Business Context and Reporting Period
Company: Morgan Stanley Dean Witter & Co.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended August 31, 2001
Business Segments: Securities, Investment Management, and Credit Services (Discover Card).
Key Financial Metrics
| Metric (in millions) | Q3 2001 | Q3 2000 | 9M 2001 | 9M 2000 |
|---|---|---|---|---|
| Total Revenues | $10,431 | $11,726 | $35,900 | $35,021 |
| Net Revenues | $5,271 | $6,309 | $17,704 | $20,825 |
| Net Income | $705 | $1,246 | $2,651 | $4,248 |
| Diluted EPS | $0.62 | $1.09 | $2.33 | $3.70 |
| Total Assets | $505,782 | $426,794 (Nov 2000) | N/A | N/A |
| Cash & Equivalents | $24,166 | $18,819 (Nov 2000) | N/A | N/A |
| Long-Term Borrowings | $49,990 | $42,051 (Nov 2000) | N/A | N/A |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 43% in the quarter and 38% for the nine-month period compared to the prior year. Diluted EPS fell from $1.09 to $0.62 for the quarter.
- Revenue Drivers: The decline was primarily driven by the Securities segment, reflecting lower investment banking fees (down 32%), reduced principal trading revenues (down 32%), and lower commission revenues (down 14%).
- Investment Losses: The company recorded principal investment losses of $59 million in the quarter and $212 million for the nine months, contrasting with gains in the prior year periods. This was largely due to markdowns in non-publicly traded investments and the technology/telecommunications sectors.
- Expense Management: Total non-interest expenses decreased 9% in both the quarter and nine-month periods, primarily due to lower incentive-based compensation.
- Accounting Adjustments: Net income for the nine-month period included a $59 million charge for the cumulative effect of adopting SFAS No. 133 (derivatives accounting) and a $30 million extraordinary loss from early extinguishment of debt.
Outlook, Risks, and Unusual Items
- Subsequent Event (Terrorist Attacks): The filing discloses the September 11, 2001, terrorist attacks. Approximately 3,700 employees were located in the World Trade Center. The company expects costs to be incurred, partially recoverable via insurance, and anticipates an adverse impact on global economies and its aircraft financing business.
- Market Conditions: Management cites worsening global economic conditions, lower corporate investment, and reduced retail investor participation as headwinds. The Federal Reserve and other central banks have aggressively lowered interest rates.
- Credit Quality: In the Credit Services segment, the provision for consumer loan losses increased 58% in the quarter due to higher net charge-off rates, driven by rising unemployment and bankruptcy filings.
- Legal Proceedings: The company is involved in various lawsuits, including class actions regarding IPO fees and research reports. Management believes the resolution will not have a material adverse effect on financial condition but could impact operating results for specific periods.
- Acquisitions: The company completed the acquisition of Quilter Holdings Limited in May 2001, adding to its Investment Management segment.
Investor Verification Checklist
- Impact of 9/11: Verify the extent of insurance recoveries and the specific financial impact on the aircraft financing business and employee relocation costs.
- Charge-off Trends: Monitor the Credit Services segment for sustained increases in net charge-off rates and the adequacy of the $792 million allowance for loan losses.
- Investment Banking Pipeline: Assess the recovery potential of investment banking revenues given the sharp decline in M&A and equity underwriting volumes.
- Derivatives Exposure: Review the $30.9 billion net replacement cost of derivative contracts and the associated Value-at-Risk (VaR) metrics ($48 million aggregate VaR) in light of market volatility.
- Capital Adequacy: Confirm that the company continues to meet regulatory capital requirements for its broker-dealer subsidiaries (MS&Co., MSDWI) and bank subsidiaries post-9/11.