Morgan Stanley 2009 Annual Report Download - page 23

settlements of these securities, the price we ultimately realize will depend on the demand and liquidity in the
market at that time and may be materially lower than their current fair value. Any of these factors could require
us to take further writedowns in the value of our securities portfolio, which may have an adverse effect on our
results of operations in future periods.
In addition, financial markets are susceptible to severe events evidenced by rapid depreciation in asset values
accompanied by a reduction in asset liquidity. Under these extreme conditions, hedging and other risk
management strategies may not be as effective at mitigating trading losses as they would be under more normal
market conditions. Moreover, under these conditions market participants are particularly exposed to trading
strategies employed by many market participants simultaneously and on a large scale, such as crowded trades.
Morgan Stanley’s risk management and monitoring processes seek to quantify and mitigate risk to more extreme
market moves. Severe market events have historically been difficult to predict, however, and Morgan Stanley
could realize significant losses if unprecedented extreme market events were to occur, such as conditions in the
global financial markets and global economy that prevailed from 2008 into 2009.
Holding large and concentrated positions may expose us to losses.
Concentration of risk may reduce revenues or result in losses in our market-making, proprietary trading,
investing, block trading, underwriting and lending businesses in the event of unfavorable market movements. We
commit substantial amounts of capital to these businesses, which often results in our taking large positions in the
securities of, or making large loans to, a particular issuer or issuers in a particular industry, country or region.
We have incurred, and may continue to incur, significant losses in the real estate sector.
We finance and acquire principal positions in a number of real estate and real estate-related products for our own
account, for investment vehicles managed by affiliates in which we also may have a significant investment, for
separate accounts managed by affiliates and for major participants in the commercial and residential real estate
markets. We also originate loans secured by commercial and residential properties. Further, we securitize and trade
in a wide range of commercial and residential real estate and real estate-related whole loans, mortgages and other
real estate and commercial assets and products, including residential and commercial mortgage-backed securities.
These businesses have been, and may continue to be, adversely affected by the downturn in the real estate sector.
Credit Risk.
Credit risk refers to the risk of loss arising from borrower or counterparty default when a borrower, counterparty
or obligor does not meet its obligations. For more information on how we monitor and manage credit risk, see
“Credit Risk” in Part II, Item 7A herein.
We are exposed to the risk that third parties that are indebted to us will not perform their obligations.
We incur significant “single name” credit risk exposure through the Institutional Securities business segment.
This risk may arise from a variety of business activities, including but not limited to entering into swap or other
derivative contracts under which counterparties have obligations to make payments to us; extending credit to
clients through various lending commitments; providing short or long-term funding that is secured by physical or
financial collateral whose value may at times be insufficient to fully cover the loan repayment amount; and
posting margin and/or collateral to clearing houses, clearing agencies, exchanges, banks, securities firms and
other financial counterparties. We incur credit risk in traded securities and loan pools whereby the value of these
assets may fluctuate based on realized or expected defaults on the underlying obligations or loans.
We also incur “individual consumer” credit risk in the Global Wealth Management Group business segment
lending to individual investors, including margin and non-purpose loans collateralized by securities, and
residential mortgage loans.
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