Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-11758

Morgan Stanley

(Exact Name of Registrant as Specified in its Charter)


Delaware		36-3145972
(State of Incorporation)		(I.R.S. Employer Identification No.)

1585 Broadway New York, NY		10036
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (212) 761-4000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated Filer x		Accelerated Filer ¨		Non-Accelerated Filer ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of September 30, 2006, there were 1,058,558,269 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

MORGAN STANLEY

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended August 31, 2006


		Page
Part I—Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Financial Condition—August 31, 2006 and November 30, 2005.	1
	Condensed Consolidated Statements of Income—Three and Nine Months Ended August 31, 2006 and 2005	3
	Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended August 31, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows—Nine Months Ended August 31, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	40
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	83
Item 4.	Controls and Procedures	90

Part II—Other Information
Item 1.	Legal Proceedings	91
Item 1A.	Risk Factors	93
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	95
Item 6.	Exhibits	95


		i

AVAILABLE INFORMATION

Morgan Stanley files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Morgan Stanley) file electronically with the SEC. Morgan Stanley’s electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.

Morgan Stanley’s internet site is www.morganstanley.com. You can access Morgan Stanley’s Investor Relations webpage through our internet site, www.morganstanley.com, by clicking on the “About Morgan Stanley” link to the heading “Investor Relations.” You can also access our Investor Relations webpage directly at www.morganstanley.com/about/ir. Morgan Stanley makes available free of charge, on or through our Investor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Morgan Stanley also makes available, through our Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of Morgan Stanley’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

Morgan Stanley has a Corporate Governance webpage. You can access Morgan Stanley’s Corporate Governance webpage through our internet site, www.morganstanley.com, by clicking on the “About Morgan Stanley” link to the heading “Inside the Company.” You can also access our Corporate Governance webpage directly at www.morganstanley.com/about/inside/governance. Morgan Stanley posts the following on its Corporate Governance webpage:

•

Composite Certificate of Incorporation;

•

Bylaws;

•

Charters for our Audit Committee, Compensation, Management Development and Succession Committee and Nominating and Governance Committee;

•

Corporate Governance Policies;

•

Policy Regarding Communication with the Board of Directors;

•

Policy Regarding Director Candidates Recommended by Shareholders;

•

Policy Regarding Corporate Political Contributions;

•

Policy Regarding Shareholder Rights Plan; and

•

Code of Ethics and Business Conduct.

You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on Morgan Stanley’s internet site is not incorporated by reference into this report.


		ii

Item 1.

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in millions, except share data)


	August 31, 2006		November 30, 2005
	(unaudited)
Assets
Cash and cash equivalents	$	18,546	$	29,414
Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements (including securities at fair value of $25,162 at August 31, 2006 and $30,223 at November 30, 2005)		43,986		40,130
Financial instruments owned (approximately $105 billion and $93 billion were pledged to various parties at August 31, 2006 and November 30, 2005, respectively):
U.S. government and agency securities		38,981		31,742
Other sovereign government obligations		27,848		22,750
Corporate and other debt		142,162		105,381
Corporate equities		74,794		52,238
Derivative contracts		48,753		45,894
Physical commodities		3,134		2,610

Total financial instruments owned		335,672		260,615
Securities received as collateral		58,170		43,557
Collateralized agreements:
Securities purchased under agreements to resell		171,547		174,330
Securities borrowed		283,024		244,241
Receivables:
Consumer loans (net of allowances of $811 at August 31, 2006 and $838 at November 30, 2005)		23,261		22,916
Customers		59,474		50,979
Brokers, dealers and clearing organizations		4,913		5,030
Fees, interest and other		8,490		6,137
Office facilities, at cost (net of accumulated depreciation of $3,498 at August 31, 2006 and $3,196 at November 30, 2005)		3,409		2,733
Aircraft held for sale		—		3,145
Goodwill and net intangible assets		2,943		2,500
Other assets		15,437		12,796

Total assets	$	1,028,872	$	898,523


		1

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

(dollars in millions, except share data)


	August 31, 2006			November 30, 2005
	(unaudited)
Liabilities and Shareholders’ Equity
Commercial paper and other short-term borrowings	$	25,998		$	31,120
Deposits		25,175			18,663
Financial instruments sold, not yet purchased:
U.S. government and agency securities		17,879			20,425
Other sovereign government obligations		28,392			25,355
Corporate and other debt		8,614			5,480
Corporate equities		50,143			45,936
Derivative contracts		47,017			44,952
Physical commodities		934			4,852

Total financial instruments sold, not yet purchased		152,979			147,000
Obligation to return securities received as collateral		58,170			43,557
Collateralized financings:
Securities sold under agreements to repurchase		246,952			237,274
Securities loaned		138,998			120,454
Other secured financings		37,942			23,534
Payables:
Customers		138,494			112,246
Brokers, dealers and clearing organizations		10,824			4,789
Interest and dividends		4,996			3,338
Other liabilities and accrued expenses		20,742			16,835
Long-term borrowings		133,364			110,465

		994,634			869,275

Capital Units		66			66

Commitments and contingencies
Shareholders’ equity:
Preferred stock		1,100			—
Common stock, $0.01 par value;
Shares authorized: 3,500,000,000 at August 31, 2006 and November 30, 2005;
Shares issued: 1,211,701,552 at August 31, 2006 and November 30, 2005;
Shares outstanding: 1,058,664,567 at August 31, 2006 and 1,057,677,994 at November 30, 2005		12			12
Paid-in capital		1,971			2,389
Retained earnings		39,519			35,185
Employee stock trust		4,693			3,060
Accumulated other comprehensive income (loss)		32			(190	)
Common stock held in treasury, at cost, $0.01 par value;
153,036,985 shares at August 31, 2006 and 154,023,558 shares at November 30, 2005		(8,462	)		(8,214	)
Common stock issued to employee trust		(4,693	)		(3,060	)

Total shareholders’ equity		34,172			29,182

Total liabilities and shareholders’ equity	$	1,028,872		$	898,523

See Notes to Condensed Consolidated Financial Statements.


		2

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(dollars in millions, except share and per share data)


	Three Months Ended August 31,				Nine Months Ended August 31,
	2006		2005		2006		2005
	(unaudited)				(unaudited)
Revenues:
Investment banking	$	1,138	$	992	$	3,252	$	2,627
Principal transactions:
Trading		2,824		2,150		9,469		5,790
Investments		202		103		1,206		482
Commissions		888		804		2,822		2,452
Fees:
Asset management, distribution and administration		1,326		1,249		3,938		3,699
Merchant, cardmember and other		312		357		878		983
Servicing and securitization income		565		398		1,812		1,315
Interest and dividends		12,670		6,998		33,333		18,876
Other		130		106		368		332

Total revenues		20,055		13,157		57,078		36,556
Interest expense		11,835		5,986		31,328		16,172
Provision for consumer loan losses		232		224		517		568

Net revenues		7,988		6,947		25,233		19,816

Non-interest expenses:
Compensation and benefits		3,149		3,165		11,033		8,641
Occupancy and equipment		255		239		724		803
Brokerage, clearing and exchange fees		339		267		971		803
Information processing and communications		371		349		1,083		1,040
Marketing and business development		292		276		828		831
Professional services		549		505		1,521		1,322
Other		366		404		942		1,396
September 11^th related insurance recoveries, net		—		—		—		(251	)

Total non-interest expenses		5,321		5,205		17,102		14,585

Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net		2,667		1,742		8,131		5,231
Losses from unconsolidated investees		2		105		174		245
Provision for income taxes		814		471

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