AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement

American International Group (AIG) and Maiden Lane II dismissing lawsuit against the Federal Reserve Bank of New York regarding the $182.3 billion financial bailout that the insurer received during the 2008 economic crisis. In dispute was whether AIG still had the right to pursue a lawsuit over residential mortgage-backed securities losses and if the company had moved $18 billion of litigation claims to Maiden Lane, which is a New York Fed-created entity.

An AIG spokesperson said that in the wake of a recent ruling by a district judge in California that the company did not assign $7.3 billion of the claims to Maiden Lane, both are dropping their action without prejudice. This means that AIG can now pursue Bank of America (BAC) for these claims, which is what the insurer wants to do.

Bank of America had said that AIG could not sue it over the allegedly fraudulent MBS because the latter transferred that right when the New York Fed bought the instruments in question 2008. However, according to Judge Mariana R. Pfaelzer, even if the New York Fed meant for Maiden Lane II to have these claims, that intention was not made clear.

On Tuesday, in New York State Supreme Court, the insurer argued that the proposed $8.5 billion settlement reached between the bank and investors in MBS from Countrywide Financial Corp. is not enough. The judge there is trying to determine whether to approve the settlement, reached with investors who claimed that the firm had misrepresented the mortgages backing the securities.

AIG is one of a number of entities that oppose the settlement. At the hearing, one of its lawyers questioned why the settlement was merely $8.5 billion when investors initially asked for $50 billion.

AIG also is arguing that there may be a conflict of interest with those that arrived at the proposed settlement amount. The insurer is questioning whether trustee Bank of New York Mellon (BK), which does a lot of its trustee business with Bank of America, did a good enough job of researching the risks involving successor liability and investigating the loan files. Bank of NY Mellon also is the trustee for 530 trusts that are holding the securities under dispute. Another investor supporting the current proposed settlement is BlackRock Inc, which also has a strategic relationship with the bank.

Meantime, the attorney who negotiated the $8.5 billion proposed settlement between BofA 22 institutional investors says that not only is this the biggest settlement in the history of private litigation, but also it is worth almost two times as much as Countrywide, which is valued at $4.8 billion.

AIG argues against $8.5 billion settlement with BofA, Reuters, June 4, 2013

Court allows AIG to sue Bank of America for fraud, The Boston Globe, May 8, 2013

More Blog Posts:
AIG Wants to Stop Former CEO Greenberg From Naming It as a Defendant in Derivatives Lawsuit Against the US, Stockbroker Fraud Blog, April 13, 2013

Bank of New York Mellon Corp. Must Contend with Pension Fund Claims Over Countrywide Mortgage-Backed Securities, Institutional Investor Securities Blog, April 10, 2012

Bank of America Subpoenaed by Massachusetts Over Bryn Mawr CLO II Ltd. and LCM VII Ltd. CLOs that Cost Investors $150 Million, Stockbroker Fraud Blog, February 14, 2012