Morgan Stanley reaches $2.6-bn settlement with US govt over mortgages

US banking giant Morgan Stanley yesterday agreed to pay $2.6 billion to US federal government to settle the charges over its role in the sub-prime mortgage lending that triggered the global financial crisis in 2008.

The settlement amount will go to ''resolve certain claims the US Department of Justice (DOJ) brought against Morgan Stanley's mortgage division," the bank said in a regulatory filing with the US securities exchange commission (SEC).

The New York-based bank said that the settlement is not final and could fall through.

The amount will be paid to the DOJ and the attorney's office for the northern district of California.

The justice department declined to comment on the settlement.

The settlement will cut the bank's 2014 profit by almost a half. Legal reserves will be increased to $2.8 billion, which will reduce the income from continuing operations by $2.7 billion or $1.35 per share from earlier $5.8 billion or $2.96 per share.

In the last two years, the bank reached smaller settlements with other federal and state agencies. In 2014, it paid $1.25 billion to the federal housing finance agency on account of risky mortgage-backed securities it sold to mortgage lenders Fannie Mae and Freddie Mac.

The bank also paid $275 million to the SEC over charges related to loans backing subprime mortgages.

Morgan Stanley's action follows the settlements of over $35 billion reached between the US government and other banking giants such as JP Morgan Chase, Bank of America and Citigroup on similar charges. JP Morgan agreed to pay $13 billion in 2013 while last year Bank of America reached a $16.7-billion settlement and Citigroup agreed on a $7 billion charge with the DOJ and for consumer relief.

Further to the news, shares of Morgan Stanley closed 0.4-per cent down at $36.59 on the New York Stock Exchange (NYSE) yesterday.

In another development, the DOJ said that MetLife's home lending unit has also agreed to pay $123.5 million to settle allegations that it knowingly made mortgages insured by the government that didn't meet federal underwriting requirements.

Another banking major Goldman Sachs said earlier this week that it could be facing a federal civil lawsuit as the government has accused the bank of violations related to the sale of residential mortgage-backed securities prior to the financial crisis. The bank estimates up to $3 billion towards the legal charges.

Wells Fargo, the country's fourth-largest bank has so far not able to resolve a government lawsuit alleging it improperly certified certain mortgage loans.