New York, California reap mini-bonanza from Bank of America settlement

NEW YORK/LOS ANGELES Thu Aug 21, 2014 4:34pm EDT

NEW YORK/LOS ANGELES Aug 21 (Reuters) - A clutch of states including California, New York and Illinois will share in a mini-bonanza from the $16.65 billion settlement agreed by Bank of America Corp on Thursday.

The settlement announced by the U.S. Department of Justice calls for the second-largest U.S. bank to pay a $9.65 billion cash penalty on charges that it misled investors into buying troubled mortgage-backed securities, and provide $7 billion of relief to struggling homeowners and communities.

Six states will reap nearly $1 billion between them as well as benefiting from cash for consumer relief credits.

New York and California will both get $300 million in damages, while Illinois receives $200 million, Maryland gets $75 million, Delaware gets $45 million and Kentucky receives $23 million, according to the individual states' attorneys generals.

"One of the benefits of a resolution like this is that we can actually begin to compensate public pension funds that ... were victims of this, as well as help to bring some ... relief to struggling home owners and other consumers who were victims of the financial crisis," said Tony West, Associate Attorney General of the United States.

Illinois' share of the settlement will flow to the state's woefully underfunded retirement systems.

The settlement eclipses the respective $13 billion and $7 billion accords that JPMorgan Chase & Co and Citigroup Inc recently reached to resolve similar claims, but is dwarfed by a $25 billion settlement in 2012 between five of the U.S.'s biggest lenders and 49 states over mortgage malpractice.

Still, some think the settlements do not make up for the damage caused by the 2007-9 financial crisis, sparked by the use of subprime mortgages.

"In the grand scheme of things ... even a settlement like this doesn't begin to compensate the adverse impact on states or the broad population," said James Parrott, chief economist at the Fiscal Policy Institute in New York.

Dennis Kelleher, a former securities and financial markets attorney who now runs consumer advocate group Better Markets, says promises made under the 2012 settlement - particularly pledges by banks to cut red tape and improve service for borrowers - have in many cases not been met.

Kelleher has similar misgivings about the $17 billion deal announced with Bank of America.

"There is no disclosure of the amount of harm done to investors, consumers or clients," Kelleher said. "Once again the Department of Justice has accepted a large dollar amount to give immunity to a Wall Street bank." (Additional reporting by Aruna Viswanatha and Lisa Lambert in Washington, Hilary Russ in New York and Karen Pierog in Chicago; Editing by Bernard Orr)

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