Morgan Stanley to pay US$1.2b to settle claims on bond sales

Deal with US housing finance regulator follows accusations the bank sold faulty mortgage-backed bonds to Fannie Mae and Freddie Mac

PUBLISHED : Wednesday, 05 February, 2014, 1:47pm
UPDATED : Thursday, 06 February, 2014, 4:12am

Morgan Stanley will pay US$1.25 billion to settle a US regulator's claims it sold faulty mortgage-backed securities to Fannie Mae and Freddie Mac that added to their losses in the financial crisis.

The investment bank took a US$150 million charge, reducing fourth-quarter and full-year 2013 earnings by five US cents a share, the New York-based bank said in a regulatory filing on Tuesday. That would bring last year's earning per share to US$1.36.

The Federal Housing Finance Agency (FHFA) sued 18 banks in 2011, seeking to recoup some of the losses taxpayers covered when the US government took control of the failing mortgage-finance companies in 2008. Seven banks, including JP Morgan Chase and Deutsche Bank, agreed to pay a total of almost US$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 US$1.2 billion to legal reserves in the fourth quarter related to mortgage-backed securities litigation and investigations. Chief executive James Gorman had said that the legal charges were a "significant progress" towards resolution of matters.

The firm disclosed in a filing in November that the case involved the sale of US$11 billion of mortgage-related securities.

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

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

JP Morgan agreed last year to pay US$4 billion to settle claims related to about US$33 billion in mortgage bonds. Frankfurt-based Deutsche Bank agreed in December to settle for US$1.9 billion, while UBS agreed in July to an US$885 million settlement. The FHFA claims against banks including Goldman Sachs and Bank of America are still in litigation.

Bank of America may have to pay US$5 billion to US$8 billion to end an FHFA suit after JP Morgan's accord set "a relatively high bar", Fitch Ratings said in October. The FHFA lawsuit cited about US$57 billion of mortgage-backed securities from Bank of America, Fitch said.

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

Additional reporting by Reuters