Armonk, N.Y.-based bond insurer MBIA reached a settlement with Morgan Stanley over credit default swaps. Previously, Morgan Stanley had purchased these derivative contracts from MBIA to help protect its commercial mortgage-backed securities.
The settlement terminates these contracts Morgan Stanley had bought. Under the the settlement deal, MBIA will make an undisclosed cash payment. Morgan Stanley said in its press release that its pre-tax loss resulting from the settlement will be around $1.8 billion for the fourth quarter.
MBIA had sold these contracts during the past housing boom, writing insurance covering mortgage-backed securities for major financial institutions including Bank of America, Morgan Stanley and Merrill Lynch.
But MBIA found itself getting hit with billions of dollars in insurance claims when the housing bubble burst.
MBIA has sued these financial giants since then, arguing that these companies misled MBIA regarding the quality of their mortgage-backed securities.
New York State Financial Services Superintendent Benjamin Lawsky said he was pleased with the settlement.
“We are pleased Mogan Stanley and MBIA have resolved this matter and applaud their willingness to find common ground allowing both firms to put the time-consuming and expensive litigation behind them,” the regulator 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.”
With HSBC also settling this week, there are only five firms remaining in a litigation that began with 18, he said.
Lawsky said the Department of Financial Services will continue to work closely with the remaining firms and MBIA to seek fair resolutions of this litigation. “We will work tirelessly to that end for the benefit of all involved and our financial system,” he said.