Morgan Stanley Pays

¹²Morgan Stanley Pays For Subprime

By Aaron Lucchetti and Brett Philbin | 25 June 2010

[ Normxxx Here:  Continuing the payoff of peanuts on the (billion) dollars. ]

QUOTE OF THE DAY: “There is a massive, rotting pool of mortgages on bank balance sheets.… There is no doubt there is going to be a double dip in housing,” ~~ Meredith Whitney, CEO of the Meredith Whitney Advisory Group.

Morgan Stanley agreed to pay $102 million to end a probe by Massachusetts into the Wall Street firm's role in the subprime-housing boom and bust. The New York company neither admitted nor denied wrongdoing, but Massachusetts Attorney General Martha Coakley accused Morgan Stanley of providing billions of dollars to subprime lender New Century Financial Corp., and then continuing to do business with the Irvine, Calif., subprime lender even though some of its loans violated guidelines at Morgan Stanley and lending laws in Massachusetts.

Massachusetts Attorney General Martha Coakley, right, accused Morgan Stanley of 'recklessness.' Morgan Stanley agreed 'to change' its practices. Source: AP

As the subprime market began struggling in 2006 and 2007, Morgan Stanley committed to provide as much as $3 billion in funding to New Century, and the lender coaxed lower-income borrowers into loans that they couldn't afford to pay, she said. According to a Massachusetts state-court filing made as part of the settlement, Morgan Stanley rejected some of the loans it was considering buying from New Century to assemble into bonds because of a "stretching of underwriting guidelines". But, after New Century threatened to move its business to other loan buyers, Morgan began to include a wider range of New Century loans in mortgage bonds, the filing said.

One 'unidentified' employee of the securities firm bought loans that Morgan's own due-diligence team had rejected. New Century filed for bankruptcy in April 2007. "This kind of recklessness results in both individual consumers and the broader economy being hurt," Ms. Coakley said in an interview Thursday.

Terms of the settlement call for Morgan Stanley to pay $58 million to more than 1,000 Massachusetts homeowners, $23.4 million that will be steered by state officials to local pension funds that invested in mortgage-related products sold by Morgan and a $19.5 million fine to the state's general fund. In a statement, a Morgan Stanley spokeswoman said the company "is pleased to resolve this matter in a way that will help many Massachusetts homeowners stay in their homes". The firm agreed to change business practices, eg, to only buying loans that meet certain criteria.

Last year, Ms. Coakley brought a similar case against Goldman Sachs Group Inc., which agreed to pay $50 million to Massachusetts homeowners and $10 million to the state. The Massachusetts attorney general's push to punish banks for packaging and selling subpar mortgage products is part of the regulatory 'crackdown' on Wall Street [[PR strictly for a gullible public: normxxx]] over its role in the financial crisis. Morgan Stanley and other firms also are under investigation by the Securities and Exchange Commission, which filed a civil-fraud lawsuit in April against Goldman.

Goldman has denied allegations that it failed to 'properly disclose' the role a bearish hedge fund played in the creation of a mortgage-related product called Abacus 2007 AC-1. Federal prosecutors also are probing how Wall Street firms sold subprime-related products. Ms. Coakley is continuing her investigation into other firms involved in the mortgage business. Analysts expect securities firms to pay additional fines and settlements to various regulators who are probing their conduct during and after the housing boom.