NYT > Home Page: Apple’s Profits Are Flat, and Stock Drops

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Apple's Profits Are Flat, and Stock Drops
Jan 23rd 2013, 22:13

Luke Macgregor/Reuters

Apple sold slightly fewer iPhones than expected in the fourth quarter of 2012.

While it would take a crowbar to pry iPhones and iPads out of the hands of their fans, investors have been falling out of love lately with the company that makes them.

On Wednesday, Apple did not appear to provide a strong enough reason for investors to warm to it again. It said its profits were flat because of higher manufacturing costs, even as revenue rose 18 percent. The results exceeded analysts' profit forecasts and just missed their revenue estimates.

Apple said revenue from the iPhone jumped 28 percent during the crucial holiday shopping season, when the company's products fly off store shelves like they do at no other time of the year.

The results arrived with an unusual level of anticipation, even for a company as high-profile as Apple, because of anxiety among some investors about Apple's ability to sustain its growth and create new hit products. Apple's stock has lost about a quarter of its value since September, erasing more than $170 billion of its market value.

The results sent Apple's stock tumbling 10 percent during after-hours trading.

Apple said its net income for its fiscal first quarter ending Dec. 29 was $13.1 billion, or $13.81 a share, compared with $13.1 billion, or $13.87 a share, in the same period a year earlier.

The company's revenue was $54.5 billion, up from $46.33 billion a year ago.

Those results compared to the average earnings estimate of $13.44 and average revenue estimate of $54.73 billion from analysts surveyed by Thomson Reuters. Apple itself had previously told Wall Street to expect earnings of $11.75 a share and revenue of $52 billion, though the company has a long history of low-balling its own financial forecasts — which are then ignored by analysts.

"Sentiment has turned super-pessimistic on Apple, where they've gone from being able to do no wrong to suddenly being able to do no right," said Rob Cihra, an analyst at Evercore Partners. "I tend to think the company's momentum is a heck of a lot more solid than people are concerned about."

Mr. Cihra said Apple's iPhone and iPad sales missed some of the most optimistic forecasts, but "all in, it was a pretty darned good quarter."

One factor that hurt comparisons between Apple's most recent holiday quarter and the prior one was that its 2012 quarter was a week shorter.

Analysts were especially worried, headed into the holiday quarter, about Apple's profit margins, which the company had warned would decline as a result of a near total overhaul of the company's product line. Apple said new products do not yield profits during their earliest days that are as juicy as when the company is manufacturing them in bigger volumes.

While new products are a routine thing for a company like Apple, it said the sheer number of new gadgets it released just before or during the holidays, including the iPhone 5, iPad Mini and new Mac computers, was unusual.

But negative sentiment around Apple has further hardened amid reports that the company had cut orders for components with some of its parts suppliers, potentially suggesting weak demand for the iPhone.

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NYT > Home Page: Apple Revenue Misses Again, iPhone Disappoints

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Apple Revenue Misses Again, iPhone Disappoints
Jan 23rd 2013, 21:58

SAN FRANCISCO (Reuters) - Apple Inc reported quarterly revenue that slightly missed Wall Street expectations as sales of its flagship iPhone came in below target, sending its shares down more than 4 percent.

Reuters

The world's largest technology company shipped 47.8 million iPhones, lower than the roughly 50 million that Wall Street analysts had predicted. Sales of the iPad came in at 22.9 million in the fiscal first quarter, about in line with forecasts.

Sources this month have pointed to production cutbacks at Apple's component suppliers as a sign that demand may be waning for the iPhone, which accounts for half of the company's sales, and the iPad.

The disappointing numbers come after Apple undershot revenue targets in the previous two quarters. The results will prompt more questions on what Apple has in its product pipeline, and what it can do to attract new sales and maintain its growth trajectory.

Apple said on Wednesday its fiscal first quarter revenue rose to $54.5 billion, below the average analyst estimate of $54.73 billion, according to Thomson Reuters I/B/E/S.

For the fiscal first quarter it posted net income of $13.07 billion, or $13.81 a diluted share, compared to $13.06 billion, or $13.87 a share, a year earlier.

(Reporting By Poornima Gupta; Editing by Bernard Orr)

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NYT > Home Page: Pentagon Says It Is Lifting Ban on Women in Combat

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Pentagon Says It Is Lifting Ban on Women in Combat
Jan 23rd 2013, 20:39

Lynsey Addario for The New York Times

Cpl. Christina Oliver, center, during a patrol in Afghanistan in 2010.

Defense Secretary Leon E. Panetta is lifting the military's ban on women in combat, which will open up hundreds of thousands of additional front-line jobs to them, senior defense officials said on Wednesday.

The groundbreaking decision overturns a 1994 Pentagon rule that restricts women from many positions in the infantry and artillery, even though in reality women have found themselves in combat in Iraq and Afghanistan, where more than 20,000 have served. As of last year, more than 800 women had been wounded in the two wars and more than 130 had died.

Defense officials offered few details about Mr. Panetta's decision but described it as the beginning of a process to allow the branches of the military to put it into effect. Defense officials said Mr. Panetta had made the decision on the recommendation of the Joint Chiefs of Staff.

Women have long chafed under the combat restrictions and have increasingly pressured the Pentagon to catch up with the reality on the battlefield. The move comes as Mr. Panetta is about to step down from his post and would leave him with a substantial legacy after only 18 months in the job.

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NYT > Home Page: At Cochran’s Ski Area, a Long Legacy of Family Success, and Fun for All

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At Cochran's Ski Area, a Long Legacy of Family Success, and Fun for All
Jan 23rd 2013, 19:58

RICHMOND, Vt. — It was 1960 in northern Vermont and Mickey Cochran had a simple plan with an uncommon stipulation. A former schoolteacher, Cochran would buy a house in the country for his growing family, but only if the new home had a pitched slope behind it where he could install a ski lift.

Cochrans Ski Area, a small family run operation in Richmond, Vt., is known throughout the racing world.

Along with his wife, Ginny, whom he met while skiing, Cochran found the right house and parcel of land for $10,000, and soon there was a rope tow just outside the back door. Educated as a mechanical engineer, Cochran affixed floodlights to adjacent trees and the roof of the two-story home, turning the modest rural hillside into a round-the-clock winter playground.

Like a Vermont version of the movie "Field of Dreams," if you build and illuminate a place to ski in snow country, people will come from far and wide.

Throughout the 1960s, thousands of local schoolchildren and their parents learned to ski at the Cochran hill, with Mickey and Ginny providing free hands-on instruction. They did not charge to use the 400-foot rope tow either. Everyone was welcome, even in the kitchen of the Cochran home, which served as a warming hut.

"It was a magical place," said Bob Cochran, one of Mickey and Ginny's four children. "Like a big party at your house every night."

The ski hill, moderately expanded in subsequent decades, continues to this day as a nonprofit organization and revered civic resource, a tribute to Mickey Cochran's humble 1960 dream.

But that is not the reason Cochran's Ski Area, with its one tiny roadside sign, is known throughout the racing world. It is not why the one-room Cochran lodge, built in 1984, is replete with pictures of international skiing stars who have made the trek to this out-of-the-way little ski area next to the Winooski River.

Mickey and Ginny Cochran's children — Marilyn, Barbara Ann, Bob and Lindy — all made the United States ski team and each raced in the Olympics. At the 1972 Games in Sapporo, Japan, Barbara Ann won a gold medal in slalom.

The Skiing Cochrans, as they became known in the 1970s, were an American sensation, feted at gala dinners and featured in national magazines, like a sporting version of the Osmonds.

But there's more: six of Mickey and Ginny Cochran's grandchildren have made the United States ski team in the last decade, including Ryan Cochran-Siegle, Barbara Ann's 20-year-old son, who won two events at the junior world championships last season. His cousin Robby Kelley, Lindy's son, is the reigning national giant slalom champion, extending the lineage of America's first family of ski racing into a sixth decade.

In 2005, four second-generation Cochrans were on the United States ski team, matching the four Cochrans on the team 43 years ago. And the ski area has helped produce more than a dozen United States team members who are not related to the Cochrans, even if they are all embraced as Cochran racers.

"People have asked me if there's something in the water," Bob, 61, said with a laugh last month, sitting at a picnic table inside the unassuming Cochran lodge. "People think we have some secret. But there was no special criteria for coming here except one. My father said you had to have fun.

"And my mother made every kid who showed up here feel like a part of the family."

Each of the original skiing Cochrans insisted that making the Olympics was never discussed by their father, who died in 1998 at age 74, or by their mother, who was 76 when she died in 2005.

"Even making the national team was never envisioned," said Lindy, now 59. "That was some mystical place and the farthest thing from my father's mind. He did, however, believe that you needed a lot of repetition to get good at something."

So what better way than to grab the rope tow just outside your bedroom window?

The usual Cochran winter day would have the children doing their homework after school, then awaiting their father, who had left teaching to take an engineering job at a General Electric plant in nearby Burlington.

"He would get home around 6 p.m. and we'd be waiting to get out there," said Bob, who became a physician after his amateur and professional ski racing career ended. "My mom would give my dad something to eat, and then he'd go fire up the old gas-powered engine that ran the rope tow."

Gates would be set on the hill, and if there were not enough gates, saplings cut from the adjacent woods would be used instead.

"It would hurt hitting those saplings," said Marilyn, 62. "But you couldn't get us off that hill. We'd be out there five nights a week, and the only way to get us to go to bed was to flip off the lights."

When Marilyn and Barbara Ann, who was 11 months younger, began winning regional and national-level races, their celebrity spread in the pastoral remote villages of northern New England, but they remained something of a curiosity at the extravagant Alps resorts that hosted the top international ski races. That was true even after they each won a medal at the 1970 world championships.

"I recall the Europeans saying: 'Who are these Cochrans? From where?' " Marilyn said. "But you know, they started thinking of us as kids to be reckoned with."

Their father was their coach and, they said, an innovator. Relying on his engineering background, he introduced scientific methods to racing tactics, turning a mountain descent into a conversation about vectors and ski path velocity. He taught his children to chart the number of gates in a racecourse and to memorize it using visualization techniques. He was also a master sports psychologist, an underappreciated part of coaching at the time.

"He was a teacher at heart, and he knew how to keep you focused on your performance and not the outcome," Bob said. "He was years ahead of his time."

If there is a shared trait from generation to generation of Cochran Olympians, it is the powerful benefit of basic homework, or time on the snow in ski racing parlance. The emphasis has always been on the value of dedicated, enthusiastic preparation, even in modest circumstances. The Cochran race training course is far from steep and only several hundred feet long. But Cochran racers for multiple decades have completed lap after lap, smiling as they go.

"There was never pressure on us," said Ryan Cochran-Siegle, who is now racing at the highest levels of the World Cup circuit, a path his cousins blazed before him. "I never felt any expectations. I wanted to do well, but winning was never the central goal. We were urged to just get better and better."

Marilyn, who became a World Cup giant slalom champion, recalled that her father always deflected questions about success, even as it became common to the household.

"Acknowledging medals and things like that seemed arrogant to him," she said recently, sitting with her sisters and brother. "Although I know he was proud of us."

Marilyn then explained that her parents could not afford to attend the 1972 Sapporo Olympics, where three of their children competed, but they stayed up late to watch the races from Japan. The living room scene, just feet from the backyard rope tow, was later recreated for her.

"My father cried twice in his life — when his mother died and when this one won the gold medal," Marilyn said, tapping the shoulder of Barbara Ann.

"I didn't know that," Barbara Ann said, turning with a look of surprise. "Now I'm going to cry."

Marilyn said, "Me, too."

The Cochran's Ski Area of today has moved about 150 yards from the original home, which has remained in the family. An adjacent 140-acre parcel of land, bought years ago for $4,000, allows more room to teach beginners, which comes in handy with more than 700 students enrolled in after-school programs.

Hundreds of local youth and Vermont high school racers also train and compete on the main trail next to a busy T-bar.

"It's just an extension of when the local parent-teacher organization came to my mom and asked if she would teach the kids on our hill," said Barbara Ann, who heads the current instruction program. "Mom always said skiing was the best way to keep parents and their kids together in the backyard."

On a bluff overlooking a dirt and cinder parking lot, the Cochran lodge is festooned with dozens of numbered racing bibs from championship races. The oldest are from New England in the mid-1960s and the newest were proudly spirited home from top international competitions last winter.

The skis Barbara Ann used to win her gold medal hang from the ceiling, and photos celebrating the careers of nearly every Cochran are tacked to the walls, which takes up a lot of room given the breadth of the accomplishments. From Bob's 1973 win in the famed Hahnenkamm combined in Austria to Lindy's top American finish for a woman in the 1976 Olympic slalom and giant slalom, to N.C.A.A. championships by the grandchildren, the Mickey and Ginny Cochran racing pedigree is long and full. And all of it from a hill that is a miniature of a major ski resort.

Simplicity and unpretentiousness have remained hallmarks of the Cochran way. So has affordability. A junior weekend lift ticket is $14. Children pay about $40 for a season of after-school lessons — $90 with rentals.

"And we give scholarships if someone can't afford that," Lindy said. "If you really want to learn to ski, you won't be turned away."

The ski area may have registered as a nonprofit organization only after Mickey's death, but as Ginny told her children at the time, "It was always a nonprofit."

The current ski area, with its gaggle of instructors, coaches and lift operators, is overseen by a board that has had to raise money for improvements like top-to-bottom snow-making. The bills are paid, the lodge picnic tables overflow in the winter with excited, red-cheeked children, and warm food is doled out of a tiny kitchen. But donations are continually sought to keep Cochran's Ski Area viable and available to the next generation.

On a stormy Friday four days before Christmas, rain pelted the tin roof of the Cochran lodge and gusts knocked out the electrical power. Man-made snow was on the slopes, but the downpour threatened the anticipated opening of the ski area the next day.

The four children of Mickey and Ginny Cochran, who live not far from Richmond, happily gathered inside the lodge nonetheless, reminiscing and finishing each other's sentences as if they were at the dining room table in 1960.

They discussed the Olympics and world championships like run-of-the-mill high school events. When shown black-and-white pictures of their Olympic media appearances, the Cochrans hardly seemed impressed; they were too busy teasing one another about their 1970s hairdos.

One by one, recollections from decades past were summoned with ease and spontaneity, and almost every story began with a Cochran turning and pointing at the ski trails beyond the lodge window and saying:

"We were on the hill. ..."

The weather that day may have been cold and blustery. The Cochran memories are forever warm and genuine.

After a few hours, the siblings departed wondering when the ski area — a Vermont cultural landmark — might open for another winter.

"If it stops raining, we've still got a chance tomorrow," Lindy said.

The next day, the rain had ceased but the snow beneath the T-bar lift was too irregular for Cochran's to open as scheduled.

About 25 youngsters from the weekend race program showed up anyway. So did some coaches and the three Cochran sisters. Pulling into the muddy parking lot, they got out of their cars to gaze uphill at the swath of good snow that remained on the central trail.

A procession soon began hiking up the hill carrying skis. Gates were set in the snow. Racers skied down.

Smiling, they walked back up the hill. Over and over.

It snowed soon after. Three days later, Cochran's Ski Area officially opened for another winter.

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NYT > Home Page: Funeral Bombing in Northern Iraq Kills at Least 35 Mourners

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Funeral Bombing in Northern Iraq Kills at Least 35 Mourners
Jan 23rd 2013, 19:42

Ako Rasheed/Reuters

A man wounded by a suicide bomber in Tuz Khurmato district in northern Iraq was treated at a hospital in Kirkuk.

BAGHDAD, Iraq — A crowded tent full of Turkmen funeral mourners in northern Iraq was transformed into a mass killing ground on Wednesday by a suicide bombing that left at least 35 people dead and 117 wounded, regional officials and tribal leaders said, calling it a genocidal attack meant to further stoke the already-inflamed sectarian tensions in the country.

Both the dead and wounded victims included a number of high-ranking regional dignitaries, military officers, professors and religious men among the Turkmen population of the Tuz Khurmato district in Salahuddin Province, an area in the Kurdish north also claimed by Arabs and Turkmens. It came a day after an extended outbreak of sectarian shootings and bombings in the country that killed at least 24 Iraqis.

Mourners at the Imam Ali mosque had been paying their respects to a Turkmen employee of the Ministry of Health who had been killed in the mayhem the day before, the brother-in-law of a deputy in the Iraqi Turkmen Front, a political party. They had packed into a funeral tent for the ceremony when the suicide bomber, apparently masquerading as one of the aggrieved, blew himself up.

Turkmen leaders were outraged.

"We demand to have international forces to secure us, for the Turkmen and our areas," said Faid Alla, the head of a Turkmen tribe. "We are being targeted and our existence in Iraq is very dangerous and we are under genocide. The central government is doing nothing for us."

Tuz Khurmato, south of Kirkuk in an oil-rich area, was the site two months ago of a sectarian-tinged confrontation over disputed territory between forces loyal to the Iraqi government in Baghdad and the Kurdish regional government, which has its own armed forces.

Iraq has been increasingly consumed by sectarian attacks and political turmoil since December, when the home of the country's Sunni finance minister was raided by security forces loyal to Prime Minister Nuri Kamal al-Maliki, a Shiite. His political bloc has been accused by Sunnis and others of seeking to monopolize power ahead of provincial elections this spring.

Mr. Maliki, who took power during the American-led military occupation of Iraq, has denied the accusations and rejected demands by rivals that he resign.

The instability has been a growing source of concern for the United States, which withdrew its military forces from Iraq a year ago.

Rick Gladstone contributed reporting from New York.

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NYT > Home Page: House Votes to Extend Debt Limit to May, Averting Fight

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House Votes to Extend Debt Limit to May, Averting Fight
Jan 23rd 2013, 18:40

WASHINGTON — Avoiding an economic showdown with President Obama, the House on Wednesday passed legislation to suspend the nation's statutory borrowing limit for three months, without including the dollar-for-dollar spending cuts that Republicans once insisted would have to be part of any debt limit bill.

The measure, however, did include a provision that docks the pay of lawmakers if one of the chambers of Congress fails to pass a budget blueprint by April 15. That provision provided House Republicans with a rationale for giving in on the debt ceiling, at least temporarily.

"It's real simple: no budget, no pay," Speaker John A. Boehner of Ohio said before the measure passed by 285 to 144. Eighty-six Democrats joined Republicans to make up for the 33 Republican defections.

Representative Pete Sessions, Republican of Texas, said the phrase went back to Jamestown in 1608, when Capt. John Smith established the "no work, no food" rule for the embattled colonists. Republicans have sought for months to score political points over the Senate's failure to pass a formal budget plan for more than three years.

The debt ceiling legislation — mindful of constitutional hurdles imposed by the 27th Amendment on Congressional pay — would simply impound lawmaker salaries until a budget is passed or the 113th Congress ends, whichever comes first. And it would not require the House and the Senate to come to a compromise on the two spending and tax blueprints, which are likely to be very different. That will be the really difficult task.

"The good news is that our Republican colleagues finally recognized that America must pay its bill and meet its financial obligations without conditions," said Representative Chris Van Hollen, Democrat of Maryland. "The bad news is they only want to do it for three months."

The decision by House Democrats to oppose a measure they called gimmickry forced many Republicans to vote to do something most said they would never do: lift the debt ceiling. Senate Democratic leaders shrugged off the dictate and claimed victory.

"The president stared down the Republicans. They blinked," said Senator Charles E. Schumer, Democrat of New York.

Senator Harry Reid of Nevada, the majority leader, said he would take up and pass the House bill without changes, possibly by unanimous consent, then move quickly on a budget plan for the first time since 2009 to contrast Democratic priorities with the plan Representative Paul D. Ryan of Wisconsin plans to move through his Budget Committee.

"Democrats are eager to contrast our pro-growth, pro-middle-class budget priorities with the House Republicans' Ryan budget that would end Medicare as we know it, gut investments in jobs and programs middle-class families depend on, and cut taxes for the wealthiest Americans and biggest corporations," said Senator Patty Murray of Washington, the Senate Budget Committee chairwoman. "We know that when our priorities are laid out next to Republicans', the public stands with us."

House Republicans appeared eager for that fight. For two years, the House has passed detailed but nonbinding budget plans that would cut domestic programs to levels not seen since World War II, enact changes to Medicare that would partly privatize the program by offering older people fixed subsidies to buy private health insurance, and mandate a much-simplified tax code. Democrats have opposed those budgets while demanding a "balanced approach" to deficit reduction.

"We have a budget that's described as draconian, that decimates this program or that. They have a phrase, 'balanced approach,'" said Representative Trey Gowdy, Republican of South Carolina. "I'm tried of debating against a phrase."

House Republicans say punting the debt ceiling to May 18 is not so much a retreat as a "reordering" of the coming budget showdowns. House Republicans now take for granted that the first deadline, March 1, will come and go, and $110 billion in across-the-board spending cuts to defense and domestic programs will go into force.

The next real showdown will come by March 27, when the stopgap measure financing the government expires. Republicans have made clear that they are willing to let the government shut down at that time to force deep spending cuts or changes to Medicare and Social Security that would bring down deficits in the long run.

"We know with certainty that a debt crisis is coming to America. It's not a question of if. It's a question of when," Mr. Ryan said. "And if there is a debt crisis, those who get hurt the worst are the ones who need government the most, our seniors, the poor."

Such continuing brinkmanship brought a rebuke from Ms. Murray, who said Republicans were trying to have it both ways, forcing Senate Democrats to move forward in an orderly way with a budget plan by mid-April, but threatening the next budget crisis weeks before that.

The pay provision brought its own protests. Representative Jerrold Nadler, Democrat of New York, called it "institutionalized bribery," since it effectively says, do what Republicans want or do not get paid. That was why the nation passed the 27th Amendment, which says Congressional pay cannot be varied within a single Congress.

But the "no budget, no pay" mantra had bipartisan appeal. Senators, including Joe Manchin III, Democrat of West Virginia, introduced their own version on Wednesday.

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NYT > Home Page: DealBook | The Trade: Financial Crisis Suit Suggests Bad Behavior at Morgan Stanley

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DealBook | The Trade: Financial Crisis Suit Suggests Bad Behavior at Morgan Stanley
Jan 23rd 2013, 17:48

On March 16, 2007, Morgan Stanley employees working on one of the toxic assets that helped blow up the world economy discussed what to name it. Among the team members' suggestions: "Subprime Meltdown," "Hitman," "Nuclear Holocaust" and "Mike Tyson's Punchout," as well a simple yet direct reference to a bag of excrement.

Ha ha. Those hilarious investment bankers.

Then they gave it its real name and sold it to a Chinese bank.

We are never going to have a full understanding of what bad behavior bankers conducted in the years leading up to the financial crisis. The Justice Department and the Securities and Exchange Commission have failed to hold big wrongdoers to account.

We are left with what scraps we can get from those private lawsuits lucky enough to get over the high hurdles for document discovery. A case brought against Morgan Stanley by a Taiwanese bank in a New York State Supreme Court in Manhattan has cleared that bar.

The results are explosive. Hundreds of pages of internal Morgan Stanley documents, released publicly last week, shed much new light on what bankers knew at the height of the housing bubble and what they did with that secret knowledge.

The lawsuit concerns a $500 million collateralized debt obligation called Stack 2006-1, created in the first half of 2006. Collections of mortgage-backed securities, C.D.O.'s were at the heart of the financial crisis.

But the documents suggest a pattern of behavior larger than this one deal: people across the bank understood that the American housing market was in trouble. They took advantage of that knowledge to create and then bet against securities and then also to unload garbage investments on unsuspecting buyers.

Morgan Stanley doesn't see the narrative as the plaintiffs do. The firm is fighting the lawsuit, contending that the buyers were sophisticated clients and could have known what was going on in the subprime market. The C.D.O. documents disclosed, albeit obliquely, that Morgan Stanley might bet against the securities, a strategy known as shorting. The firm did not pick the assets going into the deal (though it was able to veto any assets). And any shorting of the deal was part of a larger array of trades, both long and short. Indeed, Morgan Stanley owned a big piece of Stack, in addition to its short bet.

Regarding the profane naming contest, Morgan Stanley said in a statement: "While the e-mail in question contains inappropriate language and reflects a poor attempt at humor, the Morgan Stanley employee who wrote it was responsible for documenting transactions. It was not his job or within his skill set to assess the state of the market or the credit quality of the transaction being discussed."

Philip Blumberg, the Morgan Stanley lawyer who composed most of the names, meet the underside of a bus, courtesy of your employer.

Another Morgan Stanley employee sent an e-mail that same morning, suggesting that the deal be called "Hitman." This might have been an attempt to manage up, because "Hitman" was the nickname of his boss, Jonathan Horowitz, who helped head the part of the group that oversaw mortgage-backed C.D.O.'s. Mr. Horowitz replied, "I like it."

Both Mr. Blumberg and Mr. Horowitz, now at JPMorgan, declined to comment through representatives at their banks.

In February 2006, Morgan Stanley began putting together the Stack C.D.O. According to an internal presentation, Stack "represents attractive business for Morgan Stanley."

Why? In addition to fees, another bullet point listed: "Ability to short up to $325MM of credits into the C.D.O." In other words, Morgan Stanley could — and did — sell assets to the Stack C.D.O., intending to profit if the securities backed by those assets declined. The bank put on a $170 million bet against Stack, even as it was selling it.

In the end, of the $500 million of assets backing the deal, $415 million ended up worthless.

"While investors and taxpayers all over the world continue to choke on Wall Street's toxic subprime products, to this day not a single major Wall Street executive has been held accountable for misconduct relating to those products," said Jason C. Davis, a lawyer at Robbins Geller who is representing the plaintiff in the lawsuit. "They are generally untouchable, but we are pleased that the court in this case is ordering Morgan Stanley to turn over damning evidence, so that the jury will get to see what Morgan Stanley really knew about the troubled nature of its supposedly 'higher-than-AAA' quality product."

Why might Morgan Stanley have bet against the deal? Did its traders develop a brilliant thesis by assessing the fundamentals of the housing market through careful analysis of the public data? The documents suggest something more troubling: bankers found out that the housing market was diseased from their colleagues down the hall.

Bankers were getting information from fellow employees conducting and receiving private assessments of the quality of the mortgages that the bank would purchase to back securities. These reports weren't available to the public. It would be crucial information for trading in securities backed by those kinds of mortgages.

In one e-mail from Oct. 21, 2005, a Morgan Stanley employee warns a banker that the mortgages Morgan Stanley is buying from loan originators are troubled. "The real issue is that the loan requests do not make sense," he writes. As an example, he cites "a borrower that makes $12K a month as an operation manger (sic) of an unknown company — after research on my part I reveal it is a tarot reading house. Compound these issues with the fact that we are seeing what I would call a lot of this type of profile."

In another e-mail from March 17, 2006, another Morgan Stanley employee writes about a "deteriorating appraisal quality that is very flagrant."

Two of the employees who received those e-mails joined an internal hedge fund, headed by Howard Hubler, that was formed only the following month, in April 2006. As recounted in Michael Lewis's "The Big Short," Mr. Hubler infamously bet against the subprime market on Morgan Stanley's behalf, a fact that Morgan Stanley's chief financial officer conceded in late 2007. Mr. Hubler's group was supposed to be separate from the rest of Morgan Stanley, but the two bankers continued to receive similar information about the underlying market, according to the person briefed on the matter.

At no point did they receive material, nonpublic information, a Morgan Stanley spokesman says.

I struggle to see how the private assessments that the subprime market was imploding were immaterial.

Another of Morgan Stanley's main defenses is that it couldn't have thought the investment it sold to the Taiwanese was terrible because it, too, lost money on securities backed by subprime mortgages. As the Morgan Stanley spokesman put it, "This deal must be viewed in the context of a significant write-down for Morgan Stanley in 2007, when the firm recorded huge losses in its public securities filings related to other subprime C.D.O. positions."

This is a common refrain offered by big banks like Citigroup, Merrill Lynch and Bear Stearns to absolve them of any responsibility.

But does losing money wipe away sin?

Yes, Mr. Hubler made his bets in what turned out to be a deeply disastrous way. As part of a complex array of trades, he bet against the middle slices of subprime mortgage C.D.O.'s. He bought the supposedly safe top parts. The income from the top slices helped offset the cost of betting against the middle slices. But when the market collapsed, the top slices — called "super senior" because they were supposedly safer than Triple A — didn't hold their value, losing billions for Mr. Hubler and Morgan Stanley. Mr. Hubler did not respond to requests for comment.

So Morgan Stanley lost a great deal of money.

But let's review what the documents suggest is the big picture.

In the fall of 2005, bank employees share nonpublic assessments of how the subprime market is a house of tarot cards.

In February 2006, the bank begins creating Stack in part so that it can bet against it.

In April 2006, the bank creates its own internal hedge fund, led by Mr. Hubler, who shorts the subprime market. Among the traders in this internal shop are people who helped create Stack and other deals like it, and at least two employees who had access to the private due diligence reports.

Mr. Hubler's group had no investment position in Stack, according to a person briefed on the matter, but it sure looks as if the bank saw what was coming and tried to position itself for a subprime market collapse.

Finally, by early 2007, the bank appears to realize that the subprime market is cratering even worse that it expects. Even the supposedly safe pieces of C.D.O.'s that it owns, including its piece of Stack, are facing losses. So Morgan Stanley bankers set to scouring the world to peddle as a safe and sound investment what its own employees are internally deriding.

Morgan Stanley declined to comment on whether it made money on its Stack investments over all. But it looks to have turned out well for the bank. In Stack, it managed to fob off a nuclear bomb to the Taiwanese bank.

Unfortunately for Morgan Stanley, it had so many other pieces of C.D.O.'s, so many nuclear warheads, that it couldn't find nearly enough suckers around the world to buy them all.

And so when the real collapse came, Morgan Stanley was left with billions of dollars in losses.

That hardly seems exculpatory.


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