Fitch Revises Morgan Stanley's Outlook to Negative; Places Discover On Watch Negative.

NEW YORK -- Fitch Ratings has affirmed the debt and Issuer Default Ratings (IDRs) for Morgan Stanley and revised the Rating Outlook to Negative from Stable. Fitch has also placed the ratings for Discover Bank on Rating Watch Negative following the announced spin-off of Discover Financial Services today. Ratings are listed at the conclusion of this press release.

Fitch's Outlook revision to Negative is prompted by Morgan Stanley reduction of common equity from the spin and expected common stock repurchase activity, the loss of earnings from Discover Financial Services and expected increase in revenue volatility as efforts to double revenues and pretax profits continue. Fitch believes that Morgan Stanley's market and credit risk appetites will expand in certain industries and may reach beyond levels expected for firms possessing a credit rating in the 'AA' range.

To date, increases in risk appetite have been met with sufficient retained earnings and the maintenance of an appropriate funding and capital structure. Today's announcement concerning the spin of Discover Financial Services eliminates a stable and diversifying source of earnings. While material efforts have resulted in improvements to earnings contributions from Global Wealth Management and Asset management, they are not at levels that are considered sufficient to dampen volatility from Institutional Securities.

Fitch believes Morgan Stanley possesses significant competitive advantages in investment banking, prime brokerage and commodities trading and advisory businesses. However, market share gains will be difficult to achieve without the willingness to commit greater access to financing and leverage -- potentially compromising the current balance sheet strength. In addition, each of these businesses currently generates significant profit margins which in turn are attracting material competition.

The reduction of common equity from the spin and the Board approved stock repurchase program combine to reduce common equity support of the balance sheet. While hybrid capital issuances receive equity credit and are well within regulatory and Fitch allowances, balance sheet leverage on a pure and Fitch risk adjusted basis may fall below Fitch's expectations within the current credit range. Fitch will evaluate the leverage, debt to equity, economic and regulatory capital metrics as well as profitability and volatility of earnings for Morgan Stanley. An Outlook indicates a potential for change in the IDR within an intermediate time frame. If warranted, Fitch expects any downgrade to be limited to one notch.

Discover Bank's IDR was directly linked to the support provided by Morgan Stanley. Discover's standalone financial profile would warrant the assignment of a lower, albeit investment grade, long-term debt rating. Fitch expects to assign a 'BBB' IDR and 'F2' short-term rating. Long-term deposit ratings will be notched one above the IDR consistent with Fitch's view that depositors would benefit from the US Depositors Preference rule. Discover's individual rating is affirmed at 'B/C' based on Discover's profitability, asset quality, funding and capital structure independent of Morgan Stanley. Fitch believes the expected balance sheet and operating performance of the company will be consistent with the expected ratings. Fitch does not believe Discover's operations will be negatively affected by the divestiture. The Outlook is expected to be Stable. Ratings would be revised upon the spin-off (completion expected in third quarter-2007). Discover's '1' support rating will be downgraded to '5' following the spin-off.

Fitch has placed the following ratings on Rating Watch Negative:

Discover Bank

--Issuer Default Rating (IDR) 'AA-';

--Short-term Issuer 'F1+';

--Long Term Deposits 'AA';

--Short Term Deposits 'F1+';

--Support '1'.

Fitch has also affirmed and revised the Rating Outlook to Negative on the following ratings:

Morgan Stanley

--Issuer Default Rating (IDR) 'AA-';

--Senior debt 'AA-';

--Subordinated 'A+';

--Preferred 'A+';

--Short-term Issuer 'F1+';

--Individual 'B';

--Support '5'

Other ratings affirmed include:

Morgan Stanley Bank

--Issuer Default Rating (IDR) 'AA-';

--Long term deposits 'AA';

--Short-term Issuer 'F1+';

--Short-term deposits 'F1+';

--Individual 'B';

--Support '1'.

Morgan Stanley S.V.

--Issuer Default Rating (IDR) 'AA-';

--Short-term Issuer 'F1+';

--Support '1'.

Morgan Stanley Dean Witter Australia Finance Ltd..

--Issuer Default Rating (IDR) 'AA-';

--Senior debt 'AA-';

--Short-term Issuer 'F1+'.

Morgan Stanley Canada Ltd.

--Short-term Issuer 'F1+'.

Bank Morgan Stanley AG

--Issuer Default Rating (IDR) 'AA-';

--Short-term Issuer 'F1+';

--Individual 'B';

--Support '1'.

Morgan Stanley Capital Trust II - VII

--Trust preferred 'A+'.

Discover Bank

--Individual 'B/C'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.