Morgan Stanley (MS) agreed to pay $1.25 billion to settle a U.S. regulator's claims that the investment bank sold faulty mortgage-backed securities to Fannie Mae and Freddie Mac.

Morgan Stanley took a $150 million charge, reducing fourth-quarter and full-year 2013 earnings by 5 cents a share, according to a regulatory filing today by the New York-based firm. That would bring last year's earning per share to $1.36.

The Federal Housing Finance Agency sued 18 banks in 2011 seeking to recoup some of the losses taxpayers covered when the government took control of the failing mortgage-finance companies in 2008. Seven banks, including JPMorgan Chase & Co. and Deutsche Bank AG, agreed to pay a total of almost $8 billion last year to settle claims they sold faulty mortgage bonds to Fannie Mae and Freddie Mac.

Morgan Stanley said last month it added $1.2 billion to legal reserves in the fourth quarter related to mortgage-backed securities litigation and investigations. The firm disclosed in a filing in November that the case involved the sale of $11 billion of mortgage-related securities.

Denise Dunckel, a spokeswoman for FHFA, confirmed the settlement.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

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