Morgan Stanley 2014 Annual Report Download - page 35

We have also made representations and warranties in connection with our role as an originator of certain
commercial mortgage loans that we securitized in commercial mortgage-backed securities (“CMBS”). Between
2004 and December 31, 2014, we originated approximately $56.0 billion and $7.0 billion of U.S. and non-U.S.
commercial mortgage loans, respectively, that were placed into CMBS sponsored by us. At December 31, 2014,
the current UPB for all U.S. commercial mortgage loans subject to such representations and warranties was
$33.7 billion. At December 31, 2014, the current UPB when known for all non-U.S. commercial mortgage loans,
subject to such representations and warranties was approximately $1.8 billion and the UPB at the time of sale
when the current UPB is not known was $0.4 billion.
We currently have several legal proceedings related to claims for alleged breaches of representations and
warranties. If there are decisions adverse to us in those legal proceedings, we may incur losses substantially in
excess of our reserves. In addition, our reserves are based, in part, on certain factual and legal assumptions. If
those assumptions are incorrect and need to be revised, we may need to adjust our reserves substantially.
Our commodities activities subject us to extensive regulation, potential catastrophic events and environmental
risks and regulation that may expose us to significant costs and liabilities.
In connection with the commodities activities in our Institutional Securities business segment, we engage in the
production, storage, transportation, marketing and trading of several commodities, including metals (base and
precious), crude oil, oil products, natural gas, electric power, emission credits, coal, freight, liquefied natural gas
and related products and indices. In addition, we are an electricity power marketer in the U.S. and own electricity
generating facilities in the U.S. and own a minority interest in Heidmar Holdings LLC, which owns a group of
companies that provide international marine transportation and U.S. marine logistics services. As a result of these
activities, we are subject to extensive and evolving energy, commodities, environmental, health and safety and
other governmental laws and regulations. In addition, liability may be incurred without regard to fault under
certain environmental laws and regulations for the remediation of contaminated areas. Further, through these
activities we are exposed to regulatory, physical and certain indirect risks associated with climate change. Our
commodities business also exposes us to the risk of unforeseen and catastrophic events, including natural
disasters, leaks, spills, explosions, release of toxic substances, fires, accidents on land and at sea, wars, and
terrorist attacks that could result in personal injuries, loss of life, property damage, and suspension of operations.
Although we have attempted to mitigate our pollution and other environmental risks by, among other measures,
adopting appropriate policies and procedures for power plant operations, monitoring the quality of petroleum
storage facilities and transport vessels and implementing emergency response programs, these actions may not
prove adequate to address every contingency. In addition, insurance covering some of these risks may not be
available, and the proceeds, if any, from insurance recovery may not be adequate to cover liabilities with respect
to particular incidents. As a result, our financial condition, results of operations and cash flows may be adversely
affected by these events.
We continue to engage in discussions with the Federal Reserve regarding our commodities activities, as the BHC
Act provides a grandfather exemption for “activities related to the trading, sale or investment in commodities and
underlying physical properties,” provided that we were engaged in “any of such activities as of September 30,
1997 in the United States” and provided that certain other conditions that are within our reasonable control are
satisfied. If the Federal Reserve were to determine that any of our commodities activities did not qualify for the
BHC Act grandfather exemption, then we would likely be required to divest any such activities that did not
otherwise conform to the BHC Act. See also “Scope of Permitted Activities” under “Business—Supervision and
Regulation” in Part I, Item 1.
We also expect the other laws and regulations affecting our commodities business to increase in both scope and
complexity. During the past several years, intensified scrutiny of certain energy markets by federal, state and
local authorities in the U.S. and abroad and the public has resulted in increased regulatory and legal enforcement,
litigation and remedial proceedings involving companies conducting the activities in which we are engaged. For
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