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Nov 7 (Reuters) - Morgan Stanley said a group of investors had accused it of selling defective mortgage bonds contained in more than $6 billion of trusts, signaling that it may face litigation over its involvement.
Gibbs & Bruns, a law firm representing the investors, alleged in a letter received on Oct. 18 that a large number of residential mortgage-backed securities issued by trusts that the bank sponsored or underwrote was based on false or fraudulent information, the bank said in its quarterly report..
The S.E.C. has already sued Goldman Sachs for its disclosures related to a fairly esoteric derivative security, and that case may provide a template for the types of case that the commission may pursue for banks that it accuses of misleading mortgage-backed securities investors — even sophisticated ones — about the risks from foreclosure problems and obligations to take back loans that were improperly issued.
The lawsuit, filed by Pension Benefit Guaranty Corp in federal appeals court, accuses Morgan Stanley Investment Management of breaching its fiduciary duty in handling St. Vincent Catholic Medical Centers Retirement Plan's fixed income assets.
"MSIM irresponsibly concentrated approximately 50% of the Plan's fixed-income assets in the single asset class of mortgage-backed securities, even as MSIM became aware in 2007 and 2008 of the rapid and dramatic deterioration of the mortgage-backed securities market," the lawsuit said.
While everyone is focused on the drunk being pulled from the pool--Europe's sovereign debt--another drunk is teetering on the edge: public and private pension plans.
Here's the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever.
Gripped by the mono-maniacal desperation of an addict who sees no other path but another hit, central banks have lowered interest rates to near-zero to "spark growth." Unfortunately the only thing being goosed is the future cost of servicing the additional debt.
How do you earn 8% on money which yields at best 3%? You can't. How do you reap a gain on bonds when interest rates have already hit bottom and can't fall any lower? You can't.
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U.S. Bancorp knew mortgage loans underlying the bonds weren’t properly transferred to trusts and caused investors to suffer millions of dollars in losses, Oklahoma Police Pension and Retirement System said in a complaint filed yesterday in federal court in Manhattan.
“U.S. Bank’s violations of its duties have resulted in certificate holders unnecessarily suffering millions of dollars of losses because they were dependent on a faithless trustee to protect their interests,” the fund said in its complaint.
The mortgages loans were pooled and securitized by Bear Stearns, the investment bank that was acquired by JPMorgan Chase & Co. (JPM) As the trustee for the two trusts at issue in the lawsuit, U.S. Bancorp was required to take steps to ensure the securities sold to investors were properly backed by mortgages, the pension fund said.