Talks that spanned the past two months between Morgan Stanley, MBIA and New York's top financial regulator, Benjamin M. Lawsky, culminated late Monday night in a settlement that resolves about $4 billion in insurance contracts Morgan Stanley bought from MBIA before the financial crisis, according to the person. Under the agreement, the insurance contracts Morgan Stanley bought from MBIA will disappear, ending the New York securities firm's costly entanglement with the insurer.
As part of the settlement, Morgan Stanley will drop its lawsuit against MBIA and against New York's Department of Financial Services. MBIA also has agreed to drop a lawsuit that claimed Morgan Stanley misrepresented tens of millions of dollars' worth of mortgages backing loans it insured.
Morgan Stanley and MBIA didn't immediately return calls seeking comment.
The settlement with Morgan Stanley is a crucial piece of resolving the litigious puzzle that MBIA has been mired in since the financial crisis, when bond defaults rose, straining its finances. The New York Department of Financial Services has been working on resolving related disputes since Mr. Lawsky took the reins in October.
For Morgan Stanley, the $1.1 billion windfall is a relief and a meaningful addition to the bank's bottom line at a time when it is facing headwinds from investors' cautiousness in trading and deal-making. Chief Executive James Gorman has made a point of unwinding headaches that stemmed from the financial crisis, including selling off unwanted real estate, restructuring ties with Mitsubishi UFJ Financial Group Inc., and spinning off a stake in the hedge fund FrontPoint Partners.
The deal will also help Morgan Stanley with building up its capital under international regulatory standards being phased in over coming years, said the person.
Morgan Stanley and 17 other banks sued the Armonk, N.Y., bond insurer in 2009, arguing it would be unable to make good on its insurance contracts after a restructuring, blessed by New York's insurance department, that split its insurance unit in two. The banks argued the split left them relying on future payments to be made by a financially stretched segment that guarantees souring mortgage securities and other complicated bonds, rather than the healthier piece that guarantees municipal bond payments. MBIA has paid out all of its claims tied to the bonds and disputes those allegations.
The $1.1 billion will be paid to Morgan Stanley by MBIA Insurance Corp., with a loan for the $1.1 billion from the municipal side, National Finance Public Guarantee Corp. The loan was approved by Mr. Lawsky, said a person familiar with the matter.
Morgan Stanley has lost over $3 billion since 2007 from its financial exposure to bond-insurance companies, including MBIA, according to company filings. The bank's hedges on these exposures caused quarterly swings of hundreds of millions of dollars in its earnings, which some analysts have said hurt its stock price since the financial crisis.
Morgan Stanley posted profits of $2.17 billion for the third quarter ended Sept. 30, $1.19 billion for the second quarter ended June 30 and $966 million for the first quarter ended March 31. Analysts expect Morgan Stanley's fourth-quarter earnings, due out next month, to suffer from soft trading volumes in the fixed-income and commodities markets, as investors retrench amid fears about Europe's debt crisis. Morgan Stanley shares have dropped more than 40% this year.
For the bond insurance company, the agreement clears it of obligations to guarantee regular principal and interest payments on billions of dollars' worth of commercial real estate related bonds, which could sour in the current market environment. The legal overhang has hurt MBIA, one of the nation's largest bond insurers, in its efforts to win business guaranteeing new municipal bonds.
MBIA has reached settlements with 13 of the 18 companies that together sued MBIA and the New York regulator. The bond insurer hasn't disclosed how much money, if any, it paid in those agreement.
MBIA last month settled with HSBC Holdings PLC, agreeing to pay the bank $30 million, said a person familiar with the matter. A group of five banks remain in the multibank lawsuit against MBIA, including Bank of America Corp., which is separately being sued by MBIA for misrepresenting the mortgages backing the loans the bond insurer guaranteed.