AIG sues Bank of America over mortgages
Dow Jones Newswires
09 Aug 2011
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American International Group sued Bank of America yesterday in an effort to recover more than $10bn it lost on mortgage investments, and separately filed an objection to the lender's proposed settlement with other mortgage bond investors.
AIG's lawsuit and its attempt to intervene in the much-publicised $8.5bn settlement throws another obstacle in the way of Bank of America's efforts to put its mortgage woes behind it.
The suit over the $10bn in losses alleges 'massive fraud' by Bank of America and two units it acquired, Merrill Lynch and Countrywide, saying they packaged securities that were backed by 'hundreds of thousands of defective mortgages,' according to the lawsuit filed in New York Supreme Court.
The suit says Bank of America and its subsidiaries inflated home appraisals, allowed borrowers to misstate their income, ignored internal warnings about shoddy underwriting and selected the riskiest mortgages for securitisation.
AIG's suit references information gathered from several confidential witnesses, including one who alleged a vice president at Bank of America said he 'didn't give a flying f---' about whether loans met the bank's underwriting standards.
AIG contends it lost more than $10bn on about 350 residential mortgage-backed securities that it initially bought between 2005 and 2007 for about $28bn from businesses that are now part of Bank of America. The size of AIG's losses makes the suit one of the largest of its kind brought by an investor since the housing bubble popped.
Bank of America spokesman Lawrence Di Rita said the bank's disclosures on the quality of mortgage bonds were robust enough for sophisticated investors, and called AIG 'the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors. We reject AIGs assertions and allegations.'
The insurer, Di Rita said, 'recklessly chased high yields and profits throughout the mortgage and structured finance markets.'
AIG spokesman Mark Herr said Bank of America was attempting 'to blame others for its own misconduct.
'Investors, no matter how sophisticated, were entitled to rely on its numerous written representations about the securities it sold,' Herr said. 'Now that it is clear that those representations were false, Bank of America must be held to account.'
The lawsuit contends Bank of America knowingly misrepresented its underwriting standards in its descriptions of the mortgage-backed securities purchased by AIG.
An analysis of 262,322 mortgages, just a fraction of the loans that were pooled in the mortgage securities AIG purchased, found 40% of the loans violated the underwriting standards described by the bank when it sold the securities, the lawsuit alleges.
Many of the mortgage bonds AIG bought and suffered losses on are still in a vehicle called Maiden Lane II that's sitting on the balance sheet of the Federal Reserve Bank of New York. The vehicle also holds securities originated by banks including Goldman Sachs, Deutsche Bank and others.
In a related action, AIG filed papers yesterday in an attempt to intervene in the proposed $8.5bn settlement between Bank of America and Bank of New York Mellon, which served as trustee on dozens of Bank of America mortgage securities.
The attempt to block the settlement in New York State Supreme Court comes on top of an effort by New York Attorney General Eric Schneiderman to intervene. Like Schneiderman, AIG contends in its motion to intervene that the settlement is inadequate and rife with conflicts of interest.
In a recent securities filing, Bank of America said failure to win court approval for the settlement, or withdrawal from the agreement, 'could have a material adverse effect on our cash flows, financial condition and results of operation.'
Many of the mortgage bonds cited in AIG's lawsuit were purchased when the insurer used to have a securities lending business. The now-defunct division lent out corporate bonds and other securities owned by AIG's insurance units, in exchange for short-term cash loans from banks that AIG could invest for additional yield.
A Congressional Oversight Panel report on AIG last year noted that rather than investing that cash in low-risk, short-term securities for a modest yield, 'AIG invested in more speculative securities tied to the RMBS market.'
In 2008, when the housing market weakened and sub-prime bonds lost substantial value, AIG was holding tens of billions of dollars in mortgage bonds that it couldn't sell without incurring large losses. In the fall of that year, when banks asked for their cash back, the insurer had difficulty returning the money and had to use use federal aid to repay the banks after being bailed out.
Shares of Bank of America were down 16% to $6.86 in recent trading; shares of AIG were down 10.1% to $22.56.
-By Erik Holm and Serena Ng, 212-416-2892; erik.holm@dowjones.com
( David Benoit and Dan Fitzpatrick contributed to this article)
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