In a regulatory filing, the bank announced that as a result of the settlement, the bank has increased its legal reserves "for this settlement and other legacy residential mortgage-backed securities matters by approximately $2.8 billion," which will be accounted for in expenses for the 2014 financial year, added to its Institutional Securities business segment.
On January 20, the bank had announced net revenues for the year of $34.3 billion and diluted earnings per share of $2.96. As a result of the agreement, which the company announced on Wednesday had been reached "in principle," 2014 income was decreased by $2.7 billion and diluted EPS by $1.35, cutting profits for the year by almost half.
"An SEC investigation found that Morgan Stanley misrepresented the current or historical delinquency status of mortgage loans underlying two subprime RMBS securitizations that came against a backdrop of rising borrower delinquencies and unprecedented distress in the subprime market," the SEC said in a statement on the matter.
Morgan Stanley follows other financial institutions in reaching settlement with the US authorities over their part in the 2008 financial crisis. In August, Bank of America agreed to pay a $16.7 billion settlement, Citigroup reached a $7 billion settlement in July 2014, and JPMorgan Chase agreed to a $13 billion deal in November 2013.
