Epic Caveat Emptor Fail

Oh yeah, this is a great idea.

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Two years after the credit markets began to seize up, costing the world’s biggest financial institutions $1.47 trillion in writedowns and losses, banks are again taking so- called structured finance securities and turning them into new debt investments with top credit ratings. While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.

A lot of banks and insurers “cannot buy anything but AAA,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” which is due to be published in November by Oxford University Press. “You’re manufacturing AAA out of not AAA, therefore allowing those people who have AAA written on their forehead to buy.”

So...Morgan Stanley is basically freely admitting that they are putting a shiny coat of gold paint on these lumps of slag and selling them as boullion, which, I might add, is exactly how we got into this mess in the first place.

And we're doing it again. And banks are going to buy these time bombs and act all surprised when they explode in their faces again.

Listen, I really want to meet the fund manager who is going to buy these, so I know who to never, ever, ever invest with. Are we really that confident after the last 18 months to believe A) the housing market is going to go back up and B) just because these turds have "AAA" scribbled on them in Sharpie marker, you believe them?

Yeah, nothing bad will happen here. Check out that free market-based reform making sure something like the financial crisis never happens again! Who needs regulation?

EPIC FAIL.