Morgan Stanley executives told a partner in its Rhinebridge structured investment vehicle that mortgages underlying the SIV may cause it to fail, according to e-mails cited by investors who were sold $100m of the fund’s notes just days after the warning.
Bloomberg reports that officials from Morgan Stanley met with IKB Deutsche Industriebank executives in July 2007 and warned them about the stability of Rhinebridge, which they set up together, according to e-mails unsealed as part of a lawsuit by two institutional investors filed in Manhattan federal court.
'We’ve been in there with IKB this morning to raise the alarm', Robert Rooney, a Morgan Stanley executive who worked on the deal, told his colleague Stefano Corsi in a July 19, 2007, message. 'They acknowledged that this is a serious issue'.
Rhinebridge was set up to borrow from the short-term commercial paper market to fund purchases of asset-backed securities. The notes first went on sale in June 2007. The vehicle defaulted in October of that year as investors abandoned all but the safest debt.
Steve D’Agostino, a Morgan Stanley Senior Managing Director according to the court filing, had been 'expressing very strong view' that Rhinebridge’s portfolio of securities, backed by subprime mortgages, could cause it to 'hit triggers and unwind quickly', Rooney wrote in the July 19th e-mail. It isn’t clear from the documents whether D’Agostino was at the meeting with IKB. The plaintiffs’ filing identified D’Agostino as a Morgan Stanley executive involved in the deal.
'There is risk', the e-mail states. 'Perhaps not as ‘totally going to happen’ as Steve is suggesting, but a possibility'.
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