Morgan Stanley has reached $2.6bn settlement with US Department of Justice

Morgan Stanley drew a line under claims that it mis-sold mortgage-backed securities in the run-up to the financial crisis, as the bank has reached a $2.6 billion settlement with the US Department of Justice.

The investment bank had been among six big banks charged with mis-selling by the Department of Justice. JPMorgan Chase was the first to settle, for $13bn in November 2013, since it inherited large mortgage origination and securitisation businesses through its acquisitions of Washington Mutual and Bear Stearns, respectively.

Then, last summer Citigroup paid $7bn to resolve its case, wiping out almost all of its second-quarter profits, followed by Bank of America, whose penalty of $17bn reflected the huge exposures it assumed in the takeovers of Countrywide and Merrill Lynch.

Wednesday’s settlement brings the total mortgage-related penalties wrung out of the big banks by the DoJ to about $40bn, says the Financial Times.

Last August Goldman Sachs paid $1.2bn to resolve a related action from a different US government agency, the Federal Housing Finance Agency. It said the body had sold $11.1bn of MBS to Fannie Mae and Freddie Mac, the state-backed mortgage finance agencies.

The settlement between Morgan Stanley and DoJ that it is taking an additional charge of $2.8bn for legal reserves related to mortgage cases, cutting its net income from last year by $2.7bn, or $1.35 per share, according to a filing with the Securities and Exchange Commission on Wednesday. As the Financial Times reports, the DoJ has used the proceeds of previous settlements for consumer relief, in the form of modifications of existing mortgages or refinancing.

Since Morgan Stanley is an investment bank, it cannot easily assist cash-strapped homeowners, thus its settlement may end up financing new construction.