Morgan Stanley Reaches $1.25 Billion Settlement of FHFA Suit

Feb 04, 2014 6:06 pm ET

(Updates with losses in the sixth paragraph.)

Feb. 4 (Bloomberg) -- Morgan Stanley agreed to pay $1.25 billion to settle a U.S. regulator’s claims the investment bank sold faulty mortgage-backed securities to Fannie Mae and Freddie Mac that added to their losses in the financial crisis.

Morgan Stanley took a $150 million charge, reducing fourth- quarter and full-year 2013 earnings by 5 cents a share, the New York-based bank said today in a regulatory filing. That would bring last year’s earning per share to $1.36.

The Federal Housing Finance Agency sued 18 banks in 2011 seeking to recoup some of the losses taxpayers covered when the government took control of the failing mortgage-finance companies in 2008. Seven banks, including JPMorgan Chase & Co. and Deutsche Bank AG, agreed to pay a total of almost $8 billion last year to settle claims they sold faulty mortgage bonds to Fannie Mae and Freddie Mac.

Morgan Stanley said last month it added $1.2 billion to legal reserves in the fourth quarter related to mortgage-backed securities litigation and investigations. The firm disclosed in a filing in November that the case involved the sale of $11 billion of mortgage-related securities.

Denise Dunckel, a spokeswoman for FHFA, confirmed the settlement in principle. The agreement requires final approvals by the parties, according to Morgan Stanley’s filing.

Deception Alleged

The FHFA wrote in its 2011 complaint that Morgan Stanley made untrue statements and material omissions in sales of mortgage bonds. The case had been set for trial in January 2015. The unpaid balance of the securities was $2.8 billion in September, and actual losses on the bonds were about $68 million, the bank said in November.

JPMorgan agreed last year to pay $4 billion to settle claims related to about $33 billion in mortgage bonds. Frankfurt-based Deutsche Bank agreed in December to settle for $1.9 billion, while UBS AG agreed in July to an $885 million settlement.

FHFA claims against banks including Goldman Sachs Group Inc. and Bank of America Corp. are still in litigation.

Bank of America may have to pay $5 billion to $8 billion to end an FHFA suit after New York-based JPMorgan’s accord set “a relatively high bar,” Fitch Ratings said in October. The FHFA lawsuit cited about $57 billion of mortgage-backed securities from Charlotte, North Carolina-based Bank of America, Fitch said.

Fannie Mae and Freddie Mac have taken $187.5 billion in U.S. aid and have returned $185.2 billion under terms of their federal conservatorship. The companies are required to turn over to the Treasury all quarterly profits above a $3 billion net worth-cap, and money is counted as a return on the almost 80 percent stakes the government holds, not as repayment of aid.

The case is Federal Housing Finance Agency v. Morgan Stanley, 11-cv-06739, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Clea Benson in Washington. Editors: David Scheer, Steven Crabill