Morgan Stanley’s $2.6 Billion Adds to the Tens of Billions Paid by Banks for Role in Mortgage Meltdown

February 26, 2015 Updated: March 2, 2015

As the latest bank paying the consequences in the post-recession fraud sweep, Morgan Stanley agreed to a $2.6 billion settlement with the United States Department of Justice and office of the U.S. Attorney of Northern California, according to a public filing Wednesday evening.

Compared to the other banks the Justice Department has gone after for their role in the subprime crisis, Morgan Stanley sold a smaller volume of mortgage-backed securities. It is one of the last steps for the DOJ in holding the banks accountable.

Since December, the Justice Department had been probing the company’s role in influencing the now defunct New Century Financial’s increasingly risky lending practices in response to a 2012 lawsuit by the American Civil Liberties Union.

Morgan Stanley had bought mortgages from New Century and other lenders and packaged them into securities sold to investors. Many of these securities bore heavy losses during the financial meltdown.

In the 2012 lawsuit, the ACLU provided email evidence and documents that Morgan Stanley knowingly led New Century into making risky mortgages in predominately black neighborhoods just before the housing bubble burst.

Bank of America reached a record-setting $16.7 billion settlement last year, which included paying $7 billion in relief to struggling homeowners. The settlement also accounted for Bank of America subsidiaries Countrywide Financial Corp. and Merrill Lynch. In 2013, J.P. Morgan Chase paid a $13 billion settlement and Citigroup reached a $7 billion deal.

Goldman Sachs, which has had preliminary talks with the Justice Department, is the last major bank, which has yet to settle.

The settlement is a striking blow to Morgan Stanley, which had to set aside¬†$2.7 billion of its 2014 income from continuing operations to pay for the settlement, reducing the bank’s earnings by more than 40 percent, from $2.96 a share to $1.61. It also makes the fourth quarter in the past five quarters that Morgan Stanley has reduced its earnings a week after announcing them.

Last year, Morgan Stanley paid the Federal Housing Finance Agency $1.25 billion to resolve claims that it sold bad mortgage securities to the agency. In addition to the $2.6 billion settlement, the investment banking firm also increased its legal reserves by $200 million.

Morgan Stanley declined to comment beyond the filing, according to managing director Wesley McDade. The DOJ also did not have a statement.