The “Great Recession” Saga Rumbles On: AIG sues BofA

If AIG get what they want, BofA will be paying them something in the region of $10 billion

As the US suffers a credit rating downgrade and the economy is still struggling to recover from the events of the last four years, ninety private law suits relating to mortgage bonds have been filed, demanding a total of $197 billion.

In one such suit, AIG has sued Bank of America, the largest bank holding company by assets in the United States, over alleged fraud in hundreds upon hundreds of mortgage backed securities.

This may well be the largest mortgage-security-related action filed by a single investor. AIG is seeking to recover a full $10 billion over losses on $286 billion of investments.

In the 200 page complaint, the main contention is that Bank of America misrepresented the value of their mortgage securities in the distributed marketing material; looking at a sample of 200,000 mortgages, the stated metrics for forty percent of the loans were false. Moreover, those 200,000 mortgages are just a fraction of the securities AIG purchased from BofA.

In one case, a borrower claimed to have owned a construction business for 25 years, which sounds all well and good until you realize she’s only 35. 10 year-olds can be ambitious, but it’s usually more a lemonade stand than a thriving construction agency.

AIG is arguing that by providing falsified information to the rating agencies, Bank of America was able to procure better ratings than those which would have accurately reflected reality.

Bank of America, defending themselves, have lashed out at AIG by saying that if the disclosures were robust enough for seasoned investors, they should have been okay for AIG. (Though, given the behaviour of investors between 2000 and 2007, this isn’t saying much.)

Disputing these claims, Mr. Di Rita, a Bank of America spokesman said that “AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets. AIG is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors. We reject AIG’s assertions and allegations.”

The other private suits underway are already revealing suspect activities. One case against Bear Stearns suggests that its employees put troubled mortgages into securitization trusts that it sold to customers, while simultaneously receiving reimbursement — known as apology payments — from the companies that originated the loans.

In stark comparison, the Justice Department cases are being wrapped up with no charges yet filed.

No senior executives have been charged or imprisoned, and no collective government effort has emerged. This stands in contrast to the failure of numerous savings and loan institutions in the late 1980s, after which special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail.

In the wake of this crisis, no accountability has yet been demanded.

In fact, the Justice Department is currently involved in negotiations between big banks and state attorneys general, that will give banks immunity against future claims. Massive portions of the much-lauded Dodd-Frank act have yet to be implemented and lawmakers are currently working to overturn vital provisions. In other words, it’s more a husk of a law than a real reform.

Kathleen C. Engel of  Suffolk University Law School in Boston commented that when federal authorities do not fulfil their obligation to enforce the law, “they essentially give an imprimatur to the financial entities to do whatever they want”

So far, according to the general counsel of the California Public Employees’ Retirement System, private litigants in the hundred largest securities class action settlements have recovered $46.7 billion for defrauded shareholders.

Unfortunately, the costs of such recoveries are rarely borne by the corporations and their executives, but by the companies’ insurers or stockholders.  As a result, the lack of criminal inquiries by the government means that any restitution is being paid for by shareholders who have already suffered from the conduct of big banks.