Subprime: Morgan Stanley Pays to Eschew Prosecutions

The American merchant bank Morgan Stanley is going to pay $1.25 billion to the United States’ real estate funding regulator, the Federal Housing Finance Agency, in order to put an end to the prosecutions started by the American authorities: the case of toxic derivatives of mortgages and the infamous subprime mortgages.

After J.P. Morgan paid $5.1 billion, it is Morgan Stanley’s turn to settle an agreement with the FHFA, the regulator of the mortgage refinancing bodies Fannie Mae and Freddie Mac.

$1.25 Billion Amicably Negotiated

After an amicably negotiated agreement with the FHFA, the bank is going to pay $1.25 billion to end fraud accusations related to subprime mortgages.

The regulator accused Morgan Stanley of duping both Fannie Mae and Freddie Mac by selling, prior to 2008, subprime mortgage-backed securities. Both institutions are considered to have been misled on the value of the assets and the associated risk exposure.

This decision will affect the current earnings per share of the last quarter of 2013 by 5 percent, declared Morgan Stanley. The mortgage loan regulator has ordered the financial institution to increase the budget allocated to litigations to $150 million.

The American merchant bank is not yet done with the American authorities: It is still struggling with legal prosecutions from the National Credit Union Administration, the American savings bank regulator, which has accused Morgan Stanley of having misled two cooperative banks, U.S. Central and WesCorp, by selling them mortgage-backed securities that were too risky.

Sixteen Other Banks Under FHFA Ire

Hoping to compensate the loss inflicted by the banks on Fannie and Freddie at any cost, the FHFA lodged a complaint in 2011 against 16 other banks, including Ally Financial, Bank of America, Barclays, Citigroup, the Bank of America subsidiary Countrywide Financial, Crédite Suisse, Deutsche Bank, First Horizon National, General Electric, Goldman Sachs, HSBC, JPMorgan, Merrill Lynch, Nomura, The Royal Bank of Scotland and Société Générale.

Like other agreements in 2013 with Bank of America, Citi and J.P. Morgan, the agreement now signed by Morgan Stanley was resolved out of court.