Goldman Sachs is widely acknowledged to be the market leader in its field. Most other investment banks accept it as their karma to follow in its footsteps. But they don’t have to like it. And Morgan Stanley couldn’t be too pleased about following Goldman Sachs down this particular path:

U.S. federal investigators are probing whether Morgan Stanley (MS.N) misled investors about mortgage derivative products it helped create and sometimes bet against, the Wall Street Journal said, citing people familiar with the matter.
[...]
The report comes less than a month after rival Goldman Sachs (GS.N) was charged with fraud by the U.S. Securities and Exchange Commission (SEC) over its marketing of a subprime mortgage product known as ABACUS, igniting a battle between Wall Street’s most powerful bank and the nation’s top securities regulator.

Morgan Stanley arranged and marketed to investors pools of bond-related investments called collateralized debt obligations (CDOs), and its trading desk at times placed bets that their value would fall, the Wall Street Journal said, citing traders.

Federal investigators are examining whether Morgan Stanley made proper representations about its roles in the mortgage derivative deals, the newspaper said.

Two particular deals — named after U.S. Presidents James Buchanan and Andrew Jackson — were scanned by the investigators, the paper said, citing a person familiar with the matter.

Morgan Stanley helped design the deals and bet against them, but did not market them to clients, according to the paper.

Traders called them the “Dead Presidents” deals, the Journal said. The firm made money on those deals, but any profit was far overshadowed by the $9 billion the firm lost on bullish mortgage bets in 2007, the paper said.

The Wall Street Journal seems to exonerate Morgan Stanley of the charges. Let’s see what the Justice Department decides. (If it helped design the deals and went on to bet against them, wasn’t someone being taken for a ride even if it wasn’t Morgan Stanley’s own clients? Presumably Morgan Stanley isn’t too thrilled about being put in the position of arguing, “Hey, it wasn’t our own clients we took for a ride, so all’s well.)