Mr. James Gorman Morgan Stanley 1585 Broadway New York, NY 10036 Dear Mr.

Gorman, With Morgan Stanley (hereinafter the "Firm"), investors are effectively purchasing a closed-end fund, and closed-end funds should trade at a moderate discount to NAV. With the status quo, the discounts to NAV might become greater given the high leverage, entitlements and internal marks. As a deposit-taking primary dealer, the Firm has a highly-levered portfolio funded primarily by short-term borrowings, and as a result, the Firm's portfolio has little-to-no ability to withstand a fall in asset prices. In 2008, a liquidating transaction would likely have been the Firm's most capital efcient solution. Despite the political decision to rescue certain insolvent non-bank securities rms, the Firm's primary inoculation against insolvency is to restructure its calculus of compensation. The status quo system of entitlements creates (i) a codied system of self-dealing and (ii) a non-linear path to insolvency. The pro-cyclical nature of brokers and lenders is exacerbated by status quo entitlements. Despite shrinking credit spreads, the Firm's brokers and lenders actively sought to increase the Firm's credit inventory. Since falling spreads = higher prices, the decision to increase credit inventory despite rising prices is counterintuitive, given the positive correlation between current income and expected capital losses. Despite the limiting constraints of the Firm's capital structure and its liability structure, these irrational strategies become logical choices for brokers and lenders who (i) are incentivized to maximize a partial factor and (ii) have no concomitant ownership of capital losses. As a deposit-taking primary dealer, the Firm's brokers and lenders use the banking book to obfuscate latent losses. Despite an under-reported portfolio of low-quality, non-liquid, high-duration and rstloss positions, the banking book enables additional opacity of the Firms (in)solvency position. The Firms managers are able to mark assets on a p = max [BV, MV] basis, rather than p = min [BV, MV] as necessitated by (i) the Firms liability structure and (ii) basic prohibitions against conicts-of-interest. If p = min [BV, MV], the prices of internal marks might vanish in a puff of logic. (Note: There is a reason why students are not allowed to grade their own tests.)

I submit Plan B, a Precatory Proposal to (i) prevent widening discounts to NAV and (ii) abrogate the Firm's repeating cycle of discontinuous insolvency. Purchase price is the optimal way to manage investment risk, and this is ensured with a total return framework, providing the solution to the inherent conict between (i) the ability of the Firm to take risk and (ii) the willingness of the Firm's brokers and lenders to take risk. As a deposit-taking primary dealer, the Firm's brokers and lenders should be primarily focused on preserving the Firm's book value, and this is achieved by restructuring compensation from status quo entitlements to Plan B prot sharing. This is not simply a difference in degree but a difference in kind: entitlements are a function of a partial factor, while prot sharing is a function of total return. With best wishes,

Deepak

As a venture capitalist, I conrm these conclusions based on my due diligence, as required by the empirical imperative. ps = f(RT) => capital allocation = min [ability, willingness]. The Firm's (in)solvency was not a ve sigma result. It was a direct consequence of status quo entitlements, given the interdependence of incentives and (in)solvency. While typically advertised as an exogenous liquidity problem, changing the conversation helps to obfuscate the issues. Liquidity and solvency are distinct but related concepts. The Firm's capital structure and liability structure increase the primacy of liquidity in order to preserve the Firm's solvency. Entitlements => Unholy Trinity => Insolvency. (In)solvency was a fait accompli given the positive correlation between current income and expected capital losses. With status quo entitlements, it is a predetermined and inviolable conclusion that the Firm's brokers and lenders will seek to maximize current income by chasing higher risk investments, but these higher risk investments often erode principal and often produce lower returns. High expenses and capital losses are debits to the equity account, and expenses - especially entitlements - are directly controllable. With capital losses, there is a timing mismatch: current income is immediately known, while capital losses take longer to manifest. e = f(Ri) => capital allocation = max [DA-DL, 0]. The Firm's brokers and lenders actively sought to mismatch liquidity with a long-duration portfolio despite shrinking spreads and increasing leverage. This was exacerbated by the decision to purchase non-liquid assets + shift down the capital structure into rst-loss and equity-like instruments. Note: It is difcult to recover large capital losses given the negative skew and positive kurtosis of the long-duration portfolio. Further, the Firm's rst-loss positions are exposed to higher degrees of idiosyncratic risk than its secured and unsecured credit portfolio. With the Unholy Trinity of capital allocation, higher risk investments will maximize the probability of (in)solvency. Leverage enables a violation of the Law of Conservation of Losses and creates a non-linear path to insolvency. With a mismatched balance sheet, the Firm's interest-rate sensitive balance sheet is exposed to a change in discount rates, and insolvency is inevitable given (i) the differing rates of change and (ii) the de minimis - perhaps negative - equity in the capital structure. Relative to liabilities, the left side of the balance sheet more closely reects market volatility. With a rise in discount rates, prices of assets fall faster than prices of liabilities. The result: shareholder's equity quickly evaporates. Liquidation is a natural selection process for failed lenders. The Firm's managers should have embraced a liquidating transaction as the most capital efcient solution and as a solution to the homeostatic imbalance of the status quo. Creditors should have (i) opposed entitlement payments based on notions of fraudulent conveyance and (ii) favored the defenestration of the Firm's managers in a restructuring. Latent losses resemble dark matter: omnipresent but difcult to detect. While the commonly-accepted practice is Latent Losses => Banking Book => Discount Window, internal marks based on p = min [BV, MV] is necessitated by (i) the Firms liability structure and (ii) basic prohibitions against conicts-ofinterest. The Firms brokers and lenders have a history of under-reporting the large portfolio of lowquality, non-liquid, high-duration and rst-loss positions purchased for the Firms portfolio. By minimizing the portfolios J-curve, the banking book allows the duration mismatch to resolve over time, but this violates basis notions of transparency and obfuscates the Firm's (in)solvency position to investors. Deposit-gathering primary dealers should be privately-held entities, preferably partnerships. The existing paradigm is not collectively exhaustive; the current structure lacks the collective liability of a closedsystem. Further, it would be easier to manage the managers in a private company context with less dispersion of ownership. With the large number of shareholders, the Firm's brokers and lenders expect the natural impasse of inaction. Coordinating a large number of shareholders is a Sisyphean task, somewhat akin to herding kittens. While initially amusing, it is often an exercise in futility. Note: The Firm's secret borrowing of $107.3 billion is considered an explicit admission of (in)solvency, given the $35.765 billion in BV per the August 31, 2008 10Q led on October 9, 2008.

Mr. James Gorman / Morgan Stanley / January 12, 2014

Page 2 / 3

Morgan Stanley

Status Quo

Plan B

Incentives

entitlements e = f (Ri)

prot sharing ps = f (Rt)

Portfolio Leverage

25%+ equity

Management

Brokers / Lenders

PMs

Marks

p = max [BV, MV]

p = min [BV, MV]

SUMMARY Morgan Stanley has a highly-levered portfolio with a primal need for liquidity, given its extensive use of short-term borrowings, including on-balance sheet, contingent and other off-balance sheet liabilities. Innite leverage of the portfolio enables capital losses unbounded by space, time or book value. The Firm's portfolio has little-to-no ability to withstand a fall in asset prices. The Firm's capital allocation benchmarks are endogenous: the Firm's brokers and lenders should be focused on preserving book value, and this is especially important given the Firms low ability to take risk. Purchase price is the primary method of managing investment risk; higher-returns for higher-risks only applies on average and over an extended period of time. Unfortunately, brokers and lenders are currently incentivized to maximize a partial factor and have no concomitant ownership of capital losses. Compensating brokers and lenders on a partial factor is explicit permission to raid the principal via high expenses and capital losses. Plan B prot sharing provides the alternative to the Firm's status quo entitlements, and this is achieved with a total return framework, solving the inherent conict between (i) the ability of the Firm to take risk and (ii) the willingness of the Firm's brokers and lenders to take risk. This is not simply a difference in degree but a difference in kind: entitlements are a function of a partial factor, while prot sharing is a function of total return. By deliberately failing to calculate compensation as a function of total return, Morgan Stanley risks insolvency given (i) the interdependence of incentives and solvency and (ii) the non-linear rise in the probability of capital losses. Since unifying incentives are the sine qua non of solvency, the decision to ignore entitlement reform may be construed as a bad faith abdication of duciary duty. As duciaries, current income should be a by-product of capital allocation, not its primary purpose. Note: Value chain = Lender => Broker => PM

Mr. James Gorman / Morgan Stanley / January 12, 2014

Page 3 / 3