Morgan Stanley (MS, Financial) and the Department of Justice have reached a settlement wherein Morgan will pay $2.6 billion for its role in the housing bubble. The said amount will have to be paid to settle all the claims that arose from the sale of mortgage bonds. It is said that the investment firm deceived investors by falsifying the quality of the home loans Morgan Stanley packaged into bonds. These charges are levied on the company due to the sale of mortgage-backed securities during the recession. The announcement was made on Wednesday in a filing with the Securities and Exchange Commission. Other huge U.S. companies have paid a total of $130 billion in fines, settlements and other costs related to the Great Recession of 2008.
A look behind
Morgan Stanley, the American MNC, has its headquarters in Midtown Manhattan, New York City. Formed by Henry Morgan and Harold Stanley, the company came into existence in 1935. The main areas of interest are investments, institutional securities and global wealth management. The investment bank has always been embroiled in lawsuits and controversies. Before this lawsuit, Morgan Stanley had to pay $95 million to MissPERS and the West Virginia Investment Management Board. The current market capitalization of the company is 71.39 billion. The P/E ratio(ttm) is 12.37. The current dividend yield of Morgan Stanley is 1.09%.
Legal tangle
According to people familiar with this issue, Morgan Stanley and the Justice Department had their final round of talks last week. Stuart Delery, the firm’s lawyer and associate attorney general furiously made many calls before the two parties could decide on a final amount. It is said that Morgan Stanley faced a lot of pressure to strike a deal. In an annual regulatory filing, the company raised the legal reserves to mortgage issues by $2.8 million. This will be done by cutting the 2014 income by $2.7 billion, or $1.35 a share from continuing operations,more than one third of its 2014 net income. This is not the first time that this has occurred. The company has had reduced earnings after announcing them around four times in the past quarter. The reported EPS in January was $2.75, and it earned $6.2 billion last month.
James Gorman, the CEO of Morgan Stanley, said that the company has put in five years of efforts to put all this trouble in the “rear-view mirror.” In spite of paying the settlement, Morgan Stanley's troubles are far from over. They will still have to negotiate with the Justice Department about other settlement terms. Doug Sippkin, analyst at Susquehanna Financial Group, said that the large size of the penalty is a huge surprise. The Morgan Stanley deal, however, does not include an agreement to provide help to struggling homeowners. Patrick Rodenbush, Justice Department spokesman refused to make any comment about the settlement. Even representatives at the Northern District of California did not comment on the matter.
Peers facing the same heat
Morgan Stanley is not the only company to be embroiled in such a happening. Bank of America Corporation (BAC, Financial) agreed to pay $16.7 billion. Citigroup Inc.(C, Financial) agreed to pay $7 billion and J P Morgan Chase & Co (JPM, Financial) reached a $13 billion deal for misrepresenting the quality of bonds backed by home loans. Goldman Sachs Group, Inc. (GS, Financial) and the DOJ are still negotiating their settlement. They said that they could face a suit since the bank had violated laws which were related to the sale of residential mortgage-backed securities before the 2008 recession. Morgan Stanley can consider themselves lucky since they have to pay a small amount as compared to their competitors, the reason being they weren't a huge mortgage lender during the housing boom season. These cases are being investigated by a task force formed by the President Obama to probe into issues relating to misconduct during the financial crisis. The President said that this task force will hold anyone who broke the law and will help to turn the page on the era of recklessness.
