Morgan Stanley 2009 Annual Report Download - page 86

addition, the Company’s debt ratings can have a significant impact on certain trading revenues, particularly in
those businesses where longer term counterparty performance is critical, such as OTC derivative transactions,
including credit derivatives and interest rate swaps. Factors that are important to the determination of the
Company’s credit ratings include the level and quality of earnings, capital adequacy, liquidity, risk appetite and
management, asset quality, business mix and perceived levels of government support.
In connection with certain OTC trading agreements and certain other agreements associated with the Institutional
Securities business segment, the Company may be required to provide additional collateral or immediately settle
any outstanding liability balances with certain counterparties in the event of a credit rating downgrade. As of
December 31, 2009, the amount of additional collateral or termination payments that could be called by
counterparties under the terms of such agreements in the event of a one-notch downgrade of the Company’s long-
term credit rating was approximately $1,405 million. A total of approximately $2,523 million in collateral or
termination payments could be called in the event of a two-notch downgrade. A total of approximately $3,417
million in collateral or termination payments could be called in the event of a three-notch downgrade.
As of January 31, 2010, the Company’s and Morgan Stanley Bank, N.A.’s senior unsecured ratings were as set
forth below:
Company Morgan Stanley Bank, N.A.
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
Dominion Bond Rating Service Limited . . R-1 (middle) A (high) Negative — — —
Fitch Ratings ........................ F1 A Stable F1 A+ Stable
Moody’s Investors Service ............. P-1 A2 Negative P-1 A1 Negative
Rating and Investment Information, Inc. . . a-1 A+ Negative — — —
Standard & Poor’s .................... A-1 A Negative A-1 A+ Negative
Off-Balance Sheet Arrangements with Unconsolidated Entities.
The Company enters into various arrangements with unconsolidated entities, including variable interest entities,
primarily in connection with its Institutional Securities business segment.
Institutional Securities Activities.The Company utilizes SPEs primarily in connection with securitization
activities. The Company engages in securitization activities related to commercial and residential mortgage
loans, U.S. agency collateralized mortgage obligations, corporate bonds and loans, municipal bonds and other
types of financial assets. The Company may retain interests in the securitized financial assets as one or more
tranches of the securitization. These retained interests are included in the consolidated statements of financial
condition at fair value. Any changes in the fair value of such retained interests are recognized in the consolidated
statements of income. Retained interests in securitized financial assets were approximately $2.0 billion and $1.2
billion at December 31, 2009 and December 31, 2008, respectively, substantially all of which were related to
U.S. agency collateralized mortgage obligations, commercial mortgage loan and residential mortgage loan
securitization transactions. For further information about the Company’s securitization activities, see Notes 2 and
6 to the consolidated financial statements.
The Company has entered into liquidity facilities with SPEs and other counterparties, whereby the Company is
required to make certain payments if losses or defaults occur. The Company often may have recourse to the
underlying assets held by the SPEs in the event payments are required under such liquidity facilities (see Note 11
to the consolidated financial statements).
Guarantees. Accounting guidance for guarantees requires the Company to disclose information about its
obligations under certain guarantee arrangements. The FASB defines guarantees as contracts and indemnification
agreements that contingently require a guarantor to make payments to the guaranteed party based on changes in
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