Morgan Stanley 2010 Annual Report Download - page 210

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
investor’s contribution to a fund and the investor’s share of tax losses and tax credits expected to be generated by
a fund. From time to time, the Company may also guarantee return of principal invested, potentially including a
specified rate of return, to fund investors.
Liquidity Facilities. The Company has entered into liquidity facilities with SPEs and other counterparties,
whereby the Company is required to make certain payments if losses or defaults occur. Primarily, the Company
acts as liquidity provider to municipal bond securitization SPEs and for standalone municipal bonds in which the
holders of beneficial interests issued by these SPEs or the holders of the individual bonds, respectively, have the
right to tender their interests for purchase by the Company on specified dates at a specified price. The Company
often may have recourse to the underlying assets held by the SPEs in the event payments are required under such
liquidity facilities as well as make-whole or recourse provisions with the trust sponsors. Primarily all of the
underlying assets in the SPEs are investment grade. Liquidity facilities provided to municipal tender option bond
trusts are classified as derivatives.
Whole Loan Sale Guarantees. The Company has provided, or otherwise agreed to be responsible for,
representations and warranties regarding certain whole loan sales. Under certain circumstances, the Company may
be required to repurchase such assets or make other payments related to such assets if such representations and
warranties were breached. The Company’s maximum potential payout related to such representations and
warranties is equal to the current unpaid principal balance (“UPB”) of such loans. The Company has information on
the current UPB only when it services the loans. The amount included in the above table for the maximum potential
payout of $24.8 billion includes the current UPB where known ($5.9 billion) and the UPB at the time of sale ($18.9
billion) when the current UPB is not known. The UPB at the time of the sale of all loans covered by these
representations and warranties was approximately $43.0 billion. The related liability primarily relates to sales of
loans to the federal mortgage agencies.
Securitization Representations and Warranties. As part of the Company’s Institutional Securities business
segment’s securitization and related activities, the Company has provided, or otherwise agreed to be responsible
for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by
the Company. The extent and nature of the representations and warranties, if any, vary among different
securitizations. Under certain circumstances, the Company may be required to repurchase such assets or make
other payments related to such assets if such representations and warranties were breached. The maximum
potential amount of future payments the Company could be required to make would be equal to the current
outstanding balances of, or losses associated with, the assets subject to breaches of such representations and
warranties. The amount included in the above table for the maximum potential payout includes the current UPB
where known and the UPB at the time of sale when the current UPB is not known.
Between 2004 and 2010, the Company sponsored approximately $147 billion of RMBS primarily containing
U.S. residential loans. Of that amount, the Company made representations and warranties concerning
approximately $46 billion of loans and agreed to be responsible for the representations and warranties made by
third-party sellers, many of which are now insolvent, on approximately $21 billion of loans. At December 31,
2010, the current UPB for all the residential assets subject to such representations and warranties was
approximately $26.8 billion and the cumulative losses associated with U.S. RMBS were approximately $8.8
billion. The Company did not make, or otherwise agree to be responsible for the representations and warranties
made by third party sellers on approximately $81 billion of residential loans that it securitized during that time
period. The Company has not sponsored any U.S. RMBS transactions since 2007.
The Company also made representations and warranties in connection with its role as an originator of certain
commercial mortgage loans that it securitized in CMBS. Between 2004 and 2010, the Company originated
approximately $41 billion and $29 billion of U.S. and non-U.S. commercial mortgage loans, respectively, that
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