Morgan Stanley is taking low grade collateralized debt obligations, repackaging these in into new pooled securities and obtaining questionable AAA ratings. The broker-dealer plans to sell $130 million CDO’s this way in a manner similar to the way banks have been dealing with commercial mortgage-backed securities. The repackaged CDO is to a great expent a copy of a CDO put together by Goldman Sachs Group in 2007 using bonds from Greywolf CLO I Ltd.
$87.1 million of securities are expected to receive the AAA rating-the offering is 89 cents on the dollar-the second portion is $42.9 million of securities that Moody’s Investors Service have rated Baa2.
According to Sylvain Raynes, an R&R Consulting principal, many insurers and banks can only buy AAA. She says that by making AAA out of not AAA, people with AAA “on their forehead” can purchase.
Morgan Stanley is mirroring re-REMICs. This financing structure bundles mortgage securities into bonds that give investors another layer of collateral (or protection) from downgrades. Banks use Re-REMICs as protection against losses on residential mortgage securities.
Already, some $27 billion in home-loan bond re-REMICs have been issued this year-an increase from the $17 billion for all of 2008. Even Goldman Sachs has plans to sell $216.9 million of repackaged commercial mortgage debt. Re-REMIC will come from bonds sold in 2006.
After learning about Morgan Stanley’s plan to repackage CDO’s, Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney Bill Shepherd said, “Apparently there have been no lessons learned by Wall Street about packaging and selling questionable loans by attaching misleading AAA ratings to these in order to subvert prudent investment goals. Our securities fraud law firm is pursuing many claims for institutional and individual clients who have been burned by such investments. Any defense by investment firms that they did not know these investments were risky was then-as is now-simply preposterous!”
Related Web Resources:
Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds, Bloomberg.com, July 8, 2009
Morgan Stanley To Sell $130M Repackaged CDO – Sources, Wall Street Journal, July 8, 2009