Investment banking revenues were $1.4 billion, down 16% from the record set in the second quarter of 2007. All categories were lower than last quarter, but higher than last year. The company continues to maintain leading M&A market shares with a number one year-to-date rank in M&A completed, number two in announced, with approximately 30% market shares in each.

- The Investment banking environment was mixed.
- Non-investment grade debt markets effectively dried up during the second half, while investment grade issuance continued at a brisk pace.
- Equity capital market volumes and completed M&A remain relatively healthy, up from last year, down from the second quarter.
- Backlogs remain relatively strong with M&A flat to last quarter, equity down, investment grade debt up, and non-investment grade down. However, these deals are subject to market conditions and investor receptivity.

Advisory revenues decreased 8% to $664 million from record quarter last quarter.
Equity underwriting revenues were down 13% to $429 million, following near record second quarter of 2007.
Fixed income underwriting revenues were $346 million, down 29% from second quarter record, largely reflecting the sharp decline in both the high yield bond and leveraged loan markets.

The company had a weaker sales and trading quarter with total revenues of $3.1 billion, down 39% from strong second quarter.

This quarter was characterized by a deteriorating credit environment and extreme volatility across markets. Specifically, equity sales and trading revenues of $1.8 billion were 21% lower than record quarter set last quarter. The decrease was driven by losses sustained in quantitative strategies business. The other businesses that make up equities business were up from last quarter by 8%.

Derivative revenues reached a second consecutive record quarter on higher customer flow.
- Financing products had record revenues with strong commission revenues driven by increased client activity.
- The cash business had lower revenues, as higher commission revenues were offset by loss ratios.
- The contribution of electronic trading improved in a record-setting volume environment.
- Prime brokerage business produced record revenues, and had record average customer balances for the 18th consecutive quarter, although balances were affected by the market dynamics.
- Average balances increased 10% to peak levels in July, and then fell back to levels equal to where they were at the beginning of the quarter.
- There were no hedge fund defaults amongst prime brokerage clients, and the company did not see margin calls ramp up beyond normal market movements.

In fixed income sales and trading, $2.2 billion in revenues were down 24% from strong second quarter results. Difficult credit markets drove the decrease from the second quarter.
- Credit market revenues were down 72%.
- Record interest rate and currency results were 49% higher than second quarter, despite lower revenues in emerging markets. A driver of the increase of the revenues from the impact of widening Morgan Stanley credit spreads on firm-issued structured notes.
- The other increases were broad-based.
- The company was well-positioned in interest rates for market movements, and in derivatives for the flight to quality seen when foreign exchange trading revenues were higher.
- Commodities decreased 12% driven by increased gains from structured deals, and strong results in the transactional and flow business, offset by lower trading revenues.

Total loans and commitments net of hedges raised $8.3 billion to $67.2 billion.

Policy is to mark-to-market loans and commitments, and the company recorded an overall loss of approximately $940 million in lending business. As of the end of the third quarter, the company has commitments of $31 billion in the pipeline related to leveraged acquisition financings, including both bank loans and bridge financings primarily to non-investment grade names, which are accepted but not yet closed commitments. This pipeline is subject to change, either because the transaction is not completed, or the terms are changed.

The pipeline of loan commitments is mark-to-market including certain fees and based on a deal by deal assessment.

The writedown was $726 million net of certain fees. The gross was $1.2 billion. This represents marks as of August 31. The ultimate realized economics could change, depending on the extent that they are renegotiated, repriced, or the transaction does not occur. These valuations are largely the result of liquidity issues. Credit analysis would not indicate this degree of loss.
- Corporate loans within current-only tests, or covenant light deals, represent fewer than 40% of the pipeline.

Principal transactions investment revenues were $217 million, a $179 million decrease. The decrease was primarily driven by lower real estate and private equity gains on this corresponding deferred compensation markup.

Aggregate average trading and non-trading value at risk, VaR, increased to $91 million from $87 million last quarter, driven predominantly by increases in interest rate and credit spread of VaR.

Period end aggregate trading and non-trading VaR decreased to $84 million from $93 million, as the company actively reduced positions. The change in market conditions implies a higher volatility, and therefore higher risk as measured by VaR on these reduced exposures.

- Average surplus or unallocated capital was $3.5 billion, down from $4.2 billion in the last quarter. The amount of capital allocated to institutional securities increased $2 billion to $25.7 billion Tier 1 equity, largely due to the increased market volatility, particularly in the credit markets.
- The company was focused on liquidity position, and measuring the sources and uses of liquidity daily. The company took advantage of available market opportunities to issue CD and long-term debt to further strengthen liquidity.

Global Wealth Management Business

Despite the environment and typical seasonal trends, wealth management had strong results.

There were higher levels of client activity, including net new assets, continued strong financial advisor productivity, and a number of new product launches.

- Revenues reached $1.7 billion, up 2% from the second quarter of 2007, reflecting higher asset management revenues, as well as increased net interest due to growth in the bank deposit program.
- Non-interest expenses of $1.4 billion, net of an insurance recovery, were up from last quarter because of the increase in business activities.
- Profit before tax of $287 million was up 9%, and the PBT margin increased to 17% from 16%.
- The return on equity for this business was 39%.
- This business continues to build on its momentum showing strength in many areas.

- Assets in the $1 million plus household segment increased $2 billion on 71% of total client asset base, versus 66% at this point last year.
- Total client assets increased 1% sequentially to $734 billion, driven by net new assets.
- Fee-based assets represented 29% of the total.
- Average production and total client assets per global representative were inline with the second quarter at $817,000 and $88 million respectively, as FA headcount increased to over 8,300 producers, with the addition of most recent trading class as well as targeted hires of high quality producers.