Morgan Stanley 2010 Annual Report Download - page 166

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for Fiscal 2008
Beginning
Balance at
November 30,
2007
Total Realized
and
Unrealized
Gains
(Losses)(1)
Purchases,
Sales, Other
Settlements
and Issuances,
net
Net
Transfers
In and/or
(Out) of
Level 3
Ending
Balance at
November 30,
2008
Unrealized
Gains (Losses)
for Level 3
Assets/Liabilities
Outstanding at
November 30,
2008(2)
(dollars in millions)
Assets
Financial instruments owned:
U.S. agency securities ...... $ 660 $ 9 $ (367) $ (96) $ 206 $ (8)
Other sovereign government
obligations ............. 29 (6) (20) — 3 (2)
Corporate and other debt .... 37,058 (12,835) 411 9,826 34,460 (12,683)
Corporate equities ......... 1,236 (537) (52) 260 907 (351)
Net derivative and other
contracts(3) ............ 5,938 20,974 (512) 1,224 27,624 20,499
Investments .............. 13,068 (3,324) 2,151 (2,163) 9,732 (3,350)
Securities received as collateral . . 7 — 8 — 15 —
Intangible assets .............. — (220) 19 421 220 (220)
Liabilities
Financial instruments sold, not yet
purchased:
Corporate and other debt .... $ 1,122 $ 221 $2,865 $ 177 $ 3,943 $ 94
Corporate equities ......... 16 (165) (271) 111 21 27
Obligation to return securities
received as collateral ......... 7 — 8 — 15 —
Other secured financings ........ 2,321 1,349 1,440 3,335 5,747 1,349
Long-term borrowings .......... 398 226 5,428 (183) 5,417 226
(1) Total realized and unrealized gains (losses) are primarily included in Principal transactions—Trading in the consolidated statements of
income except for $(3,324) million related to Financial instruments owned—Investments, which is included in Principal transactions—
Investments.
(2) Amounts represent unrealized gains (losses) for fiscal 2008 related to assets and liabilities still outstanding at November 30, 2008.
(3) Net derivative and other contracts represent Financial instruments owned—Derivative and other contracts, net of Financial instruments
sold, not yet purchased—Derivative and other contracts.
Financial instruments owned—Corporate and other debt. The net losses in Level 3 Corporate and other debt
were primarily driven by certain asset-backed securities, including residential and commercial mortgage loans,
certain collateralized debt obligations (including collateralized bond obligations and collateralized loan
obligations), and certain commercial whole loans and by certain corporate loans and lending commitments.
During fiscal 2008, the Company reclassified approximately $17.3 billion of certain Corporate and other debt
from Level 2 to Level 3. The reclassifications were primarily related to residential and commercial mortgage-
backed securities, commercial whole loans and corporate loans. The reclassifications were due to a reduction in
the volume of recently executed transactions and market price quotations for these instruments, or a lack of
available broker quotes, such that unobservable inputs had to be utilized for the valuation of these instruments.
These unobservable inputs include, depending upon the position, assumptions to establish comparability to
bonds, loans or swaps with observable price/spread levels, default recovery rates, forecasted credit losses and
prepayment rates.
160