Negotiations that led to an $8.5 billion mortgage-bond settlement between Bank of America Corp. and institutional investors were tense and combative, the bank’s chief risk officer testified.
The first meetings with investors who brought claims against the bank for breaches of representations and warranties were “very tense,” with both sides taking “very strong positions,” Chief Risk Officer Terrence P. Laughlin testified today in New York. The settlement talks that followed were also “contentious” and “adversarial” and Laughlin said he “got very upset” because he didn’t believe the investors were negotiating in good faith.
“I thought they were being extremely aggressive and one-sided in what they thought future losses would be coming out of these trusts,” Laughlin said. “The investors were putting forth a very negative scenario. They were trying to put forth a high loss number” to reach a higher settlement.
New York State Supreme Court Justice Barbara Kapnick is presiding at a nonjury trial in Manhattan over the accord, which resolves claims from Countrywide Financial mortgage-bond investors including Pacific Investment Management Co. and BlackRock Inc. (BLK) over loans bundled into securities. American International Group Inc. (AIG) is fighting the settlement, saying Bank of America, based in Charlotte, North Carolina, isn’t paying enough to compensate investors.
The bank initially offered to settle the case for $1.5 billion, and later increased its bid to as much a $5 billion while the institutional investors were proposing to resolve the claims for $12 billion to $16 billion, Laughlin said.
The bank agreed to offer as much as $6 billion after the investors said they might be willing to lower their range, he said. The group later “got very aggressive” and said it would pursue other options to resolve the investors’ claims if the two sides didn’t reach a settlement, Laughlin said.
“It was certainly a threat,” Laughlin said.
The bank then raised its offer to $7 billion, to be paid in installments, a proposal that Gibb & Bruns LLP, the law firm representing the investors, rejected. The firm raised their proposed settlement amount to $8.5 billion and said “take it or leave it,” Laughlin said.
The bank was concerned that if it didn’t reach a settlement agreement that the investors “would become very aggressive” and go public with the fact that talks had broken down, Laughlin said. Putting Countrywide into bankruptcy was and still is an option for Bank of America, Laughlin said.
“Finally it became very evident that the investor group was not going to move past $8.5 billion,” Laughlin said. “We entered into settlement negotiations never thinking we would pay an amount that high.”
Opening statements in the case began on June 3. The settlement is part of an effort by Chief Executive Officer Brian Moynihan to clear up liabilities tied to the purchase of home lender Countrywide Financial in 2008.
For Moynihan, 53, approval of the settlement would resolve one of the biggest remaining uncertainties tied to Bank of America’s takeover of Countrywide, Pri de Silva, senior banking analyst at CreditSights Inc., said before the trial started.
The bank reached an $11.7 billion settlement with mortgage-finance company Fannie Mae in January and ended disputes with bond insurers including MBIA Inc. (MBI), which settled for $1.7 billion with the lender in May. What remains for Moynihan are claims from private investors, and the 2011 accord deals with most of those, de Silva said.
Moynihan called the deal, which stems from Countrywide loans with an original principal balance of $424 billion, “a major milestone” in a March 27 interview on PBS television’s “Charlie Rose” program. He has booked more than $45 billion in costs to clean up the mortgage mess inherited from the purchase of Countrywide.
Unresolved demands that Bank of America repurchase mortgages dropped 39 percent to $17.1 billion as of March 31, driven by demands extinguished in the Fannie Mae deal, according to company filings.
AIG and other opponents have asked Kapnick in court papers to reject the settlement. They call it a “pennies-on-the-dollar bargain” for the bank because losses to the securitization trusts at issue in the case are expected to be more than $100 billion.
They also claim BNY Mellon violated its responsibilities to investors by putting its own interests and the interests of its “business partner,” Bank of America, ahead of the interests of investors.
The investor group supporting the deal, which also includes Pacific Investment Management Co., Goldman Sachs Asset Management and MetLife Inc. (MET), called the opponents a “vocal minority.” Out of tens of thousands of investors, only 10 filed objections, they said in court papers, and many of them, including New York-based AIG, are pursuing separate litigation against Bank of America and BNY Mellon.
The settlement is “outstanding” for investors and is in the best interest of Pimco’s clients to support it, Kent Smith, an executive at the Newport Beach, California-based firm testified during the trial last week.
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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