Morgan Stanley (MS) is taking a step back to reach a mutually beneficial settlement with bond insurance firm MBIA. The investment bank announced Tuesday that it's willing to take a pre-tax loss of $1.8 billion in the current quarter to resolve outstanding legacy exposures.

The move will allow Morgan Stanley to release about $5 billion of capital due to reduced risk-weighted assets. Instead of putting this money aside as cushion against credit losses and write-downs under the proposed Basel III, Morgan Stanley will be able to reinvest it in client-focused businesses.

The comprehensive settlement terminates outstanding credit default swap Morgan Stanley purchased from MBIA to protect holdings of commercial mortgage-backed securities and resolves pending litigation between the two.

MBIA will withdraw its residential mortgage backed securities related suit against Morgan Stanley and Morgan Stanley will withdraw from suits challenging MBIA's restructuring.

The settlement will increase Morgan Stanley's Basel III Tier 1 Common ratio - a non-GAAP way to assess a company's capital adequacy -- by approximately 75 basis points by the end of 2012.

"It's critical that we reposition for the new regulatory environment and do so quickly," James Gorman, president and chief executive officer at Morgan Stanley said in the statement.

Shares of Morgan Stanley opened higher on the news. It's currently up 2.15 percent, or 33 cents, to $15.71 in morning trading.