On Tuesday, as reported by
Reuters
,
American International Group Inc.
's (
AIG
) attempts to intervene in
Bank of America Corporation
's (
BAC
) $8.5 billion mortgage bond settlement case were spurned. New York
state Supreme Court Justice Barbara Kapnick not only dismissed the
allegations of AIG, but also of the other investors.
Reasons Behind AIG's Opposition
Along with a group of investors, AIG had earlier opposed BofA's
deal, citing the settlement as substantially inadequate. They
wanted the settlement deal to come under Article 77, a special
proceeding under which the scope of inquiry would amplify in the
form of plenary action.
According to AIG, conversion of the settlement case into limited
proceeding will provide the investors with a chance to scrutinize
and consider whether the compensation offered to them by BofA was
sufficient and without any involvement of its personal gains.
AIG claimed that
The Bank of New York Mellon Corporation
(
BK
), Countrywide's mortgage-backed securities (MBS) trustee, and
several institutional investors manipulated the deal in such a way
that the investors could not make out if the settlement was in
their favor.
However, it appeared that AIG's intention to interfere in the
settlement deal was hugely influenced by its separate individual
court case against BofA. This lawsuit was filed to recover a $10
billion loss on mortgage investments, which according to AIG
occurred due to misrepresentation by BofA.
Objections in the Past
In March 2012, a similar lawsuit filed against BofA by a group
of investors, led by Walnut Place group, was also dismissed. The
litigation had charged BofA's Countrywide Financial Corp. unit,
which the bank acquired in 2008, of making wrong representations
and warranties about the loans that backed these securities.
Earlier in this month, New York's Attorney General (
AG
) Eric Schneiderman opposed the deal. According to the AG, the
compensation that BofA is giving to the investors is inadequate
compared to the losses incurred. The objection to the mortgage
settlement deal comes after the case was transferred from the
federal to the state court in late February.
Earlier, in August 2011, the New York AG had raised an objection
against the deal and won the approval of the federal court judge to
intervene and take part in the case. But, with the settlement deal
again transferred to the state court, he has to file for the
permission to participate in the case again.
The Story Behind
In June 2011, BofA had entered into an agreement to pay $8.5
billion for its legacy Countrywide mortgage repurchase and
servicing claims. This deal was struck between BofA, BNY Mellon,
Pacific Investment Management Co.,
MetLife Inc.
(
MET
),
BlackRock Inc.
(
BLK
) and a group of about 20 investors who suffered huge losses for
their investments in MBS that were sold by Countrywide prior to the
housing market failure.
The agreement basically covered most of BofA's legacy
Countrywide- issued first-lien MBS repurchase exposure. It
represented 530 trusts with original principal balance of $424
billion and total current unpaid principal balance of about $221
billion.
Conclusion
The dismissal of the lawsuits filed by AIG and Walnut Place, the
two key complainers of the settlement deal, will provide the much
needed conviction to BofA's efforts to successfully close the
settlement deal.
On the other hand, the acquisition of Countrywide resulted in
elevated mortgage exposure for BofA, compared with its peers.
Following the collapse of the housing market, mortgage repurchases
claim risk for the company grew manifold. This has significantly
drained the company's bottom line over the last several
quarters.
Moreover, with the new objections raised by the New York AG,
there might be a delay in getting the approval. However, if the AG
participates in the settlement deal, the investors will have a
chance to get a better deal from BofA.
Currently, the shares of BofA have a Zacks #3 Rank, which
translates into a short-term Hold rating. Additionally, we maintain
our long-term Neutral recommendation on the stock.
AMER INTL GRP (
AIG
): Free Stock Analysis Report
BANK OF AMER CP (
BAC
): Free Stock Analysis Report
BANK OF NY MELL (
BK
): Free Stock Analysis Report
BLACKROCK INC (
BLK
): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
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