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Levick Daily. Thoughts. Perspectives. Insights.

Financial Communications

Morgan Stanley Revelations Raise the Specter of 2008… Again

This week, The New York Times’ Dealbook dragged the specter of 2008 back into the spotlight.
A piece authored by ProPublica’s Jesse Eisinger shared “explosive” revelations about what some Morgan Stanley traders knew about the mortgage backed securities it sold, and then bet against, during the lead-up to the financial crisis that had its crescendo in 2008. If you think you’ve heard this song before, you’re not crazy. It’s been playing on repeat for four-and-a-half years. As such, this “explosion” isn’t of the lethal variety. It’s little more than a firecracker, and likely a dud at that.
In internal emails made public during the discovery phase of a lawsuit against Morgan Stanley, there exist indications that the firm’s employees knew collateralized debt obligations (CDOs) being packed for sale were worth far less than potential buyers believed. As has been the case every time such a story has made headlines (rewind to the Goldman Sachs’ congressional hearings in 2010), the bank’s response was straightforward. The buyers were sophisticated investors who knew – or should have known – what they were buying.
While some Wall Street critics might construe that as a callous defense, it has worked in the past. And, as they say, it has the added benefit of being true. After all, such are the competitive ways of Wall Street. Still, others might contend that a more comprehensive response is needed from Morgan Stanley and the banking industry as a whole as it seeks to close the trust deficit created by the financial crisis. Here again, the critics are mistaken.
The real problem that accompanies these financial crisis postmortems is that they resuscitate the narratives that “banks are the bad guys” and “someone needs to be punished.” The chances of that the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) would initiate new investigations are somewhat remote. Those carried out in the past failed to bear fruit and the regulators have seemingly moved on to new business. There is a chance the story could embolden plaintiffs and spark new civil litigation, however most of those who would have filed suit have likely done so already.
Given those realities, the best the banks can do is to continue doing what they are doing, absent potholes such as these. With every responsible mortgage they write, every small business they support, and every dollar they make for clients and investors, they distance themselves from past mistakes and remind the public of the fundamentally important role they play for every American.
In every crisis, there comes a point when it’s best for those held responsible to turn the page and let the good works that comprise the next chapter speak for themselves. If there’s anything we’ve learned from this week’s revelations about Morgan Stanley, it’s that we reached that point in the financial crisis some time ago.
Michael W. Robinson is an Executive Vice President at LEVICK and contributing author to LEVICK Daily.

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