The existence of one such secret deal, struck in July between the Federal Reserve Bank of New York and Bank of America, came to light just last week in court filings.
That the New York Fed would shower favors on a big financial institution
may not surprise. It has long shielded large banks from assertive
regulation and increased capital requirements.
Still, last week’s details of the undisclosed settlement between the New
York Fed and Bank of America are remarkable. Not only do the filings
show the New York Fed helping to thwart another institution’s fraud case
against the bank, they also reveal that the New York Fed agreed to give
away what may be billions of dollars in potential legal claims.
Here’s the skinny: Late last Wednesday, the New York Fed said in a court
filing that in July it had released Bank of America from all legal
claims arising from losses in some mortgage-backed securities the Fed
received when the government bailed out the American International Group
in 2008. One surprise in the filing, which was part of a case brought
by A.I.G., was that the New York Fed let Bank of America off the hook
even as A.I.G. was seeking to recover $7 billion in losses on those very
mortgage securities.
It gets better.
What did the New York Fed get from Bank of America in this settlement?
Some $43 million, it seems, from a small dispute the New York Fed had
with the bank on two of the mortgage securities. At the same time, and
for no compensation, it released Bank of America from all other legal
claims.
When I asked the Fed to discuss this gift to the bank, it declined. To
understand how the settlement happened, we must go back to the dark days
of September 2008. With the giant insurer A.I.G. teetering, the
government stepped in. As part of the rescue, A.I.G. sold mortgage
securities to an investment vehicle called Maiden Lane
II overseen by the New York Fed. A.I.G. was bleeding from its toxic
mortgage holdings, many of which were issued by Bank of America, and it
received $20.8 billion for securities with a face value of $39.2
billion.
In 2011, aiming to recover some of that $18 billion loss, the insurer sued
Bank of America for fraud. The case, filed in New York state court,
sought $10 billion in damages from the bank, $7 billion of that related
to securities that A.I.G. sold to Maiden Lane II. Bank of America, for
its part, argued that A.I.G. had no standing to sue for fraud on the
Maiden Lane securities. With the sale, Bank of America contended, the
right to bring a legal claim against the bank for fraud passed to Maiden
Lane II. That entity, controlled by the New York Fed, never brought
fraud claims against the bank.
Not so fast, said A.I.G. Under New York law, which governs Maiden Lane
II, an entity has to explicitly transfer the right to sue for fraud, it
said. The original agreement between the New York Fed and A.I.G. never
specified such a transfer, the insurer contended.
To settle this question, A.I.G. filed a separate lawsuit against Maiden Lane II in a New York court last month.
A.I.G.’s $10 billion fraud case against Bank of America, meanwhile, was
moved to federal court. For pretrial purposes, the bank asked that
Mariana R. Pfaelzer, a federal judge in the central district of
California, oversee aspects of the case involving the bank’s Countrywide
unit, which was in California. Its request was granted. On Jan. 30,
Judge Pfaelzer said she would rule on the issue of who owns the legal
claims.
Initially, in an October 2011 letter to A.I.G., the New York Fed agreed
that the insurer had the right to seek damages under securities laws on
instruments it sold to Maiden Lane II.
But more recently, the New York Fed began helping Bank of America battle
A.I.G. In late December, the New York Fed provided two declarations to
the bank. One stated that Maiden Lane II had “intended” to receive all
litigation claims relating to the mortgage securities, meaning that it
alone would have had the right to sue. Another said that the October
letter was not an interpretation of the Maiden Lane agreement.
But Jon Diat, an A.I.G. spokesman, said in a statement that “A.I.G. and
the Federal Reserve Bank of New York never discussed or agreed on any
transfer of A.I.G.’s residential mortgage-backed securities fraud claims
to Maiden Lane II.” He added that A.I.G. believes “it is the rightful
owner of these claims and remains committed to holding Bank of America
and other counterparties responsible for the harm caused.”
LAST week, the New York Fed opposed A.I.G.’s efforts to have the
question of who owns the legal rights decided in New York, whose law
governs the Maiden Lane II agreement, rather than in California. It was
in this filing that the New York Fed disclosed its confidential July
2012 deal with Bank of America, releasing it of any liability arising
from fraud in the Maiden Lane II securities.
Let’s recap: For zero compensation, the New York Fed released Bank of
America from what may be sizable legal claims, knowing that A.I.G. was
trying to recover on those claims.
- 1
- 2
No comments:
Post a Comment