Less than three weeks after Morgan Stanley announced a substantially higher over-the-year profit in 2015 due to reduced legal costs brought on by mortgage-backed securities settlements, the Federal Deposit Insurance Corporation (FDIC) announced on Tuesday that the investment banking firm has agreed to pay $62.95 million to settle claims of selling toxic mortgage-backed securities to three FDIC-insured banks that later failed.
According to the FDIC, the amount of the settlement will be distributed between the receiverships for the three failed banks, which are:
- Security Savings Bank of Henderson, Nevada (failed in February 2009)
- Colonial Bank of Montgomery, Alabama (failed in August 2009)
- United Western Bank of Denver, Colorado (failed in February 2011)
The FDIC, as receiver for the failed banks, filed four lawsuits against Morgan Stanley and other defendants from February 2012 to January 2014 claiming violations of state and federal laws in connection with the sales of residential mortgage-backed securities to the three failed banks. FDIC alleges there were misrepresentations in the offering documents for 14 securities that Morgan Stanley sold to the three failed banks. The FDIC has now filed 19 RMBS lawsuits on behalf of eight institutions seeking damages for violations of federal and state securities laws; this total includes the four filed against Morgan Stanley.
The $62.95 million settlement with the FDIC brings total RBMS claim settlements by the FDIC with Morgan Stanley to $86.95 million, including the $24 million settlement last year of RMBS claims related to Franklin Bank, S.S.B., of Houston, Texas (which failed in November 2008).
A spokesman for Morgan Stanley declined to comment on the most recent settlement with the FDIC when reached by email.
In February 2015, Morgan Stanley entered into a settlement with the Justice Department for $2.6 billion to resolve claims that the investment firm packaged and sold toxic MBS in the run-up to the crisis. With litigation costs of $3.1 billion reported for 2014 as a result of the settlement, the firm’s earnings for that year took a significant hit. With legal costs significantly lowered for 2015, Morgan Stanley’s net income rose from $3.5 billion in 2015 up to $6.1 billion in 2015.