Morgan Stanley Coughs Up $2.6 Billion In Settlement Over Mortgage Securities

Morgan Stanley
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Morgan Stanley cuts a deal with the Justice Department on mortgage securities allegations

Too-big-to-fail financial institution Morgan Stanley announced on Wednesday that it had agreed to a $2.6 billion settlement with the Justice Department regarding  the sale of fraudulent mortgage securities before the financial crisis.

As reported earlier, several other megabanks have already reached similar settlements with regulators, with Bank of America agreeing to pay a record $16.7 billion last year and JPMorgan Chase coughing up $13 billion in late 2013.

Morgan Stanley’s penalty was much smaller than the other banks because it was responsible for issuing less of the securities based on known-to-be-troubled mortgages.

Earlier this summer, the megabank reached a $275 million settlement with the SEC regarding allegations it understated the number of delinquent loans involved in  subprime mortgage securities.

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Justice Department spokesman Patrick Rodenbush had no comment at this point.

Settlement will slash Morgan Stanley annual profits by 40%

The $2.6 billion payment will appear in the firm’s fourth-quarter earnings, and erases the $1 billion in profits for the quarter announced a few weeks ago. The settlement also slashes MS profits for the year by over 40%, dropping EPS for 2014 to $1.61 a share.

Industry analysts say this deal is probably one of the last in the Justice Department’s campaign to punish banks involved in the subprime crisis. Goldman Sachs, currently in preliminary talks with the government, is the only remaining mega that has not settled with the government yet.

Regulators say Morgan Stanley purchased mortgages from New Century and other subprime originators, and then put them together as “safe” securities to be sold to investors. Of course, most of these mortgage-backed securities ended up taking large losses.

Further details on the MS mortgage securities settlement

A lawsuit filed in federal court by the American Civil Liberties Union almost three years ago ended up with emails and documents strongly hinting Morgan Stanley management was quite aware of the poor quality of the mortgages from New Century.

Of note, Morgan Stanley settled with the Federal Housing Finance Agency for $1.25 billion regarding allegations of pushing toxic mortgage securities off onto federal GSEs Fannie Mae and Freddie Mac.

Morgan Stanley did not strike a comprehensive deal to provide homeowner relief and dispense with the claims that have been put forward by various states, so it still faces more legal issues.

Related to this, Morgan Stanley noted in a filing Wednesday that it planned to add another $200 million to its legal reserves earmarked to pay other outstanding legal claims.