A court filing against Morgan Stanley regarding its role in the lending market prior to the financial crisis that began in 2008 has disclosed numerous details about the investment bank’s business practices. According to anonymous source with knowledge of the matter, the Justice Department has decided to focus on Morgan Stanley’s role in the debacle. The Justice Department has reached settlements with other banks regarding the same matters in recent years and has secured tens of billions of dollars in fines and penalties from those cases. Morgan Stanley declined to comment on the Justice Department negotiations.
A number of Wall Street firm have claimed that they were victims in the financial crash, suckered by the bad mortgages written by subprime mortgage lenders such as Countrywide and New Century. These exotic mortgages included mortgages with adjustable interest rates, mortgages with significant prepayment penalties, and mortgages with balloon payments. Many of these mortgages were written without taking into consideration the borrower’s ability to repay the loans or were written using inflated income figures. Documents filed in the case show that Morgan Stanley employees were aware of the potential problems with the loans, but continued to buy them and sell them to investors.
Now, documentation has also shown that Morgan Stanley exerted influence that may have resulted in New Century taking on riskier and riskier mortgages. Some of the documents show how Morgan Stanley encouraged New Century to increase the number of exotic mortgages issued by the lender because they would be more lucrative for Morgan Stanley. Morgan Stanley was once the largest single buyer of subprime loans from New Century.
A number of documents and emails created between 2004 and 2007 have been filed in the lawsuit that showed that the relationship between New Century and Morgan Stanley was closer than once thought. An internal report from Morgan Stanley in 2004 stated: “Morgan Stanley is involved in almost every strategic decision that New Century makes in securitized products.” The statement was made in regards to the loans the bank packaged into mortgage bonds and sold to investors.
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