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