Morgan Stanley, NY attorney general in $500-million talks to settle probe: WSJ.com

NEW YORK (Reuters) - Morgan Stanley is in discussions to pay $500 million to settle an investigation by New York's attorney general into whether the Wall Street bank misled investors in taking mortgage bonds that lost value during the financial crisis, the Wall Street Journal reported Sunday in its online edition, citing people familiar with the matter.

A deal with New York Attorney General Eric Schneiderman would likely include some cash from Morgan Stanley as well as consumer relief, the report said.

An agreement between the New York-based financial institution and Schneiderman's office isn't imminent, however, and the terms under discussion have changed, the report said. Aid to struggling homeowners will account for more than half of the total value of the settlement, but the form of the consumer relief isn't clear, according to sources.

Also not clear, the report said is whether Morgan Stanley will need to boost its legal reserves to account for a likely settlement with Schneiderman's office.

Earlier, Schneiderman's office had alleged that Morgan Stanley misrepresented and omitted key details on the health of the loans that underpinned the securities it sold. The firm has said it didn't agree with the allegations. But in March, Reuters reported that Morgan Stanley was in settlement talks.

Morgan Stanley officials were not immediately available for comment.

Matt Mittenthal, a spokesman for Schneiderman, declined comment.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Karen Freifeld; Editing by Eric Walsh)