Morgan Stanley 2010 Annual Report Download - page 66

valuations and realized gains of approximately $327 million offset by losses on related hedges of approximately
$669 million) associated with loans and lending commitments and the costs related to negative carry in the
Subsidiary Banks. Results in 2009 included net gains of approximately $804 million (mark-to-market valuations
and realized gains of approximately $4,042 million, partially offset by losses on related hedges of approximately
$3,238 million) associated with loans and lending commitments. Results in 2009 also included losses of $362
million, reflecting the improvement in the Company’s debt-related credit spreads on certain debt related to China
Investment Corporation’s (“CIC”) investment in the Company. Results in 2010 also included a gain of
approximately $53 million related to the OIS curve fair value methodology referred to above (see “Overview of
2010 Financial Results—Significant Items—OIS Fair Value Measurement” and Note 4 to the consolidated
financial statements).
Principal Transactions—Investments.The Company’s investments generally are held for long-term
appreciation and generally are subject to significant sales restrictions. Estimates of the fair value of the
investments may involve significant judgment and may fluctuate significantly over time in light of business,
market, economic and financial conditions generally or in relation to specific transactions.
Principal transaction net investment gains of $809 million were recognized in 2010 compared with net
investment losses of $864 million in 2009. The results for 2010 reflected a gain of $313 million on a principal
investment held by a consolidated investment partnership, which was sold in 2010. The portion of the gain
related to third-party investors amounted to $183 million and was recorded in the net income applicable to
noncontrolling interests in the consolidated statement of income. The results in 2010 also reflected gains on
principal investments in real estate funds and investments associated with certain employee deferred
compensation and co-investment plans compared with losses on such investments in 2009.
Other. Other revenues increased 83% in 2010, primarily reflecting a pre-tax gain of $668 million from the sale
of the Company’s investment in CICC. Results in 2009 included gains of approximately $465 million from the
Company’s repurchase of its debt in the open market.
Non-interest Expenses. Non-interest expenses increased 2% in 2010, primarily due to higher
non-compensation expenses, partially offset by lower compensation expense. Compensation and benefits
expenses decreased 2% in 2010, primarily due to lower net revenues, excluding the impact of negative revenues
related to the Company’s debt-related credit spreads. Compensation and benefits expenses in 2010 included a
charge of approximately $269 million related to the U.K. government’s payroll tax on discretionary above-base
compensation. Non-compensation expenses increased 9% in 2010. Brokerage and clearing expense increased
18% in 2010, primarily due to higher levels of business activity. Information processing and communications
expense increased 12% in 2010, primarily due to ongoing investments in technology. Marketing and business
development expense increased 35% in 2010, primarily due to higher levels of business activity. Professional
services expense increased 9% in 2010, primarily due to higher technology consulting expenses and higher legal
fees. Other expenses decreased 6% in 2010, primarily related to insurance recoveries reflected in 2010 and a loss
provision in deferred compensation plans reflected in 2009. The decrease in 2010 was partially offset by higher
provisions for litigation and regulatory proceedings, including $102.7 million related to the Assurance of
Discontinuance that was entered into on June 24, 2010 between the Company and the Office of the Attorney
General for the Commonwealth of Massachusetts (“Massachusetts OAG”) to resolve the Massachusetts OAG’s
investigation of the Company’s financing, purchase and securitization of certain subprime residential mortgages.
2009 Compared with Fiscal 2008.
Investment banking revenues increased 23% in 2009 from fiscal 2008, as higher revenues from equity and fixed
income underwriting transactions were partially offset by lower advisory revenues. Underwriting revenues of
$2,967 million increased 57% from fiscal 2008, reflecting higher levels of market activity, as equity underwriting
revenues increased 62% to $1,695 million and fixed income underwriting revenues increased 51% to $1,272
million. Underwriting fees in 2009 reflected a significant increase in market activity from 2008 levels, which
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