Man Trump Named to Fix Mortgage Markets Figured in Infamous Financial Crisis Episode

Former Morgan Stanley banker once dumped "shitbag" CDOs on clients

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. Credit: Stefan Falke/laif/Redux

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.