'How Morgan Stanley Pushed Risky Subprime Mortgage Lending'

http://economistsview.typepad.com/economistsview/2014/12/how-morgan-stanley-pushed-risky-subprime-mortgage-lending.html

http://www.vox.com/2014/12/30/7467981/morgan-stanley-doj-investigation

Updated by Danielle Kurtzleben on December 30, 2014

Court filings say Morgan Stanley, a major Wall Street bank, pushed subprime lender New Century into making riskier and riskier mortgage loans, the New York Times reports.
The filings include damning emails, showing that Morgan Stanley employees knew about and even joked about some borrowers' inability to pay on their mortgages.
The Justice Department is now investigating the connection between Morgan Stanley and New Century.

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At the height of the pre-crisis housing bubble, in 2006, New Century was the nation's second-largest subprime mortgage originator, and Morgan Stanley was regularly the biggest buyer of the company's subprime mortgages. New Century made the loans, which Morgan Stanley then bought and repackaged into mortgage-backed securities, which it in turn sold to investors. Morgan Stanley's position as one of New Century's biggest customers helped give the bank heavy influence into the lender's practices, the Times writes. (Now defunct, New Century filed for Chapter 11 bankruptcy in 2007.)

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An internal Morgan Stanley report directly stated that the bank was "involved in almost every strategic decision that New Century makes in securitized products," the Times reports.

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Among the filings was evidence of employees' knowledge of the poor quality of these mortgages. Due diligence executive Pamela Barrow joked in an email about "first payment defaulting straw buyin' house-swappin first time wanna be home buyers."

In addition, when lower-ranking due diligence employees tried to alert her to the bad mortgages Morgan Stanley was buying, Barrow shrugged them off.

"good find on the fraud :)," she wrote to one, adding that she would no longer be using his services.

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This isn't just a big deal because it's another instance of a big bank being accused of wrongdoing in the run-up to the crisis. It's also a clear illustration of how Wall Street banks helped cause the crisis by encouraging subprime lenders to make risky loans.

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in July, the SEC charged Morgan Stanley with misrepresenting the delinquency statuses of mortgage-backed securities to investors

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