Morgan Stanley has agreed to pay $3.2 billion to settle civil allegations the New York-based bank misled customers about the quality of mortgage-backed securities that soured during the nation's financial crisis, federal and state officials said Thursday.
The settlements mark the latest in a string of penalties against major banks as the U.S. Department of Justice and state attorneys general complete investigations into evidence the financial institutions' marketing and sales practices helped fuel the crisis.
“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. All the while, Morgan Stanley knew that in reality, many of the loans backing its securities were toxic," said acting U.S. Attorney Brian Stretch of California's northern federal district.
Morgan Stanley said its previous financial set-asides for the settlements would prevent the payments from affecting the bank's 2016 earnings. "We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters," the bank said.
The bank in February 2015 said it had reached agreement in principle on a $2.6 billion settlement resolving mortgage-related claims by DOJ's Civil Division and federal prosecutors in California. But the settlement, which affected the bank's fourth-quarter 2014 earnings, wasn't immediately finalized amid negotiations on documentation outlining the bank's conduct.
The new agreements cover the bank's handling of residential mortgage-backed securities between 2005 and 2007, just before the financial crisis erupted. A statement of facts issued with the settlements said Morgan Stanley failed to tell investors that some of the mortgages "did not comply with underwriting guidelines" or "had understated loan-to-value ratios." Additionally:
- A Morgan Stanley valuation due diligence official sent a June 2006 email that warned a colleague not to mention that some mortgage-backed securities the bank marketed to investors had "slightly higher risk tolerance." The official added: "We are running under the radar and do not want to document these types of things."
- A July 2006 email from the bank's due diligence team to a bank official included a list of problem loans and said: "I assume you will want to do your 'magic' on this one?"
- An email from a loan originator about an October 2006 loan pool urged a Morgan Stanley employee to "[p]lease, Mitigate, mitigate, mitigate!!!" a reference to the process the bank used to decide whether higher-risk loans should be packaged in mortgage securities.
The settlement includes $550 million for New York, $400 million worth of consumer relief and $150 million in cash, said New York Attorney General Eric Schneiderman. He said the penalties would "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."
Other major U.S. banks that negotiated settlements over similar mortgage-related misconduct paid even higher penalties in recent years.