Depending on whom you ask, the $8.5 billion settlement between Bank of America and 22 institutional investors is a great way for them to move on or a terrible idea. The two-year-old lawsuit has been in hearings for the past eight weeks.
The Financial Times led with the unhappy investors, who are in the minority on claiming the settlement should be rejected:
Bank of America’s plan to pay $8.5bn to compensate 22 institutional investors for soured mortgage-backed securities is a “Frankenstein settlement”, and should be rejected, a lawyer for a dissenting group of investors told a New York judge Tuesday.
The claim came as lawyers for investors locked in combat over the proposed settlement made their last pitches after eight weeks of hearings.
BofA and a group of investors that includes BlackRock, MetLife and Pimco, agreed to the $8.5bn deal more than two years ago to resolve claims on mortgage-backed securities issued by Countrywide, the troubled bank it rescued in 2008.
But a contingent of investors, led by American International Group and representing less than 7 per cent of the outstanding claims, is fighting the June 2011 settlement, which must be approved by Judge Barbara Kapnick of the New York state’s Supreme Court.
“This monster is a Frankenstein settlement . . . They [the creators] were not willing to give life to this settlement, instead they brought it to you,” Daniel Reilly, AIG’s lawyer, told Judge Kapnick.
If she finds the deal is acceptable, the dissenting investors will be bound by it. If not, BofA could face new claims and further litigation. It is not clear when she will rule.
The bank is already on the hook for around $50bn in settlements, not including this one, stemming from the financial crisis. It is also under investigation by at least three US attorneys’ offices – California, New Jersey and Atlanta – and the DoJ for various MBS securities deals. BofA says it has set aside money to cover the $8.5bn.
Reuters had this story on Monday about the investors in favor of the settlement:
A lawyer for an investor group on Monday urged a judge to approve Bank of America Corp’s proposed $8.5 billion settlement over mortgage-backed securities that soured in the financial crisis, noting that not one investor testified against the deal in a nine-week proceeding.
Kathy Patrick, a lawyer for a group of institutional investors who entered into the settlement, was summing up the case in New York state court in Manhattan.
Bank of America agreed to the settlement in June 2011 to resolve claims over shoddy mortgage-backed securities issued by Countrywide Financial Corp, which the bank acquired in 2008.
Bloomberg added this context about the settlement and why Bank of America is eager to put this behind them:
The settlement is part of an effort by Brian Moynihan, chief executive 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.
BNY Mellon, 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.
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. Only 15 objectors opposed to the settlement remained as closing arguments began, Ingber said.
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.
Bank of America declined to participate in mediation talks proposed by AIG and other opponents of the settlement after Kapnick urged the parties to consider using a mediator to resolve their objections during a break in the hearing.
The arguments before the judge comes as JPMorgan Chase works through a $13 billion civil settlement with the Justice Department. Banks are trying to put the financial crisis behind them and remove some of the overhang from litigation risk. At least once settlements have been approved then it removes the doubt from stock market valuation. It might not be best in the short-term but should be a good way for the industry to move forward.
