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Since the financial crisis, Wall Street firms have argued that they were victims, just like everybody else, of the bad mortgages that were churned out by subprime lenders like Countrywide and New Century.
Now, though, a trove of emails and confidential documents, filed in court, reveal the extent to which one of Wall Street’s leading banks, Morgan Stanley, actively influenced New Century’s push into riskier and more onerous mortgages, and brushed aside questions about the ability of homeowners to make the payments.
“Morgan Stanley is involved in almost every strategic decision that New Century makes in securitized products,” a Morgan Stanley internal report from late 2004 said, referring to the loans the bank packaged into mortgage bonds.
The Justice Department is currently examining the relationship between New Century and Morgan Stanley, and the bank’s sale of mortgage securities in the run-up to the financial crisis, according to a person briefed on the matter. After winning tens of billions of dollars from other banks, the Justice Department has turned its focus to Morgan Stanley, and is aiming to reach a settlement early next year, according to the person.
The new documents and emails, from 2004 to 2007, were recently filed in connection with a lawsuit and are not related to the Justice Department case. But they provide an inside picture of the process through which Morgan Stanley pushed New Century to issue more mortgages with burdensome conditions that would be lucrative for Morgan Stanley — including loans with balloon payments, adjustable interest rates and prepayment penalties that made them harder to refinance.
The documents indicate that Morgan Stanley employees were aware of the low credit quality — and occasionally joked about it — even as they continued to snap up loans from New Century. A top due diligence executive at Morgan Stanley, Pamela Barrow, wrote to a colleague in 2006 sarcastically describing the “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.”
“We should call all their mommas,” Ms. Barrow added in the email. “Betcha that would get some of them good old boys to pay that house bill.”
The most urgent warnings came from another lower-ranking due diligence officer, Bernard Zahn, who wrote detailed emails to both Ms. Barrow and Mr. Shapiro explaining, in increasingly urgent terms, problems with the loans they had bought.
“It isn’t ‘just a couple of typos or ‘mistakes’ as it was suggested,” Mr. Zahn wrote. “The more we dig, the more we find.”
Ms. Barrow congratulated Mr. Zahn: “good find on the fraud .” But rather than pursuing his findings, she immediately went on: “Unfortunately, I don’t think we will be able to utilize you or any other third party individual in the valuation department any longer.”
Morgan Stanley borrowed the most out of all banks during the 2008 bank bailout. Turns out the multi-billion-dollar bailouts of financial firms and major companies during the 2008 financial crisis were just pocket change. According to new data revealed Monday, the Federal Reserve lent banks and companies worldwide up to $1.2 trillion to help keep the U.S. economy from going over the edge, reported Bloomberg News.