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Goldman Sachs & Co. Financial Services Conference

Goldman Sachs & Co. Financial Services Conference. Philip J. Purcell Stephen S. Crawford Chairman & CEO Chief Financial Officer May 13, 2002. % of Firm Revenues. 27%. 27%. 31%. 34%. 37%. 39%. Sales and Trading. Sales and Trading Net Revenues. ($MM, % Total). 1997-2001 CAGR: 20%.

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Goldman Sachs & Co. Financial Services Conference

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  1. Goldman Sachs & Co.Financial Services Conference Philip J. Purcell Stephen S. Crawford Chairman & CEO Chief Financial Officer May 13, 2002

  2. % of Firm Revenues 27% 27% 31% 34% 37% 39% Sales and Trading Sales and Trading Net Revenues ($MM, % Total) 1997-2001 CAGR: 20%

  3. Diversification Sales and Trading Net Revenues ($MM, % Total) Equity Fixed Income

  4. Balance $MMs % of Total $491,651 74,298 194,222 158,846 47,885 16,400 15% 40% 32% 10% 3% Balance Sheet(1) $MMs Asset Class Total Assets Cash and cash equivalents Financing transactions, including:Reverse repos and securities borrowed Financial instruments, including: Cash products ($118,770) Derivative products ($31,814) Receivables, net of allowances: Other assets, primarily includes:Aircraft, cash collateral, goodwill, office facilities etc. Note: (1) As of February 28, 2002

  5. Financial Instruments – Cash(1) • Bank Loans: $4.9Bn • Private Equity: $900MM(2) • High Yield: $1.6Bn Selected Financial Instruments Loans and Commitments Investment Grade 75% 25% Non-Investment Grade Total: $10.2Bn Note: (1) As of February 28, 2002 (2) Of which only $250 MM is in inventory

  6. AAA AA A BBB NIG Financial Instruments – Derivatives(1) Maturity Profile by Counterparty Rating Counterparty Rating by Product ($MMs) ($MMs) Note: (1) As of February 28, 2002

  7. Revenue Drivers • Trading Volumes • Volatility • Primary Activity • Market Direction

  8. Lowers Risk Increase Flow Strengthens Client Relationships Business Model

  9. AIM MFS Janus Fidelity PIMCO Vanguard All Others TIAA-CREF T. Rowe Price Oppenheimer Cap Research Putnam Funds Morgan Stanley American Century American Express Franklin Templeton BHT SSGA Vanguard Deutsche Mellon Other Brandes Rittenhouse Alliance 1838Advisors Lazard Other Top 20 Next 20 Next 60 Next 535 Consolidation and Fragmentation 2001 Mutual Funds 2001 Passive Funds Top 15 Complexes (Cumulative Share %) (%) 2001 Hedge Funds 2001 Separately Managed Accounts (%) (Cumulative Share %) Source for above charts: Morgan Stanley/Freeman Securities Research

  10. Client Service Model • Three customer segments • Mutual funds • Hedge funds • Asset owners • Different value chains • Best execution • Enhanced services • Advice • Capital • One prerequisite: Scale operations

  11. Execution Automated Options Market Making OTC Market Making • Applied OTC market making technology and strategy to options business • Making markets in 40,000 instruments, representing 435 names – from standing start in August 1999 • Largely automated operations – handful of traders Total Number of Stocks

  12. Services and Advice • Analytics • Financing • Settlement • Securities lending • Dedicated trading • Tax and regulatory advice • Technology

  13. Scale Morgan Stanley Institutional Securities Trading Volume and Cost per Trade (Indexed) Gross Volumes Operations Expenses Cost per Trade

  14. Research Top Ranked Analysts by Institutional Investor North America II First Teams 2001 Europe II First Teams 2002 • Specialty Chemicals • Data Networking • Autos & Auto Parts • Brokers & Asset Managers • Insurance/Nonlife • Medical Supplies & Devices • Cable • Publishing & Information Services • Radio & TV Broadcasting • Enterprise Software • Internet Infrastructure Services • Autos & Auto Parts • Luxury Goods • Telecommunications Equipment • Tobacco • Convertibles • Economics/Developed Markets • Equity Strategy/Developed Markets Japan II First Teams 2002 Global II First Teams 2001 • Chemicals • Construction • Metals • Software/Business • Autos & Auto Parts • Insurance • Telecommunications Equipment • Equity Strategy Morgan Stanley Proprietary Research Ratings System Pre- 3/18/2002 Ratings: Ratings as of 3/18/2002: • SB = Strong Buy • O = Outperform • N = Neutral • U = Underperform • O or Over = Overweight • E or Equal = Equal-weight • U or Under = Underweight Currently 19% of stocks are ranked Underweight by MWD Analysts

  15. Relative Returns Annual ROE Comparison (Indexed to MWD) C MWD LEH MER GS JPM Source: Company filings and Morgan Stanley Research

  16. New NASD and NYSE Rules Provisions Address: • Promises of Favorable Research • Limitations on Relationships and Communications • Analyst Compensation • Firm Compensation • Restrictions on Personal Trading by Analysts • Disclosures of Financial Interests in Covered Companies • Disclosures in Research Reports Regarding the Firm's Ratings • Disclosures During Public Appearances by Analysts

  17. Value Added By Morgan Stanley Percent of Analysts Beating Passive Portfolio (%) Passive Portfolio Note: Active: Portfolio weighted by Morgan Stanley research recommendations (prior to 3/18/02) Passive: Equal-weighted performance

  18. Average Return(1) For All IPOs Jan 1, 1999 to May 7, 2002 (%) Source: Thomson Financial Note: (1) Based on difference between offer price and price on 5/7/02

  19. Disciplined Underwriting MWD IPO Market Share ($ volume)(1): Total IPO Market Share InternetIndustry 1995-2001 Source: Thomson Financial Note: (1) Deals of $10MM or more

  20. Disciplined Underwriting Passed On The IPO... 1-800-Flowers Buy.com Earthlink Excite Exodus GeoCites Infospace Internet Capital Group IXL Lycos Network Solutions NetZero Pets.com Startmedia Theglobe.com UUNet USWeb VerticalNet Webvan Yahoo!

  21. June 20, 2001 Morgan Stanley Downgrade Report Qwest: Report is “Hogwash” Feb. 13, 2002 Company Announces It will Draw Down $4Bn Bank Loan Aug. 14, 2001 Qwest Reports 12%Increase in Revenues for Quarter Nov. 14, 2001 Qwest Reports Revenue Flat, But Key Areas Growing Apr. 4, 2002 SEC Announces It Has Begun Formal Investigation of Qwest Jan. 25, 2001 Morgan Stanley Downgrades June 25, 2001 Other Analysts Defend Qwest; Dismiss “Accounting Esoterics” An Analyst Stands His Ground Qwest Communications Qwest Stock Price ($)

  22. Not Linked to Investment Banking Revenue

  23. A More Robust Ratings System • Revised stock rating system March 18th, 2002 based on intensive client survey • No other firm has made similar wholesale changes in their ratings • Number of stocks rated Underweight is more than 2x major competitors combined(1) Underweight19% Overweight34% Equal-Weight47% Note: (1) Competitors include Bernstein, CSFB, Deutsche Banc, Goldman Sachs, Merrill Lynch, Prudential Securities, and UBS Warburg

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