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CS First Boston Third Annual Financial Services Conference

CS First Boston Third Annual Financial Services Conference. Stephen Crawford Chief Financial Officer February 11, 2002. Agenda. Secular Trends and Company Strategy Franchise Position and Momentum Value Proposition for Shareholders. Secular Trends.

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CS First Boston Third Annual Financial Services Conference

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  1. CS First Boston Third Annual FinancialServices Conference Stephen Crawford Chief Financial Officer February 11, 2002

  2. Agenda • Secular Trends and Company Strategy • Franchise Position and Momentum • Value Proposition for Shareholders

  3. Secular Trends • Higher penetration of financial markets in commerce • Continued growth in global trading in financial markets • Pressure on margins Morgan Stanley Strategy • Low cost positions in commodity products • Highest quality in complex products • Innovation of new products/services • Leading intermediary across geography and products (“Flow”) Secular Trends and Firm Strategy Institutional Investors

  4. Securities Trading Volume Average Combined Daily Volume for NYSE,NASDAQ and All Other U.S. Exchanges (MM of Shares) CAGR ‘95 - ‘01 25.7% ‘90 - ‘01 23.1% ‘85 - ‘01 18.3% ‘80 - ‘01 19.0% (1) Note: (1) Total for 2001 does not include regional stock exchanges. Source: Securities Industry Association.

  5. Efficiency in Securities Processing Morgan Stanley Institutional Securities Trading Volume and Cost per Trade (Indexed) Gross Volumes Operations Expenses Cost per Trade

  6. Flow Morgan Stanley OTC Market Making Total Number of Stocks

  7. Net Revenues Innovation: Prime Brokerage Business Morgan Stanley Prime Brokerage Net Revenues (Indexed) 1995-2001 CAGR: 23%

  8. Innovation: Credit Derivatives Business Morgan Stanley Credit Derivatives Revenues (Indexed)

  9. Secular Trends • Globalization of industry sectors • Restructuring of selected economic areas • Disintermediation of banks Morgan Stanley Strategy • Unique global network of information/contacts for our clients • Most experienced professionals to help solve complex problemsand create opportunities for clients • Culture and incentive system which dedicates the entire firm toclient objectives Secular Trends and Firm Strategy Corporate Clients

  10. Intermediated Through Depository Institutions Intermediated Through Securities Markets Disintermediation Percent of Private Nonfinancial Debt Outstanding (%) Source: Federal Reserve Board

  11. CAGR ‘95 - ‘01 ‘90 - ‘01 ‘85 - ‘01 11.4% 13.9% 12.7% Growth in Global Mergers & Acquisitions Total Global Announced Deals ($ Billions) Source: Thomson Financial Services.

  12. Global Consolidation and Restructuring M&A as a Percentage of GDP – 2001E (%) 12.6% 9.0% 4.7% (2) (1) Note: (1) EU15 comprises the 15 current members of the European Union. (2) Asia Pacific includes Japan, China, Hong Kong SAR, Taiwan, Indonesia, Singapore, South Korea, Australia and New Zealand. Sources: Thomson Financial Securities Data, EIU/Datastream, OECD/Factset. GDP data are nominal estimates.

  13. Delivering the Firm for Corporate Clients • Comcast/AT&T Broadband Merger • France Telecom-Orange IPO • Chalco IPO

  14. Secular Trends • Increasing importance of distribution • Proliferation of professional management of assets • Ongoing volatility in asset allocation by investors Morgan Stanley Strategy • Develop best advice channel for clients • Further align advisor interests with client/firm interests • Provide best in class product across asset classes • Strengthen bonds between distribution and manufacturing Secular Trends and Firm Strategy Retail Investors

  15. CAGR Equity Total ‘95 - ‘01 ‘90 - ‘01 ‘85 - ‘01 ‘80 - ‘01 17.9% 27.1% 23.3% 22.9% 16.2% 18.6% 17.9% 20.6% Growth in U.S. Asset Management Industrywide Mutual Fund Assets ($ Billions) 6,927 6,965 Equity 2,812 1,065 495 135 (1) Note: (1) As of November 2001. Source: Investment Company Institute.

  16. Growth in Separately Managed Accounts Total Separately Managed Account Assets ($ Billions) CAGR ’93 - 3Q’01 19% Source: Cerulli Associates.

  17. Professional Management of Assets Share of U.S. Household Securities Assets Held in Mutual Funds (%) 29.1% 18.7% Source: Federal Reserve Board, Morgan Stanley Research. Securities assets includes: corporate equities, fixed income, mutual funds, money market funds, and free credit balances. Mutual funds total includes money market funds.

  18. Long-Term Funds Money Market Funds A Crowded Marketplace Number of Mutual Fund Firms Number of Mutual Funds (1) (1) Note: (1) As of November. Source: Strategic Insight, Simfund2.

  19. Percentage of Net Flows into Equity Funds All other funds Morningstar 4/5 Star funds Source: Morningstar.

  20. Performance Morgan Stanley Morningstar 4 & 5 Star Rated Funds Calendar Year-End *1996 total is pro forma.

  21. Blend Value Value Blend Growth Growth 3 10 1 6 15 9 Large Large Mid 3 0 8 Mid 3 2 9 Small 3 0 2 Small 3 1 4 Specialty Specialty Convertibles Domestic Hybrid Specialty – Financial Specialty – Health Specialty – Natural Resources Specialty – Real Estate Specialty – Technology Specialty – Utilities Convertibles Domestic Hybrid Specialty – Financial Specialty – Health Specialty – Natural Resources Specialty – Real Estate Specialty – Technology Specialty – Utilities 2 7 1 1 1 1 2 3 2 7 1 1 1 4 4 3 Product Breadth 1997 Morningstar Style Boxes –Morgan Stanley Domestic Equity Funds 2001 Morningstar Style Boxes –Morgan Stanley Domestic Equity Funds

  22. Secular Trends and Firm Strategy Consumer Credit Secular Trends • Continued shift in consumer payments from cash/check to credit cards • Pricing pressure remains intense; utility increasingly important • Consolidation of consumer relationships with fewer financial service firms Morgan Stanley Strategy • Parity on merchant acceptance • Leading customer service platform: emphasis on the Internet • Competitive product offering for mass market customers (CashBack Bonus) • Customer rewards strategy vs. price strategy

  23. ‘95 - ’00 ‘90 - ’00 ‘85 - ’00 10.0% 12.8% 15.1% CAGR Growth in U.S. Credit Cards Total Receivables ($ Billions) Source: Faulkner & Gray, Nilson, SEC Filings. *Data for 2001 is as of end of June.

  24. CAGR ‘95 - ’00 ‘90 - ’00 ‘85 - ’00 12.2% 14.0% 14.4% Growth in U.S. Credit Cards Total Charge Volume ($ Billions) Source: Faulkner & Gray, Nilson, SEC Filings.

  25. Visa MasterCard American Express Discover Merchant Acceptance Merchant Acceptance (Millions of merchant outlets) Source: Nilson

  26. Discover Card Online Payments (Indexed) Internet Penetration Discover Online Card Usage Millions of Accounts % Discover Card Online Registered Accounts

  27. Morgan Stanley • A Value proposition for shareholders built on 3 goals • Higher market share • Disciplined risk management • Differentiated financial returns

  28. 45% 20% 40% 12% 19% 20% 8% 3.3% 43% 50% 21% 27% 13% 32% 18% 20% 60% 32% 90% Market Conditions - 2001 vs. 2000 Retail Investors InstitutionalInvestors CorporateMarket Credit Cards • Volume: • NYSE • NASDAQ • Volatility: • VIX • QQV • Crude Oil (WTI) • Total Underwriting Activity • M&A Announced • Equity Underwriting • IPO's • Fixed Income Issuance • Margin Debits • Fund Flows: • Total Long-Term Fund Flows • Equity Fund Flows • Market Performance: S&P Nasdaq • Unemployment rate • Bankruptcy filings • Interest Rates: • 2-Year Treasury • Retail Sales Sources: NYSE, NASDAQ, SIA, Thomson Financial Securities Data, Investment Company Institute, Bloomberg

  29. Corporate Clients(2) Equity Issuance IPOs Fixed Income Issuance High Yield M&A Announced 19.0 15.9 6.6 9.2 34.5 17.3 14.4 6.8 10.1 34.1 18.5 14.5 5.6 7.7 28.7 1999 2000 2001 Institutional Clients(1) Research (# of positions) Listed Equities OTC Europe Equities Fixed Income Trading High Yield Trading 1 (22) 4.88% 3.14% 4.03% 5 NA 1 (20) 5.41% 3.88% 5.76% 5 7 3 (18) 6.26% 5.25% 6.50% 5 8 Up/Flat Off Down Morgan Stanley Market Share Notes: (1) Sources: Research Ranking: Institutional Investor; Listed and OTC: Autex; Europe Equities: Local Exchanges; Fiscal year basis. (2) Source: Thomson Financial Securities, Calendar year basis.

  30. 1999 2000 2001 Retail Clients(1) FA Market Share Mutual Fund Flows Equity Fund Flows 21.2% 3.2% 3.1% 21.6% 3.8% 6.0% 21.4% 0.8% 0.7% Credit Cards(2) Receivables Share Network Volume Share 7.7 6.4 8.3 7.2 8.6 6.9 Up/Flat Off Down Morgan Stanley Market Share Notes: (1) Sources: FA Market Share: Company Reports and SIA Yearbook (2001 share data is as of 3Q); Long-term and Equity Fund Flows: Strategic Insight (2001 data is year-to-date through November). (2) Sources: Nilson, Faulkner and Gray. 2001 data is as of end of June.

  31. Risk Management Selected Assets ($ in Millions) $18,800 $10,100 $14,500 $7,100 $2,200 $1,200 $1,400 $800 High Yield Private Equity Commercial Loans and Commitments Year-Over-Year Change (36)% (33)% (46)% Portfolio/Inventory 4Q00 Portfolio/Inventory 4Q01 4Q00 - Loans 4Q01 - Loans

  32. Net Revenue Compensation & Benefits Non-Comp Flexible Expense Structure Net Revenue/Expense Growth (Indexed) *1996 data is pro forma.

  33. ROE Above Average Historic Returns Morgan Stanley Historic ROE* vs. Cyclical Goal Average ‘90-’01: 21% Average ex-’99-’00: 19% Cyclical Goal 18-20% Morgan StanleyDean Witter merger *ROE prior to 1997 merger is pro forma and calculated using annual reports.

  34. CAGR: 15% Growth in Morgan Stanley Book Value Book Value per Share *Book value for 1996 is pro forma

  35. Relative Returns Annual ROE Comparison (Indexed to MWD) C MWD LEH GS MER JPM Source: Company filings and Morgan Stanley Research

  36. CS First Boston Third Annual FinancialServices Conference Stephen Crawford Chief Financial Officer February 11, 2002

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