How a Board Member Turned an Obama Deal Into a Win for Wall Street!

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Morgan Stanley managing director, Allen C. Caldwell, has a solid track record of betting on things that could eventually turn out badly. Like his decision to call off the Chase mortgage deal in 2020.

After Maureen Murdock had proposed the deal to Morgan Stanley on September 11, Murdock received an e-mail from Caldwell, titled “Murdock Position,” dated November 7, 2020. In the e-mails, Caldwell emphasized that he was still confident that he would lose the mortgage deal. So, he felt no obligation to consult with the firm’s board. Instead, he could continue to own his share of the company.

The proposal came to be known as the Mortgage Backed Securities Compromise, or MBS. It was the centerpiece of the financial crisis. For the credit firms and investment banks, which had benefited from those deals, this was a major blow.

Because of its political connections, Maureen Murdock remained the front runner for the Chase deal. Those who had supported the deal before had been backed by top government officials. So, in spite of the fact that it was a highly complex and controversial issue, the main banks had never supported Maureen Murdock or her proposal.

Not long after Caldwell got that e-mail, a new leader was brought in. This new person, a woman named Emile Rozenfeld, decided that the Chase deal should go forward. Still, he felt that the bank could lose, just as Maureen Murdock had lost. Even though he had no confidence in the policy, he thought that the company’s board should consider whether this was a good idea.

However, when the final agreement was made, Caldwell announced that the board had changed its mind. The new board decided to take a second look at the proposal. And so the affair was left with Moody’s Investors Service, which rated the plan and determined that it was “credit negative.”

Morgan Stanley was one of the companies to have found a way to end up being credit negative. Investors had lost a large sum of money in these complex arrangements. All the same, at least the loss had been quickly reversed.

What is it about the Moody’s rating that makes Morgan Stanley a problem? We will return to this later, but first we should take a look at Caldwell’s reasons for pushing through the Mortgage Backed Securities Compromise.

When Moody’s first rated the deal, it ranked the deal as neutral or poor. It warned that many other rating agencies were considering the deal and it had the potential to cause serious harm to the credit markets.

Then Moody’s assigned an agency, Mary Popp, to oversee the financial structure. This resulted in the need for every rated entity to get its deal approved by Popp before it could proceed.

Indeed, this has become a problematic situation for all of us. Of course, it is important to remember that Moody’s has a duty to the United States government, but the rating agency has also a duty to the credit markets, so it must be careful when it ranks credit ratings.

Indeed, it is only because of the Moody’s involvement that the deal was pulled off the table in 2020. These days, Moody’s has issued no negative comments on any major financial contracts, but it is still getting its share of heat.