CA sues Morgan Stanley over public pension funds

 

Morgan-StanleyThe State of California has sued investment bank Morgan Stanley, filing a complaint in San Francisco Superior Court, seeking redress for what officials said was massive harm to its public-sector workers.

“Public employees in California, including peace officers, firefighters, teachers, and other public servants, suffered major losses as a result of Morgan Stanley’s residential mortgage-backed securities, in which high-risk home loans were purchased from subprime lenders, bundled together and sold for billions of dollars to investors,” the complaint alleges, according to CBS San Francisco.

Lack of disclosure

The complaint depicts Morgan Stanley as doling out bad deals out of “fear that transparency would be ‘a relationship killer,’ hampering a lucrative business with the companies taking on the risky debt,” Bloomberg noted. “Harris accuses the bank of bundling high-risk loans from subprime lenders — some directly funded by Morgan Stanley — and selling them to investors without disclosing its own concerns about the poor quality of the debt.”

In a statement, the office of California Attorney General Kamala Harris singled out the state’s large twin public pension funds as suffering particularly large losses. “The California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) — two of the nation’s largest institutional investors — lost hundred of millions of dollars on these Morgan Stanley investments,” the statement read. “CalPERS provides retirement security and health plans to more than 1.6 million California firefighters, peace officers, and other public employees. CalSTRS provides retirement, disability, and survivor benefits for over 850,000 of California’s pre-kindergarten through community college educators and their families.”

Swinging for the fences

Blaming “a culture of greed and deception,” Harris accused the bank of obscuring the investment risk posed by “toxic residential mortgage-backed securities and ‘structured investment vehicles’ it marketed from 2004 to 2007, sometimes encouraging credit rating agencies to award unjustifiably high ratings,” as Reuters reported. Seeking to maximize compensation, “California seeks to triple the damages sustained by the pension funds, plus penalties of $2,500 for each violation of the state’s business code,” according to Bloomberg, plus a court order barring similar misrepresentations in the future.

The lawsuit reflected a hope that Morgan Stanley might also be vulnerable to an approach successfully taken in the past toward ratings agencies accused of their own misdeeds. “CalPERS had previously recovered hundreds of millions of dollars in settlements with agencies such as McGraw Hill Financial Inc’s Standard & Poor’s and Moody’s Corp’s Moody’s Investors Service over alleged inflated ratings,” as the wire service noted. In previous lawsuits, officials had pegged the combined losses facing the funds at over $1 billion, according to the Sacramento Bee, with the lion’s share falling on CalPERS.

A vigorous defense

Despite the length of time that has elapsed since the 2008 financial crisis, investment banks have still not put the past behind them in court. Confronted with the prospect of a substantial surrender of funds and the establishment of unfavorable precedent, the bank promised to defend itself vigorously in court. “Harris is seeking $700 million in penalties against Morgan Stanley, plus damages of more than $600 million,” the Los Angeles Times reported, citing Attorney General office spokeswoman Rachele Huennekens. Mark Lake, a Morgan Stanley spokesman, told the Times the bank does “not believe this case has merit. The securities at issue were marketed and sold to sophisticated institutional investors, and their performance has been consistent with the sector as a whole.”

The fight came at a moment when Morgan Stanley and the state of California have been working hand in hand on another big-ticket issue of central concern to state officials: new water bonds. “California’s Infrastructure and Economic Development Bank will issue $414.2 million of clean water state revolving fund revenue bonds as green bonds through lead manager Morgan Stanley,” as Reuters observed.

6 comments

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  1. Rex the Wonder Dog!
    Rex the Wonder Dog! 12 April, 2016, 19:05

    I wonder if the taxpayers can sue CalTURDS for the money they cost the poor and middle class?????

    Reply this comment
  2. LGMike
    LGMike 12 April, 2016, 20:37

    The California public sector retirement funds under union agreements has not lost any money on investments, as contracts specify that any losses must be made good by the employer (ie: state of California).
    As such, the Attorney Generals office would NOT have standing because there is no proof of permanent loss. If anyone has standing to sue, it would be the public at large and they would have to prove their was a willful policy to defraud the client ( California taxpayers) which would have to “make good” on under performing investments (otherwise known as profits) to the funds. Additionally, the taxpayers would have a good case against the Retirement funds policies and investment options which focused on high risk and known unrealistic expectations of growth on a year to year basis.

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  3. Knowledgeable
    Knowledgeable 13 April, 2016, 10:12

    In my opinion, based on the data I have to hand and being in the mortgage industry, Stated Income loans had qualifications based on the borrowers’ ability to make payments at 1% to 1.5% interest. This is what caused the spike in housing development and a lot of Democratic supporters who were developers got rich during the ensuing real estate bubble. This bubble was created with a point of collapse built into it; on purpose!
    After 4 years, the Note interest rate changed to the market rates which were about 6% to 7% over night. Those home owners woke up that morning and discovered their payments had jumped up about $1,000 per month! They abandoned their new homes in droves! That’s what created the massive foreclosures in California that started the crash in 2008. The government created this; Barney Frank, Maxine Waters et al.
    AIG Insurance company insured those Mortgage Backed Securities against loss but failed to do that when the losses become so high.
    Goldman Sax and other Brokerage houses had sold millions of these MBS to banks and institutions all over the world because they were insured and therefore had an inflated false rating and they became worthless over night, spread out over as many years as these loans were offered. Thus the worldwide economic crash.
    John Paulsen, Treasurer and Goldman Sax Exec, scared the hell out of Congress and got them to bail out AIG and the large banks and Goldman Sax investors that cost the tax payers Billions.
    The icing on the cake is that John Paulsen is rumored to have shorted the MBS market, betting on the crash, knowing a crash would happen because of the way the Notes were written, and pocketed some $15 billion. Golden Sax and many other insider investors may have done the same thing.
    I think there are a lot more targets available to go after to clean this all up but the only thing is, none of it fixes the loss of homes by millions of homeowners who didn’t have Stated Income loans, were up to date on their payments and lost their jobs and homes because of the created massive economic crash. This whole thing was designed to happen as it did for the economic benefit of a few, at the cost of millions of Americans’ dreams. It’s all part of the movement to take away our freedoms.
    The big thing missing in Capitalism is ethics and integrity; a personal knowledge and awareness that has to be taught at a young age. It is not a natural knowledge.
    If Goldman Sax did spot the impending doom, but didn’t blow the whistle and let the Crash and Depression occur to their benefit and their investors’ benefit, that is a huge crime against mankind and the people of this Country. If it was ALL known by the Government and the Federal Reserve etc. as a created bubble to crash the economy on purpose, then we are all in deep yogurt and it’s time to wake up, confront this evil squarely and handle it. Politicians can’t do it. They can’t confront it because they are part of it! It takes a good ethical businessman with high integrity to do this and all of us backing those efforts up. We can no longer take our freedom for granted. Freedom must be continually defended. Those who think otherwise are too busy committing unethical acts in life and business and can’t confront straightening them selves out let alone others.

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