With the latest news that Morgan Stanley (MS) is also under investigation for its role in creating and marketing CDO, it’s increasingly looking like the the real hunt is on for any firm that shorted housing prior to the bubble.That’s our conclusion and the view of derivatives expert and professor Craig Pirrong, who notes that Morgan Stanley was actually long some of the underlying mortgages it was shorting through the Dead Presidents CDOs, so we’re not even talking about outright speculation, but rather hedges — not that it should necessarily matter.
But stepping back, counterparties of these banks should be asked: Would you rather deal with a bank that may be betting against you (and exercising prudent risk management, like Goldman or Morgan Stanley, two of Wall Street’s legitimate survivors) or would you rather deal with a bank that didn’t do that and then goes bust.
We’re guessing it’s the former, easily, and though pundits keep talking about all the damage that’s been done to Goldman’s brand, there’s little evidence of mass defection from the firm. Maybe that’s because these stories confirm that they have what it takes to stick around — legal threats aside.
Along these lines, you should be worried about the anti-conflict of interest aspect of the amendment that was proposed by Carl Levin. Remember, this was one of Levin’s big issues during the Goldman hearings — he railed and railed on Goldman for shorting products it was selling. But if it passes, it takes one more risk-management tool away from the banks.