Morgan Stanley In $3.2 Billion Settlement
February 12 2016 - 03:02AM
Dow Jones News
(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)
Copyright (c) 2016 Dow Jones & Company, Inc.
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