In case you tried to block MBIA's traumatic CMBS loss development out of mind, we must remind you as Chuck Chaplin noted full year loss developments "primarily due to the establishment of $1.1 billion of reserves for CMBS-related policies."
Life and 10-K's are full of coincidence. Morgan Stanley noted in its year-end report regarding "amounts related to MBIA derivative counterparty exposure... at December 31, 2010, the aggregate value of cumulative credit valuation adjustments and hedges exceeded the amount of gross exposure of $4.2 billion by $1.1 billion."
And it continues in the next paragraph. "The Company’s hedging program for Monoline counterparty exposure continues to become more costly and difficult to effect, and, as such, the losses in 2010 reflected those additional costs as well as volatility on those hedges caused by the tightening of both MBIA and commercial mortgage-backed spreads."
Never say never, but at this point it seems safe to assume that Morgan Stanley is not engaging in volatile, large, naked, hairy CDS speculation. Rather, Morgan Stanley likely has hedged all or close to all of its gross notional exposure to lots of crappy CMBS wrapped by MBIA and established a credit allowance for about $1.1B.
Meanwhile, this hedged exposure consists of the best performing fixed income index wrapped by an even better performing individual credit. Unless it made a bold call to unhedge their exposure, Morgan Stanley is bleeding.
These hedges were expensive to implement to begin with. In its own words, Morgan Stanley's "hedging program for Monoline counterparty exposure continues to become more costly and difficult to effect." The company is almost considering out loud that eliminating such costs is one benefit that must be considered in settling this exposure.
Another consideration is the RMBS repurchase litigation between these parties. But that is a whole other, albeit smaller can of worms.