Authorities reach $3.2B settlement with Morgan Stanley

Morgan Stanley has agreed to pay $3.2 billion to federal and state authorities to settle charges over financial instruments that contributed to the housing crisis last decade.

In response to the settlement, McDade said, “We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters”.

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. 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. A statement of facts issued with the settlements said Morgan Stanley failed to tell investors that some of the mortgages “did not comply with underwriting guidelines” or “had understated loan-to-value ratios”.

The New York-based bank will pay $2.6 billion to resolve claims by the Justice Department, $550 million to New York and another $22.5 million to settle a case with Illinois, Reuters notes.

Investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in RMBS issued by Morgan Stanley in 2006 and 2007.

Morgan Stanley acknowledged it had misrepresented the quality of the mortgage bonds. “We are running under the radar and do not want to document these types of things”.

Later in 2006, another member of that team sent a list of questionable loans that required approval and wrote, “I assume you will want to do your “magic” on this one?”

Furthermore, Morgan Stanley allowed loans that it knew were risky to be purchased and securitized without a loan file review for credit and compliance.

“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”, said New York State Attorney General Eric T. Schneiderman.

Formed by President Barack Obama 2012 to hold Wall Street accountable for the 2008 crisis, the joint federal-state working group also includes officials from the Department of Justice and the U.S. Securities and Exchange Commission. Before Morgan Stanley’s settlement was reached, the group also penalized JP Morgan (JPM – Analyst Report) ($13 billion), Citigroup (C – Analyst Report) ($7 billion), and Bank of America (BAC – Analyst Report) ($16.6 billion).

In addition to the $150 million, the bank is promising to provide at least $400 million worth of direct and indirect aid to New York’s struggling homeowners and low-income renters, and to help local governments and community groups promote and provide affordable housing.