Craig S. Phillips, a former top executive on Morgan Stanley's trading desk,
is the man Donald Trump put in charge of reviewing Wall Street rules.
(photo: Stefan Falke/laif/Redux)
Man Trump Named to Fix Mortgage Markets Figured in Infamous Financial Crisis
Episode
By Matt Taibbi, Rolling Stone
29 April 17
Former Morgan Stanley banker once dumped "shitbag" CDOs on clients
In early 2007, a group of Morgan Stanley bankers bundled a group of subprime
mortgage instruments into a package they hoped to sell to investors. The
only problem was, they couldn't come up with a name for the package of
mortgage-backed derivatives, which they all knew were doomed.
The bankers decided to play around with potential names. In a series of
emails back and forth, they suggested possibilities. "Jon is voting for
'Hitman,'" wrote one. "How about 'Nuclear Holocaust 2007-1?'" wrote another,
adding a few more possible names: Shitbag, Mike Tyson's Punchout and
Fludderfish.
Eventually they stopped with the comedy jokes, gave the pile of "nuclear"
assets a more respectable name - "Stack" - and sold the $500 million
Collateralized Debt Obligation with a straight face to the China Development
Industrial Bank. Within three years, the bank was suing a series of parties,
including Morgan Stanley, to recover losses from the toxic fund.
The name on the original registration document for Stack? Craig S. Phillips,
then president of Morgan Stanley's ABS (Asset-Backed Securities) division.
Phillips may not have written the emails in question, but he was the boss of
this sordid episode, and it was his name on the comedy-free document that
was presented to Chinese investors.
This is just another detail in the emerging absurd narrative that is Donald
Trump naming Phillips, of all people, to head up the effort to reform the
Government-Sponsored Entities, Fannie Mae and Freddie Mac.
As ace investigative reporter Gretchen Morgenson of the New York Times noted
in a piece back on April 7th, Phillips headed a division that sold billions
of dollars of mortgage-backed investments to Fannie and Freddie. Many of
those investments were as bad as the ones his unit sold to the Chinese. In
fact, as Morgenson noted, Phillips became a named defendant in a lawsuit
filed by the Federal Housing Finance Authority (FHFA), which essentially
charged, as the Chinese did, that Morgan Stanley knowingly sold Fannie and
Freddie a pile of crap.
Morgan Stanley ended up having to pay $625 million apiece to Fannie and
Freddie to settle securities fraud charges in that case.
Phillips worked in an area of investment banking that was highly lucrative
and highly predatory. The basic scam in the subprime world in particular was
buying up mortgages from people who couldn't possibly afford them, making
those bad mortgages into securities, and then turning around and hawking
those same mortgages to unsuspecting institutional dopes like the Chinese
and Fannie and Freddie.
Phillips had a critical role in this activity. As Morgan Stanley's ABS
chief, he was among other things responsible for liaising with fly-by-night
subprime mortgage lenders like New Century, who fanned into low-income
neighborhoods and handed out subprime mortgages to anyone with a pulse.
In a 2012 suit, a group of Detroit-based borrowers accused Morgan Stanley of
discriminatory practices, claiming the bank helped New Century target
minority areas with predatory loans. One Morgan Stanley due diligence
officer, Pamela Barrow, joked in an email about how to go after borrowers.
"We should call all their mommas," Barrow wrote. "Betcha that would get some
of them good old boys to pay that house bill."
Phillips was named in the suit and quoted in the complaint. He said that New
Century was "extremely open to our advice and involvement in all elements of
their operation."
The worst actors in the financial crisis worked in this shady world
involving the creation of subprime-backed securities.
Of those bad actors, there is a subset of still-worse actors, who not only
sold these toxic investments to institutional investors like pension funds
and Fannie and Freddie, but helped get a generation of home borrowers -
often minorities and the poor - into deadly mortgages that ended up wiping
out their equity.
Phillips, who helped Fannie and Freddie into substantial losses and worked
with predatory firms like New Century, belongs in this second category. As
Beavis and Butthead would put it, Phillips comes from the "ass of the ass."
Donald Trump, then, has essentially picked one of the last people on earth
who should be allowed to help reshape the mortgage markets. This is like
putting a guy who sold thousand-dollar magazine subscriptions to your
grandmother on the telephone in charge of the Consumer Financial Protection
Bureau, or the A.A.R.P.
More foxes for more henhouses. Welcome to the Trump era.
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