Morgan Stanley 2010 Annual Report Download - page 212

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• Merger and Acquisition Guarantees. The Company may, from time to time, in its role as investment
banking advisor be required to provide guarantees in connection with certain European merger and
acquisition transactions. If required by the regulating authorities, the Company provides a guarantee that
the acquirer in the merger and acquisition transaction has or will have sufficient funds to complete the
transaction and would then be required to make the acquisition payments in the event the acquirer’s funds
are insufficient at the completion date of the transaction. These arrangements generally cover the time
frame from the transaction offer date to its closing date and, therefore, are generally short term in nature.
The maximum potential amount of future payments that the Company could be required to make cannot
be estimated. The Company believes the likelihood of any payment by the Company under these
arrangements is remote given the level of the Company’s due diligence associated with its role as
investment banking advisor.
• Guarantees on Morgan Stanley Stable Value Program. On September 30, 2009, the Company entered
into an agreement with the investment manager for the Stable Value Program (“SVP”), a fund within the
Company’s 401(k) plan, and certain other third parties. Under the agreement, the Company contributed
$20 million to the SVP on October 15, 2009 and recorded the contribution in Compensation and
benefits expense. Additionally, the Company may have a future obligation to make a payment of $40
million to the SVP following the third anniversary of the agreement, after which the SVP would be
wound down over a period of time. The future obligation is contingent upon whether the market-to-book
value ratio of the portion of the SVP that is subject to certain book-value stabilizing contracts has fallen
below a specific threshold and the Company and the other parties to the agreement all decline to make
payments to restore the SVP to such threshold as of the third anniversary of the agreement. The Company
has not recorded a liability for this guarantee in the consolidated financial statements.
In the ordinary course of business, the Company guarantees the debt and/or certain trading obligations (including
obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities)
of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or
trading counterparties. The activities of the subsidiaries covered by these guarantees (including any related debt
or trading obligations) are included in the Company’s consolidated financial statements.
Contingencies.
Legal. In the normal course of business, the Company has been named, from time to time, as a defendant in
various legal actions, including arbitrations, class actions and other litigation, arising in connection with its
activities as a global diversified financial services institution. Certain of the actual or threatened legal actions
include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of
damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt
or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit
crisis related matters and a Foreign Corrupt Practices Act related matter in China. Recently, the level of litigation
activity focused on residential mortgage and credit crisis related matters has increased materially in the financial
services industry. As a result, the Company expects that it may become the subject of increased claims for
damages and other relief regarding residential mortgages and related securities in the future and, while the
Company has identified below any individual proceedings where the Company believes a material loss to be
possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims
that have not yet been notified to the Company or are not yet determined to be probable or possible and
reasonably estimable losses.
The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal
and informal) by governmental and self-regulatory agencies regarding the Company’s business, including,
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