Unsealed Documents Expose Morgan Stanley Forcing Rating Agencies To Inflate Ratings

Tyler Durden's picture

With Europe, the BBA, and virtually everyone shocked, shocked, that the global bank cabal schemed and colluded for years to manipulate interest rates, so far only America appears relatively blase, and totally ignorant, about the issue. Perhaps it is because the first bank exposed in the manipulation scheme so far is European, perhaps because it is just tired of all the endless crime coming out of the criminal complex known as Wall Street. It is unclear. Then again, America will soon have its own manipulation scandals to deal with: and if it is not the US BBA member banks, all of whom were just as guilty as Barclays, and the only question is which bank will be the sacrificial scapegoat whose CEO will have to demonstratively depart (to warmer, non-extradition climes), it will be the following story from Bloomberg which will likely pick up much more steam over the next weeks and months, detailing how the bank which just barely avoided a triple notch downgrade (wink wink) has had previous dealings with the very same rating agencies seeking to, picture this, artificially inflate ratings! So to summarize: Fed manipulates capital markets, HFT manipulates bid ask spreads, "self-policing" CDS pricing market groups fudge the prices on trillions in Credit Default Swaps, bank cabals collude and manipulate short-term interest rates, and now banks are confirmed to have manipulated the ratings on tens of billions of bonds using monetary incentives and threats. Is there anything in this "market" that was fair over the past several decades, and was actual price discovery ever actually possible? Because by now it should be very clear going forward all the things that actually make a free and fair market are forever gone, and that without endless fraud and manipulation by all the market participants who realize that anyone defecting the ponzi group means immediate and terminal losses for all, and all those calls for an S&P 400 would actually prove to be overly optimistic.

From Bloomberg:

Morgan Stanley successfully pressured Standard & Poor’s and Moody’s Investors Service Inc. to give erroneous investment-grade ratings in 2006 to $23 billion worth of notes backed by subprime mortgages, investors claimed in a lawsuit, citing documents unsealed in federal court.


The unsealing of the internal documents from Moody’s and Standard & Poor’s came in one of the largest ratings lawsuits to emerge from the 2008 financial crisis. The lawsuit was filed in 2008 by Abu Dhabi Commercial Bank, based in the United Arab Emirates, and Washington’s King County, which includes Seattle.


2007. SIVs issued short-term debt to fund purchases of higher- yielding long-term notes and failed when credit dried up amid the financial crisis, sparked by investments in mortgage-backed securities.


As Morgan Stanley bankers were designing the Cheyne notes, they asked Moody’s to use the same volatility assumptions for subprime-backed mortgage securities as for those that had prime home loans as collateral, the investors allege in today’s filing. The ratings company agreed, the investors claim.


“We in fact built everything,” Dorothee Fuhrmann, an executive for New York-based Morgan Stanley, said according to the documents, allegedly referring to the risk-analysis methods applied to the Cheyne ratings.

This is where it gets good:

Morgan Stanley successfully pressured New York-based S&P to raise its rating on some of the Cheyne securities, according to the plaintiffs. After Lapo Guadagnuolo, an S&P employee, told Morgan Stanley that some of the securities would get BBB ratings instead of the desired A grade, a banker e-mailed his boss and said the ratings were “very inappropriate.” S&P then agreed to give the higher rating.


Morgan Stanley earned fees totaling as much as $30 million when the Cheyne notes were issued, according to the documents.


“All of us were under instructions to rate everything that we could bring in the door, and they were measuring market share on a monthly basis,” Frank Raiter, a former analyst of residential-mortgage bonds at S&P, said in a deposition, according to the documents.


“I wasn’t real confident we were doing a very good job at it.”


Perry Inglis, the head of the S&P group that rated the Cheyne securities, wrote in an e-mail that it would be a “good idea” to figure out how to change its methodology to be more “competitive,” according to the court filing.

And the punchline:

“I’m a bit unclear if it is a big change or a ‘wee itty bitty no-one’s going to notice’ change!” Inglis is quoted as saying in an e-mail.

Turns out someone noticed.

Reuters' Allison Frankel points out that this discredits the rating agencies, who are once again exposed for being corrupt, complicit and arguably, criminal organizations, betraying any core values for the client's buck.

In a series of filings in federal court in Manhattan, Abu Dhabi Commercial Bank and its lawyers at Robbins Geller Rudman & Dowd disclosed thousands of pages of internal communications and deposition transcripts to back their claims that S&P and Moody's are liable for fraud and negligent misrepresentation in connection with their rating of a structured investment vehicle underwritten by Morgan Stanley. Based on a declaration by plaintiffs that accompanied the documents, a huge percentage of the newly disclosed material has never previously been seen by the public -- and a good many of the documents deal not just with the Morgan Stanley SIV but more broadly with the rating process inside S&P and Moody's at a time when the two leading agencies were swamped with mortgage-backed securities to rate.


Robbins Geller also provided a helpful CliffsNotes version of the evidence in the form of an unredacted response to the defendants' motion for summary judgment. (A redacted version was filed in February, with page upon page blacked out.)  This is a hot filing. Abu Dhabi quotes deposition testimony from "S&P's most senior quantitative analyst in Europe," for instance, that says "the ratings of (the SIVs) were inappropriate because the ratings of the underlying assets were not appropriate. So it leads to the conclusion that they should not have been rated." In other snippets quoted in the filing, rating agency analysts complained about "difficulties in explaining HOW we got to these numbers since there is no science behind it" and about "(making) up haircuts that were palatable to SIV issuers."


A lead S&P analyst on the deal, according to the plaintiffs, said in an email to his boss that the default rates the agency was using for asset-backed securities were guesswork. "From looking at the numbers it is obvious that we have just stuck our preverbal (sic) finger in the air," the analyst wrote.

Naturally the blame also lies with Morgan Stanley, for knowing fully well it was openly defrauding the rating process:

Morgan Stanley, according to the plaintiffs' filing, bears at least as much blame as the rating agencies: The bank allegedly wrote the Moody's report on the SIV and read the S&P report before it was released to investors. The summary judgment opposition points to evidence that Morgan Stanley pressured the rating agencies to apply methodology that didn't suit the securities and to ignore the paucity of historical data in order to grant the SIV a rating it didn't deserve. By sending a supposedly "threatening" email to an S&P higher-up when an analyst proposed granting the SIV a BBB rating, Morgan Stanley boosted the rating to an A, the plaintiffs assert. In support, they quote an email from Morgan Stanley exec Greg Drennan, who had sent the allegedly menacing email: The bank's efforts, Drennan wrote, "did get us the rating we wanted in the end."

Of course they did. You paid and threatened to get it. One wonders (not really) if the same series of events occurred last week when Morgan Stanley got just a two notch downgrade from Moody's instead of the much anticipated 3 notches.

One also wonders (not really) when US regulators will go after Morgan Stanley with eagerness that British regulators appear to be pursuing Barclays?

Full filing below


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Fluffybunny's picture

No one could see it coming

NemoDeNovo's picture

I'm SHOCKED!!!!!!!!! </sarc>

The Monkey's picture

The market is moving higher. Deal with it.


Fucking circle jerk.....and Happy Independence Day muppets. 

resurger's picture

Dear Muppet,

Am giving an A rating for any  SIV, CDO, MMMF, ABS, PCP,ABCP, LCD, Bathsalted IGed-Zombiedusted-Xrated concocted rocket science strucutred baffle them with bullshit financially engineered synthetic psychedelic off/on balance sheet investments nukes, our math engineers and risk managers guessed that all of the above is risk free.

And dont worry, S&P, Moodys and fetch that ass got's our back.

The fee for this email is some pocket money for some of that booty meat & blow ....


Morgan Stanely Junkie XL


withnmeans's picture

U.S. does it, Europe does it, even ole Japan does it ! ITS KITING on a global scale...


If I tried it I would be in Prison in a twinkling of an eye...

It is getting quite amusing that the Europeans are getting better at it then us. Not to mention that the are doing it right in front of our own faces.

Ratings do not matter anymore, ratings agencies have been a joke for several years now "there are just a few exceptions, we know who they are".


Nothing new here, Carry on..

I am on to you's picture

If it comes with Tripple YYY+ upwards Mescal colorfull dreams  ill take two,one for my self, and one for the wife.

She to gota se this to, in full color HD,Libor or Laibor or Eurobor,think it more Maifiabored.

Happy future,planet XXX+,Jupiter is up ahead! 

HelluvaEngineer's picture

Riddle me this, fancy boy.  How many escape routes are there from Manhattan?

Kali's picture

Better get some stingers for the helicopters they'll be taking off the roof.

dolce vita's picture

i got a finger id like to stick in the air......


well  this article juuuuuuuuuust about says  it all.

disabledvet's picture

"I'm shocked, too" (sarcasm never on in cases such as this)..."now give those folks a raise for corrupting the system just like i told them to." LET US APPLAUD THEM...for if any of us could do so successfully...we would.

knukles's picture

Ah, it's justa smallwee itty bitty no-one’s going to notice’ change!”


Holy Jesus Jumpin' Jahospehafats, when are poeple gonna figure out the "social" portion of "social media"?

Michael's picture

You guys should all stop complaining and just thank God every day for the complete and total worldwide economic collapse that I've been baiting for the past 12 years. Egos and criminal minds are so easy to manipulate to a specific outcome. It was the only solution. 

sablya's picture

I will thank God when it is really, really, real and not just out of reach.  I don't care if there is global chaos.  Nation rising up against nation, earthquakes and famines in various places.  People fainting with fear for what is coming over the world.  Let the birth pangs begin.  The water has broken, let's go baby!!!  

RockyRacoon's picture

We have parallel ZH careers.  I've been happy to have the delay for several reasons:  1.  I get to stack deeper and higher   2.  "They" have kept the PM prices slow in rising   3.  The longer the end is delayed the more thoroughly cleansing it will be

vast-dom's picture

the issue with all of this is that it damages S&P and the ratings agencies a lot more than the financial institutions. Why is this important? Because the rating agencies need to downgrade said financial institutions shortly, and since these banks are already taxpayer and Fed funded they can hang on and get the advantage of claiming that downgrades don't matter when the rating agencies are on the take and innacurate....

DeadFred's picture

Doesn't work too well when you were the one giving the bribes and even with that they still consider you on par with doggie-do.

Never One Roach's picture

"Everybody's doing it." The defense claims.

veyron's picture

At this point I would be surprised if some article suggested that there was an honest person at a bank ...

UP Forester's picture

....and it wouldn't surprise me if the SEC were to go after any rating agency not on the take....


....oh, wait....

Irwin Fletcher's picture

Here's one that surprised me: the email sent out today from change.org for a petition asking Barclays and Citibank to stop killing gay people in Uganda. From the email:

"I expect Citibank and Barclays to live up to the values of equality and fairness, not just list them on their websites," Collin says."

There you go. Hilarious.

neidermeyer's picture

I know one honest person at a re-insurer but that's about it..

DeadFred's picture

If he works in the mail room I may know the same guy

greensnacks's picture

"can you explain why you think our assets are worthless?" 

EU market regulator is suspicious of rating agencies



AntiLeMaire's picture

Makes sense.

For example they've downgraded the Rabobank (a triple-A bank) a few notches, based on ... what exactly? Especially compared to the ratings of their peers this makes no sense.
I'm all for more realistic ratings, but then many other banks should be downgraded much more. The relative difference, between the former AAA (Rabo) and the formerly 'almost A' banks, is still there...

Despite tricks like this the Rabobank is one of those banks that could and can borrow money at much cheaper rates than should be possible (see recent LIEBOR chart). Of course they do suffer from these games and have to pay more, but clearly 'the market' knows that the numbers are rigged & so borrows them money cheaper than should be possible based on ratings, CDS and LIEBOR.

Ergo we have a number of banks (the 'in-crowd') with inflated ratings, who claim to be borrow money on the cheap (while many know this to be false) and have a too-good-to-be-true CDS's.
Their financial statements look like Swiss cheese, even without correcting them for obvious fraudulent misrepresentation of their 'assets'. All of them have ridiculous large derivative positions, all perfectly hedged of course (LOL). Instead one should at least include realistic counterparty risk in those derivative valuations (say 1% loss, or 0.5% or ...) and look what happens.
Can the big 20 really cover that additional loss of at least a couple of trillion? I don't think so.

And we have another set (medium or big but not the in-crowd) who are financially OK, but get comparatively lower ratings, have relatively high CDS, yet can borrow money in the open market at 'impossible' low rates. Still they pay too much when we compare financial statements & especially the quality of assets. 'Netted' derivative positions can hide any size of hole, something which is not so easy to do for a bank which has most of its assets in real estate.
A case of double standards.

Same is true for countries. 'The markets' (i.e. mostly the same set of banks) are 'concerned' with the Eurozone, yet if that where a real concern they would be looking at JP, US and UK first.
I'm not saying that there are no EZ countries with issues, but the fact is that the EZ combined is in much better shape than JP, UK or US. And this is not properly represented in the numbers.
Part of this can be explained by 'the market' being prejudiced and running along with the latest fad; but to this extent? Obviously there is manipulation.

To say that the EU market authorities are 'suspicious' or 'concerned' is the understatement of the year IMHO.
So did money change hands? How much money was paid to the rating agencies & by whom?
And why: to make a buck, to hinder the competition, to make themselves look not so bad in comparison or ... all of those?
And, importantly, can that be proven?

mendigo's picture

Its not just banks - there has been a laxness in enforcement in the name of free market. Our government has abdicated its responsibilities essensially admitting it is incapable of comprehending or dealing with the capitalist system. It is essentially every man for himself at this point there is no authority to appeal to - the government is now absorbed in self preservation. The void is being filled by the babble of the likes of krugman. Benanke has only succeeded in demonstrating that we have no idea how this system really works the only achievent he has is to make some rich people richer and totally wiped out the concept of efficient allocation of resources. For this he went to college
What really creates growth and broadbased prosperity - bernanke has no clue.

donsluck's picture

It would be ok if what you say is true, but unfortunatly it's not "every man for himself". That I can handle. The reality is the opposite, a quickly escalating fascist structure where you are only safe if you have a large well armed and financed army behind you.

vast-dom's picture

are you intimating that the articles are disreputable or the individuals at the banks?

fonzannoon's picture

The only good thing that came out of this LIBOR thing is that I no longer need to look at the price of gold. The truth will come out.

knukles's picture

And until then, all of us holders of gold can continue to enjoy a manipulated market, too.

Methinking some very wrong, unsocial thoughts about reducation camps and bankers at the moment.
Or of Robert DeNiro in his tux with the Louisville Slugger

(splat spalt)

(splat splat splat spalt spalt)

LawsofPhysics's picture

Should we expect anything less in a world where there are no real consequences for bad behavior?  Start hanging these fucks in times square and watch the markets rally.

Cursive's picture


Regardless of idealogies, you've got to hand it to the Occupy gang.  These are the only people taking to the streets to protest this shit.

LawsofPhysics's picture

Unfortunately, only actions will change anything from here on out.  One reason TPTB don't want to stop any of the wars or police actions, or whatever the fuck you want to call it, around the world is because should they bring my brothren home these good folks would find themselves rewarded for their service by being unemployed and at the bottom of the social structure.  TPTB know that these folks can commit to getting shit done.  I know several members of delta that are getting restless already.

DeadFred's picture

I've often wondered how happy the troops are with Captain 'O' and the thought of putting their lives on the line for Goldman, Exxon and Haliburton. Oops. Haliburton owned the last guy, who replaced them on the list?

daveeemc2's picture

True that - in the mean time, the rest of us pussies have jobs.

But as soon as that changes, I for one, will join them.

To some in finance industry they are taken as an enigma.

I personally see them as early adopters  =)

I wish they would take a personal stake in the finance industry (aka buy a share) so they can go to board meetings and protest INSIDE the precious vs on the streets looking like hobo's.


LawsofPhysics's picture

I agree, less "occupying" more "taking shit over", by any means nescesary.

SumSUN's picture

Boycotting fast food, and big box chain stores is something everyone can do.  That shit is shit.  Complete fucking garbage...

Kali's picture

They are leaving us no other choice. 

resurger's picture

"(aka buy a share) so they can go to board meetings and protest"

You are a cunning sharp man


marathonman's picture

Only about 1% had a clue what was really wrong.  The rest of them were hopeless statists that just wanted more free stuff.

BennyBoy's picture

Forcing is such an ugly word.

And truthful.

Cursive's picture

I feel like we've all been given the "proverbial finger."

The Monkey's picture

Falling prices are un-American and dangerous to the economy, at least that is the thought that Bernanke's Fed has made ubiquitous.

ZeroHedge is considered dangerous for advocating free markets and liquidation. Ironically, these steps were once considered part of the natural economic cycle. Now they are considered financial terrorism.


midgetrannyporn's picture

It was no big secret even back then. Fraud is cool in the usa.

cossack55's picture

Don't forget extortion. It's like way cool, daddyO.

rosiescenario's picture

The breaking news on the bankstas just gets better and better....on the one hand we have them fixing rates and on the other, fixing ratings.....they are a multi faceted group.

knukles's picture

Next thing is they'll be buying Washington, London and the whole of Switzerland.

Ineverslice's picture

Hey Maria-

You might wanna go back and interview that guy one more time.