Morgan Stanley to Pay $2.6 Billion to Settle Mortgage Cases -- Update

By Justin Baer 

Morgan Stanley agreed to pay $2.6 billion to settle U.S. claims stemming from the sale of mortgage bonds, the Wall Street firm's biggest legal bill from the financial crisis.

In light of the new 10-figure settlement, Morgan Stanley upped its legal reserves by about $2.8 billion, accounting for the costs in the 2014 results of its securities business, the firm said Wednesday in a regulatory filing. The higher reserves in turn will cut its income from continuing operations by $2.7 billion, or $1.35 a share, roughly 40% of its previously disclosed 2014 net income.

The firm reached its agreement in principle with the U.S. Department of Justice and the U.S. attorney's office for the Northern District of California, according to the filing.

A final agreement with the government would resolve one of what Morgan Stanley executives have called "legacy" issues that have weighed on the firm, CEO James Gorman and Morgan Stanley shareholders since the crisis, and follow larger multibillion-dollar settlements by other large U.S. banks, including J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.

Morgan Stanley and its archrival, Goldman Sachs Group Inc., were expected to reach smaller settlements than those big banks, which settled for amounts ranging from $7 billion in Citigroup's case to $16.65 billion in Bank of America's.

The most recent accord comes as the Justice Department prepares for the departure of Attorney General Eric Holder, who is slated to cede his post to Brooklyn U.S. Attorney Loretta Lynch once the Senate confirms her nomination.

In February 2014, Morgan Stanley struck an agreement to pay the Federal Housing Finance Agency $1.25 billion to settle a lawsuit alleging the firm sold mortgage bonds to Fannie Mae and Freddie Mac without adequately disclosing their risks.

On Monday, Goldman disclosed in a filing of its own that the U.S. attorney's office for the Eastern District of California wrote to the firm in December that the government had "preliminarily concluded" that it had violated federal law in connection the sale of mortgage bonds.

Write to Justin Baer at [e-mail]

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