Behind the Scenes: Morgan Stanley's "Nuclear Holocaust"

Posted by Adam English - Thursday, January 24th, 2013

Since the government has been more than willing to sweep the transgressions of so-called “too big to fail” banks under the rug, it has been hard to see what was really going on as they made massive bets against the same toxic asset securities they were selling to the world.

The ability to get internal documents is exceedingly tough and we'll probably never get the full picture of the behavior that tanked the global economy. Every once in a while though, we get a small glimpse into the process through lawsuits from other banks and investors.

A case brought all the way to the New York State Supreme Court has just brought hundreds of pages of internal documents into the public record. What they show is a team of Morgan Stanley employees laughing all the way to the bank... except for a brief pause when they were serious about selling the toxic assets to the Chinese and Taiwanese banks.

On March 16, 2007, Morgan Stanley employees working on one of the toxic asset collateralized debt obligations (CDOs) that tanked the world economy, including a vice president of the fixed income team, discussed what to name it.

Among the team members’ suggestions: “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust”, “Fludderfish” “Mike Tyson’s Punchout,” as well as the particularly fitting but vulgar “Shitbag.” Excuse the 'French' please, I'm just quoting them.

Pretty funny stuff for a team that is about to cost the world trillions of dollars as they sold toxic assets while simultaneously betting that the CDOs would fail.

Thankfully for them, they managed to drop the schoolyard antics just long enough to name the CDO worth $500 million “Stack 2006-1.” Morgan Stanley bet $170 million it would fail. In the end, $415 million of the $500 million in assets were worthless.

In a situation where the employees clearly knew that were selling worthless junk and lying about it, it is practically criminal that they are not facing prosecution.

As Jason C. Davis, a lawyer at Robbins Geller who is representing the plaintiff in the lawsuit states:

“While investors and taxpayers all over the world continue to choke on Wall Street’s toxic subprime products, to this day not a single major Wall Street executive has been held accountable for misconduct relating to those products. They are generally untouchable, but we are pleased that the court in this case is ordering Morgan Stanley to turn over damning evidence, so that the jury will get to see what Morgan Stanley really knew about the troubled nature of its supposedly ‘higher-than-AAA’ quality product.”

We all should be somewhat pleased as well. Anything that forces the fraudulent activities of these banks into the daylight -- along with the complacency, at best, or collusion, at worst, of government officials – can only help us get past the effects of their corruption.