Morgan Stanley accused of conspiring with rating agencies to defraud investors

Reuters
Morgan Stanley has been sued by a Virgin Islands pension fund that accused the Wall Street bank of defrauding investors by marketing $1.2 billion (753 million pounds) of risky mortgage-related notes that it expected to fail.

The lawsuit filed December 24 in Manhattan federal court said Morgan Stanley collaborated with credit rating agencies Moody's Investors Service and Standard & Poor's to obtain "triple-A" ratings for notes marketed in 2007 as part of a collateralized debt obligation (CDO) known as Libertas.

According to the complaint, the CDO was backed by low-quality assets, including securities issued by subprime lenders New Century Financial Corp, which quickly went bankrupt, and Option One Mortgage Corp, then owned by H&R Block.

The complaint alleged Morgan Stanley knew the CDO's assets were far riskier than the ratings suggested, but was "highly motivated to defraud investors" with pristine ratings because it was simultaneously "shorting" almost all the assets. This was a bet that their value would fall, which they did in 2008.

"Morgan Stanley was betting the entire investment it was promoting would fail," according to the complaint, which was made available on Tuesday. "The firm achieved its objective."

Alyson Barnes, a Morgan Stanley spokeswoman, declined to comment. S&P spokesman Frank Briamonte had no immediate comment. Moody's did not immediately return a call seeking comment. Moody's, a unit of Moody's, and S&P, a unit of McGraw-Hill Cos, were not named as defendants.

Many banks face lawsuits from investors who say they were misled into investing in securities they believed were safe but which were in fact tied to risky subprime mortgages.

Morgan Stanley is also a defendant in a closely watched case in the same Manhattan court that concerns whether rating agencies deserve free speech protection for their opinions.

The December 24 complaint said Morgan Stanley knew securities in the Libertas CDO were suffering a dramatic rise in delinquencies, but provided a misleading "risk factor" in a prospectus that rising delinquencies "may" hurt values in the $1 trillion residential mortgage-backed securities market.

It called this representation "analogous to Captain Smith's telling passengers of the Titanic that some ships have 'recently sunk' in the Atlantic and therefore 'our ship may sink,' without mentioning the facts that his ship struck an iceberg, had a hole in it, and was filling with water."

The lawsuit seeks class-action status, and also seeks compensatory and punitive damages, among other remedies. It was filed by Coughlin Stoia Geller Rudman & Robbins LLP, a law firm specializing in securities class-action lawsuits.

Morgan Stanley shares were up 22 cents at $29.51 in afternoon trading on the New York Stock Exchange.

The case is Employees' Retirement System of the Government of the Virgin Islands v. Morgan Stanley & Co et al, U.S. District Court, Southern District of New York, No. 09-10532.

Goldman Sachs and Others Investigated for Betting Against Securities They Created

Image via CrunchBase

Noel Brinkerhoff
Betting against their own securities has prompted numerous investigations of Goldman Sachs and other Wall Street institutions. Prior to the financial collapse, Goldman and others figured out a way to package risky securities, such as subprime mortgages, and sell them to investors who were told they were buying sound investments. Little did the investors know that the firms selling the synthetic collateralized debt obligations (or CDOs) turned around and bet that the CDOs would fail—costing pension funds and insurance companies billions of dollars.

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” Sylvain Raynes, an expert in structured finance at R & R Consulting in New York, told The New York Times. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

In addition to Goldman, CDOs were sold and bet against by Deutsche Bank, Morgan Stanley and Tricadia Inc.—an investment company whose parent firm’s CDO management committee was overseen by Lee Sachs. Sachs is now a special counselor to Treasury Secretary Timothy Geithner. The schemes are now being investigated by Congress, the Securities and Exchange Commission and Wall Street’s Financial Industry Regulatory Authority.

Why is GMAC Paying Dividends While It Begs the Taxpayer

Cody Willard

Let me get this straight:

GMAC, which was owned by private equity gambling firm Cerberus (which is run by former Goldman dudes and even Dan Quayle), used to be the lending and banking and gambling arm of GM. The company was founded in 1919 to help finance cars for buyers of the GM brand.

Over the years, the guys at GMAC got ever greedier and by the time the idiots at Cerberus gambled some $7 billion of their investors’ money on buying GMAC, the company was headlong into wasting its investors’ money on horrible businesses like “wholesale financing” and jumbo mortgages. They also gambled their depositors’ and investors’ and lenders’ money in those toxic mortgage assets like CDOs and so on.

Well, Cerberus and GMAC and GM went to their cronies in the Republican/Democrat Regime in power a couple years ago and begged for billions of dollars in loans and cash infusions because they’d made so many stupid investments and loans over the years that the company couldn’t even pay its utility bills without access to taxpayer largesse.

The company was insolvent. So Bush and his cronies gave the guys at Cerberus/GMAC billions of dollars of welfare. Then when that wasn’t enough, Obama and his cronies gave the guys at Cerberus/GMAC billions of dollars of welfare.

Turns out that wasn’t enough either. So after getting a million dollars for free from the government some 12,000 times already (that’s another way of saying $12 billion), Cerberus and GMAC and its other investors are back with hat in hand begging the Republican/Democrat regime to give them another 5,000 million dollars or so ($5 billion…$5,000,000,000).

It’s outrageous that this company hasn’t been forced into bankruptcy and that we’re ignoring 200 years of rule of law in order to prop up a company that obviously has no idea how to allocate capital and maintain a self-sustaining business.

And you really wanna be outraged? How about the fact that just last week, seven days before they came begging for billions of dollars of more welfare money, the company declared its dividend payouts. Yes, GMAC is asking your representatives to give them your money against your will in a time when we can’t even get health care millions of needy children, so that GMAC can send its owners $44 million next month. (GMAC is also going to pay the Treasury a couple hundred million dollars of taxpayer money…Peter pays Paul, see? Running in circles… but that’s not even the real issue this time!)

GMAC Owners Get Free Money…AGAIN!

Think about that. The government is literally taxing you so that they can give your money to people who were rich enough and powerful enough to risk their own money on GMAC.

How can any liberal be okay with that? And how can any conservative be okay with that?

I’m at war with all Republicans and Democrats in power who have created this horrid system of redistributing wealth upwards to corporations and their owners, lenders and other investors.

I’ve got a call and an email into GMAC asking them to clarify who exactly got this $44 million dividend windfall totally paid for with your taxpayer money. Holding my breath for their reply. Any bets on whether they actually will tell us?