Morgan Stanley Federal Securities Probe Mortgage Derivative Deals
The global investment bank Morgan Stanley face informal federal scrutiny over its collateralized debt obligations (CDOs), bond-related derivative investments marketed to investor pools. While Morgan Stanley officials state they have not received a Wells notice from the SEC - which informs individuals and firms that the SEC staff plans to bring charges - the issue reportedly under an informal probe is whether Morgan Stanley misled investors by betting against CDO deals that it created.
Disclosure Standards to Derivative Investors
According to a 05/11/10 Wall Street Journal news report, the informal probe was originally initiated by the SEC investigators in 2009. The New York Times DealBook blog 05/12/10 reports that "traders have said that Morgan Stanley was involved in the selecting and selling of [CDOs] to investors," which Morgan Stanley also bet against in separate transactions without disclosing these parallel deals to CDO investors.
This informal probe comes on the heel of a similar probe and subsequent filing of civil charges against Goldman Sachs. The Goldman civil complaint involves mortgage-derivative transactions (the Abacus deal) and raises the issue of what is the legal standard of disclosure in securities transactions in the United States.
Morgan Stanley's "Dead Presidents" Deals
According to the WSJ report, the main Morgan Stanley deals under the federal probe were dubbed "Dead Presidents" by traders because the transactions were named after President Andrew Jackson and President James Buchanan. These pair of derivatives were valued at $200 million and tied to mortgage-backed securities that lost significant value during the U.S. mortgage crisis.
The so-called Dead Presidents deals were not marketed to clients by Morgan Stanley. Instead, Citigroup Inc. and UBS AG marketed and underwrote the derivatives to investors. This is slightly different than the Goldman Sachs facts, as Goldman reportedly directly marketed the Abacus deal that brought about the filing of a civil fraud lawsuit by federal securities prosecutors this year.
U.S. Investment Banks Undergo Increased CDO Scrutiny
"Every investment bank has been receiving subpoenas about CDOs and the marketing of CDOS," said Mark Lane, a William Blair analyst, to the WSJ. At the time of this report, Morgan Stanley Chief Executive James Gorman had not been contacted by the U.S. Department of Justice and made a public statement in Tokyo that Morgan Stanley has no "reason to believe that there is any substance behind any supposed investigation."
Federal criminal investigators must prove criminal securities charges beyond a reasonable doubt. The level of knowledge of an investment bank is important if such a burden of proof is to be proven in a court of law. It should be noted, however, that SEC informal probes do not always lead to filing of either civil or criminal securities charges.
References:
"U.S. Probes Morgan Stanley: Prosecutors Look at Mortgage Securities; Firms Say It Hasn't Been Contacted," by Amir Efrati, Susan Pulliam, Serena NG, and Aaron Lucchetti, The Wall Street Journal (May 11, 2010).
"Morgan Stanley Said to Face C.D.O. Scrutiny," DealBook blog edited by Andrew Ross Sorkin, The New York Times (May 12, 2010).
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Morgan Stanley gets $5 billion from China: The latest in the trend of US financials being bailed out by foreigners
The headline seems eerily familiar, but the names have been changed. Morgan Stanley is desperate, disappointing financials spell doom for the company, and in sweeps China to inject $5 billion into the company.
And how do investors react? Once again, they applaud the selling of American equity.
Morgan Stanley announced today that it suffered its first quarterly loss in its 72-year history. Morgan Stanley lost $3.59 billion, or $3.61 a share. This loss was much more severe than what analysts were expecting, which was 39 cents a share.
Morgan Stanley further announced a $5.7 billion writedown, with John Mack, the company's CEO, calling it "disappointing" to the entire firm, the industry, and the company's shareholders.
As a result of the writedown and drastic losses Mack has announced that he will refuse to accept his bonus for 2007. Mack insisted that he be held at least partially accountable.
Yet, after all of this Morgan Stanley posted gains in early trading.
Along with the announcement of all of this poor news Morgan Stanley announced that it would raise $5 billion in capital from China.
China Investment Corporation is buying a stake in the company that represents slightly less than a 10% share.
While Morgan Stanley clearly needed the capital because of the losses the company cites another benefit from this sale, improved ties to China, the world's fastest growing economy. An economy, incidentally that this same day announced deregulations in its credit card industry, allowing foreign credit card companies to do more business in China.
Morgan Stanley represents just the latest financial company to report disappointing results. Just last month Citigroup made a similar deal with the UAE, raising $7.5 billion.
The UAE has also considered buying a 20% stake in an American stock exchange and China has looked into purchasing the financial company Bear Sterns. It would seem that the trend of American financials being bailed out (or bought out) has only just begun.
American Financials are for sale, and investors cheer as foreign interests buy them up (or out).
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