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Morgan Stanley probed by Federal authorities

  
Analysis, Economy, Education
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May 12 (Reuters) – U.S. federal investigators are probing whether Morgan Stanley (MS.N) misled investors about mortgage derivative products it helped create and sometimes bet against, the Wall Street Journal said, citing people familiar with the matter.

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 Journal said, citing traders.

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

Two particular deals — named after U.S. Presidents James Buchanan and Andrew Jackson — were scanned by the investigators, the paper said, 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 said. 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 said

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 said. 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 said.

“We have not been contacted by the Justice Department about the transactions being raised by The Wall Street Journal and we have no knowledge of a Justice Department investigation into these transactions,” Morgan Stanley spokesman Mark Lake told Reuters by telephone.

Spokespeople for the Manhattan Attorney’s office and the U.S. Securities and Exchange Commission (SEC) declined to comment to the Journal.

Updated at 11:17/12th May/Baroda/India

Marc Faber Discusses Chinese Economic Cooling Off, Sees Day Of Reckoning Delayed

  
Economy, Education
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Nothing notably new here from the man who has called for a Chinese crash in as little as 12 months. Now that the Chinese PMI came at the lowest level in 17 months (in line with the drop in the US ISM but completely the opposite of Europe’s PMI as everyone makes up their own data on the fly now with no rhyme or reason), Faber seems to have mellowed out a little on the Chinese end-play. He now sees the China government stepping in and prevent a collapse of the economy when needed, as the economy has dropped from a near 12% GDP growth to a collapse in the PMI in the span of a few months, even as Chinese banks lent another quarter trillion renminbi billion in July, and issued who knows how many hundreds of billions in CDOs to keep the ponzi afloat.

From Bloomberg TV:

On the cooling of China’s economy:

“I mean I’ve been arguing this year that the economy would inevitably slow down, because the impact of the stimulus would diminish. But having said that, the economy hasn’t crashed yet. It could still crash. But on the other hand, if you look at the performance of equities worldwide, it seems that the worse the economic news is, that the more the markets go up, because the market participants expect further easing measures, and maybe further stimulus. So altogether I would say it’s not going to be a disaster for stock investors yet. It’s interesting. The Chinese stock market began to discount the slowdown in economic growth actually precisely a year ago, in August, 2009. The market peaked out. And then drifted lower, but now that the bad news is essentially out, the market has started to rebound.”

On whether the property market is the biggest weakness in China:

“I’d like to make the following observation. We have a global economy, and an economy has different sectors. And you can have recession in some sectors of the economy. You can have a crash, say, in the property market, and you can have other sectors expanding. [Bolton: That’s the biggest weakness, right Marc, as far as you’re concerned, in the Chinese economy right now, it is the overheating in the property market?….] Well, I’m not sure. Because if they ease again, the speculation will go on. But we have credit problems in the property market undoubtedly. We have Ponzi schemes like loan sharking operations all over China. That’s a very dangerous. But what I would like to point out is that the agricultural sector, the rural sector in China and everywhere in the world is doing relatively well, because agricultural prices have started to rebound. And that was also seen in Thailand. In Thailand, new car sales are up very strongly.”

On whether the Chinese government will delay increasing interest rates this year:

“I think even if they increase it marginally it’s meaningless. Because interest rates are far below nominal GDP growth, and in my opinion far below inflation.”

Govt. Opening New Front in the "War on Wall Street," WSJ Reports

  
Analysis, Economy, Education
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Federal prosecutors are conducting a preliminary criminal probe into whether several Wall Street banks misled investors about their roles in mortgage-backed deals, The WSJ reports.

The banks in the early stages of scrutiny are: JPMorgan, Citigroup, Deutsche Bank and UBS. Under similar preliminary criminal scrutiny are Goldman and Morgan Stanley, as The WSJ reported yesterday. 

As our guest Todd Harrison, CEO of Minyanville.com, explains, these probe leaks are part of a larger, growing attack against Wall Street. (See: The War on Capitalism)

The focus of the inquiry are mortgage-backed collateralized debt obligations or CDOs and whether banks misled investors about these bets.

So why the focus on these specific derivatives?

“Presumably what’s closest to home, no pun intended, for a lot of people is their mortgages and foreclosures that we’re seeing,” Todd tells Aaron in the accompanying segment. “So those are the instruments that kicked Main Street in the groin pretty much. That’s where the line was drawn for a lot of the populace anger to really start to percolate.”

Harrison, who warns against the unintended consequences of Wall Street reform in an earlier segement, says policymakers risk going down a “slippery slope” by attacking financial instruments they don’t understand in an effort to score political points.  

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