AIG Slams Bank of America at Settlement Hearing

The Article 77 hearing in Justice Barbara Kapnick’s courtroom in Manhattan may have gotten off to a slow start, but a lot of action has taken place in only two days. The question of whether or not Bank of New York Mellon (NYSE: BK  ) acted reasonably in negotiating the $8.5 billion settlement between 22 institutional investors and Bank of America(NYSE: BAC  ) has been asked, with some very interesting opening arguments from BONY and AIG (NYSE: AIG  ) , the settlement’s biggest detractor.

Commentary not very positive for B of A
Since the hearing is about BONY’s judgment, the bank’s attorney, Matthew Ingber ticked off several points indicating that the decision to settle was fair and reasonable, based on the information the bank had at its disposal at the time. As Mark Palmer of BTIG Research notes, though, much of that information has since been invalidated.

For example, expert witness Professor Robert Daines, of Stanford Law School, was of the opinion that the state ofDelaware, with its very stringent laws regarding de facto mergers and successor liability, would hear this case. Of course, the venue was changed to New York, which has a less rigorous test in place for this type of issue.

Another point concerns testimony by Professor Barry Adler of the New York University of Law. In his opinion, Bank of America’s liability should be tied to the losses that were specifically due to any breach of representation or warranty. Unfortunately for B of A, this argument won’t hold water, since many rulings over the past two years have come down on the side of plaintiffs not having to show that such a breach caused their losses.

AIG has its turn
AIG’s lawyer also spoke, stating that not only was the settlement amount much too low, but that there was collusion between the two big banks that kept the process from being equitable to the complainants. According to AIG, Bank Of New York Mellon should have sued to obtain pertinent loan files (Collaterral Files)  that B of A declined to turn over to the negotiators, so the true extent of the investors’ losses could have been determined.  note(Most Collaterral Files have been destroyed)

The insurer also jabbed at BlackRock (NYSE: BLK  ) , another institutional investor that has since pulled its objections to the settlement, alleging a “cozy” relationship between the equity firm and B of A, according to The Wall Street Journal. Lastly, AIG saw Bank of America’s coverage of legal fees for trustee BONY and the group of investors as further proof of a flawed resolution procedure.

How does it look for B of A?
While Ingber’s arguments certainly help explain why BONY made the decisions it did back in 2011, the fact remains that much of the basis for that decision is no longer applicable. The New York venue will clearly make issues of successor liability less of a slam-dunk for Bank of America, and legal rulings made since the original deal was struck obviously lessen the likelihood that the investors will be required to prove the source of their losses.

As for AIG’s allegations, counsel representing the other investors said there was no collusion, but also noted that taking the deal was preferable to taking a chance that B of A would allow Countrywide to go bankrupt. This, apparently, was a real concern  — one brought out by B of A’s own Chief Risk Officer back in 2011. Put that way, the decision to settle looks more conflicted — and at the same time, calls the appropriateness of the agreed-upon $8.5 billion into question, particularly when counsel for the non-objectors noted that $32 billion was the number floated to represent investor losses at the time of the original negotiations.

Judge Kapnick has acknowledged that this case won’t be settled by the end of this month, so much more information will be forthcoming in the next few weeks. So far, though, none of it is looking terribly promising for Bank of America, or regarding the solidity of the agreement in question.

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