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Explore Morgan Stanley's history, services, risk management practices, M&A activities, industry growth, market segmentation, and global market outlook. Learn about liquidity, market, credit, operational, and legal risks in the financial sector.
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US BROKERAGES Amrit Gill Ning Liu Sizu (Warren) Jiang
Table of Contents 2. Morgan Stanley Overview 3. Risk Management 4. Employee Compensation 1. Industry
What Do They Do? Capital Raising Wealth Management Equity and debt underwriting Merger and acquisitions Advisory Fixed Income Securities Investment advisory and financial planning services Market making activities
COMPETITIVE LANDSCAPE M&A Morgan Stanley acquired Goldfish in Feb. 2006 HSBC acquired the credit card issuer Metris in Aug. 2005 M&A between JP Morgan Chase & Co and Bank One Outsourcing Lower operational costs India The Asia-Pacific region Growing market Political and regulation barriers China, India, Russia and Middle East
GLOBAL LEADING COMPANIES JP Morgan Morgan Stanley UBS AG Goldman Sachs Group
Bulge Bracket Goldman Sachs Morgan Stanley Merrill Lynch J. P. Morgan & Co. Lehman Brothers
GENERAL RISKS Liquidity Risk Inability to trade or transfer funds Inability to sell and collect the proceeds for a specific asset Inability to meet financial obligations Market Risk Adverse movements in the level or volatility of market prices of interest rate instruments, equities, commodities and currencies. Credit Risk The risk that there may be default on payment of interest or capital by a borrower
GENERAL RISKS Operational Risk The risk of loss due to system breakdowns, employee fraud or misconduct, errors in models or natural or man-made catastrophes, among other risks. It may also include the risk of loss due to the incomplete or incorrect documentation of trades. Operational risk may be defined by what it does not include: market risk, credit risk, and liquidity risk. Legal Risk Non-compliance with applicable legal and regulatory requirements and standards. Contractual and commercial risk such as the risk that a counterparty's performance obligation will be unenforceable
Business Segments Institutional Securities Global Wealth Management Group Asset Management Discover
History • 1854 – American Junius S. Morgan joined a London banking business and his son J. Piermont Morgan became the financial titan of his day, acting as the US unofficial central banker • Helped form GE and US Steel • He was succeeded by his son J.P. Morgan Jr. • 1933 – The Glass Steagall Banking Act forced firms to choose between commercial banking and investment banking • Henry S. Morgan and Harold Stanley left J.P. Morgan & Co to form Morgan Stanley & Co • 1935 – Sept 16, Firm opened its doors on 2 Wall Street
Risk Management Philosophy “Risk is an inherent part of the Company’s business and activities. The Company’s ability to properly and effectively identify, assess, monitor and manage each of the various types of risk involved in its activities is critical to its soundness and profitability. The Company’s broad-based portfolio of business activities helps reduce the impact that volatility in any particular area or related areas may have on its net revenues as a whole. The Company seeks to identify, assess, monitor and manage, in accordance with defined policies and procedures, the following principal risks involved in the Company’s business activities: market, credit, operational, legal, and liquidity and funding risk.”
INTEGRITY HOTLINE!!!!!! The cornerstone of the philosophy is the protection of the Company’s franchise, reputation and financial standing.
Risk Factors Liquidity Risk Market Risk Credit Risk Operational Risk Legal Risk Competitive Environment International Risk Acquisition Risk Credit Card Risk Risk Management
Liquidity and Funding Risk Liquidity and funding risk refers to the risk that Morgan Stanley will be unable to finance its operations due to a loss of access to the capital markets or difficulty in liquidating its assets.
Liquidity and Funding Risk Liquidity is essential to the business and they rely on external sources to finance a significant portion of operations Liquidity could be substantially negatively affected by the inability to raise funding in the long-term or short-term debt capital markets or access secured lending market Caused by: Disruption of the financial markets Negative perception of the financial industries Negative perception of Morgan Stanley Trading losses, downgraded or negative watch, decline in level of business activity, regulatory actions, employee misconduct or illegal activity
Liquidity and Funding Risk Borrowing costs and access to debt capital markets depend significantly on credit ratings Factors significant to determine credit ratings Level and volatility of earnings Relative competitive position Geographic and product diversification Ability to retain key personnel Risk profile Risk management policies Cash liquidity Capital adequacy Corporate lending credit risk Legal and regulatory developments
Liquidity and Funding Risk A holding company and depend on payments from subsidiaries Regulatory and other legal restrictions may limit ability to transfer funds freely, either to or from subsidiaries. If liquidity and funding policies are not adequate, may be unable to access sufficient financing
Liquidity and Capital Resources Senior management establishes the overall liquidity and capital policies Review business performance relative to these policies Monitor the availability of alternative sources of financing Oversee the liquidity and interest rate and currency sensitivity of the Company’s asset and liability position Evaluate, monitor and control the impact the company’s business activities have on its consolidated balance sheet, liquidity and capital structure
Liquidity and Funding Risk Management Framework The key objectives of the liquidity and funding risk management framework are to support the successful execution of the Company’s business strategies while ensuring the ongoing and sufficient liquidity through the business cycle and during periods of financial distress.
Basel II Capital Accord Introduces the concept of economic capital into the regulatory capital consideration by requiring banks to determine capital adequacy based on the level of risk posed by specific business activities Overcomes shortcoming of Basel I, which did not require banks to develop their own methods, processes, systems to measure the capital level adequate for the risks they assume.
Economic Capital Uses an economic capital model to determine the amount of equity needed to support the risk of its business activities and to ensure that the Company remains adequately capitalized. Calculated on a “going-concern basis” Amount of capital needed to run the business through the business cycle and satisfy the requirements of regulators, rating agencies, and the market Business unit economic capital allocations are evaluated by benchmarking to similarly rated peer firms by business segment
Economic Capital Assigns common equity to each business unit based on regulatory capital usage plus additional capital for stress losses, including principal investment risk Stress losses are defined at the 90% to 95% confidence interval in order to capture the worst potential losses in 10 to 20 years Types of stress losses: Market: systematic, idiosyncratic (unsystematic) or random risk Credit: counterparty defaults Business: earnings volatility Operational: legal risk
Economic Capital Beginning in the first quarter of fiscal 2007, economic capital will be met by regulatory Tier 1 equity (including common shareholders’ equity, certain preferred stock, eligible hybrid capital instruments and deductions of goodwill and certain intangible assets and deferred tax assets), subject to regulatory limits.
Liquidity Management Framework Contingency Funding Plan Cash Capital Liquidity Reserve
