Morgan Stanley 2010 Annual Report Download - page 111

conditions. Furthermore, the model does not reflect the Company’s expectations regarding the movement of
interest rates in the near term nor the actual effect on Income from continuing operations before income taxes if
such changes were to occur.
Investments.
The Company makes investments in both public and private companies, primarily in its Institutional Securities
and Asset Management business segments. These investments are predominantly equity positions with long
investment horizons, the majority of which are for business facilitation purposes. The market risk related to these
investments is measured by estimating the potential reduction in net revenues associated with a 10% decline in
asset values as shown in the table below.
Investments
10% Sensitivity
December 31, 2010
(dollars in millions)
Investments related to merchant banking activities:
Real estate funds .......................................................... $108
Private equity and infrastructure funds ......................................... 115
Other investments:
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. ............................. $179
Asset Management hedge fund investments .................................... 169
Other firm investments ..................................................... 344
Credit Risk.
Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial
obligations. The Company incurs credit risk exposure to institutions and sophisticated investors through the
Institutional Securities business segment. This risk may arise from a variety of business activities, including, but
not limited to, entering into swap or other derivative contracts under which counterparties have obligations to
make payments to us; extending credit to clients through various lending commitments; providing short- or long-
term funding that is secured by physical or financial collateral whose value may at times be insufficient to fully
cover the loan repayment amount; and posting margin and/or collateral to clearing houses, clearing agencies,
exchanges, banks, securities firms and other financial counterparties. We incur credit risk in traded securities and
loan pools, whereby the value of these assets may fluctuate based on realized or expected defaults on the
underlying obligations or loans. The Company incurs credit risk in the Global Wealth Management Group
business segment lending to individual investors, including margin and non-purpose loans collateralized by
securities and through single-family residential prime mortgage loans in conforming, nonconforming or home
equity lines of credit (“HELOC”) form.
The Company has structured its credit risk management framework to reflect that each of its businesses generates
unique credit risks, and the Credit Risk Management Department establishes company-wide practices to
evaluate, monitor and control credit risk exposure both within and across business segments. The Company
employs a comprehensive and global Credit Limits Framework as one of the primary tools used to evaluate and
manage credit risk levels across the Company. The Credit Limits Framework is calibrated within the Company’s
risk tolerance and includes single name limits and portfolio concentration limits by country, industry and product
type. The Credit Risk Management Department is responsible for ensuring transparency of material credit risks,
ensuring compliance with established limits, approving material extensions of credit, and escalating risk
concentrations to appropriate senior management. Credit risk exposure is managed by credit professionals and
committees within the Credit Risk Management Department and through various risk committees, whose
membership includes the Credit Risk Management Department. The Credit Risk Management Department also
works closely with the Market Risk Department and applicable business units to monitor risk exposures,
including margin loans, mortgage loans, and credit sensitive, higher risk transactions.
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