Quarterly Report

Quarterly Report 10-Q 1 d10q.htm QUARTERLY REPORT

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2008

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

Commission File Number 1-11758

LOGO

(Exact Name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

1585 Broadway

New York, NY 10036

(Address of principal executive
offices, including zip code)

36-3145972

(I.R.S. Employer Identification No.)

(212) 761-4000

(Registrant’s telephone number,
including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated Filer x		Accelerated Filer ¨
Non-Accelerated Filer ¨		Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of June 30, 2008, there were 1,109,013,816 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

LOGO

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended May 31, 2008


Table of Contents		Page

Part I—Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Statements of Financial Condition—May 31, 2008 and November 30, 2007	1
	Condensed Consolidated Statements of Income—Three and Six Months Ended May 31, 2008 and 2007	3
	Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended May 31, 2008 and 2007	4
	Condensed Consolidated Statements of Cash Flows—Six Months Ended May 31, 2008 and 2007	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
	Note 1. Basis of Presentation and Summary of Significant Accounting Policies	6
	Note 2. Fair Value Disclosures	21
	Note 3. Collateralized Transactions	28
	Note 4. Securitization Activities and Variable Interest Entities	30
	Note 5. Derivative Contracts	35
	Note 6. Goodwill and Net Intangible Assets	36
	Note 7. Long-Term Borrowings	37
	Note 8. Commitments, Guarantees and Contingencies	38
	Note 9. Shareholders’ Equity	43
	Note 10. Earnings per Common Share	45
	Note 11. Employee Benefit Plans	46
	Note 12. Income Taxes	46
	Note 13. Segment Information	47
	Note 14. Discontinued Operations	50
	Note 15. Business Dispositions	51
	Report of Independent Registered Public Accounting Firm	52
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	53
	Introduction	53
	Results of Operations	54
	Impact of Credit Market Events	70
	Other Matters	78
	Critical Accounting Policies	79
	Liquidity and Capital Resources	82
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	94
Item 4.	Controls and Procedures	104


		i


		Page

Part II—Other Information
Item 1.	Legal Proceedings	105
Item 1A.	Risk Factors	106
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	107
Item 4.	Submission of Matters to a Vote of Security Holders	107
Item 6.	Exhibits	107


		ii

AVAILABLE INFORMATION

Morgan Stanley files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Morgan Stanley) file electronically with the SEC. Morgan Stanley’s electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.

Morgan Stanley’s internet site is www.morganstanley.com. You can access Morgan Stanley’s Investor Relations webpage at www.morganstanley.com/about/ir. Morgan Stanley makes available free of charge, on or through our Investor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Morgan Stanley also makes available, through its Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of Morgan Stanley’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

Morgan Stanley has a Corporate Governance webpage. You can access information about Morgan Stanley’s corporate governance at www.morganstanley.com/about/company/governance. Morgan Stanley posts the following on its Corporate Governance webpage:

•

Amended and Restated Certificate of Incorporation;

•

Bylaws;

•

Charters for our Audit Committee, Compensation, Management Development and Succession Committee and Nominating and Governance Committee;

•

Corporate Governance Policies;

•

Policy Regarding Communication with the Board of Directors;

•

Policy Regarding Director Candidates Recommended by Shareholders;

•

Policy Regarding Corporate Political Contributions;

•

Policy Regarding Shareholder Rights Plan;

•

Code of Ethics and Business Conduct;

•

Code of Conduct; and

•

Integrity Hotline.

Morgan Stanley’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including its Chief Executive Officer, its Chief Financial Officer and its Controller and Principal Accounting Officer. Morgan Stanley will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, Inc. (“NYSE”) on its internet site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on Morgan Stanley’s internet site is not incorporated by reference into this report.


		iii

Part I—Financial Information.

Item 1. Financial Statements.

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in millions, except share data)


	May 31, 2008		November 30, 2007
	(unaudited)
Assets
Cash and cash equivalents	$	23,782	$	25,598
Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements (including securities at fair value of $15,270 at May 31, 2008 and $31,354 at November 30, 2007)		53,393		61,608
Financial instruments owned, at fair value (approximately $140 billion and $131 billion were pledged to various parties at May 31, 2008 and November 30, 2007, respectively):
U.S. government and agency securities		26,498		23,887
Other sovereign government obligations		32,467		21,606
Corporate and other debt		130,943		147,724
Corporate equities		89,075		87,377
Derivative contracts		92,305		77,003
Investments		15,451		14,270
Physical commodities		3,654		3,096

Total financial instruments owned, at fair value		390,393		374,963
Securities received as collateral, at fair value		25,528		82,229
Collateralized agreements:
Securities purchased under agreements to resell		165,928		126,887
Securities borrowed		257,796		239,994
Receivables:
Customers		58,172		76,352
Brokers, dealers and clearing organizations		15,035		16,011
Other loans		3,769		11,629
Fees, interest and other		8,628		8,320
Other investments		5,886		4,524
Premises, equipment and software costs, at cost (net of accumulated depreciation of $3,282 at May 31, 2008 and $3,449 at November 30, 2007)		4,856		4,372
Goodwill		2,988		3,024
Intangible assets (net of accumulated amortization of $218 at May 31, 2008 and $175 at November 30, 2007) (includes $344 at fair value at May 31, 2008 and $428 at fair value at November 30, 2007)		902		1,047
Other assets		14,172		8,851

Total assets	$	1,031,228	$	1,045,409


		1

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

(dollars in millions, except share data)


	May 31, 2008			November 30, 2007
	(unaudited)
Liabilities and Shareholders’ Equity
Commercial paper and other short-term borrowings (includes $6,427 at fair value at May 31, 2008 and $3,068 at fair value at November 30, 2007)	$	23,816		$	34,495
Deposits (includes $35 at fair value at May 31, 2008 and $3,769 at fair value at November 30, 2007)		35,227			31,179
Financial instruments sold, not yet purchased, at fair value:
U.S. government and agency securities		11,278			8,221
Other sovereign government obligations		19,033			15,627
Corporate and other debt		6,784			7,592
Corporate equities		46,632			30,899
Derivative contracts		77,439			71,604
Physical commodities		582			398

Total financial instruments sold, not yet purchased, at fair value		161,748			134,341
Obligation to return securities received as collateral, at fair value		25,528			82,229
Collateralized financings:
Securities sold under agreements to repurchase		136,998			162,840
Securities loaned		45,981			110,423
Other secured financings (includes $28,237 at fair value at May 31, 2008 and $27,772 at fair value at November 30, 2007)		29,878			27,772
Payables:
Customers		293,344			203,453
Brokers, dealers and clearing organizations		6,146			10,454
Interest and dividends		4,056			1,724
Other liabilities and accrued expenses		23,289			24,606
Long-term borrowings (includes $45,502 at fair value at May 31, 2008 and $38,392 at fair value at November 30, 2007)		210,724			190,624

		996,735			1,014,140

Commitments and contingencies
Shareholders’ equity:
Preferred stock		1,100			1,100
Common stock, $0.01 par value;
Shares authorized: 3,500,000,000 at May 31, 2008 and November 30, 2007;
Shares issued: 1,211,701,552 at May 31, 2008 and November 30, 2007;
Shares outstanding: 1,108,865,416 at May 31, 2008 and 1,056,289,659 at November 30, 2007		12			12
Paid-in capital		340			1,902
Retained earnings		39,581			38,045
Employee stock trust		7,468			5,569
Accumulated other comprehensive loss		(218	)		(199	)
Common stock held in treasury, at cost, $0.01 par value;
102,836,136 shares at May 31, 2008 and 155,411,893 shares at November 30, 2007		(6,322	)		(9,591	)
Common stock issued to employee trust		(7,468	)		(5,569	)

Total shareholders’ equity		34,493			31,269

Total liabilities and shareholders’ equity	$	1,031,228		$	1,045,409

See Notes to Condensed Consolidated Financial Statements.


		2

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(dollars in millions, except share and per share data)


	Three Months Ended May 31,					Six Months Ended May 31,
	2008			2007		2008			2007
	(unaudited)					(unaudited)
Revenues:
Investment banking	$	1,049		$	1,913	$	2,158		$	3,140
Principal transactions:
Trading		1,403			4,838		4,793			8,996
Investments		(464	)		1,004		(810	)		1,884
Commissions		1,155			1,123		2,354			2,128
Asset management, distribution and administration fees		1,464			1,596		3,014			3,075
Interest and dividends		10,117			15,400		24,082			29,571
Other		1,799			321		2,116			593

Total revenues		16,523			26,195		37,707			49,387
Interest expense		10,013			15,671		22,875			28,869

Net revenues		6,510			10,524		14,832			20,518

Non-interest expenses:
Compensation and benefits		2,960			4,994		7,031			9,769
Occupancy and equipment		329			279		615			539
Brokerage, clearing and exchange fees		448			366		892			727
Information processing and communications		312			286		617			563
Marketing and business development		207			199		390			352
Professional services		472			510		851			929
Other		336

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