Morgan Stanley 2010 Annual Report Download - page 122

considered in the review of margin loans are the amount of the loan, the intended purpose, the degree of leverage
being employed in the account, and overall evaluation of the portfolio to ensure proper diversification or, in the
case of concentrated positions, appropriate liquidity of the underlying collateral or potential hedging strategies to
reduce risk. Additionally, transactions relating to concentrated or restricted positions require a review of any
legal impediments to liquidation of the underlying collateral. Underlying collateral for margin loans is reviewed
with respect to the liquidity of the proposed collateral positions, valuation of securities, historic trading range,
volatility analysis and an evaluation of industry concentrations.
The Company, through agreements with Citi relating to the formation of MSSB, retains certain credit risk for
margin and non-purpose loans that are held at Citigroup Global Markets Inc. in its capacity as clearing broker for
certain MSSB clients. The related loans are generally subject to the same oversight as similar margin and
non-purpose loans held by the Company and its subsidiaries.
Non-purpose securities-based lending allows clients to borrow money against the value of qualifying
securities for any suitable purpose other than purchasing, trading, or carrying marketable securities or refinancing
margin debt. Similar to margin lending, non-purpose securities-based loans are structured as demand facilities.
This lending activity has primarily been conducted through the Portfolio Loan Account (“PLA”) product
platform. The Company establishes approved lines and advance rates against qualifying securities and
monitors limits daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or
reduce debt positions, when necessary. Factors considered in the review of non-purpose securities-based
lending are amount of the loan, the degree of concentrated or restricted positions, and the overall evaluation of
the portfolio to ensure proper diversification, or, in the case of concentrated positions, appropriate liquidity of the
underlying collateral or potential hedging strategies. Underlying collateral for non-purpose securities-based loans
is reviewed with respect to the liquidity of the proposed collateral positions, valuation of securities, historic
trading range, volatility analysis and an evaluation of industry concentrations.
A new non-purpose lending platform, Tailored Lending (“TL”), was launched in February 2010 and
predominantly provides securities-based lending to high net worth clients of MSSB. The TL platform looks
beyond the collateral security in its underwriting process to also incorporate a comprehensive analysis of the
obligor’s financial profile and overall creditworthiness. Consequently, TL advance rates are generally higher than
those offered in the PLA product and TL facilities may be offered on a committed basis.
The Global Wealth Management Group business segment also provides structured credit facilities to high net
worth individuals and their small and medium-sized domestic businesses, with a suite of products that includes
working capital lines of credit, revolving lines of credit, standby letters of credit, term loans and commercial real
estate mortgages. Decisions to extend credit are based on an analysis of the borrower, the guarantor, the
collateral, cash flow, liquidity, leverage and credit history.
With respect to first mortgages and second mortgages, including HELOC loans, a loan evaluation process is
adopted within a framework of credit underwriting policies and collateral valuation. The Company’s
underwriting policy is designed to ensure that all borrowers pass an assessment of capacity and willingness to
pay, which includes an analysis of applicable industry standard credit scoring models (e.g., FICO scores), debt
ratios and reserves of the borrower. Loan-to-collateral value ratios are determined based on independent third-
party property appraisal/valuations, and security lien position is established through title/ownership reports.
Historically, all mortgages were originated to be sold or securitized. Eligible conforming loans are currently sold
to the government-sponsored enterprises, while most non-conforming and HELOC loans will be held for
investment in the Company’s portfolio.
See Note 8 to the consolidated financial statements for additional information about the Company’s financing
receivables.
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