Morgan Stanley 2009 Annual Report Download - page 55

Fixed Income. Fixed income sales and trading revenues increased $1,155 million to $5,017 million in 2009 from
$3,862 million in fiscal 2008. Interest rate, currency and credit products net revenues increased 145% in 2009
primarily due to strong investment grade and distressed debt trading results, partly offset by lower levels of client
activity. Results in 2009 also included a gain of $319 million related to the sale of undivided participating interests
in a portion of the Company’s claims against a derivative counterparty that filed for bankruptcy protection.
Commodity net revenues decreased 31% in 2009, primarily reflecting reduced levels of client activity and
unfavorable market conditions.
In 2009, fixed income sales and trading revenues reflected net unrealized gains of approximately $3,462 million
related to changes in the fair value of net derivative contracts attributable to the tightening of the counterparties’
credit default spreads compared with unrealized losses of approximately $6,560 million in fiscal 2008 related to
the widening of the counterparties’ credit default spreads. The Company also recorded unrealized losses of
approximately $1,938 million in 2009, related to changes in the fair value of net derivative contracts attributable
to the tightening of the Company’s credit default swap spreads compared with unrealized gains of approximately
$1,968 million in fiscal 2008 related to the widening of the Company’s credit default swap spreads. The
unrealized losses and gains on credit default spreads do not reflect any gains or losses on related non-derivative
hedging instruments.
In addition, fixed income sales and trading revenues in 2009 were negatively impacted by losses of
approximately $3,321 million from the tightening of the Company’s credit spreads resulting from the increase in
the fair value of certain of the Company’s long-term and short-term borrowings, primarily structured notes, for
which the fair value option was elected. Fiscal 2008 reflected a benefit of approximately $3,524 million due to
the widening of the Company’s credit spreads on such borrowings.
Other. In addition to the equity and fixed income sales and trading revenues discussed above, sales and trading
revenues included other trading revenues, consisting primarily of certain activities associated with the
Company’s corporate lending activities. In connection with its corporate lending activities, the Company
provides to select clients loans or lending commitments (including bridge financing) that are generally classified
as either “event-driven” or “relationship-driven.” “Event-driven” loans and lending commitments refer to
activities associated with a particular event or transaction, such as to support client merger, acquisition or
recapitalization transactions. “Relationship-driven” loans and lending commitments are generally made to
expand business relationships with select clients. For further information about the Company’s corporate lending
activities, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk—Credit Risk” herein. The
fair value measurement of loans and lending commitments takes into account certain fee income that is
attributable to the contingent commitment contract.
In 2009, other sales and trading net revenues reflected net gains of $183 million compared with net losses of
$3,109 million in fiscal 2008. Results for 2009 included net gains of $804 million (mark-to-market valuations
and realized gains of $4,042 million, partially offset by losses on related hedges of $3,238 million) associated
with loans and lending commitments. Results for fiscal 2008 included net losses of $3,335 million (negative
mark-to-market valuations and losses of $6,311 million, net of gains on related hedges of $2,976 million)
associated with loans and lending commitments largely related to certain “event-driven” lending to non-
investment grade companies. The valuation of these commitments could change in future periods depending on,
among other things, the extent that they are renegotiated or repriced or if the associated acquisition transaction
does not occur. Results in 2009 also included losses of $362 million, reflecting the improvement in the
Company’s debt-related credit spreads on certain debt related to CIC’s investment in the Company compared
with gains of $387 million in fiscal 2008.
In fiscal 2008, other sales and trading revenues also included writedowns of securities of approximately
$1.2 billion in the Company’s Subsidiary Banks and mark-to-market gains of approximately $1,352 million on
certain swaps previously designated as hedges of a portion of the Company’s long-term debt. These swaps
were no longer considered hedges once the related debt was repurchased by the Company (i.e., the swaps were
“de-designated” as hedges). During the period in which the swaps were hedging the debt, changes in fair value
of these instruments were generally offset by adjustments to the basis of the debt being hedged.
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