Morgan Stanley and MBIA Inc have agreed to a settlement to extinguish credit-default swaps and exit litigation against one another that will lead to a charge of $1.8 billion before taxes in the fourth quarter for Morgan Stanley, the bank said on Tuesday.
After a tax credit , Morgan Stanley will lose $1.2 billion on the deal.
Under the agreement announced on Tuesday, MBIA agreed to withdraw from a residential mortgage-backed security lawsuit against Morgan Stanley, and Morgan Stanley agreed to withdraw from lawsuits challenging MBIA's planned restructuring.
Shares of MBIA were up 11.4 percent at $12.70 in trading before the market opened, while Morgan Stanley gained 6.6 percent to $16.40.
The agreement will also allow Morgan Stanley to release about $5 billion worth of capital that is now being held against risk-weighted assets related to the settlement.
Morgan Stanley said the move would increase its Tier 1 common ratio by about 75 basis points by year end, under new capital standards set by the Basel Committee. Under existing standards, its Tier 1 common ratio will be reduced by about 30 basis points.
The credit default swaps have added to big swings in Morgan Stanley's earnings for the past several years. Terminating the CDS agreement will help to stabilize results and put the company in a better position under the new regulations, Chief Executive Officer James Gorman said in a statement.
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