Morgan Stanley, Not Goldman Sachs, Was The Original BSD Of The Sub-Prime CDO Short Trade

This might explain the leak yesterday that Morgan Stanley is under investigation for CDO mis-dealing.  Essentially, their trading desk shorted the same CDOs that MS created and sold to clients.  Sounds familiar. 

This happens everywhere.  What is unique in the Goldman Sachs case, is that Goldman did not inform their client, ACA, that the Abacus CDO had been designed to fail by John Paulson.  We do not yet know if Morgan Stanley did the same.

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From the WSJ

But it was Morgan Stanley traders who came across as the real hitters in the mortgage business.  In his book “The Greatest Trade Ever: The Behind-The-Scenes Story of How John Paulson Defied Wall Street and Made Financial History,” the WSJ’s Greg Zuckerman described a visit between Morgan and Paulson traders in 2006.

At the time, Morgan traders were far ahead of Paulson in figuring how to make big so-called short bets against the mortgage market:

Brad Rosenberg, Paulson’s bond trader, invited two Morgan Stanley traders, John Pearce and Joseph Naggar, to visit the office, hoping to learn more about the market and include Morgan Stanley as one of its brokers on Paulson’s big trade.

Pearce and Naggar showed up in khaki pants and polo shirts, saying they didn’t have much time to talk because they were late for a golf outing with other clients.

“Let’s try to make this as brief as we can,” Naggar said. Pellegrini and Rosenberg, in suits and ties, handed the Morgan Stanley traders a list of subprime mortgage–backed bonds that the firm was hoping to bet against.

“Here are the names we’d like to put more shorts on,” Pellegrini said. Pearce and Naggar didn’t seem to have much interest in trading with Paulson’s team, though, or in spending time on their questions.

“It sounds like a good trade; maybe we’ll do it,” Pearce said, with a laugh. Pearce was just humoring them, Rosenberg thought. As they ended the meeting, Pearce said, “Well, if we get more capacity, we’ll put it on for you.”

Pearce and Naggar already had placed a few bearish subprime trades for their own firm, though they didn’t want to let that on in the meeting.

 Continue reading at WSJ Dealbook  >>

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