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REPORT: Morgan Stanley Sold A Toxic Security Called 'Nuclear Holocaust'



Surprise, surprise...

Pro Publica

Morgan Stanley's Nuclear Holocaust

By Jesse Eisinger

On March 16, 2007, Morgan Stanley employees working on one of the toxic assets that helped blow up the world economy discussed what to name it. Among the team members' suggestions: "Subprime Meltdown," "Hitman," "Nuclear Holocaust," "Mike Tyson's Punchout," and the simple-yet-direct: "Shitbag."

Ha ha. Those hilarious investment bankers.

Then they gave it its real name and sold it to a Chinese bank.

We are never going to have a full understanding of what bad behavior bankers conducted in the years leading up to the financial crisis. The Justice Department and the Securities and Exchange Commission have failed to hold big wrongdoers to account.

We are left with what scraps we can get from those private lawsuits lucky enough to get over the high hurdles for document discovery.  A case brought in the New York State Supreme Court in Manhattan against Morgan Stanley by a Taiwanese bank, which bought a piece of the same deal the Chinese bank did, has cleared that bar.

The results are explosive.  Hundreds of pages of internal Morgan Stanley documents, released publicly last week, shed much new light on what bankers knew at the height of the housing bubble and what they did with that secret knowledge.

The lawsuit concerns a $500 million collateralized debt obligation called Stack 2006-1, Morgan Stanley began putting together in the first half of 2006.  According to an internal presentation, Stack "represents attractive business for Morgan Stanley."

Why? In addition to fees, another bullet point listed: "Ability to short up to $325MM of credits into the C.D.O." In other words, Morgan Stanley could — and did — sell assets to the Stack C.D.O., intending to profit if the securities backed by those assets declined.  The bank put on a $170 million bet against Stack, even as it was selling it.

In the end, of the $500 million of assets backing the deal, $415 million ended up worthless.

"While investors and taxpayers all over the world continue to choke on Wall Street's toxic subprime products, to this day not a single major Wall Street executive has been held accountable for misconduct relating to those products," said Jason C. Davis, a lawyer at Robbins Geller who is representing the plaintiff in the lawsuit. "They are generally untouchable, but we are pleased that the court in this case is ordering Morgan Stanley to turn over damning evidence, so that the jury will get to see what Morgan Stanley really knew about the troubled nature of its supposedly 'higher-than-AAA' quality product."

In one email from Oct. 21, 2005, a Morgan Stanley employee warns a banker that the mortgages Morgan Stanley is buying from loan originators are troubled. "The real issue is that the loan requests do not make sense," he writes.  As an example, he cites "a borrower that makes $12K a month as an operation manger of an unknown companyafter research on my part I reveal it is a tarot reading house."

Continue reading...


Photos by WilliamBanzai7...

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Reader Comments (10)

Feb 1, 2013 at 4:05 AM | Registered CommenterDailyBail
Feb 1, 2013 at 4:06 AM | Registered CommenterDailyBail
Anonymous re-hacks US Sentencing site into video game Asteroids

Feb 1, 2013 at 4:07 AM | Registered CommenterDailyBail
Shadow Banking Facing Tougher Regulations

Feb 1, 2013 at 4:09 AM | Registered CommenterDailyBail
WASHINGTON (MarketWatch) — The Senate on Thursday approved a short-term suspension of the country’s borrowing limit, taking the threat of default off the table but setting the stage for an intensified round of new budget battles.

Feb 1, 2013 at 4:19 AM | Registered CommenterDailyBail
John Carney attempts to defend Morgan Stanley's execrable behavior over at CNBC:


His argument?

"There's a big difference between selling a product to a retail investor and a bank, even a Taiwanese bank."

To be clear, the Taiwanese bank is the party that invested in the MS deal. Carney is implicitly conceding that Morgan Stanley misrepresented the deal, and he's arguing instead that the investors' reliance on MS's misrepresentations were not reasonable given the size and presumably the resources at the bank to investigate the quality of the package. (To sustain a claim for fraud, of course, a plaintiff must show both that there was a misrepresentation by the defendant and that the plaintiff's reliance on that misrepresentation was reasonable.)

Like any deal, this one was forward-looking. So while we know from hindsight that the mortgage investments would collapse, no one knew that at the time of the investment. Carney's hindsight-based cherry-picking of the contemporaneous evidence is quite telling in this regard.

He altogether ignores the fact that the very people who were pushing the deal were also shorting it--a fact that these same people concealed from their investors across the table. Rather than focusing on this highly material evidence, Carney instead points to totally different people at MS--people who aren't even remotely connected to the deal at issue--and says, "Look over here! It's a research note that gives a lukewarm outlook on housing! This wasn't a secret!"

Not content with a single shot of intellectual dishonesty, Carney doubles down by accusing Eisenger of "financial paternalism"--a strawman attack once again designed to deflect attention away from the specific MS predators engaged in the fraud.

The only thing that could make Carney's piece any more shameful is the discovery that Morgan Stanley paid for it. Carney doesn't say. That leaves him in the position of being either a professional liar or an unpaid tool.
Feb 1, 2013 at 1:04 PM | Registered CommenterCheyenne
Kinder Morgan a vile polluter energy company buying up ports around the nation. The Port of Wilmington, Del. (largest container port on east coast) is owned by the State of Delaware (the citizens of Del). In a secret dirty backroom deal, Jack Markell Gov. an Allan Levin, Dir of Economic Development attempted to sell/lease the port of Kinder Morgan without any oversight by the legislature. Not one piece of information has been delivered to anyone outside the secret dealers. Citizens rallied, protested and informed the legislature of the deal. the Senate voted 13-9 for oversight, and the House voted unanimously to have oversight. Kinder Morgan has been sued for millions by the EPA, and the US Labor dept for not paying workers. This vile company was running negatives (Fitch downgraded them) until Goldman, JP Morgan and Morgan Stanley began investing (our bailout $) to this company run by former Enron Employees. What most people dont know is that a Trust Fund was set up in the 80's to make sure our ports were safe, moderized etc. The money was spent elsewhere, while our ports suffered economically. Kinder claims they will use this "FRUIT" port for its LNG operations, coal, coal ash, toxic chemical etc...in a a Port densely populated. Delaware has one of the highest cancer rates in the nation, thanks to dupont. The Del river is scheduled for dredging to 45ft, by Army corp of Engineers. Yesterday, Senator Boxers committee met to discuss diverting the Trust Fund directly to the Army corp of engineers. that bunch of thieves have robbed this country for decades without oversight, and now the nuts in DC want to turn over trust fund monies to them. Note: the Delaware news journal largest paper in Delaware refuses to print ANY of the horrible environmental/labor practices of Kinder where ever they go in this country. We need information re: Goldman, JP Morgan, Morgan Stanleys dealings with Kinder. thanks.
Feb 1, 2013 at 2:11 PM | Unregistered Commentersave our port
Saveourport, You may want to try and contact Ms. Fitts at solari.com.
Feb 1, 2013 at 3:44 PM | Unregistered CommenterSKINFLINT
Thanks for the info, save our port...
Feb 1, 2013 at 5:32 PM | Unregistered Commenterjohn
@ saveourport, Thanks again for the info, especially for reminding me of the Kinder Morgan connections. I am putting together my next article and will have stories re: Kinder, Oneok and Chesapeake. Should be ready by monday.

Feb 2, 2013 at 2:55 PM | Unregistered Commenterjohn

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