Morgan Stanley 2009 Annual Report Download - page 70

Other Matters.
Settlement with DFS.
On February 11, 2010, the Company and DFS entered into an agreement in which each party released the other
party from claims related to the sharing of proceeds from the lawsuit against Visa and MasterCard. In addition,
the Company and DFS entered into an agreement to provide that payments made by DFS to the Company in
satisfaction of its obligations under the special dividend declared by DFS in June 2007, shall not exceed $775
million. Also on February 11, 2010, DFS paid the Company $775 million in complete satisfaction of its
obligations to the Company under the special dividend. The payment will be included in discontinued operations
in the Company’s condensed consolidated statement of income for the first quarter of 2010.
Sale of Bankruptcy Claims.
During 2009, the Company entered into multiple participation agreements with certain investors whereby the
Company sold undivided participating interests representing 81% (or $1,105 million) of its claims totaling
$1,362 million, pursuant to International Swaps and Derivatives Association (“ISDA”) master agreements,
against a derivative counterparty that filed for bankruptcy protection. The Company received cash proceeds of
$429 million and recorded a gain on sale of $319 million in 2009. The gain is reflected in the consolidated
statement of income in Principal transactions—trading revenues within the Institutional Securities business
segment.
As a result of the bankruptcy of the derivative counterparty, the Company, as contractually entitled, exercised
remedies as the non-defaulting party and determined the value of the claims under the ISDA master agreements
in a commercially reasonable manner. The Company filed its claims with the bankruptcy court. In connection
with the sale of the undivided participating interests in a portion of the claims, the Company provided certain
representations and warranties related to the allowance of the amount stated in the claims submitted to the
bankruptcy court. The bankruptcy court will be evaluating all of the claims filed against the derivative
counterparty. To the extent, in the future, any portion of the stated claims is disallowed or reduced by the
bankruptcy court in excess of a certain amount, then the Company must refund a portion of the purchase price
plus interest from the date of the participation agreements to the repayment date. The maximum amount that the
Company could be required to refund is the total proceeds of $429 million plus interest. The Company recorded a
liability for the fair value of this possible disallowance. The fair value was determined by assessing mid-market
values of the underlying transactions, where possible, prevailing bid-offer spreads around the time of the
bankruptcy filing, and applying valuation adjustments related to estimating unwind costs. The investors,
however, bear full price risk associated with the allowed claims as it relates to the liquidation proceeds from the
bankruptcy estate. The Company also agreed to service the claims and, as such, recorded a liability for the fair
value of the servicing obligation. The Company will continue to measure these obligations at fair value with
changes in fair value recorded in earnings. These obligations are reflected in the consolidated statement of
financial condition as Financial instruments sold, not yet purchased—derivatives and other contracts.
Real Estate.
The Company acts as the general partner for various real estate funds and also invests in certain of these funds as
a limited partner.
66