More Bank of America Deathwatch: AIG to Seek $10+ Billion for Dud Mortgages

Wow, this couldn’t be happening to a nicer bank (well take that back, JPM and Goldman are tough competitors).

As you may recall, in the previous quarter, Bank of America announced its $8.5 billion mortgage settlement, which is now looking pretty wobbly, since a variety of unhappy parties, the latest being New York attorney general Eric Schneiderman, have taken aim at it. And Delaware attorney general Beau Biden is reported to be joining the pile on this week. This means either no deal, or a very different deal (almost certainly with bigger numbers attached) after a long slugfest, um, negotiations. The Charlotte bank had said it would increase loss reserves in the second quarter by $20 billion (which included this $8.5 billion) and claimed this would put its mortgage woes behind them. Yours truly was skeptical, and the market reacted badly when it saw the revelation in their 10-Q filing just released, that the bank was going to take more losses on Fannie and Freddie putbacks than previously expected.

The latest revelation, that AIG is expected to file a suit that will seek more than $10 billion in damages against Bank of America on Monday, comes from Louise Story and Gretchen Morgenson of the New York Times:

The American International Group is planning to sue Bank of America over hundreds of mortgage-backed securities, adding to the surge of investors seeking compensation for the troubled mortgages that led to the financial crisis.

The suit seeks to recover more than $10 billion in losses on $28 billion of investments, in possibly the largest mortgage-security-related action filed by a single investor.

It claims that Bank of America and its Merrill Lynch and Countrywide Financial units misrepresented the quality of the mortgages placed in securities and sold to investors.

Note that this is yet another representation and warranty suit, the very same type of liability that BofA was trying to extinguish in its $8.5 billion settlement. Clearly BofA thinks that the amount of the settlement, which looks to be 3.5% of the estimated liability, is a little light(some of the aggrieved parties say the liability across all of the 530 pools included in the settlement is $242 billion). MBS rep and warranty cases have never gone to trial, since they are too costly to perfect (they wind up being fought on a loan by loan basis, even if sampling is done, since the plaintiff must not only establish that the loans were worse than promised, but also that they went bad because they were substandard, not because the borrower lost his job or suffered a medical emergency or had some other “shit happens” normal underwriting loss).

The story also reports that AIG is readying similar suits against other logical suspects, such as Goldman Sachs, JPMorgan Chase and Deutsche Bank, so expect big financial stocks to be under even more pressure when the market opens (I wonder if this story had anything to do with S&P futures going from down more or less twenty points in the early part of the Asian trading day to minus 32 points now).

One gratifying aspect is that Story and Morgenson spend most of the article hectoring the officialdom for doing nothing about bank misdeeds:

The private actions stand in stark contrast to the few credit crisis cases brought by the Justice Department, which is wrapping up many of its inquiries into big banks without filing any charges. The lack of prosecutions — the Justice Department has brought three cases against employees at large financial companies and none against executives at large banks — has left private litigants, mainly investors and consumers, standing more or less alone in trying to hold financial parties accountable.

“When federal authorities don’t fulfill their obligation to enforce the law, they essentially give an imprimatur to the financial entities to do whatever they want and disregard the law,” said Kathleen C. Engel, a professor at Suffolk University Law School in Boston. “To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general.”

The Administration and some state attorneys general are still carrying on with the farce of a settlement of their own, having conducted zip in the way of meaningful investigations. They ought to be ashamed, but I assume they are too badly indoctrinated to be capable of such sentiments any more.

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  1. psychohistorian

    I just hope they keep processing transactions through the end of this week so I can have everything moved. Thanks for the heads up Yves…. I am moving as fast as I can to get out of BofA.

    An anecdotal note about my process is that the folks on the floor of BofA and CFCU that I am moving to are really not knowledgeable about what is going on….some serious blank stares and none ever heard of Shock Doctrine.

    Raising/educating the public consciousness is a daunting task but must be done or we will stay mired in our manipulated reality.

    1. Jim A

      Yes. The fine print on those ratings is pretty much the equivalent of “For entertainment purposes only.”

      1. Jim A

        Oops. Pressed the wrong “reply” the above was meant as a response to appointmetotheboard below.

  2. anonymoose

    Anyone have thoughts on how this would affect their treatment of non-performing mortgages, if at all? I’ve got a mortgage with them but lost my job. My new job pays much less, so I cannot afford this house over the long run (savings running out). I’m looking for a real estate agent to pursue a short sale now, and if that doesn’t work, foreclosure may be inevitable. Anyone have thoughts about whether this would affect someone in my situation?

    1. Yves Smith Post author

      The banks have been terrible about taking short sales seriously. I’d try getting some legal help to see if you can escalate the matter. Many law schools have what amounts to Legal Aid type services, I would call to see if you can get some advice here. Mortgage counselors are another route for getting advice.

      Please indicate what state you are in, readers might be able to give you more specific pointers.

      1. Odd Job

        Rather then nebulous, media-esque “hear no evil” advice, do a bankruptcy petition straight away and do not send anymore payments. I don’t care if you’re bank is Corporate Good Fella, attack!

        1. Inquiring Drunks Wanna Know

          While Financiers’ Goons are throwing people out of their broken down cottages, the TBTF executive salaries are increasing along with profits. TBTF is like the monster in a teenage horror movie, the fans keep hopin’ the local sheriff will blow the demon’s head clean off, but the monster already owns the local sheereeef. And worse, the whole situation is real. For whatever reason, Bank of ‘Murica alone is being brought to slaughter, when other intrasigent miscreants similarly must update their resumes.

    2. razzz

      While you are waiting to figure things out, request the note along with any documents supporting the note for your mortgage via a certified letter to the bank. No response or bogus paperwork will make your decision making easier.

  3. hermanas

    That “private actions” pursue justice where the suppossedly public D.O.J. wont is mind-bending. I guess turn-about is fair play.

    1. Yves Smith Post author

      I’m stunned we don’t have one. Asking my agent to ask my behind the eight ball publisher

  4. ella

    So when will AIG sue all of the companies who bought CDS’ based on doggy debt? Oh, me… AIG sold the CDS’. Glass houses anyone?

    1. psychohistorian

      Thanks ella,

      As someone who protested with a NO BAILOUTS sign over a local freeway in 2008 I was wondering the same.

  5. LeeAnne

    I don’t think there’s a substantial difference between $8B and $B242 in the scheme of international banksters who can and do counterfeit unlimited amounts of currency for any purpose whatsoever.

    For this purpose, to continue and preserve the residential real estate ‘securitizaiton’ system, they have determined to sacrifice the system of law in the developed world. Indeed, the very purpose of ‘securitization’ of residential real estate was to make money certainly, but at the same time, to void the legal system that protected individual property rights while extending cancellation of Glass Steagal to the point of eliminating SEC law protection for investors.

    And, I’m not impressed with Morgenstern’s whisper of a mention that justice isn’t being served when the Schneiderman story is HUGE and has been successfully thrown off air by phony S&P and PPT action.

    A couple of comments from the media is worth repeating. That securitization are not securities at all is the big deal:

    ” …the company [Bank of America] could be faced with the prospect of having New York’s top legal officer determining that untold billions of dollars’ worth of mortgages turned into securities by Countrywide, the nation’s largest mortgage company when purchased by Bank of America during the credit crisis, aren’t really securities at all due to failures in the security-creating process.”
    Shahien Nasiripour


    One of the stumbling blocks to a settlement is the refusal by Mr Schneiderman to grant the banks broad indemnity from future legal action such as the filing he made on Thursday.”
    Financial Times
    New York challenges $8.5bn mortgage settlement
    By Tom Braithwaite in New York

  6. DavidE

    Good! Take the lowlifes to court. The Obama administration has gotten its just desserts for its “see no evil, prosecute no evil” policies with the S&P downgrade. Criminal organizations have to be fought and the banks that issued liars loans were criminal organizations.
    As were the rating agencies that issued the Triple A ratings.

  7. Jim Haygood

    From ZeroHedge this morning:

    BAC CDS just jumped to the highest since June 2009, hitting 235 bps after exploding by almost 10% overnight.

    Let it bleed! ;-)

      1. Jim Haygood

        Oops, BAC down 17.5% at lunchtime.

        I’m worried that Yves Smith gets hauled before an investigative hearing along with S&P, as Congress shoots the messengers.

  8. Francois T

    In sync with the Chaos and Complexity Theory, here’s another grain of sand in the financial fraud pile:

    From Chris Whalen via Twitter:
    “AARP sues Wells Fargo, Fannie Mae over reverse mortgage foreclosure

    As for this statement:

    “When federal authorities don’t fulfill their obligation to enforce the law, they essentially give an imprimatur to the financial entities to do whatever they want and disregard the law,”

    You don’t say! Everyone who has been a parent paying attention could’ve told you the same; if you do not punish an unruly child who keep cheating and breaking the rules, the message will be obvious “It’s OK to disregard the rules”.

    I wonder if President Obama apply this “Look Forward, Not Backward!” formula when it comes to discipline in his own household.


  9. Stupendous Man - Defender of Liberty, Foe of Tyranny

    I am one of those private attorneys general, doing the unpaid work our federal and state regulators, law enforcement, court and judicial officers and elected representatives ARE PAID TO DO, BUT REFUSE TO DO.

    Any time the consciousness is raised among the masses in sufficient numbers I have my pitchfork and rake ready at hand.

    1. steelhead23

      Actually, you are early. Yes, early. It is clear that there was bad policy, poor regulation, and rampant fraud. Expecting the bad policy makers to fix this, especially given the revolving door between finance and politics and the worship of power, is a tad like wanting the police dog to bite its handler. It is absolutely necessary for the aggrieved parties to attack the banks. It is in the courts where this game is going to get played. Stuff will come out. It will get personal. It is possible that politicos will attempt to protect the big dogs – like pass laws that make certain bad acts legal, grant immunity, commute sentences, etc. That would be the time for pitchforks. And yeah, I’m pretty sure that’s coming.

  10. JB

    So if I have several BOA savings and checking accounts, should I get out? If so, to where….it seems the small banks are closing left and right here in Georgia, and the big ones are starting scare me. My mattress isn’t big enough or secure enough to store my money (ha)

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