Saxon Mortgage parent company Morgan Stanley has been sued over risky collateralized debts. The lawsuit filed Dec. 24 in Manhattan federal court said Morgan Stanley collaborated with credit rating agencies Moody’s Investors Service and Standard & Poor’s to obtain “triple-A” ratings for notes marketed in 2007 as part of a collateralized debt obligation (CDO) known as Libertas.
According to the complaint, the CDO was backed by low-quality assets, including securities issued by subprime lenders New Century Financial Corp, which quickly went bankrupt, and Option One Mortgage Corp, then owned by H&R Block.
In a scheme where Morgan Stanley calls the shots and pays Moody’s Investors Service and Standard & Poor’s to obtain “triple-A” ratings one questions whether other precautions were taken to insure the risky debt with insurers such as AIG. Mortgan Stanley allegedly also shorted all the assets.
The complaint alleged Morgan Stanley knew the CDO’s assets were far riskier than the ratings suggested, but was “highly motivated to defraud investors” with pristine ratings because it (Morgan Stanley) was simultaneously “shorting” almost all the assets. This was a bet that their value would fall, which they did in 2008.
Here at Saxon Watch we wonder about other Morgan Stanley and Saxon Mortgage assets. According to the US Treasury Saxon Mortgage seems to have many risky loans under servicing agreements.
Read more background on this lawsuit by reading “Morgan Stanley sued over failed $1.2 billion CDO” here at Reuters.