Investment Bank Morgan Stanley said on Wednesday evening it has confirmed an agreement in principle to settle mortgage-backed-security-related claims with the Department of Justice. It will pay $2.6 billion to resolve the case, but the deal has not been finalized, the company said in an SEC filing.
The settlement has been reached with United States Attorney’s office for the Northern District of California to resolve civil claims surroundings its sale of residential mortgage backed securities. The pact will shave $1.35 a share from Morgan Stanley’s 2014 earnings, cutting profits by 46%.
The agreement also resolves one of the last, and biggest, “legacy” issues that have weighed on the firm, its chief executive, James Gorman and shareholders since the 2008 crisis. For Morgan Stanley, the price to move on is steep – wiping out a chunk of earning – though it will be paid retroactively.
Wednesday’s settlement relates to previously disclosed litigation brought against the bank under the Financial Institutions Reform, Recovery, and Enforcement Act for its activities in the RMBS market during the lead up and collapse of the U.S. housing market. Morgan Stanley’s $200 million reserve in excess of its settlement with the DoJ and States Attorney of California give the bank money available for other state-level settlements. According to its most recent 10-Q filing, states such as Virginia and Illinois continue to litigate against the bank for its RMBS market representations.
On Jan. 20, Morgan Stanley reported net revenues of $7.8 billion and diluted EPS from continuing operations of 47-cents. For the full year, the bank reported at the time, $34.3 billion in sales and diluted EPS of $2.96. Now, EPS will fall to $1.61 for the full year. As part of its January earnings report, Morgan Stanley disclosed $284 million in quarterly legal expenses for “legacy residential mortgage and credit crisis related matters.”
Morgan Stanley denied to comment beyond its public filing on Wednesday.
The Justice Department, in conjunction with other authorities, extracted record penalties from major banks in 2013 and 2014 for inappropriately marketing risky mortgage securities in the run-up to the financial crisis. JPMorgan Chase & Co. agreed to a $13 billion deal in November 2013; Citigroup Inc. signed a $7 billion settlement in July 2014; and Bank of America Corp. reached a $16.65 billion agreement in August.