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The Lawsuit That’ll Make or Break Bank of America Corp (BAC)

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This is the second in a series of five articles covering Bank of America Corp (NYSE:BAC)’s legal problems since the financial crisis. To read the first article in the series, click here.

Although it may not seem like it, Bank of America Corp (NYSE:BAC) has made considerable progress at putting its 2008 acquisition of Countrywide Financial in the rearview mirror.

To date, the bank has paid more than $35 billion, excluding legal fees, to resolve claims related to Countrywide’s arguably criminal practices before, during, and after the financial crisis. Yet, by my count, somewhere between $15 billion and $25 billion in liability beyond stated reserves remains outstanding.

Bank of America Corp (NYSE:BAC)Where the ultimate payout falls within this range rests in part on a case that’s making its way through a New York state court.

Mapping out B of A’s legal labyrinth
If the number of lawsuits filed against B of A resembles an unsolvable puzzle, here’s a framework to keep in mind. The bank faces liability under three legal theories:

  1. Breach of contract,
  2. securities fraud, and
  3. malfeasance in mortgage servicing.

The breach of contract claims can be further broken down into:

  • Mortgages sold by Countrywide to the government-sponsored agencies Fannie Mae and Freddie Mac.
  • Private institutions that invested in Countrywide’s mortgage-backed securities.
  • Monoline insurance companies that insured particular tranches of the private-label MBSes.

In this article I’m going to be focusing on the second sub-category, the claims asserted by investors in Countrywide’s private-label MBSes.


The scale of exposure stemming from this category is breathtaking. Between 2004 and 2008, Countrywide originated $1.562 trillion in residential mortgages. Of these, it sold $846 billion to the GSEs and packaged $716 billion worth into securities which were marketed to institutional investors like insurance companies, university endowments, and pension funds. The problem is that large swaths of these mortgages have since either defaulted or are now severely delinquent — that is, more than 180 days past due. A full 13% of the loans sold to the GSEs, or $111 billion, fit into these categories. A staggering 27% of securitized loans, or $190 billion, are similarly classified.


Source: Bank of America’s 3Q12 10-Q (link opens PDF) pages 64-65.

The Bank of New York Mellon Corporation (NYSE:BK) settlement
The good news is that B of A has reached a settlement that extinguishes more than half of its liability to private investors. On June 28, 2011, the bank agreed to pay $8.5 billion to settle claims brought by the Bank of New York Mellon, acting in its capacity as the trustee of 530 MBSes, and a group of 22 institutional investors including bond giants BlackRock, Inc. (NYSE:BLK) and Pimco.

If the settlement is approved by a judge, which remains far from certain, it will be a massive victory for the nation’s second largest bank by assets. In one fell swoop, it resolves contract claims related to $409 billion, or 57%, of the mortgages packaged into private-label MBSes. Additionally, $113 billion of the mortgages covered by the settlement have either already defaulted or are now severely delinquent. That equates to 60% of toxic private-label mortgages.


Source: Bank of America’s 3Q12 10-Q (link opens PDF) pages 64-65.

The catch is that many of the remaining stakeholders in the MBSes at issue are now challenging the settlement, as the 22 institutional investors that participated held somewhere north of only a quarter of the voting interests in only 225 of the trusts within the settlement’s scope. The list of objectors includes hedge funds, pension funds, Goldman Sachs Group, Inc. (NYSE:GS) and other investment banks, insurance companies such as American International Group, Inc. (NYSE:AIG), and even the attorney generals from New York and Delaware. These parties are asserting that both the specific terms of the settlement are inadequate and that BNY Mellon violated the fiduciary duty it owes to them by entering into it.

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