A group of investors have accused Morgan Stanley (MS) of selling flawed mortgage bonds by misleading investors, the company said on Monday. The aggregate outstanding balance of the bonds underwritten by Morgan Stanley was more than $6 billion.
Morgan Stanley allegedly underwrote a large number of residential mortgage-backed securities issued by trusts based on fake information. Also, the company failed to properly service mortgage loans owned by the investors.
A lawsuit against the company over its involvement in such a deal is quite likely from Gibbs & Bruns, a law firm representing the investors. The same law firm led the $8.5 billion charge against Bank of America Corp. (BAC) in a similar case.
In October 2010, the law firm accused BofA on about $47 billion worth of mortgage bonds created by the former Countrywide Financial Corp. Such hefty payment, which represents the highest by a financial services company till date, has dented BofA’s financials and reputation to a large extent.
The acquisition of Countrywide substantially increased BofA’s mortgage exposure. As a result, following the collapse of the housing market, mortgage repurchases claim risk for the company has heightened.
This is not the only accusation against Morgan Stanley in the recent months. The company is involved in six class-action lawsuits and several other legal matters.
Recently, lawsuits against big banks have been hitting the headlines. This could be another major threat to the financial service sector. At such a crucial moment, when the world economy is palpably seesawing, if the big banks are forced to cough up billions, it’ll be a long time before they can hold their heads up once again. The already jeopardized economic recovery will then be out of the question as banks are the lifeblood of the economy.
Morgan Stanley’s third-quarter earnings from continuing operations came in way ahead of the Zacks Consensus Estimate. With this the company returned to its profit trend after incurring a loss in the prior quarter. A significant benefit from the widening of debt-related credit spreads and Debt Valuation Adjustment primarily made it possible for the company to report impressive results.
Morgan Stanley currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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