Morgan Stanley's Baldwin CDOs - Doomed to Fail?
In 2006, Morgan Stanley created a “cluster of investments doomed to fail even if default rates stayed low -- then bet against its concoction.” according to a recent article by Jody Shenn and Michael J. Moore of Bloomeberg.com.
The investments were known as the “Baldwin deals” and the Baldwin deals had a very unique feature. Rather than reducing their exposure on mortgage bonds as the underlying home loans were paid down, the collateralized debt obligations (“CDOs”) kept betting as if the risk hadn’t changed. The result was Baldwin investors were left with losses on a modest rise in U.S. housing foreclosures while Morgan Stanley was positioned to gain. According to Bloomberg, the “unique” feature meant investors could incur significant losses even if the subprime defaults stayed close to historical averages. For example, the investors in “Baldwin 2006-III would start losing money if only $235 million of the $2.3 billion portfolio of mortgage bonds it referenced went sour… They’d get wiped out after $18 million more of losses.” Meanwhile Morgan Stanley held a short position and profited on the Baldwin deals.
The same “unique“ feature was also found in at least $500 million of ABSpoke CDOs that Morgan Stanley created. Those CDOs, like the Baldwin deals, sold credit-default swap protection on mortgage bonds to Morgan Stanley. The credit default swaps paid off if the underlying securities did not.
Morgan Stanley and rivals remain embroiled in a Securities and Exchange Commission probe, started at least a year ago, that’s examining whether they misled investors when selling mortgage-linked securities such as these CDOs.
These revelations also come against the backdrop of actions by Federal prosecutors who are conducting a criminal probe into whether multiple major Wall Street banks defrauded investors in selling CDOs, that were created, sold and shorted, or bet against, by the banks and certain favored clients.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in CDO cases. For further information, please contact us.
