BofA Argues AIG Can’t Sue Over Devalued Mortgage Bonds

Bank of America Corp. lawyers asked a federal judge to dismiss American International Group Inc. (AIG)’s fraud claims over devalued Countrywide Financial mortgage-backed securities it had to sell as part of the government bailout.

U.S. District Judge Mariana Pfaelzer, at a hearing today in Los Angeles, didn’t rule on Bank of America’s request. The bank, which acquired Countrywide in 2008, argued that AIG transferred the right to sue over the securities when it sold them as part of a $21 billion transaction to an entity created by the Federal Reserve Bank of New York.

“AIG cannot pursue claims here that it long ago signed away as part of the government bailout,” Bank of America lawyer Richard St. John said at the hearing.

AIG, based in New York, sued Charlotte, North Carolina- based Bank of America and Countrywide for $10 billion in damages in 2011, alleging it was misled into believing that loans underlying its investment were issued according to certain underwriting guidelines that in fact had been “long abandoned.”

The AIG claims over the Countrywide-issued securities were transferred to Los Angeles where Pfaelzer presides over the consolidated fraud cases by investors against what at one time was the largest U.S. mortgage lender.

Maiden Lane

Michael Carlinsky, a lawyer for AIG, told the judge it was “laughable” that Bank of America asked her to infer that the 2008 asset purchase agreement between AIG and Maiden Lane II, the entity set up the New York Fed to hold the securities, included the transfer of the right to pursue fraud claims without explicitly stating so.

“This is not a case where you call your broker at Charles Schwab (SCHW) to sell securities,” Carlinsky said. “This is a case where you have two of the finest law firms in New York putting together a transaction.”

The lawyer told Pfaelzer that about $1.4 billion of AIG’s claims over Countrywide securities weren’t affected by Bank of America’s argument because the securities underlying those claims weren’t part of the sale to Maiden Lane II.

Maiden Lane II was created by the New York Fed amid the 2008 financial crisis to buy about $39 billion in securities linked to home loans from AIG. The bank purchased the securities from AIG at less than their full par value.

Taxpayer Rescue

The vehicle was part of the taxpayer rescue that swelled to $182.3 billion and helped save the insurer from collapse. AIG finished repaying the bailout in December.

AIG filed a lawsuit Jan. 11 in New York state court, seeking a ruling that it has preserved the right to bring fraud claims against the issuers of the residential mortgage-backed securities it sold as part of the bailout.

Pfaelzer hasn’t issued a ruling on AIG’s request to halt the case in her court until a New York judge has ruled whether AIG can pursue its claims.

AIG’s claims against Bank of America and Merrill Lynch, which were part of the original suit against Bank of America, are in federal court in New York.

The case is AIG v. Countrywide, 11-10549, U.S. District Court, Central District of California (Los Angeles).

To contact the reporter on this story: Edvard Pettersson in the Los Angeles federal courthouse at epettersson@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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