Two international banks are suing Morgan Stanley (MS) for misrepresenting the underlying collateral on $1.2 billion in residential mortgage-backed securities.
Belgium bank Dexia filed one of the suits in New York state court, claiming Morgan Stanley sold the bank $680 million in RMBS while representing the bonds as deserving of AAA status.
While most of the bonds initially had AAA ratings, they are now well below investment grade with the majority rated C, Ca, CCC, Caa3 and C. The Belgium lender claims Morgan Stanley knew the ratings assigned to those transactions were not correct because “those ratings were bought and paid for, and were supported by false information regarding the originators’ underwriting guidelines that Morgan Stanley provided.”
Bayerische Landesbank, a publicly regulated German bank, filed an identical suit Thursday, claiming Morgan Stanley misrepresented the quality of collateral supporting RMBS acquired by the lender.
The German financial firm bought $486 million in RMBS during 22 offerings that occurred in 2006 and 2007. Bayerische Landesbank claims those offerings misrepresented the underwriting quality of the underlying mortgages.
The suit also alleges Morgan Stanley had a policy of not securitizing loans with an loan to value or a combined LTV ratio greater than 100%. But the plaintiff claims “a substantial portion of the loans purchased and securitized by Morgan Stanley exceeded 100% as calculated under independent property valuations obtained by Morgan Stanley.”
In addition, the bank believes Morgan Stanley knew the truth about the originators’ poor lending practices and the inaccuracy of the credit ratings ascribed.
A chart included in the Bayerische complaint shows the bonds, which once had triple-A ratings, in junk status or below investment grade, carrying ratings as low as C, CCC, D, CC, Ca, Caa3.
Morgan Stanley had no comment on either complaint Thursday morning.
The Bayerische Landesbank complaint also lays out information discovered by the U.S. Financial Crisis Inquiry Commission, which studied the causes of the subprime meltdown.
According to the complaint, a former Morgan Stanley executive told the FCIC that the bank ignored warnings from a third-party due diligence provider that studied the quality of the residential loans.
In its complaint, Bayerische Landesbank claims “Morgan Stanley overruled the findings (of the due diligence provider) and waived approximately 56% of all such defective exception loans and securitized them into RMBS that were sold to investors.”
Write to Kerri Panchuk.