Bank of America’s $8.5 Billion Settlement Hit With Legal Challenge

A group of 11 mortgage-bond investors have filed a challenge to Bank of America’s proposed $8.5 billion settlement with holders of its subprime mortgage securities.

(July 5, 2011) — A group of 11 mortgage-bond investors have challenged Bank of America’s proposed $8.5 billion deal with investors who bought subprime mortgages through the bank’s Countrywide Financial subsidiary, the Wall Street Journal has reported.

The group, calling themselves Walnut Place but at this point otherwise remaining anonymous, filed a challenge in New York County Supreme Court attacking the deal’s fairness.

“Walnut Place has serious concerns about the secret, non-adversarial, and conflicted way in which the proposed settlement was negotiated and about the fairness of the terms of the proposed settlement,” said the group in the court filing.

The filing marks the first legal challenge against what would have been the banking industry’s largest single settlement stemming for the 2008 housing market collapse. Bank of America agreed on June 29 to a $14 billion settlement with embittered investors who purchased unsound subprime mortgages through the bank’s Countrywide Financial subsidiary. Walnut Place appeared to only have challenged the $8.5 billion allocated to a group of larger investors led by Pacific Investment Management Co. (PIMCO), BlackRock, and the Federal Reserve Bank of New York.  

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The filing by Walnut Place highlighted three major objections to Bank of America’s proposed settlement. The first is over the size of the proposed deal. Although the $8.5 billion represents more than the bank has made in collective profits since the financial crisis, the group argues that the bank owes its investors much more. “[Bank of America’s subsidiary] Countrywide may be liable to repurchase loans with unpaid principal balances of as much as $242 billion. The $8.5 billion that Countrywide and Bank of America have agreed to pay is therefore only a small fraction of the potential liability that they would have faced in litigation on behalf of the trusts.”

Walnut Place’s second objection in the filing is that serious conflicts of interests marred the integrity of Bank of America’s deal. “[M]any of these 22 investors have substantial ongoing business relationships with Bank of America other than their ownership of certificates in Countrywide-sponsored trusts. For example, BlackRock Financial Management, Inc., is one of the 22 investors. During the time in which the Settlement Agreement was being negotiated, Bank of America owned up to 34 percent of BlackRock….Many other of the 22 investors also have substantial business dealings with Bank of America or its subsidiaries other than their ownership of certificates in Countrywide-sponsored trusts.”

The final objection is to the secretive, non-adversarial nature of the settlement negotiations. The group also singled out Bank of New York Mellon, the trustee for the Bank of America bondholders, for the most criticism. 

“Walnut Place has serious concerns about the secret, non-adversarial, and conflicted way in which the proposed settlement was negotiated and about the fairness of the terms of the proposed settlement….In short, despite the fact that BNYM owes at least the same duties to Walnut Place that it owes to every other certificateholder in the 530 Countrywide-sponsored trusts, BNYM is asking this Court to approve a settlement that it negotiated in secret and that would release Walnut Place’s claims without its consent while it is in the middle of an active litigation…”



<p>To contact the <em>aiCIO</em> editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a></p>

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