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

Financial institutions Morgan Stanley and HSBC reached anagreement with guaranty insurer MBIA to withdraw from their legalchallenges and go their separate ways, leaving five firms to battleit out over the insurer's restructuring and accusations the banksfraudulently 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-backedsecurities suit against Morgan Stanley and the bank will see itsoutstanding credit default swap protection purchased from MBIAterminated for a net cash payment of an undisclosed amount.

Morgan Stanley drops its legal action for a hearing to challengethe state's order that allowed the restructuring of MBIA splittingthe insurer in two. The structured finance policies remained withMBIA and its healthy book of municipal-bond insurance was formedunder the umbrella of National Public Finance Guarantee.

HSBC Bank also joined in the action, but withdrew from it onMonday. HSBC was not sued by MBIA over structured financeagreements.

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

However, the settlement will release $5 billion of capital forMorgan Stanley under the proposed Basel III, the European Union'slatest regulatory agreement.

James P. Gorman, president and chief executive officer forMorgan Stanley, said it was important to address its “largeoutstanding legacy exposure,” build capital, “and de-risk thebalance 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, eachagreed to assume their own costs and attorneys' fees, according tocourt documents.

HSBC issued no statement regarding the agreement and declined tocomment.

A statement from Benjamin M. Lawsky, New York State'ssuperintendent of the Department of Financial Services says, “Weare pleased Morgan Stanley and MBIA have resolved this matter andapplaud their willingness to find common ground allowing both firmsto put the time-consuming and expensive litigation behind them.This settlement is good for Morgan Stanley, good for MBIA, and goodfor the markets and our financial system, allowing firms to moveforward and rebuild.

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

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

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

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