Morgan Stanley and MBIA settle over CDS dispute

Let’s make a deal.

Morgan Stanley and MBIA have agreed on a settlement that removes some derivative contracts from Morgan Stanley’s books and ends ongoing litigation between the two parties. The deal will result in a $1.8-billion pretax charge in Morgan Stanley’s Q4, resulting in a $1.2 billion loss after tax.

The litigation surrounded mortgage-backed securities that Morgan Stanley owns. MBIA had been covering losses on the securities due to credit-default swaps that Morgan Stanley had purchased. The settlement will cancel those agreements and will free up $5 billion in capital for Morgan Stanley, while lifting the bank’s Tier 1 common ratio by 75 bps under the new Basel III rules. In addition to the lawsuits being dropped, MBIA will pay Morgan Stanley $1.1 billion to settle the litigation.

Morgan Stanley CEO James Gorman said that the settlement will help stabilize quarterly results that have been impacted by the CDS agreements and put the company in a better position under the new Basel III requirements.

Morgan Stanley (MS : NYSE : US$15.10), Net Change: -0.29, % Change: -1.85%, Volume: 36,595,437
MBIA (MBI : NYSE : US$11.39), Net Change: -0.01, % Change: -0.09%, Volume: 11,416,792

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