Now it’s Morgan Stanley’s Turn
Morgan Stanley should understand that it is a strange thing about ethics. You either have them or you don’t. There is no such thing as a little bit of ethics. It’s like being a little bit pregnant. The state does not exist. We now know that Morgan Stanley is the subject of an investigation by federal prosecutors to determine whether or not some of the accusations made against Goldman Sachs are applicable to Morgan Stanley as well.
This is a blue blood firm, having been created directly as a result of the Glass Steagall Act passed in the 1930’s specifically to protect investors against fraudulent practices. Back then the banks were directly involved in investment banking as well as normal deposit and lending practices. There was an obvious conflict.
The banks had to choose, remain a bank or become an investment bank. Pick one or the other but not both. JP Morgan and Company, the most important bank of its era, chose to remain a commercial banking institution. Those partners in the bank that decided to remain investment bankers split off from the bank and chose to build America’s most preeminent investment bank, which was called Morgan Stanley after its two main partners.
It remained that way for 60 years, until the late 1990’s. Sandy Weill who at that time ran Citigroup desperately wanted to break apart the Glass Steagall Act, and have Citigroup in both ends of the business. Political contributions were made, Bill Clinton was agreeable, and before the millennium, Glass Steagall was repealed.
Morgan Stanley remained an investment bank until it absorbed the sales force of Dean Witter, which was owned by Sears Roebuck. The joke after the deal became buy your stocks where you buy your socks. Once the post merger integration took place, the name Dean Witter disappeared, and Morgan Stanley was the sole survivor.
That brings us to today, where apparently the government is saying that Morgan entered into a number of collateralized debt obligation deals, and on their trading desk, placed bets that the value of the bonds would fall. The government further believes that that non disclosure of the dual role of the firm is a violation since they did not disclosed their twin roles.
The burden of proof will be upon the government to prove that Morgan Stanley knew beyond a reasonable doubt that that firm employees misled investors knowingly. This is not an easy test to meet.
Strange isn’t it that the public disclosure of the investigation happens just as the President is attempting to pass financial regulation reform which may seriously erode Wall Street’s power base in this country. Do you think it is coincidental? My answer is hardly.
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