Morgan Stanley has agreed to a huge settlement over its role in the sale and issuance of subprime residential mortgage-backed securities — bringing to $5 billion the total it’s paid in such agreements.
An announcement Thursday indicated that the New York-based investment banking firm agreed to resolve claims tied to its marketing, sale and issuance of RMBS securitized in 2006 and 2007.
As part of the agreement,
Morgan Stanley acknowledged that it failed to disclose critical information to prospective investors about the quality of the RMBS loans and about its due diligence practices.
The settlement was announced by the U.S. Department of Justice and New York Attorney General Eric T. Schneiderman.
Morgan Stanley is accused of telling investors that it did not securitize negative-equity loans even though it had information indicating that nearly 9,000 of the securitized loans had loan-to-value ratios in excess of 100 percent.
The Justice Department cited a 2006 email from a
Morgan Stanley manager of valuation due diligence that allegedly said, “please do not mention the ‘slightly higher risk tolerance’ in these communications. We are running under the radar and do not want to document these types of things.”
In addition, even though offering documents stated that loans that didn’t meet originator guidelines were only securitized on a case-by-case basis if they had compensating factors,
Morgan Stanley has now reportedly acknowledged that it “did not disclose to securitization investors that employees of Morgan Stanley received information that, in certain instances, loans that did not comply with underwriting guidelines and lacked adequate compensating factors … were included in the RMBS sold and marketed to investors.”
Furthermore, the Justice Department claims that Morgan Stanley didn’t follow through with the due diligence outlined in presentation materials.
“Indeed, Morgan Stanley’s manager of credit-and-compliance due diligence was admonished to ‘stop fighting and begin recognizing the point that we need monthly volume from our biggest trading partners and that … the client [an originator] does not have to sell to Morgan Stanley,'” the Justice Department stated.
Among investors that allegedly suffered billions of dollars in losses from the RMBS were federally insured financial institutions.
As part of the settlement, Morgan Stanley has
agreed to pay a $2.6 billion civil money penalty to resolve claims under the Financial Institutions Reform, Recovery and Enforcement Act.
In addition, it has agreed to pay the state
of New York $550 million and the state of Illinois $22.5 million in related settlements.
“The resolution requires Morgan Stanley to provide significant community-level relief to New Yorkers, including loan reductions to help residents avoid foreclosure, and funds to spur the construction of more affordable housing,” Schneiderman’s announcement stated. “Additional resources will be dedicated to helping communities transform their code enforcement systems, invest in land banks, and purchase distressed properties to keep them out of the hands of predatory investors.”
Earlier this month, Morgan Stanley reached a $63 million settlement with the Federal Deposit Insurance Corp. over RMBS investments by failed banks.
“This settlement constitutes the largest component of the set of resolutions with Morgan Stanley entered by members of the RMBS Working Group, which have totaled approximately $5 billion,” the Justice Department said.
