Back in 2006, Morgan Stanley Traders Were More Interested in Golf Than in Creating CDOs


The news that Morgan Stanley may be under investigation for misleading investors about the quality of the collateralized-debt obligations that it was selling and shorting has taken a toll on the company’s stock price and received an unhappy reception from inside the firm. Still, some people there might be pleased that the accusations make Morgan Stanley, which barely made it through the crisis alive, look as canny and clever as their longtime competitor, the powerful Goldman Sachs, which was formally accused by the SEC of doing the same thing last month. However, the following snippet from Greg Zuckerman’s book The Greatest Trade Ever, in which two traders at Morgan Stanley meet with John Paulson, the hedge-fund manager at whose behest Goldman Sachs created the CDOs, does not.

Paulson wasn’t getting much more respect from Wall Street’s establishment. Brad Rosenberg, Paulson’s bond trader, invited two Morgan Stanley traders, John Pearce and Joseph Naggar, to visit the office, hoping to learn more about the market and include Morgan Stanley as one of its brokers on Paulson’s big trade. Pearce and Naggar showed up in khaki pants and polo shirts, saying they didn’t have much time to talk because they were late for a golf outing with other clients. “Let’s try to make this as brief as we can,” Naggar said. Pellegrini and Rosenberg, in suits and ties, handed the Morgan Stanley traders a list of subprime mortgage-backed bonds that the firm was hoping to bet against. “Here are the names we’d like to put more shorts on,” Pellegrini said. Pearce and Naggar didn’t seem to have much interest in trading with Paulson’s team, though, or in spending time on their questions. “It sounds like a good trade; maybe we’ll do it,” Pearce said, with a laugh. Pearce was just humoring them, Rosenberg thought. As they ended the meeting, Pearce said, “Well, if we get more capacity, we’ll put it on for you.” Pearce and Naggar already had placed a few bearish subprime trades for their own firm, though they didn’t want to let that on in the meeting. To the Paulson team, it was another exasperating experience.

In the end, Goldman Sachs made billions off of its short positions on housing. Morgan Stanley lost $9 billion. Even when it comes to potentially criminal behavior, they can’t catch up.