Morgan Stanley 1999 Annual Report Download - page 47

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and mortgage-related loan products, bridge financings, and certain
senior secured loans and positions are not highly liquid. The
Company also has commitments to fund certain fixed assets and
other less liquid investments, including at November 30, 1999
approximately $417 million in connection with its private equity
and other principal investment activities. Additionally, the
Company has provided and will continue to provide financing,
including margin lending and other extensions of credit to clients.
At November 30, 1999, the aggregate value of high-yield
debt securities and emerging market loans and securitized instru-
ments held in inventory was $2,128 million (a substantial portion
of which was subordinated debt). These securities, loans and
instruments were not attributable to more than 3% to any one
issuer, 16% to any one industry or 22% to any one geographic
region. Non-investment grade securities generally involve greater
risk than investment grade securities due to the lower credit ratings
of the issuers, which typically have relatively high levels of indebt-
edness and, therefore, are more sensitive to adverse economic con-
ditions. In addition, the market for non-investment grade securities
and emerging market loans and securitized instruments has been,
and may in the future be, characterized by periods of volatility and
illiquidity. The Company has in place credit and other risk policies
and procedures to control total inventory positions and risk con-
centrations for non-investment grade securities and emerging mar-
ket loans and securitized instruments that are administered in a
manner consistent with the Company’s overall risk management
policies and procedures (see “Risk Management” following
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations”).
The Company has contracted to develop a one million-
square-foot office tower in New York City. Pursuant to this agree-
ment, the Company will own the building and has entered into a
99-year lease for the land at the development site. Construction
began in 1999 and the Company intends to occupy the building
upon project completion, which is anticipated in 2002. The total
investment in this project (which will be incurred over the next sev-
eral years) is estimated to be approximately $650 million.
In connection with certain of its business activities, the
Company provides financing or financing commitments (on a
secured and unsecured basis) to companies in the form of senior
and subordinated debt, including bridge financing on a selective
basis. The borrowers may be rated investment grade or non-invest-
ment grade, and the loans may have varying maturities. As part of
these activities, the Company may syndicate and trade certain posi-
tions of these loans. At November 30, 1999, the aggregate value
of loans and positions was $1.3 billion. The Company also has pro-
vided additional commitments associated with these activities
aggregating $7.3 billion at November 30, 1999. These commit-
ments are generally agreements to lend to counterparties, have
fixed termination dates and are contingent on all conditions to bor-
rowing set forth in the contract having been met. At January 31,
2000, the Company had loans and positions outstanding of
$2.4 billion and aggregate commitments of $8.2 billion. The higher
level of the Company’s commitments as compared with prior periods
is primarily attributable to increased merger and acquisition activi-
ties, particularly in Europe. However, there can be no assurance that
the level of such activities will continue in future periods.
In September 1998, the Company made an investment of
$300 million in the Long-Term Capital Portfolio, L.P. (“LTCP”). The
Company is a member of a consortium of 14 financial institutions
participating in an equity recapitalization of LTCP. The objectives of
this investment were to continue active management of its posi-
tions and, over time, reduce excessive risk exposures and leverage,
return capital to the participants and ultimately realize the poten-
tial value of the LTCP portfolio. During fiscal 1999, a substantial
portion of this investment was returned to the Company.
The gross notional and fair value amounts of derivatives
used by the Company for asset and liability management and as
part of its trading activities are summarized in Notes 6 and 9,
respectively, to the consolidated financial statements (see also
“Derivative Financial Instruments” herein).
REGULATORY CAPITAL REQUIREMENTS
Dean Witter Reynolds Inc. (“DWR”) and MS&Co. are registered bro-
ker-dealers and registered futures commission merchants and,
accordingly, are subject to the minimum net capital requirements
of the Securities and Exchange Commission (“SEC”), the New York
Stock Exchange and the Commodity Futures Trading Commission.
MSIL, a London-based broker-dealer subsidiary, is regulated by the
Securities and Futures Authority (“SFA”) in the United Kingdom
and, accordingly, is subject to the Financial Resources
Requirements of the SFA. MSDWJL, a Tokyo-based broker-dealer,
is regulated by the Japanese Ministry of Finance with respect to
regulatory capital requirements. DWR, MS&Co., MSIL and MSDWJL