One of the world’s largest investment banks has agreed to put $130 million into the nation’s biggest public pension system to settle accusations it knowingly sold bad investments that caused the retirement fund for millions of workers to lose money.
California Democratic Attorney General Xavier Becerra announced the settlement with Morgan Stanley on Thursday. The bank will pay $150 million. Of that, $122 million will go to the California Public Employees’ Retirement System and $8 million will go to the California State Teachers’ Retirement System. The rest will go to the Attorney General’s Office.
Thursday’s settlement is California’s latest effort to recover the billions of dollars it lost during the financial crash of 2008, when banks rushed to approve mortgage loans in the mistaken belief the homes would not lose their value even if the buyers failed to pay the money back. But home values plummeted, leading to a worldwide financial crisis.
Including Thursday’s settlement, Becerra said California has recovered $1.3 billion from banks and other financial institutions since 2008.
The settlement is a small one for Morgan Stanley, a company that earned $2.4 billion in profit from a total of $10.3 billion in revenues during the first three months of 2019. But it is significant because it is the company’s last settlement with government agencies related to the financial crisis. The bank agreed to pay the federal government $2.6 billion in 2016.
Becerra announced the settlement during a news conference in Los Angeles. From 2003 to 2007, Morgan Stanley sold California’s two largest pension systems bundles of thousands of mortgage loans. But Becerra said the financial giant did not adequately assess those loans to remove the risky ones, and then lied about it to the pension systems.
A Morgan Stanley spokesman declined to comment on Thursday. But the company denied the allegations in a settlement agreement.
“They may tell you they didn’t do anything wrong … but they gave us $150 million. You don’t do that for free,” Becerra said. “Whether or not someone admits it or not … this settlement involves a company that lied and misrepresented to investors what it was selling.”
Becerra and his top deputies repeatedly said Morgan Stanley lied and engaged in fraud, but no one at the company was charged with a crime. Becerra said the time limit authorities had to bring charges expired before they could gather enough evidence.
“We need better laws to make it more possible for us to go after the criminal conduct and not simply the civil miscarriage of justice. That is a big frustration,” Becerra said. “What you try to do is make those who violate the law pay a price for having done so.”
Becerra said the bad investments from Morgan Stanley cost the pension systems more than $100 million. Together, California’s two largest pension systems cover more than 2.5 million people. Their assets have a combined market value of more than half a trillion dollars. Still, the plan for state and local employees has about 68 percent of the money it needs to pay benefits over the next few decades, while the plan for teachers has about 63 percent of the money it needs.
“Helping these funds recover their losses matters, because what it means is retirement security for a teacher, for a police officer, a firefighter: servants of our state,” Becerra said.