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.

Along with helping to finance riskier loans, the investigation claims that Morgan Stanley in 2006 and for the first half of 2007 sold New Century's subprime loans as investments to Massachusetts' Pension Reserves Investment Trust and to the Massachusetts Municipal Depository Trust.

This led to state funds being used to fuel predatory subprime lending and to significant losses for PRIT and the MMDT, Coakley said in a press release.

Morgan Stanley will pay $23.4 million combined to the PRIT and the MMDT for investment losses and another $19.5 million to the commonwealth's general fund.

In addition, the bank will pay a total of $58 million to 1,000 Massachusetts homeowners.

"This has become an all-too-familiar pattern in which the deceptive practices of Wall Street devastated homeowners and investors, and ultimately contributed to the collapse of our economy," Coakley said in a statement.

"Our extensive investigation revealed that Morgan Stanley not only backed loans for homeowners that they should have known were destined to fail, they also caused additional damage in the subprime marketplace," she said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.