Morgan Stanley 2010 Annual Report Download - page 58

Monoline Insurers. Monoline insurers (“Monolines”) provide credit enhancement to capital markets
transactions. The current credit environment continues to affect the ability of such financial guarantors to provide
enhancement to existing capital market transactions. The Company’s direct exposure to Monolines is limited to
bonds that are insured by Monolines and to derivative contracts with a Monoline as counterparty (principally an
affiliate of MBIA Inc. (“MBIA”)).
The Company’s exposure to Monolines at December 31, 2010 includes $1.5 billion in insured municipal bond
securities and $326 million of mortgage and asset-backed securities enhanced by financial guarantees. Excluding
MBIA, derivative counterparty exposure includes gross exposures of approximately $440 million, net of
cumulative credit valuation adjustments and hedges. The positive net derivative counterparty exposure (the sum
of net long positions for each individual counterparty) was insignificant at December 31, 2010. Positive net
derivative counterparty exposure is defined as potential loss to the Company over a period of time in an event of
100% default of a Monoline, assuming zero recovery. Amounts related to MBIA derivative counterparty
exposure are not included in the above amounts since, at December 31, 2010, the aggregate value of cumulative
credit valuation adjustments and hedges exceeded the amount of gross exposure of $4.2 billion by $1.1 billion.
The results for 2010 included losses of $865 million related to the Company’s Monoline counterparty credit
exposures, principally MBIA, compared with losses of $232 million, $1.7 billion and $203 million in 2009, fiscal
2008 and the one month ended December 31, 2008, respectively. The Company’s hedging program for Monoline
counterparty exposure continues to become more costly and difficult to effect, and, as such, the losses in 2010
reflected those additional costs as well as volatility on those hedges caused by the tightening of both MBIA and
commercial mortgage-backed spreads. The Company proactively manages its Monoline exposure; however, as
market conditions continue to evolve, significant additional losses could be incurred. The Company’s hedging
program includes the use of single name and index transactions that mitigate credit exposure to the Monolines as
well as certain market risk components of existing underlying commercial mortgage-backed securities
transactions with the Monolines and is conducted as part of the Company’s overall market risk management. See
“Qualitative and Quantitative Disclosure about Market Risk—Risk Management—Market Risk” in Part II,
Item 7A herein.
Settlement with DFS. On June 30, 2007, the Company completed the spin-off of its business segment DFS to its
shareholders. On February 11, 2010, DFS paid the Company $775 million in complete satisfaction of its
obligations to the Company regarding the sharing of proceeds from a lawsuit against Visa and MasterCard. The
payment was recorded as a gain in discontinued operations in the consolidated statement of income for 2010.
Gain on Sale of Noncontrolling Interest. In connection with the MUFG Transaction (see “Other
Matters—Japan Securities Joint Venture” herein), the Company recorded an after-tax gain of $731 million from
the sale of a noncontrolling interest in its Japanese institutional securities business. This gain was recorded in
Paid-in capital in the Company’s consolidated statements of financial condition at December 31, 2010 and
changes in total equity for 2010.
Gain on Sale of Retail Asset Management. On June 1, 2010, the Company completed the sale of Retail Asset
Management, including Van Kampen, to Invesco. The Company received $800 million in cash and
approximately 30.9 million shares of Invesco stock upon sale, resulting in a cumulative after-tax gain of $682
million, of which $570 million was recorded in 2010. The remaining gain, representing tax basis benefits, was
recorded in the quarter ended December 31, 2009. The results of Retail Asset Management are reported as
discontinued operations within the Asset Management business segment for all periods presented through the
date of divestiture. The Company recorded the 30.9 million shares as securities available for sale. In November
2010, the Company sold its investment in Invesco, resulting in a realized gain of approximately $102 million
reported within Other revenues in the consolidated statement of income for 2010.
Sale of Stake in CICC. In December 2010, the Company completed the sale of its 34.3% stake in CICC for a
pre-tax gain of approximately $668 million, which is included within Other revenues in the consolidated
statement of income for 2010. See Note 24 to the consolidated financial statements.
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