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Morgan Stanley will pay a $2.6 billion penalty to resolve federal claims over its sale of residential mortgage-backed securities.
The amount is the largest in a series of settlements with Morgan Stanley entered into by members of the mortgage-backed securities working group, which totals about $5 billion.
As part of the agreement, Morgan Stanley acknowledges that it failed to disclose critical information to prospective investors about the quality of the mortgage loans underlying its mortgage-backed securities, the U.S. Justice Department said Thursday.
Investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in these securities issued by Morgan Stanley in 2006 and 2007.
“Today’s settlement holds Morgan Stanley appropriately accountable for misleading investors about the subprime mortgage loans underlying the securities it sold,” said Acting Associate Attorney General Stuart F. Delery.
Along with the announcement of the federal government’s settlement with Morgan Stanley, the states of New York and Illinois – also members of the working group – have announced settlements with Morgan Stanley. New York’s settlement is $550 million, while Illinois’ is $22.5 million.
New York Attorney General Schneiderman, co-chair of the working group also called his state’s agreement a positive step.
“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,” Schneiderman said. “Today’s settlement will deliver resources to the families and communities that need them the most, while helping New Yorkers avoid foreclosure, and spurring the construction of more affordable housing units statewide.”
The settlement includes $550 million – $400 million for consumer relief and $150 million in cash – that will go to the state of New York.
In other settlements to resolve claims over mortgage-backed securities, Morgan Stanley previously paid:
- $225 million the National Credit Union Administration for credit union losses.
- $1.25 billion to the Federal Housing Finance Agency for losses by Fannie Mae and Freddie Mac.
- $86.95 million to the Federal Deposit Insurance Corp. as receiver on behalf of failed financial institutions.
- $275 million to the U.S. Securities and Exchange Commission for securities fraud.
In Thursday’s settlement documents, the bank acknowledges that “Morgan Stanley was aware of problematic lending practices of the subprime originators from which it purchased mortgage loans.” However, it “did not increase its credit-and-compliance due diligence samples, in part, because it did not want to harm its relationship with its largest subprime originators.”
“In today’s agreement, Morgan Stanley acknowledges it sold billions of dollars in subprime RMBS certificates in 2006 and 2007 while making false promises about the mortgage loans backing those certificates,” said Acting U.S. Attorney Brian J. Stretch of the Northern District of California.
Morgan Stanley touted the quality of the lenders with which it did business and the due diligence process it used to screen out bad loans, Stretch said.
“All the while, Morgan Stanley knew that in reality, many of the loans backing its securities were toxic,” he said. “Abuses in the mortgage-backed securities industry such as these helped bring about the most devastating financial crisis in our lifetime.”
The $2.6 billion federal civil penalty resolves claims under the Financial Institutions Reform, Recovery, and Enforcement Act. The settlement preserves the government’s ability to bring criminal charges against Morgan Stanley and doesn’t release any individuals from potential criminal or civil liability.
The Residential Mortgage-Backed Securities Group, a joint federal and state task force established in 2012 by Pres. Barack Obama, investigates potential misconduct from the financial crisis.
