Morgan Stanley's Fremont Faction

But big investors, including banks such Lehman Brothers (LEH Quote) and Bear Stearns (BSC Quote), have indicated they intend to be buyers of distressed subprime assets. They are basically betting that even with the recent unrest in the industry, which has seen a number of smaller players file for bankruptcy, the subprime business will continue to be a significant and profitable part of the loan business.

On Monday, San Francisco-based hedge fund Farallon Capital Management said it is offering a $200 million five-year secured term loan at a steep 13% interest rate to Accredited. Calls to an executive at Farallon were directed to an external spokeswoman, who declined to comment.

Last week, San Diego-based Accredited agreed to sell substantially all of its $2.7 billion worth of loans held for sale to an unnamed buyer to meet margin calls. Calls to Accredited spokesman Rick Howe were not immediately returned.

Morgan gained traction in the mortgage arena six months ago when it acquired Glen Allen, Va.-based mortgage lender Saxon Capital for $706 million. At the time, Morgan acquired the firm for its subprime mortgage servicing ability. Saxon's servicing ability could come in handy if troubled loans need to be remedied.

Morgan's mortgage business also includes Morgan Stanley Credit Corp., which services prime retail loans.