Morgan Stanley will pay $3.2 billion as part of a settlement with the Residential Mortgage-Backed Securities Working Group, group co-chair and New York Attorney General Eric Schneiderman announced Thursday.
The settlement relates to what Schneiderman called “deceptive practices” around the construction and sale of mortgage-backed securities (MBS) in the build up to the market crash in 2008.
As part of its settlement, Morgan Stanley admitted it securitized and sold residential MBS despite knowing that the underlying mortgage loans had “material defects.”
“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.” —2006 Morgan Stanley emailThe bank also acknowledged that it increased the acceptable risk levels for loans in its securitized pools. In a May 2006 email uncovered by the investigation, a Morgan Stanley leader told 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.”
The bank also admitted it securitized loans that “neither complied with the underwriting guidelines nor had adequate compensating factors,” according to a statement from the attorney-general’s office.
Morgan Stanley also purchased and securitized many loans which its credit and compliance team recommended not be purchased. Another email from November 2006 forwarded a list of questionable loans, adding, “I assume you will want to do your ‘magic’ on this one?”
Morgan Stanley’s $3.2 billion fine will help provide community housing relief, and included $550 million to be allocated to New York State.
“From day one my priority has been trying to help the people who were hurt and trying to help the communities that were devastated,” Schneiderman said at a press conference Thursday morning. “Today’s agreement is another victory in our efforts to help New Yorkers rebuild in the wake of the financial devastation caused by major banks.”
The working group has so far reached settlements totaling $65 billion, including agreements with JP Morgan and Credit Suisse. It was formed in 2012 by US President Barack Obama to investigate wrongdoing in the MBS market prior to the financial crisis.
“We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters,” a Morgan Stanley spokesperson said in a statement. “The firm has previously reserved for all amounts related to these settlements.”
Related: JP Morgan in $388M MBS Settlement