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'We Are Running Under the Radar': Morgan Stanley in $3.2 Billion Mortgage-Bond Pact

  • Ends federal-state probe into bank's role in financial crisis
  • Deal includes $2.6 billion in payments previously disclosed

Morgan Stanley agreed to pay $3.2 billion to end a joint federal-state investigation into its handling of mortgage-backed securities, the fourth deal to be struck in a probe of the role played by big U.S. banks in the subprime mortgage meltdown and the financial crisis it spawned.

The settlement, announced Thursday by federal and state officials, includes $550 million in cash and other benefits for New York, on top of $2.6 billion in payments previously disclosed in a regulatory filing. 

The additional relief for New York includes $400 million for lower-cost rental housing, mortgage principal reduction and community purchases of distressed properties, the state’s attorney general said in a statement. Illinois is receiving $22.5 million in a related settlement, the U.S. Justice Department said in a statement.

As part of the deal, Morgan Stanley admitted to having increased the level of risky loans that backed the securities it created. In a May 31, 2006, e-mail, according to the New York attorney general’s statement, the head of Morgan Stanley’s team responsible for scrutinizing the value of the securities asked a colleague, “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.”

Loan Review

In November of that year, a member of the Morgan Stanley team e-mailed a list of loans the bank wasn’t likely to buy, adding: “I assume you will want to do your ‘magic’ on this one?” In July 2006, other actions suggested what that magic might be, when an additional review resulted in clearing dozens of loans for purchase after less than one minute of review per loan file.

“Those who contributed to the financial crisis of 2008 cannot evade responsibility for their misconduct,” Benjamin C. Mizer, head of the Justice Department’s Civil Division, said in the agency’s statement.

Thursday’s settlement “continues my office’s efforts to help struggling New York families recover from the housing crisis,” state Attorney General Eric Schneiderman, who serves as co-chair of the group that negotiated the deal, said in his statement. "Today’s agreement is a significant step toward accountability and recovery.”

Other States

Through his role in the working group, Schneiderman has obtained more than $2.5 billion in cash and relief from banks. That’s more than the $2.2 billion that has gone to all other states combined from the joint settlements.

“We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters,” Morgan Stanley said in a statement, adding that it “has previously reserved for all amounts related to these settlements.”

In the lead-up to the 2008 crisis, financial firms spurred risky mortgage lending by packaging bad loans into securities and selling them to investors. When the housing bubble burst, borrowers defaulted on their mortgages and the securities turned, famously, “toxic” (the subject of Oscar contender “The Big Short”). Now, as the presidential race heats up, the political rhetoric of getting tough with -- or kowtowing to -- Wall Street has become a campaign touchstone in the battle between Hillary Clinton and Bernie Sanders, contenders for the Democratic Party’s presidential nomination, among others. 

‘White Flag’

Massachusetts Senator Elizabeth Warren, on her Facebook page, last month denounced a proposed $5.1 billion settlement with Goldman Sachs Group Inc., saying it doesn’t go far enough to make up for billions of dollars in losses to investors. “Seven years later. No admission of guilt. No individuals are going to jail,” the Democrat said in a post on Jan. 15. “That’s not justice -- it’s a white flag of surrender.”

Formed by President Barack Obama in 2012 to hold Wall Street accountable for the 2008 crisis, the federal-state working group also includes officials from the Justice Department and the U.S. Securities and Exchange Commission. Earlier, the group reached accords of $16.7 billion with Bank of America Corp., $7 billion with Citigroup Inc., and $13 billion with JPMorgan Chase & Co.

More Settlements

A settlement with Goldman Sachs is likely in the coming months. The investment bank said last month in a statement that it had agreed to pay the $5.1 billion or so as part of a deal with the U.S. task force, though the terms aren’t final. Deutsche Bank AG may be next to reach a multibillion-dollar deal with the task force, Bloomberg Intelligence wrote last month.

The accord announced Thursday follows other regulatory actions against Morgan Stanley over similar allegations. 

In 2014, Morgan Stanley agreed to pay $1.25 billion after the Federal Housing Finance Agency accused it of selling faulty mortgage-backed securities to Fannie Mae and Freddie Mac. In July 2014, the firm reached a $275 million settlement with the Securities and Exchange Commission over claims that it understated the number of delinquent loans backing subprime mortgage securities.

Schneiderman was called on to help lead the joint federal-state working group after he voiced opposition to an earlier national settlement with banks in 2011 that he claimed was too soft.

In a news conference Thursday, Schneiderman said he now has a “good working relationship” with federal agencies involved in the mortgage-backed securities task force.

“We’re New Yorkers. We tend to be a little more impatient with things than some others, but the results speaks for themselves,” he said. “This has provided a lot of relief to a lot of people all over America.”

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