Morgan Stanley Said to Near Mortgage-Bond Accord With US

31 Dec 2014 | Author: | No comments yet »

Court Filing Illuminates Morgan Stanley Role in Lending.

Bankers, you might remember, are supposed to lend money to people who can — I know this might sound quaint — actually pay them back. Morgan Stanley (MS:US) is in talks with the U.S. to resolve an investigation into the bank’s creation and sale of mortgage-backed bonds, the latest in a string of Wall Street cases tied to the 2008 financial crisis, a person familiar with the matter said.Having scored tens of billions from other banks over bubble-era mortgages, the DOJ now has Morgan Stanley (MS -0.4%) in its sights, and unearthed documents/emails from an unrelated case perhaps show an even closer relationship between the bank and subprime king New Century than previously imagined. “Morgan Stanley is involved in almost every strategic decision that New Century makes in securitized products,” according to one internal Morgan Stanley report from 2004 that the bank surely doesn’t want to see put in front of a jury.

Since the financial crisis, Wall Street firms have argued that they were victims, just like everybody else, of the bad mortgages that were churned out by subprime lenders like Countrywide and New Century. For its part, Morgan Stanley says it was competing for New Century loans with other banks and did not have any special leverage over the lender, and other documents indicate Morgan was stricter than some competitors in deciding which loans to accept. Authorities are focusing on Morgan Stanley after settling cases against firms including JPMorgan Chase & Co. and Bank of America Corp., according to the paper. A settlement would add Morgan Stanley to a growing list of banks to face federal sanctions over mortgage practices in the run-up to the collapse in housing prices.

Now, it’s true that Wall Street banks didn’t always realize how toxic the waste they were peddling really was, and got stuck with some of it on their balance sheets. But they provide an inside picture of the process through which Morgan Stanley pushed New Century to issue more mortgages with burdensome conditions that would be lucrative for Morgan Stanley — including loans with balloon payments, adjustable interest rates and prepayment penalties that made them harder to refinance. Those losses infected everything else, because they were big enough to make the banks, which had levered themselves up to absurd levels, look insolvent—setting off a run on the entire financial system and every financial asset.

The documents indicate that Morgan Stanley employees were aware of the low credit quality — and occasionally joked about it — even as they continued to snap up loans from New Century. In a November regulatory filing, the firm said that some cases had reached “advanced stages.” The investigations focus in part on the firm’s due diligence on loans it bought and disclosures to investors.

A top due diligence executive at Morgan Stanley, Pamela Barrow, wrote to a colleague in 2006 sarcastically describing the “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.” Morgan Stanley would not comment on the Justice Department negotiations. Take Morgan Stanley, which starting in 2004, told the subprime lender New Century what kind of crappy loans to make if it wanted to sell them to the investment bank. The firm in February agreed to pay $1.25 billion after the Federal Housing Finance Agency accused it of selling faulty mortgage-backed securities to Fannie Mae and Freddie Mac. About six months later, Morgan Stanley reached a $275 million settlement with the Securities and Exchange Commission over claims it understated the number of delinquent loans backing subprime mortgage securities. In its November disclosure, Morgan Stanley said the Illinois Attorney General’s Office has demanded $88 million, claiming the firm misled pension funds.

Well, other than telling him that “Unfortunately, I don’t think we will be able to utilize you or any third party in the valuation department any longer.” Still, the newly released documents suggest that Morgan Stanley’s trading desk in New York played an active role in guiding the types of loans that were being made in places like Florida and Detroit. Betcha that would get some of them good old boys to pay that house bill.” To contact the reporters on this story: David McLaughlin in Washington at; Bob Van Voris in federal court in Manhattan at; Phil Milford in Wilmington, Delaware at To contact the editors responsible for this story: Sara Forden at; Michael Hytha at Joshua Gallu, David E.

The suit accuses Morgan Stanley of dictating New Century’s lending policies, which the A.C.L.U. has argued were discriminatory and led to harsher loan terms for minorities. Morgan Stanley tried to stop the suit from going forward, and denied that it had controlled New Century’s policies and that New Century’s policies had been discriminatory.

Travis said he discovered that a borrower who claimed to make $12,000 a month at an unknown company actually worked at a “tarot reading house.” Rather than showing any concern about the problem loans, Steven J. Shapiro, head of the trading desk, responded with a narrow focus on how to get the loans purchased and packaged into securities, increasing what was referred to as “pull through.” The most urgent warnings came from another lower-ranking due diligence officer, Bernard Zahn, who wrote detailed emails to both Ms.

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