Morgan Stanley lawsuit settled for $1.25 billion

Morgan Stanley said Tuesday that it has agreed to pay $1.25 billion to resolve a lawsuit over mortgage securities with the Federal Housing Finance Agency, the regulator that oversees Fannie Mae and Freddie Mac.

In 2011 the government sued 18 financial firms for selling Fannie and Freddie $196 billion in mortgage securities that turned toxic when the housing market collapsed. The government had to rescue Fannie and Freddie, which own or guarantee about half of all U.S. mortgages, in a $187 billion bailout during the financial crisis.

Other banks have also settled with the FHFA. In October, J.P. Morgan Chase said it would pay $5.1 billion and Deutsche Bank reached a $1.92 billion settlement in December.

Morgan Stanley, which is based in New York, will record $150 million more in legal reserves, which will hurt fourth-quarter earnings by about 5 cents per share.

The settlement still has to be approved by the parties involved, Morgan Stanley said in a regulatory filing.