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.