Morgan Stanley 2009 Annual Report Download - page 190

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. A majority
of the Company’s standby letters of credit is provided on behalf of counterparties that are investment grade.
Market Value Guarantees. Market value guarantees are issued to guarantee timely payment of a specified
return to investors in certain affordable housing tax credit funds. These guarantees 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. From time to time, the Company may also guarantee return of principal invested, potentially including a
specified rate of return, to fund investors.
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. Primarily all of the
underlying assets in the SPEs are investment grade.
Whole loan sale guarantees. The Company provides representations and warranties that certain assets sold as
whole loans 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 from other parties, the Company seeks to obtain its own representations and warranties
regarding the assets. The maximum potential amount of future payments the Company could be required to make
would be equal to the current outstanding balances of assets transferred by the Company that are subject to its
representations and warranties.
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.
ARS Guarantees. Under the terms of various agreements entered into with government agencies and the terms of
the Company’s announced offer to repurchase, the Company agreed to repurchase at par certain ARS held by
retail clients that were purchased through the Company. In addition, the Company agreed to reimburse retail
clients who have sold certain ARS purchased through the Company at a loss. The Company’s maximum exposure
as it relates to these repurchase obligations was based on the Company’s best estimate of the outstanding ARS
eligible under the repurchase program. At December 31, 2008, the Company recorded a liability at fair value
related to these ARS purchase obligations. The Company had no ARS purchase obligation at December 31, 2009.
Other Guarantees and Indemnities.
In the normal course of business, the Company provides guarantees and indemnifications in a variety of
commercial transactions. These provisions generally are standard contractual terms. Certain of these guarantees
and indemnifications are described below.
• Trust Preferred Securities. The Company has established Morgan Stanley Capital Trusts for the limited
purpose of issuing trust preferred securities to third parties and lending the proceeds to the Company in
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