Morgan Stanley will pay a $3.2bn penalty to settle claims related to how the US investment bank marketed, sold and issued residential mortgage-backed securities (RMBS). 

The deal comes a month after Goldman Sachs agreed to pay over $5bn to resolve civil claims related to the firm’s securitisation, underwriting and sale of RMBS between 2005-07.

A statement issued by the US Justice Department today said Morgan Stanley had acknowledged its failure to disclose critical information to investors about the quality of the mortgage loans underlying its RMBS.

RMBS - which comprise of a pool of mortgage loans created by banks and other financial institutions - soured during the financial crisis.

Investors, including pension funds and asset managers, suffered billions of dollars in losses from investing in the products issued by Morgan Stanley between 2006-07.

“Morgan Stanley sold billions of dollars in subprime RMBS certificates in 2006 and 2007 while making false promises about the mortgage loans backing those certificates,” said acting US Attorney Brian J. Stretch of the Northern District of California. 

“The bank touted the quality of the lenders with which it did business and the due diligence process it used to screen out bad loans.  All the while, Morgan Stanley knew that in reality, many of the loans backing its securities were toxic," he added.

In conjunction with the settlement, the states of New York and Illinois – members of the RMBS working group – have announced settlements with Morgan Stanley for $550m and $22.5m, respectively, arising from its sale of RMBS.