AIG Plans to Sue Bank of America Over Losses Tied to Mortgage Underwriting

American International Group Inc. (AIG), the bailed-out insurer, sued Bank of America Corp. over $10 billion in losses on mortgage-bond investments, saying it was the victim of a “massive fraud.”

Bank of America and businesses it took over -- Countrywide Financial Corp. and Merrill Lynch & Co. -- misled AIG as they sought to profit off the bundling of mortgages into securities, the insurer said in a complaint filed today in New York State Supreme Court.

“Bank of America’s fraud caused billions of dollars in damage to AIG and we are bringing this suit today to protect AIG and the taxpayers’ stake in it,” Mark Herr, a spokesman for New York-based AIG, said in a statement. “This is not the first lawsuit that AIG has filed against counterparties that have sought to profit at our expense, and we anticipate that it will not be the last.”

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

Deal ‘Unfair’

Last week, New York Attorney General Eric Schneiderman said he opposes the bank’s proposal for an $8.5 billion mortgage-bond settlement that was negotiated with a group of institutional investors. In a court filing, Schneiderman called the deal unfair to investors and said he has potential claims against Bank of America.

Bank of America fell 20 percent to $6.51 in New York Stock Exchange composite trading. AIG fell 10 percent to $22.58.

The Charlotte, North Carolina-based bank, the biggest U.S. lender by assets, rejects AIG’s “assertions and allegations,” said spokesman Larry DiRita.

“AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets,” said DiRita. “It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors.”

Bank of America and the other defendants created mortgage securities backed by shoddy loans and sold the investments based on inflated credit ratings that masked their true risk, AIG said in the complaint. Offering materials “grossly understated” the risks of loans tied to the securities the insurer purchased, the company said.

‘Massive Scheme’

AIG was also misled into believing that loans underlying their investment were issued according to certain underwriting guidelines that in fact had been “long abandoned,” according to the complaint. The only measure of whether a loan would be approved was whether it could be packaged into bonds and sold to investors like AIG, the company said.

“The defendants were engaged in a massive scheme to manipulate and deceive investors, like AIG, who had no alternative but to rely on the lies and omissions made by the defendants,” AIG said.

AIG, which took U.S. government bailouts starting in 2008 to avert a collapse, is seeking to recover $10 billion in damages plus punitive damages after purchasing $28 billion worth of securities, according to the lawsuit.

In addition to the lawsuit against Bank of America, AIG today also sought to intervene in a separate case in which the bank hopes to resolve claims from investors in 530 mortgage- securitization trusts. The deal, which requires court approval, calls for Bank of America to pay $8.5 billion.

‘Fraction’ of Losses

AIG, which owns securities involved in the settlement, wants more information to determine whether the agreement is fair, it said in a court filing. The settlement, negotiated with a group of 22 institutional investors, pays a “fraction” of the losses estimated by that group, AIG said.

“Both the substance of the agreement and the procedure by which it was made raise numerous questions as to the reasonableness of the agreement,” AIG said.

AIG was first rescued in September 2008 after losses on housing-market bets by the Financial Products unit. The bailout was revised at least four times, swelling to $182.3 billion as the U.S. extended more credit and lowered the interest charged.

The insurer repaid the last $21 billion it owed to the Federal Reserve Bank of New York and the U.S. Treasury Department converted its preferred stake into 92 percent of AIG’s common stock in January. The holding was reduced to 77 percent in May in a share sale.

The case is American International Group Inc. v. Bank of America Corp. (BAC), 652199-2011, New York State Supreme Court (Manhattan).

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net.

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Michael Hytha at mhytha@bloomberg.net.

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