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 “This 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:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLYZhnfoXOSk&pos=5