Morgan Stanley In $3.2 Billion Settlement

   (FROM THE WALL STREET JOURNAL 2/12/16) 
   By Aruna Viswanatha and Justin Baer 

Morgan Stanley will pay $3.2 billion to complete agreements with the U.S. Justice Department and several states to resolve civil charges that it misled investors about the quality of mortgage bonds it sold in the run-up to the 2008 financial crisis.

The agreements, which had been expected, are the latest as federal and state officials work to finish their investigations into banks' contributions to the crisis.

Last year, Morgan Stanley disclosed it had agreed to pay $2.6 billion to end the Justice Department probe, but the final accord had been held up as negotiators hammered out a factual statement to accompany the deal and determine how to structure help to homeowners.

The final settlement all but ends Morgan Stanley's legal entanglements with the U.S. government over its actions during the crisis. The litany of investigations into banks' behavior in the mortgage market, and the multibillion-dollar fines that followed, have crimped profits at each of the biggest banks.

Morgan Stanley accounted for the lion's share of its litigation costs related to the mortgage probes in its 2014 results, and has "previously reserved for all amounts related to these settlements," a spokesman said Thursday.

According to a copy of the settlement, the bank admitted its employees received information that certain loans being packaged into bonds didn't comply with underwriting guidelines, but it failed to disclose that to investors.

The bank also admitted some of its due-diligence practices didn't match with how it described those practices in presentation materials to potential investors.

"Today's settlement holds Morgan Stanley appropriately accountable for misleading investors about the subprime mortgage loans underlying the securities it sold," said Stuart Delery, the Justice Department's No. 3 official.

The pact includes a $550 million deal with New York, $400 million of which is in the form of help to homeowners in the state. Morgan Stanley is expected to provide grants to local governments to support housing programs, and help nonprofits acquire troubled mortgages to reduce balances for struggling homeowners, among other programs.

Morgan Stanley also can fulfill its requirements in New York by offering principal relief on mortgages it still holds on its books. The firm had made a push into home loans through the 2006 acquisition of Saxon, a mortgage-servicing company it sold five years later to Ocwen Financial Corp.

"Today's agreement is another victory in our efforts to help New Yorkers rebuild in the wake of the financial devastation caused by our country's major banks," New York Attorney General Eric Schneiderman said.

Illinois received $22.5 million under the deal.

A Morgan Stanley spokesman said the company is "pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters."

According to the settlement, some Morgan Stanley employees tried to quietly increase the level of risk that was included in the mortgage securities, even as the bank told investors it didn't securitize underwater loans, or those that were larger than the underlying property was worth.

In a May 31, 2006 email, for example, the head of Morgan Stanley's team assessing the value of loans underlying the mortgage securities 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."

(END) Dow Jones Newswires

February 12, 2016 02:47 ET (07:47 GMT)

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