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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 company — after research on my part I reveal it is a tarot reading house."
Photos by WilliamBanzai7...
