Morgan Stanley Decides To Keep Discover

Among the considerations in the decision to retain the business are that Discover:

• Delivered record before-tax earnings of $1.27 billion in 2004, representing 19% of Morgan Stanley's total before-tax earnings and in excess of 19% ROE.
• Enjoys a strong brand and a loyal customer base of 50 million Cardmembers.
• Added more than one million merchant locations to its Discover Network in 2004 and is now accepted at more of the top 100 U.S. retailers than any other credit network.
• Has significantly improved credit quality over the past three years, and, in the second quarter of 2005, reported an over-30-day delinquency rate of 3.9% on managed loans, the lowest in 15 years.
• Is poised for new growth due to a favorable 2004 court ruling that allows the Discover Network to partner with financial institutions in the U.S. for the first time.
• Launched new partnerships with GE Consumer Credit, offering Wal-Mart- and Sam's Club-branded cards on the Discover Network.
• Acquired the fast-growing PULSE debit network in January 2005. PULSE has more than 4,100 financial institution customers.
• Recently formed a new partnership with China UnionPay, China's largest payment network with 800 million cards.
• Has a growing Morgan Stanley card business in the U.K.
• Benefits from certain synergies between Discover and Morgan Stanley, including lower funding costs for Discover as well as shared corporate functions and the ability to leverage resources.

"Of course, the U.S. credit card industry is in a low-growth stage right now - about 3 to 5% annually - and the rising cost of funds puts additional pressure on earnings in the short term," Mr. Mack added. "But given the strengths of Discover, its powerful brand name and its continuing strong ROE, retaining the business and investing in it over time give us a good chance to create value through domestic growth in excess of industry trends, growth in international profit and the unique opportunities in the payments business."

In April, the Board of Directors authorized the analysis of Discover as a possible spin-off. The analysis included, among other things, an evaluation of capital structure, financial projections, credit ratings and anticipated market valuations, together with consideration of the value of Discover to Morgan Stanley. After careful examination of the completed analysis, Mr. Mack recommended to the Board of Directors that Morgan Stanley retain Discover, and the Board agreed.