AIG: Bank of America’s Settlement Just Not Enough

Tuesday marked the second day of a hearing before Justice Barbara Kapnick who is considering the $8.5 billion settlement between Bank of America Corp (NYSE:BAC) and investors in Countrywide Financial Corp negotiated back in 2011.

The issue comes before the State Supreme Court in Manhattan which will assess the 2011 settlement that came when Countrywide was blamed for its misrepresentation of mortgages underlying its securities. Bank of America initially acquired Countrywide during the financial crisis in 2008 for $4.1 billion.

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Two years have passed since the companies struck a deal, and now, many groups are gearing up to argue for its rejection. American International Group (NYSE:AIG), one of deal’s main combatants, is arguing that Bank of America is not paying enough, as the losses that resulted from the securitization of the loans are expected to exceed $100 billion. A lawyer for AIG, Daniel Reilly, argued in court Tuesday that Bank of America had a “strategic relationship” with BlackRock (NYSE:BLK) and Bank of New York Mellon Corp (NYSE:BK), which is why the deal sunk to $8 million from its initial $50 billion. BlackRock is indeed one of the investor groups who supports the deal, as is Bank of New York Mellon, who AIG argues was putting the interests of its partner, Bank of America, before the interests of investors.

But the lawyer responsible for the negotiation of the settlement on behalf of 22 institutional investors, Kathy Patrick, defended her deal on Tuesday, contending that it was “the largest in the history of private litigation and nearly twice the $4.8 billion that Countrywide was worth.”

Moreover, Bank of America never tried to pull the wool over anyone’s eyes, she points out. Bondholders were warned during negotiations that Countrywide could ultimately be put into bankruptcy, as cleared by the Office of the Comptroller of the Currency, the regulator for national banks.

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Other groups also oppose the settlement. Federal Home Loan Banks of Boston, Chicago and Indianapolis, maintain AIG’s same argument that Bank of America’s $8 billion payment is not sufficient, especially since it contributed the last straws to the collapse of the economy in 2008. The lawyer representing Bank of New York Mellon Corp doesn’t agree, explaining that the settlement was “a win for all investors.”

Kapnick will hear the case for the first two weeks in June and then continue in July.

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