Bank of America has agreed to pay $23 million in restitution to Kentucky Retirement Systems over fraudulent mortgage-backed securities that fueled the 2008 financial crash.
The agreement is part of a $16.65 billion settlement with six states attorneys general, which the U.S. Department of Justice announced in a news conference Thursday.
The bank has agreed to pay a $5 billion cash penalty, in addition to $7 billion worth of "consumer relief" and disbursements to individual states, making it the largest payout by a major financial institution since the 2008 crash.
Kentucky Attorney General Jack Conway announced the details of Kentucky's share of the settlement in a conference call from Washington. He said the commonwealth will recoup $23 million toward the more than $21 million in losses incurred by KRS over fraudulent securities that the pension's investment team purchased from BofA and its subsidiaries.
"Classic securities fraud 101," Conway said in the conference call. "In essence, that Bank of America entities knew that they were packaging subprime mortgages into the securities that they were marketing yet were not informing investors about the risk inherent in the securities they were selling."
In addition to the $23 million, Kentucky will share $150 million with Delaware and Maryland.
Conway said the money will be disbursed over the next couple of years, and will go toward providing lending in distressed communities. The federal government will appoint an independent monitor to oversee the funds, Conway added.
Bank of America could be charged with additional penalties if it is found to have improperly disbursed those funds.Conway said he's unsure how much of the $150 million will go to Kentucky, but the money will be divided according to the amounts of foreclosure losses incurred by consumers.
Between 2004 through 2009, Conway said KRS invested in bundled securities that were originally spun off of risky subprime loans issued by Bank of America and its subsidiary companies (including the notorious mortgage lender Countrywide Realty). Bank of America then processed and sold off home loans that were known by the company to be subprime and were bundled into securities and sold to other banks and investors without disclosing their risky nature.
The attorney general added that his investigation into the deals brokered by KRS were made without the knowledge that Bank of America was marketing junk securities, and that no wrongdoing occurred on the part of KRS.
KRS executive director Bill Thielen said he could not identify which specific investments KRS brokered with Bank of America which led to the losses, nor how many.
Thielen said that while the $23 million recovery is welcome, it won't do much to shore up the pension's current outstanding liability of $17.6 billion.
"$23 million doesn't really move the needle," he said. "Although it's welcomed, certainly, any influx of additional moneys is welcomed, and the return of any additional moneys we lost is welcomed, as well."