Morgan Stanley (MS)

* Describe the nature of this company’s business according to the Annual Report.
Morgan Stanley is a financial services holding company that operates on a global basis through its subsidiaries and affiliates to maintain a competitive market position within its business segments. The three segments MS primarily positions itself in are the following: Institutional Securities, Global Wealth Management Group, and Asset Management. MS provides these services to a wide and varying client base consisting of governments, individuals, and almost everything in between. (p 50) * Was that description of business in line with what you thought the company’s main business was before reading the MD&A?
Yes, it was in line with what I thought MS, and their subsidiaries business interests were involved with. I was however unaware that the Global Wealth Management Group position of MS made up 65% of the company’s operating interest. * List five positive events (outcomes) mentioned in the MD&A. What is the source of/reasons for these positive things? Were those things good/positive due to management’s effort or due to external factors? In other words, who should/did take credit for these good things? 1. Morgan Stanley’s DVA income increased from 2011 to 2012 by $721 million. This can be considered a positive event because the decrease in the company’s liabilities is in a sense, a source of profit. (p 58) 2. Global Wealth Management Group reported an increase in EBIT of $345 million. (p 59) 3. Asset Management reported an increase in EBIT from the previous year of $337 million (p 59) 4. MS reported an income of $152 million for 2012 in comparison to a $783 million loss in it’s Japanese securities joint venture. (p 60) 5. An aggregate net tax benefit of $ 142 million was reported for 2012 when compared to the previous fiscal year. (p 60)
These benefits can be based on a variety of factors, and should not be credited to one source over another. Management obviously made the business decisions to put MS in the position that it did, however various market and external factors played a major role in these benefits. Factors such as global equity, fixed income, credit markets, as well as various other markets play, and will continue to have an impact on the results of business operations.

* List five negative events (outcomes) mentioned in the MD&A. What is the source of/reasons for these negative things? Were those things bad/negative due to management’s fault or due to external factors? In other words, who is to blame for these bad things? 1. MS incurred litigation expenses of $280 million in the institutional securities business segment. (p 60) 2. $350 million in severance costs were incurred in 2012, which was up from $195 million in 2011. I chose to list this in the negative events category even though some could consider this a positive thing. When trimming the “fat” you are bound to have to pay some price, but if the same “fat” or negative influence was never taken on to begin with there would be no need of discarding. (p 60) 3. Losses of $1,838 were associated with MBIA, which was based on their previous Credit Default Swaps (CDS’s) on commercial mortgage backed securities from previous. (p 61) 4. Net income decreased from 2011 to 2012 by $4,042 million. (p 58) 5. Trading net losses of $495 million were recorded in 2012. (p 59)
As stated before, management as well as many external factors should be considered when evaluating the source of results on business operations. Just as markets and other external factors play a role in the benefits of the company they also play a role in the negative effects. * List the risk factors for the company mentioned in the MD&A.
Morgan Stanley is exposed to numerous risk factors on a daily basis. In an effort to be more exact, you could assume Morgan Stanley is exposed to numerous risks on a second-by-second basis. Risks such as interest rate/credit spread/equity price/ implied volatility/ foreign exchange rate/commodity price/ and diversity risk are consistently changing on a daily basis for firms like Morgan Stanley. * Overall, was the last year a good or a bad year according to the MD&A?
Last year was good for Morgan Stanley according to the MD&A. They had positive cash flows as well as in increase in income in two of their three main sectors. In both the Global Wealth Management, and Asset Management sector they were able to provide not only positive income, but improve upon the previous fiscal year. MS as a whole was able to trim a lot of excess, as well as un-needed weight from their books by selling Saxon and they cut ties with losses associated with MBIA and their CDS. (p50-73) * What kind of outlook does the management give in the MD&A for the company for the next year? In other words, do they expect the next year to be good or bad (or something else) for the firm?
The company has a good outlook on the future and has just recently issued $4.5 billion in new debt. This shows the common investor that they do believe their stock is undervalued, and it is a positive sign to see MS not issuing new shares of common to investors. (p 99) * Did anything surprise you in the MD&A? If yes, what and why?
Yes, I was extremely surprised to find that Morgan Stanley’s biggest losses came in their institutional securities segment. I have always envisioned them being very strong in that segment of theirs, and I guess that caught me off guard. On a broader not I was surprised by the MD&A itself. I never knew that there was so much detailed information available about the company in one given place. I understood it was a section of the annual report, however I did not have any idea of how extensive it truly was.