Morgan Stanley and MBIA Inc. have agreed to a settlement that will remove some risky derivative contracts from the bank's books and end lawsuits the two parties had filed against one another.  The deal, announced on Tuesday, will result in a $1.8 billion charge for Morgan Stanley in the fourth quarter. After a tax credit, the bank will lose $1.2 billion on the agreement. The loss stems from declines in the value of mortgage-backed securities that Morgan Stanley owns. MBIA had been covering losses on the bonds because of credit-default swaps that Morgan Stanley purchased from the bond insurer. Tuesday's agreement will extinguish those derivative contracts, which have added to wild swings in Morgan Stanley's quarterly earnings for the past five years. It will also free up $5 billion worth of capital for Morgan Stanley and lift the bank's Tier 1 common ratio by 75 basis points under new, tougher capital rules. Under existing rules, its Tier 1 common ratio will decline 30 basis points. Morgan Stanley and MBIA also agreed to drop lawsuits against one another stemming from the CDS deals. [Reuters 12/13/11]