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Morgan Stanley's Stress Test Math (Correct)

Banks like Morgan Stanley, Goldman Sachs (GS - Get Report), Bank of America (BAC - Get Report), JPMorgan (JPM - Get Report) and Citigroup (C - Get Report) all began recording adjustments in 2007, after opting into the what's called the Fair Value Option, which forces lenders to mark-to-market many assets and liabilities.

The accounting impacts Morgan Stanley's earnings the most as a result of its size and because a hedging program put in place by Goldman Sachs reduces the company's DVA swings.

In 2008, Morgan Stanley booked $5.1 billion in revenue as a result of the widening of its credit spreads, split between a $3.5 billion gain from the company's fixed income division and a $1.6 billion gain from its equities unit. The gain equaled about 40% of the bank's overall trading revenue of $14 billion that year.

Since most stress test figures match up -- both the Fed and Morgan Stanley see trading and counterparty losses at about $11 billion -- the revenue divergence stands out as the biggest point diffference in Thursdays stress tests.

An earlier version of this article sought to explain the revenue difference by questioning whether Morgan Stanley was including DVA in its stress tests calculation. The analysis was incorrect, given Lake's late Friday confirmation that there was no inclusion of the figure in Morgan Stanleys calculation.

-- Written by Antoine Gara in New York

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