Morgan Stanley (NYSE: MS) Denies Allegations about Subprime Mortgage Investments

Posted by on Sep 15th, 2010

Morgan Stanley (NYSE: MS) denied allegations made by the China Development Industrial Bank (CDIP) that it had suffered more than $250 million in losses from subprime-mortgage investments that the firm told CDIP were supposedly low-risk.

A Morgan Stanley spokesman said in a statement on Tuesday that “we believe these allegations are wholly without merit and intend to defend ourselves vigorously.”

On July 15th, CDIP filed a suit in New York state court saying that Morgan Stanley (NYSE: MS) sold the bonds to the firm in April 2007 referring them at the time as “higher than AAA” in quality, but the suit says that the investments quickly lost value.

“Morgan Stanley paid for the credit ratings and worked with the rating agencies to engineer the ratings,” the suit said. “It took what it knew to be a toxic, unsafe investment, falsely portrayed that investment as safe, and passed it off to CDIB.”

Institutional investors and banks lost hundreds of billions of dollars by investing in mortgage backed securities known as collateralized-debt obligations, which were sold by Wall Street firms until the financial crisis. As a result of the poor performance of these investments, hedge funds and other investors have filed several civil suits against Wall Street banks that setup the securities.

The CDO that China Development Industrial Bank sued Morgan Stanley (NYSE: MS) over was a product called Stack 2006-1 Ltd. CDIP purchased a $275 million stake in the deal.

Morgan Stanley is a financial holding company. Through its subsidiaries and affiliates, the Company operates as a global financial services company that provides its products and services to a diversified group of clients and customers, including corporations, governments, financial institutions and individuals. It operates through three business segments: Institutional Securities, Global Wealth Management Group and Asset Management. In May 2010, Invesco Ltd. acquired the Company’s retail asset management business. During the year ended December 31, 2009, it disposed its former real estate subsidiary, Crescent Real Estate Equities Limited Partnership. On May 31, 2009, the Company and Citigroup Inc. (Citi) consummated the combination of the Company’s Global Wealth Management Group and the businesses of Citi’s Smith Barney in the United States, Quilter in the United Kingdom and Smith Barney Australia. The combined businesses operate as Morgan Stanley Smith Barney Holdings LLC.

Shares of Morgan Stanley (NYSE: MS) traded down 0.9% during mid-day trading on Tuesday, hitting $27.52.