Morgan Stanley 2009 Annual Report Download - page 204

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Sale of Bankruptcy Claims Related to a Derivative Counterparty.
During 2009, the Company entered into multiple participation agreements with certain investors whereby the
Company sold undivided participating interests representing 81% (or $1,105 million) of its claims totaling
$1,362 million, pursuant to International Swaps and Derivatives Association (“ISDA”) master agreements,
against a derivative counterparty that filed for bankruptcy protection. The Company received cash proceeds of
$429 million and recorded a gain on sale of $319 million in 2009. The gain is reflected in the consolidated
statement of income in Principal transactions-trading revenues within the Institutional Securities business
segment.
As a result of the bankruptcy of the derivative counterparty, the Company, as contractually entitled, exercised
remedies as the non-defaulting party and determined the value of the claims under the ISDA master agreements
in a commercially reasonable manner. The Company filed its claims with the bankruptcy court. In connection
with the sale of the undivided participating interests in a portion of the claims, the Company provided certain
representations and warranties related to the allowance of the amount stated in the claims submitted to the
bankruptcy court. The bankruptcy court will be evaluating all of the claims filed against the derivative
counterparty. To the extent, in the future, any portion of the stated claims is disallowed or reduced by the
bankruptcy court in excess of a certain amount, then the Company must refund a portion of the purchase price
plus interest from the date of the participation agreements to the repayment date. The maximum amount that the
Company could be required to refund is the total proceeds of $429 million plus interest. The Company recorded a
liability for the fair value of this possible disallowance. The fair value was determined by assessing mid-market
values of the underlying transactions, where possible, prevailing bid-offer spreads around the time of the
bankruptcy filing, and applying valuation adjustments related to estimating unwind costs. The investors,
however, bear full price risk associated with the allowed claims as it relates to the liquidation proceeds from the
bankruptcy estate. The Company also agreed to service the claims and, as such, recorded a liability for the fair
value of the servicing obligation. The Company will continue to measure these obligations at fair value with
changes in fair value recorded in earnings. These obligations are reflected in the consolidated statement of
financial condition as Financial instruments sold, not yet purchased—derivatives and other contracts, in Note 4
as Level 3 instruments, and in Note 10 as Derivatives not designated as accounting hedges. The disallowance
obligation is also reflected in Note 11 in the guarantees table.
17. Other Revenues.
Details of Other revenues were as follows:
2009
Fiscal
2008
One Month
Ended
December 31,
2008
(dollars in millions)
Repurchase of long-term debt (see Note 9) ................................ $491 $2,252 $ 73
Morgan Stanley Wealth Management S.V., S.A.U(1) ....................... — 743 —
Other ............................................................. 347 857 34
Total .......................................................... $838 $3,852 $107
(1) In the second quarter of fiscal 2008, the Company sold Morgan Stanley Wealth Management S.V., S.A.U. (“MSWM S.V.”), its Spanish
onshore mass affluent wealth management business. The Company recognized a pre-tax gain of approximately $687 million, net of
transaction-related charges of approximately $50 million. The results of MSWM S.V. are included within the Global Wealth
Management Group business segment through the date of sale.
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