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AIG sues Bank of America to recover mortgage-bond losses

August 08, 2011|Bloomberg News

American International Group Inc., the bailed-out insurer, sued Bank of America Corp. over $10 billion in losses on mortgage-bond investments. The bank dropped 14 percent in New York trading.

AIG bought more than $28 billion in residential mortgage- backed securities marred by a "massive fraud" from Bank of America and businesses it took over including Countrywide Financial Corp. and Merrill Lynch & Co., the insurer said in a lawsuit filed today in New York state Supreme Court.

"Bank of America's fraud caused billions of dollars in damage to AIG and we are bringing this suit today to protect AIG and the taxpayers' stake in it," Mark Herr, a spokesman for New York-based AIG, said in a statement. "This is not the first lawsuit that AIG has filed against counterparties that have sought to profit at our expense, and we anticipate that it will not be the last."

AIG took U.S. government bailouts starting in 2008 to avert a collapse after losses tied to subprime home loans and insuring mortgage bonds. Bank of America, which repaid its government aid in 2009, has lost more than 38 percent this year in New York trading through last week as Chief Executive Officer Brian T. Moynihan reached settlements with loan buyers and insurers who claim the firm's Countrywide unit created defective mortgages.

BofA's Response

Bank of America slid $1.15 to $7.02 in New York Stock Exchange composite trading as of 11:37 a.m. AIG fell 6.77 percent to $23.40

The AIG lawsuit is the latest legal pressure faced by Moynihan, 51, who took over as CEO last year. Last month, former Countrywide investors including BlackRock Inc. sued Bank of America after opting out of a $624 million settlement. Plaintiffs said the subprime lender misled shareholders about its finances and lending practices.

The bank rejects the insurer's "assertions and allegations," said Larry DiRita, a spokesman for the Charlotte, North Carolina-based lender, the biggest in the U.S. by assets.

"AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets," said DiRita. "It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors."

Insurer's Losses

The insurer relied on offering materials prepared by Bank of America that "grossly understated" the risks of loans tied to the securities AIG purchased, according to the complaint.

AIG was first rescued in September 2008 after losses on housing-market bets by the Financial Products unit. The bailout was revised at least four times, swelling to $182.3 billion as the U.S. extended more credit and lowered the interest charged.

The insurer repaid the last $21 billion it owed to the Federal Reserve Bank of New York and the U.S. Treasury Department converted its preferred stake into 92 percent of the AIG's common stock in January. The holding was reduced to 77 percent in May in a share sale.

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