Filed Under:Markets, Regulation/Legislation

HSBC, Morgan Stanley Exit MBIA Litigation

Update: 3:35 p.m. EST

NU Online News Service, Dec. 13, 2:43 p.m. EST

Financial institutions Morgan Stanley and HSBC reached an agreement with guaranty insurer MBIA to withdraw from their legal challenges and go their separate ways, leaving five firms to battle it out over the insurer’s restructuring and accusations the banks fraudulently secured insurance coverage.

Today, Morgan Stanley reached an agreement with Armonk, N.Y.-based MBIA to settle their differences.

Under the agreement, MBIA will drop its residential-backed securities suit against Morgan Stanley and the bank will see its outstanding credit default swap protection purchased from MBIA terminated for a net cash payment of an undisclosed amount.

Morgan Stanley drops its legal action for a hearing to challenge the state’s order that allowed the restructuring of MBIA splitting the insurer in two. The structured finance policies remained with MBIA and its healthy book of municipal-bond insurance was formed under the umbrella of National Public Finance Guarantee.

HSBC Bank also joined in the action, but withdrew from it on Monday. HSBC was not sued by MBIA over structured finance agreements.

In a statement, Morgan Stanley says it will take a charge of about $1.8 billion in the fourth quarter.

However, the settlement will release $5 billion of capital for Morgan Stanley under the proposed Basel III, the European Union’s latest regulatory agreement.

James P. Gorman, president and chief executive officer for Morgan Stanley, said it was important to address its “large outstanding legacy exposure,” build capital, “and de-risk the balance sheet.”

A spokesman for MBIA declined to comment on the agreement, except to confirm that one was in place.

HSBC and MBIA, in dropping their respective litigation, each agreed to assume their own costs and attorneys’ fees, according to court documents.

HSBC issued no statement regarding the agreement and declined to comment.

A statement from Benjamin M. Lawsky, New York State’s superintendent of the Department of Financial Services says, “We are pleased Morgan Stanley and MBIA have resolved this matter and applaud their willingness to find common ground allowing both firms to put the time-consuming and expensive litigation behind them. This settlement is good for Morgan Stanley, good for MBIA, and good for the markets and our financial system, allowing firms to move forward and rebuild.

“With HSBC also settling this week, there are only five firms remaining in a litigation that began with 18. The Department of Financial Services will continue to work closely with the remaining firms and MBIA to seek fair resolutions of this litigation and we will work tirelessly to that end for the benefit of all involved and our financial system,” adds Lawsky.

In an e-mail comment, Robert J. Giuffra Jr., lead counsel for the policyholders and a partner in the law firm Sullivan & Cromwell LLP, says, “The remaining plaintiff policyholders will continue to fight to restore the billions fraudulently taken from MBIA Insurance.”

This story was updated at 3:25 p.m. EST with comments from Robert J. Giuffra. 

A correction was made Dec. 14, 10:57 a.m. EST, regarding HSBC and structured finance agreements. MBIA did not sue HSBC over such agreements.  

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