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Morgan Stanley Mortgage Securitization Is a Microcosm of Our Economic Malady

Morgan Stanley Mortgage Securitization Is a Microcosm of Our Economic Malady

Recently, Morgan Stanley became the first investment bank to be sued by a group of homeowners, who claim they suffered from racial discrimination due to securitization of high-risk mortgage loans, which lead to the financial crisis of 2007-2008. 

This action is significant, since the plaintiffs elected to bypass the original lender of the subprime mortgage and target the investment bank responsible for securitizing high-risk loans in neighborhoods that were vulnerable to economic catastrophe. They cite the Fair Housing Act statute as a basis for this action.

Morgan Stanley orchestrated these securitizations as a principal financier of the now-defunct New Century Mortgage Corp. This firm was highly leveraged with a huge concentration of subprime loans. A small drop in asset prices virtually wiped out shareholder equity in very short order. 

BlackRock CEO Larry Fink, who has been mentioned as a possible Treasury secretary, suggested the credit bubble was present in 2006 and recognized it would implode. However, he acknowledged his timing of the crisis was grossly inaccurate, according to Businessweek.

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