Morgan Stanley 2010 Annual Report Download - page 29

Item 1A. Risk Factors.
Liquidity and Funding Risk.
Liquidity and funding risk refers to the risk that we will be unable to finance our operations due to a loss of
access to the capital markets or difficulty in liquidating our assets. Liquidity and funding risk also encompasses
our ability to meet our financial obligations without experiencing significant business disruption or reputational
damage that may threaten our viability as a going concern. For more information on how we monitor and manage
liquidity and funding risk, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources” in Part II, Item 7 herein.
Liquidity is essential to our businesses and we rely on external sources to finance a significant portion of our
operations.
Liquidity is essential to our businesses. Our liquidity could be substantially affected negatively by our inability to
raise funding in the long-term or short-term debt capital markets or the equity capital markets or our inability to
access the secured lending markets. Factors that we cannot control, such as disruption of the financial markets or
negative views about the financial services industry generally, could impair our ability to raise funding. In
addition, our ability to raise funding could be impaired if lenders develop a negative perception of our long-term
or short-term financial prospects. Such negative perceptions could be developed if we incur large trading losses,
we are downgraded or put on negative watch by the rating agencies, we suffer a decline in the level of our
business activity, regulatory authorities take significant action against us, or we discover significant employee
misconduct or illegal activity, among other reasons. If we are unable to raise funding using the methods
described above, we would likely need to finance or liquidate unencumbered assets, such as our investment and
trading portfolios, to meet maturing liabilities. We may be unable to sell some of our assets, or we may have to
sell assets at a discount from market value, either of which could adversely affect our results of operations, cash
flows and financial condition.
Our borrowing costs and access to the debt capital markets depend significantly on our credit ratings.
The cost and availability of unsecured financing generally are dependent on our short-term and long-term credit
ratings. Factors that are important to the determination of our credit ratings include the level and quality of our
earnings, capital adequacy, liquidity, risk appetite and management, asset quality, business mix and actual and
perceived levels of government support.
Our debt ratings also can have a significant impact on certain trading revenues, particularly in those businesses
where longer term counterparty performance is critical, such as OTC derivative transactions, including credit
derivatives and interest rate swaps. In connection with certain OTC trading agreements and certain other
agreements associated with the Institutional Securities business segment, we may be required to provide
additional collateral to certain counterparties in the event of a credit ratings downgrade. In addition, we may be
required to pledge additional collateral to certain exchanges and clearing organizations in the event of a credit
ratings downgrade. The rating agencies are considering the impact of the Dodd-Frank Act’s resolution authority
provisions on large banking institutions and it is possible that they could downgrade our ratings and those of
similar institutions.
We are a holding company and depend on payments from our subsidiaries.
The parent holding company depends on dividends, distributions and other payments from its subsidiaries to fund
dividend payments and to fund all payments on its obligations, including debt obligations. Regulatory and other
legal restrictions may limit our ability to transfer funds freely, either to or from our subsidiaries. In particular,
many of our subsidiaries, including our broker-dealer subsidiaries, are subject to laws, regulations and self-
regulatory organization rules that authorize regulatory bodies to block or reduce the flow of funds to the parent
23