Morgan Stanley executives claim Pallotta is involved in subprime mortgages, depositions say

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Frank Pallotta has fiercely denied allegations that he was involved in subprime mortgages while working as an investment banker, but two of his colleagues testified under oath that he was responsible for some high mortgage loans. risk that contributed to the mortgage crisis leading to an economic recession. .

After Pallotta began exploring a candidacy for the Republican Congressional nomination in early 2019, the Democratic Congressional Campaign Committee nicknamed him “The king of the subprimes of New Jersey”.

Pallotta’s response to this came quickly.

“To be clear, in my 25 years on Wall Street, I never spent a single day in subprime mortgages,” he said. told the New Jersey Globe in 2019, but previously unreported depositions with Morgan Stanley executives suggest otherwise.

In an April 2016 deposition arising from a lawsuit against Morgan Stanley by the Federal Home Loan Bank of Seattle, Francis N. Telesca, who was executive director of the company’s subprime division until 2017, said Pallotta was more involved than he suggested.

“I think he had hedging responsibilities that extended to some sellers of subprime mortgages,” Telesca said, according to court records.

Between 2003 and 2008, Pallotta was Managing Director of Morgan Stanley’s Mortgage Division and co-responsible for the company’s residential operations in the United States.

Now Pallotta, who won the Republican primary on July 7 to challenge Rep. Josh Gottheimer (D-Wyckoff), now has to face new allegations that contradict her earlier statement.

In an interview on Thursday, he pointed out that he was involved in another division of the investment bank which dealt with a separate category of loans.

“My coverage responsibility was not subprime. I was in Alt-A. I was in Jumbo-A, residential-A. The subprime was its own creature, where Frank Telesca, I believe, was part of that group, ”Pallotta said. “Subprime group, they were sitting on a completely different floor from ours, so it was impossible for people to be subprime and alt-A or jumbo-A.”

Subprime loans target borrowers with low credit scores and typically carry higher interest rates and fees than conventional loans. Alt-A loans strike a sort of middle ground between subprime mortgages and prime mortgages.

Lisa Drew, a vice president responsible for managing the company’s residential mortgage buyout group, also said Pallotta has at least some involvement in subprime lending.

Pallotta, she said in her February 2016 statement, was invited to an appeal regarding subprime mortgages.

“It was a subprime, he said specifically subprime, probably something like a buyout, pending buyout requests or something like that,” Drew said, adding that the call was not scheduled regularly.

The House candidate could not remember the call, although he said it was not unthinkable that subprime lending would emerge as a topic.

“As the CEO of the company, you are asked to participate in many calls, especially higher level calls, and higher level calls tend to cover many different topics,” Pallotta said. “So if the word or phrase or a question about subprime mortgage came up, it wouldn’t be any different than if a question arose about government business.”

But Pallotta may have come close to Morgan Stanley’s subprime business in other ways.

Some companies Morgan Stanley dealt with occasionally trafficked more than one loan type.

“If the second floor was doing alt-A business and the third floor was doing subprime business, I covered the second floor, and that’s not that unusual,” Pallotta said. “You can imagine that some large institutions do all types of businesses, but that was not my expertise. It was not in my field of activity because our division at Morgan Stanley did not really touch the subprime.

But Drew, when asked about a June 2007 email from Pallotta that remains under seal by a Seattle judge, said Pallotta was looking to maneuver Morgan Stanley into keeping a subprime mortgage sold by a public company in order to insure business for the alt-A. office.

“There was a loan, or I guess he was trying to get business from Wilmington,” Drew said. “It was mainly a subprime seller at Morgan Stanley. And he was trying to get an alt-A business, and the person he was talking to said, “There’s this loan that Morgan Stanley keeps trying to give us back and if you can cancel it, we’ll talk about it.” , or something like that.”

It is not clear that the involvement in the subprime loans in itself would harm Pallotta’s attempt to oust Gottheimer, said Micah Rasmussen, director of the Rebovich Institute for New Jersey Politics at Rider University.

While many Americans have only passing knowledge of subprime mortgages, primarily for their role in the Great Recession, this is not necessarily true for the 5th District adjacent to New York City.

“The people who live in the neighborhood are very familiar with the financial sector. Many of them work in the financial industry or have neighbors who are in the financial industry, and we all know that while these investments didn’t go well, they were part of an industry-wide practice. Rasmussen said.

Rasmussen has suggested that Wall Street is not the kind of lightning rod problem in Bergen County than it is in other parts of the country.

“It’s not as if the companies that went into this business were radioactive, so you wouldn’t imagine that an executive who worked for one of these companies would be radioactive,” he said. .

Nonetheless, it does provide Gottheimer with a line of attack, which he has enough resources to take advantage of.

“When you’re up against an opponent as exceptionally well funded as Gottheimer, you have to expect him to be able to afford to define you with an issue like this, which means he won’t get a pass. “said Rasmussen.

But the biggest problem for Pallotta may come from the disconnect between her own statements and those of her former colleagues.

“If it turns out that was not true, it is a problem for him, not because of the type of business itself, but because you now have a problem with frankness and honesty. “said Rasmussen.

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