Spate of bad news further weakens their reputation
Financial institutions have been caught by the recession and we’ve been hearing news of bankruptcies from small to large banks since 2007. And you think there’ll be big changes this year! Well there’s nothing good to hope for. Last week, Morgan Stanley conceded that it stands to lose two-thirds of its $8.8 billion real estate fund. The Wall Street Journal explains, “That would likely make it the biggest dollar loss—$5.4 billion—in the history of private-equity real-estate investing… The losses come from investments in properties such as the European Central Bank’s Frankfurt headquarters, a big development project in Tokyo and InterContinental hotels across Europe, among others.”
Morgan Stanley’s been involved in very risky deals that resulted in poor returns from real estate projects that it had a lot to do about. This news is just a ticking time bomb for the company. Its executives are sure to be finding alternative response to the market in case their plans falter.
On the other hand, the Securities and Exchange Commission recently sued Goldman Sachs for fraud due to risking collateralized loans that spurred the financial crisis. BusinessWeek reports, “The SEC alleged that Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein, 55, structured and marketed CDOs that hinged on the performance of subprime mortgage-backed securities. The New York-based firm failed to disclose to investors that hedge fund Paulson & Co. was betting against the CDO, known as Abacus, and influenced the selection of securities for the portfolio, the SEC said. Paulson wasn’t accused of wrongdoing.”
But another report puts the spotlight on an employee who was in his 20’s back then and wrote an email now considered by the SEC as the reason behind the bank’s financial mess. Fabrice Tourre, now a director in Goldman’s London office, described himself in an e-mail, “the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”
And you think the authorities can’t recover all those e-mails you’ve been sending in the office!
Updates on this issue are continuously posted online but we still have to see how Goldman’s legal team takes maneuvers out of this mess. After all, it’s what they’re known for, don’t you think? I’ve been waiting for a fresh change in the industry and seeing how large banks finally take off their toxic real estate debts in an ingenious strategy would be good news.
And to cap off the week’s complete disappointment, Washington Mutual is accused of mismanagement that led to its demise according to the former head of the Office of Thrift Supervision, John Reich. As reported by the Los Angeles Times, Reich said, “The liquidity failure at WaMu was induced by the decline in public confidence in large financial institutions, brought on by a series of prior significant events in 2008.” The Times also adds, “Further exacerbating the situation was WaMu’s large mortgage holdings in California and Florida, two states hit by the largest price declines after the housing bubble burst, Reich said. And WaMu was hurt by the federal law that requires savings and loans to invest two-thirds of their assets in real-estate-related loans.”
I can’t wait for Washington to finally make it legal to limit the bank’s power over managing real estate funds. There’s got to be a way to make this happen unless our policymakers are bowing to the pressure that some insensible lobbyists are pursuing.
Second, the government must hasten its other investigations on financial institutions that have terribly messed up. The sooner they prove who’s to blame, the faster they can eliminate doubts that they cannot perform their job well.