Bank of America Corp.’s $8.5 billion mortgage-bond settlement is “outstanding” for investors, said a Pacific Investment Management Co. executive, who defended the deal against opposition.
The settlement was reached after an investor group that included Pimco and BlackRock Inc. (BLK) at first demanded $12 billion, eventually coming down to a “take it or leave it” offer of $8.5 billion, Kent Smith, an executive vice president at Newport Beach, California-based Pimco who helped negotiate the agreement, testified yesterday.
“It’s an outstanding deal, and it’s in the best interest of our clients to support it,” Smith said.
Smith was the first witness to testify in a trial over the agreement, which is being considered by Justice Barbara Kapnick in New York State Supreme Court in Manhattan. The accord resolves claims from Countrywide Financial mortgage-bond investors over loans bundled into securities. American International Group Inc. (AIG) is fighting the settlement, saying Bank of America isn’t paying enough to compensate investors.
During settlement negotiations in 2011, the Pimco group fought with representatives of Charlotte, North Carolina-based Bank of America over the estimated size of Countrywide’s liability for defective loans, Smith said. Investors at one point presented an analysis to Bank of America, and the bank’s chief risk officer, Terrence Laughlin, “threw it back across the table at us,” Smith testified.
The investor group confronted the risk that if they decided to sue to recover losses instead of settling, Bank of America would put Countrywide into bankruptcy, Smith said. Laughlin gave the investors the “impression” that the bank had approval from a federal regulator, the Office of the Comptroller of the Currency, for the bankruptcy, Smith testified today.
A Countrywide bankruptcy was Bank of America’s “trump card,” he said, and it was a risk that the investor group took “fairly seriously.”
AIG has criticized the settlement in part because Bank of New York Mellon Corp., the trustee seeking approval of the agreement for investors, didn’t review loan files to investigate whether mortgages fell short of representations made to investors about their quality.
During questioning by an attorney for New York-based AIG, Smith acknowledged loan files weren’t examined even though the Pimco group wanted to see them.
Smith finished his testimony today, and testimony is set to continue next week. Laughlin is among the scheduled witnesses.
Smith was also asked how the group went from a demand of $12 billion to $8.5 billion during negotiations. He said there had to be agreement among the investors negotiating with the bank on the amount they wanted.
“There were discussions around a number, and people would have disagreements about what the number was until the group came to a consensus,” he said.
The case is In the matter of the application of the Bank of New York Mellon, 651786-2011, New York State Supreme Court, New York County (Manhattan).
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