Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds

Source: Bloomberg

By Pierre Paulden, Caroline Salas and Sarah Mulholland

July 8 (Bloomberg) -- Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Two years after the credit markets began to seize up, costing the world’s biggest financial institutions $1.47 trillion in writedowns and losses, banks are again taking so- called structured finance securities and turning them into new debt investments with top credit ratings. While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.

A lot of banks and insurers “cannot buy anything but AAA,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” which is due to be published in November by Oxford University Press. “You’re manufacturing AAA out of not AAA, therefore allowing those people who have AAA written on their forehead to buy.”


Read more: http://www.bloomberg.com/apps/news?pid=20601109&sid=aeTzfvEedKpQ

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This will work out well, I'm sure.

Isn't that what the derivatives did? Sell junk as A rated bonds.
The banksters won't learn until the torches and pitchforks get them.

for our IRA's?? My stomach stays in knots all the time worrying about losing money. Since it's all tax deferred I think paying the taxes will be a big problem for us. Not that we have a great deal of money, but a big tax hit will really put a squeeze on us.

If your IRA is parked at Morgan Stanley, can you move it to something safer?

Are you getting payments from the IRA now?
You can arrange the amount of payments ( various formulas) to reduce taxes.

If you are not getting payments, no problems, no taxes till you withdraw the money.

but I personally would not have my money sitting in any of the Big 5 banks..these guys have no learning curve.

would be better? Won't earn as much, but I'm afraid of "big 5" and much more!

What is piece of mind worth?

If you do move it be sure to do a "direct rollover". Talk to the people at the credit uinon on how to do that.
You will get a form and on the form be sure to check the place that says
Do Not Withhold Taxes.
That is because you are moving the money directly from Institution A to B and never touching it with your hands, therefore not "cashing out" so no taxes are due.
Be sure to find out from Credit Union what there insurance limit is on accounts, you might want to have the money divided.

Everything I am telling you is what I have done several times with my own retirement funds before I reached the age where I could withdraw them. ( 59.5 yaers )
Then taxes are due ( on 401-k, not Roth ) when you take out the money in whatever distribution cycle you choose.

a silk purse, I think.


This stuff is SHIT and callin' it a bag o' roses ain't gonna make it smell no better.

It's crap.

just like before and no one will stop them because they are the "bankers"

Meanwhile, back at the ranch, the middle and lower class cannot make their mortgage payments or buy food. morgan stanley and their buddies will have to cut off credit to them because they don't have jobs or savings.

or you shouldn't polish one. Either way.

and turn it into a AAA cancer treatment drug and sell it for big bucks?

Seems like exactly the same thing to me.

Cue "When will they ever learn, when will they e-e-ever learn?"

corporation.

Thanks for the heads-up! :hi:

It sounds like they are splitting the underlying debt into 'good' debt rated AAA and 'poor/bad' debt rated Baa2 (junk). Hasn't that been the goal the whole time, separate out the good mortgages that people are still paying from the bad ones that are too risky? I thought I read that about 90% or more of the underlying mortgages are likely to be paid as scheduled.

Edward Harrison over at "Naked Capitalism" is more polite:

http://www.nakedcapitalism.com/2009/07/financial-alchemy-at-morgan-stanley.html

"Here’s the problem. In June, Moody’s downgraded the Aaa tranche of this CDO six notches to A3 because the default rate for loans in the tranche soared to 7 percent. So, now, Morgan Stanley has been able to re-package this paper, and…voila this debt is Aaa again. Everybody’s doing this repackaging. Goldman plans to sell over $200 million of repackaged Commercial mortgage-backed paper very soon.

So, when earnings start coming in this quarter and you are wondering how these banks aren’t writing down huge losses due to events like this and this, you now have one more reason why. Here are two more reasons here and here. The question is whether investors will be fooled.

ps. – I am sure Morgan Stanley added credit enhancement, collateral, reduced the poorly performing assets, etc, etc. But, nevertheless, you have to wonder how this stuff gets a Aaa rating when substantially the same loan pool was just downgraded six notches."

The crankier Mike Shedlock isn't so polite:

http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=5367

"All that is really happening here is pools of ALT-A garbage are being further sliced and diced and repackaged with a yellow ribbon with hopes that the buyers will not take a sniff at what's inside.

ALT-A is where all the liar loans are hiding.

One thing is for certain: Smelly CDOs by any other name will still stink, no matter how many yellow ribbons are tied to the package. "

Or just more trash with a AAA rating? Deja vu all over again.

there are good, solid structures and there are stupid, unworkable structures. without knowing exactly how the deal was structured, it's IMPOSSIBLE to know if a AAA rating is appropriate or not.

at the most basic level, these types of structures build in substantial reserves. if those reserves are big enough, AAA is appropriate; if not, then AAA is not appropriate.

think of it this way. if the underlying collateral is worth (market value) 80 cents on the dollar, i.e., there's a 50-50 chance that they're worth something less than 80 cents on the dollar, then selling 80 cents worth and calling it AAA is folly. you have a 50% chance of losing money.

but if they're only selling 50 cents on the dollars, backed by collateral worth 80 cents on the dollar, then that's pretty solid, the losses in the collateral would have to be 2.5 times what they're actually expected to be before the investor lost a single cent. now that's seeming pretty rock solid. nothings bullet-proof, and a AAA rating was never meant to imply that, only that losses should be extremely rare. if the reserve levels are set right, then a AAA rating would be appropriate.