Morgan Stanley 2010 Annual Report Download - page 167

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During fiscal 2008, the Company reclassified approximately $7.5 billion of certain Corporate and other debt
from Level 3 to Level 2. These reclassifications primarily related to ABS and corporate loans as some liquidity
re-entered the market for these specific positions, and external prices and spread inputs for these instruments
became observable.
Financial instruments owned—Net derivative and other contracts. The net gains in Level 3 Net derivative and
other contracts were primarily driven by widening of credit spreads on underlying reference entities of certain
basket default swaps, single name default swaps and tranche-indexed credit default swaps where the Company
was long protection.
The Company reclassified certain Net derivative contracts from Level 2 to Level 3. The reclassifications were
primarily related to tranche-indexed credit default swaps. 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 fair value measurement. These
unobservable inputs include assumptions of comparability to similar instruments with observable market levels
and correlation.
Financial instruments owned—Investments. The net losses from investments were primarily related to
investments associated with the Company’s real estate products and private equity portfolio.
The Company reclassified investments from Level 3 to Level 2 because it was determined that certain significant
inputs for the fair value measurement were observable.
Intangible assets. The Company reclassified MSRs from Level 2 to Level 3 as significant inputs to the
valuation model became unobservable during the period.
Other secured financings. The Company reclassified Other secured financings from Level 2 to Level 3 because
it was determined that certain significant inputs for the fair value measurement were unobservable.
Long-term borrowings. Amounts included in the Purchases, sales, other settlements and issuances, net column
primarily relates to the issuance of junior subordinated debentures related to the CIC investment (see Note 15).
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