Morgan Stanley has resolved multiple legal disputes with MBIA in a deal which will see it collect $1.1bn from the bond insurer yet book an overall loss of $1.8bn, stemming from lawsuits tied to the insurance company’s guarantees on mortgage securities.
The settlement ends Morgan Stanley’s role in a 2009 lawsuit launched by 18 banks against the insurer and New York state’s financial regulator for restructuring the company during the height of the financial crisis in a way that allegedly harmed Wall Street counterparties.
MBIA in turn dropped its own suit against Morgan Stanley which had claimed the bank lied about the quality of mortgages MBIA insured, according to a person with direct knowledge of the matter.
The deal also resolves about $4bn in insurance contracts tied to financial instruments Morgan Stanley purchased from MBIA, this person said. From 2007 to 2010, Morgan Stanley lost $3bn from its exposure to bond insurers, according to a November report by the International Swaps and Derivatives Association.
Morgan Stanley had about $2.7bn in exposure to MBIA in the form of derivatives and another $144m in exposure to bond insurers overall related to guarantees on mortgages and other asset-backed securities, according to its third-quarter filing with the US Securities and Exchange Commission.
The $1.1bn payment ends the bank’s relationship with the insurer, while resulting in a near $1.8bn loss.
“A top priority for 2011 was to address this large outstanding legacy exposure and this settlement is consistent with our efforts to build capital and de-risk the balance sheet,” said James Gorman, Morgan Stanley’s chief executive. The bank said the settlement would reduce its risk-weighted assets and improve its capital ratio.
MBIA declined to comment. The insurer has reached deals with 13 of the 18 banks that it was sued by, the most recent being a $30m pay-out to HSBC, which said on Monday that it had ended its participation in the lawsuit. Bank of America, UBS, Société Générale, Natixis and BNP Paribas remain.
MBIA’s deal with Morgan Stanley was reached late on Monday after months of negotiations led by Benjamin Lawsky, New York’s financial services superintendent whose office is a combination of the state’s previously separate insurance and banking regulators.
His predecessor at the state’s insurance office, Eric Dinallo, approved a 2009 reorganisation of MBIA that split its healthy municipal bond unit from its mortgage securities and derivatives arm. Aggrieved banks subsequently sued both MBIA and the state regulator. As part of its settlement, Morgan Stanley withdrew from the suit aimed at Mr Lawsky’s office.
MBIA’s $1.1bn payment to Morgan Stanley came courtesy of a loan from the insurer’s municipal business. The transaction was approved by Mr. Lawsky, a person with direct knowledge of the matter said.
“This settlement is good for Morgan Stanley, good for MBIA, and good for the markets and our financial system, allowing firms to move forward and rebuild,” Mr Lawsky said.
Morgan Stanley shares are down 41 per cent since the start of the year, or about half of book value, albeit trading 2.2 per cent higher at midday on Tuesday at $15.72.