Morgan Stanley and MBIA have settled a series of lawsuits.

“The comprehensive settlement terminates outstanding credit default swap protection purchased from MBIA on commercial mortgage-backed securities and resolves pending litigation between the two parties for consideration of a net cash payment to Morgan Stanley,” the bank said in a press release.

The settlement was announced Tuesday morning. As part of the settlement, Morgan Stanley will withdraw from litigation that challenges MBIA’s spin-off of its municipal bond insurance portfolio and MBIA will drop its suit alleging Morgan misrepresented the risks of the securities it insured.

MBIA’s problems stemmed from the busted real estate bubble, during which many banks made dubious loans and securitized them. MBIA and other companies insured these securities through issuing credit default swaps to Morgan Stanley and other banks.

When the recession hit in 2008, real estate values plunged, unemployment spiked, and many homeowners stopped making payments on their mortgages. The securities turned out to be worth far less than promised.

After the securities failed, Morgan Stanley and other banks asked MBIA to make good on their pledge to insure them.

In 2009, MBIA decided to place its financially healthier municipal insurance business in a new unit and leave its unhealthy mortgage insurance unit to pay claims. In response, Morgan Stanley and many other banks sued MBIA.

For its part, MBIA sued Morgan Stanley and other firms for misrepresenting the soundness of the mortgage loans that the banks had MBIA insure.

However, MBIA had insured $4 billion in MBS before the financial crisis, according to the Wall Street Journal. By accepting the settlement, Morgan Stanley is acknowledging that it will never receive the full amount.

“The pre-tax loss on the settlement will approximate $1.8 billion ($1.2 billion after tax) in the current quarter,” Morgan Stanley said.

“The settlement has the effect of significantly reducing risk-weighted assets and releasing the equivalent of approximately $5 billion of capital under the Basel Committee’s proposed Basel III framework, thereby increasing the pro forma Tier I Common ratio under Basel III by approximately 75 basis points by the end of 2012,” Morgan Stanley said.

MBIA declined to comment on the settlement.

As of 10:30 a.m. Eastern Standard Time Tuesday, MBIA’s shares were up 4.5% for the day. At the same point, Morgan Stanley’s shares were up 2.9%.

The Royal Bank of Scotland reached a separate settlement with MBIA in mid-November. MBIA also recently reached a settlement with HSBC Holdings.

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