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  1. MORGAN STANLEY Rocky Shun Ho Zhengyu Lu Nantaka Vongpiyabovorn Jingxin Wu Zhe Wu

  2. Morgan Stanley • Formed on September 16, 1935 • Formed by J.P Morgan & Co. employees • Henry S. Morgan • Harold Stanley • 1942: Join the New York Stock Exchange • US $779 billion as assets

  3. Expansion

  4. Achievement

  5. Community

  6. Global Office Operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000 Operates in 36 countries, over 600 offices and a workforce of over 60,000 Headquartered in New York City, US

  7. Balance Sheet

  8. Balance Sheet

  9. Asset Level Evaluation

  10. Decompose Assets to Different Levels

  11. Income Statement

  12. Income Statement

  13. Cash Flow Statement

  14. Cash Flow Statement

  15. Three Core Businesses

  16. 5-Year Net Annual Revenue

  17. Business Mix 2008 & 2009

  18. Business Segment in 10-K

  19. Industries • Large-Market Investment Banking • Financial Services • Asset Management • Institutional Asset Management • Retail Asset Management • Investment Banking

  20. 2008: MS and Financial Crisis

  21. 2008: MS and Financial Crisis

  22. 2008: MS and Financial Crisis

  23. 2008: MS and Financial Crisis

  24. 2008: MS and Financial Crisis

  25. Risk Management Philosophy Based on the following principles • Comprehensiveness • Independence • Accountability • Defined risk • Tolerance • Transparency

  26. Risk Governance Structure Board of Directors Audit Committee and the Risk Committee of the Board Senior management oversight (including the Chief Executive Officer, the Chief Risk Officer, the Chief Financial Officer, the Chief Legal Officer and the Chief Compliance Officer) Internal Audit Department Independent risk management functions (including the Market Risk Department, Credit Risk Management, the Corporate Treasury Department and the Operational Risk Department) Company control groups (including the Human Resources Department, the Legal and Compliance Division, the Tax Department and the Financial Control Group)

  27. Risk Committee Oversees • Risk governance structure • Risk management and risk assessment guidelines and policies regarding market, credit and liquidity and funding risk • Risk tolerance • Performance of the Chief Risk Officer

  28. Types of Risks Operational risk • Risk of losses arising from insufficient controls on people, resources, and processes and external factors such as compliance risk Legal/Regulatory risk • Risk of losses in fines, penalties, damages resulting from noncompliance and legal actions Credit risk • Risk of default from borrowers

  29. Types of Risks Liquidity and funding risk • Risk of difficulty in accessing capital markets, inability to liquidate assets in a timely manner, and threats to going concern in satisfying financial obligations Market risk • Risk of losses arising from changes in market prices, rates, volatility, and correlations

  30. Types of Risks Competitive environment risk • Risks from competition International risk • Risks of losses from global operation Acquisition risk • Risk of losses from acquisitions, minority stakes, forming joint ventures, and strategic alliances

  31. Operating Risk Sources of risk • Increasingly complex and large volume of transactions processed in various markets and currencies • Internal risks from employees and control systems, and external risks from financial intermediaries and other third parties • Terrorist activities, diseases, and natural disasters  contingency planning

  32. Operating Risk Management Operational risk Oversight Committee • Chaired by CRO, provides oversight of operational risk Operational risk manager • Monitors, measures, analyzes and reports on operational risk • Independent of business segments Business Manager • Maintain processes and controls designed to manage operational risk

  33. Operating Risk Management Business Continuity Management • Contingency planning to ensure continuity of operations in case of disaster External vendors • Risk managed through service level, contractual agreements, service and quality reviews

  34. Legal Risk Extensive supervision from the Fed and regulatory agencies • Possibly stricter capital requirements and leverage limits coming as soon 2010 Risk related to commodities activities • Engages in production, storage, and transportation of several commodities including metals, agricultural and energy products • Contamination may create liability even if MS is not at fault

  35. Legal Risk Fiscal and monetary policy • Various policies from central banks have effect on cost of funds for lending, capital raising and investment activities Conflict of interests • Can result in enforcement by governing agencies • Can result in public scrutiny or loss of business Estimation errors • For legal proceedings which involve substantial stake and are in early stages, costs are hard to estimate

  36. Legal Risk Management Legal and Compliance Division • “Develops various procedures addressing issues such as regulatory capital requirements, sales and trading practices, new products, potential conflicts of interest, structured transactions, use and safekeeping of customer funds and securities, credit granting, money laundering, privacy and recordkeeping”

  37. Credit Risk Institutional Securities Activities Corporate lending • Relationship-driven – expand business relationships • Event driven – lending commitments for events such as acquisition and mergers by clients Securitized products • Structuring, underwriting, and trading collateralized securities • Risk borrower not performing according to agreement and devaluation of collateral

  38. Credit Risk Institutional Securities Activities Derivate contracts • Dealer in OTC derivatives • “Generally represent future commitments to swap interest payment streams, exchange currencies, or purchase or sell commodities and other financial instruments on specific terms at specified future dates”

  39. Credit Risk Global Wealth Management Group Activities Commercial Lending • Working capital lines of credit, revolving lines of credit, standby letters of credit, term loans and commercial real estate mortgages • Involves the use of independent credit agencies Margin Lending • Reviews amount of the loan, the intended purpose, the degree of leverage being employed in the account

  40. Credit Risk Global Wealth Management Group Activities Consumer Lending • Mortgages, HELOC • Evaluation of capacity and willingness to pay • FICO scores, debt ratios, borrower’s reserves

  41. Credit Risk Management Credit Risk Management is responsible for • Evaluating, monitoring and controlling credit risk for each business segment • Ensuring transparency of material credit risks, compliance with established limits, approving material extensions of credit, and communicating with senior management regarding risk concerns

  42. Analyzing Credit Risk Transactions and creditworthiness of borrowers reviewed regularly At three levels: transaction, counterparty and portfolio Produces credit ratings similar to external services • BB+ below considered non-investment grade

  43. AnalyzingCreditRisk

  44. Risk Mitigation Through management of key risk elements such as size, seniority and collateral Sell or assign lending commitments to other financial institutions Netting agreements to offset obligations in derivate trading

  45. Exposure by Country

  46. Exposure by Industry

  47. Regulation: Basel II Accord • The First Pillar: Minimum Capital Requirements • Maintain three major risks: Credit Risk, Operational Risk, Market Risk • Minimum Capital Requirement: (risk weighted) 8% • The Second Pillar: Supervisory Review • Assist the first pillar with regulatory responses • Deals with liquidity risk and other risks • The Third Pillar: Market Discipline • Market disclosure

  48. Basel & Morgan Stanley • Transferred to Financial Holding Company since 2008 • Capital Standard: • Maintain a total capital ratio of 10%, minimum Tier 1 capital ratio is 6% • Currently comply to Basel I, will adjust to Basel II

  49. Morgan Stanley-Capital Ratio

  50. Economic Capital-Function • Estimate the amount of equity capital required to support the business over a wide range of market environments while simultaneously satisfying regulatory, rating agency and investor requirements • Continue to evolve over time in response to changes in in business and regulatory environment and to enhance modeling technique • Assign to each business segment and sub-allocate to product lines • Align equity capital with risks in business segments to evaluate return on a risk-adjusted basis