Morgan Stanley's Doomed Baldwin CDOs Thwarted 'Natural Process'
By Jody Shenn and Michael J. Moore
May 14 (Bloomberg) -- In June 2006, a year before the subprime mortgage market collapsed, Morgan Stanley created a cluster of investments doomed to fail even if default rates stayed low -- then bet against its concoction.
Known as the Baldwin deals, the $167 million of synthetic collateralized debt obligations had an unusual feature, according to sales documents. Rather than curtailing their bets on mortgage bonds as the underlying home loans paid down, the CDOs kept wagering as if the risk hadn’t changed. That left Baldwin investors facing losses on a modest rise in U.S. housing foreclosures, while Morgan Stanley was positioned to gain.
“I can’t imagine anybody would take that bet knowingly,” said Thomas Adams, a former executive at bond insurers Ambac Financial Group Inc. and FGIC Corp. who is now a partner at New York-based law firm Paykin Krieg & Adams LLP. “You’re overriding the natural process of risk-mitigation.”
