The deal, announced yesterday, will result in a $1.8bn (£1.16bn) charge for Morgan Stanley in the fourth quarter. After a tax credit, the bank will lose $1.2bn.
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.
The agreement will extinguish those contracts, which have added to swings in Morgan Stanley’s quarterly earnings for the past five years.
It will also free up $5bn in capital and lift the bank’s Tier 1 common ratio by 75 basis points under new, tougher capital rules.