New York Fed Bailed Out Bank of America Over Mortgage-Backed Securities Sold to AIG

Recently, a secret deal came to light involving the Federal Reserve Bank of New York bailing out Bank of America (BAC) that released the latter from all legal claims involving mortgage-backed securities losses that the former obtained when the government rescued American International Group (AIG) in 2008. Some believe that the bank was allowed to abscond responsibility even as AIG sought to recover $7 billion that was loss on these same MBSs.

According to The New York Times, as part of its settlement with BofA, the New York Fed obtained $43 million in a securities dispute involving two of the mortgage securities. For no compensation, the bank was released from all other legal claims.

The roots of this settlement can be traced back to 2008 when the government intervened to rescue AIG . Part of that aid involved AIG selling mortgage securities to Maiden Lane II, which the New York Fed oversees. At the time, the insurer was losing money from toxic mortgages, many of which came from BofA. AIG obtained $20.8 billion for securities valued at $39.2 billion.

In 2011, AIG sued BofA for securities fraud in attempted to obtain $10 billion in damages–$7 billion from the Maiden Lane II-related securities. Meantime, Bank of America argued that AIG had no grounds for suing it on these securities, noting that possession of the entitlement to bring a legal lawsuit against the bank had passed to Maiden Lane. New York Fed, which controlled Maiden Lane II, never brought securities claims against BofA.

However, AIG contended that under New York law, which Maiden Lain II is subject to, an entity must explicitly transfer the right to sue for fraud and that the deal between AIG and the New York Fed never specified this switch. AIG then filed a separate MBS lawsuit against Maiden Lane II in New York.

Now, AIG’s $10 billion fraud lawsuit against BofA has gone to federal court. Federal Judge Mariana R. Pfaelzer in California’s central district will rule on who is the claims’ owner.

While the New York Fed agreed in late 2011 that AIG is entitled to seek damages on instruments that it sold to Maiden Lane II, it is now aiding BofA in the latter’s legal fight against AIG, even providing a declaration that Maiden Lane II was the only one entitled to sue. Some, however, are asking why if the New York Fed meant for Maiden Lane II to possess ownership of the right to sue Bank of America it didn’t try to file its own claim for taxpayers rather than discharging the bank from liability. Meantime, the question of whether BofA should be liable for wrongdoing committed by Countrywide during economic crisis has still not been answered.

Don’t Blink, or You’ll Miss Another Bailout, The New York TImes, February 16, 2013

AIG sues NY Fed over right to

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Former Jeffries Director Charged with Securities Fraud Crimes and Sued By SEC Over Alleged Residential Mortgage-Backed Securities, Stockbroker Fraud Blog, February 11, 2013

McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit, Stockbroker Fraud Blog, December 20, 2012

Investment Fraud Lawsuit Against BlackRock Over Exchange-Traded Funds Could Shed More Light on Securities Lending, Institutional Investor Securities Blog, February 18, 2013