Morgan Stanley Agrees to $3.2B MBS Settlement

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Morgan Stanley agreed to pay $3.2 billion to end a joint federal-state investigation into its handling of mortgage-backed securities, the fourth deal to be struck in a probe of the big U.S. banks' role in the subprime mortgage meltdown and the financial crisis it spawned.

The settlement, announced Thursday by federal and state officials, includes $550 million in cash and other benefits for New York, on top of $2.6 billion in payments previously disclosed in a regulatory filing.

The additional relief for New York includes $400 million for lower-cost rental housing, mortgage principal reduction and community purchases of distressed properties, according to a statement Thursday from New York's attorney general.

As part of the deal, Morgan Stanley admitted to having increased the level of risky loans that backed the securities it created. In a May 31, 2006, email, the statement said, the head of Morgan Stanley’s team charged with scrutinizing the value of the 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."

In November of that year, a member of the Morgan Stanley team emailed a list of loans the bank wasn’t likely to buy, adding: "I assume you will want to do your 'magic' on this one?" In July 2006, other actions suggested what that magic might be, when an additional review resulted in clearing dozens of loans for purchase after less than one minute of review per loan file.

Thursday's settlement "continues my office's efforts to help struggling New York families recover from the housing crisis," New York Attorney General Eric Schneiderman, who serves as co-chair of the group that negotiated the deal, said in the statement. "Today's agreement is a significant step toward accountability and recovery."

Through his role in the working group, Schneiderman has obtained more than $2.5 billion in cash and relief from banks. That's more than the $2.2 billion that has gone to all other states combined from the joint settlements.

"We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters," Morgan Stanley said in a statement, adding that it "has previously reserved for all amounts related to these settlements."

In the lead-up to the 2008 crisis, financial firms spurred risky mortgage lending by packaging bad loans into securities and selling them to investors. When the housing bubble burst, borrowers defaulted on their mortgages and the securities turned, famously, "toxic" (the subject of Oscar contender "The Big Short"). Now, as the presidential race heats up, the political rhetoric of getting tough with — or kowtowing to — Wall Street has become a campaign touchstone in the battle between Hillary Clinton and Bernie Sanders, among others.

Massachusetts Sen. Elizabeth Warren, on her Facebook page, last month denounced a proposed $5.1 billion settlement with Goldman Sachs Group Inc., saying it doesn't go far enough to make up for billions of dollars in losses to investors. "Seven years later. No admission of guilt. No individuals are going to jail," she said in a post on Jan. 15. "That’s not justice— it's a white flag of surrender."

Formed by President 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. Earlier, the group reached accords of $16.7 billion with Bank of America Corp., $7 billion with Citigroup Inc., and $13 billion with JPMorgan Chase & Co.

A settlement with Goldman Sachs is likely in the coming months. The investment bank said last month in a statement that it had agreed pay the $5.1 billion or so as part of a deal with the U.S. task force, though the terms aren’t final. Deutsche Bank may be next to reach a multibillion-dollar accord with the task force, Bloomberg Intelligence wrote last month.

The accord announced on Thursday follows other regulatory actions against Morgan Stanley over similar allegations.

In 2014, Morgan Stanley agreed to pay $1.25 billion after the Federal Housing Finance Agency accused it of selling faulty mortgage-backed securities to Fannie Mae and Freddie Mac. In July 2014, the firm reached a $275 million settlement with the Securities and Exchange Commission over claims that it understated the number of delinquent loans backing subprime mortgage securities.

Bloomberg News