Morgan Stanley CDO is object of lawsuit
It's a familiar narrative: A bank puts together a CDO--or a synthetic CDO--fully aware that the potential for the value of the investment to tank is quite high. So high, in fact, that the bank is aiming to short the securities, even as its salespeople market the deal to unsuspecting banks. The bank may hold a small sliver of the equity but they chances for a massive investment gain are higher if they short.
Goldman Sachs, Citigroup and JPMorgan have all been accused of such behavior by other companies, government prosecutors, or both. Now it's Morgan Stanley's turn.
The lawsuit is noteworthy in part because the discovery process uncovered an email trail in which Morgan Stanley employees seek to find a suitable name for the CDO.
As noted by ProPublica, the suggestions ranged from "Subprime Meltdown," to "Hitman," to "Nuclear Holocaust" and to "Mike Tyson's Punchout," as well "a simple yet direct reference to a bag of excrement."
The case suggests "a pattern of behavior larger than this one deal: people across the bank understood that the American housing market was in trouble. They took advantage of that knowledge to create and then bet against securities and then also to unload garbage investments on unsuspecting buyers."
The buyers of the securities were professionals and should've known better. Morgan Stanley notes also that in this case it disclosed that it might short the securities in the CDO. If it did, it fared well.
ProPublica notes that, "In the end, of the $500 million of assets backing the deal, $415 million ended up worthless."
- here's the article