Zoe Cruz started with Morgan Stanley in 1982 and was often profiled as one of the few female leaders on Wall Street. (She is one of only four women on this list. The other three – Kathleen Brown (#7), Jamie Gorelick (#26) and Maxine Waters (#47) – are all no-talent political hacks with no real, purely business connection to Wall Street or even private industry.) Zoe Cruz eventually became president of Morgan Stanley and was even listed as one of the most powerful women in the world by Forbes magazine; pretty heady stuff for a literature major.
In April 2007, Morgan Stanley was insuring several billion dollars of mortgage bonds against losses. At this time, the ticking time bomb nature of many mortgage bond related securities was becoming increasingly clear on Wall Street. Most tellingly, on April 2, 2007, New Century Financial, the second biggest sub-prime lender went bankrupt. However, among the last firms to understand the enormous increase in the risks of mortgage bond investments was Bear Stearns. Bear Stearns actually approached Morgan Stanley and offered to purchase several billion dollars of mortgage bond insurance policies issued by Morgan Stanley. (If Bear purchased these policies, the premium payments would go to Bear, but Bear would be responsible for the losses on the mortgage bonds.) In essence, Bear Stearns was attempting to double down on a bet that was already starting to show signs that it was a losing bet.
Because of the billions of dollars at stake, Zoe Cruz, then president of Morgan Stanley, was consulted. She decided not to sell to Bear Stearns and to keep billions of exposure to sub-prime mortgages with Morgan Stanley. The decision to not to sell the “insurance policies” to Bear Stearns will cost Morgan Stanley about $6-billion.
See Lloyd Blankfein (#4) for Goldman using mortgage credit default swaps to bilk some clients out of money while advancing the interests of another client. See Jimmy Cayne (#10) for more information on Bear Stearns. See Gary Gorton (#27) for more information on the trade in mortgage credit default swaps or mortgage bond “insurance.”