Form 10-Q

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 August 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 September 30, 2008, there were 1,061,983,111 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 August 31, 2008


Table of Contents						Page



Part I—Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Statements of Financial Condition—August 31, 2008 and November 30, 2007	1
	Condensed Consolidated Statements of Income—Three and Nine Months Ended August 31, 2008 and 2007	3
	Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended August 31, 2008 and 2007	4
	Condensed Consolidated Statements of Cash Flows—Nine Months Ended August 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	29
	Note 4. Securitization Activities and Variable Interest Entities	31
	Note 5. Derivative and Other 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. Regulatory Requirements	44
	Note 10. Shareholders’ Equity	45
	Note 11. Earnings per Common Share	47
	Note 12. Employee Benefit Plans	48
	Note 13. Income Taxes	48
	Note 14. Segment and Geographic Information	49
	Note 15. Discontinued Operations	52
	Note 16. Business Dispositions	53
	Note 17. Subsequent Events	54
	Report of Independent Registered Public Accounting Firm	55
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56
	Introduction	56
	Results of Operations	57
	Impact of Credit Market Events	74
	Financial Holding Company Status	83
	Other Matters	84
	Critical Accounting Policies	85
	Liquidity and Capital Resources	88
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	101
Item 4.	Controls and Procedures	112


		i


		Page

Part II—Other Information
Item 1.	Legal Proceedings	113
Item 1A.	Risk Factors	114
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	116
Item 6.	Exhibits	116


		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. 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)


	August 31, 2008		November 30, 2007
	(unaudited)
Assets
Cash and cash equivalents	$	23,702	$	25,598
Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements (including securities at fair value of $21,775 at August 31, 2008 and $31,354 at November 30, 2007)		58,798		61,608
Financial instruments owned, at fair value (approximately $141 billion and $131 billion were pledged to various parties at August 31, 2008 and November 30, 2007, respectively):
U.S. government and agency securities		28,955		23,887
Other sovereign government obligations		36,036		21,606
Corporate and other debt		118,886		147,724
Corporate equities		81,311		87,377
Derivative and other contracts		87,580		77,003
Investments		14,799		14,270
Physical commodities		3,988		3,096

Total financial instruments owned, at fair value		371,555		374,963
Securities received as collateral, at fair value		19,235		82,229
Collateralized agreements:
Securities purchased under agreements to resell		179,540		126,887
Securities borrowed		241,051		239,994
Receivables:
Customers		48,052		76,352
Brokers, dealers and clearing organizations		7,308		16,011
Other loans		3,050		11,629
Fees, interest and other		7,479		8,320
Other investments		3,864		4,524
Premises, equipment and software costs, at cost (net of accumulated depreciation of $3,434 at August 31, 2008 and $3,449 at November 30, 2007)		5,004		4,372
Goodwill		2,961		3,024
Intangible assets (net of accumulated amortization of $275 at August 31, 2008 and $175 at November 30, 2007) (includes $278 at fair value at August 31, 2008 and $428 at fair value at November 30, 2007)		1,035		1,047
Other assets		14,769		8,851

Total assets	$	987,403	$	1,045,409


		1

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

(dollars in millions, except share data)


	August 31, 2008			November 30, 2007
	(unaudited)
Liabilities and Shareholders’ Equity
Commercial paper and other short-term borrowings (includes $3,858 at fair value at August 31, 2008 and $3,068 at fair value at November 30, 2007)	$	14,159		$	34,495
Deposits (includes $3,769 at fair value at November 30, 2007)		36,774			31,179
Financial instruments sold, not yet purchased, at fair value:
U.S. government and agency securities		10,219			8,221
Other sovereign government obligations		17,767			15,627
Corporate and other debt		11,394			7,592
Corporate equities		42,180			30,899
Derivative and other contracts		68,401			71,604
Physical commodities		464			398

Total financial instruments sold, not yet purchased, at fair value		150,425			134,341
Obligation to return securities received as collateral, at fair value		19,235			82,229
Collateralized financings:
Securities sold under agreements to repurchase		122,801			162,840
Securities loaned		33,979			110,423
Other secured financings, at fair value		22,720			27,772
Payables:
Customers		315,289			203,453
Brokers, dealers and clearing organizations		6,477			10,454
Interest and dividends		3,193			1,724
Other liabilities and accrued expenses		24,259			24,606
Long-term borrowings (includes $43,114 at fair value at August 31, 2008 and $38,392 at fair value at November 30, 2007)		202,327			190,624

		951,638			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 August 31, 2008 and November 30, 2007;
Shares issued: 1,211,701,552 at August 31, 2008 and November 30, 2007; Shares outstanding: 1,109,155,431 at August 31, 2008 and 1,056,289,659 at November 30, 2007		12			12
Paid-in capital		615			1,902
Retained earnings		40,698			38,045
Employee stock trust		7,354			5,569
Accumulated other comprehensive loss		(380	)		(199	)
Common stock held in treasury, at cost, $0.01 par value;
102,546,121 shares at August 31, 2008 and 155,411,893 shares at November 30, 2007		(6,280	)		(9,591	)
Common stock issued to employee trust		(7,354	)		(5,569	)

Total shareholders’ equity		35,765			31,269

Total liabilities and shareholders’ equity	$	987,403		$	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 August 31,					Nine Months Ended August 31,
	2008			2007		2008			2007
	(unaudited)					(unaudited)
Revenues:
Investment banking	$	1,146		$	1,659	$	3,304		$	4,799
Principal transactions:
Trading		2,604			1,381		7,397			10,377
Investments		(453	)		558		(1,263	)		2,442
Commissions		1,070			1,264		3,424			3,392
Asset management, distribution and administration fees		1,423			1,701		4,437			4,776
Interest and dividends		9,792			14,405		33,874			43,976
Other		1,117			262		3,233			855

Total revenues		16,699			21,230		54,406			70,617
Interest expense		8,650			13,272		31,525			42,141

Net revenues		8,049			7,958		22,881			28,476

Non-interest expenses:
Compensation and benefits		3,695			3,596		10,726			13,365
Occupancy and equipment		309			279		924			818
Brokerage, clearing and exchange fees		378			459		1,270			1,186
Information processing and communications		302			302		919			865
Marketing and business development		168			190

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