Morgan Stanley 2009 Annual Report Download - page 105

Analyzing Credit Risk. Credit risk management takes place at the transaction, counterparty and portfolio levels.
In order to protect the Company from losses resulting from these activities, Credit Risk Management analyzes all
material lending and derivative transactions and ensures that the creditworthiness of the Company’s
counterparties and borrowers is reviewed regularly and that credit exposure is actively monitored and managed.
Credit Risk Management assigns obligor credit ratings to the Company’s counterparties and borrowers. These
credit ratings are intended to assess a counterparty’s probability of default and are derived using methodologies
generally consistent with those employed by external rating agencies. Credit ratings of “BB+” or below are
considered non-investment grade. Additionally, Credit Risk Management evaluates the relative position of the
Company’s particular obligation in the borrower’s capital structure and relative recovery prospects, as well as
collateral (if applicable) and other structural elements of the particular transaction.
Risk Mitigation. The Company may seek to mitigate credit risk from its lending and derivatives transactions in
multiple ways. At the transaction level, the Company seeks to mitigate risk through management of key risk
elements such as size, tenor, seniority and collateral. The Company actively hedges its lending and derivatives
exposure through various financial instruments that may include single name, portfolio and structured credit
derivatives. Additionally, the Company may sell, assign or sub-participate funded loans and lending
commitments to other financial institutions in the primary and secondary loan market. In connection with its
derivatives trading activities, the Company generally enters into master netting agreements and collateral
arrangements with counterparties. These agreements provide the Company with the ability to offset a
counterparty’s rights and obligations, request additional collateral when necessary or liquidate the collateral in
the event of counterparty default.
Credit Exposure—Corporate Lending. The following tables present information about the Company’s
corporate funded loans and lending commitments as of December 31, 2009 and December 31, 2008. The “total
corporate lending exposure” column includes both lending commitments and funded loans. Fair value of
corporate lending exposure represents the fair value of loans that have been drawn by the borrower and lending
commitments that were outstanding as of December 31, 2009 and December 31, 2008. Lending commitments
represent legally binding obligations to provide funding to clients as of December 31, 2009 and December 31,
2008 for both “relationship-driven” and “event-driven” lending transactions. As discussed above, these loans and
lending 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.
As of December 31, 2009 and December 31, 2008, the aggregate amount of investment grade loans was $6.5
billion and $7.4 billion, respectively, and the aggregate amount of non-investment grade loans was $9.5 billion
and $9.4 billion, respectively. As of December 31, 2009 and December 31, 2008, the aggregate amount of
lending commitments outstanding was $47.9 billion and $43.9 billion, respectively. In connection with these
corporate lending 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 $25.8 billion and
$35.7 billion related to the total corporate lending exposure of $64.0 billion and $60.7 billion as of December 31,
2009 and December 31, 2008, respectively.
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