Recently Yves Smith of Naked Capitalism started a death watch for Bank of America. Smith cited the bank's massive and growing legal liabilities, as well as the low chances that they will be able to shore up their capital levels through asset sales. David Dayen then joined in the death watch and advanced it following Washington Attorney General Rob McKenna launched a lawsuit against BoA for violating foreclosure law.
Today Gretchen Morgenson and Louise Story in the Times break news that signifies another big step in the Bank of America death watch. AIG is suing BoA for $10 billion: The suit seeks to recover more than $10 billion in losses on $28 billion of investments, in possibly the largest mortgage-security-related action filed by a single investor.
It claims that Bank of America and its Merrill Lynch and Countrywide Financial units misrepresented the quality of the mortgages placed in securities and sold to investors, according to three people with knowledge of the complaint.
Morgenson and Story also reported that AIG plans to join other investors and New York Attorney General Eric Schneiderman in objecting to BoA's $8.5 billion mortgage backed security settlement with Bank of New York Mellon.
Yves Smith has a post on the Morgenson and Story piece, which draws out one passage which is tremendously important in terms of framing how to think about private litigation in an area that has been essentially devoid of federal investigations. The quote from Story and Morgenson: The private actions stand in stark contrast to the few credit crisis cases brought by the Justice Department, which is wrapping up many of its inquiries into big banks without filing any charges. The lack of prosecutions — the Justice Department has brought three cases against employees at large financial companies and none against executives at large banks — has left private litigants, mainly investors and consumers, standing more or less alone in trying to hold financial parties accountable.
“When federal authorities don’t fulfill their obligation to enforce the law, they essentially give an imprimatur to the financial entities to do whatever they want and disregard the law,” said Kathleen C. Engel, a professor at Suffolk University Law School in Boston. “To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general.”
Smith says federal authorities and AGs driving the 50 state settlement talks should be ashamed for trying to settle without doing any meaningful investigation. But Engel's quote really goes beyond that. The lack of real investigation and criminal prosecution constitutes the government taking the side of Wall Street banks while providing a functional whitewash of massive criminal behavior. Yes, having private investors bring suits which will help them individually can still be a means for banks feeling pain for their bad behavior, but the interests of individual private investors don't necessarily align with the interests of struggling homeowners, let alone the general public. Private suits aren't a substitute for federal law enforcement and federal regulators doing their job in the first place.
It's fortunate that a handful of attorneys general at the state level - Schneiderman, Beau Biden, McKenna, and a few others - are actually pursuing accountability for fraud connected to residential mortgage backed securities and foreclosure. Even a handful of actions at the state level, plus suits by private investors, has created an environment where there is real merit to watching for the death of Bank of America. The rot is deep and these suits are bringing it to light.
