Net new assets of $10 billion represented 7th consecutive quarter of positive client influence.

- Assets in the $1 million plus household segment increased $29 billion, increased to 72% of total client asset base, as the company continues to be effective in gathering assets in the high network segment.
- Total client assets increased 3% sequentially to $758 billion, driven by both marked increases of net new assets.
- Fee-based assets represented 27% of the total, down from 29% last quarter. This decline largely reflects the termination on October 1st of choice of fee in lieu of commission brokerage program.

- Client assets in the Choice program primarily moved to commission-based brokerage accounts for the election of clients, the fee-based advisory programs including Morgan Stanley Advisory, a new norm discretionary advisory account launched in August.
- Average production and total client assets for Global represented $853,000 and $90 million, respectively, as FA headcount increased to 8,429 producers.
- The company is achieving increased FA productivity, while growing the number of FAs. Bank deposit program ended the year at $26.2 billion, exceeding goal of $20 billion.
- The company launched another closed-end fund this quarter, PIMCO Income Opportunities Fund bring the total to five this year with over $4 billion in sales.

Asset Management business revenues were $1.3 billion, down 8% for the third quarter, driven primarily by $129 million of losses in securities issued by structured investment vehicles SIVs and held by asset management.

- Total SIV exposure in money funds is $7.7 billion. Of that 92% is in lower risk SIVs that are sponsored by banks, which have continued to support SIVs.
- Income before tax is $294 million, down 40% from the third quarter driven by lower revenues and higher expenses including both compensation and non-compensation expenses.
- PBT margin was 24%, and ROE was 18%.

- Principal transaction revenues excluding the losses of securities on non-bank sponsored SIVs and held by asset management decreased 7%, reflecting lower revenues from real-estate investment are offset by higher alternative investment gains.
- Management and administrative fees increased 6% to $1 billion, driven by asset growth in a more favorable asset mix.
- Non-interest expense of nearly $1 billion grew up 10% from the third quarter, driven by higher compensation, reflecting expenses associated with deferred compensation plans as well as increases in professional services and occupancy cost.

In Private Equity Asia Fund III, the company has raised $1.5 billion, including $350 million of commitments from the firm.

In real-estate, the company has raised almost $15 billion in 2007 across funds most notably measured at fixed international where the company has a rate $8 billion and committed $1.6 billion of own capital.

Assets under management and supervision increased by $20 billion to $597 billion primarily due to market increases in September and October.

The company has $400 billion in total net inflows as $5.6 billion of inflows in non-liquidity products were partly offset by $5.2 billion of outflows in liquidity products.

Positive net flows were driven by non-U.S. channels that had $7.4 billion of inflows, the majority of which were from alternatives real-estate products.

- U.S. institutional and America''s intermediary channels had inflows of $800 billion and $400 billion respectively.
- Van Kampen and Morgan Stanley branded retail funds showed outflows of $1.4 billion and $1.6 billion respectively.
- Institutional liquidity outflows were $2.9 billion compared to $12.4 billion in net inflows last quarter.

- This quarter’s short-term outflows were driven by an expected $5.2 billion client outflow gained in the prior quarter.
- Retail liquidity outflows are $2.3 billion primarily driven by additional bank deposit programs introduced in Global Wealth Management business.
- The company launched and incubated 14 new products including six alternatives, seven in equities, and one in fixed income.

In non-subprime residential mortgages, the company has both balance sheet and net exposure in the U.S., Europe and Asia.

- This includes RMBS bonds, European mortgage loans and to a lesser degree residential Alt-A loans.
- At end of the fourth quarter, the company had $16.4 billion on balance sheet with a total net exposure of $10.8 billion, and a write-down reflected in income statement on $800 billion this quarter. These positions are value based on subordination changes by rating agencies and execution of trades and comparable instruments.

- In CMBS, commercial whole loans the company has $31.5 billion on the balance sheet at the end of the fourth quarter.
- The company reduced net exposures to these positions by more than half from $36.2 at the end of the third quarter, to $17.5 million at the end of the fourth quarter.

- The write-down on the portfolio was $400 million, based on fair value inline with the observable market prices from executed trades. A majority of these assets are categorized as Level 2. Residual exposures are well diversified and approximately two-thirds are outside of the U.S. As a result of the write-downs, the level of financial assets categorized in Level 3 has decreased. The movement of assets from Level 2 into Level 3 category was more than offset by losses in Level 3 driven by corporate and other debt and derivative contracts.

Fiscal 2007 Highlights

- Over the past year trading Group decided to short the subprime market. The traders were short, the lowest transaction in subprime securities with a notional value of approximately $2 billion. The traders decided to cover the cost of the negative count in the short position. In doing so they went along approximately $14 billion at the Super Senior AAA or BBB subprime securities, the company refers to as mezzanine.
- But the credit market declined. The implied cumulative losses in the subprime market action to the value of the Super Senior AAA branch were notionally long. As a result, notwithstanding the short position, the implied loses of the notional long generated a major net loss from the position of advanced markets.
- The loss was non-linear with the decline of the relevant ABX index, given the long-short structure of this particular trait. The updated schedule through November. Writedown reflected the impact of November increased to $7.8 billion from $3.7 billion as of October 31, while total net exposure decreased to $1.8 billion from $6 billion over the same period.

- Using consistent valuation methodology, the fair value of these positions declined from October 31 to November 30. Valuations of these positions take into consideration observable traits, the continued deterioration in market conditions, the decline in the ABX indices and other market developments, including updated mortgage remittance and cumulative loss data.
- The decrease in the fair value of subprime exposures has led to first quarterly loss. The traits observed on exposures have led to first quarterly loss. The trends observed were those executed in November, as part of effort to reduce exposure. The ABX deterioration in the class to two senior positions, namely the BBB061 Vintage where most significant exposure risk, was approximately 24% during November, which relates to 2005 collateral.
- In addition to the $7.8 billion in subprime writedowns, the company wrote down approximately $1.2 billion in other mortgage related positions as a result of fair value declines in November, of which $400 million relates to CMBS, were trained to execute as part of balance sheet reduction.