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Morgan Stanley is coughing up $102 million to settle charges that it helped a notorious subprime mortgage lender gouge borrowers in Massachusetts.

The state’s attorney general, Martha Coakley, said Morgan Stanley would provide $58 million in principal reduction and other payments to aggrieved subprime borrowers. It will also pay $23 million to compensate the state pension fund for investment losses and $20 million to the state’s general fund.

Sinking feeling

Coakley said Morgan Stanley helped New Century Financial, one of the most aggressive subprime lenders during the bubble, by bundling the company’s loans into bonds and selling them to pension funds and other institutional investors.

Morgan Stanley earned millions of dollars in fees selling the bonds, which were stuffed with loans that the bank should have known were likely to default, the attorney general said.

“This has become an all-too-familiar pattern in which the deceptive practices of Wall Street devastated homeowners and investors, and ultimately contributed to the collapse of our economy,” Coakley said.

New Century wrote many so-called stated income loans that were particularly subject to abuse, Coakley said. She suggested Morgan Stanley caught onto this in 2005 and 2006 and pulled back from its support for New Century.

But after the California-based lender threatened to take its business elsewhere, Morgan Stanley resumed its sales of loans that Coakley said frequently fell short of the company’s guidelines and basic common sense.

It continued selling New Century bonds until the utter worthlessness of the lender’s underwriting became clear. New Century then collapsed in the spring of 2007 in the opening act of the financial crisis.

“The large majority of New Century loans failed the basic test of their own underwriting guidelines and could only be approved as ‘exception’ loans, which required the presence of ‘compensating factors,’” Coakley said. “Sample reviews by Morgan vendors showed that many of these loans violated the guidelines in several different ways, and about one-third of the randomly sampled loans lacked compensating factors to justify the extension of credit.”

Last year, another big Wall Street bank, Goldman Sachs , agreed to pay $60 million to settle similar charges with Massachusetts.

Morgan Stanley shares, hit hard by worries about a regulatory rollback of its profit prospects and questions about the stability of the global financial system, tumbled 3% to a 52-week low just above $24.