BofA, AIG Must Provide Evidence About Bailout Transaction

Bank of America Corp. and American International Group Inc. must provide evidence from a 2008 U.S. bailout transaction to a federal judge who is deciding whether AIG can sue over Countrywide Financial mortgage securities.

U.S. District Judge Mariana Pfaelzer in Los Angeles said in an order yesterday that she can’t decide on Bank of America’s request to dismiss AIG’s claims as “a matter of law.” The judge said she needed further evidence regarding assignment of tort claims under New York state contract law.

Bank of America lawyers argued at a Jan. 29 hearing that AIG can’t bring fraud claims over Countrywide residential mortgage-backed securities that it had to sell to an entity set up by the Federal Reserve Bank of New York as part of the government bailout of the insurer. AIG argues that it retained the right to bring fraud claims over its purchase of the bonds.

The evidence Bank of America and AIG have provided so far “does not give due consideration to the circumstances surrounding the execution of the asset purchase agreement, or to the purpose of the parties making the contract,” Pfaelzer said.

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 thinking that loans underlying its investment were issued according to certain underwriting guidelines that in fact had been “long abandoned.”

Fraud Cases

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. Bank of America bought Countrywide in 2008 during the collapse of the U.S. housing market when the Calabasas, California-based mortgage lender was unable to raise funds to issue new home loans.

AIG said in a complaint filed Jan. 11 in New York state court that Maiden Lane II, an entity created by the New York Fed to buy $21 billion of its mortgage-backed securities to shore up the insurer’s liquidity, says it owns the litigation claims for the bonds, including those against Countrywide.

In the New York case, AIG seeks a declaration that the 2008 transaction didn’t transfer to Maiden Lane II AIG’s right to sue Bank of America and others for AIG’s alleged damages.

Financial Crisis

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.

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.

Pfaelzer in yesterday’s order denied AIG’s request to halt the case before her until a New York state court judge has resolved AIG’s case against the New York Fed over its right to bring fraud claims.

Jon Diat, a spokesman for AIG, and Lawrence Grayson, a Bank of America spokesman, declined to comment on Pfaelzer’s order.

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

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