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Sweeping Up

13 December 2011 By Agnes T. Crane

Morgan Stanley chief James Gorman’s settlement with bond insurer MBIA puts a big chunk of the financial crisis legacy behind the firm. At $1.8 billion, it doesn’t come cheap. But it puts the investment bank on the right track by boosting regulatory capital and tidying up a very messy second year for Gorman.

The bank’s spat with MBIA was, like much of the litigation stemming from the crisis, about who would ultimately bear the cost of wagers gone disastrously wrong. MBIA made a name for itself in the staid municipal bond market by insuring more esoteric instruments, including bonds backed by commercial real estate debt held by Morgan Stanley. The bank recently valued MBIA’s insurance contracts at some $4.9 billion.

By settling the dispute, Morgan Stanley is tacking a $1.8 billion loss to an already-crummy year, all the better to kick off 2012 on a more solid footing. First, the deal frees up capital, getting the firm closer to meeting stiffer requirements coming down the pike under the Bank for International Settlements’ Basel III accord.

The New York bank estimates that closing its MBIA-related positions, even after taking the loss, should unlock $5 billion of capital. That should punch up its ratio of so-called Tier One common equity to risk weighted assets, estimated at over 7 percent at the end of September, by another 75 basis points. That nudges the bank closer to the 8.5 percent to 9 percent cushion it could eventually need.

The loss notwithstanding, investors applauded the move. That alone could encourage the remaining five banks – including Bank of America – still engaged in a legal battle with MBIA to consider similar deals. True, modest applause at year-end hardly makes up for the near 40 percent decline in Morgan Stanley’s stock so far this year. Gorman needs to do more than clean up old messes next year to keep shareholders on his side.


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