American International Group’s lawsuit against Bank of America was widely reported yesterday, as news outlets revealed that the financial firm initiated the suit in an effort to recover more than ten billion dollars in losses resulting from asset-backed securities they purchased from the bank. According to the New York Times’ financial reporters Gretchen Morgenson and Louise Story, AIG “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,” say inside sources.
As many of you many now know, BoA has faced intense scrutiny over the last several weeks. A few weeks back, we covered the controversy clouding the bad loan settlement the bank negotiated with investors, in which BoA managed to secure a tremendously favorable outcome. Just a few days ago, Morgenson penned a follow up piece documenting New York Attorney General Eric Schneiderman’s decision to challenge the settlement. Apparently, Schneiderman takes issue with a number of the settlement’s terms, particularly those that preclude private litigants who may have suffered from the bank’s troubled loans from making a further claim.
The settlement has prompted other investors, like AIG, to join in on the litigation against the bank. As Morgenson and Story’s article points out, BoA has encountered 25 suits related to the financial crisis thus far, many more than any other American bank. Moreover, the journalists correctly tie this ongoing litigation into a broader theme: the federal government’s inability to successfully prosecute members of the banking industry.
Citing legal scholars and the insiders at the Justice Department, the writers imply that the lack of government intervention may be the result of the higher standard of proof necessary to secure a criminal conviction. This notion has been buttressed by the fact that federal prosecutors were unable to deliver a conviction against Washington Mutual and Countrywide, two banks that have been involved in Justice Department investigations. These failures, unfortunately, create a situation in which investors must regulate the banks through litigation, which is extraordinarily costly and inefficient for all parties involved.
Whether the suit has any merit is a question in and of itelf—BoA rebuts AIG’s claims by arguing that the securities at issue appeared safe to both parties, and that their decline was the result of an unexpected depression in the housing market. BoA further contends that “AIG is the very definition of an informed, seasoned investor,” and that they fully assumed the risk in purchasing the bank’s potentially high yield securities.
As we have stated several times, the underlying theme that constitently presents itself throughout the media analysis of BoA’s pre-courtroom saga is the lack of regulation in the securities industry. While it is unclear as to which industry player has the upper hand here, all bear some fault—BoA for marketing the securities in the first place, AIG for creating a market for them, the ratings agencies for ensuring their legitimacy, and perhaps most of all, the government for failing to regulate. Had these toxic assets not hit the market in the first place, the transaction and subsequent dispute would never had occurred and the economy may be much better off. Along with it, our clients, many of whom had mortgages resold to Wall Street banks before the crisis, would have been better off, too.