NEW YORK—E-mails and confidential documents from Morgan Stanley that have been revealed as part of a lawsuit against the Wall Street bank suggest that although it had claimed to be a victim in the mortgage crisis, it actually was pressuring subprime lender New Century to push into riskier and more onerous mortgages.
Those same documents also show Morgan Stanley downplayed any concerns over the ability of homeowners to make the payments.
The New York Times reported that one 2004 internal report stated that “Morgan Stanley is involved in almost every strategic decision that New Century makes in securitized products,” a reference 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 The New York Times. The Justice Department is focusing on Morgan Stanley, and is aiming to reach a financial settlement early next year, the Times reported.
The new documents and e-mails, from 2004 to 2007, were recently filed in connection with a lawsuit and are not related to the Justice Department case, the Times reported. “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 bank appears to have gained its influence, in part, because it was regularly the largest single buyer of subprime loans from New Century,” the publication reported.
According to the report, 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.” One memo it quoted was from Pamela Barrow, a top due-diligence executive at Morgan Stanley, who 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 e-mail,” according to the Times. “Betcha that would get some of them good old boys to pay that house bill.”
Morgan Stanley would not comment on the Justice Department negotiations to The New York Times, but has said in previous court filings that there is “no evidence” that it had any influence over New Century’s lending or practices.
The documents quoted in The New York Times story were submitted as part of a class-action lawsuit against Morgan Stanley that was filed in Federal District Court in Manhattan in 2012 by the American Civil Liberties Union on behalf of several borrowers.
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