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Rating Action:

Moody's Downgrades Morgan Stanley to A1, Stable.

11 Aug 2008
Moody's Downgrades Morgan Stanley to A1, Stable.

Approximately $200 Billion in Long-Term Debt Affected

New York, August 11, 2008 -- Moody's Investors Service downgraded the long-term ratings of Morgan Stanley and its major subsidiaries to A1 from Aa3. All Prime-1 short-term ratings were affirmed. The outlook on all ratings is stable. This concludes a review commenced on June 27, 2008.

The downgrade to A1 reflects Morgan Stanley's risk management miscues and a risk appetite which resulted in operating performance which has been below Moody's expectations during the credit crisis. Over the past year, excluding recent gains from asset sales and credit spread widening on its own obligations, Morgan Stanley has reported a pretax loss of about $3.0 billion.

"The size of trading losses in the past year has reduced our confidence in Morgan Stanley's risk controls - this is the primary driver of the downgrade," said Peter Nerby, a Moody's Senior Vice President. Morgan Stanley took on positions that proved difficult to unwind when markets became volatile and illiquid and produced a high levels of earnings volatility, the rating agency observed.

"Morgan Stanley's business model results in the periodic assumption of concentrated and complex positions, which requires both a strong capital base and dynamic risk management," Nerby said. Moody's noted that Morgan Stanley is instituting several changes to risk management, including adding new professionals with enhanced authority, centralizing control, and designing additional stress tests.

In stress-testing Morgan Stanley's various large exposures, Moody's has incorporated up to $7 billion in further losses into the current A1 rating. The firm has a strong capital position, as evidenced by a ratio of tangible common equity (plus hybrid equity credit according to Moody's guidelines) to risk-weighted assets exceeding 11% at May 31, 2008. This capital position partially compensates for risk management concerns and supports the A1 rating.

The stable outlook on the A1 rating is based on Morgan Stanley's profitable and diversified franchises in investment banking, capital markets, commodities trading and prime brokerage. This global institutional platform is supplemented by an improved retail brokerage business and asset management. Moody's expects that the diversity of these franchises will enable the firm to produce solid profitability for the balance of 2008 and 2009, even as certain capital markets stay challenging.

In affirming the Prime-1 ratings Moody's observed that Morgan Stanley retains a strong liquidity profile. During the second quarter the firm increased its long term capital base by $12 Billion to $210 billion and increased its average liquidity pool by $13B to $135 billion. The firm also employs comprehensive and prudent liquidity risk management including a variety of stress tests that capture maturing debt, changes in collateral terms, potential departure of customer balances and other short-term working capital requirements. "In concert with its overall liquidity planning, Morgan Stanley has also lengthened the term of its secured funding book in the past year," Nerby said.

Moody's noted that the collapse of Bear Stearns in March highlights the vulnerability of the secured funding model to overall market liquidity for Morgan Stanley and other investment banks to overall market liquidity. When market liquidity dries up, collateral becomes harder to value, margin disputes arise, and pressure on an investment bank's funding increases. The supportive actions of the Federal Reserve, including the Term Securities Lending Facility and the Primary Dealer Credit Facility, have played a critical role to stabilize funding markets in the wake of the Bear Stearns collapse. These actions have provided at least an interim solution to industry-wide structural liquidity challenges. Although these facilities have been extended to January, neither facility is permanent in nature. In the absence of a more permanent solution Moody's believes that the newly revealed vulnerability of the secured funding model may warrant negative action on investment banks that rely on that model.

Morgan Stanley is a global investment banking and wealth management firm headquartered in New York that reported pre-tax earnings of $3.8 billion for the six months ending May 31, 2008.

The long-term ratings of Morgan Stanley and its major subsidiaries were downgraded to A1 from Aa3. Short-term ratings of Morgan Stanley and its subsidiaries (P-1) were affirmed. The following is a partial listing of major operating subsidiaries and ratings that were downgrade:

Morgan Stanley Bank AG; B- Bank Financial Strength and A1 long-term deposit ratings.

Morgan Stanley Bank; B- Bank Financial Strength and A1 long-term deposit ratings.

Morgan Stanley & Co. International plc; A1 long-term deposit ratings.

New York
Peter E. Nerby
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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