Morgan Stanley (MS) is now one step closer to closing the chapter on the financial crisis of 2008. In a settlement with the U.S. Department of Justice, the investment banking firm agreed to pay $2.6 billion in fines for its involvement in the sale of toxic mortgage-backed securities. According to the Wall Street Journal, the fines were because Morgan Stanley “deceived investors by misrepresenting the quality of the home loans the firm packaged into bonds.”
The settlement carved a huge piece of the bank’s 2014 earnings, shaving off $1.35 per share, or 46% of total profits. It comes on the back of two settlements last year—one for $1.25 billion with the Federal Housing Finance Agency for “selling faulty mortgage-backed securities to Fannie Mae and Freddie Mac,” and one with the Securities and Exchange Commission for understating “the number of delinquent loans backing subprime mortgages.”
Not quite out of the woods yet
Even though this latest settlement is the largest to date, the bank is expecting another lawsuit from the next regulatory agency in line: New York’s Attorney General. While the big bank has disputed the charges, it also announced it would increase its legal reserves by about $2.8 billion in anticipation of this and possibly yet even more lawsuits.
As I’ve digested the timeline of this whole process, I have to wonder whether enough is enough. And it isn’t just Morgan Stanley, it’s all the big banks. It could be argued that the industry won’t reach a full recovery until it can actually focus on the future rather than waiting to get to the light at the end of the tunnel. It also makes me wonder whether these regulatory agencies are actually interested in bringing justice to the banking industry, or simply trying to get their slice of the pie. Either way, shareholders are still in for a long year.
Passing the first stage of the stress test
In other news, Morgan Stanley has been found to have the capital necessary to keep lending in the case of another severe economic downturn. As the Federal Reserve continues with other stages of its stress test to make sure another financial crisis doesn’t happen, it will make a “decision next week about whether to approve the bank’s plan for rewarding shareholders with dividends or potential share buybacks.”
To give you an idea of how well Morgan Stanley is doing with securing its assets and solvency, its common ratio, which measures capital as a share of assets, came in at 6.2%, easily surpassing the Fed’s requirement of 5%.
Along with Morgan Stanley, it seems as if rest of the U.S. banks passed the first test as well, something that hasn’t happened before. Not all of them passed with flying colors, but it goes to show that the banking industry as a whole has made huge strides over the past few years to get their ducks in a row. While investors should still be wary of the overarching culture of the investment banking industry that started this whole mess, they can rest assured that it’s going in the right direction.
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