Morgan Stanley is paying a huge fine for a pre-crisis 'magic' trick
Morgan Stanley is paying a huge settlement related to residential mortgage-backed securities, or RMBS, sold before the financial crisis.
New York Attorney General Eric Schneiderman on Thursday announced a $3.2 billion settlement with the firm over charges that it misled investors on the quality of mortgage loans it sold.
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New York State will receive $550 million.
"We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters. The Firm has previously reserved for all amounts related to these settlements," Morgan Stanley said in a statement.
"Morgan Stanley securitized and sold RMBS with underlying mortgage loans that it knew had material defects," the Attorney General's office said in a statement.
The statement described a 2006 email in which Morgan Stanley's due diligence team 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."
Another 2006 email from a due diligence team member included a list of questionable loans, seeking approval for purchase. The email read: "I assume you will want to do your 'magic' on this one?"
Goldman Sachs last month announced it would pay a $5 billion settlement related to RMBS sold between 2005 and 2007. That nearly wiped out fourth-quarter earnings for the firm, which were announced later that week.
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Here is the press release from the New York Attorney General:
NEW YORK – Attorney General Eric T. Schneiderman today joined members of the state and federal working group he co-chairs to announce a $3.2 billion settlement with Morgan Stanley over the bank's deceptive practices leading up to the financial crisis. The settlement includes $550 million – $400 million worth of consumer relief and $150 million in cash – that will be allocated to New York State.
The resolution requires Morgan Stanley to provide significant community-level relief to New Yorkers, including loan reductions to help residents avoid foreclosure, and funds to spur the construction of more affordable housing. Additional resources will be dedicated to helping communities transform their code enforcement systems, invest in land banks, and purchase distressed properties to keep them out of the hands of predatory investors.
The settlement was negotiated through the Residential Mortgage-Backed Securities Working Group, a joint state and federal working group formed in 2012 to share resources and continue investigating wrongdoing in the mortgage-backed securities market prior to the financial crisis.
"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," said Attorney General Schneiderman. "Today's settlement will deliver resources to the families and communities that need them the most, while helping New Yorkers avoid foreclosure, and spurring the construction of more affordable housing units statewide."
The settlement includes an agreed-upon statement of facts that describes how Morgan Stanley made multiple representations to RMBS investors about the quality of the mortgage loans it securitized and sold to investors, and its process for screening out questionable loans. Contrary to those representations, Morgan Stanley securitized and sold RMBS with underlying mortgage loans that it knew had material defects.
In the statement of facts, Morgan Stanley acknowledged that it increased the acceptable risk levels for loans in its securitized pools. This allowed Morgan Stanley to purchase various loans with loan-to-value (LTV) ratios over 100%, i.e. loans that were "underwater." In a May 31, 2006 email, the head of Morgan Stanley's team tasked with doing due diligence on the value of properties underlying the mortgage loans asked 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."
In another email on November 21, 2006, a member of the Morgan Stanley due diligence team forwarded a list of questionable loans, seeking review and approval to purchase them and adding "I assume you will want to do your 'magic' on this one?" In another similar instance from July 2006, the head of Morgan Stanley's valuation due diligence cleared dozens of risky loans for purchase after less than one minute of review per loan file.
In the settlement, Morgan Stanley also acknowledged that it securitized certain loans that neither complied with underwriting guidelines nor had adequate compensating factors. Morgan Stanley also purchased and securitized many loans which its credit and compliance team recommended not be purchased, after its finance team decided that the loans had "acceptable risk." Morgan Stanley also allowed loans that it knew were risky to be purchased and securitized without a loan file review for credit and compliance.
In his 2012 State of the Union address, President Obama announced the formation of the RMBS Working Group. The collaboration brought together the Department of Justice, other federal entities, and several state law enforcement officials – co-chaired by Attorney General Schneiderman – to investigate those responsible for misconduct contributing to the financial crisis through the pooling of loans and sale of residential mortgage-backed securities.
Under the settlement, Morgan Stanley will be required to provide a minimum of $400 million in creditable consumer relief directly to struggling families and communities across the state. The settlement includes a menu of options for consumer relief to be provided, and different categories of relief are credited at different rates toward the bank's $400 million obligation. Creditable dollars will go toward the creation and preservation of affordable rental housing, land banks, code enforcement, communities purchasing distressed properties, and principal reductions for homeowners.
"Mayors across the state have been dealing with the impact of the financial crisis for years now. The settlement funds will have a huge impact, helping homeowners who continue to struggle and are in need of mortgage relief" said Tom Roach mayor of the city of White Plains and Vice President of the New York Conference of Mayors. "Applying the settlement proceeds to fund land banks, affordable housing and enhanced code enforcement will have a direct impact on the quality of life of those most affected by the financial meltdown and be of great assistance to our municipalities."
"The Center for NYC Neighborhoods applauds Attorney General Eric Schneiderman for standing with New Yorkers at risk of foreclosure. This settlement will help to ensure that our neighbors' homes do not fall into the hands of predatory investors. With innovative programs like these, we can finally put the housing crisis behind us and work toward a stronger, more affordable New York," said Christie Peale, Executive Director of the Center for NYC Neighborhoods.
"Attorney General Schneiderman's use of these settlement dollars to investment in communities hardest hit by the foreclosure crisis, has significantly accelerated the recovery efforts of cities across New York who are still struggling to move past this crisis. Without these critical funds, our organization would not be able to make such broad revitalization impacts on such a short timeline," said Madeline Fletcher, Executive Director of Newburgh Land Bank.
This matter was led by Senior Enforcement Counsel for Economic Justice Steven Glassman and Assistant Attorney General Tanya Trakht. The Division of Economic Justice is led by Karla G. Sanchez.
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