| MORGAN STANLEY Item 1A Risk Factors |
| Our results of operations may be materially affected by market fluctuations and by economic and other factors |
| Results of operations in the past have been, and in the future may continue to be, materially affected by many factors of a global nature, including political, economic and market conditions; the availability and cost of capital; the level and volatility of equity prices, commodity prices and interest rates; currency values and other market indices; technological changes and events; the availability and cost of credit; inflation; and investor sentiment and confidence in the financial markets |
| In addition, there have been legislative, legal and regulatory developments related to our businesses that potentially could increase costs, thereby affecting future results of operations |
| These factors also may have an impact on our ability to achieve our strategic objectives |
| The results of our Institutional Securities business, particularly results relating to our involvement in primary and secondary markets for all types of financial products, are subject to substantial fluctuations due to a variety of factors that we cannot control or predict with great certainty, including variations in the fair value of securities and other financial products and the volatility and liquidity of global markets |
| Fluctuations also occur due to the level of global market activity, which, among other things, affects the size, number, and timing of investment banking client assignments and transactions and the realization of returns from our principal investments |
| During periods of unfavorable market or economic conditions, the level of individual investor participation in the global markets may also decrease, which would negatively impact the results of our Retail Brokerage business |
| In addition, fluctuations in global market activity could impact the flow of investment capital into or from assets under management and supervision and the way customers allocate capital among money market, equity, fixed income or other investment alternatives, which could negatively impact our Asset Management business |
| Furthermore, changes in economic variables, such as the number and size of personal bankruptcy filings, the rate of unemployment, and the level of consumer confidence and consumer debt, may substantially affect consumer loan levels and credit quality, which, in turn, could impact the results of our Discover business |
| Liquidity is essential to our businesses and we rely on external sources to finance a significant portion of our operations |
| Liquidity is essential to our businesses |
| Our liquidity could be substantially negatively affected by an inability to raise funding in the long-term or short-term debt capital markets or an inability to access the secured lending markets |
| Factors that we cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, could impair our ability to raise funding |
| In addition, our ability to raise funding could be impaired if lenders develop a negative perception of our long-term or short-term financial prospects |
| Such negative perceptions could be developed if we incur large trading losses, we suffer a decline in the level of our business activity, regulatory authorities take significant action against us, or we discover serious employee misconduct or illegal activity, among other reasons |
| If we are unable to raise funding using the 17 LOGO ______________________________________________________________________ [58]Table of Contents methods described above, we would likely need to liquidate unencumbered assets, such as our investment and trading portfolios, to meet maturing liabilities |
| We may be unable to sell some of our assets, or we may have to sell assets at a discount from market value, either of which could adversely affect our results of operations |
| The cost and availability of unsecured financing generally are dependent on our short-term and long-term credit ratings |
| Factors that are significant to the determination of our credit ratings or otherwise affect our ability to raise short-term and long-term financing include the level and volatility of our earnings; our relative competitive position in the markets in which we operate; our geographic and product diversification; our ability to retain key personnel; our risk management policies; our cash liquidity; our capital adequacy; our corporate lending credit risk; and legal and regulatory developments |
| A deterioration in any of these factors or combination of these factors may lead rating agencies to downgrade our credit ratings, thereby increasing our cost of obtaining unsecured funding |
| Our debt ratings also can have a significant impact on certain trading revenues, particularly in those businesses where longer term counterparty performance is critical, such as OTC derivative transactions, including credit derivatives and interest rate swaps |
| In connection with certain OTC trading agreements and certain other agreements associated with the Institutional Securities business, we would be required to provide additional collateral to certain counterparties in the event of a downgrade by either Moody’s Investors Service or Standard & Poor’s |
| Payments From Subsidiaries |
| We depend on dividends, distributions and other payments from our subsidiaries to fund dividend payments and to fund all payments on our obligations, including debt obligations |
| Regulatory and other legal restrictions may limit our ability to transfer funds freely, either to or from our subsidiaries |
| In particular, many of our subsidiaries, including our broker-dealer subsidiaries, are subject to laws and regulations that authorize regulatory bodies to block or reduce the flow of funds to the parent holding company, or that prohibit such transfers altogether in certain circumstances |
| These laws and regulations may hinder our ability to access funds that we may need to make payments on our obligations |
| Liquidity and Funding Policies |
| Our liquidity and funding policies have been designed to ensure that we maintain sufficient liquid financial resources to continue to conduct our business for an extended period in a stressed liquidity environment |
| If our liquidity and funding policies are not adequate, we may be unable to access sufficient financing to service our financial obligations when they come due, which could have a material adverse franchise or business impact |
| See “Management’s Discussion and Analysis of Results of Operations—Liquidity and Capital Resources” in Part II, Item 7 for a discussion of how we monitor and manage liquidity risk |
| We are exposed to the risk that third parties that are indebted to us will not perform their obligations |
| Credit risk refers to the risk of loss arising from the default by a borrower, counterparty or other obligor when it is unable or unwilling to meet its obligations to us |
| We are exposed to three distinct types of credit risk in our businesses |
| We incur significant, “single-name” credit risk exposure through the Institutional Securities business |
| This risk may arise, for example, from entering into swap or other derivative contracts under which counterparties have long-term obligations to make payments to us and by extending credit to our clients through various credit arrangements |
| We incur “individual consumer” credit risk in the Retail Brokerage business through margin loans to individual investors and loans to small businesses, both of which are generally collateralized |
| We incur “consumer portfolio” credit risk in the Discover business primarily through cardholder receivables |
| Credit risk in a pool of cardholder receivables is generally highly diversified, without significant individual exposures, and, accordingly, is managed on a portfolio and not a single-name basis |
| The amount, duration and range of our credit exposures have been increasing over the past several years, and may continue to do so |
| In recent years, we have significantly expanded our use of swaps and other derivatives and we may continue to do so |
| Corporate clients are increasingly seeking loans or lending commitments from us in connection with investment banking and other assignments |
| In addition, we have experienced, due to competitive factors, increased pressure to assume longer-term credit risk, to extend credit against less liquid collateral and to price derivatives instruments more aggressively based on the credit risks that we take |
| As a LOGO 18 ______________________________________________________________________ [59]Table of Contents clearing member firm, we finance our customer positions and we could be held responsible for the defaults or misconduct of our customers |
| Although we regularly review our credit exposures, default risk may arise from events or circumstances that are difficult to detect or foresee |
| For more information regarding our credit risk, see “Credit Risk” in Part II, Item 7A below |
| We face strong competition from other financial services firms, which could lead to pricing pressures that could materially adversely affect our revenue and profitability |
| The financial services industry, and all of our businesses, are intensely competitive, and we expect them to remain so |
| We compete with commercial banks, insurance companies, sponsors of mutual funds, hedge funds, energy companies and other companies offering financial services in the US, globally and through the internet |
| We compete on the basis of several factors, including transaction execution, capital or access to capital, products and services, innovation, reputation and price |
| Over time, certain sectors of the financial services industry have become considerably more concentrated, as financial institutions involved in a broad range of financial services have been acquired by or merged into other firms |
| This convergence could result in our competitors gaining greater capital and other resources, such as a broader range of products and services and geographic diversity |
| We may experience pricing pressures as a result of these factors and as some of our competitors seek to increase market share by reducing prices |
| For more information regarding the competitive environment in which we operate, see “Competition” in Part I, Item 1 above |
| Our ability to retain and attract qualified employees is critical to the success of our business and the failure to do so may materially adversely affect our performance |
| Our people are our most important resource and competition for qualified employees is intense |
| In order to attract and retain qualified employees, we must compensate such employees at market levels |
| Typically, those levels have caused employee compensation to be our greatest expense as compensation is highly variable and moves with performance |
| If we are unable to continue to attract and retain qualified employees, or if compensation costs required to attract and retain employees become more expensive, our performance, including our competitive position, could be materially adversely affected |
| We are subject to extensive regulation in the jurisdictions in which we conduct our businesses |
| We are subject to extensive regulation globally and face the risk of significant intervention by regulatory authorities in the jurisdictions in which we conduct our businesses |
| Among other things, we could be fined, prohibited from engaging in some of our business activities or subject to limitations or conditions on our business activities |
| Significant regulatory action against us could have material adverse financial effects, cause significant reputational harm to us, or harm our business prospects |
| New laws or regulations or changes in the enforcement of existing laws or regulations applicable to our clients may also adversely affect our business |
| For more information regarding the regulatory environment in which we operate, see “Regulation” in Part I, Item 1 above |
| The financial services industry faces substantial litigation and regulatory risks, and we may face damage to our reputation and legal liability |
| We have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with our activities as a global diversified financial services institution |
| Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages |
| In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or in financial distress |
| We are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business, including, among other things, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief |
| The number of these investigations and proceedings has increased in recent years with regard to many firms in the financial services industry, including us |
| We are also subject to risk from 19 LOGO ______________________________________________________________________ [60]Table of Contents potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information |
| Substantial legal liability or significant regulatory action against us could materially adversely affect our business, financial condition or results of operations or cause us significant reputational harm, which could seriously harm our business |
| For more information regarding legal proceedings in which we are involved and in particular, the Coleman Litigation, see “Legal |