Morgan Stanley 2010 Annual Report Download - page 184

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Credit Protection Purchased Through CLNs. In a CLN transaction, the Company transfers assets (generally
high quality securities or money market investments) to an SPE, enters into a derivative transaction in which the
SPE writes protection on an unrelated reference asset or group of assets, through a credit default swap, a total
return swap or similar instrument, and sells to investors the securities issued by the SPE. In some transactions,
the Company may also enter into interest rate or currency swaps with the SPE. Upon the occurrence of a credit
event related to the reference asset, the SPE will deliver collateral securities as the payment to the Company. The
Company is generally exposed to price changes on the collateral securities in the event of a credit event and
subsequent sale. These transactions are designed to provide investors with exposure to certain credit risk on the
reference asset. In some transactions, the assets and liabilities of the SPE are recognized in the Company’s
consolidated financial statements. In other transactions, the transfer of the collateral securities is accounted for as
a sale of assets, and the SPE is not consolidated. The structure of the transaction determines the accounting
treatment. CLNs are included in Other in the above VIE tables.
The derivatives in CLN transactions consist of total return swaps, credit default swaps or similar contracts in
which the Company has purchased protection on a reference asset or group of assets. Payments by the SPE are
collateralized. The risks associated with these and similar derivatives with SPEs are essentially the same as
similar derivatives with non-SPE counterparties and are managed as part of the Company’s overall exposure.
Other Structured Financings. The Company primarily invests in equity interests issued by entities that
develop and own low-income communities (including low-income housing projects) and entities that
construct and own facilities that will generate energy from renewable resources. The equity interests entitle the
Company to its share of tax credits and tax losses generated by these projects. In addition, the Company has
issued guarantees to investors in certain low-income housing funds. The guarantees are designed to return an
investor’s contribution to a fund and the investor’s share of tax losses and tax credits expected to be generated by
the fund. The Company is also involved with entities designed to provide tax-efficient yields to the Company or
its clients.
Collateralized Loan and Debt Obligations. A collateralized loan obligation (“CLO”) or a CDO is an SPE that
purchases a pool of assets, consisting of corporate loans, corporate bonds, asset-backed securities or synthetic
exposures on similar assets through derivatives, and issues multiple tranches of debt and equity securities to
investors.
Equity-Linked Notes. In an equity-linked note transaction included in the tables above, the Company typically
transfers to an SPE either (1) a note issued by the Company, the payments on which are linked to the
performance of a specific equity security, equity index or other index or (2) debt securities issued by other
companies and a derivative contract, the terms of which will relate to the performance of a specific equity
security, equity index or other index. These transactions are designed to provide investors with exposure to
certain risks related to the specific equity security, equity index or other index. Equity-linked notes are included
in Other in the above VIE tables.
Managed Real Estate Partnerships. The Company sponsors funds that invest in real estate assets. Certain of
these funds are classified as VIEs primarily because the Company has provided financial support through lending
facilities and other means. The Company also serves as the general partner for these funds and owns limited
partnership interests in them. These funds are consolidated at December 31, 2010.
Asset Management Investment Funds. The tables above do not include certain investments made by the
Company held by entities qualifying for accounting purposes as investment companies.
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