are included in Principal transactions—investments and Other revenues, respectively, and $(4) million related to Other assets, which are included in Other revenues. Unrealized gains (losses) relate to Level 3 asset and liabilities still held by the Company at February 28, 2007.
(2) The gains and losses associated with Net derivative contracts were primarily driven by credit products as a result of market movements.
(3) Amounts represent Financial instruments owned—derivative contracts net of Financial instruments sold, not yet purchased—derivative contracts.

 

  22   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

(4) The net gains from Financial instruments owned—investments were primarily related to investments associated with the Company’s real estate funds.
(5) Gains and losses associated with DFS within Other revenues are included in discontinued operations.

Fair Value Option.

The following tables present gains and (losses) due to changes in fair value for items measured at fair value pursuant to the fair value option election for the quarters ended February 29, 2008 and February 28, 2007:

 

Three months ended February 29, 2008

   Principal
Transactions:
Trading
    Net
Interest
Revenue
    Gains (losses)
Included in
the Three Months Ended
February 29, 2008(1)
 
     (dollars in millions)  

Commercial paper and other short-term borrowings

   $ 208     $ (2 )   $ 206  

Deposits

     (6 )     —         (6 )

Long-term borrowings

     464       (198 )     266  

 

(1) In addition to these amounts, as discussed in Note 1, 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—investments revenues.

 

Three months ended February 28, 2007

   Principal
Transactions:
Trading
    Net
Interest
Revenue
    (Losses) gains
Included in

the Three Months Ended
February 28, 2007(1)
 
     (dollars in millions)  

Commercial paper and other short-term borrowings

   $ (5 )   $   —       $ (5 )

Deposits

     4       —         4  

Long-term borrowings

     136       (49 )     87  

 

(1) In addition to these amounts, as discussed in Note 1, 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—investments revenues.

As of February 29, 2008 and 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 $28,193 million and $28,880 million, respectively. The aggregate fair value of loans that were 90 or more days past due as of February 29, 2008 and November 30, 2007 was $2,267 million and $6,588 million, respectively. The aggregate contractual principal amount of such loans 90 or more days past due exceeded their fair value by approximately $21,239 million and $23,501 million at February 29, 2008 and November 30, 2007, respectively. 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 quarter ended February 29, 2008, 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 $2,226 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 quarter ended February 28, 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 estimated to be an immaterial unrealized loss.

 

LOGO   23  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

For the quarter ended February 29, 2008, the estimated changes in the fair value of the Company’s short-term and long-term borrowings, including structured notes and junior subordinated debentures, for which the fair value option was elected that were attributable to changes in instrument-specific credit spreads were gains of approximately $895 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. For the quarter ended February 28, 2007, the estimated changes in the fair value of the Company’s short-term and long-term borrowings, including structured notes and junior subordinated debentures, for which the fair value option was elected that were attributable to changes in instrument-specific credit spreads were not material. As of February 29, 2008 and 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 $2,955 million and $1,572 million, respectively.

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 $482 million in the quarter ended February 29, 2008. This loss was primarily related to leveraged loan contingent commitments and was attributable to the illiquid market conditions that existed in the quarter. It was generally determined based on the differential between estimated expected client yields at February 29, 2008 and contractual yields. For the quarter ended February 28, 2007, the estimated changes in the fair value of other liabilities for which the fair value option was elected that were attributable to changes in instrument-specific credit spreads were not material.

 

3. 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 condensed 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
February 29,
2008
   At
November 30,
2007
     (dollars in millions)

Financial instruments owned:

     

U.S. government and agency securities

   $ 7,655    $ 7,134

Other sovereign government obligations

     6,619      333

Corporate and other debt

     43,087      32,530

Corporate equities

     3,938      1,133
             

Total

   $ 61,299    $ 41,130
             

 

  24   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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 February 29, 2008 and November 30, 2007, the fair value of securities received as collateral where the Company is permitted to sell or repledge the securities was $935 billion and $948 billion, respectively, and the fair value of the portion that had been sold or repledged was $721 billion and $708 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 condensed consolidated statements of financial condition. At February 29, 2008 and November 30, 2007, $49 billion and $82 billion, respectively, were reported as Securities received as collateral and an Obligation to return securities received as collateral in the condensed consolidated statements of financial condition. Collateral received in connection with these transactions that was subsequently repledged was approximately $44 billion and $72 billion at February 29, 2008 and November 30, 2007, 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.

 

4. 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 condensed 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 condensed consolidated statements of financial condition at fair value. Any changes in the fair value of such retained interests are recognized in the condensed consolidated statements of income.

 

LOGO   25  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Retained interests in securitized financial assets were approximately $3.5 billion at February 29, 2008, 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 the quarter ended February 29, 2008.

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 as of February 29, 2008 were as follows (dollars in millions):

 

     Residential
Mortgage
Loans
    Commercial
Mortgage
Loans
    U.S. Agency
Collateralized
Mortgage
Obligations
 

Investment grade retained interests

   $ 1,264     $ 760     $ 491  

Non-investment grade retained interests

     580       191       —    
                        

Total retained interests (carrying amount/fair value)

   $ 1,844     $ 951     $ 491  
                        

Weighted average life (in months)

     46       37       44  

Range

     0.3-146       5.5-119       1.5-268  

Weighted average discount rate (per annum)

     15.08 %     7.86 %     6.92 %

Range

     4.30-124.62 %     2.82-27.90 %     0.21-40.63 %

Impact on fair value of 10% adverse change

   $ (65 )   $ (16 )   $ (8 )

Impact on fair value of 20% adverse change

   $ (124 )   $ (30 )   $ (16 )

Weighted average credit losses(1)(2)

     2.13 %     7.10 %     0.00 %

Range

     0.00-12.00 %     0.00-25.80 %     0.00-0.00 %

Impact on fair value of 10% adverse change

   $ (122 )   $ (4 )   $ —    

Impact on fair value of 20% adverse change

   $ (186 )   $ (7 )   $ —    

Weighted average prepayment speed assumption (“PSA”)(3)(4)

     973       —         359  

Range

     182-1,500 PSA     —         166-558 PSA

Impact on fair value of 10% adverse change

   $ (71 )   $ —       $ (7 )

Impact on fair value of 20% adverse change

   $ (115 )   $ —       $ (15 )

 

(1) Residential mortgage loans credit loss rate stated in terms of cumulative loss rate. Commercial mortgage loans credit loss rate stated in terms of annualized loss rate.
(2) Credit losses are computed only on positions for which expected credit loss is either a key assumption in the determination of fair value or is not reflected in the discount rate.
(3) Amounts for residential mortgage loans exclude positive valuation effects from immediate 10% and 20% changes.
(4) Commercial mortgage loans typically contain provisions that either prohibit or economically penalize the borrower from prepaying the loan for a specified period of time.

 

  26   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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
    Commercial
Mortgage
Loans
    U.S. Agency
Collateralized
Mortgage
Obligations
 

Investment grade retained interests

   $ 2,048     $ 678     $ 826  

Non-investment grade retained interests

     1,167       406       —    
                        

Total retained interests (carrying amount/fair value)

   $ 3,215     $ 1,084     $ 826  
                        

Weighted average life (in months)

     49       57       51  

Range

     1-322       0.5-139       1-271  

Weighted average discount rate (per annum)

     12.55 %     8.48 %     6.04 %

Range

     1.12 - 74.10 %     3.00 - 16.83 %     0.75 - 18.12 %

Impact on fair value of 10% adverse change

   $ (114 )   $ (14 )   $ (16 )

Impact on fair value of 20% adverse change

   $ (218 )   $ (28 )   $ (31 )

Weighted average credit losses(1)(2)

     4.52 %     3.24 %     0.00 %

Range

     0.00 - 12.00 %     0.00 - 13.69 %     0.00 - 0.00 %

Impact on fair value of 10% adverse change

   $ (215 )   $ (5 )   $ —    

Impact on fair value of 20% adverse change

   $ (371 )   $ (10 )   $ —    

Weighted average prepayment speed assumption (“PSA”)(3)(4)

     1,173       —         301  

Range

     188 - 2,250 PSA     —         167 - 718 PSA

Impact on fair value of 10% adverse change

   $ (118 )   $ —       $ (7 )

Impact on fair value of 20% adverse change

   $ (194 )   $ —       $ (19 )

 

(1) Residential mortgage loans credit loss rate stated in terms of cumulative loss rate. Commercial mortgage loans credit loss rate stated in terms of annualized loss rate.
(2) Credit losses are computed only on positions for which expected credit loss is either a key assumption in the determination of fair value or is not reflected in the discount rate.
(3) Amounts for residential mortgage loans exclude positive valuation effects from immediate 10% and 20% changes.
(4) 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 February 29, 2008 were as follows:

 

     Residential
Mortgage
Loans
    Commercial
Mortgage
Loans
    U.S. Agency
Collateralized
Mortgage
Obligations
 

Weighted average life (in months)

   51     44     75  

Weighted average discount rate (rate per annum)

   10.04 %   6.03 %   6.29 %

Weighted average credit losses (1)(2)

   0.73 %   1.51 %   —    

Weighted average prepayment speed assumptions

   1,628 PSA   —       279 PSA

 

(1) Residential mortgage loans credit loss rate stated in terms of cumulative loss rate. Commercial mortgage loans credit loss rate stated in terms of annualized loss rate.
(2) Credit losses are computed only on positions for which expected credit loss is either a key assumption in the determination of fair value or is not reflected in the discount rate.

 

LOGO

  27  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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 independently 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.

During the quarters ended February 29, 2008 and February 28, 2007, the Company received proceeds from new securitization transactions of $3.8 billion and $14.5 billion, respectively, and cash flows from retained interests in securitization transactions of $1.7 billion in both periods.

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 condensed consolidated statements of financial condition.

The following table presents information about the Company’s MSRs, which relate to its mortgage loan business activities:

 

     Three Months Ended  
     February 29,
2008
    February 28,
2007
 
     (dollars in millions)  

Fair value as of the beginning of the period

   $ 428     $ 93  

Additions:

    

Purchases of servicing assets

     1       187  

Servicing assets that result from transfers of financial assets

     14       50  
                

Total additions

     15       237  

Subtractions:

    

Sales/disposals

     (8 )     (18 )

Changes in fair value(1)

     (43 )     (25 )
                

Fair value as of the end of the period

   $ 392     $ 287  
                

Amount of contractually specified(1):

    

Servicing fees

   $ 65     $ 38  

Late fees

     8       6  

Ancillary fees

     —         1  
                
   $ 73     $ 45  
                

 

(1) These amounts are recorded within Other revenues in the Company’s condensed consolidated statements of income.

 

  28   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

     Three Months Ended  
     February 29,
2008
    February 28,
2007
 

Assumptions Used in Measuring Fair Value:

    

Weighted average discount rate

   17.59 %   17.87 %

Weighted average prepayment speed assumption

   584 PSA   977 PSA

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 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 QSPEs.

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.

 

LOGO   29  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The following table presents information about the Company’s total assets and maximum exposure to loss associated with VIEs as of February 29, 2008 which the Company consolidates. 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 condensed consolidated statements of financial condition (dollars in millions):

 

     VIE Assets
That the
Company
Consolidates
   At February 29, 2008
Maximum Exposure to Loss in Consolidated VIEs(1)
      Debt and
Equity
Interests
   Derivatives    Commitments
and
Guarantees
   Total

Mortgage and asset-backed securitizations

   $ 7,141    $ 1,864    $ 4    $   —      $ 1,868

Municipal bond trusts

     811      1      —        810      811

Credit and real estate(2)

     4,608      3,606      2,606      —        6,212

Commodities financing

     1,160      —        274      —        274

Other structured transactions

     15,257      14,736      —        9      14,745
                                  
   $ 28,977    $ 20,207    $ 2,884    $ 819    $ 23,910
                                  

 

(1) 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.
(2) 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.

The following table presents information about the Company’s total assets and maximum exposure to loss associated with non-consolidated VIEs as of February 29, 2008 in which the Company had significant variable interests (dollars in millions):

 

     VIE Assets
That the
Company
Does not
Consolidate
   At February 29, 2008
Maximum Exposure to Loss in Non-consolidated VIEs (1)
      Debt and
Equity
Interests
   Derivatives    Commitments
and
Guarantees
   Total

Mortgage and asset-backed securitizations

   $ 7,475    $ 136    $ 108    $   —      $ 244

Municipal bond trusts

     801      518      —        142      660

Credit and real estate

     13,351      7,361      703      52      8,116

Other structured transactions

     10,457      2,169      —        414      2,583
                                  
   $ 32,084    $ 10,184    $ 811    $ 608    $ 11,603
                                  

 

(1) 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.

 

  30   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

5. 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. For further discussion of these matters, refer to Note 6 to the consolidated financial statements for the fiscal year ended November 30, 2007 included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007 (the “Form 10-K’’).

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 condensed consolidated statements of financial condition. 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) for derivatives for trading and investment and for asset and liability management, 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. In accordance with the provisions of FSP FIN 39-1, the Company offset cash collateral receivables and payables of $33 billion and $45 billion, respectively, against net derivative positions as of February 29, 2008.

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, as of February 29, 2008 and November 30, 2007 are summarized in the table below, showing the fair value of the related assets and liabilities by product:

 

     At February 29,
2008
   At November 30,
2007

Product Type

   Assets    Liabilities    Assets    Liabilities
     (dollars in millions)

Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts

   $ 47,776    $ 29,504    $ 33,804    $ 19,515

Foreign exchange forward contracts and options

     10,956      10,955      7,755      9,372

Equity securities contracts (including equity swaps, warrants and options)

     20,777      30,156      19,913      27,887

Commodity forwards, options and swaps

     19,965      18,777      15,531      14,830
                           

Total

   $ 99,474    $ 89,392    $ 77,003    $ 71,604
                           

 

LOGO   31  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

6. Goodwill and Net Intangible Assets.

Changes in the carrying amount of the Company’s goodwill and intangible assets for the quarter ended February 29, 2008 were as follows:

 

    Institutional
Securities
    Global Wealth
Management Group
  Asset
Management
    Total
    (dollars in millions)

Goodwill:

       

Balance as of November 30, 2007

  $ 1,555     $ 297   $ 1,172     $ 3,024

Foreign currency translation adjustments

    (2 )     6     —         4

Goodwill acquired during the period and other

    28       —       (3 )     25
                           

Balance as of February 29, 2008

  $ 1,581     $ 303   $ 1,169     $ 3,053
                           

Due to the deterioration in the broader credit markets, the Company performed an interim impairment test of goodwill in the first quarter of fiscal 2008, which did not result in an impairment.

 

    Institutional
Securities
    Global Wealth
Management Group
  Asset
Management
    Total  
    (dollars in millions)  

Intangible Assets:

       

Amortizable intangible assets at November 30, 2007

  $ 386     $   —     $ 233     $ 619  

Foreign currency translation adjustments

    (1 )     —       —         (1 )

Intangible assets acquired during the period and other

    24       —       —         24  

Intangible assets disposed of during the period and other

    (8 )     —       (4 )     (12 )

Amortization expense

    (12 )     —       (2 )     (14 )
                             

Amortizable intangible assets at February 29, 2008

    389       —       227       616  

Mortgage servicing rights(see Note 4)

    392       —       —         392  
                             

Balance as of February 29, 2008

  $ 781     $ —     $ 227     $ 1,008  
                             

 

7. Long-Term Borrowings.

Long-term borrowings at February 29, 2008 scheduled to mature within one year aggregated $35,386 million.

During the quarter ended February 29, 2008, the Company issued notes with a carrying value at quarter-end aggregating $15,861 million, including non-U.S. dollar currency notes aggregating $3,737 million. Maturities in the aggregate of these notes by fiscal year are as follows: 2009, $2,046 million; 2010, $1,474 million; 2011, $716 million; 2012, $1,338 million; and thereafter, $10,287 million. In the quarter ended February 29, 2008, $10,330 million of notes were repaid.

The weighted average maturity of the Company’s long-term borrowings, based upon stated maturity dates, was approximately 6.2 years at February 29, 2008.

 

  32   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

8. Commitments, Guarantees and Contingencies.

Commitments.

The Company’s commitments associated with letters of credit and other financial guarantees obtained to satisfy collateral requirements, investment activities, corporate lending and financing arrangements, and mortgage lending as of February 29, 2008 are summarized below by period of expiration. Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements:

 

     Years to Maturity    Total
     Less
than 1
   1-3    3-5    Over 5    February 29,
2008
     (dollars in millions)

Letters of credit and other financial guarantees obtained to satisfy collateral requirements

   $ 11,719    $ 11    $ —      $ 1    $ 11,731

Investment activities

     527      220      97      699      1,543

Primary lending commitments(1)

     14,687      7,894      26,350      10,594      59,525

Secondary lending commitments(1)

     5      17      228      275      525

Commitments for secured lending transactions

     2,710      4,143      2,610      23      9,486

Commitments to enter into reverse repurchase agreements

     115,036      —        —        —        115,036

Commercial and residential mortgage-related commitments(1)

     4,654      —        —        —        4,654

Other commitments

     1,062      13      5      —        1,080
                                  

Total

   $ 150,400    $ 12,298    $ 29,290    $ 11,592    $ 203,580
                                  

 

(1) These commitments are recorded at fair value within Financial instruments owned and Financial instruments sold, not yet purchased in the condensed consolidated statements of financial condition (see Note 2).

Letters of Credit and Other Financial Guarantees Obtained to Satisfy Collateral Requirements .    The Company has 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 provide collateral for securities and commodities borrowed and to satisfy various margin requirements in lieu of depositing cash or securities with these counterparties.

Investment Activities.     The Company enters into commitments associated with its real estate, private equity and principal investment activities, which include alternative products.

Lending Commitments.     Primary lending commitments are those which are originated by the Company whereas secondary lending commitments are purchased from third parties in the market. The commitments include lending commitments that are made to investment grade and non-investment grade companies in connection with corporate lending and other business activities.

Commitments for Secured Lending Transactions.     Secured lending commitments are extended by the Company to companies and are secured by real estate or other physical assets of the borrower. Loans made under these arrangements typically are at variable rates and generally provide for over-collateralization based upon the

 

LOGO   33  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

creditworthiness of the borrower. This amount also includes commitments to asset-backed commercial paper conduits of $590 million as of February 29, 2008, which have maturities of less than four years.

Commitments to Enter into Reverse Repurchase Agreements.     The Company enters into forward starting securities purchased under agreements to resell that are primarily secured by collateral from U.S. government agency securities and other sovereign government obligations.

Commercial and Residential Mortgage-Related Commitments.     The Company enters into forward purchase contracts involving residential mortgage loans, residential mortgage loan commitments to individuals and residential home equity lines of credit. In addition, the Company enters into commitments to originate commercial and residential mortgage loans.

Other Commitments.     Other commitments include 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 segment.

Guarantees.

The table below summarizes certain information regarding the Company’s obligations under guarantee arrangements at February 29, 2008:

 

    Maximum Potential Payout/Notional   Carrying
Amount
  Collateral/
Recourse
    Years to Maturity   Total    

Type of Guarantee

  Less than 1   1-3   3-5   Over 5      
    (dollars in millions)

Notional amount of derivative contracts

  $ 948,925   $ 1,174,956   $ 2,834,213   $ 2,135,215   $ 7,093,309   $ 426,538   $        46

Standby letters of credit and other financial guarantees issued(1)

    619     1,018     2,516     7,823     11,976     9     4,804

Market value guarantees

    108     76     —       653     837     66     145

Liquidity facilities(2)

    19,371     1,598     803     425     22,197     22     20,224

General partner guarantees

    47     111     40     306     504     14     —  

 

(1) Approximately $5 billion of standby letters of credit are also reflected in the “Commitments” table above in primary and secondary lending commitments.
(2) The maximum potential payout amount includes liquidity facilities to asset-backed commercial paper conduits of $714 million.

 

  34   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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 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. 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 Issued.     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, respectively, 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.

 

LOGO   35  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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.

Other Guarantees and Indemnities.

In the normal course of business, the Company provides a variety of other guarantees and indemnifications, which are described below.

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 condensed 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 to the consolidated financial statements for the fiscal year ended November 30, 2007 included in the Form 10-K for details on the Company’s junior subordinated debentures.

Indemnities .    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 condensed 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. Any potential contingent liability under these membership agreements cannot be estimated. The Company has not recorded any contingent liability in the condensed consolidated financial statements for these agreements and believes that any potential requirement to make payments under these agreements is remote.

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

 

  36   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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 February 29, 2008 and November 30, 2007, the maximum potential amount of future payments the Company may be required to make under its surety bond was $133 million and $122 million, respectively. The Company has not recorded any contingent liability in the condensed consolidated financial statements for these representations and warranties and reimbursement agreements and believes that the probability of any payments under these arrangements is remote.

Merger and Acquisition Guarantees .    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.

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 result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

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

 

LOGO   37  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the condensed 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.

 

9. Shareholders’ Equity.

Regulatory Requirements.     MS&Co. is a registered broker-dealer and registered futures commission merchant and, accordingly, 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 $9,131 million at February 29, 2008, which exceeded the amount required by $6,866 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.

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 February 29, 2008, 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 MSDP or the assets of Cournot, unless and until the obligations of such entity to its own creditors are satisfied in full. Creditors of MSDP or Cournot, 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 MSDP or Cournot.

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 February 29, 2008, 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 February 29, 2008, MS&Co. had tentative net capital in excess of the minimum and the notification requirements.

Treasury Shares.     During the quarter ended February 29, 2008, the Company did not purchase any of its common stock through the open market share repurchase program. During the quarter ended February 28, 2007, the Company purchased approximately $1.2 billion of its common stock through open market purchases at an average cost of $82.02 per share.

 

  38   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

China Investment Corporation Investment.     In December 2007, the Company sold Equity Units which included contracts to purchase Company common stock to a wholly owned subsidiary of China Investment Corporation (“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 that were outstanding on November 30, 2007. CIC is a passive financial investor and has no special rights of ownership nor a role in the management of the Company. A substantial portion of the investment proceeds were treated as Tier 1 capital for regulatory capital purposes.

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 Paid-in capital, a component of Shareholders’ equity in the Company’s condensed 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.

For a more detailed summary of the Equity Units, including the junior subordinated debentures issued to support trust common and trust preferred securities and the stock purchase contracts, refer to Note 28 to the consolidated financial statements for the fiscal year ended November 30, 2007 included in the Form 10-K.

Prior to the issuance of common stock upon settlement of the stock purchase contract, the impact of the Equity Units are 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 are 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 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 occurs (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.

The dilutive impact for the first quarter of fiscal 2008 was approximately 256,000 shares.

 

LOGO   39  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

10. Earnings per Common Share.

Basic earnings per 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. The following table presents the calculation of basic and diluted EPS (in millions, except for per share data):

 

     Three Months Ended  
     February 29,
2008
    February 28,
2007
 

Basic EPS:

    

Income from continuing operations

   $ 1,551     $ 2,314  

Gain on discontinued operations, net

     —         358  

Preferred stock dividend requirements

     (17 )     (17 )
                

Net income applicable to common shareholders

   $ 1,534     $ 2,655  
                

Weighted average common shares outstanding

     1,021       1,009  
                

Earnings per basic common share:

    

Income from continuing operations

   $ 1.50     $ 2.28  

Gain on discontinued operations

     —         0.35  
                

Earnings per basic common share

   $ 1.50     $ 2.63  
                

Diluted EPS:

    

Net income applicable to common shareholders

   $ 1,534     $ 2,655  
                

Weighted average common shares outstanding

     1,021       1,009  

Effect of dilutive securities:

    

Stock options and restricted stock units

     37       49  
                

Weighted average common shares outstanding and common stock equivalents

     1,058       1,058  
                

Earnings per diluted common share:

    

Income from continuing operations

   $ 1.45     $ 2.17  

Gain on discontinued operations

     —         0.34  
                

Earnings per diluted common share

   $ 1.45     $ 2.51  
                

The following securities were considered antidilutive and, therefore, were excluded from the computation of diluted EPS:

 

     Three Months Ended
     February 29,
2008
   February 28,
2007
     (shares in millions)

Number of antidilutive securities (including stock options and restricted stock units) outstanding at end of period

   60    16

Cash dividends declared per common share were $0.27 for the quarters ended February 29, 2008 and February 28, 2007.

For information on the dilutive impact related to CIC, see Note 9.

 

  40   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

11. Employee Benefit Plans.

The Company maintains various pension and benefit plans for eligible employees.

The components of the Company’s net periodic benefit expense for its pension and postretirement plans were as follows:

 

     Three Months Ended  
     February 29,
2008
    February 28,
2007
 
     (dollars in millions)  

Service cost, benefits earned during the period

   $ 28     $ 29  

Interest cost on projected benefit obligation

     36       33  

Expected return on plan assets

     (33 )     (31 )

Net amortization of actuarial loss

     8       10  

Net amortization of prior-service credit

     (2 )     (2 )
                

Net periodic benefit expense

   $ 37     $ 39  
                

 

12. Income Taxes.

The Company adopted FIN 48 on December 1, 2007 and recorded a cumulative effect adjustment of approximately $92 million as a decrease to the opening balance of Retained earnings as of December 1, 2007.

The total amount of unrecognized tax benefits as of the date of adoption of FIN 48 was approximately $2.7 billion. Of this total, approximately $1.7 billion (net of federal benefit of state issues, competent authority and foreign tax credit offsets) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods.

The Company recognizes the accrual of interest related to unrecognized tax benefits in Provision for income taxes in the condensed consolidated statements of income. The Company recognizes the accrual of penalties (if any) related to unrecognized tax benefits in income before income taxes. Interest expense included in income taxes as of December 1, 2007 was approximately $223 million, net of federal and state income tax benefits. The amount of penalties accrued is immaterial.

It is reasonably possible that significant changes in the gross balance of unrecognized tax benefits may occur within the next twelve months. It is difficult to estimate the range of such changes; however, the Company does not expect that any change in the gross balance of unrecognized tax benefits would have a material impact on its effective tax rate over the next twelve months.

The Company is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax authorities in certain countries, such as Japan and the United Kingdom, and states in which the Company has significant business operations, such as New York. 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 unrecognized tax benefits that the Company believes are adequate in relation to the potential for additional assessments. Once established, the Company adjusts unrecognized tax benefits only when more information is available or when an event occurs necessitating a change. The Company believes that the resolution of tax matters will not have a material effect on the condensed consolidated statements of financial condition of the Company, although a resolution could have a material impact on the Company’s condensed consolidated statements of income for a particular future period and on the Company’s effective income tax rate for any period in which such resolution occurs.

 

LOGO   41  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The following are the major tax jurisdictions in which the Company and its affiliates operate and the earliest tax year subject to examination:

 

Jurisdiction

   Tax Year

United States

   1999

New York State and City

   2002

Hong Kong

   2001

United Kingdom

   2004

Japan

   2004

 

13. Segment 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.

 

  42   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Selected financial information for the Company’s segments is presented below:

 

Three Months Ended February 29, 2008

  Institutional
Securities
    Global Wealth
Management
Group
  Asset
Management
    Intersegment
Eliminations
    Total  
    (dollars in millions)  

Net revenues excluding net interest

  $ 5,313     $ 1,395   $ 566     $ (55 )   $ 7,219  

Net interest

    900       211     (23 )     15       1,103  
                                     

Net revenues

  $ 6,213     $ 1,606   $ 543     $ (40 )   $ 8,322  
                                     

Income from continuing operations before losses from unconsolidated investees and income taxes

  $ 2,117     $ 254   $ (161 )   $ 4     $ 2,214  

Gains from unconsolidated investees

    2       —       —         —         2  

Provision for (benefit from) income taxes

    627       95     (58 )     1       665  
                                     

Income from continuing operations

  $ 1,492     $ 159   $ (103 )   $ 3     $ 1,551  
                                     

Three Months Ended February 28, 2007

  Institutional
Securities
    Global Wealth
Management
Group
  Asset
Management
    Intersegment
Eliminations
    Total  
    (dollars in millions)  

Net revenues excluding net interest

  $ 6,332     $ 1,375   $ 1,371     $ (57 )   $ 9,021  

Net interest

    830       136     (3 )     10       973  
                                     

Net revenues

  $ 7,162     $ 1,511   $ 1,368     $ (47 )   $ 9,994  
                                     

Income from continuing operations before losses from unconsolidated investees and income taxes

  $ 2,845     $ 226   $ 379     $ 6     $ 3,456  

Losses from unconsolidated investees

    (26 )     —       —         —         (26 )

Provision for income taxes

    878       87     149       2       1,116  
                                     

Income from continuing operations(1)

  $ 1,941     $ 139   $ 230     $ 4     $ 2,314  
                                     

Net Interest

  Institutional
Securities
    Global Wealth
Management
Group
  Asset
Management
    Intersegment
Eliminations
    Total  
    (dollars in millions)  

Three Months Ended February 29, 2008

         

Interest and dividends

  $ 13,660     $ 302   $ 15     $ (12 )   $ 13,965  

Interest expense

    12,760       91     38       (27 )     12,862  
                                     

Net interest

  $ 900     $ 211   $ (23 )   $ 15     $ 1,103  
                                     

Three Months Ended February 28, 2007

         

Interest and dividends

  $ 14,021     $ 274   $ 14     $ (138 )   $ 14,171  

Interest expense

    13,191       138     17       (148 )     13,198  
                                     

Net interest

  $ 830     $ 136   $ (3 )   $ 10     $ 973  
                                     

 

Total Assets(2)

  Institutional
Securities
  Global Wealth
Management
Group
  Asset
Management
  Total
    (dollars in millions)

At February 29, 2008

  $ 1,052,488   $ 26,632   $ 11,776   $ 1,090,896
                       

At November 30, 2007

  $ 1,005,452   $ 27,518   $ 12,439   $ 1,045,409
                       

 

(1) See Note 14 for a discussion of discontinued operations.
(2) Corporate assets have been fully allocated to the Company’s business segments.

 

LOGO   43  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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 of the Company’s operations by geographic area. The net revenues disclosed in the following table reflect 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 & trading—trading desk location.

 

   

Global Wealth Management Group: global representative coverage location.

 

   

Asset Management: client location, except for the merchant banking business, which is based on asset location.

 

Net Revenues

   Americas    Europe,
Middle
East and
Africa
   Asia    Total
     (dollars in millions)

Three Months Ended February 29, 2008

   $ 3,823    $ 3,267    $ 1,232    $ 8,322

Three Months Ended February 28, 2007

     6,072      2,702      1,220      9,994

 

14. Discontinued Operations.

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 results of DFS prior to the Discover Spin-off are included within discontinued operations for the three months ended February 28, 2007.

Net revenues included in discontinued operations related to DFS were $1,025 million for the three months ended February 28, 2007.

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 the three months ended February 28, 2007, the amount of interest expense reclassified to discontinued operations was approximately $88 million.

Quilter.     On February 28, 2007, the Company sold Quilter, its standalone U.K. mass affluent business that was formerly included within the Global Wealth Management Group business segment. The results of Quilter are included within discontinued operations for the three months ended February 28, 2007. The results for discontinued operations in the quarter ended February 28, 2007 also included a pre-tax gain of $168 million ($109 million after-tax) on disposition.

 

  44   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Summarized financial information for the Company’s discontinued operations:

The table below provides information regarding amounts included within discontinued operations for the three months ended February 28, 2007 (dollars in millions):

 

Pre-tax gain on discontinued operations

  

DFS

   $ 390

Quilter

     174
      
   $ 564
      

 

15. Business Disposition.

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 closed during the second quarter of fiscal 2008. The results of MSWM are included within the Global Wealth Management Group business segment.

 

LOGO   45  


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Morgan Stanley:

We have reviewed the accompanying condensed consolidated statement of financial condition of Morgan Stanley and subsidiaries (the “Company”) as of February 29, 2008, and the related condensed consolidated statements of income, comprehensive income and cash flows for the three-month periods ended February 29, 2008 and February 28, 2007. These interim financial statements are the responsibility of the management of the Company.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously 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 statements of income, comprehensive income, cash flows and changes in shareholders’ equity for the fiscal year then ended (not presented herein) included in Morgan Stanley’s Annual Report on Form 10-K; and in our report dated January 28, 2008, which report contains an explanatory paragraph relating to the adoption, in fiscal 2005, of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” and effective December 1, 2005, the change in accounting policy for recognition of equity awards granted to retirement-eligible employees, an explanatory paragraph relating to, in fiscal 2006, the application of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” an explanatory paragraph relating to the adoption, in fiscal 2007, of SFAS No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” and an explanatory paragraph relating to the adoption, in fiscal 2007, of 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),” we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of November 30, 2007 is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.

As discussed in Note 1 and in Note 12 to the condensed consolidated interim financial statements, effective December 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”

 

/s/    Deloitte & Touche LLP

New York, New York
April 7, 2008

 

  46  


Table of Contents
Item 2. 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 funds of funds, and merchant banking, which includes real estate, private equity and infrastructure, to institutional and retail clients through proprietary and third-party distribution channels. Asset Management also engages in investment activities.

The discussion of the Company’s results of operations below may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect the Company’s future results, please see “Forward-Looking Statements” immediately preceding Part I, Item 1, “Competition” and “Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A and “Certain Factors Affecting Results of Operations” in Part II, Item 7 and other items throughout the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007 (the “Form 10-K”) and the Company’s 2008 Current Reports on Form 8-K.

The Company’s results of operations for the three month periods ended February 29, 2008 and February 28, 2007 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 the first quarter of fiscal 2007. The results of Quilter Holdings Ltd. (“Quilter”), Global Wealth Management Group’s former mass affluent business in the U.K., are also reported as discontinued operations for the first quarter of fiscal 2007. See Note 14 to the condensed consolidated financial statements.

 

LOGO   47  


Table of Contents

Results of Operations.

Executive Summary.

Financial Information.

 

     As of or for the
Three Months Ended
 
     February 29,
2008
    February 28,
2007
 

Net revenues (dollars in millions):

    

Institutional Securities

   $ 6,213     $ 7,162  

Global Wealth Management Group

     1,606       1,511  

Asset Management

     543       1,368  

Intersegment Eliminations

     (40 )     (47 )
                

Consolidated net revenues

   $ 8,322     $ 9,994  
                

Income (loss) before income taxes (dollars in millions)(1):

    

Institutional Securities

   $ 2,117     $ 2,845  

Global Wealth Management Group

     254       226  

Asset Management

     (161 )     379  

Intersegment Eliminations

     4       6  
                

Consolidated income before taxes

   $ 2,214     $ 3,456  
                

Consolidated net income (dollars in millions)

   $ 1,551     $ 2,672  
                

Earnings applicable to common shareholders (dollars in millions)(2)

   $ 1,534     $ 2,655  
                

Earnings per basic common share:

    

Income from continuing operations

   $ 1.50     $ 2.28  

Gain on discontinued operations

     —         0.35  
                

Earnings per basic common share

   $ 1.50     $ 2.63  
                

Earnings per diluted common share:

    

Income from continuing operations

   $ 1.45     $ 2.17  

Gain on discontinued operations

     —         0.34  
                

Earnings per diluted common share

   $ 1.45     $ 2.51  
                

Regional net revenues (dollars in millions)(3):

    

Americas

   $ 3,823     $ 6,072  

Europe, Middle East and Africa

     3,267       2,702  

Asia

     1,232       1,220  
                

Consolidated net revenues

   $ 8,322     $ 9,994  
                

Statistical Data.

    

Book value per common share(4)

   $ 29.11     $ 34.71  

Average common equity (dollars in billions)(5):

    

Institutional Securities

   $ 24.4     $ 20.0  

Global Wealth Management Group

     1.5       1.7  

Asset Management

     3.8       3.0  
                

Total from operating segments

     29.7       24.7  

Discontinued operations

     —         5.7  

Unallocated capital

     1.5       5.1  
                

Consolidated

   $ 31.2     $ 35.5  
                

 

  48   LOGO


Table of Contents

Statistical Data—(Continued).

 

     As of or for the
Three Months Ended
 
     February 29,
2008
    February 28,
2007
 

Return on average common equity(5) :

    

Consolidated

     20 %     30 %

Institutional Securities

     24 %     38 %

Global Wealth Management Group

     42 %     32 %

Asset Management

     N/M       31 %

Effective income tax rate from continuing operations

     30.0 %     32.5 %

Worldwide employees

     47,050       44,797  

Consolidated assets under management or supervision by asset class (dollars in billions):

    

Equity

   $ 317     $ 317  

Fixed income

     124       111  

Money market

     117       90  

Alternatives(6)

     111       77  
                

Subtotal

     669       595  

Unit trusts

     14       15  

Other(7)

     59       59  
                

Total assets under management or supervision(8)

     742       669  

Share of minority interest assets(9)

     7       5  
                

Total

   $ 749     $ 674  
                

Institutional Securities:

    

Mergers and acquisitions completed transactions (dollars in billions)(10):

    

Global market volume

   $ 103.4     $ 153.6  

Market share

     27.6 %     30.0 %

Rank

     4       2  

Mergers and acquisitions announced transactions (dollars in billions)(10):

    

Global market volume

   $ 88.1     $ 226.9  

Market share

     23.5 %     40.5 %

Rank

     2       1  

Global equity and equity-related issues (dollars in billions)(10):

    

Global market volume

   $ 2.6     $ 6.0  

Market share

     3.9 %     5.6 %

Rank

     10       8  

Global debt issues (dollars in billions)(10):

    

Global market volume

   $ 45.1     $ 71.3  

Market share

     5.3 %     5.5 %

Rank

     5       6  

Global initial public offerings (dollars in billions)(10):

    

Global market volume

   $ 0.5     $ 1.8  

Market share

     3.7 %     7.1 %

Rank

     8       5  

Pre-tax profit margin(11)

     34 %     40 %

 

LOGO   49  


Table of Contents

Statistical Data—(Continued).

 

     As of or for the
Three Months Ended
 
     February 29,
2008
    February 28,
2007
 

Global Wealth Management Group:

    

Global representatives

     8,456       7,993  

Annualized net revenue per global representative (dollars in thousands)(12)

   $ 761     $ 758  

Client assets by segment (dollars in billions):

    

$10 million or more

   $ 229     $ 210  

$1 million – $10 million

     262       248  
                

Subtotal $1 million or more

     491       458  

$100,000 – $1 million

     175       174  

Less than $100,000

     23       26  
                

Client assets excluding corporate and other accounts

     689       658  

Corporate and other accounts

     33       32  
                

Total client assets

   $ 722     $ 690  
                

Fee-based assets as a percentage of total client assets(13)

     26 %     29 %

Client assets per global representative (dollars in millions)(14)

   $ 85     $ 86  

Bank deposits (dollars in billions)(15)

   $ 33.4     $ 16.4  

Pre-tax profit margin(11)

     16 %     15 %

Asset Management:

    

Assets under management or supervision (dollars in billions)(16)

   $ 577     $ 521  

Percent of fund assets in top half of Lipper rankings(17)

     48 %     48 %

Pre-tax profit margin(11)

     N/M       28 %

 

N/M – Not Meaningful

(1) Amounts represent income from continuing operations before gains (losses) from unconsolidated investees, income taxes and gain from discontinued operations.
(2) Earnings applicable to common shareholders are used to calculate earnings per share information. The three months ended February 29, 2008 and February 28, 2007 reflect a preferred stock dividend of $17 million.
(3) 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 coverage location. Asset Management: client location, except for the merchant banking business, which is based on asset location.
(4) Book value per common share equals common shareholders’ equity of $32,180 million at February 29, 2008 and $36,854 million at February 28, 2007, divided by common shares outstanding of 1,105 million at February 29, 2008 and 1,062 million at February 28, 2007.
(5) The computation of average common equity for each business segment is based upon an economic capital framework that estimates the amount of equity capital required to support the businesses over a wide range of market environments while simultaneously satisfying regulatory, rating agency and investor requirements. The economic capital framework will evolve over time in response to changes in the business and regulatory environment and to improvements in modeling techniques. The effective tax rates used in the computation of segment return on average common equity were determined on a separate entity basis.
(6) Amounts reported for Alternatives include 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.
(7) Amounts include assets under management or supervision associated with the Global Wealth Management Group business segment.
(8) Revenues and expenses associated with these assets are included in the Company’s Asset Management, Global Wealth Management Group and Institutional Securities business segments.
(9) Amounts represent Asset Management’s proportional share of assets managed by entities in which it owns a minority interest.
(10) Source: Thomson Financial, data as of March 5, 2008—The data for the three months ended February 29, 2008 and February 28, 2007 are for the periods from January 1 to February 29, 2008 and January 1 to February 28, 2007, respectively, as Thomson Financial presents these data on a calendar-year basis.
(11) Percentages represent income from continuing operations before losses from unconsolidated investees and income taxes, as a percentage of net revenues.
(12) 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.

 

  50   LOGO


Table of Contents
(13) 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.
(14) Client assets per global representative equal total period-end client assets divided by period-end global representative headcount.
(15) 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.
(16) Amounts include Asset Management’s proportional share of assets managed by entities in which it owns a minority interest.
(17) Source: Lipper, one-year performance excluding money market funds as of February 29, 2008 and February 28, 2007, respectively.

First Quarter 2008 Performance.

Company Results .     The Company recorded net income of $1,551 million in the quarter ended February 29, 2008, a 42% decrease from the comparable fiscal 2007 period. Net revenues (total revenues less interest expense) declined 17% to $8,322 million. Non-interest expenses of $6,108 million, including severance expense of approximately $161 million related to staff reductions, decreased 7% from the first quarter of last year primarily due to lower compensation and benefits costs. Diluted earnings per share were $1.45 compared with $2.51 in last year’s first quarter. Compensation and benefits expense decreased 15%, primarily reflecting lower incentive-based compensation accruals due to lower net revenues in the Company’s Institutional Securities and Asset Management business segments. Diluted earnings per share from continuing operations were $1.45 compared with $2.17 in last year’s first quarter. The annualized return on average common equity was 19.7% compared with 29.9% in the first quarter of last year. The return on average common equity from continuing operations was 19.7% compared with 30.9% in the first quarter of last year.

Results for the first quarter of fiscal 2007 included a gain of $168 million ($109 million after-tax) in discontinued operations related to the sale of Quilter on February 28, 2007 (see Note 14 to the condensed consolidated financial statements).

The Company’s effective income tax rate from continuing operations was 30.0% for the first quarter of fiscal 2008 compared with 32.5% for the first quarter of fiscal 2007. The decrease primarily reflected a change in the geographic mix of earnings, partially offset by an increase in the rate due to lower domestic tax credits.

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).

At February 29, 2008, the Company had 47,050 employees worldwide compared with 44,797 (excluding DFS employees) at the end of the first quarter of last year and 48,256 at November 30, 2007.

Institutional Securities.     Institutional Securities recorded income from continuing operations before gains (losses) from unconsolidated investees and income taxes of $2,117 million, a 26% decrease from last year’s first quarter. Net revenues declined 13% to $6,213 million as lower results in fixed income sales and trading and underwriting transactions more than offset record results in equity sales and trading. Non-interest expenses decreased 5% to $4,096 million from last year’s first quarter, reflecting lower compensation costs, partially offset by higher costs associated with higher levels of business activity.

Investment banking revenues decreased 5% from the first quarter of fiscal 2007 to $980 million. Underwriting revenues decreased 19% to $536 million due to a decline in market activity. Advisory fees from merger, acquisition and restructuring transactions were $444 million, an increase of 19% from the comparable period of fiscal 2007, reflecting higher revenues from completed transactions.

Equity sales and trading revenues increased 51% to a record $3,329 million. Strong trading results in a volatile market coupled with increased customer flows contributed to record results in derivatives and higher revenues in cash equity products. Prime brokerage also generated record net revenues for the quarter. Equity sales and

 

LOGO   51  


Table of Contents

trading revenues also benefited by approximately $321 million from the widening of the Company’s credit spreads on certain long-term and short-term borrowings that are accounted for at fair value. Fixed income sales and trading revenues were $2,907 million, 15% below the record $3,430 million in the first quarter of fiscal 2007, as record revenues in interest rate, credit and currency products and higher revenues from commodities products were partially offset by net writedowns on mortgage proprietary trading products. Interest rate, credit and currency trading products generated higher revenues from strong customer flows and higher levels of volatility, and emerging markets generated record revenues. Credit trading also benefited from favorable positioning as credit spreads widened during the quarter. Commodities revenues benefited from strong customer flows and were higher than last year’s first quarter as higher trading revenues in agricultural products and oil liquids were partly offset by lower revenues in electricity and natural gas products. Fixed income sales and trading also benefited by approximately $527 million from widening of the Company’s credit spreads on certain long-term and short-term borrowings that are accounted for at fair value.

In the first quarter of fiscal 2008, other sales and trading losses of $1,102 million reflected writedowns on loans and commitments largely related to “event-driven” lending transactions to non-investment grade companies and the writedown of mortgage-related securities portfolios in the Company’s domestic subsidiary banks (see “Impact of Credit Market Events” herein).

Principal transaction net investment losses aggregating $141 million were recognized in the quarter ended February 29, 2008 as compared with net investment gains of $350 million in the quarter ended February 28, 2007. The decrease was primarily related to net losses from the Company’s investments in passive limited partnership interests associated with the Company’s real estate funds and investments related to certain employee deferred compensation and co-investment plans.

Global Wealth Management Group .     Global Wealth Management Group recorded income from continuing operations before income taxes of $254 million, up 12% from the first quarter of fiscal 2007. Net revenues were $1,606 million, a 6% increase from last year’s first quarter, primarily reflecting higher net interest revenue from growth in the bank deposit program and higher client activity. Total non-interest expenses were $1,352 million, a 5% increase from last year’s first quarter. Compensation and benefits expense increased 10%, primarily reflecting higher incentive-based compensation accruals due to higher net revenues and severance-related expenses. Non-compensation costs decreased 7%, as higher levels of business activity were more than offset by a change in the classification of sub-advisory fees due to modifications of certain customer agreements. Total client assets increased to $722 billion, a 5% increase from last year’s first quarter. In addition, client assets in fee-based accounts decreased 8% from last year’s first quarter to $185 billion and decreased as a percentage of total client assets to 26% from 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 February 29, 2008, the number of global representatives was 8,456, an increase of 463 from a year ago.

Asset Management .    Asset Management recorded a loss before income taxes of $161 million in the first quarter of fiscal 2008 as compared with income before income taxes of $379 million in the first quarter of last year. Net revenues of $543 million decreased 60% from last year’s first quarter, primarily due to principal transaction net investment losses in real estate, including those associated with deferred compensation and co-investment plans, as compared with net gains recorded in the first quarter of fiscal 2007. The current quarter also included principal transaction trading losses of approximately $187 million related to securities issued by structured investment vehicles. These decreases were partly offset by higher asset management, distribution and administration fees resulting primarily from an increase in assets under management and a more favorable asset mix. Non-interest expenses decreased 29% to $704 million from last year’s first quarter. Compensation and benefits expense decreased primarily due to lower net revenues and lower expenses associated with the Company’s employee deferred compensation plans. Non-compensation expenses increased from a year ago reflecting higher levels of business activity. Assets under management or supervision within Asset Management of $577 billion were up $56 billion, or 11%, from a year ago, primarily driven by increases in the alternative and money market asset classes related to positive net customer inflows.

 

  52   LOGO


Table of Contents

Global Market and Economic Conditions in the Quarter Ended February 29, 2008.

In the U.S., the slowdown of economic growth that occurred during the second half of fiscal 2007 continued during the first quarter of fiscal 2008. Significant and broad-based illiquidity in the residential real estate and credit markets continued to stress financial markets. Continued concerns about the impact of subprime loans caused the subprime-related and broader credit markets to deteriorate further over the course of the quarter. The U.S. unemployment rate at the end of the first quarter of fiscal 2008 increased to 4.8% from 4.7% at the end of fiscal 2007. During the quarter, the U.S. dollar weakened against most major currencies. Conditions in the U.S. equity markets were also volatile and major equity market indices declined during the quarter, primarily as a result of concerns about future economic growth, record oil prices, lower consumer sentiment, the adverse developments in the credit markets and mixed corporate earnings. The Federal Reserve Board (the “Fed”) lowered both the benchmark interest rate and discount rate by an aggregate of 1.50% during the first quarter of fiscal 2008, including an unscheduled 0.75% interest rate reduction in January 2008. The Fed acted to continue 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. Although providing liquidity and stability to the financial markets is a primary objective, the Fed also remains concerned about inflationary pressures. Subsequent to quarter end, the Fed lowered both the benchmark interest rate and discount rate by an additional 0.75% in order to provide increased liquidity to the financial markets. In March 2008, the Fed also announced new lending facilities, which are now available to primary broker-dealers in an additional effort to restore liquidity within the securities industry. Also in March 2008, the Fed lowered the primary credit rate by 0.25%. The Fed continues to consult frequently with its central bank counterparts in Europe and North America to address liquidity pressures within the capital markets.

In Europe, the strong pace of economic growth that occurred in fiscal 2007 showed signs of slowing during the first quarter of fiscal 2008 as export demand decreased, the Euro strengthened against the U.S. dollar and the disruption in the global financial markets continued. Major equity market indices in Europe decreased during the first quarter of fiscal 2008, primarily due to concerns about the economic outlook and difficult conditions in the credit markets. The European Central Bank left the benchmark interest rate unchanged during the first quarter of fiscal 2008, while the Bank of England reduced the benchmark interest rate by an aggregate of 0.50%.

In Japan, economic growth moderated as demand for exports were adversely impacted by a stronger Japanese yen against the U.S. dollar. The level of unemployment remained relatively low. Japanese equity market indices decreased during the first quarter of fiscal 2008 amid tighter global credit conditions. The Bank of Japan left the benchmark interest rate unchanged during the first quarter of fiscal 2008. 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 declined during the first quarter of fiscal 2008. In addition, the People’s Bank of China raised the benchmark lending rate by 0.18%.

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 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. Income before taxes recorded in Intersegment Eliminations was $4 million in the quarter ended February 29, 2008 and $6 million in the quarter ended February 28, 2007.

 

LOGO   53  


Table of Contents

INSTITUTIONAL SECURITIES

INCOME STATEMENT INFORMATION

 

     Three Months Ended  
     February 29,
2008
    February 28,
2007
 
     (dollars in millions)  

Revenues:

    

Investment banking

   $ 980     $ 1,032  

Principal transactions:

    

Trading

     3,394       4,029  

Investments

     (141 )     350  

Commissions

     840       691  

Asset management, distribution and administration fees

     31       25  

Interest and dividends

     13,660       14,021  

Other

     209       205  
                

Total revenues

     18,973       20,353  

Interest expense

     12,760       13,191  
                

Net revenues

     6,213       7,162  
                

Total non-interest expenses

     4,096       4,317  
                

Income from continuing operations before gains (losses) from unconsolidated investees and income taxes

     2,117       2,845  

Gains (losses) from unconsolidated investees

     2       (26 )

Provision for income taxes

     627       878  
                

Income from continuing operations

   $ 1,492     $ 1,941  
                

Investment Banking .     Investment banking revenues for the quarter ended February 29, 2008 decreased 5% from the comparable period of fiscal 2007. The decrease was due to lower revenues from fixed income and equity underwriting transactions, partially offset by higher revenues from merger, acquisition and restructuring activities. Advisory fees from merger, acquisition and restructuring transactions were $444 million, an increase of 19% from the comparable period of fiscal 2007, reflecting higher revenues from completed transactions. Underwriting revenues were $536 million, a decrease of 19% from the comparable period of fiscal 2007. Equity underwriting revenues decreased 13% to $261 million. Fixed income underwriting revenues decreased 23% to $275 million. The decrease in underwriting activity was consistent with a decline in industry-wide activity.

At February 29, 2008, the backlog for investment banking transactions remained relatively robust given market conditions that continue to be challenging. 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 .     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.

 

  54   LOGO


Table of Contents

Total sales and trading revenues decreased 7% from the comparable period of fiscal 2007. Lower fixed income sales and trading revenues and increased net losses from other sales and trading revenues were partially offset by record equity sales and trading revenues.

Sales and trading revenues include the following:

 

     Three Months Ended  
     February 29,
2008(1)
    February 28,
2007(1)
 
     (dollars in millions)  

Equity

   $ 3,329     $ 2,209  

Fixed income

     2,907       3,430  

Other

     (1,102 )     (89 )
                

Total sales and trading revenues

   $ 5,134     $ 5,550  
                

 

(1) Amounts include Principal transactions—trading, Commissions and Net interest revenues. 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.

Equity sales and trading revenues increased 51% to a record $3,329 million. 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 lower revenues from principal trading strategies. Revenues from derivative products and equity cash products benefited from strong customer flows and higher market volatility. Record prime brokerage revenues reflected 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 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 2 to the condensed consolidated financial statements). Revenues included approximately $321 million due to the widening of the Company’s credit spreads during the quarter 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.

Fixed income sales and trading revenues were $2,907 million, 15% lower than the first quarter of fiscal 2007. The first quarter of fiscal 2008 reflected record results in interest rate, credit and currency products and higher revenues from commodities, partially offset by losses in residential and commercial mortgage loan products. Writedowns on mortgage proprietary trading products of $1.2 billion were primarily due to a broadening decline in the residential and commercial mortgage sector. The decline in the Company’s residential mortgage loan activities reflected the difficult market conditions, 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 February 29, 2008.

Interest rate, credit and currency product revenues increased 46%, reflecting higher revenues from interest rate, credit and foreign exchange products and record revenues in emerging markets, partially offset by writedowns related to exposure to monoline insurers (see “Impact of Credit Market Events—Monoline Insurers” herein). Revenues from interest rate and credit trading products benefited from strong customer flows and higher levels of market volatility. Higher revenues from credit trading products also reflected favorable positioning as credit spreads widened during the first quarter of fiscal 2008. Commodity revenues benefited from strong customer flows and increased 25%, primarily due to higher trading results from agricultural products and oil liquids, partially offset by lower revenues from electricity and natural gas products. 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

 

LOGO   55  


Table of Contents

Note 2 to the condensed consolidated financial statements). Revenues increased by approximately $527 million due to the widening of the Company’s credit spreads during the quarter 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.

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 the first quarter of fiscal 2008, other sales and trading losses were $1,102 million. Included in the $1,102 million were net losses of approximately $910 million (mark-to-market valuations of approximately $2.1 billion, net of gains on hedges of approximately $1.2 billion) associated with loans and commitments largely related to “event-driven” lending to non-investment grade companies and the writedown of securities in the Company’s domestic subsidiary banks (see “Impact of Credit Market Events” 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 the first quarter of fiscal 2008. 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 is taking longer than in the past. Widening credit spreads for non-investment grade loans could 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 3, “Quantitative and Qualitative Disclosures about Market Risk—Credit Risk.”

Principal Transactions Investments.     Principal transaction net investment losses aggregating $141 million were recognized in the quarter ended February 29, 2008 as compared with net investment gains of $350 million in the quarter ended February 28, 2007. The decrease was primarily related to net losses from the Company’s investments in passive limited partnership interests associated with the Company’s real estate funds and investments related to certain employee deferred compensation and co-investment plans.

Other.     Other revenues increased 2%. The increase was primarily attributable to higher sales of benchmark indices and risk management analytic products, partially offset by lower revenues related to the operation of pipelines, terminals and barges and the distribution of refined petroleum products associated with TransMontaigne and lower revenues associated with Saxon.

Non-Interest Expenses.     Non-interest expenses decreased 5%, primarily reflecting a decrease in compensation and benefits expense, partially offset by higher non-compensation expenses. Compensation and benefits expense decreased 15%, primarily reflecting lower incentive-based compensation accruals due to lower net revenues, partially offset by severance-related expenses of $130 million recorded in the first quarter of fiscal 2008. Excluding compensation and benefits expense, non-interest expenses increased 24%, reflecting increased levels of business activity. Brokerage, clearing and exchange fees increased 25%, primarily reflecting substantially increased equity and fixed income trading activity. Information processing and communications expense increased 15%, primarily due to higher market data and data processing costs. Marketing and business development expense increased 24%, primarily due to a higher level of business activity. Other expenses increased 66%, primarily reflecting higher regulatory and litigation costs.

 

  56   LOGO


Table of Contents

GLOBAL WEALTH MANAGEMENT GROUP

INCOME STATEMENT INFORMATION

 

     Three Months Ended  
     February 29,
2008
    February 28,
2007
 
     (dollars in millions)  

Revenues:

    

Investment banking

   $ 104     $ 166  

Principal transactions:

    

Trading

     177       129  

Investments

     (4 )     (2 )

Commissions

     363       315  

Asset management, distribution and administration fees

     716       729  

Interest and dividends

     302       274  

Other

     39       38  
                

Total revenues

     1,697       1,649  

Interest expense

     91       138  
                

Net revenues

     1,606       1,511  
                

Total non-interest expenses

     1,352       1,285  
                

Income from continuing operations before income taxes

     254       226  

Provision for income taxes

     95       87  
                

Income from continuing operations

   $ 159     $ 139  
                

Investment Banking.     Investment banking revenues decreased 37%, primarily due to lower underwriting activity across equity and unit trust products, partially offset by an increase in fixed income underwriting activity. The first quarter of fiscal 2007’s equity underwriting results included a significant closed end fund offering.

Principal Transactions—Trading.     Principal transaction trading revenues increased 37%, primarily due to higher revenues from municipal, government and corporate fixed income securities, partially offset by losses associated with investments related to certain employee deferred compensation plans.

Commissions.     Commission revenues increased 15% reflecting higher client activity.

Asset Management, Distribution and Administration Fees.     Asset management, distribution and administration fees decreased 2%, primarily reflecting the discontinuance of certain fee-based brokerage programs in the fourth quarter of fiscal 2007 and a change in the classification of sub-advisory fees due to modifications of certain customer agreements, partially offset by growth in other fee-based products.

Client assets in fee-based accounts decreased 8% to $185 billion at February 29, 2008 and represented 26% of total client assets compared with 29% at February 28, 2007. 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 nondiscretionary account launched in August 2007. Total client asset balances increased to $722 billion at February 29, 2008 from $690 billion at February 28, 2007, primarily due to higher client inflows. Client asset balances in households greater than $1 million increased to $491 billion at February 29, 2008 from $458 billion at February 28, 2007.

 

LOGO   57  


Table of Contents

Net Interest.     Net interest revenues increased 55%, primarily due to increased customer account balances in the bank deposit program. Balances in the bank deposit program rose to $33.4 billion at February 29, 2008 from $16.4 billion at February 28, 2007.

Non-Interest Expenses.     Non-interest expenses increased 5%, primarily reflecting an increase in compensation and benefits expense, partially offset by lower non-compensation expenses. Compensation and benefits expense increased 10%, primarily reflecting higher incentive-based compensation accruals related to higher net revenues and severance-related expenses of $19 million recorded in the first quarter of fiscal 2008. Excluding compensation and benefits expense, non-interest expenses decreased 7%. Occupancy and equipment increased 6%, primarily due to an increase in space costs and branch renovations. Marketing and business development expense increased 14%, primarily due to a higher level of business activity. Professional service expenses decreased 32%, primarily due to the change in the classification of sub-advisory fees relating to certain customer agreements. Other expenses increased 6%, primarily due to an increase in the reserve for debit card fraud and higher FDIC insurance premiums related to the bank deposit program, partially offset by lower litigation expenses.

 

  58   LOGO


Table of Contents

ASSET MANAGEMENT

INCOME STATEMENT INFORMATION

 

     Three Months Ended
     February 29,
2008
    February 28,
2007
     (dollars in millions)

Revenues:

    

Investment banking

   $ 26     $ 31

Principal transactions:

    

Trading

     (179 )     —  

Investments

     (201 )     532

Commissions

     4       6

Asset management, distribution and administration fees

     845       768

Interest and dividends

     15       14

Other

     71       34
              

Total revenues

     581       1,385

Interest expense

     38       17
              

Net revenues

     543       1,368
              

Total non-interest expenses

     704       989
              

(Loss) income before income taxes

     (161 )     379

(Benefit from) provision for income taxes

     (58 )     149
              

Net income (loss)

   $ (103 )   $ 230
              

Investment Banking.     Investment banking revenues decreased 16%, primarily reflecting lower revenues from certain merchant banking products and unit trust sales.

Principal Transactions Trading.     The first quarter of fiscal 2008 primarily included losses of $187 million related to structured investment vehicles. See “Impact of Credit Market Events—Structured Investment Vehicles” herein for further discussion.

Principal Transactions Investments.     Principal transaction net investment losses aggregating $201 million were recognized in the first quarter of fiscal 2008 as compared with gains of $532 million in the prior-year period. The current quarter included net investment losses associated with the Company’s real estate products, including those associated with deferred compensation and co-investment plans and alternative investments and lower investment gains in the Company’s private equity portfolio.

Asset Management, Distribution and Administration Fees.     Asset management, distribution and administration fees increased 10%, primarily due to higher fund management and administration fees resulting from an increase in assets and a more favorable asset mix. Average assets under management increased 14% to $585 billion as of February 29, 2008 from the prior-year period average of $512 billion. The increase was partially offset by lower performance fees from the alternatives business and lower distribution fees.

 

LOGO   59  


Table of Contents

Asset Management’s period-end and average customer assets under management or supervision were as follows:

 

     February 29,
2008
   February 28,
2007
   Average for the Three
Months Ended
           February 29,
2008
   February 28,
2007
     (dollars in billions)

Assets under management or supervision by distribution channel:

           

Americas Retail Morgan Stanley brand

   $ 58    $ 62    $ 61    $ 62

Americas Retail Van Kampen brand

     88      96      94      96

Americas Intermediary(1)

     64      61      66      60

U.S. Institutional

     123      110      125      107

Non-U.S.

     128      102      129      97
                           

Total long-term assets under management or supervision

     461      431      475      422
                           

Institutional money markets/liquidity

     76      52      71      51

Retail money markets

     33      33      32      34
                           

Total money markets

     109      85      103      85
                           

Total assets under management or supervision

     570      516      578      507

Share of minority interest assets(2)

     7      5      7      5
                           

Total

   $ 577    $ 521    $ 585    $ 512
                           

Assets under management or supervision by asset class:

           

Equity

   $ 235    $ 245    $ 249    $ 244

Fixed income

     101      94      102      93

Money market

     109      85      103      85

Alternatives(3)

     111      77      110      71
                           

Subtotal

     556      501      564      493

Unit trusts

     14      15      14      14
                           

Total assets under management or supervision

     570      516      578      507

Share of minority interest assets(2)

     7      5      7      5
                           

Total

   $ 577    $ 521    $ 585    $ 512
                           

 

(1) Americas Intermediary channel primarily represents client flows through defined contribution, insurance and bank trust platforms.
(2) Amounts represent Asset Management’s proportional share of assets managed by entities in which it owns a minority interest.
(3) 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.

 

  60   LOGO


Table of Contents

Activity in Asset Management’s assets under management or supervision were as follows:

 

     Three Months Ended  
     February 29,
2008
    February 28,
2007
 
     (dollars in billions)  

Balance at beginning of period

   $ 597     $ 496  

Net flows by distribution channel:

    

Americas Retail Morgan Stanley brand

     (2 )     (2 )

Americas Retail Van Kampen brand

     (3 )     —    

Americas Intermediary(1)

     1       1  

U.S. Institutional

     1       —    

Non-U.S.

     —         5  
                

Net (outflows)/inflows excluding money markets

     (3 )     4  
                

Money market net flows:

    

Institutional

     8       3  

Retail

     1       (2 )
                

Total money market net flows

     9       1  
                

Net market (depreciation)/appreciation

     (26 )     14  
                

Total net (decrease)/increase

     (20 )     19  

Acquisitions

     —         6  
                

Balance at end of period

   $ 577     $ 521  
                

 

(1) Americas Intermediary channel primarily represents client flows through defined contribution, insurance and bank trust platforms.

Net outflows (excluding money markets) during the quarter ended February 29, 2008 were primarily associated with Americas Retail Morgan Stanley and Van Kampen brand products, partially offset by positive flows into Americas Intermediary and U.S. Institutional products. Money market net flows for the quarter were primarily associated with positive flows into institutional liquidity assets.

Other.     Other revenues increased 109%, primarily due to revenues associated with Lansdowne Partners (“Lansdowne”), a London-based investment manager in which the Company has a minority interest.

Non-Interest Expenses.     Non-interest expenses decreased 29%, primarily reflecting a decrease in compensation and benefits expense. Compensation and benefits expense decreased 46%, primarily reflecting lower incentive-based compensation accruals due to lower net revenues and lower expenses associated with certain employee deferred compensation plans. Excluding compensation and benefits expense, non-interest expenses increased 6%. Brokerage, clearing and exchange fees increased 11%, primarily due to increased fee sharing related to increased assets under management. Professional services expense decreased 19%, primarily due to lower sub-advisory fees. Other expenses increased 38%, primarily due to higher minority interest and other miscellaneous expense.

 

LOGO   61  


Table of Contents

Impact of Credit Market Events.

Overview.

The systematic risk reduction in the markets that occurred in the latter half of fiscal 2007 continued in the first quarter of fiscal 2008 after an extended period of global liquidity and historically low interest rates. Continued concerns about the impact of subprime loans caused the subprime-related and broader credit markets to deteriorate further, with lower levels of liquidity and price transparency for certain credit products. These difficult market conditions adversely affected “event-driven” lending transactions, U.S. subprime and non-subprime residential mortgage products, commercial real estate products, structured investment vehicles and monoline insurers.

The results for the first quarter of fiscal 2008 included net losses of approximately $910 million (mark-to-market valuations of approximately $2.1 billion net of gains on hedges of approximately $1.2 billion) associated with loans and loan commitments largely related to “event-driven” lending transactions to non-investment grade companies. The losses included markdowns of leveraged loan commitments associated with “event-driven” lending 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 first quarter of fiscal 2008. 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 is taking longer than in the past. Widening credit spreads for non-investment grade loans could result in additional writedowns for these loans and commitments. For further information about the Company’s corporate lending activities, see Item 3, “Quantitative and Qualitative Disclosures about Market Risk—Credit Risk.”

In the first quarter of fiscal 2008, the Company recorded mortgage proprietary trading net writedowns of approximately $1.2 billion, half of which was related to U.S. subprime exposures. The $1.2 billion reflected net writedowns on U.S. subprime trading positions including super senior derivative positions and subprime residuals. The $1.2 billion also included net writedowns on non-subprime residential mortgages. See “Non-subprime Residential Mortgages and Commercial Mortgage-backed Securities” herein.

In addition, the Company recorded writedowns of approximately $204 million related to mortgage-related securities portfolios in the Company’s domestic subsidiary banks (see “Subsidiary Banks” herein).

The Company also recognized losses of $187 million in the first quarter of fiscal 2008 related to investments issued by structured investment vehicles (see “Structured Investment Vehicles” herein).

The Company continues to have exposure to real estate and lending-related markets and instruments, and, as market conditions continue to evolve, the fair value of these other positions could further deteriorate (see “Results of Operations—Asset Management” herein for discussion of losses related to real estate products). Additionally, given the current challenges in the financial markets, it is possible that declines in the estimated fair value of the Company’s businesses may occur which could result in a future goodwill impairment charge.

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 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

 

  62   LOGO


Table of Contents

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; or (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”). 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 channel 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. 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 of the Form 10-K.

 

LOGO   63  


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 quarter ended February 29, 2008. Net exposure as of November 30, 2007 is also presented. 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 such that actual losses could exceed the amount of Net Exposure. See Note 1 to the condensed consolidated financial statements for a description regarding valuation of these instruments. See “Quantitative and Qualitative Disclosures about Market Risk—Credit Risk” in Part II, Item 7A of the Form 10-K for a further description of how credit risk is monitored.

 

     Statement
of Financial
Condition

February 29,
2008(1)
    Profit and
(Loss)
Three Months
Ended

February 29,
2008
    Net Exposure
February 29,
2008
    Net Exposure
November 30,
2007
 
     (dollars in billions)  

Super Senior Derivative Exposure:

        

Mezzanine

   $ (8.5 )   $ (0.5 )   $ 2.8     $ 3.9  

CDO squared(3)

     —         —         —         0.1  
                                

Total ABS CDO super senior derivative exposure

   $ (8.5 )   $ (0.5 )   $ 2.8     $ 4.0  
                                

Other CDO Exposure:

        

ABS CDO CDS

   $ 2.4     $ 0.5     $ (1.0 )   $ (1.5 )

ABS CDO bonds

     0.8       (0.2 )     0.8       1.1  
                                

Total other CDO exposure

   $ 3.2     $ 0.3     $ (0.2 )   $ (0.4 )
                                

Subtotal ABS CDO-related exposure(2)

   $ (5.3 )   $ (0.2 )   $ 2.6     $ 3.6  
                                

U.S. Subprime Mortgage-Related Exposure:

        

Loans

   $ 0.5     $   —       $ 0.5     $ 0.6  

Total rate-of-return swaps

     —           —         0.1       —    

ABS bonds

     1.9       (0.4 )     1.9       2.7  

ABS CDS

     10.5       0.6       (3.3 )     (5.1 )
                                

Subtotal U.S. subprime mortgage-related exposure

   $ 12.9     $ 0.2     $ (0.8 )   $ (1.8 )
                                

Total U.S. subprime trading exposure

   $ 7.6     $   —       $ 1.8     $ 1.8  
                                

 

(1) 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 $7.6 billion is reflected in the Company’s condensed consolidated statement of financial condition as follows: Financial instruments owned of $15.4 billion and Financial instruments sold, not yet purchased of $7.8 billion.
(2) 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 18% – 26% implied by the ABX indices. These cumulative loss levels, at a severity rate of 55%, imply defaults in the range of 52% – 61% for 2005 and 2006 outstanding mortgages.
(3) Refers to CDOs where the collateral is comprised entirely of another CDO security.

 

  64   LOGO


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 February 29, 2008 and November 30, 2007, the securities portfolios totaled $9.6 billion and $9.9 billion, respectively, consisting primarily of AAA-rated ABS and residential mortgage-backed securities. Of these total amounts, $4.7 billion and $5.5 billion were subprime mortgage-related securities as of February 29, 2008 and November 30, 2007, respectively.

Non-subprime Residential Mortgages and Commercial Mortgage-backed Securities.

The Company continues to have exposure to non-subprime residential mortgages which include residential mortgage-backed securities bonds, residential Alt-A (a residential mortgage loan categorization that falls between prime and subprime) and European mortgage loans. Statement of financial condition amounts for non-subprime residential mortgages were $14.5 billion and $16.5 billion as of February 29, 2008 and November 30, 2007, respectively. Net exposure amounts as of February 29, 2008 and November 30, 2007 were $8.7 billion and $10.9 billion, respectively.

The Company also has exposure to commercial mortgage-backed securities (“CMBS”). Statement of financial condition amounts for CMBS were $23.5 billion and $31.5 billion as of February 29, 2008 and November 30, 2007, respectively. Net exposure amounts as of February 29, 2008 and November 30, 2007 were $11.6 billion and $17.5 billion, respectively.

See Note 1 to the condensed consolidated financial statements for a description regarding valuation of these instruments.

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 4 to the condensed 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-SPEs/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; and

 

LOGO   65  


Table of Contents
   

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.

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 the second half of fiscal 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 at amortized cost approximately $900 million of such securities from the Funds during fiscal 2007 and $217 million of such securities during the first quarter of fiscal 2008. During the first quarter of fiscal 2008, the Company recorded losses of $187 million on these securities. The carrying value of the purchased securities still held by the Company as of February 29, 2008 was $588 million. Such positions are reflected at fair value, and presented in Financial instruments owned—Corporate and other debt in the condensed consolidated statements of financial condition. Subsequent to February 29, 2008, the Company has not purchased additional securities from the Funds. The Company has no obligation to purchase any additional securities from the Funds in the future. The Funds continue to have investments in securities issued by SIVs, with an aggregate face value of $3.6 billion as of February 29, 2008 compared with $8.2 billion as of November 30, 2007.

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 direct exposure to Monolines is limited to bonds that are insured by Monolines and as counterparties to derivative contracts. The Company’s direct exposure to Monolines at February 29, 2008 consisted primarily of ABS bonds of $1.3 billion in the Subsidiary Banks’ portfolio (see “Subsidiary Banks”) that are collateralized by first and second lien subprime mortgages enhanced by financial guarantees, $2.6 billion in insurance municipal bond securities and $800 million in net counterparty exposure. The Company’s direct exposure to Monolines at November 30, 2007 consisted primarily of ABS bonds of $1.5 billion in the Subsidiary Banks’ portfolio, $1.3 billion in insurance municipal bond securities and $800 million in net counterparty exposure. The increase in direct exposure in the first quarter of fiscal 2008 reflects the Company’s support for clients of the Company’s municipal business, partially offset by a writedown of approximately $600 million.

ASF Framework.

In December 2007, the American Securitization Forum (“ASF”) issued the “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans” (the “ASF Framework”). The overall purpose of the ASF Framework is to provide recommended guidance for servicers to streamline borrower evaluation procedures and to facilitate the effective use of all forms of foreclosure and loss prevention efforts, including refinancings, forbearances, workout plans, loan modifications, deeds-in-lieu and short sales or short payoffs. The ASF Framework is focused on subprime first-lien adjustable rate residential mortgages loans that have an initial fixed rate period of 36 months or less, are included in securitized pools, were originated between January 1, 2005 and July 31, 2007, and have an initial interest rate reset date between January 1, 2008 and July 31, 2010 (“subprime ARM loans”).

The ASF Framework categorizes the population of subprime ARM loans into three segments. Segment 1 includes current loans, as defined, where the borrower is likely to be able to refinance into an available mortgage product. It is expected that borrowers in this category should refinance their loans, if they are unable or unwilling to meet their reset payment. Segment 2 includes current loans where the borrower is unlikely to be able to refinance and meet specific criteria related to Fair Isaac Corporation (or “FICO”) scores and expected payment increase due to the initial adjustment of the interest rate. Borrowers in this segment are eligible for a fast track

 

  66   LOGO


Table of Contents

loan modification under which the interest rate will be kept at the existing rate, generally for five years following the upcoming reset. The ASF Framework indicates that for Segment 2 loans, the servicer can presume that the borrower would be unable to pay pursuant to the original terms of the loan after the interest rate reset, and thus, borrower default on the loan is “reasonably foreseeable” in absence of a modification. Segment 3 includes loans where the borrower is not current or which do not otherwise qualify for Segment 1 or Segment 2. For loans in this category, the servicer will determine the appropriate loss mitigation approach in a manner consistent with the applicable servicing standard in the transaction documents, but without employing the fast track procedures described under Segment 2.

In January 2008, the SEC’s Office of Chief Accountant (the “OCA”) issued a letter (the “OCA Letter”) addressing accounting issues that may be raised by the ASF Framework. The OCA Letter concluded that the SEC would not object to continuing off-balance sheet accounting treatment for qualifying special purpose entities (“QSPEs”) that hold Segment 2 subprime ARM loans modified pursuant to the ASF Framework.

For those current loans that are accounted for off-balance sheet that are modified, but not as part of the ASF Framework above, the servicer must perform on an individual basis an analysis of the borrower and the loan to provide sufficient evidence to demonstrate that default on the loan is imminent or reasonably foreseeable.

The Company adopted the ASF Framework during the first quarter of fiscal 2008, but has not yet modified a significant volume of loans using the ASF Framework. The Company does not expect that its application of the ASF Framework will impact the off-balance sheet status of Company-sponsored QSPEs that hold Segment 2 subprime ARM loans and is currently evaluating the potential impact on its condensed consolidated statements of income. The total amount of assets owned by Company-sponsored QSPEs that hold subprime ARM loans (including those loans that are not serviced by the Company) as of February 29, 2008, was approximately $30.5 billion. Of this amount, approximately $11.8 billion relates to subprime ARM loans serviced by the Company. The Company’s retained interests in Company sponsored QSPEs that hold subprime ARM loans totaled approximately $272 million as of February 29, 2008.

 

LOGO   67  


Table of Contents

Other Matters.

The following matters are discussed in the Company’s notes to the condensed consolidated financial statements. For further information on these matters, please see the applicable note:

 

     Note

Accounting Developments:

  

Accounting for Uncertainty in Income Taxes

   1

Employee Benefit Plans

   1

Offsetting of Amounts Related to Certain Contracts

   1

Investment Company Accounting

   1

Dividends on Share-Based Payment Awards

   1

Business Combinations

   1

Noncontrolling Interests

   1

Transfers of Financial Assets and Repurchase Financing Transactions

   1

Disclosures about Derivative Instruments and Hedging Activities

   1

Income Taxes

   12

Discontinued Operations

   14

Business Disposition

   15

 

  68   LOGO


Table of Contents

Critical Accounting Policies.

The Company’s condensed 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 condensed consolidated financial statements). The Company believes that of its significant accounting policies (see Note 2 to the consolidated financial statements for the fiscal year ended November 30, 2007 included in the Form 10-K), the following 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 condensed 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 notes and certain junior subordinated debentures.

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. A hierarchy for inputs is 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. For further information on the fair value definition, Level 1, Level 2 and Level 3 hierarchy and related valuation techniques, see Note 1 to the condensed consolidated financial statements.

The Company’s Level 3 assets before the impact of counterparty netting across the levels of the fair value hierarchy were $78.2 billion and $73.7 billion as of February 29, 2008 and November 30, 2007, respectively, and represented approximately 15% as of both periods of the assets measured at fair value (7% of total assets as of both periods). Level 3 liabilities were $24.8 billion and $19.5 billion as of February 29, 2008 and November 30, 2007, respectively, and represented approximately 8% and 7%, respectively, of the Company’s liabilities measured at fair value.

During the quarter ended February 29, 2008, the Company reclassified approximately $2.0 billion of certain Corporate and other debt from Level 2 to Level 3. These reclassifications included transfers primarily related to loans and loan commitments largely related to “event-driven” transactions. The reclassifications were due to a reduction in recently executed transactions and market price quotations for these instruments such that the inputs for these instruments became less observable.

See Note 2 to the condensed consolidated financial statements for further information about the Company’s financial assets and liabilities that are accounted for at fair value.

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

 

LOGO   69  


Table of Contents

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 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. For more information regarding the Company’s risk management practices, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the Form 10-K.

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 result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

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 for

 

  70   LOGO


Table of Contents

potential losses related to litigation and regulatory proceedings and FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) for potential losses related to tax audits. 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 8 and 12 to the condensed consolidated financial statements for additional information on legal proceedings and tax examinations.

Special Purpose Entities.

The Company enters into a variety of transactions with 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 instruments. In most cases, these SPEs are deemed to be VIEs. Unless a VIE is determined to be a QSPE, the Company is required 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.

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.

QSPEs are not consolidated. 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 4 to the condensed consolidated financial statements).

 

LOGO   71  


Table of Contents

Liquidity and Capital Resources.

The Company’s senior management establishes the 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, interest rate and currency sensitivities of the Company’s asset and liability position. The Company’s Treasury Department and other control groups, assist in evaluating, monitoring and controlling the impact that the Company’s business activities have on its condensed consolidated statements of financial condition, liquidity and capital structure.

The Balance Sheet.

The Company actively monitors and evaluates the composition and size of its balance sheet. A substantial portion of the Company’s total assets consists of liquid marketable securities and short-term receivables arising principally from Institutional Securities sales and trading activities. The liquid nature of these assets provides the Company with flexibility in managing the size of its balance sheet.

The Company’s total assets increased to $1,090,896 million at February 29, 2008, from $1,045,409 million at November 30, 2007. The increase was primarily due to increases in financial instruments owned (largely driven by increases in derivative contracts, U.S. government and agency securities, other sovereign government obligations and corporate and other debt) and securities purchased under agreements to resell, partially offset by a decrease in securities received as collateral.

Within the sales and trading related assets and liabilities are transactions attributable to securities financing activities. As of February 29, 2008, securities financing assets and liabilities were $565 billion and $546 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 also 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 risk exposure on these transactions is mitigated by collateral maintenance policies that limit the Company’s credit exposure to customers. Included within securities financing assets was $49 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 a more relevant measure of financial risk than gross leverage 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.

Leverage ratios reflect 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

 

  72   LOGO


Table of Contents

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. , 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.

The following table sets forth the Company’s total assets, adjusted assets and leverage ratios as of February 29, 2008 and November 30, 2007 and for the average month-end balances during the quarter ended February 29, 2008:

 

        Balance at     Average Month-
End Balance
 
        February 29,
2008
    November 30,
2007
    For the Quarter Ended
February 29,

2008
 
        (dollars in millions, except ratio data)  

Total assets

  $ 1,090,896     $ 1,045,409     $ 1,083,685  

Less:  

  Securities purchased under agreements to resell     (143,097 )     (126,887 )     (130,731 )
  Securities borrowed     (243,695 )     (239,994 )     (243,297 )

Add:  

  Financial instruments sold, not yet purchased     171,111       134,341       155,337  
Less:   Derivative contracts sold, not yet purchased     (89,392 )     (71,604 )     (75,666 )
                         
 

Subtotal

    785,823       741,265       789,328  

Less:  

 

Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements

    (60,964 )     (61,608 )     (61,215 )
 

Assets recorded under certain provisions of SFAS No. 140 and FIN 46R

    (83,906 )     (110,001 )     (98,606 )
 

Goodwill and net intangible assets

    (4,061 )     (4,071 )     (4,081 )
                         

Adjusted assets

  $ 636,892     $ 565,585     $ 625,426  
                         

Common equity

  $ 32,180     $ 30,169     $ 31,202  

Preferred equity

    1,100       1,100       1,100  
                         

Shareholders’ equity

    33,280       31,269       32,302  

Junior subordinated debt issued to capital trusts

    10,621       4,876       9,185  
                         
 

Subtotal

    43,901       36,145       41,487  

Less:

 

Goodwill and net intangible assets

    (4,061 )     (4,071 )     (4,081 )
                         

Tangible shareholders’ equity

  $ 39,840     $ 32,074     $ 37,406  
                         

Leverage ratio(1)

    27.4x       32.6x       29.0x  
                         

Adjusted leverage ratio(2)

    16.0x       17.6x       16.7x  
                         

 

(1) Leverage ratio equals total assets divided by tangible shareholders’ equity.
(2) Adjusted leverage ratio equals adjusted assets divided by tangible shareholders’ equity.

The Company’s discipline in maintaining an appropriately sized balance sheet along with the adequate capital position has brought the leverage ratio down to 27.4x from 32.6x and the adjusted leverage ratio down to 16.0x from 17.6x.

Activity in the Quarter Ended February 29, 2008.

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 February 29, 2008, total capital was $198,210 million, an increase of $7,125 million from November 30, 2007.

 

LOGO   73  


Table of Contents

During the quarter ended February 29, 2008, the Company issued notes with a carrying value at quarter-end aggregating $15.9 billion, including non-U.S. dollar currency notes aggregating $3.7 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 February 29, 2008, the aggregate outstanding principal amount of the Company’s Senior Indebtedness (as defined in the Company’s senior debt indentures) was approximately $208 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 6.2 years at February 29, 2008. 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.

China Investment Corporation Investment.

In December 2007, the Company sold Equity Units which included contracts to purchase Company common stock 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 that were outstanding on November 30, 2007. CIC is a passive financial investor and has no special rights of ownership nor a role in the management of the Company. A substantial portion of the investment proceeds were treated as Tier 1 capital for regulatory capital purposes.

For a more detailed summary of the Equity Units, including the junior subordinated debentures issued to support trust common and trust preferred securities and the stock purchase contracts, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Part II, Item 7 of the Form 10-K and “Financial Statements and Supplementary Data—Note 28” in Part II, Item 8 of the Form 10-K.

Prior to the issuance of common stock upon settlement of the stock purchase contract, the impact of the Equity Units are 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 are 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 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 occurs (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.

The dilutive impact for the first quarter of fiscal 2008 was approximately 256,000 shares.

Equity Capital Management Policies.

The Company’s senior management views equity capital as an important source of financial strength. 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 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 February 29, 2008, the Company’s equity capital (which includes shareholders’ equity and junior subordinated debt issued to capital trusts) was $43,901 million, an increase of $7,756 million from November 30, 2007, primarily due to the CIC investment. The Company returns internally generated equity capital that is in

 

  74   LOGO


Table of Contents

excess of the needs of its businesses to its shareholders through common stock repurchases and dividends. During the quarter ended February 29, 2008, the Company did not purchase any of its common stock through the open market share repurchase program (see also “Unregistered Sales of Equity Securities and Use of Proceeds” in Part II, Item 2).

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 February 29, 2008, 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 March 2008, 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 $313.29 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 $0.31329).

Economic Capital.

The Company’s economic capital framework estimates the amount of equity capital required to support the businesses over a wide range of market environments while simultaneously satisfying regulatory, rating agency and investor requirements. The framework will evolve over time in response to changes in the business and regulatory environment and to incorporate improvements in modeling techniques.

Economic capital is assigned to each business segment and sub-allocated to product lines. Each business segment is capitalized as an independent operating entity. This process is intended to align equity capital with the risks in each business in order to allow senior management to evaluate returns on a risk-adjusted basis (such as return on equity and shareholder value added).

Economic capital is based on regulatory capital usage plus additional capital for stress losses. The Company assesses stress loss capital across various dimensions of market, credit, business and operational risks. 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. The difference between the Company’s Tier 1 equity and aggregate equity requirements denotes the Company’s unallocated capital position.

The following table presents the Company’s allocated average Tier 1 equity (“economic capital”) and average common equity for the quarters ended February 29, 2008 and November 30, 2007:

 

     Three Months
Ended February 29, 2008
   Three Months
Ended November 30, 2007
 
     Average
Tier 1
equity
   Average
common
equity
   Average
Tier 1
equity
    Average
common
equity
 
     (dollars in billions)  

Institutional Securities

   $ 27.5    $ 24.4    $ 28.0     $ 27.7  

Global Wealth Management Group

     1.6      1.5      1.6       1.7  

Asset Management

     3.2      3.8      3.1       3.9  

Unallocated capital

     1.5      1.5      (0.4 )     (0.4 )
                              

Total

   $ 33.8    $ 31.2    $ 32.3     $ 32.9  
                              

Tier 1 Equity allocated to the operating segments remained relatively flat in comparison to the prior quarter. The marginal decrease in Tier 1 equity allocated to Institutional Securities was driven by reductions in market risk. Additionally, the proportion of common equity allocated to the operating segments decreased due to the issuance of hybrid capital. 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.

 

LOGO   75  


Table of Contents

Liquidity and Funding Management Policies.

The primary goal of the Company’s liquidity management and funding activities is to ensure adequate funding over a wide range of market environments. Given the mix of the Company’s business activities, funding requirements are fulfilled through a diversified range of secured and unsecured financing.

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 without material 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 sufficient liquidity through the business cycle and during periods of financial distress.

Liquidity Management Policies.

The principal elements of the Company’s liquidity management framework are the Contingency Funding Plan (“CFP”), the Liquidity Reserves and the Cash Capital Policy. Comprehensive financing guidelines (secured funding, long-term funding strategy, surplus capacity, diversification, staggered maturities and committed credit facilities) support the Company’s target liquidity profile.

Contingency Funding Plan.     The Contingency Funding Plan is the Company’s primary liquidity risk management tool. The CFP models a potential, prolonged liquidity contraction over a one-year time period and sets forth a course of action to effectively manage a liquidity event. The CFP and liquidity risk exposures are evaluated on an on-going basis and reported to the Firm Risk Committee and other appropriate risk committees.

The Company’s CFP model is designed to be dynamic and scenarios incorporate 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 and no incremental unsecured debt issuance; (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 two-notch long-term credit 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.

The CFP is produced on a parent, bank subsidiary and non-bank subsidiary level to capture specific cash requirements and cash availability at various legal entities. The CFP assumes that the parent company does not have access to cash that may be held at certain 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 Reserves.     The Company seeks to maintain target liquidity reserves that are sized to cover daily funding needs and meet strategic liquidity targets as outlined in the CFP. These liquidity reserves are held in the form of cash deposits with banks and pools of unencumbered securities. The parent company liquidity reserve is managed globally and consists of cash deposits and unencumbered U.S. and European government bonds and other high-quality collateral. The U.S. component of unencumbered securities is all Federal Reserve repo eligible. The Company believes that diversifying the form in which its liquidity reserves (cash and securities) are maintained enhances its ability to quickly and efficiently source funding in a stressed environment. The Company’s funding requirements and target liquidity reserves may vary based on changes to the level and composition of its balance sheet, timing of specific transactions, client financing activity, market conditions and seasonal factors.

 

  76   LOGO


Table of Contents

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.

 

          Average Balance

Liquidity Reserve

   At
February 29, 2008
   For the Quarter
Ended February, 29, 2008
     (dollars in billions)

Parent

   $ 70    $ 71

Bank subsidiaries

     25      22

Non-bank subsidiaries

     28      29
             

Total

   $ 123    $ 122
             

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) drawdowns of unfunded commitments.

The Company seeks to maintain a surplus cash capital position. The Company’s equity capital of $43,901 million (including junior subordinated debt issued to capital trusts of $10,621 million) and long-term borrowings (debt obligations scheduled to mature in more than 12 months) of $154,309 million comprised the Company’s total capital of $198,210 million as of February 29, 2008, 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 the Americas, Europe and Asia.

The Company maintains a senior revolving credit agreement with a group of banks to support general liquidity needs, 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 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.

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 February 29, 2008, no borrowings were outstanding under the Credit Facility.

At February 29, 2008, the Company had a $15.9 billion consolidated stockholders’ equity surplus as compared with the Credit Facility’s covenant requirement.

In March 2008, the Company went to market with the annual renewal of the Credit Facility and expects to close on April 16, 2008 in a reduced amount with substantially similar terms. Given the growth of the Company’s

 

LOGO   77  


Table of Contents

liquidity reserves during fiscal 2007 and in fiscal 2008 as well as the robustness of its overall liquidity management framework, the Company has elected to reduce its Credit Facility amount in this year’s renewal.

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’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. The Company pursues a strategy of diversification of secured and unsecured 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 to manage exposure to refinancing risk in any one period.

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; letters of credit; unsecured bond borrowings; securities lending; buy/sell agreements; municipal reinvestments; promissory 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.

Secured Financing.     A substantial portion of the Company’s total assets consists of liquid marketable securities and short-term receivables arising principally from its Institutional Securities sales and trading activities. The liquid nature of these assets provides the Company with flexibility in financing these assets with collateralized borrowings.

The Company’s goal is to achieve an optimal mix of secured and unsecured funding through appropriate use of collateralized borrowings. 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.

On March 11, 2008, the Federal Reserve announced an expansion of its securities lending program to promote liquidity in the financing markets for Treasury and other collateral. Under this new Term Securities Lending

 

  78   LOGO


Table of Contents

Facility (“TSLF”), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (“MBS”), and non-agency AAA/Aaa-rated private-label residential MBS.

On March 16, 2008, the Federal Reserve announced that the Federal Reserve Bank of New York has been granted the authority to establish a Primary Dealer Credit Facility (“PDCF”). The PDCF provides overnight funding to primary dealers in exchange for a specified range of collateral. The Company may at times use the PDCF as an additional source of secured funding for its regular business operations.

Unsecured Financing.     The Company views long-term debt as a stable source of funding for core inventories and illiquid assets. 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 for the fiscal year ended November 30, 2007 included in the Form 10-K).

Short-Term Debt.     The Company’s unsecured short-term borrowings consist of commercial paper, bank loans, Federal Funds, bank notes and structured notes with maturities of twelve months or less at issuance. The primary source of unsecured short-term borrowings for the Company is commercial paper. The Company seeks to diversify commercial paper issuance by investor, region and currency by maintaining active programs in North America, Europe and Asia and by monitoring and managing investor concentration limits on a global basis.

The Company maintains a surplus of unused short-term funding sources to withstand unforeseen contractions 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.

 

     At
February 29, 2008
   At
November 30, 2007
     (dollars in millions)

Commercial paper

   $ 16,629    $ 22,596

Other short-term borrowings

     9,323      11,899
             

Total

   $ 25,952    $ 34,495
             

Deposits.     The Company’s bank subsidiaries’ primary source of funding includes bank deposit sweeps, federal funds purchased, certificates of deposit, money market deposit accounts, commercial paper and FHLB advances. As of February 29, 2008, the Company’s bank subsidiaries had total deposits of approximately $36 billion, an increase of approximately $5 billion from November 30, 2007.

Long-Term Debt.     The Company uses a variety of long-term debt funding sources to generate liquidity, taking into consideration the CFP and cash capital requirements. In addition, issuance of long-term debt allows the Company to reduce reliance on short-term credit sensitive instruments ( e.g. , commercial paper and other unsecured short-term borrowings). Financing transactions are structured to ensure staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients. 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.

During the quarter ended February 29, 2008, 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). As a result, for the quarter ended February 29, 2008, a principal amount of $16 billion of unsecured debt was issued (of which $5 billion of certain structured notes were not considered to be a component of the Company’s cash capital).

 

LOGO   79  


Table of Contents

Credit Ratings.

The Company relies on external sources to finance a significant portion of its day-to-day operations. The cost and availability of 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, management quality, franchise strength and diversification, risk appetite and management, liquidity, funding capacity and capital adequacy as well as the operating environment. 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 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 February 29, 2008, the amount of additional collateral that would be required in the event of a one-notch downgrade of the Company’s long-term credit rating was approximately $973 million. An additional amount of approximately $813 million would be required in the event of a two-notch downgrade. Of these amounts, $1,681 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 April 2, 2008, the Company’s senior unsecured credit ratings were as follows:

 

     Short-Term
Debt
   Long-Term
Debt
   Rating
Outlook

Dominion Bond Rating Service Limited

   R-1 (middle)    AA (low)    Stable

Fitch Ratings

   F1+    AA-    Negative

Moody’s Investors Service

   P-1    Aa3    Negative

Rating and Investment Information, Inc.

   a-1+    AA    Negative

Standard & Poor’s

   A-1+    AA-    Negative

 

  80   LOGO


Table of Contents

Commitments.

The Company’s commitments associated with outstanding letters of credit and other financial guarantees obtained to satisfy collateral requirements, investment activities, corporate lending and financing arrangements and mortgage lending as of February 29, 2008 are summarized below by period of expiration. Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements:

 

     Years to Maturity    Total
     Less
than 1
   1-3    3-5    Over 5    February 29,
2008
     (dollars in millions)

Letters of credit and other financial guarantees obtained to satisfy collateral requirements

   $ 11,719    $ 11    $ —      $ 1    $ 11,731

Investment activities

     527      220      97      699      1,543

Primary lending commitments(1)

     14,687      7,894      26,350      10,594      59,525

Secondary lending commitments(1)

     5      17      228      275      525

Commitments for secured lending transactions

     2,710      4,143      2,610      23      9,486

Commitments to enter into reverse repurchase agreements

     115,036      —        —        —        115,036

Commercial and residential mortgage-related commitments(1)

     4,654      —        —        —        4,654

Other commitments

     1,062      13      5      —        1,080
                                  

Total

   $ 150,400    $ 12,298    $ 29,290    $ 11,592    $ 203,580
                                  

 

(1) These commitments are recorded at fair value within Financial instruments owned and Financial instruments sold, not yet purchased in the condensed consolidated statements of financial condition (see Note 2 to the condensed consolidated financial statements).

For further description of these commitments, see Note 8 to the condensed consolidated financial statements.

Regulatory Requirements.

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 February 29, 2008, the Company was in compliance with the CSE capital requirements.

 

LOGO   81  


Table of Contents
Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Market Risk.

The Company uses Value-at-Risk (“VaR”) as one of a range of risk management tools. VaR values should be interpreted in light of the method’s strengths and limitations, which include, but are not limited to: historical changes in market risk factors may not be accurate predictors of future market conditions; VaR estimates represent a one-day measurement and do not reflect the risk of positions that cannot be liquidated or hedged in one day; and VaR estimates may not fully incorporate the risk of more extreme market events that are outsized relative to observed historical market behavior or reflect the historical distribution of results beyond the 95% confidence interval. A small proportion of market risk generated by trading positions 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 a further discussion of the Company’s VaR methodology and its limitations, and the Company’s risk management policies and control structure, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the Form 10-K.

The tables below present the following: the Company’s quarter-end Aggregate (Trading and Non-trading), Trading and Non-trading VaR (see Table 1 below); the Company’s quarterly average, high, and low Trading VaR (see Table 2 below); and the VaR statistics that would result if the Company were to adopt alternative parameters for its calculations, such as the reported confidence level (95% vs. 99%) for the VaR statistic or a shorter historical time series (four years vs. one year) of market data upon which it bases its simulations (see Table 3 below). Aggregate 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 presented below. Aggregate 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 February 29, 2008, 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 liabilities ( i.e. , those funding both trading and non-trading assets) corresponded to an increase in value of approximately $79 million for each +1 basis point (or 1/100 th of a percentage point) widening in the Company’s credit spread level as of February 29, 2008.

The table below presents 95%/one-day VaR for each of the Company’s primary risk exposures and on an aggregate basis at February 29, 2008 and November 30, 2007.

 

    Aggregate
(Trading and Non-trading)
  Trading   Non-trading

Table 1: 95% Total VaR

  95%/One-Day VaR at   95%/One-Day VaR at   95%/One-Day VaR at

Primary Market Risk Category

  February 29,
2008
  November 30,
2007
  February 29,
2008
  November 30,
2007
  February 29,
2008
  November 30,
2007
    (dollars in millions)

Interest rate and credit spread

  $ 83   $ 52   $ 74   $ 45   $ 33   $ 33

Equity price

    36     40     35     39     6     4

Foreign exchange rate

    24     24     24     25     1     1

Commodity price

    40     34     40     34     —       —  
                                   

Subtotal

    183     150     173     143     40     38

Less diversification benefit(1)

    76     67     73     65     6     5
                                   

Total VaR

  $ 107   $ 83   $ 100   $ 78   $ 34   $ 33
                                   

 

(1) 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.

 

  82   LOGO


Table of Contents

The Company’s Aggregate VaR at February 29, 2008 was $107 million compared with $83 million at November 30, 2007, The Company’s Trading VaR at February 29, 2008 was $100 million compared with $78 million at November 30, 2007. The increases in Aggregate VaR and Trading VaR were driven predominantly by an increase in interest rate and credit spread VaR. The increase in interest rate and credit spread VaR reflects higher levels of realized price volatility in securities that reference subprime mortgage pools and related financial instruments, whose change in value is modeled as a function of the underlying securities.

The Company views average Trading VaR over a period of time 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 the quarters ended February 29, 2008 and November 30, 2007, 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 the quarter ended February 29, 2008 increased to $97 million from $89 million for the quarter ended November 30, 2007, primarily driven by increases in interest rate and credit spread VaR, foreign exchange rate VaR, and commodity price VaR. The increase in interest rate and credit spread VaR was predominantly 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 quarter. The increase in interest rate and credit spread VaR during the quarter also reflects the reclassification effective November 30, 2007 of the Company’s bank subsidiaries portfolio of securities available for sale to Financial instruments owned in the condensed consolidated statement of financial condition. The increase in foreign exchange rate VaR was driven by increased exposure to foreign currencies. The increase in commodity price VaR was predominantly driven by increased exposure to petroleum products.

 

Table 2: 95% High/Low/Average Trading VaR    Daily 95%/One-Day VaR
for the Quarter Ended
February 29, 2008
   Daily 95%/One-Day VaR
for the Quarter Ended
November 30, 2007

Primary Market Risk Category

   High    Low    Average    High    Low    Average
     (dollars in millions)

Interest rate and credit spread

   $ 74    $ 42    $ 59    $ 68    $ 40    $ 53

Equity price

     44      31      37      50      31      41

Foreign exchange rate

     40      18      30      33      15      25

Commodity price

     44      33      38      42      31      35

Trading VaR

     110      78      97      107      74      89

Non-trading VaR

     48      29      37      61      21      36

Total VaR

     116      82      103      123      77      98

 

LOGO   83  


Table of Contents

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

   Average 95%/One-Day VaR
for the Quarter Ended
February 29, 2008
   Average 99%/One-Day VaR
for the Quarter Ended
February 29, 2008

Primary Market Risk Category

   Four-Year
Factor History
   One-Year
Factor History
   Four-Year
Factor History
   One-Year
Factor History
     (dollars in millions)

Interest rate and credit spread

   $ 59    $ 147    $ 168    $ 308

Equity price

     37      42      58      80

Foreign exchange rate

     30      26      43      35

Commodity price

     38      35      59      47

Trading VaR

     97      134      168      316

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 the quarter ended February 29, 2008 would have been $306 million and $531 million, respectively.

 

  84   LOGO


Table of Contents

Distribution of VaR Statistics and Net Revenues for the quarter ended February 29, 2008.

As shown in Table 2 above, the Company’s average 95%/one-day Trading VaR for the quarter ended February 29, 2008 was $97 million. The histogram below presents the distribution of the Company’s daily 95%/one-day Trading VaR for the quarter ended February 29, 2008. The most frequently occurring value was between $106 million and $109 million, while for approximately 91% of trading days during the quarter, VaR ranged between $82 million and $109 million.

LOGO

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 one day during the quarter ended February 29, 2008. 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.

 

LOGO   85  


Table of Contents

The histogram below shows the distribution of daily net trading revenue during the quarter ended February 29, 2008 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 the quarter ended February 29, 2008, the Company experienced net trading losses on eight days.

LOGO

Credit Risk.

For a further discussion of the Company’s credit risks, see “Quantitative and Qualitative Disclosures about Market Risks—Credit Risk” in Part II, Item 7A of the Form 10-K.

Credit Exposure 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” lending 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

 

  86   LOGO


Table of Contents

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.

The following table presents information about the Company’s corporate loans and commitments as of February 29, 2008. 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 February 29, 2008. Lending commitments represent legally binding obligations to provide funding to clients as of February 29, 2008 for both “relationship-driven” and “event-driven” lending 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.

At February 29, 2008 and November 30, 2007, the aggregate amount of investment grade loans was $15.6 billion and $13.0 billion, respectively, and the aggregate amount of non-investment grade loans was $10.7 billion and $10.9 billion, respectively. At February 29, 2008 and November 30, 2007, the aggregate amount of lending commitments outstanding was $59.5 billion and $70.2 billion, respectively. In connection with these business activities (which include corporate funded loans and lending commitments), the Company had hedges (which include “single name,” “sector” and “index” hedges) with a notional amount of $40.6 billion and $37.6 billion at February 29, 2008 and November 30, 2007, respectively. The table below shows the Company’s credit exposure from its corporate lending positions and commitments as of February 29, 2008. 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   Total Corporate
Lending
Exposure(2)(3)
  Corporate
Funded
Loans
  Total
Corporate
Lending
Commitments

Credit Rating(1)

  Less than 1   1-3   3-5   Over 5      
    (dollars in millions)

AAA

  $ 581   $ 260   $ 1,239   $ 425   $ 2,505   $ 364   $ 2,141

AA

    6,248     559     3,664     333     10,804     1,621     9,183

A

    7,674     3,349     8,481     224     19,728     2,431     17,297

BBB

    8,393     5,068     12,400     937     26,798     11,138     15,660
                                         

Investment grade

    22,896     9,236     25,784     1,919     59,835     15,554     44,281
                                         

Non-investment grade

    4,086     1,647     4,979     15,243     25,955     10,711     15,244
                                         

Total

  $ 26,982   $ 10,883   $ 30,763   $ 17,162   $ 85,790   $ 26,265   $ 59,525
                                         

 

(1) Obligor credit ratings are determined by the Institutional Credit Department using methodologies generally consistent with those employed by external rating agencies.
(2) Total corporate lending exposure includes both lending commitments and funded loans. Amounts exclude approximately $41 billion of notional amount of hedges.
(3) Total corporate lending exposure includes “event-driven” funded loans of $14.6 billion and “event-driven” lending commitments of $16.0 billion. Included in the $16.0 billion of “event-driven” loan commitments were $8.2 billion of commitments to non-investment grade borrowers that were accepted by the borrower but not yet closed, including amounts related to Clear Channel Communications, Inc.

 

LOGO   87  


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 as of February 29, 2008. 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   Cross-Maturity
and Cash
Collateral
Netting(3)
    Net Exposure
Post-Cash
Collateral
  Net Exposure
Post-
Collateral

Credit Rating(2)

  Less than 1   1-3   3-5   Over 5      
    (dollars in millions)

AAA

  $ 1,354   $ 2,287   $ 3,550   $ 11,444   $ (4,866 )   $ 13,769   $ 13,423

AA

    15,775     15,084     8,568     30,116     (39,376 )     30,167     27,589

A

    6,614     4,697     4,748     9,440     (11,757 )     13,742     13,341

BBB

    4,709     4,120     2,196     3,106     (4,630 )     9,501     8,102

Non-investment grade

    8,447     5,259     5,132     3,995     (8,184 )     14,649     9,982

Unrated(4)

    1,741     568     116     365     (368 )     2,422     184
                                           

Total

  $ 38,640   $ 32,015   $ 24,310   $ 58,466   $ (69,181 )   $ 84,250   $ 72,621
                                           

 

(1) 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.
(2) Obligor credit ratings are determined by the Institutional Credit Department using methodologies generally consistent with those employed by external rating agencies.
(3) 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.
(4) 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 as of February 29, 2008, 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   Cross-Maturity
and Cash
Collateral
Netting(1)
    Net Exposure
Post-Cash
Collateral
  Net Exposure
Post-
Collateral

Product Type

  Less than 1   1-3   3-5   Over 5      
    (dollars in millions)

Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts

  $ 5,811   $ 17,252   $ 19,294   $ 55,749   $ (50,520 )   $ 47,586   $ 43,758

Foreign exchange forward contracts and options

    11,543     1,383     155     91     (2,216 )     10,956     9,127

Equity securities contracts (including equity swaps, warrants and options)

    9,429     2,809     449     777     (6,631 )     6,833     3,526

Commodity forwards, options and swaps

    11,857     10,571     4,412     1,849     (9,814 )     18,875     16,210
                                           

Total

  $ 38,640   $ 32,015   $ 24,310   $ 58,466   $ (69,181 )   $ 84,250   $ 72,621
                                           

 

  88   LOGO


Table of Contents

 

(1) 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.

OTC Derivative Products—Financial Instruments Sold, Not Yet Purchased(1)

 

     Years to Maturity    Cross-Maturity
and Cash
Collateral
Netting(2)
    Total

Product Type

   Less than 1    1-3    3-5    Over 5     
     (dollars in millions)

Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts

   $ 6,958    $ 11,818    $ 13,947    $ 38,533    $ (41,968 )   $ 29,288

Foreign exchange forward contracts and options

     11,178      1,185      156      76      (1,616 )     10,979

Equity securities contracts (including equity swaps, warrants and options)

     8,883      3,948      2,020      1,405      (5,209 )     11,047

Commodity forwards, options and swaps

     12,008      9,203      2,226      2,008      (8,062 )     17,383
                                          

Total

   $ 39,027    $ 26,154    $ 18,349    $ 42,022    $ (56,855 )   $ 68,697
                                          

 

(1) Since these amounts are liabilities of the Company, they do not result in credit exposures.
(2) 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 February 29, 2008 and November 30, 2007 are summarized in the table below, showing the fair value of the related assets and liabilities by product:

 

     At February 29, 2008    At November 30, 2007

Product Type

   Assets    Liabilities    Assets    Liabilities
     (dollars in millions)

Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts

   $ 47,776    $ 29,504    $ 33,804    $ 19,515

Foreign exchange forward contracts and options

     10,956      10,955      7,755      9,372

Equity securities contracts (including equity swaps, warrants and options)

     20,777      30,156      19,913      27,887

Commodity forwards, options and swaps

     19,965      18,777      15,531      14,830
                           

Total

   $ 99,474    $ 89,392    $ 77,003    $ 71,604
                           

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 condensed 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 1 to the condensed 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 February 29, 2008, based on the domicile of the counterparty, approximately 6% of the Company’s credit

 

LOGO   89  


Table of Contents

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.

Industry Exposure.     The Company also monitors its credit exposure to individual industries. At February 29, 2008, 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: financial institutions, banks, consumer-related entities, utilities, sovereign, energy-related entities and telecommunications.

 

  90   LOGO


Table of Contents
Item 4. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

LOGO   91  


Table of Contents

Part II OTHER INFORMATION

Item 1. Legal Proceedings

In addition to the matters described in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007 (the “Form 10-K”) and those described below, 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 result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

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 the 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 for a particular future period, depending on, among other things, the level of the Company’s revenues or income for such period.

The following developments have occurred with respect to certain matters previously reported in the Form 10-K.

IPO Fee Litigation.

On remand, plaintiffs filed a motion for class certification on October 17, 2007, which defendants opposed.

Subprime-related Matters.

A shareholder derivative lawsuit was filed in the U.S. District Court for the Southern District of New York (the “SDNY”) during November 2007 asserting claims related in large part to losses caused by certain subprime-related trading positions and related matters. The complaint in that lawsuit, which is styled Steve Staehr, Derivatively on Behalf of Morgan Stanley v. John J. Mack, et al., was served on the Company on February 15, 2008. In January and February 2008, two purported class action complaints were filed in the SDNY asserting claims on behalf of participants in the Company’s 401(k) plan and employee stock ownership plan against the Company and other parties, including certain present and former directors and officers, under the Employee Retirement Income Security Act of 1974 (“ERISA”). The complaints are similar to certain ERISA-related complaints filed in the SDNY in December 2007 insofar as they relate in large part to subprime-related losses, and allege, among other things, that the Company’s stock was not a prudent investment and that risks associated with the Company’s stock and its financial condition were not adequately disclosed. On February 11, 2008, all of the pending actions asserting claims under ERISA related to the Company’s 401(k) and employee stock ownership plan were consolidated in a single proceeding in the SDNY, which is styled In re Morgan Stanley ERISA Litigation.

 

  92   LOGO


Table of Contents

Item 1A. Risk Factors

For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of the Form 10-K.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the quarterly period ended February 29, 2008.

Issuer Purchases of Equity Securities

(dollars in millions, except per share amounts)

 

Period

   Total
Number of
Shares
Purchased
   Average Price
Paid Per
Share
   Total Number of
Shares Purchased
As Part of Publicly
Announced Plans
or Programs (C)
   Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs

Month #1

(December 1, 2007—December 31, 2007)

           

Share Repurchase Program (A)

   —        N/A    —      $ 2,271

Employee Transactions (B)

   117,266    $ 51.23    N/A      N/A

Month #2

(January 1, 2008—January 31, 2008)

           

Share Repurchase Program (A)

   —        N/A    —      $ 2,271

Employee Transactions (B)

   484,270    $ 49.44    N/A      N/A

Month #3

(February 1, 2008—February 29, 2008)

           

Share Repurchase Program (A)

   —        N/A    —      $ 2,271

Employee Transactions (B)

   382,082    $ 47.15    N/A      N/A

Total

           

Share Repurchase Program (A)

   —        N/A    —      $ 2,271

Employee Transactions (B)

   983,618    $ 48.76    N/A      N/A

 

(A) On December 19, 2006, the Company announced that its Board of Directors authorized the repurchase of up to $6 billion of the Company’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. The Company’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 the Company common stock on the date the relevant transaction occurs, using a valuation methodology established by the Company.
(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 the Company deems appropriate.

Item 6. Exhibits

An exhibit index has been filed as part of this Report on Page E-1.

 

LOGO   93  


Table of Contents

SIGNATURE

Pursuant to the requirements 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.

 

MORGAN STANLEY

(Registrant)

By:

 

/s/    C OLM K ELLEHER         

 

Colm Kelleher

Executive Vice President and

Chief Financial Officer

By:

 

/ S /    P AUL C. W IRTH        

 

Paul C. Wirth

Controller and Principal Accounting Officer

Date: April 8, 2008

 

  94   LOGO


Table of Contents

EXHIBIT INDEX

MORGAN STANLEY

Quarter Ended February 29, 2008

 

Exhibit

No.

  

Description

10.1    Morgan Stanley 2006 Notional Leveraged Co-Investment Plan.
10.2    Directors’ Equity Capital Accumulation Plan as amended and restated as of December 11, 2007.
10.3    Amendment to 1993 Stock Plan for Non-Employee Directors, dated as of December 11, 2007.
10.4    Agreement dated as of July 21, 2005 between Morgan Stanley and Thomas R. Nides and amendment to agreement, dated as of February 8, 2008.
10.5    Agreement dated as of July 18, 2005 between Morgan Stanley and Gary G. Lynch and amendment to agreement, dated as of February 8, 2008.
10.6    Memorandum dated as of February 16, 2006 to Colm Kelleher regarding Expatriate Relocation Policy and European Tax Equalisation Policy.
10.7    Form of Award Certificate under the 2006 Notional Leveraged Co-Investment Plan.
10.8    Form of Award Certificate under the 2007 Notional Leveraged Co-Investment Plan for Certain Management Committee Members.
10.9    Form of Term Sheet under the Select Employees’ Capital Accumulation Program.
10.10    Form of Award Certificate for Discretionary Retention Awards of Stock Units to Certain Management Committee Members.
11    Statement Re: Computation of Earnings Per Common Share (The calculation of per share earnings is in Part I, Item 1, Note 10 to the Condensed Consolidated Financial Statements (Earnings per Share) and is omitted in accordance with Section (b)(11) of Item 601 of Regulation S-K).
12    Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings to Fixed Charges and Preferred Stock Dividends.
15    Letter of awareness from Deloitte & Touche LLP, dated April 7, 2008, concerning unaudited interim financial information.
31.1    Rule 13a-14(a) Certification of Chief Executive Officer.
31.2    Rule 13a-14(a) Certification of Chief Financial Officer.
32.1    Section 1350 Certification of Chief Executive Officer.
32.2    Section 1350 Certification of Chief Financial Officer.

 

E-1


Table of Contents

 

LOGO

Exhibit 10.1

MORGAN STANLEY

2006 NOTIONAL LEVERAGED CO-INVESTMENT PLAN

SECTION 1 . Purpose. The Morgan Stanley 2006 Notional Leveraged Co-Investment Plan (as may be amended from time to time, the “ Plan ”) has the purposes of: (i) providing the opportunity to a select group of management and highly compensated employees to enhance (A) the portion of any discretionary above base compensation that would otherwise be awarded to them in the form of Morgan Stanley equity compensation or other mandatory long-term incentive compensation or (B) any retention, new hire or similar awards that would be granted to such management and employees and (ii) facilitating the allocation of such compensation to the notional investment opportunities afforded by the Plan.

SECTION 2. Definitions . As used in the Plan, unless determined otherwise by the Firm and set forth in the applicable Award Certificate, the following terms shall have the indicated meanings:

Above Base Compensation ” means any compensation other than base salary that the Firm awards to an Eligible Person, before reduction for any applicable taxes. Nothing in the Plan shall obligate the Firm to award or pay any Above Base Compensation to any person.

Account ” means the bookkeeping account that the Firm establishes and maintains for a Participant pursuant to Section 7. An Account is established only for purposes of tracking a Notional Plan Investment and not to segregate or identify assets that may be used to make distributions or other payments under the Plan.

Accredited Investor ” means an Eligible Person who is able to represent at the time of such Eligible Person’s submission of an Allocation Form that:

(i) Such Eligible Person’s net worth, either individually or jointly with such Eligible Person’s spouse, exceeds $1,000,000; or

(ii) Such Eligible Person had individual income (before elective deferrals) in excess of $200,000 in each of the two most recent years and has a reasonable expectation of reaching the same level in the current year; or

(iii) Such Eligible Person had joint income with such Eligible Person’s spouse in excess of $300,000 in each of the two most recent years and has a reasonable expectation of reaching the same level in the current year.


Income does not include the value of any mandatory equity-based or other long-term incentive compensation awards.

Administrator ” means one or more officers of the Firm to whom the Committee, in its sole discretion, delegates all or some of its authority and responsibilities to administer the Plan. Such officers are authorized to sub-delegate some or all of such authority and responsibilities to the Executive Compensation Department, another committee of the Firm and/or one or more officers of the Firm, and any person or persons to whom are sub-delegated all or some of such authority and responsibilities is also, to the extent of such sub-delegation, the “Administrator”. Only the Committee is authorized to make any decision or amendment regarding the participation in the Plan or any interest in the Plan held by any member of the Management Committee of Morgan Stanley or any employee who is an “executive officer” of Morgan Stanley under United States federal securities laws.

Allocation ” shall have the meaning set forth in Section 5(a).

Allocation Form ” shall have the meaning set forth in Section 5(a).

Allocation Preference ” shall have the meaning set forth in Section 5(a).

Associated Employee Fund ” means, with respect to any reference investment underlying a Notional Plan Investment, a co-investment or feeder fund that is available primarily to employees of the Firm and is associated with such reference investment.

Award Certificate ”, with respect to any Participant, means a written document (including in electronic form) that sets forth the terms and conditions of such Participant’s participation in the Plan. A Participant’s participation in the Plan shall be governed by the Plan, such Participant’s Award Certificate and, if and to the extent applicable pursuant to Section 16(e), the International Supplement.

Board ” means the Board of Directors of Morgan Stanley.

Cancellation Event ”, with respect to any Participant, shall have the meaning set forth in such Participant’s Award Certificate. Cancellation Events in respect of any given Fiscal Year shall be substantially similar to such events as set forth in the annual year-end equity compensation awards granted to such Participant.

Closed-End Investment ” means a Notional Plan Investment in a reference investment that generally does not permit redemptions by investors but makes distributions to investors from time to time following the sale, transfer or other disposition of its investments.

 

2


Code ” means the United States Internal Revenue Code of 1986, as amended.

Committee ” means the Compensation, Management Development and Succession Committee of the Board, any successor committee thereto or any other committee of the Board appointed by the Board with the powers of the Committee under the Plan, or any subcommittee appointed by such Committee.

Descriptive Materials ” means all brochures, letters, memoranda or other documents from the Firm to a Participant regarding the Plan, including all electronic-based materials.

Distribution Date ” means, (i) with respect to a Closed-End Investment, the Scheduled Distribution Date and all Subsequent Distribution Dates (including the Final Distribution Date) and (ii) with respect to an Open-End Investment, the Scheduled Distribution Date.

Eligible Person ” means a professional employee of the Firm who satisfies the eligibility requirements set forth in Section 4.

Executive Compensation Department ” means Morgan Stanley’s Executive Compensation Department or any other department of Morgan Stanley that succeeds to the functions of the Executive Compensation Department.

Final Distribution Date ” means, with respect to any Participant, the date, specified in such Participant’s Award Certificate, on which the Firm shall make its final distribution to such Participant in accordance with Section 10(a)(iii). The Final Distribution Date in respect of any given Fiscal Year shall be January 15 of the thirteenth Fiscal Year following the end of such Fiscal Year ( e.g. , in respect of the 2006 Fiscal Year, the Final Distribution Date shall be January 15, 2019).

Firm ” means Morgan Stanley together with its subsidiaries and other affiliates.

Fiscal Year ” and “ Fiscal Quarter ” mean Morgan Stanley’s Fiscal Year and Morgan Stanley’s Fiscal Quarter, respectively.

International Supplement ” shall have the meaning set forth in Section 16(e).

Investment Committee ” means a committee of two or more officers of the Firm to whom the Administrator delegates the authority and responsibilities to select Notional Plan Investments.

Legal Requirement means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance or other legal requirement.

 

3


LIBOR ” means the London Interbank Offering Rate.

Morgan Stanley ” means Morgan Stanley, a Delaware corporation, or any successor thereto.

Morgan Stanley Applicable Rate ” means, for any period, the rate at which notional interest with respect to any Notional Advance shall accrue from the date when it is used to notionally fund a Notional Plan Investment until and to the extent such Notional Advance (or portion thereof) is reduced by any Proceeds. Unless otherwise determined by the Firm, the Morgan Stanley Applicable Rate shall be equal to the sum of (i) 90-day LIBOR, as determined before the beginning of the applicable period, plus (ii) 50 basis points. Pursuant and subject to Section 3(a)(iv), the Firm reserves the right to revise the Morgan Stanley Applicable Rate at any time and from time to time.

Notional Advance ” means, with respect to any Participant, the notional amount that Morgan Stanley adds to that portion of such Participant’s Participant Allocation that is notionally invested in a Notional Plan Investment in accordance with Section 6.

Notional Plan Investment ” means an investment designated by the Firm as a reference investment for the benefit of the Plan. Reference investments underlying Notional Plan Investments include proprietary investment funds of the Firm or “funds of funds” of the Firm that include investment funds sponsored or offered by third parties. For the avoidance of doubt, a Participant’s interest in any Notional Plan Investment shall be notional.

Open-End Investment ” means a Notional Plan Investment in a reference investment that generally does not make distributions to its investors but permits investors to redeem their interest in the fund from time to time.

Open-End Investment Proceeds ” shall have the meaning set forth in Section 10(b).

Participant ” means an Eligible Person who participates in the Plan.

Participant Allocation ” means, with respect to any Participant, (i) that portion of such Participant’s Above Base Compensation that would otherwise be awarded in the form of Morgan Stanley equity compensation or other mandatory long-term incentive compensation that is allocated to the Plan or (ii) such Participant’s Special Award.

Participant Applicable Rate ” means, for any period, the rate at which notional interest shall accrue with respect to:

(i) Each Participant’s Participant Allocation (or the portion thereof), from the date on which such Participant’s Above Base Compensation would

 

4


otherwise have been paid (or, in the case of a Special Award, the grant date of such Special Award) until the Firm notionally allocates such Participant Allocation (or such portion) to one or more Notional Plan Investments;

(ii) Each Participant’s Participant Allocation, if the Firm determines that a Participant’s Participant Allocation shall not be notionally invested in Notional Plan Investments, from the date on which such Participant’s Above Base Compensation would otherwise have been paid (or, in the case of a Special Award, the grant date of such Special Award) until the Scheduled Distribution Date;

(iii) The Proceeds relating to a Realization (or partial Realization) with respect to a Closed-End Investment, from the date of such Realization until the applicable Distribution Date, as further set forth in Section 10(a);

(iv) The Proceeds relating to a Realization (or partial Realization) with respect to an Open-End Investment, from the date of such Realization until the Scheduled Distribution Date, as further set forth in Section 10(b);

(v) The Proceeds relating to a Realization (or partial Realization) with respect to a Notional Plan Investment, from the date of the applicable Distribution Date to the actual date of distribution permitted by Section 11(a); and

(vi) Each Participant’s Plan Termination Value, from the date of any termination of the Plan until the distribution of such Plan Termination Value on the applicable Distribution Date.

Unless otherwise determined by the Firm, the Participant Applicable Rate shall be equal to 90-day LIBOR, as determined before the beginning of the applicable period. Pursuant and subject to Section 3(a)(iv), the Firm reserves the right to revise the Participant Applicable Rate at any time and from time to time.

Plan ” shall have the meaning set forth in Section 1.

Plan Interest ” means, with respect to any Participant, such Participant’s Total Notional Investment (including any notional interest accrued at the Participant Applicable Rate) minus such Participant’s theretofore unreduced Notional Advances (plus accrued and previously unreduced notional interest thereon).

Plan Termination Value ” means, with respect to any Participant in connection with the termination of this Plan or a Final Distribution Date, the fair value (determined by reference to the value that the Firm’s books and records show as of the then most recently concluded Fiscal Quarter end preceding the date of such termination) of such Participant’s vested Plan Interest, if any (together with any notional interest accrued thereon), on the effective date of such termination or as of such Final Distribution Date, as applicable.

 

5


Proceeds ” means, with respect to any Notional Plan Investment, (i) notional gross cash proceeds, if any, that are Realized in respect of such Notional Plan Investment at any time, plus (ii) if there is an Associated Employee Fund, an additional amount equal to the difference between (A) the “carried interest” that would be paid by third-party investors with respect to the reference investment underlying such Notional Plan Investment, and (B) the “carried interest” that would be paid by employee investors in an Associated Employee Fund.

Realization ” or “ Realize ” means (i) with respect to a Closed-End Investment, the receipt of a distribution by an investor, had such investor received such a distribution from such Closed-End Investment; and (ii) with respect to an Open-End Investment, the receipt of a distribution or redemption proceeds by an investor, had such investor received such a distribution or effected such a redemption from such Open-End Investment as of such Open-End Investment’s most recent valuation date. For the avoidance of doubt, the re-investment of proceeds by a Notional Plan Investment does not, itself, give rise to a Realization.

Scheduled Distribution Date ” means, with respect to any Participant, the date, specified in such Participant’s Award Certificate, on which Proceeds in respect of Notional Plan Investments shall commence being distributed to such Participant. Except as set forth in Section 14, the Scheduled Distribution Date in respect of any given Fiscal Year shall be the date on which any annual year-end stock unit awards granted to such Participant in respect of such Fiscal Year first convert into shares of Morgan Stanley common stock.

Section 409A ” means Section 409A of the Code, and the rules, regulations and guidance thereunder (or any successor provisions thereto).

Securities Act ” means the United States Securities Act of 1933, as amended.

Special Award ” means a retention, new hire or similar award that is granted in the form of a participation in the Plan.

Subsequent Distribution Date ”, with respect to any Participant, means each anniversary of such Participant’s Scheduled Distribution Date, until the earlier of (i) the Subsequent Distribution Date on which all remaining Proceeds relating to all Closed-End Investments are distributed to Participants, and (ii) the Final Distribution Date.

Total Compensation ” means (i) base salary, commissions and annual bonus, inclusive of the value of long-term incentive compensation, or what the Firm designates as “total reward”; and (ii) for employees who are Investment Representatives or Financial Advisors of the Global Wealth Management Group, gross compensation, pre-deductions, inclusive of the value of long-term incentive compensation, or what the Firm designates as “total reward”.

 

6


Total Notional Investment ” means, with respect to any Participant at any time, such Participant’s interest in the Plan that is attributable to such Participant’s Participant Allocations at such time and any related Notional Advances.

SECTION 3 . Administration.

(a) The Committee shall administer the Plan. In addition to other express powers and authorizations that the Plan confers on the Committee, the Committee shall have full power and authority, subject to the express provisions of the Plan, Legal Requirements and contractual provisions binding upon the Firm and any internal policies and procedures of the Firm:

(i) to determine the terms and conditions of each Award Certificate;

(ii) to construe and interpret the Plan, any Award Certificate or any summary of the foregoing;

(iii) to prescribe, amend, rescind or waive rules and procedures relating to the Plan with respect to any and all Participants;

(iv) to revise the Morgan Stanley Applicable Rate and the Participant Applicable Rate;

(v) to waive any provision of the Plan or one or more Award Certificates with respect to any and all Participants;

(vi) to vary the terms and conditions of participation in the Plan to take account of tax laws, securities laws and other regulatory requirements of foreign jurisdictions; and

(vii) to make all other determinations necessary or advisable for the administration of the Plan.

Except as expressly provided for in the Plan, the Committee’s determinations under the Plan need not be uniform and may be made selectively among Eligible Persons and Participants, whether or not such persons are similarly situated. All determinations by the Committee or the Administrator pursuant to Section 3(b), in administering, construing or interpreting the Plan shall be final, binding and conclusive for all purposes and upon all persons.

(b) The Committee may, but need not, from time to time delegate such of its responsibilities under the Plan as it deems appropriate to the Administrator; provided, however , that only the Committee shall be authorized to make any determination under the Plan with respect to any Participant who is a member of the Management Committee of Morgan Stanley or who is an “executive officer”

 

7


of Morgan Stanley under United States federal securities laws; and provided further that the Administrator is not authorized to designate Notional Plan Investments without the concurrence and authorization of the Investment Committee. In connection with the performance of their responsibilities under the Plan, the Committee, the Administrator and the Investment Committee may consult with any third party they deem necessary or advisable, including any outside consultant or advisor.

(c) Neither the Firm nor any member of the Board, the Committee, the Investment Committee, the Administrator and their respective affiliates and employees shall be liable in any manner whatsoever in connection with the administration, construction or interpretation of the Plan, any Award Certificate or the Descriptive Materials, except for any liability arising out of such person’s willful misconduct. Under no circumstances shall any such person be liable for any act or omission of any other person. In the performance of its, his or her functions with respect to the Plan, each such person shall be entitled to rely upon information and advice furnished by the Firm’s officers, the Firm’s accountants, the Firm’s counsel, the Firm’s tax advisors and any other person the Committee deems necessary or advisable, and no such person shall be liable for any action taken or not taken in reliance upon any such advice.

(d) Any discretionary authority or obligation pursuant to the Plan shall not be applicable to the extent such discretionary authority or obligation is prohibited by Section 409A, or would result in a Participant being required to recognize income for United States federal income tax purposes prior to the relevant Distribution Date or would result in a Participant incurring interest or additional tax under Section 409A.

SECTION 4 . Eligibility.

(a) In order for a professional employee of the Firm to be an Eligible Person with respect to any given Fiscal Year, such employee shall:

(i) Have earned Total Compensation of at least US$500,000 (annualized), or local currency equivalent, in respect of the most recently ended Fiscal Year, or, if hired during the current Fiscal Year, have a reasonable expectation of Total Compensation of at least such amount in respect of the current Fiscal Year; and

(ii) Certify that such employee qualifies as an Accredited Investor.

(b) An Eligible Person with respect to a given Fiscal Year who does not earn Total Compensation of at least US$500,000 (annualized), or local currency equivalent, in respect of such Fiscal Year shall not be permitted to participate in the Plan.

 

8


(c) A Branch Manager or a Financial Advisor in the Global Wealth Management Group shall be an Eligible Person if such Branch Manager or Financial Advisor satisfies the requirements described in Section 4(a) and receives a “challenge bonus” or “productivity bonus” award (as such internal titles, units and bonuses may be referred to from time to time).

(d) Any employee who is a member of the Management Committee of Morgan Stanley or who is an “executive officer” of Morgan Stanley under United States federal securities laws is not eligible to participate in the Plan. However, if a Participant subsequently becomes such a member or executive officer, such Participant shall continue to participate in the Plan in respect of such Participant’s then existing Total Notional Investment on the same basis as other Participants.

SECTION 5 . Participant Allocation.

(a) In accordance with any rules and procedures that the Firm establishes, an Eligible Person with respect to any given Fiscal Year may express a preference to allocate up to 40% of the compensation other than base salary that would otherwise be granted in the form of Morgan Stanley equity compensation or other mandatory long-term incentive compensation in respect of such Fiscal Year to the Plan (an “ Allocation Preference ”); provided that the Firm, in its sole discretion, reserves the right not to give effect to all or any portion of such Allocation Preference and retains ultimate and sole discretion on the final allocation (“ Allocation ”) of the non-cash component of such Eligible Person’s Above Base Compensation. Such Allocation Preference, which such Eligible Person shall make by submitting a form, including in electronic form (an “ Allocation Form ”), on or prior to a date specified on such Allocation Form, shall be irrevocable on or after such date. Any Allocation shall be subject to the eligibility criteria of Section 4 and shall not constitute a guarantee of Plan participation.

(b) If the Firm’s ability to give effect to Allocations is limited for any reason, it shall limit Allocations on a basis that is as pro rata as administratively practicable.

(c) The Firm shall issue to each Participant an Award Certificate setting forth the terms and conditions of such Participant’s participation in the Plan.

(d) Each Participant’s Participant Allocation shall accrue notional interest at the Participant Applicable Rate from the date that such Participant’s Above Base Compensation would otherwise have been paid (or, in the case of a Special Award, the grant date of such Special Award): (i) until the Firm notionally allocates such Participant Allocation (or the portion thereof) to one or more Notional Plan Investments pursuant to Section 8, or (ii) if the Firm does not notionally invest such Participant Allocation (or portion thereof) in a Notional Plan Investment, until the Scheduled Distribution Date, on which date the Firm shall pay such Participant Allocation (or such portion) to such Participant.

 

9


(e) Allocations are intended to be exempt from registration under the Securities Act. By participating in the Plan, each Participant shall be deemed to acknowledge, represent and warrant to and agree with Morgan Stanley, and the Firm may require the Participant to affirmatively acknowledge, represent and warrant to and agree with Morgan Stanley, as follows:

(i) The Participant received and carefully reviewed the Descriptive Materials, and the Participant understands the information contained therein, the risks associated with a Notional Plan Investment under the Plan and the conflicts that the Plan may present for the Firm and agrees to be bound by the terms of the Descriptive Materials;

(ii) The Participant had a reasonable opportunity to ask questions of and receive answers from a person or persons acting on behalf of Morgan Stanley concerning the Plan and all such questions were answered to the Participant’s full satisfaction;

(iii) No oral or written representations were made to the Participant concerning the Plan other than as stated in any Award Certificate and/or the Descriptive Materials, and no oral or written information furnished to the Participant in connection with the Plan was inconsistent with the information stated in the Descriptive Materials;

(iv) The Participant has adequate means of providing for the Participant’s current financial needs and contingencies, is able to bear the substantial economic risks of the Plan for an indefinite period of time, has no need for liquidity regarding the Participant’s assets placed in the Plan and, at the present time, could afford a complete loss of such assets;

(v) The Participant has such knowledge and experience in financial, tax and business matters so as to enable the Participant to utilize the information made available to the Participant in connection with the Plan to evaluate the merits and risks of the Plan and to make an informed decision with respect thereto;

(vi) The Participant is not relying on Morgan Stanley or any person or persons acting on behalf of Morgan Stanley with respect to the tax and other economic considerations of the Plan;

(vii) The Participant satisfies the eligibility requirements set forth in Section 4;

(viii) The Participant shall provide such information and execute and deliver such documents as may reasonably be requested by the Firm in connection with the Plan, including such information and documents as may reasonably be necessary to comply with any and all laws to which the Firm is subject, and such additional information as the Firm may deem

 

10


appropriate with regard to the Participant’s eligibility (including documentation relating to the Participant’s qualification as an Accredited Investor); and

(ix) The Participant shall keep confidential all matters relating to the Plan (including the terms of the Plan and any Award Certificate and the Descriptive Materials), except to the extent such matters are publicly available (through no fault of the Participant) or as otherwise required by Legal Requirements. The Firm’s Code of Conduct regarding confidential and proprietary information shall cover such matters.

SECTION 6 . Notional Advance.

(a) At the time that any Participant Allocation (or portion thereof) is notionally invested in a Notional Plan Investment, a Notional Advance in an amount equal to such Participant Allocation (or such portion) multiplied by two shall be added to the Participant Allocation (or such portion) for purposes of the Participant’s notional investment in such Notional Plan Investment.

(b) Each Notional Advance shall accrue notional interest at the Morgan Stanley Applicable Rate during the period that such Notional Advance is deemed to be outstanding ( i.e. , from the date of the addition of such Notional Advance to the related Participant Allocation (or such portion) until and to the extent such Notional Advance (or portion thereof) is reduced by any Proceeds). For the avoidance of doubt, no Notional Advance shall be allocated until a Participant’s Participant Allocation is notionally invested in a Notional Plan Investment (therefore, no notional interest shall begin to accrue until such time).

(c) Any Notional Advance shall be satisfied only through reductions to: (i) any notional interest theretofore accrued at the Participant Applicable Rate, or (ii) Proceeds in accordance with Section 10. No Participant shall be required to make any direct or out-of-pocket payment to the Firm in connection with any Notional Advance.

SECTION 7 . Establishment of Accounts. The Firm shall establish an Account for each Participant, to which it shall credit such Participant’s Participant Allocations and any related Notional Advances. Each Participant’s Account shall reflect such Participant’s notional share of each Notional Plan Investment.

SECTION 8 . Notional Plan Investments.

(a) The Firm shall designate Notional Plan Investments for the benefit of the Plan, and shall establish a purchase price, for purposes of the Plan, equal to the fair value (as the Firm shall determine) of such Notional Plan Investments at the time of their designation. Participants shall participate in each Notional Plan Investment pro rata based on their respective Total Notional Investments. Each Participant’s notional share of any Notional Plan Investment shall be deemed to have been notionally funded by such Participant’s Participant Allocation and the related Notional Advance.

 

11


(b) Notional Plan Investments in respect of any given Fiscal Year shall be indicated on the Executive Compensation Department website or through other means that the Firm shall determine and communicate to Participants from time to time. The Firm may provide a Participant with a description of the related reference investments and their historical returns; however , the Firm is not responsible for actions, statements or performance of the Notional Plan Investments.

(c) The Firm may choose Notional Plan Investments based on a variety of factors, which may include the Firm’s own business interests and its relations with such reference investments or parties affiliated with such referenced funds. By participating in the Plan, each Participant shall be deemed to acknowledge the existence of actual and potential conflicts of interest with the Firm and waive any claim with respect to the existence of any conflict of interest and the Firm may require each Participant to affirmatively make such acknowledgment and waiver.

(d) The performance of each Notional Plan Investment shall reflect all of the fees and costs of the related reference investment, including placement agent and brokerage fees, which such reference investment may pay to the Firm if the Firm provides such services to it. The Firm may also act as the investment advisor or provide other services to such reference investment and receive fees for providing these services. Fees paid by any reference investment will reduce the performance of such reference investment (and, accordingly, the performance of the Notional Plan Investment) and, therefore, will reduce the amount of the Firm’s distribution obligations to Participants under the Plan.

(e) Nothing in the Descriptive Materials shall be construed to confer on a Participant the right to continue to have any particular Notional Plan Investment available for purposes of measuring the value of the Participant’s Total Notional Investment.

(f) The value of a Participant’s Total Notional Investment is subject to risk at all times based upon the performance of the Notional Plan Investments. If the value of the Notional Plan Investments decreases in the future, then the value of a Participant’s Total Notional Investment may be lower than the Participant’s Participant Allocation. Additionally, if the value of the Notional Plan Investments decreases in the future and proves to be insufficient to reduce the Notional Advances (plus any notional interest thereon), a Participant will not be entitled to receive any of such Participant’s Participant Allocation. Although a Participant will not be an investor in any reference investments underlying the Notional Plan Investments, a Participant’s Total Notional Investment will be determined by referencing the gains and losses attributable to the performance of such Notional Plan Investments. In effect, the Firm is merely targeting the return and liquidity on such Notional Plan Investments and to the extent that the Firm

 

12


incurs any costs in connection therewith or in connection with the administration of the Plan, it has the right to adjust the return on a Participant’s Notional Plan Investments to reflect these costs. Any distribution or other payment under the Plan is also subject to the risks associated with the Participant’s status as an unsecured general creditor of Morgan Stanley as described in Section 16(c).

SECTION 9 . Vesting.

(a) Terms and conditions relating to the vesting of a Participant’s Plan Interest (including any consequences of a termination of such Participant’s employment) shall be set forth in such Participant’s Award Certificate. Such terms and conditions with respect to any Participant in respect of any given Fiscal Year shall be substantially similar to analogous terms and conditions set forth in the annual year-end equity compensation awards granted to such Participant in respect of such Fiscal Year.

(b) The Firm may accelerate the vesting of a Participant’s Plan Interest and may, in its sole discretion, determine other circumstances under which a Participant’s Plan Interest shall vest. Nothing in the Plan or in any Award Certificate shall entitle a Participant to request or receive any distribution or other payment upon the vesting of all or any portion of such Participant’s Plan Interest.

(c) Even if a Participant holds a Plan Interest, whether or not fully vested, it may be cancelled without any consideration upon the occurrence of a Cancellation Event prior to the Scheduled Distribution Date. Upon such occurrence, the Participant shall have no further interest in or entitlement under the Plan, including no right or entitlement to any Participant Allocation.

SECTION 10 . Distributions.

(a) Closed-End Investments .

(i) With respect to any Proceeds in respect of a Closed-End Investment on or prior to the Scheduled Distribution Date, the Participant’s share thereof shall immediately be reduced by such Participant’s theretofore unreduced Notional Advances (plus accrued and previously unreduced notional interest thereon). Any remaining Proceeds shall accrue notional interest at the Participant Applicable Rate from the date of the Realization of such Proceeds until the Scheduled Distribution Date. Any unreduced Notional Advances (plus accrued and previously unreduced notional interest thereon) shall reduce subsequent Proceeds (including, if applicable, Proceeds in respect of a Closed-End Investment Realized after the Scheduled Distribution Date and/or Proceeds in respect of an Open-End Investment). Such remaining Proceeds shall be aggregated and distributed to such Participant on the Scheduled Distribution Date.

 

13


(ii) With respect to any Proceeds in respect of a Closed-End Investment Realized after the Scheduled Distribution Date, but on or prior to the Subsequent Distribution Date, the Participant’s share of such Proceeds, to the extent of such Realizations, shall be reduced and aggregated and distributed on such Subsequent Distribution Date in accordance with the method described in Section 10(a)(i). A Participant’s share of Proceeds in respect of a Closed-End Investment Realized after such Subsequent Distribution Date and on or prior to the next Subsequent Distribution Date shall be reduced and aggregated and distributed on such next Subsequent Distribution Date.

(iii) If the last Subsequent Distribution Date is the Final Distribution Date, then the Firm shall distribute to each Participant an amount equal to the sum of (i) such Participant’s share of any undistributed Proceeds and (ii) such Participant’s Plan Termination Value with respect to any then un-Realized Notional Plan Investments in accordance with the method described in Section 10(a)(i) on such Final Distribution Date.

(b) Open-End Investments . With respect to any Proceeds in respect of an Open-End Investment, the Participant’s share thereof shall accrue notional interest at the Participant Applicable Rate from the date of the Realization relating to such Proceeds until the Scheduled Distribution Date. Such Proceeds (and any accrued notional interest thereon) (“ Open-End Investment Proceeds ”) will immediately be reduced by such Participant’s theretofore unreduced Notional Advances (plus accrued and previously unreduced notional interest thereon), and, after such reduction, such Participant’s share of any remaining Open-End Investment Proceeds, if any, shall be distributed to such Participant on the Scheduled Distribution Date.

(c) Distributions in Connection with a Termination of Employment . Terms and conditions relating to any distribution of a Participant’s vested Plan Interest in connection with a termination of such Participant’s employment shall be set forth in such Participant’s Award Certificate. Such terms and conditions with respect to any Participant in respect of any given Fiscal Year shall be consistent with analogous terms and conditions set forth in the annual year-end equity compensation awards granted to such Participant in respect of such Fiscal Year.

(d) Distributions in Connection with a Plan Termination . Upon a termination of the Plan, subject to any Cancellation Event, the Firm shall distribute to each Participant an amount equal to such Participant’s Plan Termination Value (with notional interest accruing thereon at the Participant Applicable Rate from the date of such termination until the date of distribution) in accordance with the method described in Section 10(a)(i) on the applicable Distribution Date.

 

14


SECTION 11 . Distributions and Other Payments Generally.

(a) References in the Plan to distributions or other payments on a given date (including any Distribution Date) shall mean on such date or as soon thereafter as administratively practicable; provided that such distributions or other payments shall be made prior to December 31 of the calendar year in which the applicable Distribution Date or other payment date occurs or, if later, no more than 21/2 months after such Distribution Date or other payment date. The Proceeds relating to a Realization (or partial Realization) with respect to a Notional Plan Investment (after the reduction of such Proceeds pursuant to Sections 10(a)(i) and 10(a)(ii) or Section 10(b), as applicable) shall accrue interest at the Participant Applicable Rate from the date of the applicable Distribution Date to the actual date of distribution permitted by this Section 11(a).

(b) The Firm may accelerate distributions or other payments under the Plan, without the consent of any Participant, only to the extent such modification is not inconsistent with Section 3(d).

(c) Notwithstanding any provision of the Plan or in the Award Certificate to the contrary, if the Firm considers a Participant to be one of its “specified employees” under Section 409A at the time of termination of such Participant’s employment, any distribution or other payment of any deferred amounts shall commence on the date that is six months after such termination of employment.

(d) Notwithstanding the other provisions of the Plan or in any Award Certificate, distributions or other payments under the Plan will be deferred with respect to a Participant if, at the time scheduled for such distribution or payment (whether a Distribution Date or some other time), Morgan Stanley considers such Participant to be one of its executive officers and such Participant’s compensation may not be fully deductible by virtue of Section 162(m) of the Code. This deferral will continue until the termination of such Participant’s employment with the Firm, and the Firm shall make any distribution or other payment in respect of such Participant’s vested Plan Interest as soon thereafter as administratively practicable; provided that if Morgan Stanley considers such Participant to be one of its “specified employees” under Section 409A at the time of termination of such Participant’s employment with the Firm, such deferral will continue until the date that is six months after such termination of employment, and the Firm shall make any distribution or other payment in respect of such Participant’s vested Plan Interest as soon as administratively practicable thereafter; and provided, further, that in the event of such Participant’s death or a corporate event relating to the ownership of Morgan Stanley, such distribution or payment shall be made in accordance with such Participant’s Award Certificate.

(e) Unless otherwise set forth in an International Supplement, all distributions or other payments under the Plan shall be made in United States dollars or the Participant’s local currency.

 

15


(f) The Firm may, in its sole discretion and to the maximum extent permissible under applicable Legal Requirements, withhold from or offset against any distribution or other payment to which a Participant may be entitled under the Plan an amount sufficient to satisfy any obligation owed by such Participant to the Firm.

SECTION 12 . Transferability.

(a) No Participant may transfer (other than by will or by the laws of descent and distribution), pledge, hypothecate or otherwise dispose of or encumber such Participant’s Total Notional Investment.

(b) During a Participant’s lifetime, the Firm shall make any distribution or other payment in respect of such Participant’s Plan Interest only to such Participant. A Participant may designate in writing on a beneficiary designation form, in accordance with procedures established by the Executive Compensation Department, a beneficiary or beneficiaries (including the Participant’s estate) to receive all or part of the amounts that the Firm may be obligated to pay or distribute in respect of such Participant’s Plan Interest in the event of such Participant’s death. A Participant may replace or revoke a designation of a beneficiary at any time by filing a new beneficiary designation form.

SECTION 13 . Withholding or Other Deductions. The Firm may withhold or otherwise deduct from any amounts distributable or otherwise payable under the Plan any such taxes or other amounts as may be required to be withheld or otherwise deducted pursuant to applicable Legal Requirements.

SECTION 14 . Special Awards. In the sole discretion of the Firm, an Eligible Employee may be eligible to receive a Special Award. Upon the grant of such Special Award, such Eligible Employee shall be treated as a Participant for all purposes of the Plan. Notwithstanding anything to the contrary in the Plan, terms and conditions relating to such Participant’s participation in the Plan may differ from the analogous terms and conditions set forth in the Plan, in which case such terms and conditions shall be set forth in such Participant’s Award Certificate.

SECTION 15 . Termination and Amendment.

(a) The Firm may terminate the Plan at any time in its sole discretion, subject to Section 10(d).

(b) The Firm may also alter, amend or modify the Plan, any Award Certificate or the International Supplement at any time in its sole discretion. These amendments may include changes that the Firm considers necessary or advisable as a result of changes in any, or the adoption or interpretation of any new, Legal Requirement. The Firm may not amend or modify the Plan, any Award Certificate or the International Supplement in a manner that would

 

16


materially impair a Participant’s participation in the Plan without the Participant’s consent; provided , however , that the Firm may, without a Participant’s consent alter, amend or modify the Plan, any Award Certificate or the International Supplement in any manner that the Firm considers necessary or advisable to comply with any Legal Requirement (including Section 409A) and to ensure that no Participant would be required to recognize income for United States federal income tax purposes prior to the relevant Distribution Date or would result in a Participant incurring interest or additional tax under Section 409A. No such action shall give rise to a claim of constructive termination on the part of such Participant. Any amendment or waiver of a provision of the Plan, any Award Certificate or the International Supplement (other than any amendment or waiver applicable to all Participants, or similarly situated Participants, generally), which amendment or waiver operates in a Participant’s favor or confers a benefit on the Participant, must be in writing and signed by the Global Director of Human Resources or the Chief Administrative Officer (or if such positions no longer exist, by the holder of an equivalent position) to be effective. The Firm shall notify Participants of any amendment to the Plan, any Award Certificate or the International Supplement that is material, and shall notify affected Participants of any amendment that affects such Participants’ rights.

SECTION 16 . Miscellaneous.

(a) The headings of sections herein are included solely for the convenience of reference and shall not affect the meaning of any of the provisions of the Plan.

(b) THE PLAN AND ALL RIGHTS UNDER THE PLAN (INCLUDING UNDER ANY AWARD CERTIFICATE OR THE INTERNATIONAL SUPPLEMENT) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY CONFLICTS IN CHOICE OF LAW, RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER THE INTERPRETATION OF THE PLAN ON ANY SUCH RIGHT TO THE SUBSTANTIVE LAW OF ANOTHER JURISDICTION.

(c) Except as set forth in an International Supplement, neither the Plan, any Award Certificate, the International Supplement nor the Descriptive Materials shall create or be construed to create a trust with respect to the Plan nor create or be construed to create a separate fund of any kind or a fiduciary relationship between the Firm, a Participant or any other person nor create or be construed to create a segregation by the Firm of assets to fund the Plan. To the extent any Participant has a right to receive distributions or other payments from the Firm pursuant to the Plan, such right shall be no greater than the right of any unsecured general creditor of the Firm.

(d) The Firm has no obligation to invest amounts corresponding to a Participant’s Participant Allocation or Notional Advance and/or any Proceeds

 

17


with respect to Notional Plan Investments. If the Firm invests amounts corresponding to a Participant’s Participant Allocation or Notional Advance in any Notional Plan Investment, such investment shall not confer on such Participant any right or interest in any such Notional Plan Investment. The Participant will have no ownership or other interest in any financial or other instrument or arrangement that the Firm may acquire or enter into to hedge its obligations under the Plan.

(e) A Participant’s participation in the Plan shall be conditioned on the Firm making any filings and the Firm’s receipt of any consents or authorizations required to comply with, or required to be obtained under, applicable Legal Requirements. To the extent necessary to comply with the local Legal Requirements of any jurisdiction in which the Firm implements the Plan, the Firm may supplement the Plan and/or the Award Certificate with a supplement (the “ International Supplement ”), which shall set forth certain terms and conditions applicable to such implementation in such jurisdiction. If there is a conflict between the provisions of the Plan and the provisions contained in the International Supplement on an issue pertinent to such jurisdiction, then the provisions of such International Supplement shall govern.

(f) Neither the Plan, any Award Certificate, the International Supplement, the Descriptive Materials nor any interpretation, determination or other action taken or omitted to be taken pursuant to the Plan shall be construed as guaranteeing a Participant’s employment, a discretionary bonus or any particular level of bonus, compensation or benefits, as giving a Participant any right to continued employment, during any period, nor shall they be construed as giving a Participant any right to be reemployed by the Firm following any termination of employment. The Firm reserves the right not to make available any plan similar to the Plan (in whole or in part), nor to permit any future participation after Allocations are made with respect to Above Base Compensation in respect of any given Fiscal Year or after a Special Award is granted.

(g) If any provision of the Plan or any Award Certificate is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Participant, or would disqualify the Plan or such Award Certificate under any Legal Requirement, such provision shall be construed or deemed amended to conform to any such Legal Requirement, or if it cannot be construed or deemed amended without materially altering the intent of the Plan or such Award Certificate, then such provision shall be stricken as to such jurisdiction or as to such Participant, and the remainder of the Plan or such Award Certificate shall remain in full force and effect.

[END OF THE PLAN]

[REMAINDER OF PAGE LEFT BLANK]

 

18

Exhibit 10.2

MORGAN STANLEY

DIRECTORS’ EQUITY CAPITAL ACCUMULATION PLAN

(as amended through December 11, 2007)

Section 1. Purpose

Morgan Stanley, a Delaware corporation (the “ Company ”), hereby adopts the Morgan Stanley Directors’ Equity Capital Accumulation Plan (the “ Plan ”). The purpose of the Plan is to promote the long-term growth and financial success of the Company by attracting, motivating and retaining non-employee directors of outstanding ability and assisting the Company in promoting a greater identity of interest between the Company’s non-employee directors and its stockholders.

Capitalized terms used herein without definition have the meanings ascribed thereto in Section 22.

Section 2. Eligibility

Only directors of the Company who are not employees of the Company or any affiliate of the Company (the “ Eligible Directors ”) shall participate in the Plan.

Section 3. Plan Operation

(a) Administration . Other than as provided in Section 5(c)(v), the Plan requires no discretionary action by any administrative body with regard to any transaction under the Plan. To the extent, if any, that questions of administration arise, these shall be resolved by the Board. The Board may, in its discretion, delegate to the Chief Financial Officer, the Chief Legal Officer, the Secretary of the Company or to one or more officers of the Company any or all authority and responsibility to act pursuant to the Plan. All references to the “Plan Administrators” in the Plan shall refer to the Board, or the Chief Financial Officer, the Chief Legal Officer, the Secretary or to one or more officers of the Company if the Board has delegated its authority pursuant to this Section 3(a). The determination of the Plan Administrators on all matters within their authority relating to the Plan shall be conclusive.

(b) No Liability . The Plan Administrators shall not be liable for any action or determination made in good faith with respect to the Plan or any award hereunder, and the Company shall indemnify and hold harmless the Plan Administrators from all losses and expenses (including reasonable attorneys’ fees) arising from the assertion or judicial determination of any such liability.

Section 4. Shares of Stock Subject to the Plan

(a) Stock . Awards under the Plan shall relate to shares of Stock.

(b) Shares Available for Awards . Subject to Section 4(c) (relating to adjustments upon changes in capitalization), as of any date, the total number of shares of Stock with respect


to which awards may be granted under the Plan shall be equal to the excess (if any) of (i) 1,700,000 shares over (ii) the sum of (a) the number of shares subject to outstanding awards granted under the Plan and (b) the number of shares previously issued pursuant to the Plan. In accordance with (and without limitation upon) the preceding sentence, shares of Stock covered by awards granted under the Plan that are canceled or expire unexercised shall again become available for awards under the Plan. Shares of Stock that shall be issuable pursuant to the awards granted under the Plan shall be authorized and unissued shares, treasury shares or shares of Stock purchased by, or on behalf of, the Company in open-market transactions.

(c) Adjustments . In the event of any merger, reorganization, recapitalization, consolidation, sale or other distribution of substantially all of the assets of the Company, any stock dividend, split, spin-off, split-up, split-off, distribution of cash, securities or other property by the Company, or other change in the Company’s corporate structure affecting the Stock, then the following shall be automatically adjusted in order to prevent dilution or enlargement of the benefits or potential benefits intended to be awarded under the Plan:

(i) the aggregate number of shares of Stock reserved for issuance under the Plan,

(ii) the number of shares of Stock subject to outstanding awards,

(iii) the number of Stock Units credited pursuant to Sections 6(a) and 7(a) of the Plan,

(iv) the per share purchase price of Stock subject to any stock options granted pursuant to the Plan, and

(v) the number of shares to be granted as Director Stock pursuant to Section 6(a) or to be granted pursuant to any other automatic awards that may be provided for under the Plan in the future.

(d) Types of Award . The Company’s stockholders originally approved the Plan on April 19, 1996, and approved amendments to the Plan on March 19, 2002. The types of award authorized by the stockholders under the Plan are Director Stock, Stock Units, shares of Stock awarded at an Eligible Director’s election pursuant to Section 8 and stock options.

Section 5. Stock Options

(a) Effective as of February 8, 2005 (the “ Transition Date ”), no additional stock options will be awarded under the Plan.

(b) Section 5(a) shall not impair the rights of any person in any stock option that was awarded under the Plan prior to the Transition Date. All such stock options shall remain subject to the terms and conditions applicable thereto.

(c) The following terms and conditions apply to stock options issued under the Plan, including without limitation all stock options issued prior to the Transition Date:

(i) Nontransferability . No stock option granted pursuant to the Plan shall be sold, assigned or otherwise transferred by an Eligible Director other than by will or the laws of descent or distribution and any such stock option may be exercised during the Eligible Director’s lifetime only by such Eligible Director.

 

2


(ii) Limitation on Exercise . No stock option granted pursuant to this Plan may be exercised for a period of six (6) months from the date such stock option was granted.

(iii) Effect of Termination .

(A) If an Eligible Director’s service as a director of the Company terminates for a reason other than for Cause, then any stock option granted to such Eligible Director shall remain exercisable following the date of such Eligible Director’s termination of service in accordance with the following provisions:

(a) Disability, Normal Retirement or Death. If service terminates by reason of Disability, Normal Retirement or death, until the expiration date of the stock option.

(b) Other. If service terminates for any other reason (except for Cause), until the earlier of 90 days after the termination date and the expiration date of the stock option.

(B) If an Eligible Director is terminated for Cause, all stock options granted under the Plan to such Eligible Director shall be canceled and shall no longer be exercisable, effective on the date of such Eligible Director’s termination for Cause.

(iv) Expiration Date of Stock Options . All stock options granted under the Plan shall expire on the tenth anniversary of the date on which they are granted.

(v) Extension of Exercisability . Notwithstanding any other provision hereof, the Board shall have the authority, in its discretion, to amend any outstanding stock option granted pursuant to the Plan to extend the exercisability thereof; provided , however , that no such amendment shall cause such stock option to remain exercisable beyond its original expiration date.

(d) Notwithstanding Section 5(a), stock options remain one of the types of award that the stockholders of the Company have authorized for the Plan, and Section 5(a) shall not impair the authority of the Board under Section 13 to amend the Plan in the future to provide for awards of stock options without obtaining additional stockholder approval.

 

3


Section 6. Initial and Annual Awards of Director Stock and Stock Units

(a) Awards Granted .

(i) Initial Awards . On the first day of the calendar month following the month in which any person (other than a person who is already an Eligible Director) becomes an Eligible Director, otherwise than by reason of being elected to the Board at an Annual Meeting, (A) such Eligible Director shall be entitled to receive a number of shares of Director Stock equal to the number obtained by dividing $125,000 by the Fair Market Value of a share of Stock on such day and (B) the Company shall credit an equal number of Initial Stock Units, representing the other half of the initial equity award, to such Eligible Director’s Mandatory Stock Unit Account; provided, however, that if such a person is elected, appointed or otherwise becomes an Eligible Director less than 60 days prior to the Annual Meeting in any year, then such Eligible Director shall receive no shares of Director Stock and no Initial Stock Units shall be credited to such Eligible Director’s Mandatory Stock Unit Account pursuant to this Section 6(a)(i).

(ii) Subsequent Awards . As of the date of each Annual Meeting, (A) each Eligible Director, including, without limitation, any Eligible Director who becomes a member of the Board by reason of being elected to the Board at such Annual Meeting, shall be entitled to receive a number of shares of Director Stock equal to the number obtained by dividing $125,000 by the Fair Market Value of a share of Stock on such day and (B) the Company shall credit an equal number of Annual Stock Units, representing the other half of the annual equity award, to the Mandatory Stock Unit Account of each Eligible Director; provided, however, that such Eligible Director shall continue to serve as a director of the Company after such Annual Meeting.

(b) Limitation on Transfer . Director Stock may not be sold, transferred, pledged, assigned or otherwise conveyed by an Eligible Director for a period of six (6) months from the date such Stock is awarded. Neither Annual Stock Units nor Initial Stock Units may be sold, transferred, pledged, assigned or otherwise conveyed by an Eligible Director until distributed in accordance with Section 7 or Section 9.

(c) Deferral of Awards . Annual Stock Units and Initial Stock Units credited to the Mandatory Stock Unit Account of each Eligible Director shall be deferred in accordance with Section 7(b). An Eligible Director may elect to defer the receipt of all or a portion of the Director Stock by making an election pursuant to Section 7(a), in which case there shall be credited to the Eligible Director’s Elective Stock Unit Account a number of Elective Stock Units equal to the number of shares of Director Stock being deferred.

Section 7. Deferral Elections and Distributions

(a) Elective Stock Unit Account and Cash Account Deferral Elections . Each Eligible Director may make a Deferral Election to defer receipt of (i) all or part of any or all of such Eligible Director’s Retainers or (ii) any or all shares of Director Stock. An Eligible Director may make a Deferral Election with respect to all or part of any or all Retainers or shares

 

4


of Director Stock by submitting a Deferral Election Form to the Secretary, indicating: (i) the Deferred Amount or a percentage of such Retainer or shares of Director Stock to be deferred; (ii) the Distribution Commencement Date, in accordance with Section 7(c); (iii) whether distributions are to be made in a lump sum, installments or a combination thereof, in accordance with Section 7(e); (iv) the percentage or amount of (x) Retainers to be deferred and credited to a Cash Account or (y) Retainers and/or Director Stock to be deferred and credited to the Elective Stock Unit Account; and (v) from which Account each distribution is to be made on each Distribution Commencement Date. Deferral Election Forms must be submitted before the start of the fiscal year during which the Eligible Director will earn such Retainer or shares of Director Stock to be deferred; provided , however , that in the case of an Eligible Director who is newly elected or appointed to the Board, such Eligible Director’s Deferral Election Form relating to the Retainer or shares of Director Stock earned during the fiscal year of such election or appointment may be submitted within 30 days after the date of such election or appointment. In all cases, a Deferral Election Form shall be effective only with respect to such Retainers or shares of Director Stock that are earned after the Deferral Election is made. All Deferral Elections (including indications on the Deferral Election Form as to Distribution Commencement Date and form of distributions), once made, shall be irrevocable. Notwithstanding the foregoing, a Deferral Election may be superseded with respect to future deferrals of an Eligible Director’s Retainers and grants of Director Stock by submitting a new Deferral Election Form to the Secretary, in which case such new Deferral Election shall be effective starting with the Retainer or shares of Director Stock earned in the fiscal year following the year in which such new Deferral Election Form is submitted. An Eligible Director may designate, in any Deferral Election Form, one or more beneficiaries to receive any distributions under the Plan upon the Eligible Director’s death, and may change such designation at any time by submitting a new Deferral Election Form to the Secretary.

(i) Stock Unit Deferral . An Eligible Director may elect to have all or part of the Deferred Amount credited to an Elective Stock Unit Account in the form of Elective Stock Units. Credits to an Eligible Director’s Elective Stock Unit Account will be made as follows:

(A) Deferral of Retainers . As of each Retainer Payment Date, the Company shall credit to the Elective Stock Unit Account an amount equal to any Deferred Amount resulting from an Eligible Director’s deferral of all or part of such Eligible Director’s Retainers. The number of Elective Stock Units credited to the Elective Stock Unit Account shall be the amount obtained by dividing (X) the Deferred Amount by (Y) the Fair Market Value of a share of Stock on such Retainer Payment Date.

(B) Deferral of Director Stock . An Eligible Director who defers the receipt of Director Stock shall have credited to the Elective Stock Unit Account a number of Elective Stock Units equal to the number of shares of Director Stock deferred. The credit will be made as of the date on which the Eligible Director becomes entitled to receive the Director Stock.

(ii) Cash Deferral . An Eligible Director may elect to have all or part of the Deferred Amount derived from his or her Retainers credited to a Cash Account.

 

5


The Deferred Amount allocated to the Cash Account shall be credited thereto on the date on which the Eligible Director becomes entitled to payment of such Deferred Amount. As of the last day of each fiscal quarter and the Eligible Director’s Service Termination Date, the Eligible Director’s Cash Account will be credited with an Interest Equivalent equal to (i) the Rate of Interest, multiplied by (ii) the Average Daily Cash Balance, multiplied by (iii) the number of days during the fiscal quarter or other period during which such Cash Account had a positive balance, divided by (iv) 365.

(b) Mandatory Stock Unit Account Deferral Elections . An Eligible Director may elect to defer receipt of Annual Stock Units and Initial Stock Units by submitting a Deferral Election Form to the Secretary indicating: (i) the Distribution Commencement Date for such Mandatory Stock Unit Account, in accordance with Section 7(d) and (ii) whether distributions are to be made in a lump sum, installments or a combination thereof, in accordance with Section 7(e). Deferral Election Forms must be submitted prior to the first day of the fiscal year during which the Eligible Director will earn the Annual Stock Units and Initial Stock Units to be deferred; provided, however , that in the case of an Eligible Director who is newly elected or appointed to the Board, such Eligible Director’s Deferral Election Form relating to the Annual Stock Units and/or Initial Stock Units earned during the fiscal year of such election or appointment may be submitted within 30 days after the date of such election or appointment. In all cases, a Deferral Election Form shall be effective only with respect to the Annual Stock Units and Initial Stock Units that are earned after the Deferral Election is made. All Deferral Elections with respect to any Annual Stock Units and Initial Stock Units, once made, shall be irrevocable. Notwithstanding the foregoing, a Deferral Election relating to Annual Stock Units may be superseded with respect to future deferrals of an Eligible Director’s Annual Stock Units by submitting a new Deferral Election Form to the Secretary, in which case such new Deferral Election shall be effective starting with the Annual Stock Units earned in the fiscal year following the year in which such new Deferral Election Form is submitted. An Eligible Director may designate, in any Deferral Election Form, one or more beneficiaries to receive any distributions under the Plan upon the Eligible Director’s death, and may change such designation at any time by submitting a new Deferral Election Form to the Secretary.

(c) Distribution Commencement Date for Elective Stock Unit Account and Cash Account . Each Eligible Director shall designate on the Deferral Election Form one of the following dates as a Distribution Commencement Date with respect to amounts credited to the Elective Stock Unit Account or Cash Account thereafter: (A) the date of such Eligible Director’s death; (B) such Eligible Director’s Service Termination Date; (C) the first day of a calendar month specified by such Eligible Director; or (D) the earliest to occur of (A), (B) or (C). If an Eligible Director fails to designate one of the foregoing alternatives as the Distribution Commencement Date for the Elective Stock Unit Account and Cash Account, the Eligible Director shall be deemed to have designated alternative (D). Unless a Deferral Election Form designates a different Distribution Commencement Date for the Eligible Director’s Elective Stock Unit Account than for such Eligible Director’s Cash Account, the Eligible Director shall be deemed to have selected the same Distribution Commencement Date for both Accounts. Notwithstanding any election made by an Eligible Director on any Deferral Election Form or any other provision of the Plan, in the event of such Eligible Director’s death, all amounts credited to such Eligible Director’s Elective Stock Unit Account and Cash Account will be paid in a lump

 

6


sum to such Eligible Director’s beneficiary (or if no beneficiary has been designated, to such Eligible Director’s estate) as soon as administratively practicable following the date of such Eligible Director’s death.

(d) Distribution Commencement Date for Mandatory Stock Unit Account . Notwithstanding any provision to the contrary in this Plan or any Deferral Election Form, no amounts credited to an Eligible Director’s Mandatory Stock Unit Account shall be distributed prior to such Eligible Director’s Service Termination Date. Each Eligible Director may designate on the Deferral Election Form for such Eligible Director’s Mandatory Stock Unit Account one of the following dates as a Distribution Commencement Date with respect to amounts credited to the Mandatory Stock Unit Account: (A) the date of such Eligible Director’s death; (B) such Eligible Director’s Service Termination Date; or (C) the later to occur of (B) or first day of a calendar month specified by such Eligible Director. If an Eligible Director fails to designate one of the foregoing alternatives as the Distribution Commencement Date for the Mandatory Stock Unit Account, such Eligible Director shall be deemed to have designated alternative (B). Notwithstanding any election made by an Eligible Director on any Deferral Election Form or any other provision of the Plan, in the event of such Eligible Director’s death, all amounts credited to such Eligible Director’s Mandatory Stock Unit Account will be paid in a lump sum to such Eligible Director’s beneficiary (or if no beneficiary has been designated, to such Eligible Director’s estate) as soon as administratively practicable following the date of such Eligible Director’s death.

(e) Distribution Method . An Eligible Director shall state on each Deferral Election Form whether distributions that are subject to such Deferral Election Form shall be made in (A) a lump sum, (B) no more than 120 monthly, 40 quarterly or 10 annual installments or (C) in part as provided in clause (A) and in part as provided in clause (B); provided, however, that any distributions following an Eligible Director’s death shall be paid in a lump sum to such Eligible Director’s beneficiary (or if no beneficiary has been designated, to such Eligible Director’s estate) as soon as administratively practicable following the date of such Eligible Director’s death. The amount to be distributed in any installment pursuant to a specific Deferral Election Form shall be determined by dividing the balance in the Cash Account or the number of Stock Units in the Mandatory Stock Unit Account or Elective Stock Unit Account, as the case may be, that are subject to such Deferral Election Form by the number of remaining installments. If an Eligible Director receives a distribution on an installment basis, undistributed Deferred Amounts shall remain subject to the provisions of this Section 7.

(f) Form of Distributions . All distributions from the Cash Account shall be paid in cash. Distributions made from the Elective Stock Unit Account and the Mandatory Stock Unit Account shall be for a number of whole shares of Stock equal to the number of whole Stock Units to be distributed and cash in lieu of any fractional share (determined by using the Fair Market Value of a share of Stock on the date on which such distributions are distributed).

(g) Dividend Equivalents . If there are Stock Units in an Eligible Director’s Elective Stock Unit Account or Mandatory Stock Unit Account on a dividend record date with respect to the Company’s Stock, the Elective Stock Unit Account and/or Mandatory Stock Unit Account, as applicable, shall be credited, on the dividend payment date for such dividend record date, with an additional number of Stock Units equal to (i) the cash dividend paid on one share of Stock, multiplied by (ii) the number of Stock Units in such Account on such dividend record date, divided by (iii) the Fair Market Value of a share of Stock on the dividend payment date.

 

7


(h) Deferral of Meeting Fees . As of the Transition Date, the Company does not pay Meeting Fees. In the event that the Company determines in the future to pay Meeting Fees to Eligible Directors, and in the case of Meeting Fees deferred prior to the Transition Date, the provision of this Section 7 relating to elective deferrals of Retainers and Director Stock, and the provisions of Section 8 relating to Stock Elections, shall apply to such Meeting Fees mutatis mutandis ; provided , however , that any Deferred Amount resulting from deferral of all or part of an Eligible Director’s Meeting Fees (other than Meeting Fees for meetings of the Board or any committee thereof held on the date of an Annual Meeting) will initially be credited to the Cash Account as of the date on which the Eligible Director becomes entitled to payment of the Meeting Fees, shall thereafter be credited with Interest Equivalents as calculated under Section 7(a)(ii) (such Deferred Amount as increased by such Interest Equivalents being the “ Adjusted Deferred Amount ”) and will thereafter be debited from the Cash Account and credited to the Eligible Director’s Elective Stock Unit Account as of the date of the next Annual Meeting following the date of such meeting (or, if the Eligible Director’s service on the Board terminates prior to the next Annual Meeting following the date of such meeting, as of the first business day following his or her Service Termination Date), with the number of Stock Units credited to the Elective Stock Unit Account being the amount obtained by dividing (i) the relevant Adjusted Deferred Amount by (ii) the Fair Market Value of a share of Stock on the date of such Annual Meeting or the Service Termination Date, as applicable.

Section 8. Election to Receive Stock

(a) Election . An Eligible Director may make a Stock Election to receive all or part of any or all of such Eligible Director’s Retainers in shares of Stock by submitting a Stock Election Form to the Secretary indicating the Stock Amount. A Stock Election Form shall be effective only with respect to Retainers payable after the date on which the Secretary receives the Stock Election Form. Each Stock Election, once made, shall be irrevocable. Notwithstanding the foregoing, a Stock Election may be superseded with respect to future payments of an Eligible Director’s Retainers by submitting a new Stock Election Form to the Secretary.

(b) Payment in Stock . As of each Retainer Payment Date, an Eligible Director who has made a Stock Election will receive, in lieu of the Retainer elected to be received in Stock, a whole number of shares of Stock (but not fractional shares) determined by dividing:

(i) the amount of the Retainer that is payable to the Eligible Director on the applicable Retainer Payment Date and is subject to a Stock Election; by

(ii) the Fair Market Value of a share of Stock on such Retainer Payment Date.

In no circumstances shall an Eligible Director be entitled to receive, or shall the Company have any obligation to issue to the Eligible Director, any fractional share of Stock. In lieu of any fractional share of Stock, the Eligible Director shall be entitled to receive, and the Company shall be obligated to pay to such Eligible Director, cash equal to the value of any fractional share of Stock (determined by using the Fair Market Value of a share of Stock on such Retainer Payment Date).

 

8


Section 9. Governmental Service

(a) Governmental Service Resignation . Notwithstanding any election made by an Eligible Director on any Deferral Form, if an Eligible Director resigns as a director of the Company as a result of accepting employment at a governmental department or agency, self-regulatory agency or other public service employer (a “Governmental Employer”) (such resignation is referred to herein as a “Governmental Service Resignation”), then (i) if the Eligible Director provides the Company with satisfactory evidence demonstrating that as a result of such employment, the divestiture of his or her continued interest in Company equity awards or continued ownership of Stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to the Eligible Director at such Governmental Employer, all amounts credited to the Eligible Director’s Elective Stock Unit Account and Mandatory Stock Unit Account will be distributed in a lump sum in accordance with Section 7(f), and all transfer restrictions will lift on shares of Director Stock held by the Eligible Director, on or as soon as administratively practicable after the date of such Governmental Service Resignation, and (ii) if the Eligible Director provides the Company with satisfactory evidence demonstrating that as a result of such employment, the divestiture of the Eligible Director’s continued interest in his or her Cash Account is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to the Eligible Director at such Governmental Employer, all amounts credited to the Eligible Director’s Cash Account will be distributed in a lump sum on or as soon as administratively practicable after the date of such Governmental Service Resignation

(b) Governmental Service following Resignation . Notwithstanding any election made by an Eligible Director on any Deferral Form, if, following the termination of an Eligible Director’s service as a director of the Company, the Eligible Director accepts employment with a Governmental Employer, then (i) upon providing the Company with satisfactory evidence demonstrating that as a result of such employment the divestiture of the Eligible Director’s continued interest in Company equity awards or continued ownership of Stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to the Eligible Director at such Governmental Employer, all amounts credited to the Eligible Director’s Elective Stock Unit Account and Mandatory Stock Unit Account will be distributed in a lump sum in accordance with Section 7(f), and all transfer restrictions will lift on shares of Director Stock held by the Director, on or as soon as administratively practicable after the date on which the Eligible Director provides the Company with such satisfactory evidence, and (ii) if the Eligible Director provides the Company with satisfactory evidence demonstrating that as a result of such employment, the divestiture of the Eligible Director’s continued interest in his or her Cash Account is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to the Eligible Director at such Governmental Employer, all amounts credited to the Eligible Director’s Cash Account will be distributed in a lump sum on or as soon as administratively practicable after the date on which the Eligible Director provides the Company with such satisfactory evidence.

 

9


Section 10. Fair Market Value

Fair Market Value ” shall mean, with respect to each share of Stock for any day:

(a) if the Stock is listed for trading on the New York Stock Exchange, (i) the volume weighted average price of the Stock, reflecting composite trading between 9:30 a.m. and 4:00 p.m. (Eastern time) on such date, as reported by the Bloomberg Professional Service on the MS Equity Volume at Price page under the “VWAP” field, at 4:00 p.m. on such date, rounded up to the nearest whole cent, or, if not so reported, as reported by another third party source to which the Company has access on such date, or if no such reported sale of the Stock shall have occurred on such date, on the most recent date on which such a reported sale occurred; or (ii) if the volume weighted average price is not available from a third party source to which the Company has access on such date or on the most recent date on which a reported sale occurred, “Fair Market Value” will be the average of the high and low prices of the Stock as reported on the Consolidated Transaction Reporting System on such date, rounded up to the nearest whole cent, or if no such reported sale of the Stock shall have occurred on such date, on the most recent date on which such a reported sale occurred; or

(b) if the Stock is not so listed, but is listed on another national securities exchange, the closing price, regular way, of the Stock on such exchange, rounded up to the nearest whole cent, on which the largest number of shares of Stock have been traded in the aggregate on the preceding twenty trading days, or, if no such reported sale of the Stock shall have occurred on such date on such exchange, on the most recent date on which such a reported sale occurred on such exchange, or

(a) if the Stock is not listed for trading on a national securities exchange, the average of the closing bid and asked prices as reported by the National Association of Securities Dealers, rounded up to the nearest whole cent, or, if no such prices shall have been so reported for such date, on the most recent date for which such prices were so reported.

Section 11. Issuance of Stock

(a) Restrictions on Transferability . All shares of Stock delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Company may deem advisable or legally necessary under any laws, statutes, rules, regulations and other legal requirements, including, without limitation, those of any stock exchange upon which the Stock is then listed and any applicable federal, state or foreign securities law.

(b) Compliance with Laws . Anything to the contrary herein notwithstanding, the Company shall not be required to issue any shares of Stock under the Plan if, in the opinion of legal counsel to the Company, the issuance and delivery of such shares would constitute a violation by the Eligible Director or the Company of any applicable law or regulation of any governmental authority, including, without limitation, federal and state securities laws, or the regulations of any stock exchanges on which the Company’s securities may then be listed.

Section 12. Withholding Taxes

The Company may require as a condition of delivery of any shares of Stock that the Eligible Director remit (i) in cash, (ii) by tendering (or attesting to the ownership of) shares of Stock that the Company determines will not result in unfavorable accounting treatment or (iii) by the Company withholding shares of Stock, an amount sufficient to satisfy all foreign, federal, state, local and other governmental withholding tax requirements relating thereto (if any) and,

 

10


exclusively in the case of an award that does not constitute a deferral of compensation subject to Section 409A, any or all indebtedness or other obligation of the Eligible Director to the Company or any of its subsidiaries. In the case of any award that constitutes a deferral of compensation subject to Section 409A, the Company may not withhold shares of Stock to satisfy obligations that an Eligible Director owes to the Company or any of its subsidiaries other than with respect to taxes or other governmental charges imposed on amounts received by the Eligible Director pursuant to such award, except to the extent such withholding is not prohibited by Section 409A and would not cause the Eligible Director to recognize income for United States federal income tax purposes prior to the time of payment of the award or to incur interest or additional tax under Section 409A. Any shares tendered or withheld pursuant to this Section 12 will be valued at Fair Market Value on the relevant payment or exercise date, as applicable.

Section 13. Plan Amendments and Termination

The Board may suspend or terminate the Plan at any time, in whole or in part. Termination of the Plan shall not adversely affect the rights of Eligible Directors in Mandatory Stock Unit Accounts, Cash Accounts and Elective Stock Unit Accounts outstanding at the time of termination. Notwithstanding any termination of the Plan, distributions to Eligible Directors in respect of their Mandatory Stock Unit Accounts, Cash Accounts and Elective Stock Unit Accounts shall be made at the times and in the manner provided herein.

The Board may also alter, amend or modify the Plan at any time. These amendments may include (but are not limited to) changes that the Board considers necessary or advisable as a result of changes in, or the adoption or interpretation of, any law, regulation, ruling, judicial decision or accounting standards (collectively, “ Legal Requirements ”). The Board may not amend or modify the Plan in a manner that would materially impair an Eligible Director’s rights in any Mandatory Stock Unit Account, Cash Account or Elective Stock Unit Account without the Eligible Director’s consent; provided , however , that the Board may, without an Eligible Director’s consent, amend or modify the Plan in any manner that it considers necessary or advisable to comply with any Legal Requirement or to ensure that amounts credited to an Eligible Director’s Mandatory Stock Unit Account, Cash Account or Elective Stock Unit Account are not subject to federal, state or local income tax prior to payment.

Notwithstanding the foregoing, if any provision of this Plan would, in the reasonable, good faith judgment of the Company, result in or likely result in the imposition on any Eligible Director or any other person of any tax, interest or penalty under Section 409A of the Internal Revenue Code of 1986, as amended, the Company may reform this Plan or any provision hereof, without the consent of any Eligible Director, in the manner that the Company reasonably and in good faith determines to be necessary or advisable to avoid the imposition of such tax, interest or penalty; provided, however, that any such reformation shall, to the maximum extent the Company reasonably and in good faith determines to be possible, retain the economic and tax benefits to the Eligible Directors hereunder while not materially increasing the cost to the Company of providing such benefits to the Eligible Directors.

The Board may delegate to the Plan Administrator its authority under this Section 13 to amend any provision of the Plan for which approval by the Board (or a committee thereof) is not required under applicable law or the rules of any national securities exchange on which the Stock is traded.

 

11


Section 14. Listing, Registration and Legal Compliance

If the Plan Administrators shall at any time determine that any Consent (as hereinafter defined) is necessary or desirable as a condition of, or in connection with, the granting of any award under the Plan, the issuance or purchase of shares or other rights hereunder or the taking of any other action hereunder (each such action being hereinafter referred to as a “ Plan Action ”), then such Plan Action shall not be taken, in whole or in part, unless and until such Consent shall have been effected or obtained. The term “ Consent ” as used herein with respect to any Plan Action means (i) the listing, registrations or qualifications in respect thereof upon any securities exchange or under any foreign, federal, state or local law, rule or regulation, (ii) any and all consents, clearances and approvals in respect of a Plan Action by any governmental or other regulatory bodies, or (iii) any and all written agreements and representations by an Eligible Director with respect to the disposition of Stock or with respect to any other matter, which the Plan Administrators shall deem necessary or desirable in order to comply with the terms of any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or registration be made.

Section 15. Right Reserved

Nothing in the Plan shall confer upon any Eligible Director the right to continue as a director of the Company or affect any right that the Company or any Eligible Director may have to terminate the service of such Eligible Director.

Section 16. Rights as a Stockholder

Except as otherwise provided by the terms of any applicable Benefit Plan Trust, an Eligible Director shall not, by reason of any stock option, Director Stock, Stock Unit or Stock Amount, have any rights as a stockholder of the Company until Stock has been issued to such Eligible Director.

Section 17. Unfunded Plan

The Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company and any Eligible Director or other person. To the extent any person holds any rights by virtue of a pending grant or deferral under the Plan, such rights shall be no greater than the rights of an unsecured general creditor of the Company. Notwithstanding the foregoing, the Company may (but shall not be obligated to) contribute shares of Stock corresponding to Stock Units to a Benefit Plan Trust, provided that the principal and income of any such Benefit Plan Trust shall be subject to the claims of general creditors of the Company. The Company may amend the terms of any Benefit Plan Trust as applicable to any one or more Eligible Directors in order to procure favorable tax treatment for such Eligible Director(s) or to comply with the laws applicable in any non-U.S. jurisdiction.

 

12


Section 18. Governing Law

The Plan is deemed adopted, made and delivered in New York and shall be governed by the laws of the State of New York applicable to agreements made and to be performed entirely within such state.

Section 19. Severability

If any part of the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of the Plan not declared to be unlawful or invalid. Any Section or part of a Section so declared to be unlawful or invalid shall, if possible, be construed in a manner that will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

Section 20. Notices

All notices and other communications hereunder shall be given in writing and shall be deemed given when personally delivered against receipt or five days after having been mailed by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: (a) if to the Company: Morgan Stanley, 1585 Broadway, New York, New York 10036, Attention: Corporate Secretary; and (b) if to an Eligible Director, at the Eligible Director’s principal residential address last furnished to the Company. Either party may, by notice, change the address to which notice to such party is to be given.

Section 21. Section Headings

The Section headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of said Sections.

Section 22. Definitions

As used in the Plan, the following terms shall have the meanings indicated below:

Account ” means Cash Account, Elective Stock Unit Account or Mandatory Stock Unit Account, as applicable.

Adjusted Deferred Amount ” has the meaning set forth in Section 7(h).

Annual Meeting ” means an annual meeting of the Company’s stockholders.

Annual Retainer ” means a cash retainer for services as a member of the Board.

Annual Stock Units ” means the Stock Units credited to any Eligible Director’s Mandatory Stock Unit Account pursuant to Section 6(a)(ii)(B).

Average Daily Cash Balance ” means the sum of the daily balances for a Cash Account for any quarter or shorter period for which the calculation is made, divided by the number of days on which a positive balance existed in such Cash Account.

 

13


Benefit Plan Trust ” means any trust established by the Company under which Eligible Directors, or Eligible Directors and participants in designated employee benefit plans of the Company, constitute the principal beneficiaries.

Board ” means the board of directors of the Company.

Cash Account ” means a bookkeeping account to which Deferred Amounts are credited pursuant to Section 7(a)(ii).

Cause ” means, with respect to any Eligible Director, termination of service on the Board on account of any act of (A) fraud or intentional misrepresentation, or (B) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any affiliate.

Committee Retainer ” means a cash retainer for services as a member of any committee of the Board.

Company ” has the meaning set forth in Section 1.

“Consent” has the meaning set forth in Section 14.

Deferred Amount ” means any amount, in dollars, of Retainers and/or Director Stock that an Eligible Director elects to defer, as indicated on the relevant Deferral Election Form.

Deferral Election ” means a deferral election by an Eligible Director made with respect to any Retainers, Director Stock, Initial Stock Units and/or Annual Stock Units.

Deferral Election Form ” means an election form submitted by an Eligible Director to the Secretary with respect to any Retainers, Director Stock, or Stock Units.

Director Stock ” means shares of Stock awarded to an Eligible Director for service on the Board as provided in Section 6(a).

Disability ” means a “permanent and total disability” as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended.

Distribution Commencement Date ” means the date that an Eligible Director elects as the date on which distribution of Deferred Amounts should begin, as indicated on the relevant Deferral Election Form.

Elective Stock Unit Account ” means a bookkeeping account to which Deferred Amounts are credited pursuant to Section 7(a).

Elective Stock Units ” means Stock Units that are elected pursuant to Section 7(a) to be received in lieu of Retainers and/or Director Stock.

Eligible Directors ” has the meaning set forth in Section 2.

 

14


Fair Market Value ” has the meaning set forth in Section 10.

Initial Stock Units ” means the Stock Units credited to any Eligible Director’s Mandatory Stock Unit Account pursuant to Section 6(a)(i)(B).

Interest Equivalent ” means an additional amount to be credited to a Cash Account calculated in accordance with Section 7(a)(ii).

Lead Director Retainer ” means a cash retainer for services as the lead director of the Board.

Mandatory Stock Unit Account ” means a bookkeeping account to which Initial Stock Units and Annual Stock Units are credited pursuant to Sections 6(a)(i)(B) and 6(a)(ii)(B).

Meeting Fees ” means fees (if any) payable to an Eligible Director for participation in meetings of the Board or any committee thereof.

Normal Retirement ” means the termination of service on the Board for retirement at or after attaining age 65, other than for Cause, Disability or death.

Plan ” has the meaning set forth in Section 1.

Rate of Interest ” means the time weighted average interest rate paid by the Company for a quarter, or such shorter period from the end of the preceding quarter to an Eligible Director’s Service Termination Date, to institutions from which it borrows funds.

Retainer ” means the Annual Retainer, the Committee Retainer and/or the Lead Director Retainer, as applicable.

Retainer Payment Date ” means, with respect to any Retainer, the date as of which an Eligible Director becomes entitled to payment of Retainer; provided, however , that in the event such date is a date other than the date of the Annual Meeting, the Retainer Payment Date shall be the first day of the calendar month following the month in which such Eligible Director becomes entitled to the payment of such Retainer.

Section 409A ” means Section 409A of the Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder (or any successor provisions thereto).

Service Termination Date ” means the date of an Eligible Director’s termination of service on the Board or such later date as constitutes the Eligible Director’s separation from service with the Company for purposes of Section 409A.

Stock ” means the Company’s common stock, par value $0.01 per share, and any other shares into which such stock shall thereafter be changed by reason of any merger, reorganization, recapitalization, consolidation, split-up, combination of shares or similar event as set forth in and in accordance with Section 4.

 

15


Stock Amount ” means the percentage of the Retainers that an Eligible Director elects to have paid in Stock, as indicated on the relevant Stock Election Form.

Stock Election ” means an election by an Eligible Director to receive all or a portion of the Eligible Director’s Retainers in shares of Stock.

Stock Election Form ” means the election form submitted by an Eligible Director to the Secretary as provided in Section 8(a).

Stock Units ” means Initial Stock Units, Annual Stock Units and/or Elective Stock Units, as applicable.

Transition Date ” has the meaning set forth in Section 5(a).

 

16

E XHIBIT 10.3

A MENDMENT , D ATED D ECEMBER  11, 2007, TO THE

M ORGAN S TANLEY 1993 S TOCK P LAN FOR N ON -E MPLOYEE D IRECTORS

Section 6.4.1 of the Morgan Stanley 1993 Stock Plan for Non-Employee Directors, as amended, is amended by adding a new sentence at the end thereof. With such addition, Section 6.4.1 reads in its entirety as follows:

6.4.1 Distribution Date . Each Eligible Director shall designate on the Election Form one of the following dates as a Distribution Date with respect to amounts credited to the accounts thereafter: (i) the first day of the calendar month following the date of the Eligible Director’s death; (ii) the first day of the calendar month following the date of termination of service as a member of the Board of Directors of the Company; (iii) the first day of a calendar month specified by the Eligible Director which is at least six months after the Election Date; or (iv) the earlier to occur of (i), (ii) or (iii). For any account balances in existence as of March 18, 2007, an Eligible Director’s election pursuant to clause (ii) or (iv) of the preceding sentence shall be understood to reference the first day of the calendar month following the date of termination of service as a member of the Board of Directors of the Company or such later date as constitutes the Eligible Director’s separation from service with the Company for purposes of Section 409A of the Internal Revenue Code and the rules, regulations and guidance thereunder (including any successor provisions thereto).

Exhibit 10.4

LOGO

July 21, 2005

Thomas R. Nides

[address redacted]

Dear Tom:

I am pleased to extend to you an offer of employment as Chief Administrative Officer and a Managing Director of Morgan Stanley. We anticipate that you will begin employment with Morgan Stanley in our principal executive offices in Manhattan on August 15, 2005. You will report to the Chief Executive Officer of Morgan Stanley and will be a member of the Firm’s Management Committee or any successor committee thereto (the “Management Committee”).

For fiscal 2005, beginning December 1, 2004, your Total Reward will consist of an annual base salary of $300,000, pro-rated from your start date, paid in semi-monthly installments plus a year-end discretionary bonus that we anticipate will be payable 45% in cash and 55% in the form of an equity-based award (such as restricted stock units and/or stock options or other equity-based awards in effect at the time, at the discretion of the Compensation, Management Development and Succession Committee (the “Committee”)) under the Firm’s Equity Incentive Compensation Plan. From time to time, we review the terms of the equity-based compensation and the percentage component that it constitutes of Total Reward with the Committee. Your actual award in any year will be consistent with the terms and conditions of other Management Committee members at the time of the award and will be subject to certain restrictions and cancellation provisions (for example, your equity award, even if vested, is subject to cancellation if you engage in certain prohibited conduct). Your 2005 year-end bonus will be determined as if you had been employed by the Firm for the full fiscal year so long as you have not resigned (other than for Good Reason, as such term is defined in Annex A) or been terminated for Cause (as such term is defined in Annex A), in each case on or prior to November 30, 2005, and the cash portion of such bonus will be payable after the close of the 2005 fiscal year, on or before January 31, 2006. All payments are subject to applicable withholdings and deductions.

The Firm will also grant you a one-time award of $5,000,000 in the form of Morgan Stanley restricted stock units (“Incoming Units”). The number of Morgan Stanley restricted stock units you will receive will be determined by dividing the award value by the closing price of Morgan Stanley common stock on the date of this letter. Your Incoming Units will vest and convert to shares on the following schedule: Twenty percent will vest, and the underlying shares shall be delivered, on each of the first five anniversaries of your hire date. Except as specifically provided in this letter, the terms and conditions of these Incoming Units will be substantially similar to the terms and conditions in the fiscal 2004 Management Committee annual stock unit awards granted under the Firm’s Equity Incentive Compensation Plan, including the definition and effect of a Full Career Retirement. Your Incoming Units will not constitute part of your Total Reward.

 

- 1 -


LOGO

 

In addition to the foregoing, you will, contingent on your joining the Firm, receive a one-time cash payment of $750,000 less applicable withholdings and deductions and payable in January, 2006. This amount will be payable to you after your start date during 2005, regardless of your employment status at the time of payment.

All payments relating to your awards are subject to applicable withholding and deductions. If any stock unit award that is granted to you (not including your Incoming Units) is scheduled to be paid to you when you are an executive officer of Morgan Stanley and is not deemed to be granted pursuant to performance criteria and therefore not deductible to the Firm, payment or conversion of such stock units will be deferred until six (6) months after your employment terminates; provided, however, that in the event that you die or there is a Change in Ownership of Morgan Stanley (as will be defined in your award certificate), in each case that occurs at any time on or after the deferral from the original conversion date, payment will be made as soon as administratively practicable after such event.

The foregoing awards and their terms will be subject to approval by the Committee and, except as specifically provided in this letter, will be subject to the same cancellation provisions, sales restrictions and other terms as are in effect at the time for similar equity-based awards (for example, your equity awards, even if vested but not converted in the case of stock units, are subject to cancellation if you engage in certain prohibited conduct) and the terms and conditions of the award certificate and the equity compensation plan under which the awards are issued. The Management Committee Equity Ownership Commitment will apply to any Morgan Stanley common stock you own and any equity-based award that may be granted to you.

In the event that you resign other than for Good Reason or are terminated for Cause prior to the end of the applicable fiscal year, you will receive solely your unpaid base salary as of the date of termination. If you are terminated other than for Cause, you resign for Good Reason or you terminate your employment as a result of your death or Disability (as such term is defined in Annex A), in each case on or prior to November 30, 2005, the Incoming Units will vest and be paid out upon such termination or, if they have not been granted, you will receive a cash payment equal to the Incoming Units value. If you are terminated other than for Cause, you resign for Good Reason or you terminate your employment as a result of your death or Disability, in each case after November 30, 2005 but on or before November 30, 2006, you will receive a severance payment that is no less than your Total Reward for 2005 (on an annualized basis), payable to you in cash within 30 days of such termination, and the Incoming Units will vest and be paid out upon such termination or, if they have not been granted, the severance payment will be increased by the Incoming Units value. If you are terminated other than for Cause, you resign for Good Reason or you terminate your employment as a result of your death or Disability, in each case after November 30, 2006, the Incoming Units will vest and be paid out upon such termination or, if they have not been granted, you will receive a cash payment equal to the Incoming Units value.

 

- 2 -


LOGO

 

All payments are subject to your execution and non-revocation of a release in a form reasonably acceptable to the Firm and to you. Except as specifically provided in this letter, your entitlements upon death or Disability shall be governed by the applicable Morgan Stanley benefits programs. Historically, all stock units and stock options issued under the Equity Incentive Compensation Plan have vested immediately on an employee’s termination of employment due to death or Disability.

You will be accorded Full Career Retirement status for purposes of all equity-based awards granted to you during your employment at Morgan Stanley and for any other purpose for which Full Career Retirement status is provided generally to other members of the Management Committee. Full Career Retirement status provides that so long as you do not engage in any conduct that constitutes a cancellation event under the relevant equity-based award, such equity-based award will vest upon your termination of employment. Transfer restrictions will lift on schedule (e.g., restricted stock units will convert to shares of Morgan Stanley common stock on their scheduled conversion date). Your awards will remain subject to all terms and conditions approved by the Committee for such awards, including without limitation, the cancellation of the award for certain prohibited conduct.

Since your primary residence will remain in Washington, D.C., you will be reimbursed for reasonable commutation expenses, e.g., by way of regularly scheduled flights or rail service, to New York City and be provided housing arrangements in New York City. If the Firm determines that you are required to pay tax on this benefit, it will provide you with a payment (the “Tax Gross-Up Payment”) equal to the amount of all taxes you are required to pay on this benefit, including any income taxes imposed on the Tax Gross-Up Payment.

Notwithstanding any provision of this agreement to the contrary, if at the time of your termination you are a “specified employee” as defined in Section 409A of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), you shall not be entitled to any payments upon a termination of your employment until the earlier of (i) the date which is six (6) months after your termination of employment for any reason other than death or, in the case of any severance to which you are entitled under this letter or Incoming Units, disability (as such term is used in Section 409A(a)(2)(C) of the Code) or (ii) the date of your death, or in the case of any severance to which you are entitled under this letter or Incoming Units, disability (as such term is used in Section 409A(a)(2)(C) of the Code). The provisions of this paragraph shall only apply if required to comply with Section 409A of the Code. In addition, if any provision of this agreement contravenes Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder, the Firm may reform this agreement or any provision hereof to maintain to the maximum extent practicable the original intent of the applicable provision without violating the provisions of Section 409A of the Code.

In the event it shall be determined that any payment or distribution you receive from Morgan Stanley (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue

 

- 3 -


LOGO

 

Code, or any interest or penalties are incurred by you with respect to such excise tax (together, the “Excise Tax”), you shall be entitled to receive an additional payment (the “Gross-Up Payment”) in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount on an after-tax basis of the Gross-Up Payment equal to the Excise Tax imposed upon all such Payments.

You will be eligible to participate in certain of the Firm’s voluntary non-qualified deferred compensation plans offered in fiscal year 2005. You will be permitted thirty (30) days from your start date to elect to defer on a pre-tax basis a portion of your 2005 compensation. The Executive Compensation department will contact you regarding these plans.

You will also be eligible for six weeks of vacation for each calendar year, pro-rated from your start date.

You will be eligible for the Firm’s benefits programs in accordance with the terms and conditions of those programs. For details on all benefits plans, please read the Summary Plan Descriptions included in your orientation package. In addition, you will be entitled to participate in all perquisite and other plans, programs or arrangements on a basis no less favorable than provided to other members of the Management Committee (other than the Chief Executive Officer of Morgan Stanley).

You are eligible for immediate participation in the Firm’s Health and Welfare benefits program, under which you may elect an individualized package of medical, dental, disability, life and accidental death and dismemberment insurance coverage, for which the Firm pays a substantial portion of the cost.

Approximately two to three weeks from the date of your acceptance of this letter, you will receive a personalized Health and Welfare Benefits Enrollment package, which includes your benefit costs and options. You will have 31 days from the date printed on the personalized Enrollment Worksheet to contact the Benefit Center to enroll. Otherwise, you will receive the coverages listed in the ‘If You Do Not Make Elections’ section of the Worksheet. Alternatively, if you prefer, within approximately one week after we send the Benefits Enrollment package, we will arrange a meeting to complete your benefits selections, or you may access the Benefit Center’s Web site at [website address redacted] to review your options and enroll in coverage by using your Social Security number and Personal Identification Number (PIN). Your initial PIN is [redacted]. Any elected health and welfare coverage will be effective as of your start date.

Upon your start date, you will be eligible to participate in the Morgan Stanley 401(k) Plan (“401(k) Plan”) and you will be eligible for the Firm’s 401(k) Match. Generally, you must remain employed through December 31 to receive a Match for that year. With respect to your own contributions to the 401(k) Plan, enrollment is ongoing. You may elect to contribute to this Plan from your base salary, bonus and commissions, as applicable, at any time.

 

- 4 -


LOGO

 

Upon your start date, you may elect to participate in the Firm’s Employee Stock Purchase Plan (ESPP) which allows eligible participants to purchase Morgan Stanley common stock at a discount with after-tax payroll deductions.

Also on the first of the month after you complete one year of service, you will be eligible to participate in the Firm’s Pension Plan. Enrollment is automatic. You will be vested in your 401(k) Match and any Profit Sharing after three years of service, and you will be vested under the Pension Plan after five years of service.

We remind you that this offer is contingent upon a number of additional steps in the employment process including, but not limited to, background and reference checking and a drug screening test. The Health Center is open Monday through Friday from 9:00 am until 2:00 pm. Please come in no earlier than 48 hours from your start date for your drug screening. You do not need to make an appointment. You are also required to show appropriate proof of authorization to commence work in the United States. We ask that you complete Part 1 of the attached Form I-9, on or before your first day of work (see, in the attached packet, a list of the type of documentation we will need). This is a requirement of the Immigration Reform and Control Act of 1986. If you are not legally able to work for the Firm in the United States in the position offered you, or if any part of the screening process proves unsatisfactory to the Firm or you are unable to complete Part 1 of the Form I-9, the Firm reserves the right to rescind any outstanding offer of employment or terminate your employment without notice or severance benefits and rescind any stock unit or stock option or restricted stock awards described herein. Further, this offer is contingent on your obtaining and retaining all licenses and registrations from the NASD, exchanges, state securities commissions and other regulatory bodies as Morgan Stanley shall determine necessary for your position. Also in the enclosed packet, please find personnel forms that need to be completed and brought with you on your start date.

You acknowledge that in the course of your employment with the Firm, you are not permitted to make any unauthorized use of documents or other information that are the confidential, trade secret or proprietary information (“Confidential Information”) of another individual or company.

Likewise, you may not bring onto Firm premises any Confidential Information, whether documents or other tangible forms, relating to your prior employer(s)’ business.

In the event of your termination of employment, you will not be required to seek other employment or take any other action by way of mitigation of amounts payable to you under any provision of this letter or otherwise, and such amounts shall not be reduced whether or not you obtain other employment.

 

- 5 -


LOGO

 

Except as expressly set forth herein, nothing in this letter should be construed as a guarantee of any particular level of benefits, of your participation in any benefit plan, or of continued employment for any period of time. You should understand that your employment will be “at will”, which means that either you or the Firm may terminate your employment for any reason, at any time, subject to the terms of this letter. Morgan Stanley reserves the right, subject to the terms of this letter, to amend, modify or terminate, in its sole discretion, all benefit and compensation plans in effect from time to time. This offer constitutes the entire understanding and contains a complete statement of all agreements between you and Morgan Stanley and supersedes all prior or contemporaneous verbal or written agreements, understandings or communications. If there is any conflict with the benefit information included in this letter or any verbal representation and the Plan documents or insurance contracts, the Plan documents or insurance documents control. This letter is governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflicts of laws. This letter may not be amended or modified otherwise than by a written agreement executed by the parties or their respective successors and legal representatives.

With the formalities covered, we are looking forward to your joining Morgan Stanley. If you have questions regarding the above, please feel free to call [name and telephone number redacted]

We ask that you confirm your acceptance by signing and dating this offer letter in the area designated below and returning this letter to [name redacted] at 1585 Broadway, New York, New York 10036. Your signature below confirms that you are subject to no contractual or other restriction or obligation that is inconsistent with your accepting this offer of employment and performing your duties.

Please retain the additional copy of this offer letter for your reference.

Very truly yours,

 

LOGO
John J. Mack
Chairman of the Board and Chief Executive Officer
Offer Accepted and Agreed To:
Signed:  

LOGO

 

- 6 -


LOGO

 

Annex A

“Cause” means:

 

   

any act or omission which constitutes a material breach of your material obligations to the Firm or of the provisions of this letter, in either case of which you have been made aware in writing, or your continued failure or refusal to perform substantially any material duties reasonably required of you, other than any such breach, failure or refusal resulting from incapacity due to physical or mental illness, which breach (if susceptible to cure), failure or refusal is not corrected (other than failure to correct by reason of your incapacity due to physical or mental illness) within ten (10) business days after written notification thereof to you by the Firm;

 

   

your willful commission of any illegal, dishonest or fraudulent act which is materially and demonstrably injurious to the interest or business reputation of the Firm;

 

   

your conviction of a felony or your guilty or nolo contedere plea by you with respect thereto; and

 

   

your material violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Firm is a member or of any policy of the Firm relating to compliance with any of the foregoing.

For purposes of this provision, no act or failure to act on your part will be considered “willful” unless done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of Morgan Stanley or was done or omitted to be done with reckless disregard of the consequences. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board of Directors of Morgan Stanley (the “Board”) or the Management Committee or upon instructions of the Chairman and Chief Executive Officer of Morgan Stanley or based upon advice of counsel for Morgan Stanley shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of Morgan Stanley.

“Good Reason” means a voluntary termination by you following: (i) removal from the Management Committee or from the position of Chief Administrative Officer or a change in your reporting relationship such that you are no longer reporting to the Chief Executive Officer of Morgan Stanley; (ii) a material diminution of your duties and responsibilities as the Chief Administrative Officer that is not agreed to by the parties or the assignment to you of duties materially inconsistent with your position (including status, offices, titles and reporting requirements), duties or responsibilities as contemplated herein, or any other material action by Morgan Stanley which is materially inconsistent or materially reduces such position, duties or responsibilities; (iii) any material breach by Morgan Stanley of its material obligations to provide payments or benefits as required in this

 

- 7 -


LOGO

 

agreement or the failure of the Committee to approve the Incoming Units; (iv) Morgan Stanley’s requiring your principal office to be based at any office or location other than such office or location designated as Morgan Stanley’s principal executive offices (i.e., where the principal office of the Chief Executive Officer of Morgan Stanley is located); (v) any purported termination by Morgan Stanley of your employment otherwise than as expressly permitted by this letter; or (vi) a failure by Morgan Stanley to require any successor (whether direct or indirect, by purchase, merger, consolidation, spin-off or otherwise) to all or substantially all of the business and/or assets of Morgan Stanley to assume expressly and agree to perform the terms herein as if no such succession had taken place.

It is further provided that you shall not be entitled to terminate your employment for Good Reason unless you have given the Chief Executive Officer written notification of your intention to terminate your employment for Good Reason describing the factual basis for such “Good Reason” and the event giving rise to “Good Reason” is not cured by the Firm within thirty (30) business days after the receipt of such notice by the Chief Executive Officer.

“Disability” means your becoming disabled such that you are prevented from performing your usual duties and services hereunder for a period of one hundred and twenty (120) consecutive days or for shorter periods aggregating one hundred and twenty (120) days in any twelve (12) month period.

 

- 8 -


February 8, 2008

Dear Tom,

This letter confirms the understanding between you and Morgan Stanley (the “Company”) regarding the treatment of the Incoming Units granted to you in connection with your commencement of employment with the Company. In the event your employment with the Company is terminated other than for Cause, you resign for Good Reason or you terminate your employment as a result of your Disability (each as defined in your offer letter from the Company dated July 21, 2005 (the “Offer Letter”)), in each case, after the date hereof, the Incoming Units will vest on such termination and be paid out on their scheduled conversion dates, provided that, following such termination, the Incoming Units will not be subject to cancellation.

All other terms of your Offer Letter and Incoming Units shall remain in full force and effect.

We ask that you confirm your understanding of the foregoing by signing and dating this letter in the area designated below and returning this letter to me.

 

/s/ Karen C. Jamesley

By:   Karen C. Jamesley
Title:   Global Head of Human Resources
Confirmed and Agreed to:

/s/ Thomas R. Nides

By:   Thomas R. Nides
Title:   Chief Administrative Officer

Exhibit 10.5

LOGO

July 18, 2005

Gary Lynch

[address redacted]

Dear Gary:

I am pleased to extend to you an offer of employment as Chief Legal Officer and a Managing Director of Morgan Stanley. We anticipate that you will begin employment with Morgan Stanley in our principal executive offices in Manhattan on October 18, 2005. You will report to the Chief Executive Officer of Morgan Stanley and will be a member of the Firm’s Management Committee or any successor committee thereto (the “Management Committee”).

For fiscal 2005, beginning December 1, 2004, your Total Reward will consist of an annual base salary of $300,000, pro-rated from your start date, paid in semi-monthly installments plus a year-end discretionary bonus that we anticipate will be payable 45% in cash and 55% in the form of an equity-based award (such as restricted stock units and/or stock options or other equity-based awards in effect at the time, at the discretion of the Compensation, Management Development and Succession Committee (the “Committee”)) under the Firm’s Equity Incentive Compensation Plan. From time to time, we review the terms of the equity-based compensation and the percentage component that it constitutes of Total Reward with the Committee. Your actual award in any year will be consistent with the terms and conditions of other Management Committee members at the time of the award and will be subject to certain restrictions and cancellation provisions (for example, your equity award, even if vested, is subject to cancellation if you engage in certain prohibited conduct). Your 2005 year-end bonus will be determined as if you had been employed by the Firm for the full fiscal year so long as you have not resigned (other than for Good Reason, as such term is defined in Annex A) or been terminated for Cause (as such term is defined in Annex A), in each case on or prior to November 30, 2005, and the cash portion of such bonus will be payable after the close of the 2005 fiscal year, on or before January 31, 2006. All payments are subject to applicable withholdings and deductions.

The Firm will also grant you awards intended to offset any awards you forfeit at your previous employer (“Offset Units”), which shall be in the form of Morgan Stanley restricted stock units in the case of forfeited equity awards and shall be paid to you in cash at the starting date in the case of awards that would have been settled in cash. The number of Morgan Stanley restricted stock units you will receive will be determined by dividing the value of any non-cash settled forfeited awards (determined, following such forfeiture, based on the closing price of your previous employer’s American Depositary Shares on the date of this letter) by the closing price of Morgan Stanley common stock on the date of

 

- 1 -


LOGO

 

this letter. The Offset Units are intended as an offset of any awards you forfeit at your previous employer and are contingent upon satisfactory confirmation of the forfeiture of such previous awards. Except as specifically provided in this letter, the Offset Units will vest and be paid out as shown in Annex B. Except as specifically provided in this letter, the terms and conditions of these Offset Units will be substantially similar to the terms and conditions in the fiscal 2004 Management Committee annual stock unit awards granted under the Firm’s Equity Incentive Compensation Plan, including the definition and effect of a Full Career Retirement. Your Offset Units will not constitute part of your Total Reward.

All payments relating to your awards are subject to applicable withholding and deductions. If any stock unit award that is granted to you (not including your Offset Units) is scheduled to be paid to you when you are an executive officer of Morgan Stanley and is not deemed to be granted pursuant to performance criteria and therefore not deductible to the Firm, payment or conversion of such stock units will be deferred until six (6) months after your employment terminates; provided, however, that in the event that you die or there is a Change in Ownership of Morgan Stanley (as will be defined in your award certificate), in each case that occurs at any time on or after the deferral from the original conversion date, payment will be made as soon as administratively practicable after such event.

The foregoing awards and their terms will be subject to approval by the Committee and, except as specifically provided in this letter, will be subject to the same cancellation provisions, sales restrictions and other terms as are in effect at the time for similar equity-based awards (for example, your equity awards (other than Offset Units), even if vested but not converted in the case of stock units, are subject to cancellation if you engage in certain prohibited conduct) and the terms and conditions of the award certificate and the equity compensation plan under which the awards are issued. The Management Committee Equity Ownership Commitment will apply to any Morgan Stanley common stock you own and any equity-based award that may be granted to you.

In the event that you resign other than for Good Reason or are terminated for Cause prior to the end of the applicable fiscal year, you will receive solely your unpaid base salary as of the date of termination. If you are terminated other than for Cause, you resign for Good Reason or you terminate your employment as a result of your death or Disability (as such term is defined in Annex A), in each case on or prior to November 30, 2005, the Offset Units will vest and be paid out upon such termination or, if they have not been granted, you will receive a cash payment equal to the value of any awards you forfeit at your previous employer. If you are terminated other than for Cause, you resign for Good Reason or you terminate your employment as a result of your death or Disability, in each case after November 30, 2005 but on or before November 30, 2006, you will receive a severance payment that is no less than your Total Reward for 2005 (on an annualized basis), payable to you in cash within 30 days of such termination, and the Offset Units will vest and be paid out upon such termination or, if they have not been granted, the severance payment will be increased by the value of any awards you forfeit at your previous employer. If you are terminated other than for Cause, you resign for Good Reason or you terminate your employment as a result of your death or Disability, in each case after November 30, 2006, the Offset Units will vest and be paid out upon such termination or, if they have not been granted, you will receive a cash payment equal to the value of any awards you forfeit at your previous employer.

 

- 2 -


LOGO

 

All payments are subject to your execution and non-revocation of a release in a form reasonably acceptable to the Firm and to you. Except as specifically provided in this letter, your entitlements upon death or Disability shall be governed by the applicable Morgan Stanley benefits programs. Historically, all stock units and stock options issued under the Equity Incentive Compensation Plan have vested immediately on an employee’s termination of employment due to death or Disability.

You will be accorded Full Career Retirement status for purposes of all equity-based awards granted to you during your employment at Morgan Stanley and for any other purpose for which Full Career Retirement status is provided generally to other members of the Management Committee. Full Career Retirement status provides that so long as you do not engage in any conduct that constitutes a cancellation event under the relevant equity-based award, such equity-based award will vest and be paid out upon your termination of employment. Transfer restrictions will lift on schedule (e.g., restricted stock units will convert to shares of Morgan Stanley common stock on their scheduled conversion date). Your awards will remain subject to all terms and conditions approved by the Committee for such awards, including without limitation, the cancellation of the award for certain prohibited conduct.

Notwithstanding any provision of this agreement to the contrary, if at the time of your termination you are a “specified employee” as defined in Section 409A of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), you shall not be entitled to any payments upon a termination of your employment until the earlier of (i) the date which is six (6) months after your termination of employment for any reason other than death or, in the case of any severance to which you are entitled under this letter or Offset Units, disability (as such term is used in Section 409A(a)(2)(C) of the Code) or (ii) the date of your death, or in the case of any severance to which you are entitled under this letter or Offset Units, disability (as such term is used in Section 409A(a)(2)(C) of the Code). The provisions of this paragraph shall only apply if required to comply with Section 409A of the Code. In addition, if any provision of this agreement contravenes Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder, the Firm may reform this agreement or any provision hereof to maintain to the maximum extent practicable the original intent of the applicable provision without violating the provisions of Section 409A of the Code.

In the event it shall be determined that any payment or distribution you receive from Morgan Stanley (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, or any interest or penalties are incurred by you with respect to such excise tax (together, the “Excise Tax ), you shall be entitled to receive an additional payment (the “Gross-Up Payment”) in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount on an after-tax basis of the Gross-Up Payment equal to the Excise Tax imposed upon all such Payments.

You will be eligible to participate in certain of the Firm’s voluntary non-qualified deferred compensation plans offered in fiscal year 2005. You will be permitted thirty (30) days from your start date to elect to defer on a pre-tax basis a portion of your 2005 compensation. The Executive Compensation department will contact you regarding these plans.

 

- 3 -


LOGO

 

You will also be eligible for six weeks of vacation for each calendar year, pro-rated from your start date.

You will be eligible for the Firm’s benefits programs in accordance with the terms and conditions of those programs. For details on all benefits plans, please read the Summary Plan Descriptions included in your orientation package. In addition, you will be entitled to participate in all perquisite and other plans, programs or arrangements on a basis no less favorable than provided to other members of the Management Committee (other than the Chief Executive Officer of Morgan Stanley).

You are eligible for immediate participation in the Firm’s Health and Welfare benefits program, under which you may elect an individualized package of medical, dental, disability, life and accidental death and dismemberment insurance coverage, for which the Firm pays a substantial portion of the cost.

Approximately two to three weeks from the date of your acceptance of this letter, you will receive a personalized Health and Welfare Benefits Enrollment package, which includes your benefit costs and options. You will have 31 days from the date printed on the personalized Enrollment Worksheet to contact the Benefit Center to enroll. Otherwise, you will receive the coverages listed in the ‘If You Do Not Make Elections’ section of the Worksheet. Alternatively, if you prefer, within approximately one week after we send the Benefits Enrollment package, we will arrange a meeting to complete your benefits selections, or you may access the Benefit Center’s Web site at [website address redacted] to review your options and enroll in coverage by using your Social Security number and Personal Identification Number (PIN). Your initial PIN is [redacted]. Any elected health and welfare coverage will be effective as of your start date.

Upon your start date, you will be eligible to participate in the Morgan Stanley 401(k) Plan (“40l(k) Plan”) and you will be eligible for the Firm’s 401(k) Match. Generally, you must remain employed through December 31 to receive a Match for that year. With respect to your own contributions to the 401(k) Plan, enrollment is ongoing. You may elect to contribute to this Plan from your base salary, bonus and commissions, as applicable, at any time.

On the first of the month following completion of one year of service, you may elect to participate in the Firm’s Employee Stock Purchase Plan (ESPP) which allows eligible participants to purchase Morgan Stanley common stock at a discount with after-tax payroll deductions.

Also on the first of the month after you complete one year of service, you will be eligible to participate in the Firm’s Pension Plan. Enrollment is automatic. You will be vested in your 401(k) Match and any Profit Sharing after three years of service, and you will be vested under the Pension Plan after five years of service.

 

- 4 -


LOGO

 

We remind you that this offer is contingent upon a number of additional steps in the employment process including, but not limited to, background and reference checking and a drug screening test. The Health Center is open Monday through Friday from 9:00 am until 2:00 pm. Please come in no earlier than 48 hours from your start date for your drug screening. You do not need to make an appointment. You are also required to show appropriate proof of authorization to commence work in the United States. We ask that you complete Part 1 of the attached Form I-9, on or before your first day of work (see, in the attached packet, a list of the type of documentation we will need). This is a requirement of the Immigration Reform and Control Act of 1986. If you are not legally able to work for the Firm in the United States in the position offered you, or if any part of the screening process proves unsatisfactory to the Firm or you are unable to complete Part 1 of the Form I-9, the Firm reserves the right to rescind any outstanding offer of employment or terminate your employment without notice or severance benefits and rescind any stock unit or stock option or restricted stock awards described herein. Further, this offer is contingent on your obtaining and retaining all licenses and registrations from the NASD, exchanges, state securities commissions and other regulatory bodies as Morgan Stanley shall determine necessary for your position. Also in the enclosed packet, please find personnel forms that need to be completed and brought with you on your start date.

You acknowledge that in the course of your employment with the Firm, you are not permitted to make any unauthorized use of documents or other information that are the confidential, trade secret or proprietary information (“Confidential Information”) of another individual or company. Likewise, you may not bring onto Firm premises any Confidential Information, whether documents or other tangible forms, relating to your prior employer(s)’ business.

In the event of your termination of employment, you will not be required to seek other employment or take any other action by way of mitigation of amounts payable to you under any provision of this letter or otherwise, and such amounts shall not be reduced whether or not you obtain other employment.

Except as expressly set forth herein, nothing in this letter should be construed as a guarantee of any particular level of benefits, of your participation in any benefit plan, or of continued employment for any period of time. You should understand that your employment will be “at will”, which means that either you or the Firm may terminate your employment for any reason, at any time, subject to the terms of this letter. Morgan Stanley reserves the right, subject to the terms of this letter, to amend, modify or terminate, in its sole discretion, all benefit and compensation plans in effect from time to time. This offer constitutes the entire understanding and contains a complete statement of all agreements between you and Morgan Stanley and supersedes all prior or contemporaneous verbal or written agreements, understandings or communications. If there is any conflict with the benefit information included in this letter or any verbal representation and the Plan documents or insurance contracts, the Plan documents or insurance documents control. This letter is governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflicts of laws. This letter may not be amended or modified otherwise than by a written agreement executed by the parties or their respective successors and legal representatives.

 

- 5 -


LOGO

 

With the formalities covered, we are looking forward to your joining Morgan Stanley. If you have questions regarding the above, please feel free to call [name and telephone number redacted]

We ask that you confirm your acceptance by signing and dating this offer letter in the area designated below and returning this letter to [name redacted] at 1585 Broadway, New York, New York 10036. Your signature below confirms that you are subject to no contractual or other restriction or obligation that is inconsistent with your accepting this offer of employment and performing your duties.

Please retain the additional copy of this offer letter for your reference.

Very truly yours,

 

LOGO
John J. Mack
Chairman of the Board and Chief Executive Officer
Offer Accepted and Agreed To:
Signed:  

LOGO

Date:   July 18, 2005

 

- 6 -


LOGO

 

Annex A

“Cause” means:

 

   

any act or omission which constitutes a material breach of your material obligations to the Firm or of the provisions of this letter, in either case of which you have been made aware in writing, or your continued failure or refusal to perform substantially any material duties reasonably required of you, other than any such breach, failure or refusal resulting from incapacity due to physical or mental illness, which breach (if susceptible to cure), failure or refusal is not corrected (other than failure to correct by reason of your incapacity due to physical or mental illness) within ten (10) business days after written notification thereof to you by the Firm;

 

   

your willful commission of any illegal, dishonest or fraudulent act which is materially and demonstrably injurious to the interest or business reputation of the Firm;

 

   

your conviction of a felony or your guilty or nolo contedere plea by you with respect thereto; and

 

   

your material violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Firm is a member or of any policy of the Firm relating to compliance with any of the foregoing.

For purposes of this provision, no act or failure to act on your part will be considered “willful” unless done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of Morgan Stanley or was done or omitted to be done with reckless disregard of the consequences. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board of Directors of Morgan Stanley (the “Board”) or the Management Committee or upon instructions of the Chairman and Chief Executive Officer of Morgan Stanley or based upon advice of counsel for Morgan Stanley shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of Morgan Stanley.

“Good Reason” means a voluntary termination by you following: (i) removal from the Management Committee or from the position of Chief Legal Officer or a change in your reporting relationship such that you are no longer reporting to the Chief Executive Officer of Morgan Stanley; (ii) a material diminution of your duties and responsibilities as the Chief Legal Officer that is not agreed to by the parties or the assignment to you of duties materially inconsistent with your position (including status, offices, titles and reporting requirements), duties or responsibilities as contemplated herein, or any other material action by Morgan Stanley which is materially inconsistent or materially reduces such position, duties or responsibilities; (iii) any material breach by Morgan Stanley of its material obligations to

 

- 7 -


LOGO

 

provide payments or benefits as required in this agreement or the failure of the Committee to approve the Offset Units; (iv) Morgan Stanley’s requiring your principal office to be based at any office or location other than such office or location designated as Morgan Stanley’s principal executive offices (i.e., where the principal office of the Chief Executive Officer of Morgan Stanley is located); (v) any purported termination by Morgan Stanley of your employment otherwise than as expressly permitted by this letter, or (vi) a failure by Morgan Stanley to require any successor (whether direct or indirect, by purchase, merger, consolidation, spin-off or otherwise) to all or substantially all of the business and/or assets of Morgan Stanley to assume expressly and agree to perform the terms herein as if no such succession had taken place.

It is further provided that you shall not be entitled to terminate your employment for Good Reason unless you have given the Chief Executive Officer written notification of your intention to terminate your employment for Good Reason describing the factual basis for such “Good Reason” and the event giving rise to “Good Reason” is not cured by the Firm within thirty (30) business days after the receipt of such notice by the Chief Executive Officer.

“Disability” means your becoming disabled such that you are prevented from performing your usual duties and services hereunder for a period of one hundred and twenty (120) consecutive days or for shorter periods aggregating one hundred and twenty (120) days in any twelve (12) month period.

 

- 8 -


LOGO

 

Annex B

The Offset Units in the form of Morgan Stanley restricted stock units shall vest and be paid out as follows:

35% on January 20, 2006

35% on January 20, 2007

15% on January 20, 2008

15% on January 20, 2009

 

- 9 -


February 8, 2008

Dear Gary,

This letter confirms the understanding between you and Morgan Stanley (the “Company”) regarding the treatment of the Offset Units granted to you in connection with your commencement of employment with the Company. In the event your employment with the Company is terminated other than for Cause, you resign for Good Reason or you terminate your employment as a result of your Disability (each as defined in your offer letter from the Company dated July 18, 2005 (the “Offer Letter”)), in each case, after the date hereof, the Offset Units will vest on such termination and be paid out on their scheduled conversion dates, provided that, following such termination, the Offset Units will not be subject to cancellation.

All other terms of your Offer Letter and Offset Units shall remain in full force and effect.

We ask that you confirm your understanding of the foregoing by signing and dating this letter in the area designated below and returning this letter to me.

 

/s/ Karen C. Jamesley

By:   Karen C. Jamesley
Title:   Global Head of Human Resources
Confirmed and Agreed to:

/s/ Gary G. Lynch

By:   Gary G. Lynch
Title:   Chief Legal Officer

E XHIBIT 10.6

LOGO

 

TO:   Colm Kelleher       DATE:   February 16, 2006
FROM:   [Names redacted]       DEPT:   London Human Resources
SUBJECT:   Relocation to New York under the Expatriate Policy

The Expatriate programme has been developed to ensure that employees on international assignments are able to maintain a lifestyle comparable to that which they enjoyed in their home countries. The expatriate programme is designed only for temporary assignments; this programme will be reviewed for discontinuation or renewal on an annual basis.

Your terms and conditions of employment, other than as set out in this memorandum, will remain unchanged throughout this temporary assignment. Your employment will remain with Morgan Stanley UK Limited and shall continue to be governed by UK law.

Your International Services contact in New York is [name, telephone number and email address redacted].

Expatriate compensation consists of base salary, bonus, and a system of allowances, deductions and reimbursements as follows:

Compensation Package:

 

   

Base Salary: Upon transfer your base salary will continue to be £170,000. Base, bonus and any other regular compensation will be deposited into your UK bank account at the same time as your peers in the UK and you will be responsible for transferring funds to New York.

 

   

Cost of Living Allowance: Morgan Stanley assumes that expatriates spend their base salary on three items in the home country; housing, taxes and goods and services (spendable income). A cost of living allowance (COLA) is a differential paid to equalise the expatriate for the difference between the cost of goods and services in the home location versus the cost of these same goods and services in the assignment location. COLA is a function of spendable income and family size.

Associates for International Research, Inc. (AIRINC), an international consulting firm which specialises in surveying international goods and services markets, is the source for all cost of living differentials.

 


Your cost of living allowance will be £6,494 annually. This allowance will be reviewed quarterly and adjusted if warranted and will be paid with your regular salary on a monthly basis.

 

   

Housing/Utility Allowance: In each assignment location, Human Resources establishes reasonable housing cost guidelines. You may select housing in accordance with these guidelines. The housing allowance will be paid into your US bank account and you will pay rent directly to your landlord. In addition the Firm will pay a utility allowance to cover the costs of heating, lighting and personal effects insurance. The Firm will not take responsibility in the assignment location for house maintenance costs (gardening fee, annual painting, etc.).

Your housing allowance will be $11,000 per month. 1

Your utility allowance will be $700 per month. 2

In addition, should you decide not to ship furniture to New York, and rent an unfurnished apartment, you will be eligible for a furniture rental allowance of $1,300 per month.

 

   

Assumed UK Housing Deduction: An assumed home country housing cost is deducted from your base salary. The assumed home country housing deduction is determined using Associates for International Research (AIRINC) tables which contain average housing costs by base salary and family size.

Your annual assumed UK housing deduction, based on your annual base salary and family size of five will be £19,734.

However, if you decide to rent out your UK home please refer to the Homesale/Home Management paragraph below.

 

   

Hypothetical Taxes: The tax equalisation programme is designed to ensure that an expatriate will remain whole with respect to his home country tax position. The Firm takes responsibility for the expatriate’s actual foreign tax liability and withholds hypothetical UK taxes and National Insurance contributions from the expatriate’s base salary and above base compensation. Outside income such as interest and dividends are also subject to hypothetical tax, however, there is no withholding on these amounts.

Your annual hypothetical tax withholding on your base salary taking into account your current tax free allowance will be approximately £60,607.

The expatriate’s total hypothetical tax liability to the Firm is calculated after his actual or hypothetical UK income tax return has been prepared. The tax equalisation calculation is a hypothetical or ‘dummy’ return which is based on Morgan Stanley compensation, outside income or losses and actual deductions. Tax equalisation begins in the year of transfer and

 

1

Effective May 1, 2007 through June 30, 2007, the housing allowance was $22,000. Effective July 1, 2007, the housing allowance is $28,600 per month.

2

Effective July 1, 2007, the utility allowance is $850 per month.

 

2


continues up to the tax year of repatriation and may include the year following repatriation. Details can be obtained in the attached tax equalisation policy document. Please contact [name and telephone number redacted] if you have any queries in this regard. All expatriates are required to sign the tax equalisation acknowledgement statement attached to the front of the tax equalisation policy and return it to [name redacted] , London Human Resources .

The Firm has engaged Price Waterhouse Coopers (PwC) on a worldwide basis to prepare the expatriate’s foreign individual income tax returns and tax equalisation calculation. Reasonable fees associated with these services will be borne by the Firm.

You must contact the following PwC team member prior to your departure to discuss the UK and US tax implications of your assignment: [name, telephone number and email address redacted].

Relocation Package:

 

   

Visa: In order to work in the United States, you may need to obtain a visa. If you have not already done so, please fill out the Immigration Data Sheet attached and fax the completed form and requested documents to the Morgan Stanley Visa Center in New York on [telephone number and email address redacted]. Upon review of the data sheet the Visa Center will determine the type of visa required and contact you to begin the process. Approval will take approximately 8 weeks after your completed application has been submitted to the immigration authorities. All business unit employees MUST have series 7 registration in order to obtain a visa as outlined on the attached data sheet. Please contact the Visa Center on [telephone number redacted] if you have any questions with respect to the required data.

Employment authorisation must be obtained before you begin work in the United States and any travel to the US whilst the visa is pending should be notified in advance to the Visa Center.

 

   

Relocation Allowance : Prior to your transfer you will receive a relocation allowance for miscellaneous expenses of one month’s base salary to a maximum of £3,300, plus 25% of one month’s capped base salary for each accompanying family member to an overall maximum of £6,600. Miscellaneous expenses would include the purchase of small household appliances, curtain and carpet refitting, driver’s licence fees, etc. This is the standard relocation allowance for assignments lasting several years; please be aware that should your assignment last fifteen months or less your relocation allowance upon repatriation may not be calculated in the same manner.

Please note that you must return a signed tax equalisation policy acknowledgement statement to [name redacted] in London Human Resources and meet with Price Waterhouse Coopers prior to your departure, in order to receive the relocation allowance.

The relocation allowance is considered taxable income in most countries. However, the Firm will protect you for any tax liability on the relocation allowance through the tax equalisation process.

Your miscellaneous relocation allowance based on a family size of five will be £6,600.

 

3


Househunting Trip: Expatriates with accompanying dependants are eligible to visit their assignment location for up to 10 days to secure housing, orient themselves to the location and address family issues. Travel arrangements (business class) and hotel accommodation should be made through American Express.

The Firm will meet reasonable expenses incurred during the house hunting trip including meals and taxi cab fares (with receipts).

House hunting trips must be co-ordinated with Human Resources in New York and London.

Please use job number [number redacted] when booking your flight.

 

   

Broker’s Fee: The Firm will reimburse any customary broker’s fee up to 12 percent required to be paid for the rental of an apartment in New York. Employees should not sign any leases until they have a valid US visa.

 

   

Travel Expenses at Time of Transfer: You will be reimbursed for customary and reasonable transportation expenses for travel to New York including business class airfare and transportation to and from airports.

Please use job number [number redacted] when booking your flight.

 

   

Transportation of Household Goods: Morgan Stanley will pay for one air shipment of personal effects (excluding furniture) to a maximum of 500 lbs, plus an additional 100 lbs for each accompanying family member. If you decide not to rent furniture in New York you will also be entitled to one surface shipment of household goods (furniture and other items that may have exceeded the limitation of the air shipment) to the maximum capacity of a 40 foot container (approx 10,000 lbs). Please contact [name redacted] at our preferred shippers, 360 Relocations [telephone number and email address redacted] to make the necessary arrangements.

 

   

Storage of Household Goods: The Firm will meet the cost of long-term storage of goods left in the UK with the shipping company for the duration of your assignment if you choose not to ship certain goods to New York. Storage will be provided in New York only during your temporary living period.

 

   

UK Car: If you have a private car, the Firm will reimburse the loss on sale of up to 2 cars per household. The loss is calculated as the differential between the sale price obtainable by a car dealer (retail sale value as determined using the independent car trade publication, The CAP Guide), and the amount actually received on disposal of the car(s) to an independent third party. The maximum reimbursable loss per car is £3,000 or 25% of the retail sale value, whichever is the lower amount. Alternatively, the Firm will reimburse the cost of storage in the UK for the duration of the assignment if the value of the car (as determined using the CAP Guide) exceeds the likely storage costs.

 

   

Temporary Living: If you need to live in an hotel or other facility upon your arrival in New York, temporary living accommodation must be arranged through Execustay by Marriott. Please contact [name redacted], at Execustay on [telephone number and email address redacted] to make the necessary arrangements.

 

4


You are entitled to temporary living for a maximum of 30 days. You are expected to make every effort to move into permanent housing within this time period.

The cost of living allowance will commence from the start of your temporary living period and no separate reimbursement will be made for expenses incurred whilst in temporary accommodation.

 

   

Homesale/Home Management: If you own a primary residence in the UK, you are encouraged to retain and rent out your home while on assignment. If you rent out your home, the Firm will reimburse you for the customary costs associated with managing your home while on assignment.

If you rent your home the Firm will assist in keeping it in good condition for your use upon repatriation by providing a Rental Refurbishing Allowance. This allowance will equal twenty percent of the Assumed Home Country Housing Deduction and will be paid on a monthly basis through the payroll by charging 80% of the full assumed housing deduction. The Firm will protect you from any tax liability on the Rental Refurbishing Allowance through the tax equalisation process.

Alternatively, if you decide to sell your home within 6 months of expatriation and the assignment is expected to exceed 18 months, Morgan Stanley will reimburse typical seller’s fees to a maximum of £11,500. If you are selling your home in the UK, you must contact Prudential Homesale in the United States on [telephone number redacted] prior to listing your property. You must sell through Third Party Homesale Program in order for the payments not to be considered taxable income to you. In order to receive tax-effective home sale benefits, all homeowners ARE REQUIRED to work with the Firm’s designated Third Party Home Sale Company. BEFORE YOU ARE ELIGIBLE TO RECEIVE THE HOME SALE BENEFIT, YOU MUST COMPLETE THE EMPLOYEE ENROLMENT AUTHORISATION FORM ATTACHED. PLEASE EMAIL THE FORM TO [email address redacted].

Please be aware that there may be tax implications associated with selling, renting or keeping your house vacant. You are encouraged to consult your personal tax advisor in order to familiarise yourself with these implications.

OR

 

   

Lease Cancellation: The Firm will reimburse you for costs associated with the cancellation of a lease in London to a maximum of 2 months rent.

 

   

Benefits: You will continue to be covered under the UK benefits programme except that your medical insurance cover will be enhanced to provide international cover during your assignment. You need to complete and return to the ibenefit centre, a CIGNA International enrolment form and full details are attached. For further information please refer to Morgan Stanley&i or contact the ibenefit centre on [telephone number and email address redacted].

Additional Transfer Provisions:

 

   

Home Leave: You will be entitled to one “Home Leave” trip to the UK for each 12 month period in the assignment location. Generally this should not be taken until 6 months in the new location. This includes round-trip airfare in business class from New York to London. Alternatively, you may elect to travel in economy (coach) in which case you will be entitled to two home leave trips per 12 month period. If you do not take advantage of the home leave entitlement, you will not be paid in lieu of travel.

 

5


   

Education Assistance: The Firm will pay for customary charges for tuition, fees, room and board for your children from 1 September before your child reaches the age of five through secondary education. In addition, the Firm will provide assistance for tuition and registration fees for a pre-school programme. The Firm will reimburse pre-school costs in excess of your current expenditure. You should liaise with your International Services contact for additional information on the above.

 

   

Relocation Expenses: All relocation expenses must be submitted on a properly completed relocation expense form, copies of which are enclosed. Completed forms should be submitted to the ‘HR Service Centre, Edinburgh’ for authorisation. Expenses are reimbursed in sterling by Accounts Payable by direct deposit to your UK bank account within approximately 14 working days of receipt (bank account notification form enclosed which should be sent directly to Accounts Payable, GL/GC/01).

Incomplete expense forms will be returned and employees are expected to retain copies of the form and receipts. Expenses should be submitted within 60 days or you will need to obtain Managing Director sign-off in addition to Human Resources authorisation.

 

   

Repatriation: Upon completing your assignment you will need to contact [name redacted] in Human Resources in London in order that a repatriation package can be prepared.

If you have any questions regarding your transfer, please contact [names, telephone numbers and email addresses redacted].

 

cc:   [names redacted]
encs:   Change of Personal Details Form
  CIGNA International Enrolment Form
  European Tax Equalisation Policy
  Expatriate Assignment Checklist
  New York Orientation Memo
  Relocation Expense Forms
  US Immigration Data Sheet
  Worldwide Expatriate Policy

 

6


MORGAN STANLEY

EUROPEAN TAX EQUALISATION POLICY

 

CONTENTS   
I    GENERAL    1
II    PROCEDURES    2
   A.    Exit/Entrance Interviews    2
   B.    Social Security    2
   C.    Actual and Hypothetical Home Country Tax Returns    2
   D.    Actual Host Country Tax Returns    3
   E.    Final Tax Equalisation Settlement    4
   F.    Advisory Allowance    4
III    TAX EQUALISATION CALCULATION    5
   A.    Hypothetical Withholding    5
   B.    Income and Capital Subject to Tax Equalisation    5
   C.    Assumptions used in Tax Equalisation Calculations    6
      1.    Income Tax    6
      2.    Filing Status    6
      3.    Spousal Income    6
      4.    Joiners    7
      5.    Leavers    7
      6.    Joiners/Leavers Outside Income    7
      7.    International Medical Cover    7
      8.    Rental Income    7
      9.    Profit Share    7
IV.    COUNTRY SPECIFIC INFORMATION   
   A.    United Kingdom   
April 2002      


MORGAN STANLEY GROUP

EUROPEAN TAX EQUALISATION POLICY

 

I. GENERAL STATEMENTS

 

A. The tax equalisation programme is designed to ensure that the home country tax positions of employees on temporary foreign assignments will be undisturbed. The Firm is responsible for actual home country and host country taxes with the exception of inheritance tax and taxes related to extraordinary income such as sweepstakes or gambling winnings. In return, expatriates pay a hypothetical tax to the Firm. The expatriate has the responsibility of paying hypothetical tax to the Firm even though no actual home country tax liability may exist. Hypothetical tax is assessed only on compensation, outside income, proceeds from sales of stock and other chargeable capital gains the expatriate would have received had he remained in his home country. It is not assessed on assignment related items such as COLA, housing, utilities or home leave. Expatriates receive these benefits free of tax. Please see section III B below for more details.

 

B. The Firm has engaged a tax return preparer (details of which can be found in your assignment memo) to complete all necessary host country individual income Tax Returns. (All host country Tax Returns must be completed by the designated tax return preparer; for preparation of home country Tax Returns see Section II C below). Reasonable fees associated with the preparation of these returns are met by the Firm. Expatriates are expected to co-operate fully with Human Resources and the designated tax return preparer in the preparation of actual returns and tax equalisation calculations. This includes providing all necessary information to Human Resources and the designated tax return preparer on a timely basis, prompt filing of completed home and host country Tax Returns, and prompt payment of any taxes due.

In cases in which late filing is due to an employee’s delinquency or negligence, they will be liable for the actual penalties and interest assessed by the relevant tax authorities against their actual tax liability.

Any cost relating to the re-running of a tax equalisation calculation once a late organiser is received will be the employee’s responsibility. The Firm will not be responsible for any incremental accounting fees, late filing or payment penalties or interest which result from an individual’s lateness in providing information to the designated tax return provider or not filing on a timely basis.

 

C. This policy is subject to modification to reflect changes in actual tax law, practice, Divisional and Firm policy. Any unique circumstances not envisioned by the programme will be handled on an ad hoc basis by Human Resources.

 

D. It may be possible to mitigate the Firm’s tax exposure if the expatriate is able to organise their financial affairs in a particular way. The expatriate will be expected to co-operate with any such requests to reduce the Firm’s costs and will be protected from any consequential cost to themselves.

 

1


E. Unless otherwise stated, this policy will be effective from April 1, 2002.

All questions regarding policy and procedure should be directed to [name redacted] or [name redacted] in London Human Resources.

 

II. PROCEDURES

 

A. Exit/Entrance Interviews : Once an expatriate assignment has been accepted, arrangements will be made for the employee to meet or have a conference call with London International Services. This orientation briefing allows the expatriate to become familiar with the expatriate programme, including the tax equalisation policy.

Employees will be required to arrange and attend an “exit” interview with the designated tax return preparer at the offices of Morgan Stanley prior to departure from the home location. At this meeting all expatriates will be required to complete appropriate income tax and social security forms, any tax refund claim forms, any social security filings, provide any necessary information relevant to the tax equalisation calculation and will receive limited home country tax planning advice related to their overseas assignment. Upon return from the assignment a similar briefing will be held to complete entrance forms and to advise the expatriate of their taxation responsibilities on returning to the home country.

The relocation allowance will not be paid until we receive confirmation from the Firm’s designated tax preparer that you have met with them for the “exit interview” and all necessary filings have been satisfactorily completed.

 

B. Social Security Coverage Continued While on Assignment

The expatriate will be subject to actual or hypothetical home country social security contributions for the duration of the overseas assignment. The expatriate’s contribution will be based on actual rates for home country social security contributions in force each year. Where the home country has reciprocal arrangements with the assignment country, the Firm will maintain the employee in the home country social security to the extent possible. In locations where no reciprocal arrangements exist, the Firm will be responsible for meeting all foreign social security costs during the assignment period.

 

C. Actual and Hypothetical Home Country Individual Income Tax Returns

All expatriates must complete a home country tax organiser for the designated tax return preparer in each year of their overseas assignment. The designated tax return preparer will then prepare all of the necessary home country tax returns that are required for the assignment period.

The Firm reserves the right to withhold payment of expatriate benefits if the expatriate is delinquent in supplying the necessary information.

 

2


It is the responsibility of the expatriate to ensure that their own home country Tax Returns are filed on a timely basis . Although actual taxes are the responsibility of the Firm, the expatriate is expected to pay to the home country tax authority any balance of tax due based on their final tax assessment. These payments will then be credited against the expatriate’s hypothetical tax liability. As the Firm meets the expatriate’s actual home country taxes, any refund received from the tax authorities will be refunded to the Firm.

In cases in which late filing of the return or late payment of the tax raised by the assessment is due solely to an expatriate’s delinquency or negligence, they will be liable for the actual penalties and interest assessed by the tax authorities. No credit for these interest and penalties will be given in the hypothetical computation.

As the late filing of any home country Tax Return or tax organiser results in a delayed hypothetical tax calculation, additional interest and penalties will be levied against any “delayed” hypothetical tax balance due to the Firm at the applicable rates.

 

D. Actual Host Country Individual Income Tax Return

Although actual host country taxes are paid directly by the Firm, all expatriates are required to file a host country individual income tax return. The preparation of the host return will be completed by the designated tax return preparer in the assignment location.

In order to prepare the overseas return, the designated tax return preparer requires details of all income, gains and losses, allowances and deductions. The Firm provides the designated tax return preparer with all necessary Morgan Stanley compensation and benefit information for each tax year. Shortly after the close of each assignment location tax year, the designated tax return preparer sends a tax organiser to each expatriate. Since the Firm has already provided compensation and benefit information to the designated tax return preparer, the expatriate need only complete the sections in the organiser which detail outside income, gains, losses, deductions and travelling time, etc. Since most jurisdictions operate on a calendar year, if your home or host country operates on a fiscal year basis, you will be required to provide this information for both fiscal and calendar year periods.

As the late filing of income tax returns often results in the assessment of penalties and interest, expatriates are required to return the tax organisers within four weeks of their receipt.

 

3


E. Final Tax Equalisation Settlement

Once an expatriate’s final hypothetical tax liability for a particular tax year is calculated, all tax payments made by the expatriate are compared to the final hypothetical liability in order to determine if the Firm has a balance due to the expatriate or vice versa. Tax payments made by the expatriate include but are not limited to:

 

  a. Hypothetical tax withheld (as appropriate) from base salary, above base compensation and executive compensation.

 

  b. Actual home country taxes withheld from the expatriate prior to commencement of their overseas assignment or following their return, unless the withholding is refundable.

 

  c. Any actual home or host income tax payments made by the expatriate as estimates or balances due with actual returns.

 

  d. Any actual tax payments made by spouse, subject to the stated limitations.

 

  e. Any overseas withholding on interest, dividends etc.

Any payment due to the employee will be made with the first available payroll after agreement of the final computation. Typically this will be approximately 6 weeks. If the expatriate owes the Firm further hypothetical tax, the final liability should be remitted within six weeks of agreement of the final computation. If payment is not received within six weeks, interest will be added to any balance due.

 

F. Advisory Allowance

In addition to paying for the preparation of home and host country Tax Returns in respect of all applicable years during the assignment, the Firm also provides the expatriate with advisory time to meet with the designated tax return preparers. The Firm will absorb the cost of the expatriate’s consultation with the designated tax return preparer up to the following maximum time/cost limits in each year of assignment:

 

Level

  

Time Allocation

Managing Director

   four hours

Principal

   three hours

All other Professional Staff

   two hours

Note that any unused allocation cannot be carried forward from year to year nor can future years’ entitlement be used currently.

 

4


III. TAX EQUALISATION CALCULATION

 

A. Hypothetical Tax Withholding

Each expatriate receives as part of their compensation package a base salary, a Cost Of Living Allowance (COLA), an assumed home country housing deduction (when appropriate) and hypothetical tax and social security withholding.

The hypothetical withholding will not take into account the effect of any tax planning mechanisms, with the exception of monthly pension contributions made via the home country payroll. Appropriate tax relief for these investments will be reflected in the final hypothetical tax liability.

Adjustments to hypothetical tax withholding will be allowed only for those expatriates who have substantiating evidence and are subject to review by International Services.

 

B. Income and Capital Subject to Tax Equalisation

The tax equalisation calculation is prepared by the designated tax return preparer. Expatriates are tax equalised up to and including the tax year of repatriation or termination. In addition, tax equalisation may extend to subsequent tax years to the extent that those years are affected by items of income, deduction or credit relating to the expatriate assignment. The tax equalisation calculation is essentially a hypothetical or dummy home country return in which tax is calculated and assessed only on those amounts an employee would have received had they remained in the home location.

Listed below are the types of income which are generally subject to hypothetical tax, as well as those types of income which are not subject to hypothetical tax. The Firm pays the actual home and host country taxes on both types of income:

 

Income and Capital Subject To

Hypothetical Tax Includes But

Is Not Limited To:

  

Income Not Subject To

Hypothetical Tax:

MS Base Salary

   Moving Expenses

MS Bonus/Executive Compensation Payments

   COLA

MS Termination Payments

   Housing Allowance

MS Commission and Pool Payments

   Utilities Payments

Investment Income (home and host)

   Home Leave

Spousal Income (to the extent tax equalised)

   Social Club

Income and Capital gain sums derived

   Tuition Reimbursement

from stock or other property

   Language Lessons

Cash Payments of Profit Sharing

   Furniture Rental Allowance

Domestic Medical Insurance Benefit

   International Medical Insurance

Mortgage Allowance (if applicable)

   Foreign Tax Payments

Remittance of Income and Chargeable Gains

   Relocation Allowance
   Visa/Immigration costs
   Car Loss reimbursement

 

5


C. Assumptions Used in Tax Equalisation Calculations

The assumptions listed below are used in the preparation of the tax equalisation calculation:

 

  1. Income Tax - Hypothetical income taxes are determined by using the applicable statutory home country tax rates for the year in question.

 

  2. Filing Status - Your tax equalisation calculation will be prepared using your actual filing status.

Certain overseas countries require returns to be filed on a joint basis. In such cases the expatriate may elect to include spousal income in the equalisation process within the limits set out below. If the expatriate does so elect, hypothetical tax will be assessed on the spousal income and the Firm will pay host country taxes on all equalised income. If the expatriate does not so elect, no hypothetical tax will be assessed on the spousal income, and the actual liability in the overseas location will be apportioned between the Firm and the individual in accordance with the ratio of equalised to non-equalised income (gross income before deductions).

If the host country does not require joint returns or filing as a single person is advantageous, spousal income will not be equalised unless the expatriate so elects.

The election once made for a particular year is irrevocable but may be revoked in subsequent years. Should significant changes in personal circumstances occur, the election may be reviewed by International Services at the expatriate’s request.

 

  3. Spousal Income - There is a limit on the amount of spousal income the Firm will tax equalise for each tax year. The limit is £30,000/EUR 50,000/CHF 70,000 or 40% of the expatriate’s normal total Morgan Stanley cash compensation, which ever is greater, with an overall limit of £70,000/EUR 110,000/CHF 165,000. Hypothetical tax will be assessed on this amount, and actual taxes paid or accrued by the spouse, subject to the above limitations, will be credited against the expatriate’s final hypothetical tax liability. In situations where a spouse of an expatriate works for another firm that offers expatriate benefits, Morgan Stanley will co-ordinate its benefits, including tax equalisation, with those of the other firm to ensure that the family unit is compensated for the additional costs it incurs, but does not receive any windfall benefit.

 

6


  4. Joiners - If the employee joins Morgan Stanley in the home country in the same tax year as they are expatriated then the tax rates and allowances used in the hypothetical computation for that year will be pro-rated from the date of leaving the previous home country employer. For example:

 

  a. If the employee has not previously worked in the home country, then they will receive the full year’s rates and allowances.

 

  b. If the employee leaves their previous home country employer and immediately joins Morgan Stanley, the rates and allowances will be reduced according to the date of joining.

 

  c. If the employee leaves their previous home country employer and has a period of unemployment before joining Morgan Stanley, the rates and allowances will be apportioned from the first day of that unemployment.

 

  5. Leavers - If the expatriate leaves Morgan Stanley during the year, then the rates and allowances for that year will be pro-rated to the date of termination, unless they have no home country-taxable income in the remainder of the home location tax year in which case no pro-ration of the rates and allowances will be made.

For expatriates who terminate employment in a host location and do not return to the home country, the Firm will be responsible only for the host taxes that would have been due if the expatriate had returned to the home location upon termination. Expatriates should be aware that this can result in a significant differential in some jurisdictions.

 

  6. Joiners/Leavers Outside Income – If the employee joins and/or leaves the Firm during the year, then outside income will only be tax equalised to the extent that it has arisen during the period of their employment with the Firm.

 

  7. International Medical Cover – Medical benefits will be provided to an expatriate during the overseas assignment through the International Medical Program detailed in your expatriate package. The taxable benefit of their home country medical plan will also be included in the expatriate’s taxable income for home country hypothetical tax purposes.

 

  8. Rental Income – Employees are encouraged to maintain their home country property and rent it out during their expatriate assignment. Any net rental income will be included in the tax equalisation computation.

 

  9. Profit Share – You will continue to receive profit share whilst on overseas assignment calculated under your home country terms and conditions.

 

7


  10. US Citizens/Greencard holders – The Firm will meet the cost of US Federal (and state where applicable) tax returns for the duration of the assignment via the designated tax return preparer. You will be tax equalised to the US tax position that would have prevailed had you remained in the home location. The designated tax return preparer will prepare a hypothetical US tax calculation including the hypothetical home country tax liability and you will be responsible for any hypothetical US tax due on this calculation. The Firm will meet any actual US tax costs arising.

 

8


APPENDIX A: UK SPECIFIC POLICIES

 

A: UK NATIONAL INSURANCE

Where actual national insurance contributions are no longer being made, the Firm will contribute to the UK/Offshore pension plan an amount equal to the voluntary (class 3) national insurance contribution. This contribution is the amount that would otherwise be paid to the UK Contributions Agency to make that tax year a qualifying year for UK state pension purposes.

If you do not have a national insurance number, you must make arrangements to apply for one prior to your departure from the UK. A memo outlining the procedure for obtaining a national insurance number will be provided with your expatriate assignment package. If the Firm is unable to obtain continuing coverage under the UK social security system as a result of the expatriate’s failure to apply for a national insurance number, the expatriate will be responsible for any incremental employer and employee social security costs which arise in the assignment location.

 

B: UK HYPOTHETICAL TAX WITHHOLDING

Upon actually leaving the home country for the assignment location, if the assignment is likely to extend to at least one UK tax year, most expatriates will provisionally cease to have any further UK tax liability on their earned compensation. Although no actual UK tax will then be withheld on base and above base compensation, the Firm will withhold hypothetical tax. If, however, an actual UK liability exists during the assignment due to interest, dividends, rental income, etc arising in the UK, the law requires that a UK tax return be filed on a timely basis.

Even if the expatriate has no actual UK tax liability and no actual UK Tax Return is therefore required, the expatriate is still responsible for the payment of hypothetical taxes. The Firm provides the designated tax return preparer with all necessary Morgan Stanley compensation and benefits information for each tax year. Each expatriate must supply to the designated tax return preparer all other information pertinent to the calculation of the hypothetical tax. An organiser will be sent to the expatriate shortly after the end of the tax year and it is required to be returned within 4 weeks of receipt.

The hypothetical tax withholding on base salary is determined by a number of factors, including the level of base salary and the current tax year’s hypothetical PAYE tax code. Tax on above-base compensation will also be withheld at the employee’s appropriate UK marginal tax rate. The rates and allowances will be reviewed each April in line with any Budget changes, or at any other time if an interim tax rate change is effected.

 

9


C: DUAL CONTRACTS OF EMPLOYMENT

Employees having dual contracts of employment prior to their foreign assignment will be tax equalised as if the dual contract continued to be in effect (subject to the provisos outlined in the below paragraph). The compensation related to the non-UK contract will be calculated for hypothetical tax purposes by using the percentage of business days the employee spent working for Morgan Stanley under the non-UK contract during the Firm’s year (on an annualised basis) immediately prior to the year of their foreign assignment.

In calculating the hypothetical off shore percentage, please note the following two provisos. (i) Any business days spent working in the pending assignment location city will not be included for the purposes of the hypothetical dual contract split. (ii) The prior year actual dual contract split will not be used for calculating the hypothetical split if that year is deemed to be unrepresentative of the employee’s typical travel pattern. In all cases, the proportion to be treated as paid under the non-UK contract will be determined by Human Resources.

Payments of base salary made under both the UK and the non-UK contracts will be included in the spendable income computation for Cost of Living Allowance purposes and in the calculation for the hypothetical tax deduction for that computation, but only the UK base salary will be included in the calculation of the hypothetical tax to be actually deducted in arriving at net income. Dual contracts will be used in tax equalisation only as long as dual contracts remain effective for UK income tax purposes and valid under UK tax law. The benefit of the current dual employment split is based on an agreement between Morgan Stanley and the Inland Revenue. To the extent that the agreement becomes invalid or is replaced by a new agreement by either party, then the hypothetical split will be adjusted appropriately.

 

D: RELIEF FOR OVERSEAS WORKDAYS

Employees with a history of claiming relief on their UK tax returns for workdays spent outside of the UK will continue to be equalised to this position whilst on assignment; subject to the following:

 

  1. The employee must provide International Services with documentation supporting prior year overseas workdays claims (eg: copy of UK tax return).

 

  2. Hypothetical overseas work days relief will be limited to the actual percentage relief claimed on prior year tax returns, excluding any days spent working in the pending assignment location city.

 

  3. Hypothetical relief for overseas workdays will only be included in the hypothetical tax calculation for as long as the employee would have retained an entitlement had they remained in the UK, and as long as the deduction remains valid under UK law.

 

10


E. ALLOWANCES AND DEDUCTIONS

Certain allowances and deductions allowed on the expatriate’s home Tax Return immediately prior to their foreign assignment may be allowed on the hypothetical return. These allowances and deductions include but are not limited to:

 

  a. The single person’s allowance.

 

  b. Charitable contributions to the extent they have been made in the past and are still legally required to be made under a deed of covenant or Give As You Earn/ Gift Aid.

 

  c. Additional monthly voluntary pension contributions to the extent that they have been made in the past into the company pension scheme.

 

  d. Waivers into the UK or offshore pension plan only to the extent they have been made in prior years. The maximum contribution subject to tax equalisation will be based on the same percentage waived from the last bonus paid prior to the assignment commencing.

 

F. MORTGAGE ALLOWANCE

If the expatriate owns a principal residence in the UK and is currently in receipt of the mortgage allowance, this allowance will continue to be provided to the expatriate subject to the appropriate limits detailed in the mortgage allowance scheme. The allowance will be subject to UK hypothetical tax when the tax equalisation calculation is prepared, but no withholding will be made during the year.

 

G . DOMICILE

UK expatriates who have been ruled not domiciled in the UK by Inland Revenue will be tax equalised to that status, ie. offshore investment income will not be subject to UK hypothetical tax unless remitted to the UK.

 

H. RESTRICTED INVESTMENTS

The Firm recognises that as a result of the expatriate assignment the individual may be prevented from participating in UK tax efficient income schemes such as an Individual Savings Account (ISA). To compensate the individual for this, the Firm will exempt from hypothetical tax the first £900 of an individual’s outside investment income (excluding capital gain income) This will be expressed in the form of a deduction against investment income, limited to the lower of the investment income or £900.

 

11


I. PROFIT SHARE

As a result of the expatriate assignment, an individual’s participation in the UK profit sharing plan may be restricted to less than the full amount of entitlement.

Where an individual elects participation in the scheme, then no hypothetical tax will be charged on this amount, which would have been utilised to purchase shares had the individual remained in the UK.

Where no election to participate is made, the entire amount of profit sharing will be subject to hypothetical tax.

The maximum amount which can be allocated to shares cannot exceed £8,000. Anything paid in excess of this threshold will be paid as cash and subject to hypothetical tax.

 

12

E XHIBIT 10.7

M ORGAN S TANLEY

2006 NOTIONAL LEVERAGED CO-INVESTMENT PLAN

[FISCAL YEAR] AWARD CERTIFICATE

 


T ABLE OF C ONTENTS FOR A WARD C ERTIFICATE

 

1.    Your award generally    2
2.    Vesting schedule    3
3.    Distributions    3
4.    Death, Disability and Full Career Retirement    3
5.    Involuntary termination by the Firm    4
6.    Change in Control and Change in Ownership    4
7.    Termination of Employment and cancellation of Plan Interest    4
8.    Satisfaction of obligations    7
9.    Designation of a beneficiary    7
10.    No entitlements    7
11.    Consents under local law    8
12.    Award modification    8
13.    Severability    8
14.    Incorporation of the Plan document    9
15.    Governing law    9
16.    Defined terms    9

 


M ORGAN S TANLEY

2006 N OTIONAL L EVERAGED C O -I NVESTMENT P LAN

A WARD C ERTIFICATE

F ISCAL Y EAR [    ]

Morgan Stanley has awarded you an interest in the Morgan Stanley 2006 Notional Leveraged Co-Investment Plan (the “ Plan ”) as part of your discretionary long-term incentive compensation for services provided during Fiscal Year [    ] and as an incentive for you to continue to remain in Employment and provide services to the Firm through the Scheduled Vesting Dates, as provided in this award certificate (the “ Award Certificate ”). This Award Certificate sets forth the general terms and conditions of your Fiscal Year [    ] award under the Plan. The initial value of your Fiscal Year [    ] award (your “ Allocation ”) has been communicated to you independently.

If you are employed outside the United States, you have also received an “ International Supplement ” that contains supplemental terms and conditions for your Fiscal Year [    ] award. This Award Certificate should be read in conjunction with the International Supplement, if applicable, and the Plan document in order for you to understand the terms and conditions of your Fiscal Year [    ] award.

Your Fiscal Year [    ] award is made pursuant to the Plan. References to “Allocation” and “Plan Interest” in this Award Certificate mean only your Allocation and Plan Interest related to your Fiscal Year [    ] award, and the terms and conditions herein apply only to such award. If you receive any other award under the Plan, it will be governed by the terms and conditions of the applicable award documentation, which may be different from those herein.

The purposes of the Fiscal Year [    ] award are, among other things, to enhance the portion of any discretionary Above Base Compensation that would otherwise be awarded to you in the form of Morgan Stanley equity compensation or other mandatory long-term incentive compensation and to facilitate the allocation of such compensation to the notional investment opportunities afforded by the Plan, as well as to reward you for your continued employment and service to the Firm in the future, to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. In view of these purposes, you will earn each portion of your Plan Interest only if you (1) remain in continuous Employment through the applicable Scheduled Vesting Date and (2) do not engage in any activity that is a cancellation event set forth in Section 7(c) below. Therefore, even if your Plan Interest has vested, you will have no right to your Plan Interest if a cancellation event


occurs. You will be required to provide Morgan Stanley with such written certification or other evidence as Morgan Stanley deems appropriate, from time to time in its sole discretion, to confirm that no cancellation event has occurred. If you fail to provide such certification or evidence, Morgan Stanley will cancel your Plan Interest.

Section 409A, which was adopted pursuant to the American Jobs Creation Act of 2004, imposes rules relating to the taxation of deferred compensation, including your Fiscal Year [    ] award. The Firm reserves the right to modify the terms of your Fiscal Year [    ] award, including, without limitation, the distribution and other payment provisions applicable to your Plan Interest, to the extent necessary or advisable to comply with Section 409A.

Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section 16 below. Capitalized terms used in this Award Certificate that are not defined in the text or in Section 16 below have the meanings set forth in the Plan.

 

1. Your award generally .

(a) Allocation and Account. Your Allocation is credited to an Account as of the Date of the Award. Your Allocation (or portion thereof) will accrue notional interest at the Participant Applicable Rate from the Date of the Award: (i) until the Firm notionally invests your Allocation (or such portion thereof) in one or more Notional Plan Investments, or (ii) if the Firm does not notionally invest your Allocation (or such portion thereof) in one or more Notional Plan Investments, until the Scheduled Distribution Date.

(b) Notional Advance. At the time that your Allocation (or portion thereof) is notionally invested in a Notional Plan Investment, a Notional Advance in an amount equal to your Allocation (or such portion thereof) multiplied by two will be added to your Allocation (or such portion thereof) for purposes of your notional investment in such Notional Plan Investment. 1

Each Notional Advance will accrue notional interest at the Morgan Stanley Applicable Rate during the period that the Notional Advance is deemed to be outstanding ( i.e. , from the date of the addition of the Notional Advance to your Allocation (or portion thereof) until and to the extent the Notional Advance is subsequently satisfied in accordance with the Plan).

(c) Notional Plan Investments. Your Account will initially be notionally invested approximately [insert names of Notional Plan Investments and approximate percentage allocations relating thereto]. You will have no discretion to notionally re-invest your Account.

 

1

The notional advance presented in this form of Award Certificate is indicative. The notional advance applicable to awards may vary.

 

2


2. Vesting schedule .

Your Plan Interest will vest according to the following schedule: (i) 50% of your Plan Interest will vest on the First Scheduled Vesting Date, and (ii) the remaining portion of your Plan Interest will vest on the Second Scheduled Vesting Date. 2 Except as otherwise provided in this Award Certificate, each portion of your Plan Interest will vest only if you continue to provide future services to the Firm by remaining in continuous Employment through the applicable Scheduled Vesting Date and providing value added services to the Firm during this time frame. The special vesting terms set forth in Sections 4, 5 and 6 of this Award Certificate apply (i) if your Employment terminates by reason of your death or Disability, (ii) upon your Full Career Retirement, (iii) if the Firm terminates your employment in an involuntary termination under the circumstances described in Section 5 below, or (iv) upon a Change in Control or a Change in Ownership. Your vested Plan Interest is subject to the cancellation provisions set forth in this Award Certificate and the withholding provisions set forth in the Plan and in this Award Certificate.

 

3. Distributions .

Except as otherwise provided in this Award Certificate, distributions in respect of your share of any Proceeds will be made to you on each applicable Distribution Date in accordance with Section 10 of the Plan and subject to Section 11 of the Plan.

 

4. Death, Disability and Full Career Retirement .

The following special vesting, distribution and other payment terms apply to your Plan Interest:

(a) Death during Employment. If your Employment terminates due to death, the unvested portion of your Plan Interest will vest in full on the date your Employment terminates. The fair value (determined by reference to the value that the Firm’s books and records show as of the most recently concluded Fiscal Quarter end preceding the date of death) of your vested Plan Interest will be distributed to the beneficiary you have designated pursuant to Section 9 or the legal representative of your estate, as applicable, as soon as administratively practicable after Morgan Stanley receives appropriate notice of your death.

(b) Death after termination of Employment. If you die after the termination of your Employment, the fair value (determined by reference to the value that the Firm’s books and records show as of the most recently concluded Fiscal Quarter end preceding the date of death) of the vested portion of your Plan Interest that you held at the time of your death will be distributed to the beneficiary you have designated pursuant to Section 9 or the legal representative of your estate, as applicable, as soon as administratively practicable after Morgan Stanley receives appropriate notice of your death.

 

2

The vesting schedule presented in this form of Award Certificate is indicative. The vesting schedule applicable to awards may vary.

 

3


(c) Disability. If your Employment terminates due to Disability, the unvested portion of your Plan Interest will vest in full on the date your Employment terminates. Distributions in respect of your share of any Proceeds will be made to you on each applicable Distribution Date in accordance with Section 10 of the Plan and subject to Section 11 of the Plan. The cancellation provisions set forth in Section 7(c) below will continue to apply until the Scheduled Distribution Date.

(d) Full Career Retirement. If your Employment terminates in a Full Career Retirement, the unvested portion of your Plan Interest will vest in full on the date your Employment terminates. Distributions in respect of your share of any Proceeds will be made to you on each applicable Distribution Date in accordance with Section 10 of the Plan and subject to Section 11 of the Plan. The cancellation provisions set forth in Section 7(c) will continue to apply until the Scheduled Distribution Date.

 

5. Involuntary termination by the Firm .

If the Firm terminates your employment under circumstances not involving Cause or any other cancellation event described in Section 7(c) below, the unvested portion of your Plan Interest will vest in full on the date your employment with the Firm terminates; provided that you sign an agreement and release satisfactory to the Firm. Distributions in respect of your share of any Proceeds will be made to you on each applicable Distribution Date in accordance with Section 10 of the Plan and subject to Section 11 of the Plan. The cancellation provisions set forth in Section 7(c) below will continue to apply until the Scheduled Distribution Date.

 

6. Change in Control and Change in Ownership .

If there is a Change in Control or a Change in Ownership, the unvested portion of your Plan Interest will immediately vest. If the Change in Control is not also a Change in Ownership, distributions in respect of your share of any Proceeds will be made to you on each applicable Distribution Date in accordance with Section 10 of the Plan and subject to Section 11 of the Plan. The cancellation provisions set forth in Section 7(c) below will continue to apply until the Scheduled Distribution Date.

The fair value (determined by reference to the value that the Firm’s books and records show as of the most recently concluded Fiscal Quarter end preceding the effective date of the Change in Ownership) of your vested Plan Interest will be distributed as soon as administratively practicable after a Change in Ownership. The cancellation provisions set forth in Section 7(c) below will no longer apply after a Change in Ownership.

 

7. Termination of Employment and cancellation of Plan Interest .

(a) Cancellation of unvested Plan Interest. Your unvested Plan

 

4


Interest will be canceled if your Employment terminates for any reason other than under the circumstances set forth in this Award Certificate for death, Disability, a Full Career Retirement or an involuntary termination by the Firm described in Section 5 above.

(b) General treatment of vested Plan Interest. Except as otherwise provided in this Award Certificate, distributions in respect of your share of any Proceeds related to your vested Plan Interest will be made to you on each applicable Distribution Date in accordance with Section 10 of the Plan and subject to Section 11 of the Plan. The cancellation provisions set forth in Section 7(c) below will continue to apply until the Scheduled Distribution Date.

(c) Cancellation of Plan Interest under certain circumstances . The cancellation events set forth in this Section 7(c) are designed, among other things, to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. This Section 7(c) shall apply notwithstanding any other terms of this Award Certificate (except where sections in this Award Certificate specifically provide that the cancellation events set forth in this Section 7(c) no longer apply).

Your Plan Interest, even if vested, is not earned until the Scheduled Distribution Date and will be canceled prior to the Scheduled Distribution Date in any of the following circumstances:

(1) Competitive Activity . If you engage in Competitive Activity following the voluntary termination of your Employment in a termination that satisfies the definition of a Full Career Retirement, and before the Scheduled Distribution Date, the following shall apply:

(i) If your Competitive Activity occurs before the First Scheduled Vesting Date, then your entire Plan Interest will be canceled immediately.

(ii) If your Competitive Activity occurs on or after the First Scheduled Vesting Date, then:

 

  (A) 50% of your Plan Interest will be canceled immediately; and

 

  (B) Distributions in respect of your share of any Proceeds related to the remaining portion of your Plan Interest will be made to you on each applicable Distribution Date in accordance with Section 10 of the Plan, subject to all other terms and conditions set forth in this Award Certificate and the Plan (including, without limitation, the cancellation provisions of Section 7(c)(2) below, Section 11 of the Plan and the withholding provisions of the Plan and Section 8 below).

 

5


(2) Other Events. If any of the following events occur at any time prior to the Scheduled Distribution Date, your entire Plan Interest (whether or not vested) will be canceled immediately:

(i) Your Employment is terminated for Cause;

(ii) Following the termination of your Employment, the Firm determines that your Employment could have been terminated for Cause (for these purposes, “Cause” will be determined without giving consideration to any “cure” period included in the definition of “Cause”);

(iii) You disclose Proprietary Information to any unauthorized person outside the Firm, or use or attempt to use Proprietary Information other than in connection with the business of the Firm, where such disclosure, use or attempt to use may be adverse to the interests of the Firm; or you fail to comply with your obligations (either during or after your Employment) under the Firm’s Code of Conduct (and any applicable supplements) or otherwise existing between you and the Firm, relating to an assignment, procurement or enforcement of rights in Proprietary Information;

(iv) You engage in a Wrongful Solicitation;

(v) You make any Unauthorized Comments; or

(vi) You resign from your employment with the Firm without having provided the Firm prior written notice of your resignation at least:

 

  (A) 180 days before the date on which your employment with the Firm terminates if you are a member of the Management Committee at the time of notice of your resignation;

 

  (B) 90 days before the date on which your employment with the Firm terminates if clause (A) of this Section 7(c)(2)(vi) does not apply to you and you are a Managing Director (or equivalent title) at the time of notice of your resignation;

 

  (C) 60 days before the date on which your employment with the Firm terminates if you are an Executive Director (or equivalent title) at the time of notice of your resignation; and

 

6


  (D) 30 days before the date on which your employment with the Firm terminates if none of clauses (A) through (C) of this Section 7(c)(2)(vi) apply to you at the time of notice of your resignation.

 

8. Satisfaction of obligations .

Notwithstanding any other provision of this Award Certificate, Morgan Stanley may, in its sole discretion, take various actions affecting your Plan Interest in order to collect amounts sufficient to satisfy any obligation that you owe to the Firm and any tax or other withholding obligations. Accordingly, Morgan Stanley may withhold from or offset against any distribution or other payment to which you may be entitled under the Plan an amount sufficient to satisfy any obligation that you owe to the Firm and any tax or other withholding obligation.

Morgan Stanley’s determination of the amount that you owe the Firm shall be conclusive.

 

9. Designation of a beneficiary .

You may make a written designation of beneficiary or beneficiaries to receive all or part of the amounts to be distributed or paid in respect of your Plan Interest in the event of your death. To make a beneficiary designation, you must complete and file the form attached hereto as Appendix A with the Executive Compensation Department. Your share of any Proceeds that become payable upon your death, and as to which a designation of beneficiary is not in effect, will be distributed to your estate.

You may replace or revoke your beneficiary designation at any time. If there is any question as to the legal right of any beneficiary to receive amounts to be distributed or paid in respect of your Plan Interest in the event of your death, Morgan Stanley may determine in its sole discretion to distribute the amounts in question to your estate. Morgan Stanley’s determination shall be binding and conclusive on all persons and it will have no further liability to anyone with respect to such amounts.

 

10. No entitlements .

(a) No right to continued Employment. This Fiscal Year [    ] award is not an employment agreement, and nothing in this Award Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of the Firm or your employment status at a Related Employer. None of this Award Certificate, the International Supplement, if applicable, or the Plan shall be construed as guaranteeing your employment by the Firm or a Related Employer, or as giving you any right to continue in the employ of the Firm or a Related Employer, during any period (including without limitation the period between the Date of the Award and any of the First Scheduled Vesting Date, the Second Scheduled Vesting Date or any Distribution Date, or any portion of any of these periods), nor shall they be construed as giving you any right to be reemployed by the Firm or a Related Employer following any termination of Employment.

 

7


(b) No right to future awards. This award and all other awards made pursuant to the Plan are discretionary. This award does not confer on you any right or entitlement to receive another award under the Plan or any other award at any time in the future or in respect of any future period.

(c) No effect on future employment compensation. Morgan Stanley has made this award to you in its sole discretion. This award does not confer on you any right or entitlement to receive compensation in any specific amount for any future Fiscal Year, nor does it diminish in any way the Firm’s discretion to determine the amount, if any, of your compensation. In addition, this award is not part of your base salary or wages and will not be taken into account in determining any other employment-related rights you may have, such as rights to pension or severance pay.

 

11. Consents under local law .

Your award is conditioned upon the making of all filings and the receipt of all consents or authorizations required to comply with, or required to be obtained under, applicable local law.

 

12. Award modification .

Morgan Stanley reserves the right to modify or amend unilaterally the terms and conditions of your Fiscal Year [    ] award, without first asking your consent, or to waive any terms and conditions that operate in favor of Morgan Stanley. These amendments may include (but are not limited to) changes that Morgan Stanley considers necessary or advisable as a result of changes in any, or the adoption of any new, Legal Requirement. Morgan Stanley may not modify your Fiscal Year [    ] award in a manner that would materially impair your rights in your Fiscal Year [    ] award without your consent; provided , however , that Morgan Stanley may, without your consent, amend or modify your Fiscal Year [    ] award in any manner that Morgan Stanley considers necessary or advisable to comply with any Legal Requirement or to ensure that your Fiscal Year [    ] award is not subject to United States federal, state or local income tax or any equivalent taxes in territories outside the United States prior to payment or distribution. Morgan Stanley will notify you of any amendment of your Fiscal Year [    ] award that affects your rights. Any amendment or waiver of a provision of this Award Certificate (other than any amendment or waiver applicable to all recipients generally), which amendment or waiver operates in your favor or confers a benefit on you, must be in writing and signed by the Global Head of Human Resources or the Chief Administrative Officer (or if such positions no longer exist, by the holder of an equivalent position) to be effective.

 

13. Severability .

In the event Morgan Stanley determines that any provision of this Award Certificate would cause you to be in constructive receipt for United States federal or state

 

8


income tax purposes of any portion of your award, then such provision will be considered null and void and this Award Certificate will be construed and enforced as if the provision had not been included in this Award Certificate as of the date such provision was determined to cause you to be in constructive receipt of any portion of your award.

 

14. Incorporation of the Plan document .

The Plan document (including, without limitation, Sections 5(e) and 8 of the Plan) is incorporated in this Award Certificate by reference. In the event of any conflict or inconsistency between the Plan document and this Award Certificate, the Plan document will govern and the Award Certificate will be interpreted to minimize or eliminate any such conflict or inconsistency; provided , however , that to the extent this Award Certificate expressly provides that a definition set forth in Section 2 of the Plan is modified by a definition set forth in this Award Certificate, such modified definition, as set forth in this Award Certificate, will govern.

 

15. Governing law .

This Award Certificate and the related legal relations between you and Morgan Stanley will be governed by and construed in accordance with the laws of the State of New York, without regard to any conflicts or choice of law, rule or principle that might otherwise refer the interpretation of the award to the substantive law of another jurisdiction.

 

16. Defined terms .

For purposes of this Award Certificate, the following terms shall have the meanings set forth below:

(a) A “ Cancellation Event ” means any cancellation event set forth in Section 7(c) above.

(b) Cause ” means:

(1) any act or omission which constitutes a breach of your obligations to the Firm or your failure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (if susceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to physical or mental illness) within ten (10) business days after written notification thereof to you by the Firm;

(2) your commission of any dishonest or fraudulent act, or any other act or omission, which has caused or may reasonably be expected to cause injury to the interest or business reputation of the Firm; or

(3) your violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Firm is a member or of any policy of the Firm relating to compliance with any of the foregoing.

 

9


(c) A “ Change in Control ” shall be deemed to have occurred if any of the following conditions shall have been satisfied:

(1) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), as such term is modified in Sections 13(d) and 14(d) of the Exchange Act), other than (i) any employee plan established by Morgan Stanley or any of its Subsidiaries, (ii) any group of employees holding shares subject to agreements relating to the voting of such shares, (iii) Morgan Stanley or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (iv) an underwriter temporarily holding securities pursuant to an offering of such securities, or (v) a corporation owned, directly or indirectly, by stockholders of Morgan Stanley in substantially the same proportions as their ownership of Morgan Stanley, is or becomes the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 25% or more of either the total fair market value or total voting power of the stock of Morgan Stanley;

(2) a change in the composition of the Board such that individuals who, as of the Date of the Award, constitute the Board (the “ Incumbent Board ”) cease for any reason to constitute at least a majority of the Board; provided , however , that any individual becoming a member of the Board subsequent to the Date of the Award whose election, or nomination for election by Morgan Stanley’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board;

(3) the consummation of a merger or consolidation of Morgan Stanley with any other corporation or other entity, or the issuance of voting securities in connection with a merger or consolidation of Morgan Stanley (or any direct or indirect subsidiary of Morgan Stanley) pursuant to applicable stock exchange requirements, other than (A) a merger or consolidation which results in the voting securities of Morgan Stanley outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of Morgan Stanley or any of its Subsidiaries, at least 66-2/3% of the combined voting power of the voting securities of Morgan Stanley or such surviving entity or any parent thereof outstanding immediately after such

 

10


merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Morgan Stanley (or similar transaction) in which no person (determined pursuant to clause (1) above) is or becomes the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 25% or more of either the then outstanding shares of Morgan Stanley common stock or the combined voting power of Morgan Stanley’s then outstanding voting securities; or

(4) the stockholders of Morgan Stanley approve a plan of complete liquidation of Morgan Stanley or an agreement for the sale or disposition by Morgan Stanley of all or substantially all of Morgan Stanley’s assets, other than a sale or disposition by Morgan Stanley of all or substantially all of Morgan Stanley’s assets to an entity, at least 66-2/3% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportions as their ownership of Morgan Stanley immediately prior to such sale.

Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of Morgan Stanley common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns substantially all of the assets of Morgan Stanley immediately prior to such transaction or series of transactions.

(d) A “ Change in Ownership ” shall be deemed to have occurred if any of the following conditions shall have been satisfied:

(1) any one person or more than one person acting as a group (as determined under Section 409A), other than (i) any employee plan established by Morgan Stanley or any of its Subsidiaries, (ii) any group of employees holding shares subject to agreements relating to the voting of such shares, (iii) Morgan Stanley or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (iv) an underwriter temporarily holding securities pursuant to an offering of such securities, or (v) a corporation owned, directly or indirectly, by stockholders of Morgan Stanley in substantially the same proportions as their ownership of Morgan Stanley, is or becomes the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person(s) any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing more than 50% of either the total fair market value or total voting power of the stock of Morgan Stanley;

 

11


(2) a change in the composition of the Board such that, during any 12-month period, the individuals who, as of the beginning of such period, constitute the Board (the “ Existing Board ”) cease for any reason to constitute at least 50% of the Board; provided , however , that any individual becoming a member of the Board subsequent to the beginning of such period whose election, or nomination for election by Morgan Stanley’s stockholders, was approved by a vote of at least a majority of the directors immediately prior to the date of such appointment or election shall be considered as though such individual were a member of the Existing Board;

(3) the consummation of a merger or consolidation of Morgan Stanley with any other corporation or other entity, or the issuance of voting securities in connection with a merger or consolidation of Morgan Stanley (or any direct or indirect subsidiary of Morgan Stanley) pursuant to applicable stock exchange requirements, provided that immediately following such merger or consolidation the stockholders of the other corporation or other entity own securities representing more than 50% of the total voting power of Morgan Stanley stock (or if Morgan Stanley is not the surviving entity of such merger or consolidation, securities representing more than 50% of the total voting power of the stock of such surviving entity), but not counting for purposes thereof any shares of Morgan Stanley stock that such stockholders owned immediately prior to such merger or consolidation (or if Morgan Stanley is not the surviving entity of such merger or consolidation, not counting any securities of the surviving entity into which any shares of Morgan Stanley stock that such stockholders owned immediately prior to such merger or consolidation are converted); and provided, further , that a merger or consolidation effected to implement a recapitalization of Morgan Stanley (or similar transaction) in which no person (as determined under Section 409A) is or becomes the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing more than 50% of either the then outstanding shares of Morgan Stanley common stock or the combined voting power of Morgan Stanley’s then outstanding voting securities shall not be considered a Change in Ownership; or

(4) the complete liquidation of Morgan Stanley or the sale or disposition by Morgan Stanley of all or substantially all of Morgan Stanley’s assets in which any one person or more than one person acting as a group (as determined under Section 409A) acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from Morgan Stanley that have a total gross fair market value equal to more than 40% of the total gross fair market value of all of the assets of Morgan Stanley immediately prior to such acquisition or acquisitions.

Notwithstanding the foregoing, (i) no Change in Ownership shall be deemed to have occurred if there is consummated any transaction or series of integrated

 

12


transactions immediately following which the record holders of Morgan Stanley common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns substantially all of the assets of Morgan Stanley immediately prior to such transaction or series of transactions and (ii) no event or circumstances described in any of clauses (1) through (4) above shall constitute a Change in Ownership unless such event or circumstances also constitute a change in the ownership or effective control of Morgan Stanley, or in the ownership of a substantial portion of Morgan Stanley’s assets, as defined in Section 409A and the regulations and guidance thereunder. In addition, no Change in Ownership shall be deemed to have occurred upon the acquisition of additional control of Morgan Stanley by any one person or more than one person acting as a group that is considered to effectively control Morgan Stanley.

For purposes of the provisions of this Award Certificate, terms used in the definition of a Change in Ownership shall be as defined or interpreted pursuant to Section 409A.

(e) Competitive Activity ” means:

(1) becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor, director, independent contractor, consultant, advisor, representative or agent of, or serving in any similar position or capacity with, a Competitor, where you will be responsible for providing, or managing or supervising others who are providing, services (x) that are similar or substantially related to the services that you provided to the Firm, or (y) that you had direct or indirect managerial or supervisory responsibility for at the Firm, or (z) that calls for the application of the same or similar specialized knowledge or skills as those utilized by you in your services for the Firm, in each such case, at any time during the year preceding the termination of your employment with the Firm; or

(2) either alone or in concert with others, forming, or acquiring a 5% or greater equity ownership, voting interest or profit participation in, a Competitor.

(f) Competitor ” means any corporation, partnership or other entity that is engaged in any activity, or that owns a significant interest in any corporation, partnership or other entity, that competes with any business activity the Firm engages in, or that you reasonably knew or should have known that the Firm was planning to engage in, at the time of the termination of your Employment.

(g) Date of the Award ” means [insert grant date, which typically will coincide approximately with the end of the fiscal year in respect of which the award is made].

 

13


(h) Disability ” means any condition that would qualify for a benefit under any group long-term disability plan maintained by the Firm and applicable to you.

(i) Employed ” and “ Employment ” refer to employment with the Firm and/or Related Employment.

(j) Final Distribution Date ” means the date on which the Firm shall make its final distribution to you in accordance with Section 10(a)(iii) of the Plan. The Final Distribution Date is [tenth anniversary of January 15 following the Date of the Award]. 3

(k) The “ Firm ” means Morgan Stanley (including any successor thereto) together with its subsidiaries and affiliates. For purposes of the definitions of “Cause,” “Proprietary Information,” “Unauthorized Comments” and “Wrongful Solicitation” set forth in this Award Certificate, references to the “Firm” shall refer severally to the Firm as defined in the preceding sentence and your Related Employer, if any. For purposes of the cancellation provisions set forth in this Award Certificate relating to disclosure or use of Proprietary Information, references to the “Firm” shall refer to the Firm as defined in the second preceding sentence or to your Related Employer, as applicable.

(l) First Scheduled Vesting Date ” means [second anniversary of January 2 following the Date of the Award]. 4

(m) Fiscal Year ” and “ Fiscal Quarter ” mean Morgan Stanley’s Fiscal Year and Morgan Stanley’s Fiscal Quarter, respectively. Morgan Stanley’s Fiscal Year [    ] begins on December 1, [    ] and ends on November 30, [    ].

(n) Full Career Retirement ” means the termination of your Employment by you or by the Firm for any reason other than for Cause (or under circumstances involving any other cancellation event described in Section 7(c)), and other than due to your death or Disability, on or after the date on which:

(1) you have attained age [    ] and completed at least [    ] years of service as a [    ] 5 ; or

 

3

The final distribution date presented in this form of Award Certificate is indicative. The final distribution date applicable to awards may vary.

4

The vesting schedule presented in this form of Award Certificate is indicative. The vesting schedule applicable to awards may vary.

5

Specified officer title(s) in one or more specified business units.

 

14


(2) you have attained age [    ] and completed at least [    ] years of service as an officer of the Firm at the level

of [    ] 6 or above; or

(3) you have completed at least [    ] years of service with the Firm; or

(4) you have attained age [    ] and have completed at least [    ] years of service with the Firm and the sum of your age and years of service equals or exceeds [    ]. 7

For the purposes of the foregoing definition, service with the Firm will include any period of service with the following entities and any of their predecessors:

(i) AB Asesores (“ ABS ”) prior to its acquisition by the Firm ( provided , that only years of service as a partner of ABS shall count towards years of service as an officer);

(ii) Morgan Stanley Group Inc. and its subsidiaries (“ MS Group ”) prior to the merger with and into Dean Witter, Discover & Co.;

(iii) Miller Anderson & Sherrerd, L.L.P. prior to its acquisition by MS Group;

(iv) Van Kampen Investments Inc. and its subsidiaries prior to its acquisition by MS Group;

(v) FrontPoint Partners LLC and its subsidiaries prior to its acquisition by the Firm; and

(vi) Dean Witter, Discover & Co. and its subsidiaries (“ DWD ”) prior to the merger of Morgan Stanley Group Inc. with and into Dean Witter, Discover & Co.;

provided that, in the case of an employee who has transferred employment from DWD to MS Group or vice versa, a former employee of DWD will receive credit for employment with DWD only if he or she transferred directly from DWD to Morgan Stanley & Co. Incorporated or its affiliates subsequent to February 5, 1997, and a former employee of MS Group will receive credit for employment with MS Group only if he or she transferred directly from MS Group to Morgan Stanley DW Inc. or its affiliates subsequent to February 5, 1997.

(o) Management Committee ” means the Morgan Stanley Management Committee and any successor or equivalent committee.

 

6

Specified officer title(s) in one or more specified business units.

7

Age and service conditions specified in clauses (i) through (iv) may vary from year to year.

 

15


(p) Proprietary Information ” means any information that may have intrinsic value to the Firm, the Firm’s clients or other parties with which the Firm has a relationship, or that may provide the Firm with a competitive advantage, including, without limitation, any trade secrets; inventions (whether or not patentable); formulas; flow charts; computer programs; access codes or other systems information; algorithms; technology and business processes; business, product, or marketing plans; sales and other forecasts; financial information; client lists or other intellectual property; information relating to compensation and benefits; and public information that becomes proprietary as a result of the Firm’s compilation of that information for use in its business, provided that such Proprietary Information does not include any information which is available for use by the general public or is generally available for use within the relevant business or industry other than as a result of your action. Proprietary Information may be in any medium or form, including, without limitation, physical documents, computer files or disks, videotapes, audiotapes, and oral communications.

(q) Related Employment ” means your employment with an employer other than the Firm (such employer, herein referred to as a “ Related Employer ”), provided: (i) you undertake such employment at the written request or with the written consent of Morgan Stanley’s Global Head of Human Resources; (ii) immediately prior to undertaking such employment you were an employee of the Firm or were engaged in Related Employment (as defined herein); and (iii) such employment is recognized by the Firm in its discretion as Related Employment; and, provided further, that the Firm may (1) determine at any time in its sole discretion that employment that was recognized by the Firm as Related Employment no longer qualifies as Related Employment, and (2) condition the designation and benefits of Related Employment on such terms and conditions as the Firm may determine in its sole discretion. The designation of employment as Related Employment does not give rise to an employment relationship between you and the Firm, or otherwise modify your and the Firm’s respective rights and obligations.

(r) Scheduled Distribution Date ” means [third anniversary of January 2 following the Date of the Award] or as soon thereafter as administratively practicable. 8

(s) Scheduled Vesting Date ” means the First Scheduled Vesting Date and/or the Second Scheduled Vesting Date, as the context requires.

(t) Second Scheduled Vesting Date ” means [third anniversary of January 2 following the Date of the Award]. 9

 

8

The scheduled distribution date presented in this form of Award Certificate is indicative. The scheduled distribution date applicable to awards may vary.

9

The vesting schedule presented in this form of Award Certificate is indicative. The vesting schedule applicable to awards may vary.

 

16


(u) Subsidiary ” means (i) a corporation or other entity with respect to which Morgan Stanley, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such corporation’s board of directors or analogous governing body, or (ii) any other corporation or other entity in which Morgan Stanley, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Plan.

(v) You will be deemed to have made “ Unauthorized Comments ” about the Firm if, while Employed or following the termination of your Employment, you make, directly or indirectly, any negative, derogatory, or disparaging comment, whether written, oral or in electronic format, to any reporter, author, producer or similar person or entity or to any general public media in any form (including, without limitation, books, articles or writings of any other kind, as well as film, videotape, audiotape, computer/Internet format or any other medium) that concerns directly or indirectly the Firm, its business or operations, or any of its current or former agents, employees, officers, directors, customers or clients.

(w) A “ Wrongful Solicitation ” occurs upon either of the following events:

(1) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 180 days after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you hire or solicit, recruit, induce, entice, influence or encourage any Firm employee to leave the Firm or become hired or engaged by another firm; provided , however , that this clause shall apply only to employees with whom you worked or had professional or business contact, or who worked in or with your business unit, during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment; or

(2) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 90 days (180 days if you are a member of the Management Committee at the time of notice of termination) after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you solicit or entice away or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Firm (i) to discontinue or diminish his, her or its relationship or prospective relationship with the Firm or (ii) to otherwise provide his, her or its business to any person, corporation, partnership or other business entity which engages in any line of business in which the Firm is engaged (other than the Firm); provided , however , that this clause shall apply only to clients or customers, or prospective clients or customers, that you worked for on an actual or prospective project or assignment during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment.

 

17


IN WITNESS WHEREOF , Morgan Stanley has duly executed and delivered this Award Certificate as of the Date of the Award.

 

MORGAN STANLEY

/s/

[NAME]
[TITLE]

 

18


APPENDIX A

Designation of Beneficiary(ies) Under

[Fiscal Year] Notional Leveraged Co-Investment Plan

This Designation of Beneficiary shall remain in effect with respect to all awards issued to me under the 2006 Notional Leveraged Co-Investment Plan (the “ Plan ”), including any awards that may be issued to me after the date hereof, unless and until I modify or revoke it by submitting a later dated beneficiary designation. This Designation of Beneficiary supersedes all my prior beneficiary designations with respect to all my Plan awards.

I hereby designate the following beneficiary(ies) to receive any survivor benefits with respect to all my Plan awards:

 

     

Beneficiary(ies) Name

  

Relationship

  

Percentage

(1)

 

 

  

 

  

 

(2)

 

 

  

 

  

 

(3)

 

 

  

 

  

 

(4)

 

 

  

 

  

 

Address(es) of Beneficiary(ies):

(1)

       

(2)

       

(3)

       

(4)

       

 

 

  

Name: (please print)

   Date   

 

     
Signature      

Please sign and return this form to the Executive Compensation Department, [insert address].

E XHIBIT 10.8

M ORGAN S TANLEY

2007 NOTIONAL LEVERAGED CO-INVESTMENT PLAN

[FISCAL YEAR] AWARD CERTIFICATE FOR CERTAIN

MANAGEMENT COMMITTEE MEMBERS

 


T ABLE OF C ONTENTS FOR A WARD C ERTIFICATE

 

1.

   Your award generally    2

2.

   Vesting schedule    3

3.

   Distributions    3

4.

   Death, Disability and Full Career Retirement    3

5.

   Governmental Service    4

6.

   Qualifying Termination    5

7.

   Specified employees    5

8.

   Cancellation of Plan Interest under certain circumstances    5

9.

   Obligations you owe to the Firm    7

10.

   Designation of a beneficiary    7

11.

   No entitlements    7

12.

   Consents under local law    8

13.

   Award modification    8

14.

   Incorporation of the Plan document    8

15.

   Governing law    8

16.

   Defined terms    9

 


M ORGAN S TANLEY

2007 N OTIONAL L EVERAGED C O -I NVESTMENT P LAN

A WARD C ERTIFICATE F OR C ERTAIN M ANAGEMENT C OMMITTEE M EMBERS

F ISCAL Y EAR [    ]

Morgan Stanley has awarded you an interest in the Morgan Stanley 2007 Notional Leveraged Co-Investment Plan (the “ Plan ”) as part of your discretionary long-term incentive compensation for services provided during Fiscal Year [    ] and as an incentive for you to remain in Employment and provide services to the Firm through the Scheduled Vesting Dates. This award certificate (the “ Award Certificate ”) sets forth the general terms and conditions of your Fiscal Year [    ] award under the Plan. The initial value of your Fiscal Year [    ] award (your “ Allocation ”) has been communicated to you independently.

If you are employed outside the United States, you have also received an “ International Supplement ” that contains supplemental terms and conditions for your Fiscal Year [    ] award. You should read this Award Certificate in conjunction with the International Supplement, if applicable, and the Plan document in order to understand the terms and conditions of your Fiscal Year [    ] award.

Your Fiscal Year [    ] award is made pursuant to the Plan. References to “Allocation” and “Plan Interest” in this Award Certificate mean only your Allocation and Plan Interest related to your Fiscal Year [    ] award, and the terms and conditions herein apply only to such award. If you receive any other award under the Plan, it will be governed by the terms and conditions of the applicable award documentation, which may be different from those herein.

The purposes of the Fiscal Year [    ] award are, among other things, to enhance the portion of any discretionary Above Base Compensation that would otherwise be awarded to you in the form of Morgan Stanley equity compensation or other mandatory long-term incentive compensation and to facilitate the allocation of such compensation to the notional investment opportunities afforded by the Plan, as well as to reward you for your continued employment and service to the Firm in the future, to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. In view of these purposes, you will earn each portion of your Plan Interest only if you do not engage in any activity that is a cancellation event set forth in Section 8 below. Therefore, even if your Plan Interest has vested, you will have no right to your Plan Interest if a cancellation event occurs under the circumstances set forth in set forth in Section 8 below. You will be required to provide Morgan Stanley with such written certification or other evidence as Morgan Stanley deems appropriate, from time to time in its sole discretion, to confirm that no cancellation event has occurred. If you fail to provide such certification or evidence, Morgan Stanley will cancel your Plan Interest.

 


Section 409A imposes rules relating to the taxation of deferred compensation, including your Fiscal Year [    ] award. The Firm reserves the right to modify the terms of your Fiscal Year [    ] award, including, without limitation, the distribution and other payment provisions applicable to your Plan Interest, to the extent necessary or advisable to comply with Section 409A.

Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section 16 below. Capitalized terms used in this Award Certificate that are not defined in the text or in Section 16 below have the meanings set forth in the Plan.

 

1. Your award generally .

(a) Allocation and Account. Your Allocation is credited to an Account as of the Date of the Award. Your Allocation (or portion thereof) will accrue notional interest at the Participant Applicable Rate from the Date of the Award: (i) until the Firm notionally invests your Allocation (or such portion thereof) in one or more Notional Plan Investments, or (ii) if the Firm does not notionally invest your Allocation (or such portion thereof) in one or more Notional Plan Investments, until the applicable Distribution Date.

(b) Notional Advance. At the time that your Allocation (or portion thereof) is notionally invested in a Notional Plan Investment, a Notional Advance in an amount equal to your Allocation (or such portion thereof) multiplied by two will be added to your Account for purposes of enhancing your notional investment in such Notional Plan Investment. 1

Each Notional Advance will accrue notional interest at the Morgan Stanley Applicable Rate during the period that the Notional Advance is deemed to be outstanding ( i.e. , from the date of the addition of the Notional Advance to your Allocation (or portion thereof) until and to the extent the Notional Advance is subsequently satisfied in accordance with the Plan).

(c) Notional Plan Investments. Your Account will initially be notionally invested approximately [insert names of Notional Plan Investments and approximate percentage allocations relating thereto]. You will have no discretion to re-index or notionally re-invest your account. The Firm may, in its sole discretion, change your allocation percentages and the Notional Plan Investments at any time.

 

1 The notional advance presented in this form of Award Certificate is indicative. The notional advance applicable to awards may vary.

 

2


2. Vesting schedule .

Except as otherwise provided in this Award Certificate, your Plan Interest will vest according to the following schedule: (i) 50% of your Plan Interest will vest on the First Scheduled Vesting Date, and (ii) the remaining portion of your Plan Interest will vest on the Second Scheduled Vesting Date. 2 The special vesting terms set forth in Sections 4, 5 and 6 of this Award Certificate apply (i) if your Employment terminates by reason of your death or Disability, (ii) upon your Full Career Retirement, (iii) upon Governmental Service Termination, or (iv) upon a Qualifying Termination. Your vested Plan Interest remains subject to the cancellation provisions set forth in this Award Certificate and the withholding provisions set forth in the Plan and Section 9 below.

 

3. Distributions .

Except as otherwise provided in this Award Certificate, distributions of your share of any Proceeds with respect to your vested Plan Interest will commence on the Earliest Distribution Date and subsequent distributions will be made on the applicable Distribution Date(s) thereafter in accordance with Section 10 of the Plan and subject to Section 11 of the Plan. With respect to any Closed-End Investment, Section 10(b) of the Plan shall apply to your applicable Total Notional Investment. 3

 

4. Death, Disability and Full Career Retirement .

The following special vesting, distribution and other payment terms apply to your Plan Interest:

(a) Death during Employment. If your Employment terminates due to death, the unvested portion of your Plan Interest will vest in full on the date of your death. The fair value (determined by reference to the value that the Firm’s books and records show as of the most recently concluded Fiscal Quarter end preceding the date of death) of your vested Plan Interest will be distributed to the beneficiary you have designated pursuant to Section 10 or the legal representative of your estate, as applicable, upon your death, provided that your estate or beneficiary notifies the Firm of your death within 60 days following your death.

(b) Death after termination of Employment. If you die after the termination of your Employment, the fair value (determined by reference to the value that the Firm’s books and records show as of the most recently concluded Fiscal Quarter end preceding the date of your death) of the vested portion of your Plan Interest that you held at the time of your death will be distributed to the beneficiary you have designated pursuant to Section 10 or the legal representative of your estate, as applicable, upon your death, provided that your estate or beneficiary notifies the Firm of your death within 60 days following your death.

 

2 The vesting schedule presented in this form of Award Certificate is indicative. The vesting schedule applicable to awards may vary.
3 The distribution schedule presented in this form of Award Certificate is indicative. The distribution schedule applicable to awards may vary.

 

3


(c) Disability or Full Career Retirement. If your Employment terminates due to Disability or in a Full Career Retirement, the unvested portion of your Plan Interest will vest in full on the date your Employment terminates. Distributions in respect of your share of any Proceeds will be made to you on each applicable Distribution Date in accordance with Section 10 of the Plan and subject to Section 11 of the Plan. The cancellation provisions set forth in Section 8 below will continue to apply until the Earliest Distribution Date.

 

5. Governmental Service .

(a) General treatment of Plan Interest upon Governmental Service Termination. If your Employment terminates in a Governmental Service Termination and not involving a cancellation event set forth in Section 8 below, then, provided that you sign an agreement satisfactory to the Firm relating to your obligations pursuant to Section 5(c), the unvested portion of your Plan Interest will vest on the date of your Governmental Service Termination. The fair value (determined by reference to the value that the Firm’s books and records show as of the last day of the calendar quarter in which your Governmental Service Termination occurred) of your Plan Interest that you held at the time of your Governmental Service Termination will be distributed to you on the date of your Governmental Service Termination.

(b) General treatment of vested Plan Interest upon commencement of employment with a Governmental Employer following termination of Employment. If your Employment terminates other than in a Governmental Service Termination and not involving a cancellation event and, following your termination of Employment, you accept employment with a Governmental Employer, then, provided that you sign an agreement satisfactory to the Firm relating to your obligations pursuant to Section 5(c), then, the fair value (determined by reference to the value that the Firm’s books and records show as of the last day of the calendar quarter preceding the date on which you commence such employment) of your Plan Interest that you held at the time of your commencement of employment with such Governmental Employer will be distributed to you upon your commencement of such employment, provided that you present the Firm with satisfactory evidence demonstrating that as a result of such employment the divestiture of your Plan Interest is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflict of interests law applicable to you at such Governmental Employer.

(c) Repayment obligation. If you engage in any activity constituting a cancellation event set forth in Section 8 within the applicable period of time that would have resulted in cancellation of all or a portion of your Plan Interest (had it not become vested and distributed pursuant to Section 5(a) or 5(b) above), you will be required to pay to Morgan Stanley (i) an amount equal to the amount distributed to you pursuant to Section 5(a) or 5(b) above) plus, (ii) interest on such amount at the average rate of interest the Firm paid to borrow money from financial institutions during the period from the date of distribution to you pursuant to Section 5(a) or 5(b) above through the date preceding the date of repayment by you pursuant to this Section 5(c).

 

4


6. Qualifying Termination .

If your Employment terminates in a Qualifying Termination, the unvested portion of your Plan Interest will vest in full, cancellation provisions will lapse, and the fair value (determined by reference to the value that the Firm’s books and records show as of the most recently concluded fiscal quarter end preceding the date of your Qualifying Termination) of your Plan Interest at such time will be paid on the date of your Qualifying Termination.

 

7. Specified employees .

Notwithstanding any other terms of this Award Certificate, if Morgan Stanley considers you to be one of its “specified employees” as defined in Section 409A at the time of your Separation from Service, any distribution under the Plan that otherwise would occur upon your Separation from Service (including, without limitation, any distributions deferred due to Section 162(m) of the Internal Revenue Code, as provided in Section 11(d) of the Plan, and distributions that otherwise would occur upon your Qualifying Termination, as provided in Section 6) will be delayed for six months after your Separation from Service, and such distribution will commence on the first business day following the date that is six months after your Separation from Service; provided , however , that in the event that your death, your Governmental Service Termination or your employment with a Governmental Employer following your termination of Employment under circumstances set forth in Section 5(b) occurs at any time after the Date of the Award, payment will be made in accordance with Section 4(a), 4(b), 5(a) or 5(b), as applicable.

 

8. Cancellation of Plan Interest under certain circumstances .

The cancellation events set forth in this Section 8 are designed, among other things, to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. This Section 8 shall apply notwithstanding any other terms of this Award Certificate (except where sections in this Award Certificate specifically provide that the cancellation events set forth in this Section 8 no longer apply).

Your Plan Interest, even if vested, is not earned until the Earliest Distribution Date and will be canceled prior to such Distribution Date in any of the following circumstances:

(a) Competitive Activity. If you engage in Competitive Activity following the voluntary termination of your Employment, and before the Earliest Distribution Date, the following shall apply:

(1) If your Competitive Activity occurs before the First Scheduled Vesting Date, then your entire Plan Interest will be canceled immediately; and

(2) If your Competitive Activity occurs on or after the First Scheduled Vesting Date, then:

(i) 50% of your Plan Interest will be canceled immediately; and

 

5


(ii) Distributions in respect of your share of any Proceeds related to the remaining portion of your Plan Interest will be made to you on each applicable Distribution Date in accordance with Section 10 of the Plan, subject to all other terms and conditions set forth in this Award Certificate and the Plan (including, without limitation, the cancellation provisions of Section 8(b) below, Section 11 of the Plan and the withholding provisions of the Plan and Section 9 below).

(b) Other Events. If any of the following events occur at any time prior to the Earliest Distribution Date, your entire Plan Interest (whether or not vested) will be canceled immediately:

(1) Your Employment is terminated for Cause;

(2) Following the termination of your Employment, the Firm determines that your Employment could have been terminated for Cause (for these purposes, “Cause” will be determined without giving consideration to any “cure” period included in the definition of “Cause”);

(3) You disclose Proprietary Information to any unauthorized person outside the Firm, or use or attempt to use Proprietary Information other than in connection with the business of the Firm, where such disclosure, use or attempt to use may be adverse to the interests of the Firm; or you fail to comply with your obligations (either during or after your Employment) under the Firm’s Code of Conduct (and any applicable supplements) or otherwise existing between you and the Firm, relating to an assignment, procurement or enforcement of rights in Proprietary Information;

(4) You engage in a Wrongful Solicitation;

(5) You make any Unauthorized Comments; or

(6) You resign from your employment with the Firm without having provided the Firm prior written notice of your resignation at least:

(i) 180 days before the date on which your employment with the Firm terminates if you are a member of the Management Committee at the time of notice of your resignation;

(ii) 90 days before the date on which your employment with the Firm terminates if clause (i) of this Section 8(b)(6) does not apply to you and you are a Managing Director (or equivalent title) at the time of notice of your resignation;

(iii) 60 days before the date on which your employment with the Firm terminates if you are an Executive Director (or equivalent title) at the time of notice of your resignation; and

(iv) 30 days before the date on which your employment with the Firm terminates if none of clauses (i) through (iii) of this Section 8(b)(6) apply to you at the time of notice of your resignation.

 

6


9. Obligations you owe to the Firm .

Morgan Stanley may not withhold from any distribution under the Plan to satisfy obligations that you owe to the Firm except (i) to the extent such withholding is authorized under the withholding provisions of the Plan and (ii) to the extent such withholding is not prohibited by Section 409A and would not cause you to recognize income for United States federal income tax purposes prior to the time of distribution of your Plan Interest or to incur interest or additional tax under Section 409A.

 

10. Designation of a beneficiary .

You may make a written designation of beneficiary or beneficiaries to receive all or part of the amounts to be distributed or paid in respect of your Plan Interest in the event of your death. To make a beneficiary designation, you must complete and submit the Beneficiary Designation form on the Executive Compensation Department website at [insert website address]. Your share of any Proceeds that become payable upon your death, and as to which a designation of beneficiary is not in effect, will be distributed to your estate.

You may replace or revoke your beneficiary designation at any time. If there is any question as to the legal right of any beneficiary to receive amounts to be distributed or paid in respect of your Plan Interest in the event of your death, Morgan Stanley may determine in its sole discretion to distribute the amounts in question to your estate. Morgan Stanley’s determination shall be binding and conclusive on all persons and it will have no further liability to anyone with respect to such amounts.

 

11. No entitlements .

(a) No right to continued Employment. This Fiscal Year [    ] award is not an employment agreement, and nothing in this Award Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of the Firm or your employment status at a Related Employer. None of this Award Certificate, the International Supplement, if applicable, or the Plan shall be construed as guaranteeing your employment by the Firm or a Related Employer, or as giving you any right to continue in the employ of the Firm or a Related Employer, during any period (including without limitation the period between the Date of the Award and any of the First Scheduled Vesting Date, the Second Scheduled Vesting Date or any Distribution Date, or any portion of any of these periods), nor shall they be construed as giving you any right to be reemployed by the Firm or a Related Employer following any termination of Employment.

(b) No right to future awards. This award and all other awards made pursuant to the Plan are discretionary. This award does not confer on you any right or entitlement to receive another award under the Plan or any other award at any time in the future or in respect of any future period.

(c) No effect on future employment compensation. Morgan Stanley has made this award to you in its sole discretion. This award does not confer on you any right or entitlement to receive compensation in any specific amount for any future Fiscal Year, nor does it diminish in any way the Firm’s discretion to determine the amount, if any, of your

 

7


compensation. This award is not part of your base salary or wages and will not be taken into account in determining any other employment-related rights you may have, such as rights to pension or severance pay.

 

12. Consents under local law .

Your award is conditioned upon the making of all filings and the receipt of all consents or authorizations required to comply with, or required to be obtained under, applicable local law.

 

13. Award modification .

Morgan Stanley reserves the right to modify or amend unilaterally the terms and conditions of your Fiscal Year [    ] award, without first asking your consent, or to waive any terms and conditions that operate in favor of Morgan Stanley. These amendments may include (but are not limited to) changes that Morgan Stanley considers necessary or advisable as a result of changes in any, or the adoption of any new, Legal Requirement. Morgan Stanley may not modify your Fiscal Year [    ] award in a manner that would materially impair your rights in your Fiscal Year [    ] award without your consent; provided , however , that Morgan Stanley may, without your consent, amend or modify your Fiscal Year [    ] award in any manner that Morgan Stanley considers necessary or advisable to comply with any Legal Requirement or to ensure that your Fiscal Year [    ] award is not subject to United States federal, state or local income tax or any equivalent taxes in territories outside the United States prior to payment or distribution. Morgan Stanley will notify you of any amendment of your Fiscal Year [    ] award that affects your rights. Any amendment or waiver of a provision of this Award Certificate (other than any amendment or waiver applicable to all recipients generally), which amendment or waiver operates in your favor or confers a benefit on you, must be in writing and signed by the Global Head of Human Resources or the Chief Administrative Officer (or if such positions no longer exist, by the holder of an equivalent position) to be effective.

 

14. Incorporation of the Plan document .

The Plan document (including, without limitation, Sections 4(d) and 7 of the Plan) is incorporated in this Award Certificate by reference. In the event of any conflict or inconsistency between the Plan document and this Award Certificate, the Plan document will govern and the Award Certificate will be interpreted to minimize or eliminate any such conflict or inconsistency; provided , however , that to the extent this Award Certificate expressly provides that a definition set forth in Section 2 of the Plan is modified by a definition set forth in this Award Certificate, such modified definition, as set forth in this Award Certificate, will govern.

 

15. Governing law .

This Award Certificate and the related legal relations between you and Morgan Stanley will be governed by and construed in accordance with the laws of the State of New York, without regard to any conflicts or choice of law, rule or principle that might otherwise refer the interpretation of the award to the substantive law of another jurisdiction.

 

8


16. Defined terms .

For purposes of this Award Certificate, the following terms shall have the meanings set forth below:

(a) A “ Cancellation Event ” means any cancellation event set forth in Section 8 above.

(b) Cause ” means:

(1) any act or omission which constitutes a breach of your obligations to the Firm (including, without limitation, your failure to comply with any notice or non-solicitation restrictions that may be applicable to you) or your failure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (if susceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to physical or mental illness) within ten (10) business days after written notification thereof to you by the Firm;

(2) your commission of any dishonest or fraudulent act, or any other act or omission, which has caused or may reasonably be expected to cause injury to the interest or business reputation of the Firm; or

(3) your violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Firm is a member or of any policy of the Firm relating to compliance with any of the foregoing.

(c) A “ Change in Control ” shall be deemed to have occurred if any of the following conditions shall have been satisfied:

(1) any one person or more than one person acting as a group (as determined under Section 409A), other than (A) any employee plan established by Morgan Stanley or any of its Subsidiaries, (B) Morgan Stanley or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) a corporation owned, directly or indirectly, by stockholders of Morgan Stanley in substantially the same proportions as their ownership of Morgan Stanley, is or becomes, during any twelve-month period, the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person(s) any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 50% or more of the total voting power of the stock of Morgan Stanley; provided , however , that the provisions of this subsection (1) are not intended to apply to or include as a Change in Control any transaction that is specifically excepted from the definition of Change in Control under subsection (3) below;

(2) a change in the composition of the Board such that, during any twelve-month period, the individuals who, as of the beginning of such period, constitute

 

9


the Board (the “ Existing Board ”) cease for any reason to constitute at least 50% of the Board; provided , however , that any individual becoming a member of the Board subsequent to the beginning of such period whose election, or nomination for election by Morgan Stanley’s stockholders, was approved by a vote of at least a majority of the directors immediately prior to the date of such appointment or election shall be considered as though such individual were a member of the Existing Board;

(3) the consummation of a merger or consolidation of Morgan Stanley with any other corporation or other entity, or the issuance of voting securities in connection with a merger or consolidation of Morgan Stanley (or any direct or indirect subsidiary of Morgan Stanley) pursuant to applicable stock exchange requirements; provided that immediately following such merger or consolidation the voting securities of Morgan Stanley outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity of such merger or consolidation or parent entity thereof) 50% or more of the total voting power of Morgan Stanley stock (or if Morgan Stanley is not the surviving entity of such merger or consolidation, 50% or more of the total voting power of the stock of such surviving entity or parent entity thereof); and, provided , further , that a merger or consolidation effected to implement a recapitalization of Morgan Stanley (or similar transaction) in which no person (as determined under Section 409A) is or becomes the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 50% or more of either the then outstanding shares of Morgan Stanley common stock or the combined voting power of Morgan Stanley’s then outstanding voting securities shall not be considered a Change in Control; or

(4) the complete liquidation of Morgan Stanley or the sale or disposition by Morgan Stanley of all or substantially all of Morgan Stanley’s assets in which any one person or more than one person acting as a group (as determined under Section 409A) acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person or persons) assets from Morgan Stanley that have a total gross fair market value equal to more than 50% of the total gross fair market value of all of the assets of Morgan Stanley immediately prior to such acquisition or acquisitions.

Notwithstanding the foregoing, (1) no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of Morgan Stanley common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns substantially all of the assets of Morgan Stanley immediately prior to such transaction or series of transactions and (2) no event or circumstances described in any of clauses (1) through (4) above shall constitute a Change in Control unless such event or circumstances also constitute a change in the ownership or effective control of Morgan Stanley, or in the ownership of a substantial portion of Morgan Stanley’s assets, as defined in Section 409A and the regulations and guidance thereunder. In addition, no Change in Control shall be

 

10


deemed to have occurred upon the acquisition of additional control of Morgan Stanley by any one person or more than one person acting as a group that is considered to effectively control Morgan Stanley.

For purposes of the provisions of this Award Certificate, terms used in the definition of a Change in Control shall be as defined or interpreted pursuant to Section 409A.

(e) Competitive Activity ” means:

(1) becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor, director, independent contractor, consultant, advisor, representative or agent of, or serving in any similar position or capacity with, a Competitor, where you will be responsible for providing, or managing or supervising others who are providing, services (x) that are similar or substantially related to the services that you provided to the Firm, or (y) that you had direct or indirect managerial or supervisory responsibility for at the Firm, or (z) that call for the application of the same or similar specialized knowledge or skills as those utilized by you in your services for the Firm, in each such case, at any time during the year preceding the termination of your employment with the Firm; or

(2) either alone or in concert with others, forming, or acquiring a 5% or greater equity ownership, voting interest or profit participation in, a Competitor.

(f) Competitor ” means any corporation, partnership or other entity that is engaged in any activity, or that owns a significant interest in any corporation, partnership or other entity, that competes with any business activity the Firm engages in, or that you reasonably knew or should have known that the Firm was planning to engage in, at the time of the termination of your Employment.

(g) Date of the Award ” means [insert grant date, which typically will coincide approximately with the end of the fiscal year in respect of which the award is made].

(h) Disability ” means any condition that would qualify for a benefit under any group long-term disability plan maintained by the Firm and applicable to you.

(i) Distribution Date ” means, (i) with respect to a Closed-End Investment, the Single Closed-End Distribution Date, or in the event such distributions are governed by Section 10(a) of the Plan, the Earliest Distribution Date and all Subsequent Closed-End Distribution Dates (including the Final Distribution Date) and (ii) with respect to an Open-End Investment, the Earliest Distribution Date and any Subsequent Open-End Distribution Date(s).

(j) Earliest Distribution Date ” means the first date on which your share of Proceeds, if any, from Notional Plan Investments will be distributed. With respect to your vested Plan Interest, the Earliest Distribution Date is [third anniversary of January 2 following the Date of the Award]. 4

 

4 The earliest distribution date presented in this form of Award Certificate is indicative. The earliest distribution date applicable to awards may vary.

 

11


(k) Employed ” and “ Employment ” refer to employment with the Firm and/or Related Employment.

(l) Final Distribution Date ” means the date on which the Firm shall make its final distribution to you in accordance with Section 10(a)(iii) of the Plan. The Final Distribution Date is [twelfth anniversary of January 15 following the Date of the Award]. 5

(m) The “ Firm ” means Morgan Stanley (including any successor thereto) together with its subsidiaries and affiliates. For purposes of the definitions of “Cause,” “Proprietary Information,” “Unauthorized Comments” and “Wrongful Solicitation” set forth in this Award Certificate, references to the “Firm” shall refer severally to the Firm as defined in the preceding sentence and your Related Employer, if any. For purposes of the cancellation provisions set forth in this Award Certificate relating to disclosure or use of Proprietary Information, references to the “Firm” shall refer to the Firm as defined in the second preceding sentence or your Related Employer, as applicable.

(n) First Scheduled Vesting Date ” means [second anniversary of January 2 following the Date of the Award]. 6

(o) Fiscal Year ” and “ Fiscal Quarter ” mean Morgan Stanley’s Fiscal Year and Morgan Stanley’s Fiscal Quarter, respectively. Morgan Stanley’s Fiscal Year [    ] begins on December 1, [    ] and ends on November 30, [    ].

(p) Full Career Retirement ” means the termination of your Employment by you or by the Firm for any reason other than under circumstances involving any cancellation event described in Section 8 and other than due to your death, Disability, a Governmental Service Termination or pursuant to a Qualifying Termination. 7

 

5 The final distribution date presented in this form of Award Certificate is indicative. The final distribution date applicable to awards may vary.
6 The vesting schedule presented in this form of Award Certificate is indicative. The vesting schedule applicable to awards may vary.
7 Some awards may include age and/or service conditions in order for a termination of Employment to qualify as Full Career Retirement.

 

12


(q) Governmental Employer ” means a governmental department or agency, self-regulatory agency or other public service employer.

(r) Governmental Service Termination ” means the termination of your Employment and your commencement of employment with a Governmental Employer; provided that you have presented the Firm with satisfactory evidence demonstrating that as a result of such new employment, the divestiture of your continued interest in Morgan Stanley equity awards or continued ownership of Morgan Stanley common stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer.

(s) Management Committee ” means the Morgan Stanley Management Committee and any successor or equivalent committee.

(t) Proprietary Information ” means any information that may have intrinsic value to the Firm, the Firm’s clients or other parties with which the Firm has a relationship, or that may provide the Firm with a competitive advantage, including, without limitation, any trade secrets; inventions (whether or not patentable); formulas; flow charts; computer programs; access codes or other systems of information; algorithms; technology and business processes; business, product or marketing plans; sales and other forecasts; financial information; client lists or other intellectual property; information relating to compensation and benefits; and public information that becomes proprietary as a result of the Firm’s compilation of that information for use in its business, provided that such Proprietary Information does not include any information which is available for use by the general public or is generally available for use within the relevant business or industry other than as a result of your action. Proprietary Information may be in any medium or form, including, without limitation, physical documents, computer files or discs, videotapes, audiotapes, and oral communications.

(u) Qualifying Termination ” means your Separation from Service within eighteen (18) months following a Change in Control, under either of the following circumstances: (a) the Firm terminates your employment under circumstances not involving any cancellation event; or (b) you resign from the Firm due to (i) a materially adverse alteration in your position or in the nature or status of your responsibilities from those in effect immediately prior to the Change in Control, as determined by the Committee or its delegees, or (ii) the Firm requiring your principal place of employment to be located more than 75 miles from the location where you were principally employed at the time of the Change in Control (except for required travel on the Firm’s business to an extent substantially consistent with your business travel obligations in the ordinary course of business prior to the Change in Control).

(v) Related Employment ” means your employment with an employer other than the Firm (such employer, herein referred to as a “ Related Employer ”), provided: (i) you undertake such employment at the written request or with the written consent of Morgan Stanley’s Global Head of Human Resources; (ii) immediately prior to undertaking such employment you were an employee of the Firm or were engaged in Related Employment (as defined herein); and (iii) such employment is recognized by the Committee in its discretion as Related Employment; and, provided further that the Firm may (A) determine at any time in its sole discretion that employment that was recognized by the Committee as Related Employment

 

13


no longer qualifies as Related Employment, and (B) condition the designation and benefits of Related Employment on such terms and conditions as the Firm may determine in its sole discretion. The designation of employment as Related Employment does not give rise to an employment relationship between you and the Firm, or otherwise modify your and the Firm’s respective rights and obligations.

(w) Scheduled Vesting Date ” means the First Scheduled Vesting Date and/or the Second Scheduled Vesting Date, as the context requires.

(x) Second Scheduled Vesting Date ” means [third anniversary of January 2 following the Date of the Award]. 8

(i) Separation from Service ” means a separation from service with the Firm for purposes of Section 409A determined using the default provisions set forth in Treasury Regulation §1.409A-1(h) or any successor regulation thereto. For purposes of this definition, Morgan Stanley’s subsidiaries and affiliates include (and are limited to) any corporation that is in the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as Morgan Stanley and any trade or business that is under common control with Morgan Stanley (within the meaning of Section 414(c) of the Internal Revenue Code), determined in each case in accordance with the default provisions set forth in Treasury Regulation §1.409A-1(h)(3).

(y) Single Closed-End Distribution Date ” means [tenth anniversary of January 15 following the Date of the Award]. 9

(z) Subsequent Closed-End Distribution Date ” means, with respect to any Plan Interest, each [one year] anniversary from the Earliest Distribution Date until the earlier of (i) the realization of all Notional Plan Investments (in which case, the last Subsequent Closed-End Distribution Date will be the next such anniversary) or (ii) the Final Distribution Date. 10

(aa) Subsequent Open-End Distribution Date ” means, with respect to any Plan Interest, each date after the Earliest Distribution Date selected by you in accordance with rules and procedures established by the Firm as a Distribution Date for Proceeds relating to Open-End Investments.

(bb) Subsidiary ” means (i) a corporation or other entity with respect to which Morgan Stanley, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such

 

8 The vesting schedule presented in this form of Award Certificate is indicative. The vesting schedule applicable to awards may vary.
9 The single closed-end distribution date presented in this form of Award Certificate is indicative. The single closed-end distribution date applicable to awards may vary.
10 The subsequent closed-end distribution date presented in this form of Award Certificate is indicative. The subsequent closed-end distribution date applicable to awards may vary.

 

14


corporation’s board of directors or analogous governing body, or (ii) any other corporation or other entity in which Morgan Stanley, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Plan.

(cc) You will be deemed to have made “ Unauthorized Comments ” about the Firm if, while Employed or following the termination of your Employment, you make, directly or indirectly, any negative, derogatory or disparaging comment, whether written, oral or in electronic format, to any reporter, author, producer or similar person or entity or to any general public media in any form (including, without limitation, books, articles or writings of any other kind, as well as film, videotape, audiotape, computer/Internet format or any other medium) that concerns, directly or indirectly, the Firm, its business or operations, or any of its current or former agents, employees, officers, directors, customers or clients.

(dd) A “ Wrongful Solicitation ” occurs upon either of the following events:

(1) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 180 days after the termination of your Employment, directly or indirectly, in any capacity (including through any person, corporation, partnership or other business entity of any kind), you hire or solicit, recruit, induce, entice, influence or encourage any Firm employee to leave the Firm or become hired or engaged by another firm; provided , however , that this clause shall apply only to employees with whom you worked or had professional or business contact, or who worked in or with your business unit, during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment; or

(2) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 90 days (180 days if you are a member of the Management Committee at the time of notice of termination) after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you solicit or entice away or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Firm (i) to discontinue or diminish his, her or its relationship or prospective relationship with the Firm or (ii) to otherwise provide his, her or its business to any person, corporation, partnership or other business entity which engages in any line of business in which the Firm is engaged (other than the Firm); provided , however , that this clause shall apply only to clients or customers, or prospective clients or customers, that you worked for on an actual or prospective project or assignment during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment.

 

15


IN WITNESS WHEREOF , Morgan Stanley has duly executed and delivered this Award Certificate as of the Date of the Award.

 

MORGAN STANLEY

/s/

[Name]
[Title]

 

16

E XHIBIT 10.9

MORGAN STANLEY

SELECT EMPLOYEES’ CAPITAL ACCUMULATION PROGRAM

FISCAL YEAR [            ] TERM SHEET

This Term Sheet sets forth the general terms and conditions of your irrevocable request to allocate all or a portion of your Eligible Compensation pursuant to the Morgan Stanley Select Employees’ Capital Accumulation Program (“ SECAP ”). This Term Sheet applies to the allocation from your Fiscal Year [            ] year-end discretionary bonus paid in January [            ], if any, as well as to allocations from your monthly commission payouts generated and paid in calendar year [            ], if any. All references in this Term Sheet to Allocated Amount, Allocation Preference, Allocation Year, Applicable Account Value and Distribution Commencement Date are in respect of the amount allocated from your Fiscal Year [            ] year-end discretionary bonus and calendar year [            ] monthly commission payouts, as applicable. Capitalized terms used in this Term Sheet that are not defined in the text have the meanings set forth in Section 10 below or in the SECAP plan document.

 

  1. Eligibility.

You are an “ Eligible Employee ” if you are an employee of the Firm and:

(a) You are employed as a [            ] 1 ;

(b) You had earned annualized Total Compensation of at least $[            ] 2 , or local currency equivalent, for each of Fiscal Year [            ] and [            ]; and

(c) You qualify as an Accredited Investor; and

(d) For eligible Australian local employees, you qualify as a “Wholesale Client” under Section 761G of the Australian Corporation Act 2001 3 .

 

  2. Vesting.

Your Allocated Amount and 100% of the appreciation, if any, on your Allocated Amount, if any, is fully vested at all times.

 

1

Eligibility criteria may include specified officer titles and/or employment in specified business units.

2

Minimum annualized Total Compensation required as a condition to participation may vary from one Fiscal Year to another.

3

Employees in certain jurisdictions may not be eligible to participate and/or additional eligibility conditions may apply to them.

 


  3. Separation from Service.

(a) Separation from Service due to Full Career Retirement or Retirement . Upon your Separation from Service due to Full Career Retirement or Retirement, as applicable, you will either remain in the Plan or terminate your participation in the Plan, as specified in your Allocation Preference. If you will remain in the Plan upon your Separation from Service due to your Full Career Retirement or Retirement, as applicable, distributions will commence on your Distribution Commencement Date notwithstanding your Separation from Service under these circumstances. If you will terminate your participation in the Plan upon your Separation from Service with the Firm upon your Full Career Retirement or Retirement, then, subject to Section 6, distributions will commence on the earlier of your Distribution Commencement Date and January 2 nd of the year following the year in which your Separation from Service occurs. Distributions will be paid using the Distribution Method. The amount of your distributions will be reduced by any Administration Fee outstanding.

If you will receive installments, your undistributed Applicable Account Value will remain in your Account following payment of each installment and thus will be credited (or debited) with future returns based on the performance of your selected Notional Investments. The amount of each annual installment will be calculated in accordance with the SECAP plan document.

(b) Separation from Service other than due to Full Career Retirement, Retirement or Death . Upon your Separation from Service other than due to Full Career Retirement, Retirement or your death, subject to Section 6, you will receive a lump sum distribution on the earlier of your Distribution Commencement Date and January 2 nd of the year following the year in which your Separation from Service occurs. The amount of your distribution will be reduced by any Administration Fee outstanding.

(c) Death . In the event of your death, the unpaid portion of your Applicable Account Value shall be paid in a lump sum to your Beneficiaries or estate upon your death, provided that your Beneficiaries or estate notify the Firm of your death within 60 days following the date of death. The amount of the distribution will be reduced by any Administration Fee outstanding.

(d) General treatment of award upon Governmental Service Termination . If your employment with the Firm terminates in a Governmental Service Termination, your undistributed Applicable Account Value will be paid to you on the date of your Governmental Service Termination.

(e) General treatment of award upon employment at a Government Employer following termination of employment. If your employment with the Firm terminates other than in a Governmental Service Termination and following your termination of employment, you accept employment with a Governmental Employer, your Applicable Account Value will be paid to you upon your commencement of such employment, provided you present the Firm with satisfactory evidence demonstrating that as a result of your acceptance of such employment the divestiture of your continued

 

2


interest in your Applicable Account Value is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics laws or conflicts of interest law applicable to you at such Governmental Employer.

 

  4. Administration Fee.

Your Allocated Amount is subject to and your Account Value is subject to a quarterly administration fee of 20 basis points (the “ Administration Fee ”). The Administration Fee is separate from any fees applicable to the Notional Investments and the related Referenced Funds, which are reflected in the net returns credited to your Account. The Administrator reserves the right to change the Administration Fee at any time in its sole discretion.

 

  5. Severability.

In the event the Administrator determines that any provision of the Descriptive Materials would cause you to be in constructive receipt for federal or state income tax purposes of any portion of your Applicable Account Value, then such provision will be considered null and void and the Descriptive Materials will be construed and enforced as if the provision had not been included in the Descriptive Materials as of the date such provision was determined to have the potential to cause you to be in constructive receipt of any portion of your Applicable Account Value.

 

  6. Specified Employees.

Notwithstanding anything contrary set forth in this Term Sheet or any Descriptive Material, if the Firm considers you to be one of its Specified Employees at the time of your Separation from Service, any distribution or other payment of your Applicable Account Value that is due upon or as a result of your Separation from Service will be delayed, to the extent it otherwise would be payable within the six months after your Separation from Service, and shall instead be made on the first business day following the date that is six months after the date of your Separation from Service; provided , however , that in the event that your death, your Governmental Service Termination or your employment at a Governmental Employer following your termination of employment with the Firm under circumstances set forth in Section 3(e) occurs at any time after the Date of the Award, payment will be made in accordance with Section 3(c), 3(d), or 3(e), as applicable.

 

  7. Amendment.

Notwithstanding any provision set forth in any Descriptive Materials, the Administrator may, without your consent, modify the terms and conditions of your Allocated Amount or the Descriptive Materials to the extent it deems necessary or advisable, in its sole discretion, in order to comply with Section 409A and to ensure that you are not required to recognize income for United States federal income tax purposes prior to the date of distribution or payment provided for herein or to incur interest or additional tax under Section 409A.

 

3


  8. Incorporation of the SECAP Plan Document.

The SECAP plan document is incorporated in this Term Sheet by reference. In the event of any conflict or inconsistency between the SECAP plan document and this Term Sheet, the SECAP plan document will govern and the Term Sheet will be interpreted to minimize or eliminate any such conflict or inconsistency; provided , however , that any definition set forth in this Term Sheet will govern.

 

  9. Provisions for Australian Participants and Participants located in Australia.

Morgan Stanley Dean Witter Australia Limited acts as agent for Morgan Stanley in relation to the offer of SECAP to participants located in Australia and the grant of SECAP awards to Australian participants. However, Morgan Stanley Dean Witter Australia Limited will not have any obligations or liability under SECAP or in respect of SECAP awards, any such obligations or liabilities will be the responsibility of Morgan Stanley.

As a condition of participation in SECAP, you acknowledge and agree that nothing in any of the Descriptive Materials, the SECAP plan document or this Term Sheet constitutes financial product advice under the Australian Corporations Act 2001. You should consider obtaining your own financial product advice from an independent person who is licensed by the Australian Securities and Investments Commission to give such advice in relation to your participation in SECAP or making any decisions regarding that participation (including your initial allocation preference or a reallocation preference among Notional Investments).

 

  10. Defined Terms.

The following terms have the indicated meanings:

(a) “ Eligible Compensation ” means the cash portion of the compensation you may allocate pursuant to SECAP and consists of (i) your Fiscal Year [            ] year-end discretionary bonus paid in January [            ], if any, and (ii) your monthly commission payouts generated and paid in calendar year [            ], if any.

(b) The “ Firm ” means Morgan Stanley (including any successor thereto) together with its subsidiaries and other affiliates.

(c) For [            ] 4 , “ Full Career Retirement ” means your Separation from Service for any reason other than your death on or after the date on which:

(i) You have attained age [    ] and completed at least [    ] years of service as a [            ] 5 ;

 

4

Definition applies to employees holding specified officer titles and/or working in specified business units.

5

Specified officer title(s) in one or more specified business units.

 

4


(ii) You have attained age [    ] and completed at least [    ] years of service as an officer of the Firm at the level of [            ] 5 or above;

(iii) You have completed at least [    ] years of service with the Firm; or

(iv) You have attained age [    ] and have completed at least [    ] years of service with the Firm and the sum of your age and years of service equals or exceeds [    ]. 6

For purposes of the foregoing definition and the definition of “ Retirement ” set forth below, service with the Firm will include any period of service with the following entities and any of their predecessors:

(1) AB Asesores (“ ABS ”) prior to its acquisition by the Firm ( provided , that only years of service as a partner of ABS will count towards years of service as an officer);

(2) Morgan Stanley Group Inc. and its subsidiaries (“ MS Group ”) prior to the merger with and into Dean Witter, Discover & Co.;

(3) Miller Anderson & Sherrerd, L.L.P. prior to its acquisition by MS Group;

(4) Van Kampen Investments Inc. and its subsidiaries prior to its acquisition by MS Group;

(5) FrontPoint Partners LLC and its subsidiaries prior to its acquisition by the Firm; and

(6) Dean Witter, Discover & Co. and its subsidiaries (“ DWD ”) prior to the merger of Morgan Stanley Group Inc. with and into Dean Witter, Discover & Co.;

provided that, in the case of an employee who has transferred employment from DWD to MS Group or vice versa, a former employee of DWD will receive credit for employment with DWD only if the employee transferred directly from DWD to Morgan Stanley & Co. Incorporated or its affiliates subsequent to February 5, 1997, and a former employee of MS Group will receive credit for employment with MS Group only if the former employee transferred directly from MS Group to Morgan Stanley DW Inc. or its affiliates subsequent to February 5, 1997.

(d) “ Governmental Employer ” means a governmental department or agency, self-regulatory agency or other public service employer.

 

6

Age and service conditions specified in clauses (i) through (iv) may vary from year to year.

 

5


(e) “ Governmental Service Termination ” means the termination of your employment with the Firm and your commencement of employment at a Governmental Employer; provided that you have presented the Firm with satisfactory evidence demonstrating that as a result of such new employment, the divestiture of your continued interest in your Applicable Account Value is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer.

(f) “ Internal Revenue Code ” means the Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder.

(g) For [            ] 7 , “ Retirement ” means your Separation from Service on or after the date on which:

(i) You have attained age 65; or

(ii) You have attained age 55 and completed at least 10 years of service with the Firm. 8

(h) “ Section 409A ” means Section 409A of the Internal Revenue Code.

(i) “ Specified Employee ” means a “specified employee” as defined in Section 409A.

(j) “ Total Compensation ” means (i) base salary, commissions and annual bonus, inclusive of the value of long-term incentive compensation, or what the Firm designates as “total reward”; and (ii) for employees who are Investment Representatives or Financial Advisors of the Global Wealth Management Group, gross compensation, pre-deductions, inclusive of the value of long-term incentive compensation, or what the Firm designates as “total reward.”

 

7

Definition applies to employees holding specified officer titles and/or working in specified business units.

8

Age and service conditions specified in clauses (i) and (ii) may vary from year to year.

 

6

E XHIBIT 10.10

M ORGAN S TANLEY

[FISCAL YEAR] DISCRETIONARY RETENTION

AWARDS

AWARD CERTIFICATE FOR CERTAIN MANAGEMENT

COMMITTEE MEMBERS

 


T ABLE OF C ONTENTS FOR A WARD C ERTIFICATE

 

1.    Stock units generally.    3
2.    Vesting schedule and conversion.    3
3.    Special provision for certain employees.    4
4.    Dividend equivalent payments.    4
5.    Death, Disability and Full Career Retirement.    4
6.    Governmental Service.    5
7.    Qualifying Termination.    6
8.    Specified employees.    6
9.    Cancellation of awards under certain circumstances.    7
10.    Tax and other withholding obligations.    8
11.    Obligations you owe to the Firm.    8
12.    Nontransferability.    9
13.    Designation of a beneficiary.    9
14.    Ownership and possession.    9
15.    Securities law compliance matters.    10
16.    Compliance with laws and regulation.    10
17.    No entitlements.    10
18.    Consents under local law.    11
19.    Award modification.    11
20.    Governing law.    12
21.    Rule of construction for timing of conversion.    12
22.    Defined terms.    12

 


M ORGAN S TANLEY

C ERTAIN M ANAGEMENT C OMMITTEE M EMBERS

A WARD C ERTIFICATE FOR D ISCRETIONARY R ETENTION

A WARD OF S TOCK U NITS

F ISCAL Y EAR [            ]

Morgan Stanley has awarded you retention stock units as your discretionary long-term incentive compensation for services provided during Fiscal Year [            ] and as an incentive for you to remain in Employment and provide services to the Firm. This Award Certificate sets forth the general terms and conditions of your Fiscal Year [            ] stock unit award. The number of stock units in your award has been communicated to you independently.

If you are employed outside the United States, you will also receive an “ International Supplement ” that contains supplemental terms and conditions for your Fiscal Year [            ] stock unit award. You should read this Award Certificate in conjunction with the International Supplement, if applicable, in order to understand the terms and conditions of your stock unit award.

Your stock unit award is made pursuant to the Plan. References to “stock units” in this Award Certificate mean only those stock units included in your Fiscal Year [            ] stock unit award, and the terms and conditions herein apply only to such award. If you receive any other award under the Plan or another equity compensation plan, it will be governed by the terms and conditions of the applicable award documentation, which may be different from those herein.

The purpose of the stock unit award is, among other things, to align your interests with the interests of the Firm and Morgan Stanley’s stockholders, to reward you for your continued employment and service to the Firm in the future, to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. In view of these purposes, you will earn each portion of your Fiscal Year [            ] stock unit award only if you do not engage in any activity that is a cancellation event set forth in Section 9 below. Therefore, even if your award has vested, you will have no right to your award if a cancellation event occurs under the circumstances set forth in Section 9 below. You will be required to provide Morgan Stanley with such written certification or other evidence as Morgan Stanley deems appropriate, from time to time in its sole discretion, to confirm that no cancellation event has occurred. If you fail to provide such certification or evidence, Morgan Stanley will cancel your award.

Section 409A imposes rules relating to the taxation of deferred compensation, including your Fiscal Year [            ] stock unit award. The Firm reserves the right to modify the


terms of your Fiscal Year [            ] stock unit award, including, without limitation, the payment provisions applicable to your stock units, to the extent necessary or advisable to comply with Section 409A.

Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section 22 below. Capitalized terms used in this Award Certificate that are not defined in the text or in Section 22 below have the meanings set forth in the Plan.

 

1. Stock units generally .

Each of your stock units corresponds to one share of Morgan Stanley common stock. A stock unit constitutes a contingent and unsecured promise of Morgan Stanley to pay you one share of Morgan Stanley common stock on the conversion date for the stock unit. As the holder of stock units, you have only the rights of a general unsecured creditor of Morgan Stanley. You will not be a stockholder with respect to the shares of Morgan Stanley common stock corresponding to your stock units unless and until your stock units convert to shares.

 

2. Vesting schedule and conversion .

(a) Vesting schedule . Except as otherwise provided in this Award Certificate, your stock units will vest according to the following schedule: (i) 50% of your stock units will vest on the First Scheduled Vesting Date, and (ii) the remaining 50% of your stock units will vest on the Second Scheduled Vesting Date. 1 Any fractional stock units resulting from the application of the vesting schedule will be aggregated and will vest on the Second Scheduled Vesting Date. The special vesting terms set forth in Sections 5, 6 and 7 of this Award Certificate apply (i) if your Employment terminates by reason of your death or Disability, (ii) upon your Full Career Retirement, (iii) upon a Governmental Service Termination, or (iv) upon a Qualifying Termination. Vested stock units remain subject to the cancellation and withholding provisions set forth in this Award Certificate.

(b) Conversion. Except as otherwise provided in this Award Certificate, (i) 50% of your stock units will, to the extent vested, convert to shares of Morgan Stanley common stock on the First Scheduled Conversion Date, and (ii) the remaining 50% of your stock units will, to the extent vested, convert to shares of Morgan Stanley common stock on the Second Scheduled Conversion Date. 2 The special conversion provisions set forth in Sections 5(a), 5(b), 6 and 7 of this Award Certificate apply (i) if your Employment terminates by reason of your death or you die after termination of your Employment, (ii) upon your Governmental Service Termination or your employment at a Governmental Employer following your termination of employment with the Firm under circumstances set forth in Section 6(b), or (iii) upon a Qualifying Termination.

 

1

The vesting schedule presented in this form of Award Certificate is indicative. The vesting schedule applicable to awards may vary.

2

The conversion schedule presented in this form of Award Certificate is indicative. The conversion schedule applicable to awards may vary.

 

3


The shares delivered upon conversion of stock units pursuant to this Section 2(b) will not be subject to any transfer restrictions, other than those that may arise under the securities laws or the Firm’s policies, or to cancellation under the circumstances set forth in Section 9.

(c) Accelerated conversion. Morgan Stanley shall have no right to accelerate the conversion of any of your stock units, except to the extent that such acceleration is not prohibited by Section 409A and would not result in your being required to recognize income for United States federal income tax purposes before your stock units convert to shares of Morgan Stanley common stock or your incurring additional tax or interest under Section 409A. If any stock units are converted to shares of Morgan Stanley common stock prior to the applicable Scheduled Conversion Date pursuant to this Section 2(c), these shares may not be transferable and may remain subject to applicable vesting, cancellation and withholding provisions, as determined by Morgan Stanley.

 

3. Special provision for certain employees .

Notwithstanding the other provisions of this Award Certificate, the conversion of your vested stock units into Morgan Stanley common stock will be deferred if, at the time scheduled for conversion (whether on the applicable Scheduled Conversion Date or some other time), Morgan Stanley considers you to be one of its executive officers and your compensation may not be fully deductible by virtue of Section 162(m) of the Internal Revenue Code. This deferral will continue until your Separation from Service, and, subject to Section 8, your vested stock units will convert to Morgan Stanley common stock upon your Separation from Service.

 

4. Dividend equivalent payments .

Until your stock units convert to shares, if Morgan Stanley pays a regular or ordinary dividend on its common stock, you will be paid a dividend equivalent for your vested and unvested stock units. No dividend equivalents will be paid to you on any canceled stock units.

Morgan Stanley will decide on the form of payment and may pay dividend equivalents in shares of Morgan Stanley common stock, in cash or in a combination thereof. Morgan Stanley will pay the dividend equivalent when it pays the corresponding dividend on its common stock.

Because dividend equivalent payments are considered part of your compensation for income tax purposes, they will be subject to applicable tax and other withholding obligations.

 

5. Death, Disability and Full Career Retirement .

The following special vesting and payment terms apply to your stock units:

(a) Death during Employment . If your Employment terminates due to death, all of your unvested stock units will vest on the date of your death. Your stock units will

 

4


convert to shares of Morgan Stanley common stock and be delivered to the beneficiary you have designated pursuant to Section 13 or the legal representative of your estate, as applicable, upon your death, provided that your estate or beneficiary notifies the Firm of your death within 60 days following your death.

After your death, the cancellation provisions set forth in Section 9 will no longer apply, and the shares delivered upon conversion of stock units pursuant to this Section 5(a) will not be subject to any transfer restrictions (other than those that may arise under the securities laws or the Firm’s policies).

(b) Death after termination of Employment . If you die after the termination of your Employment any vested stock units that you held at the time of your death will convert to shares of Morgan Stanley common stock and be delivered to the beneficiary you have designated pursuant to Section 13 or the legal representative of your estate, as applicable, upon your death, provided that your estate or beneficiary notifies the Firm of your death within 60 days following your death.

After your death, the cancellation provisions set forth in Section 9 will no longer apply, and the shares delivered upon conversion of stock units pursuant to this Section 5(b) will not be subject to any transfer restrictions (other than those that may arise under the securities laws or the Firm’s policies).

(c) Disability or Full Career Retirement. If your Employment terminates due to Disability or in a Full Career Retirement, all of your unvested stock units will vest on the date your Employment terminates. Your stock units will convert to shares of Morgan Stanley common stock on the applicable Scheduled Conversion Date. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the applicable Scheduled Conversion Date.

 

6. Governmental Service .

(a) General treatment of awards upon Governmental Service Termination. If your Employment terminates in a Governmental Service Termination and not involving a cancellation event set forth in Section 9 then, provided that you sign an agreement satisfactory to the Firm relating to your obligations pursuant to Section 6(c), all of your unvested stock units will vest on the date of your Governmental Service Termination. Your vested stock units will convert to shares of Morgan Stanley common stock on the date of your Governmental Service Termination.

 

5


(b) General treatment of vested awards upon acceptance of employment at a Governmental Employer following termination of Employment. If your Employment terminates other than in a Governmental Service Termination and not involving a cancellation event and, following your termination of Employment, you accept employment with a Governmental Employer, then, provided that you sign an agreement satisfactory to the Firm relating to your obligations pursuant to Section 6(c), all of your outstanding vested stock units will convert to shares of Morgan Stanley common stock upon your commencement of such employment, provided you present the Firm with satisfactory evidence demonstrating that as a result of such employment the divestiture of your continued interest in Morgan Stanley equity awards or continued ownership of Morgan Stanley common stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflict of interests law applicable to you at such Governmental Employer.

(c) Repayment obligation. If you engage in any activity constituting a cancellation event set forth in Section 9 within the applicable period of time that would have resulted in cancellation of all or a portion of your stock units (had they not converted to shares pursuant to Sections 6(a) or 6(b) above), you will be required to pay to Morgan Stanley an amount equal to the number of stock units that would have been canceled upon the occurrence of such cancellation event, multiplied by the fair market value, determined using a valuation methodology established by Morgan Stanley, of Morgan Stanley common stock on the date your stock units converted to shares of Morgan Stanley common stock plus interest on such amount at the average rate of interest Morgan Stanley paid to borrow money from financial institutions during the period from the date of such conversion through the date preceding the payment date.

 

7. Qualifying Termination .

If your employment terminates in a Qualifying Termination, all of your unvested stock units will vest, cancellation provisions will lapse, and, subject to Section 8, your stock units will be paid upon your Qualifying Termination.

 

8. Specified employees .

Notwithstanding any other terms of this Award Certificate, if Morgan Stanley considers you to be one of its “specified employees” as defined in Section 409A at the time of your Separation from Service, the conversion of any of your stock units that otherwise would convert upon your Separation from Service (including, without limitation, stock units whose conversion was deferred due to Section 162(m) of the Internal Revenue Code, as provided in Section 3, and stock units payable upon your Qualifying Termination, as provided in Section 7) will be delayed for six months after your Separation from Service, and such stock units will convert to Morgan Stanley common stock on the first business day following the date that is six months after your Separation from Service; provided, however , that in the event that your death, your Governmental Service Termination or your employment at a Governmental Employer following your termination of employment with the Firm under circumstances set forth in Section 6(b) occurs at any time after the Date of the Award, payment will be made in accordance with Section 5(a), 5(b), or 6, as applicable.

 

6


9. Cancellation of awards under certain circumstances .

The cancellation events set forth in this Section 9 are designed, among other things, to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. This Section 9 shall apply notwithstanding any other terms of this Award Certificate (except where sections in this Award Certificate specifically provide that the cancellation events set forth in this Section 9 no longer apply).

Your stock units, even if vested, are not earned until the applicable Scheduled Conversion Date, and will be canceled prior to the applicable Scheduled Conversion Date in any of the following circumstances:

(a) Competitive Activity . If you engage in Competitive Activity following the voluntary termination of your Employment, the following shall apply:

(1) If your Competitive Activity occurs before the First Scheduled Vesting Date, then all of your stock units will be canceled immediately.

(2) If your Competitive Activity occurs on or after the First Scheduled Vesting Date, but before the Second Scheduled Vesting Date, then the 50% of your stock units that are scheduled to convert on the Second Scheduled Conversion Date will be canceled immediately.

(b) Other Events. If any of the following events occur at any time before the applicable Scheduled Conversion Date, all of your stock units (whether or not vested), will be canceled immediately:

(1) Your Employment is terminated for Cause;

(2) Following the termination of your Employment, the Firm determines that your Employment could have been terminated for Cause (for these purposes, “Cause” will be determined without giving consideration to any “cure” period included in the definition of “Cause”);

(3) You disclose Proprietary Information to any unauthorized person outside the Firm, or use or attempt to use Proprietary Information other than in connection with the business of the Firm, where such disclosure, use or attempt to use may be adverse to the interests of the Firm; or you fail to comply with your obligations (either during or after your Employment) under the Firm’s Code of Conduct (and any applicable supplements) or otherwise existing between you and the Firm, relating to an assignment, procurement or enforcement of rights in Proprietary Information;

(4) You engage in a Wrongful Solicitation;

(5) You make any Unauthorized Comments; or

(6) You resign from your employment with the Firm without having provided the Firm prior written notice of your resignation at least:

(i) 180 days before the date on which your employment with the Firm terminates if you are a member of the Management Committee at the time of notice of your resignation;

 

7


(ii) 90 days before the date on which your employment with the Firm terminates if clause (i) of this Section 9(b)(6) does not apply to you and you are a Managing Director (or equivalent title) at the time of notice of your resignation;

(iii) 60 days before the date on which your employment with the Firm terminates if you are an Executive Director (or equivalent title) at the time of notice of your resignation; and

(iv) 30 days before the date on which your employment with the Firm terminates if none of clauses (i) through (iii) of this Section 9(b)(6) apply to you at the time of notice of your resignation.

 

10. Tax and other withholding obligations .

Pursuant to rules and procedures that Morgan Stanley establishes, you may elect to satisfy the tax or other withholding obligations arising upon conversion of your stock units by having Morgan Stanley withhold shares of Morgan Stanley common stock or by tendering shares of Morgan Stanley common stock, in each case in an amount sufficient to satisfy the tax or other withholding obligations. Shares withheld or tendered will be valued using the fair market value of Morgan Stanley common stock on the date your stock units convert, using a valuation methodology established by Morgan Stanley.

In order to comply with applicable accounting standards or the Firm’s policies in effect from time to time, Morgan Stanley may limit the amount of shares that you may have withheld or that you may tender.

 

11. Obligations you owe to the Firm .

Morgan Stanley may not withhold shares upon conversion of stock units, and may not withhold the payment of dividend equivalents on your stock units or subject dividend equivalents to deferral, to satisfy obligations that you owe to the Firm except (i) to the extent authorized under Sections 4 or 10, relating to tax and other withholding obligations or, otherwise, (ii) to the extent such withholding is not prohibited by Section 409A and would not cause you to recognize income for United States federal income tax purposes prior to the time of conversion of your stock units or to incur interest or additional tax under Section 409A.

Morgan Stanley’s determination of any amount that you owe the Firm shall be conclusive. The fair market value of Morgan Stanley common stock for purposes of the foregoing provisions shall be determined using a valuation methodology established by Morgan Stanley.

 

8


12. Nontransferability .

You may not sell, pledge, hypothecate, assign or otherwise transfer your stock units, other than as provided in Section 13 (which allows you to designate a beneficiary or beneficiaries in the event of your death) or by will or the laws of descent and distribution. This prohibition includes any assignment or other transfer that purports to occur by operation of law or otherwise. During your lifetime, payments relating to the stock units will be made only to you.

Your personal representatives, heirs, legatees, beneficiaries, successors and assigns, and those of Morgan Stanley, shall all be bound by, and shall benefit from, the terms and conditions of your award.

 

13. Designation of a beneficiary .

You may make a written designation of beneficiary or beneficiaries to receive all or part of the shares to be paid under this Award Certificate in the event of your death. To make a beneficiary designation, you must complete and submit the Beneficiary Designation form on the Executive Compensation website at [insert website address].

Any shares that become payable upon your death, and as to which a designation of beneficiary is not in effect, will be distributed to your estate.

If you previously filed a designation of beneficiary form for your equity awards with the Executive Compensation Department, such form will also apply to the stock units included in this award. You may replace or revoke your beneficiary designation at any time. If there is any question as to the legal right of any beneficiary to receive shares under this award, Morgan Stanley may determine in its sole discretion to deliver the shares in question to your estate. Morgan Stanley’s determination shall be binding and conclusive on all persons, and it will have no further liability to anyone with respect to such shares.

 

14. Ownership and possession .

(a) Generally . Generally, you will not have any rights as a stockholder in the shares of Morgan Stanley common stock corresponding to your stock units prior to conversion of your stock units.

Prior to conversion of your stock units, however, you will receive dividend equivalent payments, as set forth in Section 4 of this Award Certificate. In addition, if Morgan Stanley contributes shares of Morgan Stanley common stock corresponding to your stock units to a grantor trust it has established, you may be permitted to direct the trustee how to vote the shares in the trust corresponding to your stock units. Voting rights, if any, are governed by the terms of the grantor trust, and Morgan Stanley may amend any such voting rights, in its sole discretion, at any time. Morgan Stanley is under no obligation to contribute shares corresponding to stock units to a trust. If Morgan Stanley elects not to contribute shares corresponding to your stock units to a trust, you will not have voting rights with respect to shares corresponding to your stock units until they convert to shares.

(b) Following conversion . Following conversion of your stock units you will be the beneficial owner of the shares of Morgan Stanley common stock issued to you, and you will be entitled to all rights of ownership, including voting rights and the right to receive cash or stock dividends or other distributions paid on the shares.

 

9


(c) Custody of shares. Morgan Stanley may maintain possession of the shares subject to your award until such time as your shares are no longer subject to restrictions on transfer.

 

15. Securities law compliance matters .

Morgan Stanley may affix a legend to the stock certificates representing shares of Morgan Stanley common stock issued upon conversion of your stock units (and any stock certificates that may subsequently be issued in substitution for the original certificates). The legend will read substantially as follows:

THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE WERE ISSUED PURSUANT TO A MORGAN STANLEY EQUITY INCENTIVE COMPENSATION PLAN AND ARE SUBJECT TO THE TERMS AND CONDITIONS THEREOF AND OF AN AWARD CERTIFICATE FOR STOCK UNITS AND ANY SUPPLEMENT THERETO.

THE SECURITIES REPRESENTED BY THIS STOCK CERTIFICATE MAY BE SUBJECT TO RESTRICTIONS ON TRANSFER BY VIRTUE OF THE SECURITIES ACT OF 1933.

COPIES OF THE PLAN, THE AWARD CERTIFICATE FOR STOCK UNITS AND ANY SUPPLEMENT THERETO ARE AVAILABLE THROUGH THE EXECUTIVE COMPENSATION DEPARTMENT.

Morgan Stanley may advise the transfer agent to place a stop order against such shares if it determines that such an order is necessary or advisable.

 

16. Compliance with laws and regulation .

Any sale, assignment, transfer, pledge, mortgage, encumbrance or other disposition of shares issued upon conversion of your stock units (whether directly or indirectly, whether or not for value, and whether or not voluntary) must be made in compliance with any applicable constitution, rule, regulation or policy of any of the exchanges or associations or other institutions with which the Firm or a Related Employer has membership or other privileges, and any applicable law or applicable rule or regulation of any governmental agency, self-regulatory organization or state or federal regulatory body.

 

17. No entitlements .

(a) No right to continued Employment. This stock unit award is not an employment agreement, and nothing in this Award Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of the Firm or your employment status at a Related Employer. None of this Award Certificate, the International Supplement, if applicable, or the Plan shall be construed as guaranteeing your employment by

 

10


the Firm or a Related Employer, or as giving you any right to continue in the employ of the Firm or a Related Employer, during any period (including without limitation the period between the Date of the Award and any of the First Scheduled Vesting Date, the Second Scheduled Vesting Date, the First Scheduled Conversion Date, the Second Scheduled Conversion Date or any portion of any of these periods), nor shall they be construed as giving you any right to be reemployed by the Firm or a Related Employer following any termination of Employment.

(b) No right to future awards. This award, and all other awards of stock units and other equity-based awards, are discretionary. This award does not confer on you any right or entitlement to receive another award of stock units or any other equity-based award at any time in the future or in respect of any future period.

(c) No effect on future employment compensation. Morgan Stanley has made this award to you in its sole discretion. This award does not confer on you any right or entitlement to receive compensation in any specific amount for any future fiscal year and does not diminish in any way the Firm’s discretion to determine the amount, if any, of your compensation. This award is not part of your base salary or wages and will not be taken into account in determining any other employment-related rights you may have, such as rights to pension or severance pay.

 

18. Consents under local law .

Your award is conditioned upon the making of all filings and the receipt of all consents or authorizations required to comply with, or required to be obtained under, applicable local law.

 

19. Award modification .

Morgan Stanley reserves the right to modify or amend unilaterally the terms and conditions of your stock units, without first asking your consent, or to waive any terms and conditions that operate in favor of Morgan Stanley. These amendments may include (but are not limited to) changes that Morgan Stanley considers necessary or advisable as a result of changes in any, or the adoption of any new, Legal Requirement. Morgan Stanley may not modify your stock units in a manner that would materially impair your rights in your stock units without your consent; provided , however , that Morgan Stanley may, without your consent, amend or modify your stock units in any manner that Morgan Stanley considers necessary or advisable to comply with any Legal Requirement or to ensure that your stock units are not subject to United States federal, state or local income tax or any equivalent taxes in territories outside the United States prior to conversion. Morgan Stanley will notify you of any amendment of your stock units that affects your rights. Any amendment or waiver of a provision of this Award Certificate (other than any amendment or waiver applicable to all recipients generally), which amendment or waiver operates in your favor or confers a benefit on you, must be in writing and signed by the Global Head of Human Resources or the Chief Administrative Officer (or if such positions no longer exist, by the holder of an equivalent position) to be effective.

 

11


20. Governing law .

This Award Certificate and the related legal relations between you and Morgan Stanley will be governed by and construed in accordance with the laws of the State of New York, without regard to any conflicts or choice of law, rule or principle that might otherwise refer the interpretation of the award to the substantive law of another jurisdiction.

 

21. Rule of construction for timing of conversion .

Whenever this Award Certificate provides for your stock units to convert to shares on the First Scheduled Conversion Date or the Second Scheduled Conversion Date or upon a different specified event or date, such conversion will be considered to have been timely made, and neither you nor any of your beneficiaries or your estate shall have any claim against the Firm for damages based on a delay in payment, and the Firm shall have no liability to you (or to any of your beneficiaries or your estate) in respect of any such delay, as long as payment is made by December 31 of the year in which occurs the applicable Scheduled Conversion Date or such other specified event or date or, if later, by the 15th day of the third calendar month following such specified event or date.

 

22. Defined terms .

For purposes of this Award Certificate, the following terms shall have the meanings set forth below:

(a) Board ” means the Board of Directors of Morgan Stanley.

(b) Cause ” means:

(1) any act or omission which constitutes a breach of your obligations to the Firm (including, without limitation, your failure to comply with any notice or non-solicitation restrictions that may be applicable to you) or your failure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (if susceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to physical or mental illness) within ten (10) business days after written notification thereof to you by the Firm;

(2) your commission of any dishonest or fraudulent act, or any other act or omission, which has caused or may reasonably be expected to cause injury to the interest or business reputation of the Firm; or

(3) your violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Firm is a member or of any policy of the Firm relating to compliance with any of the foregoing.

(c) A “ Change in Control ” shall be deemed to have occurred if any of the following conditions shall have been satisfied:

(1) any one person or more than one person acting as a group (as determined under Section 409A), other than (A) any employee plan established by

 

12


Morgan Stanley or any of its Subsidiaries, (B) Morgan Stanley or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) a corporation owned, directly or indirectly, by stockholders of Morgan Stanley in substantially the same proportions as their ownership of Morgan Stanley, is or becomes, during any 12-month period, the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person(s) any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 50% or more of the total voting power of the stock of Morgan Stanley; provided, however, that the provisions of this subsection (1) are not intended to apply to or include as a Change in Control any transaction that is specifically excepted from the definition of Change in Control under subsection (3) below;

(2) a change in the composition of the Board such that, during any 12-month period, the individuals who, as of the beginning of such period, constitute the Board (the “ Existing Board ”) cease for any reason to constitute at least 50% of the Board; provided, however, that any individual becoming a member of the Board subsequent to the beginning of such period whose election, or nomination for election by Morgan Stanley’s stockholders, was approved by a vote of at least a majority of the directors immediately prior to the date of such appointment or election shall be considered as though such individual were a member of the Existing Board;

(3) the consummation of a merger or consolidation of Morgan Stanley with any other corporation or other entity, or the issuance of voting securities in connection with a merger or consolidation of Morgan Stanley (or any direct or indirect subsidiary of Morgan Stanley) pursuant to applicable stock exchange requirements; provided that immediately following such merger or consolidation the voting securities of Morgan Stanley outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity of such merger or consolidation or parent entity thereof) 50% or more of the total voting power of Morgan Stanley stock (or if Morgan Stanley is not the surviving entity of such merger or consolidation, 50% or more of the total voting power of the stock of such surviving entity or parent entity thereof); and provided, further, that a merger or consolidation effected to implement a recapitalization of Morgan Stanley (or similar transaction) in which no person (as determined under Section 409A) is or becomes the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 50% or more of either the then outstanding shares of Morgan Stanley common stock or the combined voting power of Morgan Stanley’s then outstanding voting securities shall not be considered a Change in Control; or

(4) the complete liquidation of Morgan Stanley or the sale or disposition by Morgan Stanley of all or substantially all of Morgan Stanley’s assets in which any one person or more than one person acting as a group (as determined under

 

13


Section 409A) acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from Morgan Stanley that have a total gross fair market value equal to more than 50% of the total gross fair market value of all of the assets of Morgan Stanley immediately prior to such acquisition or acquisitions.

Notwithstanding the foregoing, (1) no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of Morgan Stanley common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns substantially all of the assets of Morgan Stanley immediately prior to such transaction or series of transactions and (2) no event or circumstances described in any of clauses (1) through (4) above shall constitute a Change in Control unless such event or circumstances also constitute a change in the ownership or effective control of Morgan Stanley, or in the ownership of a substantial portion of Morgan Stanley’s assets, as defined in Section 409A and the regulations and guidance thereunder. In addition, no Change in Control shall be deemed to have occurred upon the acquisition of additional control of Morgan Stanley by any one person or more than one person acting as a group that is considered to effectively control Morgan Stanley.

For purposes of the provisions of this Award Certificate, terms used in the definition of a Change in Control shall be as defined or interpreted pursuant to Section 409A.

(d) Committee ” means the Compensation, Management Development and Succession Committee of the Board, any successor committee thereto or any other committee of the Board appointed by the Board with the powers of the Committee under the Plan, or any subcommittee appointed by such Committee.

(e) Competitive Activity ” means:

(1) becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor, director, independent contractor, consultant, advisor, representative or agent of, or serving in any similar position or capacity with, a Competitor, where you will be responsible for providing, or managing or supervising others who are providing, services (x) that are similar or substantially related to the services that you provided to the Firm, or (y) that you had direct or indirect managerial or supervisory responsibility for at the Firm, or (z) that call for the application of the same or similar specialized knowledge or skills as those utilized by you in your services for the Firm, in each such case, at any time during the year preceding the termination of your employment with the Firm; or

(2) either alone or in concert with others, forming, or acquiring a 5% or greater equity ownership, voting interest or profit participation in, a Competitor.

(f) Competitor ” means any corporation, partnership or other entity that is engaged in any activity, or that owns a significant interest in any corporation, partnership or other entity, that competes with any business activity the Firm engages in, or that you reasonably knew or should have known that the Firm was planning to engage in, at the time of the termination of your Employment.

 

14


(g) Date of the Award ” means [insert grant date, which typically will coincide approximately with the end of the fiscal year in respect of which the award is made].

(h) Disability ” means any condition that would qualify for a benefit under any group long-term disability plan maintained by the Firm and applicable to you.

(i) Employed ” and “ Employment ” refer to employment with the Firm and/or Related Employment.

(j) The “ Firm ” means Morgan Stanley (including any successor thereto) together with its subsidiaries and affiliates. For purposes of the definitions of “Cause,” “Proprietary Information,” “Unauthorized Comments” and “Wrongful Solicitation” set forth in this Award Certificate, references to the “Firm” shall refer severally to the Firm as defined in the preceding sentence and your Related Employer, if any. For purposes of the cancellation provisions set forth in this Award Certificate relating to disclosure or use of Proprietary Information, references to the “Firm” shall refer to the Firm as defined in the second preceding sentence or your Related Employer, as applicable.

(k) First Scheduled Conversion Date ” means [second anniversary of January 2 following the Date of the Award].

(l) First Scheduled Vesting Date ” means [second anniversary of January 2 following the Date of the Award].

(m) “Fiscal Year [            ] means Morgan Stanley’s fiscal year beginning on December 1, [    ] and ending on November 30, [    ].

(n) “Full Career Retirement means the termination of your Employment by you or by the Firm for any reason other than under circumstances involving any cancellation event described in Section 9, and other than due to your death, Disability, a Governmental Service Termination or pursuant to a Qualifying Termination. 3

(o) Governmental Employer ” means a governmental department or agency, self-regulatory agency or other public service employer.

(p) Governmental Service Termination ” means the termination of your Employment and your commencement of employment at a Governmental Employer; provided that you have presented the Firm with satisfactory evidence demonstrating that as a result of such new employment, the divestiture of your continued interest in Morgan Stanley equity awards or continued ownership of Morgan Stanley common stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer.

 

3

Some awards may include age and/or service conditions in order for a termination of Employment to qualify as Full Career Retirement.

 

15


(q) Internal Revenue Code ” means the United States Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder.

(r) Legal Requirement ” means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance or other legal requirement.

(s) Management Committee ” means the Morgan Stanley Management Committee and any successor or equivalent committee.

(t) Plan ” means the Morgan Stanley equity compensation plan pursuant to which your award is made and which has been communicated to you independently.

(u) Proprietary Information ” means any information that may have intrinsic value to the Firm, the Firm’s clients or other parties with which the Firm has a relationship, or that may provide the Firm with a competitive advantage, including, without limitation, any trade secrets; inventions (whether or not patentable); formulas; flow charts; computer programs; access codes or other systems of information; algorithms; technology and business processes; business, product or marketing plans; sales and other forecasts; financial information; client lists or other intellectual property; information relating to compensation and benefits; and public information that becomes proprietary as a result of the Firm’s compilation of that information for use in its business, provided that such Proprietary Information does not include any information which is available for use by the general public or is generally available for use within the relevant business or industry other than as a result of your action. Proprietary Information may be in any medium or form, including, without limitation, physical documents, computer files or discs, videotapes, audiotapes, and oral communications.

(v) Qualifying Termination ” means your Separation from Service within eighteen (18) months following a Change in Control, under either of the following circumstances: (a) the Firm terminates your employment under circumstances not involving any cancellation event; or (b) you resign from the Firm due to (i) a materially adverse alteration in your position or in the nature or status of your responsibilities from those in effect immediately prior to the Change in Control, as determined by the Committee or its delegees, or (ii) the Firm requiring your principal place of employment to be located more than 75 miles from the location where you were principally employed at the time of the Change in Control (except for required travel on the Firm’s business to an extent substantially consistent with your business travel obligations in the ordinary course of business prior to the Change in Control).

(w) Related Employment ” means your employment with an employer other than the Firm (such employer, herein referred to as a “ Related Employer ”), provided : (i) you undertake such employment at the written request or with the written consent of Morgan Stanley’s Global Head of Human Resources; (ii) immediately prior to undertaking such employment you were an employee of the Firm or were engaged in Related Employment (as defined herein); and (iii) such employment is recognized by the Committee in its discretion as Related Employment; and, provided further that the Firm may (1) determine at any time in its

 

16


sole discretion that employment that was recognized by the Committee as Related Employment no longer qualifies as Related Employment, and (2) condition the designation and benefits of Related Employment on such terms and conditions as the Firm may determine in its sole discretion. The designation of employment as Related Employment does not give rise to an employment relationship between you and the Firm, or otherwise modify your and the Firm’s respective rights and obligations.

(x) Scheduled Conversion Date ” means the First Scheduled Conversion Date and/or the Second Scheduled Conversion Date, as the context requires.

(y) Scheduled Vesting Date ” means the First Scheduled Vesting Date and/or the Second Scheduled Vesting Date, as the context requires.

(z) Second Scheduled Conversion Date ” means [third anniversary of January 2 following the Date of the Award].

(aa) Second Scheduled Vesting Date ” means [third anniversary of January 2 following the Date of the Award].

(bb) Section 409A ” means Section 409A of the Internal Revenue Code.

(cc) Separation from Service ” means a separation from service with the Firm for purposes of Section 409A determined using the default provisions set forth in Treasury Regulation §1.409A-1(h) or any successor regulation thereto. For purposes of this definition, Morgan Stanley’s subsidiaries and affiliates include (and are limited to) any corporation that is in the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as Morgan Stanley and any trade or business that is under common control with Morgan Stanley (within the meaning of Section 414(c) of the Internal Revenue Code), determined in each case in accordance with the default provisions set forth in Treasury Regulation §1.409A-1(h)(3).

(dd) Subsidiary ” means (i) a corporation or other entity with respect to which Morgan Stanley, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such corporation’s board of directors or analogous governing body, or (ii) any other corporation or other entity in which Morgan Stanley, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Plan.

(ee) You will be deemed to have made “ Unauthorized Comments ” about the Firm if, while Employed or following the termination of your Employment, you make, directly or indirectly, any negative, derogatory or disparaging comment, whether written, oral or in electronic format, to any reporter, author, producer or similar person or entity or to any general public media in any form (including, without limitation, books, articles or writings of any other kind, as well as film, videotape, audio tape, computer/Internet format or any other medium) that concerns directly or indirectly the Firm, its business or operations, or any of its current or former agents, employees, officers, directors, customers or clients.

(ff) A “ Wrongful Solicitation ” occurs upon either of the following events:

(1) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 180 days after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you hire or solicit, recruit, induce, entice, influence or encourage any Firm employee to leave the Firm or become hired or engaged by another firm; provided , however , that this clause shall apply only to employees with whom you worked or had professional or business contact, or who worked in or with your business unit, during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment; or

 

17


(2) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 90 days (180 days if you are a member of the Management Committee at the time of notice of termination) after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you solicit or entice away or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Firm (i) to discontinue or diminish his, her or its relationship or prospective relationship with the Firm or (ii) to otherwise provide his, her or its business to any person, corporation, partnership or other business entity which engages in any line of business in which the Firm is engaged (other than the Firm); provided , however , that this clause shall apply only to clients or customers, or prospective clients or customers, that you worked for on an actual or prospective project or assignment during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment.

IN WITNESS WHEREOF , Morgan Stanley has duly executed and delivered this Award Certificate as of the Date of the Award.

 

MORGAN STANLEY
/s/

 

[Name]
[Title]

 

18

Exhibit 12

Morgan Stanley

Ratio of Earnings to Fixed Charges

and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends

(dollars in millions)

 

     Three Months Ended    Fiscal Year
     February 29,
2008
   February 28,
2007(1)
   2007    2006    2005    2004    2003

Ratio of Earnings to Fixed Charges

                    

Earnings:

                    

Income before income taxes (2)

   $ 2,214    $ 3,456    $ 3,441    $ 9,103    $ 6,316    $ 5,517    $ 5,070

Add: Fixed charges, net

     12,916      13,246      57,519      41,069      23,757      14,133      11,976
                                                

Income before income taxes and fixed charges, net

   $ 15,130    $ 16,702    $ 60,960    $ 50,172    $ 30,073    $ 19,650    $ 17,046
                                                

Fixed Charges:

                    

Total interest expense

   $ 12,862    $ 13,198    $ 57,302    $ 40,897    $ 23,552    $ 13,977    $ 11,826

Interest factor in rents

     54      48      217      172      205      156      150

Dividends on preferred securities subject to mandatory redemption

     —        —        —        —        —        45      154
                                                

Total fixed charges

   $ 12,916    $ 13,246    $ 57,519    $ 41,069    $ 23,757    $ 14,178    $ 12,130
                                                

Ratio of earnings to fixed charges

     1.2      1.3      1.1      1.2      1.3      1.4      1.4

Ratio of Earnings to Fixed Charges and Preferred Stock Dividends

                    

Earnings:

                    

Income before income taxes (2)

   $ 2,214    $ 3,456    $ 3,441    $ 9,103    $ 6,316    $ 5,517    $ 5,070

Add: Fixed charges, net

     12,916      13,246      57,519      41,069      23,757      14,133      11,976
                                                

Income before income taxes and fixed charges, net

   $ 15,130    $ 16,702    $ 60,960    $ 50,172    $ 30,073    $ 19,650    $ 17,046
                                                

Fixed Charges:

                    

Total interest expense

   $ 12,862    $ 13,198    $ 57,302    $ 40,897    $ 23,552    $ 13,977    $ 11,826

Interest factor in rents

     54      48      217      172      205      156      150

Dividends on preferred securities subject to mandatory redemption

     —        —        —        —        —        45      154

Preferred stock dividends

     24      25      90      27      —        —        —  
                                                

Total fixed charges and preferred stock dividends

   $ 12,940    $ 13,271    $ 57,609    $ 41,096    $ 23,757    $ 14,178    $ 12,130
                                                

Ratio of earnings to fixed charges and preferred stock dividends

     1.2      1.3      1.1      1.2      1.3      1.4      1.4

 

(1) Certain prior-period information has been reclassified to conform to the current year’s presentation.
(2) Income before income taxes does not include losses from unconsolidated investees, dividends on preferred securities subject to mandatory redemption, gain/(loss) on discontinued operations, cumulative effect of accounting change (net) and income (loss) from investments accounted for under the equity method of accounting.

“Fixed charges” consist of interest cost, including interest on deposit, dividends on preferred securities subject to mandatory redemption, and that portion of rent expense estimated to be representative of the interest factor.

The preferred stock dividend amounts represent pre-tax earnings required to cover dividends on preferred stock.

Exhibit 15

To the Board of Directors and Shareholders of Morgan Stanley:

We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim condensed consolidated financial information of Morgan Stanley and subsidiaries as of February 29, 2008 and for the three-month periods ended February 29, 2008 and February 28, 2007, and have issued our report dated April 7, 2008 (which report included an explanatory paragraph regarding Morgan Stanley’s adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”) As indicated in such report, because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended February 29, 2008, is incorporated by reference in the following Registration Statements of Morgan Stanley:

Filed on Form S-3:

Registration Statement No. 33-57202

Registration Statement No. 33-60734

Registration Statement No. 33-89748

Registration Statement No. 33-92172

Registration Statement No. 333-07947

Registration Statement No. 333-27881

Registration Statement No. 333-27893

Registration Statement No. 333-27919

Registration Statement No. 333-46403

Registration Statement No. 333-46935

Registration Statement No. 333-76111

Registration Statement No. 333-75289

Registration Statement No. 333-34392

Registration Statement No. 333-47576

Registration Statement No. 333-83616

Registration Statement No. 333-106789

Registration Statement No. 333-117752

Registration Statement No. 333-129243

Registration Statement No. 333-131266

Filed on Form S-4:

Registration Statement No. 333-25003

Filed on Form S-8:

Registration Statement No. 33-63024

Registration Statement No. 33-63026

Registration Statement No. 33-78038

Registration Statement No. 33-79516

Registration Statement No. 33-82240

Registration Statement No. 33-82242

Registration Statement No. 33-82244

Registration Statement No. 333-04212

Registration Statement No. 333-28141

Registration Statement No. 333-28263


Registration Statement No. 333-62869

Registration Statement No. 333-78081

Registration Statement No. 333-95303

Registration Statement No. 333-85148

Registration Statement No. 333-85150

Registration Statement No. 333-108223

Registration Statement No. 333-142874

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

 

/s/    Deloitte & Touche LLP

New York, New York
April 7, 2008

EXHIBIT 31.1

Certification

I, John J. Mack, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Morgan Stanley (the “registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 8, 2008

 

/s/ JOHN J. MACK

John J. Mack
Chairman of the Board and Chief Executive Officer

EXHIBIT 31.2

Certification

I, Colm Kelleher, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Morgan Stanley (the “registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 8, 2008

 

/s/ COLM KELLEHER

Colm Kelleher
Executive Vice President and Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Morgan Stanley (the “Company”) on Form 10-Q for the quarterly period ended February 29, 2008, as filed with the Securities and Exchange Commission (the “Report”), I, John J. Mack, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ JOHN J. MACK

John J. Mack
Chairman of the Board and Chief Executive Officer

Dated: April 8, 2008

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Morgan Stanley (the “Company”) on Form 10-Q for the quarterly period ended February 29, 2008, as filed with the Securities and Exchange Commission (the “Report”), I, Colm Kelleher, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ COLM KELLEHER

Colm Kelleher
Executive Vice President and Chief Financial Officer

Dated: April 8, 2008