Since AIG’s board considered, and the decided against, suing the U.S. government last week, the idea that AIG would sue the NY Fed is definitely a touchy subject.
But in this case, it shouldn’t be.
When the New York Fed bailed out AIG in 2008, it created a separate LLC called Maiden Lane II to essentially take AIG’s bad residential-backed mortgage investments (RMBS) off its hands. In this latest lawsuit, AIG is only trying to find out if it has the right to sue the originators of those residential-backed mortgages.
They don’t even want money from the NY Fed — they want money from the RMBS originator, in this case, Bank of America. AIG is seeking $7 billion.
An AIG spokesman said Friday’s lawsuit “narrowly seeks a declaration from the Court that a 2008 contract between AIG and ML II did not transfer to ML II AIG’s right to sue Bank of America and other financial institutions for the billions of dollars of damages they caused AIG and its shareholders in connection with the fraudulent sale of RMBS to AIG.”
According to Friday’s complaint, Maiden Lane II paid $20.8 billion for a variety of subprime and other mortgage securities from AIG, barely half of their estimated $39.3 billion face value.
What this all means is that AIG wants to join the fray of legal suits against Wall Street Banks. They did just pay $20 billion to settle claims with Fannie Mae. Bank of America itself paid $11.6 billion in the name of the mortgage lender it acquired before the financial crisis, Countrywide.
And that’s who should be worried about this law suite — Bank of America. At this point, their legal costs stemming from bad mortgages are reaching $50 billion.
We’ll find out how these numbers have impacted their earnings for Q4 and their outlook for Q1 when Bank of America does announces earnings next week.