Image copyright Getty Images Image caption Morgan Stanley's legal expenses saw its net income hit in 2013 after mistakes made in the sub-prime mortgage crisis

US banking giant Morgan Stanley has agreed to pay $1.25bn (£765.5m) to settle a lawsuit over the sale of mortgage-backed securities.

The money will be paid to the US regulator that oversees Fannie Mae and Freddie Mac mortgage guarantee firms.

US taxpayers had to rescue the two firms in 2008 in a bailout worth $187bn during the financial crisis.

Morgan Stanley joins other banks, including JP Morgan Chase and Deutsche Bank, in settling with the regulator.

The banking giant will add an additional $150m to its legal reserves as a result of the settlement with the US regulator, the Federal Housing Finance Agency (FHFA).

Other settlements

The US government filed lawsuits against 17 financial institutions in 2011 over the sale of residential mortgage-backed securities

The mortgage securities became toxic when the US housing market collapsed.

In December 2013, Germany's biggest lender, Deutsche Bank, agreed to pay $1.9bn to settle a lawsuit with FHFA.

The German bank had been accused of breaking state and federal laws when it sold financial products backed by mortgage loans to Fannie Mae and Freddie Mac between 2005 and 2007.

One month prior, in November 2013, US bank JP Morgan Chase agreed to a $13bn settlement with the US regulator for misleading investors during the housing crisis.

It was the largest settlement ever between the US government and a corporation.

At the time, JP Morgan Chase acknowledged it had made serious misrepresentations to the public, but said it did not violate US laws.

Bottom line

Morgan Stanley's quarterly net income for the October-to-December period last year was more than halved by heavy legal fees relating to the mortgage-backed securities.

The lender's fourth quarter earnings, which were reported earlier this month, were $433m, down from $982m a year earlier.

Legal expenses were $1.2bn.

US banking giants Citigroup and JP Morgan were also affected by legal costs stemming from the sub-prime mortgage crisis.

Morgan Stanley said its legal costs were "specifically litigation and investigations related to residential mortgage-backed securities and the credit crisis".