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William Pike
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For Immediate Release

Morgan Stanley Reports Third Quarter Results
Quarterly EPS from Continuing Operations Up 61% to $1.75
ROE Increases to 23 Percent in Quarter
Best Third Quarter Ever in Revenues, Net Income and EPSFirst Nine Months of FY06 Best Ever in Revenues, Net Income and EPS
NEW YORK, September 20, 2006 - Morgan Stanley (NYSE: MS) today reported income fromcontinuing operations for the third quarter ended August 31, 2006 of $1,851 million, an increase of 59
percent from $1,166 million in the third quarter of 2005. The annualized return on average common
equity from continuing operations was 22.7 percent in the current quarter, compared with 17.1 percent
in the third quarter of 2005. Diluted earnings per share from continuing operations were $1.75
compared with $1.09 a year ago. Net revenues (total revenues less interest expense and the provision
for loan losses) were $8.0 billion, 15 percent above last year’s third quarter. Non-interest expenses of$5.3 billion increased 2 percent from last year.

For the first nine months of 2006, income from continuing operations was $5,291 million, a 54 percent
increase from $3,446 million a year ago. The annualized return on average common equity fromcontinuing operations was 22.7 percent compared with 17.0 percent a year ago. Diluted earnings per
share from continuing operations were $5.01 compared with $3.19 last year.

Net income for the quarter, including discontinued operations, was $1,851 million, compared with
$144 million in the third quarter of 2005. For the first nine months of 2006, net income, including
discontinued operations, was $5,266 million, a 113 percent increase from $2,474 million a year ago.
Results for the third quarter and first nine months of 2005 include an after-tax charge of approximately$1 billion for discontinued operations related to the sale of the Company’s aircraft financing business.1
Diluted earnings per share, including discontinued operations, were $1.75 for the quarter, comparedwith $0.13 in the third quarter of 2005, and the annualized return on average common equity,
including discontinued operations, for the third quarter was 22.7 percent compared with 2.0 percent a
year ago. For the first nine months, diluted earnings per share, including discontinued operations,were $4.99 compared with $2.29 a year ago and the annualized return on average common equity,
including discontinued operations, was 22.6 percent compared with 11.6 percent last year.
1

The actual after-tax loss upon finalization of the sale was approximately $400 million.

Business Highlights•

Institutional Securities delivered its best third quarter results ever, with net revenues of $5.0
billion and income before taxes of $2.0 billion, up 55 percent from last year.

•

Equities sales and trading revenues of $1.5 billion included record results in Prime Brokerage.
Fixed Income sales and trading revenues of $2.2 billion reflected record third quarter results incommodities and credit products.

•

The Firm reached agreements on several “bolt-on” acquisitions, including the acquisition ofTransMontaigne and Heidenreich Marine, Inc. in our commodities business and Saxon Capitalin our residential mortgage business.

•

Global Wealth Management Group achieved record average annualized revenue and totalclient assets per global representative of $675,000 and $81 million, respectively, and it
recorded $5.4 billion in net new domestic assets during the quarter.

•

Asset Management continued to expand its product offerings with the launch of 23 new
products primarily targeted at the Company’s institutional and non-US client bases, including
10 in Alternatives, 10 in Equities and 3 in Fixed Income.

•Discover achieved record third quarter net revenues and income before taxes and continued its
strategy of broadening acceptance of the Discover Card through agreements with merchantacquirers First Data, Global Payments, Inc. and RBS Lynk. Discover also entered a strategic
partnership with JCB, the leading card issuer in Japan.

John J. Mack, Chairman and CEO, said, “Despite challenging market conditions, Morgan Stanleyachieved its best third quarter ever, demonstrating the continued progress we’re making in executing
on our plan to improve financial performance. Building on our positive momentum in recent quarters,
the people of Morgan Stanley delivered record revenues and earnings in the first nine months of 2006
and an ROE of more than 20% for the fourth quarter in a row. Just as important, we have madesubstantial progress strengthening key businesses and investing in key areas where we see significant
opportunities to further improve our performance and create additional shareholder value.”

INSTITUTIONAL SECURITIESInstitutional Securities posted income before taxes2 of $2.0 billion, up 55 percent from $1.3 billion in
the third quarter of 2005. Net revenues of $5.0 billion were 20 percent higher, driven by strong results
across all businesses. The quarter’s pre-tax margin was 40 percent, compared with 31 percent in last2

Represents income from continuing operations before losses from unconsolidated investees, taxes andcumulative effect of an accounting change.
2

year’s third quarter. The quarter’s return on average common equity was 30 percent compared with
24 percent a year ago.
•

Advisory revenues were $461 million, a 19 percent increase from last year’s third quarter.

•

Underwriting revenues were $548 million, a 7 percent increase from last year’s third quarter.
Equity underwriting revenues increased 19 percent to $237 million and fixed income underwriting
revenues were virtually unchanged at $311 million.

•

Fixed income sales and trading net revenues were $2.2 billion, a 13 percent increase over the third
quarter of 2005. The increase was driven by strong results in commodities and credit products,
partially offset by lower results in interest rate & currency products. The increase in commodities
was driven by strong results in oil liquids, electricity and natural gas due to strong client activity
including revenues recognized on a few large structured transactions as a result of increased
visibility of market value. Credit products had a record third quarter benefiting from activity instructured products, particularly in Europe. Interest rate & currency products were adversely
affected by a less favorable environment as customer driven flow and volatility declined and theyield curve flattened. In addition, emerging markets revenues were significantly lower due toslower customer flow and market conditions. These factors more than offset an increase inrevenues recognized on structured transactions in interest rate & currency products.

•

Equity sales and trading net revenues of $1.5 billion were a record third quarter and increased 18
percent from last year’s third quarter. Increased client flows across both the cash and derivatives
markets and record results in Prime Brokerage drove revenues higher.

•

Investment revenues were $188 million compared with $69 million in the third quarter of last year
and included significant gains from investments in the Company’s real estate funds,
IntercontinentalExchange and Grifols S.A.

•The Company’s aggregate average trading VaR measured at the 95% confidence level3 was $56
million compared with $52 million in the third quarter of 2005 and $63 million in the second
quarter of 2006. Total aggregate average trading and non-trading VaR was $66 million comparedwith $58 million in the third quarter of 2005 and $70 million in the second quarter of 2006. At
quarter end, the Company’s aggregate trading VaR was $61 million, and the aggregate trading andnon-trading VaR was $75 million.

•

Non-interest expenses were $3.0 billion, a 4 percent increase from a year ago. Non-compensation
expenses increased as a result of higher levels of business activity and charges for legal and

3

The Company has changed the confidence level at which VaR is utilized for limit and other management
purposes from a 99% confidence level to a 95% confidence level. The Company believes this change will
facilitate comparisons to other companies in the financial services industry. Under the 99% confidence level theaggregate average trading VaR and aggregate average trading and non-trading VaR would have been $91
million and $103 million, respectively. Under the 99% confidence level the quarter end aggregate trading VaR
and aggregate trading and non-trading VaR would have been $97 million and $108 million, respectively. Goingforward the Company will report VaR under the 95% confidence level.
3

regulatory matters. Compensation costs declined slightly from a year ago reflecting theCompany’s current estimate of 2006 full year compensation based on forecasted full year
performance and market conditions. In addition, the prior year included charges for senior
management severance and new hires.

For the first eight months of calendar 2006, the Company ranked first in global IPOs with an 11
percent market share, third in global equity and equity-related issuances with a 9 percent market share,
third in global completed M&A with a 26 percent market share, fourth in global announced M&A
with a 25 percent market share and fifth in global debt issuance with a 6 percent market share.4

GLOBAL WEALTH MANAGEMENT GROUP
Global Wealth Management Group’s pre-tax income for the third quarter was $158 million comparedwith $30 million in the third quarter of last year. The quarter's pre-tax margin was 12 percent
compared with 2 percent in last year’s third quarter. The quarter’s return on average common equity
was 14 percent compared with 2 percent a year ago.
•

Net revenues of $1.4 billion were up 9 percent from a year ago, reflecting higher net interest
revenue primarily resulting from the bank deposit sweep program, an increase in revenues fromfee-based products and higher investment banking revenues. These increases were partially offset
by a decline in commissions.

•Non-interest expenses declined 1 percent to $1.2 billion, reflecting a significant reduction in legal
and regulatory costs, which more than offset increased compensation expense due in part to higher
revenues.

•

Total client assets were $652 billion, a 5 percent increase from last year’s third quarter. Client
assets in fee-based accounts rose 14 percent to $193 billion over the last 12 months and increased
as a percentage of total assets to 30 percent from 27 percent.

•The 8,069 global representatives at quarter-end achieved record average annualized revenue andtotal client assets per global representative of $675,000 and $81 million, respectively.

ASSET MANAGEMENT
Asset Management reported pre-tax income of $125 million, 23 percent lower than last year's $162
million. The quarter's pre-tax margin was 20 percent compared with 24 percent a year ago and thereturn on average common equity was 13 percent compared with 24 percent in last year’s third
quarter. Net revenues fell 7 percent to $634 million primarily reflecting lower Private Equity
revenues. Higher management and administration fees, driven by higher assets under management,
were offset by a decline in distribution and other fees. Non-interest expenses decreased 2 percent to4

Source: Thomson Financial -- for the period January 1, 2006 to August 31, 2006.
4

$509 million. Excluding results from the Private Equity business, pre-tax income declined by 8
percent from last year and the pre-tax margin was 21 percent compared with 22 percent a year ago.

Assets under management or supervision at August 31, 2006 were $448 billion, up $20 billion, or 5
percent, from a year ago. The increase resulted from market appreciation partly offset by customer
out-flows. The percent of the Company’s long-term fund assets performing in the top half of the
Lipper rankings was 39 percent over one year, 58 percent over three years, 74 percent over five years
and 81 percent over 10 years.

DISCOVER
Discover’s third quarter pre-tax income was $368 million on a managed basis, up 54 percent from$239 million in the third quarter of 2005. Net revenues of $1,047 million were 15 percent higher thanlast year’s third quarter. The quarter’s pre-tax margin was 35 percent compared with 26 percent a year
ago. The quarter’s return on average common equity was 19 percent compared with 13 percent a year
ago. The current quarter includes the results of the Goldfish credit card business.
•

Net sales volume was a record $25.7 billion, a 15 percent increase from a year ago, reflecting
increased cardmember usage and the acquisition of the Goldfish credit card business.

•

Managed credit card loans of $49.6 billion were up 5 percent from a year ago and up 2 percent
from the end of the second quarter.

•

Managed merchant, cardmember and other fees were $579 million, up 9 percent from a year ago.
The increase was primarily due to higher merchant discount and other revenues, partially offset byhigher cardmember rewards. The increase in merchant discount revenue was primarily driven byrecord sales activity.

•

The provision for consumer loan losses on a managed basis was $496 million, down 16 percent
from last year, reflecting significantly lower bankruptcy charge-offs and improved credit quality.

•

Managed net interest income declined $35 million from a year ago, reflecting a narrowing of theinterest rate spread as a higher yield was more than offset by a higher cost of funds, partially offset
by higher average loans.

•

Non-interest expenses increased 1 percent to $679 million, primarily due to higher operating
expenses associated with the Goldfish credit card business, partially offset by lower compensation.

•

The credit card net charge-off rate was 3.81 percent, 131 basis points lower than last year’s third
quarter, but 51 basis points higher than this year’s second quarter. The managed credit card over30-day delinquency rate was 3.41 percent, a decrease of 50 basis points from the third quarter of2005. The managed credit card over-90-day delinquency rate was 1.59 percent, 21 basis points
lower than a year ago.

5

OTHER MATTERS
The quarter’s results reflect a decrease in the Company’s annual effective tax rate from 35.0 percent in
the second quarter to 33.5 percent, primarily due to the estimated impact of overseas tax planning
strategies on the full year.

The Company has adjusted its opening financial position for fiscal 2006 and its financial results for the
first two quarters of 2006 to reflect a change in its hedge accounting under SFAS No. 133, Accounting
for Derivatives Instruments and Hedging Activities. The change is being made following a recent
technical clarification by the U.S. Securities and Exchange Commission (SEC) of its interpretation of
SFAS No. 133 related to the accounting for fair value hedges of fixed-rate trust preferred securities.
The same periods noted also reflect the adjustment of two cumulative compensation and benefit
accruals. The Company has elected early application of Staff Accounting Bulletin 108 that wasrecently released by the SEC (refer to page 24 of the Financial Supplement available online in theInvestor Relations section at www.morganstanley.com).

As of August 31, 2006, the Company repurchased approximately 39 million shares of its common
stock since the end of fiscal 2005. The Company also announced that its Board of Directors declared
a $0.27 quarterly dividend per common share. The dividend is payable on October 31, 2006 tocommon shareholders of record on October 13, 2006.

Total capital as of August 31, 2006 was $150.0 billion, including $38.0 billion of commonshareholders’ equity, preferred equity and junior subordinated debt issued to capital trusts. Book
value per common share was $31.24, based on 1.1 billion shares outstanding.

Morgan Stanley is a leading global financial services firm providing a wide range of investmentbanking, securities, investment management, wealth management and credit services. The Firm's
employees serve clients worldwide including corporations, governments, institutions and individuals
from more than 600 offices in 30 countries. For further information about Morgan Stanley, please
visit www.morganstanley.com.

A financial summary follows. Financial, statistical and business-related information, as well as
information regarding business and segment trends, is included in the Financial Supplement. Both theearnings release and the Financial Supplement are available online in the Investor Relations section atwww.morganstanley.com.

###
6

(See Attached Schedules)

The information above contains forward-looking statements. Readers are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the date on which they are
made and which reflect management’s current estimates, projections, expectations or beliefs andwhich are subject to risks and uncertainties that may cause actual results to differ materially. Fora discussion of additional risks and uncertainties that may affect the future results of theCompany, please see “Forward-Looking Statements” immediately preceding Part I, Item 1,“Competition” and “Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A and “Certain
Factors Affecting Results of Operations” in Part II, Item 7 of the Company’s Annual Report on
Form 10-K for the fiscal year ended November 30, 2005, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in the Company’s 2006 Quarterly
Reports on Form 10-Q and in other items throughout the Form 10-K, the Forms 10-Q and theCompany’s 2006 Current Reports on Form 8-K.

7

MORGAN STANLEY
Quarterly Financial Summary(unaudited, dollars in millions)

Quarter Ended
Aug 31, 2005

Aug 31, 2006
Net revenues
Institutional Securities
Global Wealth Management Group
Asset Management
DiscoverIntersegment Eliminations

May 31, 2006 (1)Percentage Change From:Aug 31, 2005
May 31, 2006

Nine Months Ended
Aug 31, 2006 (1)Aug 31, 2005

Percentage
Change

$

4,989
1,371
634
1,047
(53)

$

4,164
1,255
679
911
(62)

$

5,545
1,402
723
1,191
(98)

20%
9%
(7%)
15%
15%

(10%)
(2%)
(12%)
(12%)
46%

$

16,007
4,057
2,052
3,327
(210)

$

11,519
3,721
2,017
2,758
(199)

39%
9%
2%
21%
(6%)

$

7,988

$

6,947

$

8,763

15%

(9%)

$

25,233$

19,816

27%

$

2,001
158
125
368
15

$

1,288
30
162
239
23

$

2,087
157
224
541
(13)

55%
*
(23%)
54%
(35%)

(4%)
1%
(44%)
(32%)
*

$

5,863
338
521
1,388
21

$

3,178
501
624
856
72

84%
(33%)
(17%)
62%
(71%)

$

2,667

$

1,742

$

2,996

53%

(11%)

$

8,131

$

5,231

55%

Earnings per basic share:
Income from continuing operations
Discontinued operations
Cumulative effect of accounting change (3)Earnings per basic share

$
$
$
$

1.83
1.83

$
$
$
$

1.12
(0.98)
0.14

$
$
$
$

1.81
0.01
1.82

63%
*
-*

1%
*
-1%

$
$
$
$

5.21
(0.02)
5.19

$
$
$
$

3.26
(0.97)
0.05
2.34

60%
98%
*
122%

Earnings per diluted share:
Income from continuing operations
Discontinued operations
Cumulative effect of accounting change (3)Earnings per diluted share

$
$
$
$

1.75
1.75

$
$
$
$

1.09
(0.96)
0.13

$
$
$
$

1.74
0.01
1.75

61%
*
-*

1%
*
---

$
$
$
$

5.01
(0.02)
4.99

$
$
$
$

3.19
(0.95)
0.05
2.29

57%
98%
*
118%

Consolidated net revenues
Income before taxes (2)Institutional Securities
Global Wealth Management Group
Asset Management
DiscoverIntersegment Eliminations
Consolidated income before taxes

Average common shares outstanding
Basic
Diluted
Period end common shares outstanding
Return on average common equityfrom continuing operations
Return on average common equity
(1)
(2)
(3)
Note:

1,010,468,365
1,055,664,392
1,058,664,567

1,045,874,085
1,072,033,275
1,082,727,000

1,013,241,715
1,054,733,745
1,071,786,172

1,014,846,804
1,055,811,711
1,058,664,567

1,056,211,084
1,080,279,276
1,082,727,000

22.7%
22.7%

17.1%
2.0%

23.6%
23.7%

22.7%
22.6%

17.0%
11.6%

As adjusted, refer to page 24 of the Financial Supplement available online in the Investor Relations section at www.morganstanley.com.
Represents consolidated income from continuing operations before losses from unconsolidated investees, taxes,
gain/(loss) from discontinued operations and cumulative effect of accounting change.
Represents the effects of the adoption of SFAS 123R in the first quarter of fiscal 2005.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
8

MORGAN STANLEY
Quarterly Consolidated Income Statement Information(unaudited, dollars in millions)

Investment banking
Principal transactions:
Trading
Investments
Commissions
Fees:
Asset management, distribution and admin.
Merchant, cardmember and otherServicing and securitizations income
Interest and dividends
Other
Total revenues
Interest expense
Provision for consumer loan losses
Net revenues

Aug 31, 2006

Quarter Ended
Aug 31, 2005

May 31, 2006 (1)

$

$

$

Compensation and benefits
Occupancy and equipment
Brokerage, clearing and exchange fees
Information processing and communications
Marketing and business development
Professional services
Other
September 11th related insurance recoveries, net
Total non-interest expenses
Income from continuing operations before losses
from unconsolidated investees, taxes
and cumulative effect of accounting change
Losses from unconsolidated investees
Provision for income taxes
Income from continuing operations
Discontinued operations
Gain/(loss) from discontinued operations
Income tax benefit/(provision)
Gain/(loss) from discontinued operations(2)
Cumulative effect of accounting change
Net income
Return on average common equityfrom continuing operations
Return on average common equity(3)
Pre-tax profit margin
Compensation and benefits as a % of net revenues
(1)
(2)
(3)
Note:

$

1,138

992

Percentage Change From:Aug 31, 2005
May 31, 2006

1,132

15%

1%

Nine Months Ended
Aug 31, 2006 (1)Aug 31, 2005
$

3,252

$

Percentage
Change

2,627

24%

2,824
202
888

2,150
103
804

3,565
690
1,005

31%
96%
10%

(21%)
(71%)
(12%)

9,469
1,206
2,822

5,790
482
2,452

64%
150%
15%

1,326
312
565
12,670130
20,055
11,835
232
7,988

1,249
357
398
6,998
106
13,157
5,986
224
6,947

1,333
277
651
10,114123
18,890
9,997
130
8,763

6%
(13%)
42%
81%
23%
52%
98%
4%
15%

(1%)
13%
(13%)
25%
6%
6%
18%
78%
(9%)

3,938
878
1,812
33,333368
57,07831,328517
25,233

3,699
983
1,315
18,876332
36,556
16,172568
19,816

6%
(11%)
38%
77%
11%
56%
94%
(9%)
27%

3,149
255
339
371
292
549
366
0
5,321

3,165
239
267
349
276
505
404
0
5,205

3,723
237
340
365
298
538
266
0
5,767

(1%)
7%
27%
6%
6%
9%
(9%)
-2%

(15%)
8%
0%
2%
(2%)
2%
38%
-(8%)

11,033
724
971
1,083
828
1,521
942
0
17,102

8,641
803
803
1,040
831
1,322
1,396
(251)
14,585

28%
(10%)
21%
4%
-15%
(33%)
*
17%

2,667
2
814
1,851

1,742
105
471
1,166

2,996
103
1,060
1,833

53%
(98%)
73%
59%

(11%)
(98%)
(23%)
1%

8,131
174
2,666
5,291

5,231
245
1,540
3,446

55%
(29%)
73%
54%

0
0
0
0
1,851

(1,700)678(1,022)
0
144

14
(6)
8
0
1,841

*
*
*
-*

*
*
*
-1%

(42)
17
(25)
0
5,266

(1,698)677(1,021)
49
2,474

98%
(97%)
98%
*
113%

22.7%
22.7%
33%
39%

$

$

17.1%
2.0%
25%
46%

23.6%
23.7%
34%
43%

As adjusted, refer to page 24 of the Financial Supplement available online in the Investor Relations section at www.morganstanley.com
Represents the effects of the adoption of SFAS 123R in the first quarter of fiscal 2005.
Income before taxes, excluding losses from unconsolidated investees, as a % of net revenues.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
9

$

22.7%
22.6%
32%
44%

$

17.0%
11.6%
26%
44%