BofA Faced With Lawsuit From AIG, Shares Drop 20%

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In the latest round of score-settling,American International GroupInc. on Monday filed a lawsuit againstBank of AmericaCorp. in New York Supreme Court. It is seeking to recover more than $10 billion on investments in mortgage-backed securities it initially purchased for about $28 billion between 2005 and 2007.

The 187-page lawsuit alleges “massive fraud” by BofA and two units it acquired, Merrill Lynch and Countrywide, saying that they packaged securities that were backed by “hundreds of thousands of defective mortgages.” The lawsuit is one of the largest of its kind brought by a single investor since the housing bubble popped. AIG is likely to file similar suits against others, people familiar with the matter said.

BofA spokesman Lawrence DeRita said the bank’s disclosures on the quality of mortgage bonds were robust enough for sophisticated investors. He called AIG “the very definition of an informed, seasoned investor” and said the insurer’s losses were “solely attributable to its own excesses and errors.”

In June, BofA agreed to pay $8.5 billion to settle claims by a group of high-profile bond investors who took a beating on mortgage bonds issued before the housing market collapsed. AIG on Monday filed an objection to the proposed settlement.

In the lawsuit filed Monday, AIG said BofA 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.

An analysis of 262,322 mortgages, just a fraction of the loans that were pooled in the mortgage securities AIG purchased, found 40% of the loans violated the underwriting standards described by the bank when it sold the securities, the lawsuit alleges.

While the statute of limitations on common-law fraud claims made by AIG in its suit is six years in New York, in January BofA reached a tolling agreement with AIG holding that any claims from Jan. 10, 2005, could still be made, people familiar with the matter said. Typically tolling agreements are made so that a settlement between parties can be reached, these people said.

Shares plunge

The banking giant, which is already reeling from billions in mortgage-related losses and litigation, is now witnessing the effects of this lawsuit.

BofA plunged more than 20 percent, falling $1.66 to close at $6.51, which is their lowest since April 2009, over fears of a slowing U.S.economyand challenges to a multi-billion dollar mortgage settlement.

S&P’s unprecedented recent downgrade of the nation’s debt sparked a massive sell-off that sent the S&P 500 tumbling 6.7 percent.

Bank analyst Jefferson Harralson at Keefe Bruyette & Woods estimates that BofA may have to shell out an additional $3.5 billion on top of the $31.5 billion it has set aside for mortgage settlements.

Bank stocks broadly fell after the downgrading, triggering fears that the global economy is destabilizing.

BofA woes

The suit is the latest legal pressure faced by Moynihan, 51, who took over as CEO last year. Last month, former Countrywide investors including BlackRock Inc. sued BofA after opting out of a $624 million settlement. Plaintiffs said the subprime lender misled shareholders about its finances and lending practices.

BofA shares have been dogged by concerns that mortgage expenses and a stagnating U.S.economy will crimp profit and force it to bolster capital by selling new shares. Moynihan has repeatedly said this year that the firm wont need to issue common stock.

Sources: WSJ, Nypost, Reuters, Bloomberg

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