Feds Probing Morgan Stanley CDO Deals
May 12, 2010
(ChattahBox) – looks like Goldman Sachs wasn’t the only one playing loose with CDOs. Federal prosecutors are investigating Morgan Stanley for possibly misleading investors about mortgage-backed derivatives it helped to design. The Wall Street Journal says, “The probe is at a preliminary stage.” Citing people familiar with the matter, the paper reported that Morgan Stanley arranged and marketed pools of bond-related investments referred to as “collateralized debt obligations,” or CDOs — and traders said Morgan Stanley’s trading desk sometimes placed bets that their value would fall. Investigators are examining whether Morgan Stanley made proper representations about its roles.
Two of the deals coming under prosecutors’ scrutiny were dubbed the “Dead Presidents” deals by traders, on account of their being named after U.S. Presidents James Buchanan and Andrew Jackson, the newspaper reported. Morgan Stanley was involved in creating and subsequently betting against these deals, but allegedly did not market them to investors. Bringing criminal cases involving complex Wall Street deals is a huge challenge, because prosecutors must prove beyond a reasonable doubt that a firm or its employees knowingly misled investors. The government launches many criminal investigations that end without any charges being filed.