By Justin Baer And Aruna Viswanatha
Morgan Stanley is in talks to pay about $500 million to settle a
probe by New York's attorney general into whether the Wall Street
firm misled investors in mortgage bonds that cratered during the
financial crisis, people familiar with the matter said.
A deal with New York's top litigator, Eric Schneiderman, would
likely include some cash from Morgan Stanley as well as a chunk of
consumer relief. The pact would clear up another headache for the
New York firm and add to the $130 billion legal tab rung up by the
largest U.S. banks for their actions during the crisis.
Morgan Stanley ranks down the list among the big banks that have
paid mortgage-related fines, in part because it never held a
sprawling home-lending business like Bank of America Corp. and J.P.
Morgan Chase & Co. According to a recent analysis by The Wall
Street Journal, those two banks paid $73 billion and $26 billion,
respectively, in costs related to the financial crisis and
mortgages, compared with a $4.5 billion tab for Morgan Stanley.
An agreement between the New York firm and Mr. Schneiderman's
office isn't imminent, and the terms under discussion have
fluctuated. Aid to struggling homeowners will account for well over
half of the total value of the settlement, though the form of the
consumer relief isn't clear, the people familiar with the matter
said.
It is also unclear if Morgan Stanley will need to boost its
legal reserves to account for a likely settlement with Mr.
Schneiderman.
The firm is scheduled to report first-quarter results Monday and
may update its legal situation.
Morgan Stanley's actual costs from the agreement are expected to
fall far short of $500 million. That is because banks generally
account as expenses only a fraction of the value they agree to
dispense in consumer relief.
Earlier this year, Morgan Stanley struck a preliminary deal to
resolve the federal government's inquiry into those same
mortgage-bond practices, agreeing to pay $2.6 billion to the
Justice Department. The entire payout was accounted for as a cash
penalty, The Wall Street Journal has reported.
Negotiations on that settlement are also continuing, and while a
draft "statement of facts" has gone back and forth between the
parties, any final deal is still weeks, if not months, away, the
people said.
When it announced the initial accord with the U.S. government in
February, Morgan Stanley noted it had set aside $2.8 billion in
added legal costs. The reserve, announced after the firm disclosed
fourth-quarter results but before it had filed its annual report,
wiped out much of the firm's previously reported 2014 profit.
The firm's management team has worked hard during the past five
years to "put the trouble from the financial crisis clearly in the
rearview mirror," Chairman and Chief Executive James Gorman said in
January.
The payout left the New York firm with some $200 million in dry
powder to resolve issues with state officials who had filed or have
threatened to file similar claims against Morgan Stanley.
Morgan Stanley has also disclosed it faces lawsuits or potential
actions from state officials in California, Virginia and Illinois.
Some of the states have held discussions with the bank to resolve
their cases, and a joint announcement is expected once states and
the Justice Department reach final accords, people familiar with
the matter said.
In past settlements that state and federal authorities have
reached with other banks to resolve mortgage-securities claims,
both California and New York received similar pots of money.
As part of a nearly $17 billion deal last August, for example,
Bank of America agreed to pay each state $300 million.
Last year, the office of California's attorney general, Kamala
Harris, also told the bank it believed Morgan Stanley had violated
California law by making misrepresentations on a structured
investment vehicle known as the Cheyne SIV. The California Public
Employees' Retirement System bought $1.3 billion in the investment
and has said it lost $1 billion on it. The bank has said it didn't
agree with the conclusions.
The New York litigator told Morgan Stanley in January it planned
to sue the firm over its role in selling bonds tied to subprime
mortgages. The action, Morgan Stanley wrote in a regulatory filing
earlier this year, stems from "approximately 30 subprime
securitizations sponsored by the company."
Mr. Schneiderman's office alleged Morgan Stanley misrepresented
and omitted key details on the health of the loans that underpinned
the securities it sold. The firm has said it didn't agree with the
allegations. But in March, Reuters reported that Morgan Stanley was
in the settlement talks.
The consumer relief included in any deal with New York is
expected to differ from previous similar bank settlements, which
largely revolved around reducing mortgage debt or otherwise
lowering payments for struggling borrowers. Morgan Stanley no
longer has a mortgage or servicing business that would provide the
same pool of loans on which to offer help.
While past deals have largely been negotiated through the
Justice Department on behalf of both federal and state authorities,
Morgan Stanley has been negotiating individually with New York,
people familiar with the talks said.
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