New court filings in a lawsuit involving Morgan Stanley cast light on how the incestuous relationship between New Century and Morgan Stanley helped precipitate the subprime mortgage crisis, and make it clear senior execs knew about the very poor quality of the loans. Emails and other confidential documents according to a report by Nathaniel Popper of New York Times’ Dealbook, highlight the great extent which Morgan Stanley actively influenced New Century’s move into riskier and more onerous mortgages in 2004, and how greedy, profit- and bonus-focused MS execs brushed off obviously legitimate questions regarding whether homeowners would be able to make the mortgage payments.

Documents Show Morgan Stanley Knew About Subprime Loan Problems

Excerpts from documents

According to a Morgan Stanley internal report written in late 2004, “Morgan Stanley is involved in almost every strategic decision that New Century makes in securitized products.” Securitized products refers to the loans the bank was packaging into “low risk” mortgage bonds.

The documents are in effect a smoking gun confirming that Morgan Stanley employees were quite aware of the low credit quality of the securitized mortgage products and even joked about it. A senior due diligence exec at MS, Pamela Barrow, wrote an email to a colleague describing mortgage holders as “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.”

“We should call all their mommas,” Barrow commented sarcastically in the email. “Betcha that would get some of them good old boys to pay that house bill.”

Justice Department investigating Morgan Stanley

The Justice Department is digging deeper into the relationship between New Century and Morgan Stanley, especially relating to the sale of mortgage securities in the run-up to the financial crisis, according to a person briefed on the matter. According to a New York Times source, the department believes it will reach a settlement in the case in the first half of next year

The new documents and emails stretch from 2004 to 2007. Of note, they were made public as part of filings in a separate lawsuit against MS. The documents paint a clear picture of how Morgan Stanley consistently pushed New Century to write more and more mortgages with questionable conditions that were highly profitable  for Morgan Stanley, such as balloon payments, adjustable interest rates and usurious prepayment penalties that make mortagages very hard to refinance.

The NYT says the megabank had the ability to strongly influence New Century lending because it bought the most subprime loans from New Century.