Morgan Stanley 2010 Annual Report Download - page 95

The rating agencies have stated that they currently incorporate various degrees of uplift from perceived
government support in the credit ratings of systemically important banks, including the credit ratings of the
Company. The U.S. financial reform legislation has rating agencies reviewing their methodologies and may be
seen as limiting the possibility of extraordinary government support for the financial system in any future
financial crises. This may lead to reduced uplift assumptions for U.S. banks and thereby place downward
pressure on credit ratings. At the same time, the U.S. financial reform legislation also has credit ratings positive
features such as higher standards for capital and liquidity levels. The net result on credit ratings and the timing of
any rating agency actions is currently uncertain (see “Other Matters—Regulatory Outlook” herein).
In connection with certain OTC trading agreements and certain other agreements associated with the Institutional
Securities business segment, the Company may be required to provide additional collateral or immediately settle
any outstanding liability balances with certain counterparties in the event of a credit rating downgrade. At
December 31, 2010, the amount of additional collateral or termination payments that could be called by
counterparties under the terms of such agreements in the event of a one-notch downgrade of the Company’s long-
term credit rating was $1,516 million. A total of $3,701 million in collateral or termination payments could be
called in the event of a two-notch downgrade.
Also, the Company is required to pledge additional collateral to certain exchanges and clearing organizations in
the event of a credit rating downgrade. At December 31, 2010, the increased collateral requirement at certain
exchanges and clearing organizations was $173 million in the event of a one-notch downgrade of the Company’s
long-term credit rating. A total of $1,446 million of collateral is required in the event of a two-notch downgrade.
The liquidity impact of additional collateral requirements is accounted for in the Company’s CFP.
At January 31, 2011, the Company’s and Morgan Stanley Bank, N.A.’s senior unsecured ratings were as set forth
below:
Company Morgan Stanley Bank, N.A.
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
Dominion Bond Rating Service Limited . . R-1 (middle) A (high) Negative — — —
Fitch Ratings ........................ F1 A Stable F1 A Stable
Moody’s ........................... P-1 A2 Negative P-1 A1 Negative
Rating and Investment Information, Inc. . . a-1 A+ Negative — — —
Standard & Poor’s .................... A-1 A Negative A-1 A+ Negative
In September 2010, Fitch Ratings downgraded Morgan Stanley Bank, N.A.’s rating to “A,” and this downgrade
had no impact on the operations of Morgan Stanley Bank, N.A. or the Company as a whole. As the rating outlook
of Morgan Stanley Bank, N.A. is Stable, the Company does not expect this downgrade to have any future impact
on operations.
Off-Balance Sheet Arrangements with Unconsolidated Entities.
The Company enters into various arrangements with unconsolidated entities, including variable interest entities,
primarily in connection with its Institutional Securities business segment.
Institutional Securities Activities. The Company utilizes SPEs primarily in connection with securitization
activities. The Company engages in securitization activities related to commercial and residential mortgage
loans, U.S. agency collateralized mortgage obligations, corporate bonds and loans, municipal bonds and other
types of financial assets. The Company may retain interests in the securitized financial assets as one or more
tranches of the securitization. These retained interests are included in the consolidated statements of financial
89