Morgan Stanley Defaults

That headline got your attention, didn’t it? Bloggishly irresponsible of me, I know, to alarm people about Morgan Stanley defaulting. The responsible, grown up media handle these things much more professionally. They talk about Morgan Stanley having to “Give Up” five San Francisco office buildings to their lender, because they were bought at the peak of the market and have lost about half of their value. The bank that holds the mortgage on these properties, and which lent the money to Morgan Stanley to buy them in 2007, has been in “negotiations” with Morgan Stanley for months on the “orderly transfer” of these properties to the bank.

This is just a beautiful example of how the morality that applies to the corporate world is so different than the morality expected of you as a homeowner. You “default” on your home mortgage and go into “foreclosure” just before you lose the property to the bank. Morgan Stanley is going to “relinquish” its assets to the bank. It sounds so polite and gentlemanly of Morgan Stanley to do this, like they are volunteering to make this orderly transfer. Alyson Barnes, a spokesperson for Morgan Stanley, said ”œThis isn’t a default or foreclosure situation, we are going to give them the properties to get out of the loan obligation.” The hell it isn’t a default or foreclosure. If you were to do this with your home, you would be classified by the real estate industry as entering into a “strategic default.” This is exactly what Morgan Stanley is doing, and everything about the way this deal is being reported is intended to prevent you from doing the same thing.

Morgan Stanley made a series of injudicious commercial real estate purchases at the peak of the market in 2007. They probably have the biggest portfolio of such lemons of any investment bank. Their market timing was dreadful and these decisions can only be described as atrocious. In 2008, Morgan Stanley was on the verge of bankruptcy because of foolish investments such as these, as well as truckloads of mortgage backed securities that were collapsing in value. The firm was allowed to convert to a commercial bank and have access to TARP rescue money and many other liquidity facilities that kept it alive at your expense. They are having a near-record year in 2009 trading with the new capital given to them by the taxpayers, and this new lease on life has allowed them to quietly default on their real estate mortgages.

The firm itself is no longer in danger of failing, and these defaults are technically in the category of strategic defaults, where the borrower turns the property over to the bank and washes their hands of the mortgage. But these are defaults nonetheless, representing an inability of the borrower to repay principal and interest, or a recognition that the market value of the properties is well below the mortgage amount, or both of these things. Since Morgan Stanley is still in business overall, it is able to avoid a literal foreclosure on the property forced upon them by the lender. Morgan Stanley is big enough in the markets it probably had a lot of leverage over the bank to force it to negotiate some loss on this loan, just as Morgan Stanley has had to take a large write-down on the real estate it purchased.

This is how things are done in big business. The bank likes it this way because it can avoid ratcheting up its foreclosure statistics, which might alarm both the public and the regulators nervous about bank solvency. Of course, the bank is stuck holding on to five office buildings that are struggling to find tenants, but recent changes in accounting rules allow banks to hide these assets for years on their balance sheet without recording any further impairment of value.

This is not how things are done in the home mortgage business. Morgan Stanley, Goldman Sachs, Merrill Lynch and other big financial firms made billions of dollars buying up sub-prime mortgages and selling them on as securities to investors . Now these homeowners are defaulting in record numbers on these mortgages, of which over half are now underwater – the loan balance exceeds the property value serving as collateral. Homeowners wanting to renegotiate their mortgage terms are struggling even to find the bank which owns the mortgage, because Morgan Stanley and their like are hiding behind a multitude of subsidiaries that are pushing these homes into foreclosure as fast as possible, in order to stop the losses experienced by the investors who bought the securities.

The investment banks are winning at this game. Very few mortgages are being renegotiated to allow the homeowners to keep their home, and this despite all the programs of the federal and state governments trying to force renegotiations on to the financial firms. One of the reasons the investment banks are winning is that there is a conscious, deliberate effort by the financial industry, the press, and the government to prevent homeowners from entering into strategic defaults. Less than 5% of all residential foreclosures are strategic defaults, done deliberately by the homeowner as their best possible financial alternative. Americans still view a deliberate default as immoral and a sign of personal failure.

Morgan Stanley doesn’t look at it that way, not when it comes to its own behavior. It only expects you, the consumer and homeowner, to have moral attitudes about financial decisions. With the corporations, morality doesn’t enter into it; it’s just business. That is why it is very, very important for strategic defaults by firms like Morgan Stanley to be dressed up as something different – as a negotiation done voluntarily for mutual agreement. And after all, Morgan Stanley itself isn’t going bankrupt, just the subsidiary that bought these properties is acting like it’s bankrupt.

The last thing the financial industry and our worthy government leaders want is for American consumers to act as irresponsibly and amorally as our corporations do. If most Americans acted like that, not one major US financial firm would be left standing.

The article from Bloomberg on the Morgan Stanley transaction:

This post was read 232 times.

About author View all posts Author website


Numerian is a devoted author and poster on The Agonist, specializing in business, finance, the global economy, and politics. In real life he goes by the non-nom de plume of Garrett Glass and hides out in Oak Park, IL, where he spends time writing novels on early Christianity (and an occasional tract on God and religion). You can follow his writing career on his website,

12 CommentsLeave a comment

  • Has been losing a ton of money since last year. I think they lost 50% of the value and still going down. I wonder when it’ll stop. I sold everything last year.

  • putting their house back to the bank exactly the same way, particularly when the value of the house declined below the value of the note.

    However, there is one reason the press does not refer to it that way. It does not preserve the victimhood of the person who put their property to the bank. Doesn’t it sound better to write, 1 million homeowners foreclosed and thrown out into the street, made homeless. Than, 1 million homeowners recognizing that the value of their homes had fallen below the debt they owed had decided to relinguish their ownership rights to their lender and release themselves from a crushing debt and thereby maintain a better financial net worth and opportunity for the future.

    Where is the victimhood in that?? How much fun would it be as a news intern to write stories like that.

    Why do surveys of people indicate that they feel better about their financial position today than they did 12 or 18 months ago. Why do you think that is? Because folks have been getting their financial house in order, and that includes getting out from under too much debt, and if it includes foreclosure or bankruptcy so be it. It is identical and I would advise anyone sitting in a home worth $100k carrying $300k of debt to walk. Get rid of the $3,500 loan and then go to the bank itself and offer to rent the same house for $750 a month.

  • Corporate media puts up bogus headlines routinely but never tells the reader it was a “grag”;) The Gulf of Tonkin “attack” comes to mind.

    Your article is a fascinating juxtaposition of moral unbalance – shaming the homeowners while defining Morgan Stanley out any unpleasantly accurate comparisons. This is the type of thing that people understand intuitively. But the facts are always a big help.

  • The whole purpose of using euphemistic words like “relinquish” and “give back” to describe turning property over to a bank is to gloss over the nature of what is really going on. I suspect most people reading that headline would think this is just another business transaction. They probably wouldn’t read the article as a consequence. They certainly wouldn’t connect what Morgan Stanley has done with the possibility that they too could walk away from their mortgage.

    Whether advertent or inadvertent, language is used every day to frame behavior in a certain way, and most of us are oblivious to this use much less to how our views of the world are set by this conditioning.

    I suspect Morgan Stanley thought long and hard about how they would frame the discussion regarding its property losses. I even wonder if anyone at the firm has been fired over these deals.

  • Ed Stubai, a local plumbing contractor that spent more than $450 thousand on residential property in 2007, plans to relinquish his five bedroom home to his lender two years after purchasing it from Mary and Dave Levi near the top of the market.

    Ed has been negotiating an “orderly transfer” of the house since earlier this year, Lyona Smith, Ed’s neighbor, said yesterday in a telephone interview. FAREA Property Partners will take over the house, which has been held by the bank’s HSREF VI fund. Smith declined to say when the transfer will occur.

    “It’s not surprising this deal ran into trouble,” Dave Gonzalez, senior teller at Main Street Community Bank in Lapineville, Oregon, said in an interview. “It was eye-opening among a group of eye-opening deals. There was almost no price too high in 2007 for a house in top suburban markets.”

    The Lapineville transfer would mark the second real estate deal to unravel this year for Ed, who bet on a duplex downtown as prices were rising. The plumber last month agreed to surrender 22 hundred square feet of rentals to Barclays Capital after acquiring them for $186 thousand in 2007 from Crescent Real Estate Equities. U.S. housing real estate prices have dropped 43 percent from October 2007’s peak, Moody’s Investors Service said last month.

    Lost Value

    Ed’s house may have lost as much as 50 percent of its value since the purchase, Gonzalez estimated.

    Julie Sorie, vice president at FAREA Property Partners in Klamath, declined to comment.

    The most desirable of the properties — the duplex, with 3,000 square feet, and his house, with 2,200 square feet — would sell for $60 a square foot, according to Colliers International. The value of all both buildings is about $279 thousand, the brokerage said.

    “This isn’t a default or foreclosure situation,” Gonzales said. “It is a negotiated transfer to our lenders.”

  • And to think, this article could have been written more than a million times already for all the Ed Stubais in America.

    I swear you must work in the business. You have all the facts down perfectly. I especially like the HSREF VI fund. It’s just the sort of thing people would have invested in a few years ago to get 0.25% more yield.

  • …which is where I lived before expatriating myself to Thailand. LaPineville? LOL, but you did a great job in your post.

    “We’re all of us children in a vast kindergarten trying to spell God’s name with the wrong alphabet blocks.” ~ Edwin Arlington Robinson

  • So, scotjen, you are saying that no one individual or family that was foreclosed on became homeless as a result? And can a corporation become homeless? Just wondering.

    You seem to be equating “financial equivalency” in these deals, J6P versus the banker/mortgage broker. Who has the advanced financial degree, the license, the experience, the risk evaluation software, the fiduciary duty, and receives the quick profit to get a deal done regardless?

  • Unanswerable questions:
    Where is the deed?
    Mark to market
    Derivative equivalence terms
    Where are the assets carried on the balance sheet?
    Did the bailouts have anything to do with solvency? or just liquidity?

    Defaults go to into that black hole on the other side of the universe.

  • Buying up your impaired securities, paying over the market for them, keeping the price secret as well as the name of the banks which participate in the program, and then taking tens of billions of dollars of write-downs on the paper without offering any explanation.

    Then you get the FASB to change the accounting rules so banks don’t have to write down the securities they still own, and no one has to worry about a thing.

    What sort of benefits do consumers and homeowners get when they deal with banks? Nothing like what the banks get from the government.

  • So lets juxtaposition the relinquish/foreclosure aftermath. Morgan Stanley can keep on going buying more real estate. John Public has taken a significant ding to his credit rating to the point he probably can’t buy another house. He’ll probably end up renting but his selection will be limited to a landlord who doesn’t pay attention to his credit rating. And of course the whole slew of other issues that revolve around having a poor credit rating. As long as John has cash on hand, and a lot of it, he shouldn’t have much to worry about.

    The banks have worked the system so that not only do people have to get over the stigma of defaulting, but the system itself penalizes against other financial aspects in your life, not just home ownership.

    I’m not getting into what’s right or wrong or giving advice, I’m just saying that it’s definitely a different set of rules for a bank to walk away from a deal versus John Public walking away.

  • If he defaulted because he lost his job, lets say middle management or well paid line employee, he’ll have a decent chance of having a credit check by his next prospective employer. Many employers are requiring credit checks as part of the application process. The default will show up and that’s it for John. The credit check creates a spiral downward for those hit hardest.

    I may be missing something but I thought credit records were private. Yet to get a job, citizens are required to waive that right in some instances. Can we be asked to waive other privacy rights? What if we were asked to have a company representative hang out with on the weekend to check out our “lifestyle” as a requirement to apply for work?

Leave a Reply