AIG to Sue Bank of America Over Mortgages
By ERIK HOLM
NEW YORK—American International Group Inc. plans to sue Bank of America Corp. Monday in an effort to recover more than $10 billion it lost on mortgage investments, and intends to object to the lender’s proposed settlement with other mortgage-bond investors.
AIG’s lawsuit and its separate attempt to intervene in the much-publicized $8.5 billion settlement throw another obstacle in the way of Bank of America’s efforts to put its mortgage woes behind it.
The suit over the $10 billion 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 a copy of the legal action AIG representatives plan to file in New York Supreme Court Monday morning.
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 securitization. The lender knowingly misrepresented the underwriting process in its descriptions of the mortgage-backed securities purchased by AIG, the suit alleges.
AIG contends it lost more than $10 billion on about 350 residential mortgage backed securities that it initially bought from Bank of America for about $28 billion. 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 “recklessly chased high yields and profits throughout the mortgage and structured finance markets,” he said.
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.”
In a related action, AIG intends to intervene in the proposed $8.5 billion settlement between Bank of America and Bank of New York Mellon Corp., 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 Mr. Schneiderman, AIG contends in its planned motion to intervene that the settlement is inadequate and rife with conflicts of interest.
Some mortgage-bond investors already have objected to the deal, alleging conflicts of interest that raise questions about the fairness of the deal. Others have said they need more information to decide their course of action.
In a recent securities filing, Bank of America said if it fails to win court approval for the settlement or withdraws from the agreement, its future losses for violations of representations and warranties made to bond investors “could be substantially different” from its estimates and “consequently could have a material adverse effect on our cash flows, financial condition and results of operation.”
Write to Erik Holm at email@example.com