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Morgan Stanley and Goldman Sachs are making amends, kind of...

One of the 12 steps that every recovering addict must make, according to the Alcoholics Anonymous program, is to make amends to every person that they harmed while they were under the influence. Accordingly, Morgan Stanley and Goldman Sachs have released a flood of update filings with the SEC over the past few weeks covering some of the hundreds of structured products that they have jammed through their retail distribution networks over the years. The reason for this sudden flurry of paper is that, in the wake of Lehman’s failure, all of the retail investors who bought the products (typically notes linked to the performance of equities, indices or commodities that were packaged as “principal protected”) have suddenly panicked at the thought that they have credit exposure to the issuing bank.

Morgan Stanley and Goldman (along with Lehman and Bear) were such prolific issuers of these exotic retail products that they were given a special filing status by the SEC: “Well Known Seasoned Issuer” or “WKSI” (pronounced Wiksy). This allowed them to issue structured notes to the public with a 2 or 3 page summary instead of filing a full blown prospectus.

Now that they have filed these updates on those streamlined filings, everyone who, for example, purchased one of Morgan Stanley’s “Buffered Return Enhanced Notes” which were “designed for investors who seek a return of twice the appreciation of the Asian Equity Index Basket” can find the updated term sheet at the SEC’s site and Google what the implications of owning “Senior unsecured obligations of Morgan Stanley” are.

Having their own brokerage force sell their proprietary debt to unsophisticated retail investors at terms advantageous to themselves in the guise of “risk free” investments was a great business for the banks while it lasted. Now, in the cold light of sobriety, the potential for self dealing and misstatement of risk all looks rather different.

I wish I could write this from the pure perspective of an outraged observer but, truth be told: I sold tons of this type of stuff through the retail systems of banks I worked at in my 20’s.

Andrew Barber
Director