Morgan Stanley Pays $3.2 Billion in Reparations

By John Gallagher,
International Business Assistant Editor

The financial crisis, caused by reckless lending behavior, the securitization, and the widespread exposure of bad debt obligations, brought the world economy to its knees from 2007-2009.

Seven years later, some analysts argue that the United States has fully recovered from the recession, but others say that we are still in recovery.

This past week, it was reported that the investment bank, Morgan Stanley (NYSE: MS) came to a settlement with the Residential Mortgage-Backed Securities Working group, a group started by President Obama in 2012 to investigate the reckless behavior that led to the financial crisis.

The $3.2 billion settlement comes among charges that the bank misled investors into purchasing “investment grade securities” tied to mortgages that they knew had a much higher chance of default than its rating signified.

In an email written in 2006 by the head of Morgan Stanley’s mortgage due diligence team, a colleague was asked to “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.”

Morgan Stanley is paying their reparations for all of the damage that they caused by purposely misleading investors of the true value of their investments in mortgage backed securities.

The news release from the New York Attorney General breaks down the $3.2 billion, allocating $550 million to New York State; $400 million of that to fund consumer relief and $150 million in cash to be awarded to the state.

Some of the benefits that will come from the significant sum of money are loan reductions, helping New Yorkers avoid foreclosure and helping spur the construction of more affordable housing.

Reuters reported that the remaining $2.6 billion will go toward covering claims brought by the U.S. Justice Department.

$3.2 billion is an enormous sum of money, even for a bank with $834 billion in assets.

Morgan Stanley’s share price was unaffected by the news as they had previously set a lump sum aside for a settlement of this nature.  Their share price jumped 6 percent last week after being battered by uncertainty of global growth, low oil price, and volatile markets thus far in 2016.

To put this settlement into perspective, Bank of America (NYSE: BAC) agreed to two settlements in 2014, one for $16.65 billion and the other for $9.5 billion.  They had previously paid out $11.6 billion in 2013 over allegations that it knowingly sold toxic mortgages to investors, Time Magazine reported.

As of 2014, the six largest banks have shelled out over $120 billion in settlements related to mortgage fraud.

Citigroup (NYSE: C) settled for $7 billion in 2014, J.P. Morgan Chase (NYSE: JPM) settled for $13 billion in 2013, and five banks including Wells Fargo (NYSE: WFC), J.P. Morgan Chase, Citigroup, Bank of America, and Ally Financial (NYSE: ALLY) settled for $25 billion in February 2012 in what President Obama called a “landmark” settlement.

The $120 billion paid by banks still falls significantly short of the $700 billion plus that the government had to spend to keep these institutions afloat when the faulty mortgage loans went away.

Seven years after the depths of the great recession, we are still seeing the institutions at fault under investigation.

It will be interesting to see if the RMBS group will detect more evidence of fraud and squeeze more money out of the banks, which have recovered very handily after the bailout.

A version of this article appeared in the Tuesday, February 23rd print edition.

Contact John at

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