Morgan Stanley 2009 Annual Report Download - page 57

from foreign exchange products, partially offset by lower net revenues from the interest rate and credit
businesses. Interest rate, currency and credit products revenues decreased 55% in fiscal 2008. Continued
dislocation in the credit markets resulted in lower net revenues from credit products, including losses of $1,686
million related to exposure to Monolines and unfavorable positioning, partially offset by higher revenues from
foreign exchange products and strong results in interest rate products. Interest rate, currency and credit products
revenues for fiscal 2008 benefited by $171 million due to the reversal of prior-period valuation adjustments
related to interest rate derivatives, partially offset by a cumulative negative adjustment of $120 million related to
prior-period incorrect valuations of a London-based trader’s positions (see Notes 21 and 26 to the consolidated
financial statements for further information). Results in foreign exchange products were primarily due to higher
levels of customer flows and market volatility. Mortgage-related losses of approximately $1.7 billion were
primarily due to a broadening decline in the residential and commercial mortgage sector. The decline in the
Company’s mortgage loan product activities reflected the difficult credit market conditions in fiscal 2008.
Commodity revenues increased 62%, primarily due to higher revenues from oil liquids and electricity and natural
gas products, reflecting higher market volatility and strong customer flow. As previously mentioned, fixed
income sales and trading revenues also benefited in fiscal 2008 by approximately $3,524 million from the
widening of the Company’s credit spreads.
In fiscal 2008, other sales and trading losses were approximately $3,109 million compared with $1,246 million in
fiscal 2007. Fiscal 2008 reflected 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, 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.
In fiscal 2007, other sales and trading losses primarily reflected approximately $700 million of mark-to-market
valuations associated with loans and commitments largely related to “event-driven” lending to non-investment
grade companies and the impairment charge related to securities in the Company’s Subsidiary Banks.
Principal transactions net investment losses aggregating $2,478 million were recognized in fiscal 2008 as
compared with net investment gains aggregating $1,458 million in fiscal 2007. The losses in fiscal 2008 were
primarily related to net realized and unrealized losses from the Company’s investments in passive limited
partnership interests associated with the Company’s real estate funds and investments that benefit certain
employee deferred compensation and co-investment plans and other principal investments. Fiscal 2007’s results
primarily related to realized and unrealized net gains associated with certain of the Company’s investments.
Other revenues increased 379% in fiscal 2008. The increase reflected revenues related to Institutional Securities’
share (approximately $2,135 million) of the Company’s repurchase of debt. Fiscal 2008 also included a gain
associated with the sale of a controlling interest in a previously consolidated commodities subsidiary.
Non-interest expenses decreased 12% in fiscal 2008, primarily due to lower compensation expense. Compensation
and benefits expense decreased 29%, primarily reflecting lower incentive-based compensation accruals due to a
challenging market environment, partially offset by severance-related expenses of $653 million in fiscal 2008.
Non-compensation expenses increased 23% in fiscal 2008. Fiscal 2008 results included a charge of approximately
$694 million for the impairment of goodwill and intangible assets related to certain fixed income businesses (see
Note 7 to the consolidated financial statements), and fiscal 2007’s results included a reversal of the $360 million
legal accrual related to the Company’s favorable outcome from the Coleman (Parent) Holdings, Inc. (“Coleman”)
litigation. Occupancy and equipment expense increased 27%, primarily due to higher depreciation expense on
property and equipment and higher costs associated with exiting certain property lease agreements. Information
processing and communications expense increased 4% in fiscal 2008, primarily due to higher data processing costs
and market data. Marketing and business development expense decreased 7%, primarily due to lower levels of
business activity. Other expenses increased 151%, reflecting the previously mentioned charge of approximately
$694 million for the impairment of goodwill and intangible assets and the $360 million reversal of the Coleman
litigation reserve in fiscal 2007 as previously mentioned, partially offset by lower minority interest.
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