Morgan Stanley 2009 Annual Report Download - page 56

Principal Transactions—Investments. The Company’s investments generally are held for long-term
appreciation and generally are subject to significant sales restrictions. Estimates of the fair value of the
investments may involve significant judgment and may fluctuate significantly over time in light of business,
market, economic and financial conditions generally or in relation to specific transactions.
Principal transactions net investment losses of $875 million were recognized in 2009 as compared with net
investment losses of $2,478 million in fiscal 2008. The losses were primarily related to net realized and
unrealized losses from the Company’s limited partnership investments in real estate funds and investments that
benefit certain employee deferred compensation and co-investment plans.
Other. Other revenues decreased 80% in 2009 compared with fiscal 2008. During 2009, the Company recorded
gains of approximately $465 million from the Company’s repurchase of debt in the open market compared with
approximately $2.1 billion in fiscal 2008 (see “Certain Factors Affecting Results of Operations—Morgan Stanley
Debt” herein for further discussion).
Non-interest Expenses. Non-interest expenses decreased 11% in 2009, primarily due to lower non-compensation
expense. Compensation and benefits expense increased 1% from fiscal 2008. Non-compensation expenses
decreased 26% in 2009, partly due to the Company’s initiatives to reduce costs. Occupancy and equipment expense
decreased 11% in 2009, primarily due to lower leasing costs associated with office facilities. Brokerage, clearing
and exchange fees decreased 20% in 2009, primarily due to decreased trading activity. Marketing and business
development expense decreased 43% in 2009, primarily due to lower levels of business activity. Professional
services expense decreased 18% in 2009, primarily due to lower consulting and legal fees. Other expenses
decreased 50% in 2009. In fiscal 2008, other expenses included $694 million related to the impairment of goodwill
and intangible assets related to certain fixed income businesses. Excluding the fiscal 2008 impairment charges,
other expenses decreased in 2009, primarily due to lower levels of business activity and lower litigation expense.
Fiscal 2008 Compared with Fiscal 2007
Investment banking revenues decreased 34% in fiscal 2008, reflecting the unprecedented market turmoil that
significantly reduced levels of market activity. Advisory fees from merger, acquisition and restructuring
transactions were $1,740 million, a decrease of 32% from fiscal 2007. Advisory fees in fiscal 2008 reflected
lower levels of activity due to the challenging market environment. Equity underwriting revenues decreased 33%
to $1,045 million in fiscal 2008, reflecting significantly lower levels of market activity, particularly for initial
public offerings. Fixed income underwriting revenues decreased 41% to $845 million in fiscal 2008. Fiscal 2008
revenues were impacted by significantly lower levels of market activity across most products, particularly loan
syndications and securitized products.
Total sales and trading revenues increased 33% in fiscal 2008. Equity sales and trading revenues increased 10%
to $9,968 million in fiscal 2008 and reflected higher net revenues from derivative products and slightly higher
results in prime brokerage. Equity sales and trading revenues also benefited from the widening of the Company’s
credit spreads on financial instruments that are accounted for at fair value, including, but not limited to, those for
which the fair value option was elected. As previously mentioned, equity sales and trading revenues in fiscal
2008 reflected approximately $1,604 million due to the widening of the Company’s credit spreads. Revenues
from derivative products reflected higher customer flows and high levels of volatility. Principal trading strategies
reflected significantly lower revenues in fiscal 2008 as the Company exited select proprietary trading strategies.
Although prime brokerage revenues increased in fiscal 2008, in the fourth quarter, the Company’s prime
brokerage business experienced significant outflows as clients withdrew their cash balances and reallocated
positions. These outflows have had a negative impact on prime brokerage’s operating results in fiscal 2008.
Fixed income sales and trading revenues increased to $3,862 million in fiscal 2008 from $268 million in fiscal
2007. Fiscal 2007 results included mortgage-related writedowns of $7.8 billion, reflecting the deterioration in the
value of U.S. subprime trading positions, principally super senior derivative positions in collateralized debt
obligations (“CDOs”) entered into primarily by the Company’s mortgage proprietary trading group. Fiscal 2008
results reflected lower losses in mortgage loan products, higher revenues from commodities, higher revenues
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