Morgan Stanley reaches $1.25bn lawsuit settlement

US regulator claims bank sold faulty mortgage-backed securities

Morgan Stanley and JPMorgan Chase agreed to pay $1.86 billion to end US accusations of misconduct in their handling of home loans and related securities that left taxpayers shouldering losses after the financial crisis.

Morgan Stanley has agreed to pay $1.25 billion to settle a US regulator's claims that the investment bank sold faulty mortgage-backed securities to Fannie Mae and Freddie Mac.

JPMorgan will pay $614 million after admitting it submitted ineligible loans for Federal Housing Administration and Veterans Affairs insurance.

JPMorgan “put profits ahead of responsibility by recklessly churning out thousands of defective mortgage loans, failing to inform the government of known problems with those loans and leaving the government to cover the losses,” US prosecutor Preet Bharara said in a statement.


The six largest US lenders have allocated more than $114 billion since the financial crisis to cover legal expenses, government probes and mortgage-related claims.

Morgan Stanley’s deal with the FHFA prompted the New York-based bank to book an additional $150 million charge in the fourth quarter, reducing earnings for the period by 5 cents a share.

Morgan Stanley, which disclosed its settlement in a regulatory filing yesterday, was among 18 banks sued by the FHFA in 2011.

Authorities sought to recoup some losses taxpayers covered when the government took control of the failing mortgage-finance companies in 2008.

Seven banks, including JPMorgan and Deutsche Bank, agreed last year to pay a total of almost $8 billion to settle claims they also 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.