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FDIC Objects to BofA’s $8.5 Billion Mortgage-Bond Settlement

FDIC Objects to BofA’s $8.5 Billion Mortgage-Bond Accord
Under the agreement, Bank of America would pay $8.5 billion to resolve claims from investors in Countrywide Financial Corp. mortgage bonds. Photographer: Robert Caplin/Bloomberg

The Federal Deposit Insurance Corp. filed an objection to Bank of America Corp.’s proposed $8.5 billion mortgage-bond settlement with investors, joining investors and states that are challenging the agreement.

The FDIC, the receiver for failed banks, owns securities covered by the settlement and said it doesn’t have enough information to evaluate the accord, according to a filing yesterday in federal court in Manhattan.

Under the agreement, Bank of America would pay $8.5 billion to resolve claims from investors in Countrywide Financial Corp. mortgage bonds. The settlement was negotiated with a group of institutional investors, including BlackRock Inc. and Pacific Investment Management Co. LLC, and would apply to investors outside that group.

Bank of New York Mellon Corp., the trustee for the mortgage-securitization trusts covered by the agreement, has asked a New York state judge to approve the settlement in November. An investor group is trying to move the case to federal court, which Bank of New York opposes.

Investors that would be bound by the settlement, including American International Group Inc., have criticized the deal and Bank of New York’s role representing investors in the mortgage bonds. New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden have sought to intervene in the case and asked the court to reject it.

FDIC’s Involvement

The FDIC’s involvement may make it more difficult for Charlotte, North Carolina-based Bank of America to get approval for the settlement, said Bert Ely, a bank-industry consultant in Alexandria, Virginia.

“You would think as a regulator or as an investor or both that they would be kept apprised of what was going on,” he said. “Any time you hold up a deal it becomes more likely it doesn’t happen.”

If the settlement doesn’t get court approval and Bank of America goes back to the negotiating table, it will become more expensive for the bank, Paul Miller, an analyst at FBR Capital Markets, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene.

“If the judge accepts it, then that’s going to be a big positive, because that starts to ring-fence those private-label losses, and we can start to move forward and say ‘This is what we think the losses are going to be,’” he said.

Andrew Gray, an FDIC spokesman, said in an e-mail that the FDIC generally doesn’t comment on pending litigation.

“This filing is simply a formal notice to preserve our right to make claims as a part of the settlement and seeks additional information to evaluate those potential claims,”  he said. “It is not an evaluation or opinion on the settlement itself.”

‘Trustee Acted Reasonably’

“We believe that the trustee acted reasonably in entering into the settlement, and that there are compelling reasons why the agreement should receive judicial approval,” Lawrence Grayson, a Bank of America spokesman, said in an e-mail.

Kevin Heine, a spokesman for Bank of New York, said the the company had no comment.

The state 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). The federal case is In the Matter of the Application of Bank of New York Mellon, 11-cv-5988, U.S. District Court, Southern District of New York (Manhattan).

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