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It’s Settled: Morgan Stanley Agrees to Pay $3.2 Billion to Resolve Toxic MBS Claims

money-fourMorgan Stanley [1] is the latest firm to settle federal and state probes concerning "deceptive" handling of mortgage-backed securities (MBS). This settlement, which totals $3.2 billion, will be the fourth multi-billion dollar deal to be struck among the largest U.S. financial institutions for their MBS practices.

In February 2015, Morgan Stanley entered into a settlement [2] 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 2014 up to $6.1 billion in 2015.

The $3.2 billion settlement, announced Thursday by federal and state authorities and Attorney General Eric T. Schneiderman [3], includes $550 million–$400 million worth of consumer relief and $150 million in cash–that will be allocated to New York State.

Wesley McDade, Managing Director at Morgan Stanley told DS News that the $3.2 billion settlement will not impact current quarter earnings.

"We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters. The Firm has previously reserved for all amounts related to these settlements."

Wesley McDade, Managing Director at Morgan Stanley

The settlement also includes an agreed-upon statement of facts that describes how Morgan Stanley misrepresented the quality of its MBS to investors, but "contrary to those representations, Morgan Stanley securitized and sold RMBS with underlying mortgage loans that it knew had material defects," Schneiderman's office stated. Morgan Stanley acknowledged that it increased the acceptable risk levels for loans in its securitized pools.

According to the announcement, a May 31, 2006 email showed the head of Morgan Stanley’s team asking a colleague, “please do not mention the ‘slightly higher risk tolerance’ in these communications. We are running under the radar and do not want to document these types of things.”

In response to the settlement, McDade said, "We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters. The firm has previously reserved for all amounts related to these settlements."

"Today’s agreement is another victory in our efforts to help New Yorkers rebuild in the wake of the financial devastation caused by major banks,” said Attorney General Schneiderman. "Today’s settlement will deliver resources to the families and communities that need them the most, while helping New Yorkers avoid foreclosure, and spurring the construction of more affordable housing units statewide."

JPMorgan Chase ($13 billion), Bank of America ($16.65 billion), and Citi ($7 billion) all entered into similar MBS settlements for their role in 2013 and 2014. A Bloomberg article raised the question if Goldman Sachs and Deutsche Bank would be next to settle their legal affairs, especially in light of Goldman's recent $5.06 billion settlement [4]in January and Deutsche's recent announcement to begin resolving their legal matters. [5]

Click here [3]read the full announcement.