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Report: Feds Investigating Morgan Stanley’s Mortgage Deals

Wednesday, 12 May 2010 07:21 AM

Federal investigators are probing whether Morgan Stanley misled investors about mortgage derivative products it helped create and sometimes bet against, the Wall Street Journal reported, citing people familiar with the matter.

Morgan Stanley Chief Executive James Gorman told media in Tokyo that he had no knowledge of any U.S. federal investigation into his firm.

"We have not been contacted by the Justice Department about any transactions that were raised in the Wall Street Journal article," Gorman said at a joint news conference with Mitsubishi UFJ Financial Group. "We have no knowledge whatsoever about the Justice Department investigation."

The report comes less than a month after rival Goldman Sachs was charged with fraud by the U.S. Securities and Exchange Commission (SEC) over its marketing of a subprime mortgage product known as Abacus, igniting a battle between Wall Street's most powerful bank and the nation's top securities regulator.

Morgan Stanley arranged and marketed to investors pools of bond-related investments called collateralized debt obligations (CDOs), and its trading desk at times placed bets that their value would fall, the Wall Street Journal reported, citing traders.

Federal investigators are examining whether Morgan Stanley made proper representations about its roles in the mortgage derivative deals, the newspaper reported.

Two particular deals — named after U.S. Presidents James Buchanan and Andrew Jackson — were scanned by the investigators, the paper reported, citing a person familiar with the matter.

Morgan Stanley helped design the deals and bet against them, but did not market them to clients, according to the paper.

Traders called them the "Dead Presidents" deals, the Journal reported.

The firm made money on those deals, but any profit was far overshadowed by the $9 billion the firm lost on bullish mortgage bets in 2007, the paper reported.

"Yes, we have looked into the situation internally," Gorman said when asked in Tokyo about the "Dead Presidents" deals.

"We have no reason to believe there is any substance behind any supposed investigation that appeared in the Wall Street Journal article this morning," he added.

Spokespeople for the Manhattan Attorney's office and the SEC declined to comment to the Journal.

The SEC and New York Attorney's office could not be immediately reached for comment by Reuters outside regular U.S. business hours.

© 2015 Thomson/Reuters. All rights reserved.

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