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Morgan Stanley has reached a $3.2 billion settlement with state and federal authorities, the New York attorney general’s office announced Thursday.
In the deal, the investment bank acknowledges misrepresenting the risks of mortgage-backed securities leading to the 2008 financial and housing crisis.
Morgan Stanley knew it was selling residential mortgage-backed securities with “material defects” – such as “submarine” loans, where the loan was greater than the value of the house.
Internal emails provided evidence that the company was fully aware of the high risks of the loans it was securitizing, writes the New York Attorney General’s office:
“In an email dated May 31, 2006, the head of the Morgan Stanley team responsible for carrying out due diligence on the value of the properties underlying the mortgages asked a colleague, ‘please do not mention the ‘slightly higher risk tolerance’ in these communications. We go under the radar and don’t want to document this stuff.”
“In another email dated November 21, 2006, a member of Morgan Stanley’s due diligence team forwarded a list of bad loans, asking for review and approval to purchase them and adding ‘I guess you’ll want to do your “magic” on this one. ?’ “
The settlement announced Thursday was negotiated by a task force including federal and state authorities, led by New York Attorney General Eric Schneiderman.
The $3.2 billion deal represents an increase from the $2.6 billion Morgan Stanley agreed to pay last year. As NPR’s Yuki Noguchi reports, “Final terms now include a distressed homeowner relief program. For example, New York State alone will receive more than half a billion dollars, the majority of which will go to support local housing programs.”
This additional money will be used, among other things, to help residents avoid foreclosures and finance the construction of affordable housing.
The Associated Press helps put the $3.2 billion worth into perspective:
The New York-based investment bank reported fourth-quarter profit of $908 million. It recorded $3.1 billion in legal fees in 2014 for settlements with state and federal regulators over its role in the real estate bubble and the subsequent financial crisis.”