NEW YORK – 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 in a regulatory filing. That would bring last year's earnings 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.
The FHFA wrote in its 2011 complaint that Morgan Stanley made untrue statements and material omissions in sales of mortgage bonds. 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.