BofA $8.5 Billion MBS Accord Looked Small, Objectors Say

Bank of America Corp.’s $8.5 billion settlement with mortgage-bond holders “looked minuscule” to sophisticated investors, a lawyer for opponents of the agreement told a Manhattan judge.

“This unprecedented settlement should not be approved because it’s the result of a flawed and conflicted process,” Daniel Reilly, an attorney for American International Group Inc. (AIG), the lead objector to the settlement, told New York State Supreme Court Justice Barbara Kapnick today during closing arguments of a hearing on the agreement.

The settlement is part of an effort by Brian Moynihan, chief executive officer of Charlotte, North Carolina-based Bank of America, to resolve liabilities tied to faulty mortgages that have cost the company about $50 billion in legal claims, including those the bank inherited with the purchase of home lender Countrywide Financial Corp. in 2008.

The accord, which includes more than $3 billion in servicing improvements, resolves claims over mortgages packaged into securities. It settles allegations the loans backing the bonds didn’t meet their promised quality. While the settlement was backed by a group of more than two dozen investors including BlackRock Inc. (BLK) and Pacific Investment Management Co., almost four dozen investors objected, including AIG.

‘Red Flags’

“To sophisticated investors, the number looked minuscule compared to the hundreds of billions of dollars in losses,” Reilly said today. “The process was in the dark, and the relief requested sent up red flags in the financial community and with those who invest in mortgage-backed securities.”

Bank of New York Mellon Corp., as trustee for more than 500 residential mortgage-securitization trusts, filed a petition in June 2011 seeking approval of the settlement under a state law that allows trustees to seek judicial consent for their actions.

Matthew Ingber, a lawyer for the trustee, defended the settlement yesterday, saying it gave investors more than twice what they would have recovered through litigation.

The closing arguments cap a hearing that started in June, stretched over eight weeks and included testimony from almost two dozen witnesses and evidence from more than 200 documents.

Opponents will be bound by the settlement, if approved. They said in court papers that the process leading to the agreement was “plagued by conflict and collusion” and settles claims where investor losses totaled more than $100 billion.

“If this court says no to this settlement, there are sophisticated parties around this table,” Reilly said. “The objectors who were left out of the negotiating room will be there, and we’ll get it done.”

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).

To contact the reporter on this story: Chris Dolmetsch in New York State Supreme Court in Manhattan at

cdolmetsch@bloomberg.net

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

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