Morgan Stanley Reaches Settlement with MBIA

Sometimes you have to take a step back to take two steps forward, which is what Morgan Stanley appears to be doing Tuesday in a settlement with bond insurance firm MBIA that will result in a $1.8 billion charge but allow the bank to release about $5 billion of capital thanks to a significant reduction in risk-weighted assets.


Tuesday’s agreement comes after Morgan Stanley and MBIA had sued each other over insurance sold on mortgage-backed securities. MBIA, and its peers like Ambac Financial Group, traditionally operated in the somewhat routine business of insuring municipal bonds but expanded into the mortgage market as the housing boom swelled and began writing insurance on mortgage-related instruments that turned sour en masse when the bubble burst.


The settlement terminates credit default swaps Morgan Stanley purchased from MBIA to protect holdings of commercial mortgage-backed securities and resolves the pending litigation between the two. Morgan Stanley had been challenging MBIA’s restructuring, while MBIA had an ongoing suit tied to residential mortgage-backed securities packaged by Morgan Stanley.


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1A, "Legal Proceedings" in Part I, Item 3, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 and "Quantitative and Qualitative Disclosures about Market Risk" in Part II, Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2010 and other items throughout the Form 10-K, the Company’s
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1 Tier 1 common ratio (Tier 1 common equity divided by Risk-Weighted Assets) is a non-GAAP financial measure that the Company considers to be a useful measure that the Company and investors use to assess capital adequacy.


^2 The Basel III estimates are preliminary and may change based on guidelines
for implementation to be issued by the Federal Reserve.