Morgan Stanley 2009 Annual Report Download - page 50

Subsidiary Banks that are collateralized primarily by first and second lien subprime mortgages enhanced by
financial guarantees, approximately $2.0 billion in insured municipal bond securities and approximately $651
million in net counterparty exposure (gross exposure of approximately $5.4 billion net of cumulative credit
valuation adjustments of approximately $2.8 billion and net of hedges). Net counterparty exposure is defined as
potential loss to the Company over a period of time in an event of 100% default of a Monoline, assuming zero
recovery. The Company’s hedging program for Monoline risk includes the use of transactions that effectively
mitigate certain market risk components of existing underlying transactions with the Monolines.
MSSB. During 2009, the Company recorded deal closing costs of $221 million and integration costs of $280
million. Deal closing costs include a one-time expense of $124 million primarily for replacement of deferred
compensation awards for MSSB retirement-eligible employees. The costs of these replacement awards were fully
allocated to Citi.
Structured Investment Vehicles. The Company recognized net gains of $164 million in 2009 and losses of
$470 million and $84 million in fiscal 2008 and the one month ended December 31, 2008, respectively, related to
securities issued by structured investment vehicles (“SIV”). The Company no longer has any SIV positions on
the consolidated statements of financial condition as of December 31, 2009.
Income Tax Benefit. The Company recognized a tax benefit of $331 million in 2009 resulting from the cost of
anticipated repatriation of non-U.S. earnings at lower than previously estimated tax rates.
Goodwill and Intangibles. Impairment charges related to goodwill and intangible assets were $16 million in
2009 and $725 million for fiscal 2008 (see Note 7 to the consolidated financial statements).
Subsidiary Banks.The Company recorded gains of approximately $140 million in 2009 and losses of
approximately $900 million in fiscal 2008 related to mortgage-related securities portfolios of the Subsidiary
Banks.
ARS. 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. Fiscal 2008 reflected charges of $532
million for the ARS repurchase program and writedowns of $108 million associated with ARS held in inventory
(see Note 11 to the consolidated financial statements).
Sales of Subsidiaries and Other Items. Results for fiscal 2008 included a pre-tax gain of $687 million related
to the sale of MSWM S.V.
Equity Capital-Related Transactions.
During fiscal 2008, the Company entered into several capital-related transactions. Such transactions included the
sale of equity units (the “Equity Units”) to a wholly owned subsidiary of CIC for approximately $5.6 billion and
the issuance to Mitsubishi UFJ Financial Group, Inc. (“MUFG”) of shares of Series B Non-Cumulative
Non-Voting Perpetual Convertible Preferred Stock (“Series B Preferred Stock”) and shares of Series C
Non-Cumulative Non-Voting Perpetual Preferred Stock (“Series C Preferred Stock”) for a total of $9 billion. In
addition, the Company, as part of the Capital Purchase Program (“CPP”), issued to the U.S. Treasury 10,000,000
shares of Series D Preferred Stock and a warrant to purchase 65,245,759 shares of the Company’s common stock
(the “Warrant”) for a purchase price of $10 billion.
In June 2009, the Company repurchased the 10,000,000 shares of Series D Preferred Stock from the U.S.
Treasury at the liquidation preference amount plus accrued and unpaid dividends, for an aggregate repurchase
price of $10,086 million. As a result of the Company’s repurchase of the Series D Preferred Stock, the Company
incurred a one-time negative adjustment of $850 million in its calculation of basic and diluted EPS (reduction to
earnings (losses) applicable to the Company’s common shareholders) for 2009 due to the accelerated
amortization of the issuance discount on the Series D Preferred Stock.
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