Morgan Stanley 2009 Annual Report Download - page 21

Item 1A. Risk Factors.
Liquidity and Funding Risk.
Liquidity and funding risk refers to the risk that Morgan Stanley will be unable to finance its operations due to a
loss of access to the capital markets or difficulty in liquidating its assets. Liquidity and funding risk also
encompasses the ability of Morgan Stanley to meet its financial obligations without experiencing significant
business disruption or reputational damage that may threaten its viability as a going concern. For more
information on how we monitor and manage liquidity and funding risk, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Part II, Item 7
herein.
Liquidity is essential to our businesses and we rely on external sources to finance a significant portion of our
operations.
Liquidity is essential to our businesses. Our liquidity could be substantially affected negatively by our inability to
raise funding in the long-term or short-term debt capital markets or the equity capital markets or our inability to
access the secured lending markets. Factors that we cannot control, such as disruption of the financial markets or
negative views about the financial services industry generally, could impair our ability to raise funding. In
addition, our ability to raise funding could be impaired if lenders develop a negative perception of our long-term
or short-term financial prospects. Such negative perceptions could be developed if we incur large trading losses,
we are downgraded or put on (or remain on) negative watch by the rating agencies, we suffer a decline in the
level of our business activity, regulatory authorities take significant action against us, or we discover significant
employee misconduct or illegal activity, among other reasons. If we are unable to raise funding using the
methods described above, we would likely need to finance or liquidate unencumbered assets, such as our
investment and trading portfolios, to meet maturing liabilities. We may be unable to sell some of our assets, or
we may have to sell assets at a discount from market value, either of which could adversely affect our results of
operations and cash flows.
Our borrowing costs and access to the debt capital markets depend significantly on our credit ratings.
The cost and availability of unsecured financing generally are dependent on our short-term and long-term credit
ratings. Factors that are important to the determination of our credit ratings include the level and quality of our
earnings, as well as our capital adequacy, liquidity, risk appetite and management, asset quality and business
mix.
Our debt ratings also 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 segment, we may be required to provide
additional collateral to certain counterparties in the event of a credit ratings downgrade.
We are a holding company and depend on payments from our subsidiaries.
The parent holding company depends on dividends, distributions and other payments from its subsidiaries to fund
dividend payments and to fund all payments on its obligations, including debt obligations. Regulatory and other
legal restrictions may limit our ability to transfer funds freely, either to or from our subsidiaries. In particular,
many of our subsidiaries, including our broker-dealer subsidiaries, are subject to laws, regulations and self-
regulatory organization rules that authorize regulatory bodies to block or reduce the flow of funds to the parent
holding company, or that prohibit such transfers altogether in certain circumstances. These laws, regulations and
rules may hinder our ability to access funds that we may need to make payments on our obligations. Furthermore,
as a bank holding company, we may become subject to a prohibition or to limitations on our ability to pay
dividends. The OCC, the Fed and the FDIC have the authority, and under certain circumstances the duty, to
prohibit or to limit the payment of dividends by the banking organizations they supervise, including us and our
bank holding company subsidiaries.
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