This week, Morgan Stanley agreed to a settlement with federal and state regulators for its part in the flawed mortgage-backed bonds it bundled ahead of the financial/housing crisis.
Morgan Stanley settlement larger than expected
While Morgan Stanley had hoped to settle for $2.6 billion, the crusade launched by New York Attorney General Eric Schneiderman, will see his state receive $550 million in consumer relief on top of the money that Morgan Stanley will pay the federal government.
While it’s certainly a victory for the Department of Justice, President Obama’s Residential Mortgage Backed Securities Working Group and others, Schneiderman will surely be looking at this as a personal victory as well as a victory for New York State which will receive $150 million in cash for consumer relief as well as $400 million in other relief.
What is a bit ironic, however, is the fact that New York wasn’t hit that hard when the housing bubble burst especially when compared to Florida, Nevada, California and Arizona. Those states needed the relief more than New York, but they didn’t have a Schneiderman.
To call Schneiderman a crusader might seem unduly harsh but then try to tell that to the CEO of AirBnB or the owners of Draft Kings and other fantasy leagues that the attorney general clearly believes are no more than gambling sites or providers of illegal housing in reverse order.
About the settlement, Schneiderman states, “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.”
Just last year, Morgan Stanley announced that it expected to settle its fraud for $2.6 billion.
Morgan Stanley got off easy?
Presidential hopeful Sen. Bernie Sanders will surely think so. Sanders has repeatedly railed at these monstrous fines that are reached without seeing individuals prosecuted, he’s certainly not alone.
While $3.2 billion is a fair chunk of money, because Morgan Stanley did not write the sub-prime, underwater mortgages themselves, but rather simply bundled them together is the reason for the relatively small settlement. For example, Bank of America reached a settlement of its own in 2014 for $16.6 billion as a consumer bank that was responsible for writing the mortgages as well.
“We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters,” a spokesman for the firm, Mark Lake, said in a statement.
The firm also stated that the money to cover the settlement had already been but aside and will not carry additional charges forward to its next quarterly reporting of results.
Morgan Stanley and New Century
New Century was largely responsible for providing Morgan Stanley with mortgages to package into bonds. Many of these were terrifically risking mortgages that saw Morgan Stanley employees looking to increase the “pull-through-rate” of New Century’s loans in order to package them. This was confirmed by emails between employees of both firms.
Beyond the financial aspect of the settlement, Morgan was forced to agree to a statement of fact about its relationship with New Century. This included correspondence found by the New York AG.
In a May 31, 2006 email, the head of Morgan Stanley’s team tasked with doing due diligence on the value of properties underlying the mortgage loans asked 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 another email on November 21, 2006, a member of the same Morgan Stanley due diligence team forwarded a list of questionable loans, seeking review and approval to purchase them and adding “I assume you will want to do your ‘magic’ on this one?”
With this settlement, Goldman Sachs will likely be the last to settle with the Department of Justice as the Obama administration comes to an end.