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Morgan Stanley in $2.6 Billion Settlement Over Crisis in Mortgages

The headquarters of Morgan Stanley in New York. The bank has been struggling to improve profitability since the financial crisis.Credit...Mike Segar/Reuters

Morgan Stanley said on Wednesday that it had reached a $2.6 billion settlement with the Justice Department over the sale of mortgage securities before the financial crisis.

Other large banks have already struck similar settlements, with Bank of America agreeing to pay a record $16.7 billion last year and JPMorgan Chase settling for $13 billion in 2013.

Compared with other Wall Street banks, Morgan Stanley was responsible for a smaller volume of securities backed by troubled mortgages, the investments at the heart of the settlements.

The $2.6 billion price tag, which will be included in Morgan Stanley’s final fourth-quarter earnings results, will more than wipe out the $1 billion in quarterly profits that the firm had announced last month. It will also reduce the firm’s profits for the year by more than 40 percent, taking the bank’s earnings for 2014 to $1.61 a share from $2.96 a share.

The size of the settlement is something of a blow for Morgan Stanley, which has been struggling to improve profitability since the financial crisis and has lagged behind some of its biggest competitors.

The deal is expected to be one of the last major steps in the Justice Department’s push to make banks pay for their role in the subprime crisis. Goldman Sachs, which has had preliminary talks with the government, is the last major bank that has not yet reached an agreement with the Justice Department.

Morgan Stanley bought mortgages from New Century and other subprime mortgage originators and packaged them into securities that it sold to investors. Many of those securities ended up sustaining significant losses.

A federal lawsuit filed by the American Civil Liberties Union in 2012 provided emails and documents suggesting that some Morgan Stanley executives were aware of the low quality of the loans it was buying from New Century.

Last year, Morgan Stanley paid the Federal Housing Finance Agency $1.25 billion to resolve claims that it sold bad mortgage securities to Fannie Mae and Freddie Mac.

Unlike other banks that have reached mortgage settlements, Morgan Stanley did not strike a comprehensive deal to provide homeowner relief and dispense with the claims that have been put forward by various states.

Morgan Stanley said in a regulatory filing on Wednesday that it was putting an additional $200 million in its legal reserves, beyond the $2.6 billion, which could go to deal with other outstanding claims.

There were few details about the structure of the settlement. The Justice Department did not issue a statement on the agreement.

A version of this article appears in print on  , Section B, Page 3 of the New York edition with the headline: Bank Settles Federal Case Over Crisis in Mortgages. Order Reprints | Today’s Paper | Subscribe

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