Morgan Stanley will pay $42.5 million to Massachusetts' pension funds and its general fund in a settlement agreement regarding the financing and securitization of subprime loans in the state.

An investigation by Attorney General Martha Coakley alleges that Morgan Stanley provided billions of dollars in funding to subprime lender New Century, who offered lower-income borrowers subprime loans. Under Massachusetts law, it is illegal to facilitate loans without reasonably analyzing a borrower's ability to pay the loan according to its terms.

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