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Morgan Stanley Agrees to Pay $2.6 Billion to Resolve RBMS Claims

Morgan Stanley RMBS Department of Justice [1]Investment firm Morgan Stanley [2] agreed in principle on Wednesday to pay $2.6 billion to resolve claims that it packaged and sold faulty residential mortgage-backed securities leading up to the financial crisis, according to multiple media reports [3].

Should Morgan Stanley agree to a settlement in this case, it will be another in a series of multi-billion dollar agreements as the U.S. Department of Justice [4] continues to hold firms accountable for their roles in the financial crisis.  Three of the country's biggest banks – JPMorgan Chase (a then-record $13 billion in November 2013), Citigroup ($7 billion in July 2014), and Bank of America (a record $16.65 billion in August 2014) have all settled to resolve claims of packaging and selling toxic RMBS, and credit ratings agency Standard & Poor's settled for $1.37 billion in early February to resolve claims that the agency misrepresented ratings on RMBS.

A spokesperson from the Department of Justice declined to comment on the agreement with Morgan Stanley, but did stress that it was an agreement in principle and not a settlement as of yet.

In a separate case, Morgan Stanley made a motion [5] in the New York Supreme Court in mid-February to dismiss two lawsuits filed by the Federal Housing Finance Agency (FHFA [6]) accusing the firm of failing to buy back $2.5 billion worth of faulty residential mortgage-backed securities.

Morgan Stanley, a worldwide investment firm that is headquartered in New York, has had ongoing legal troubles in the last year with regards to its sales of RMBS prior to the financial crisis, resulting in a series of settlements totaling hundreds of millions.

In February 2014, the firm settled a separate lawsuit [7] filed by FHFA for $1.25 billion over the selling of faulty RMBS to Fannie Mae and Freddie Mac during the run-up to the financial crisis. In July 2014, the firm settled with the Securities and Exchange Commission for $275 million [8] for allegedly misrepresenting the delinquency status of subprime mortgage loans in 2007. Then, in September 2014, Morgan Stanley settled for $95 million [9] with the Public Employees' Retirement System of Mississippi (MissPERS) to resolve claims that the firm misled investors as to the quality of RMBS it sold before the financial crisis.