Accusations fly on Day 2 of hearing on BofA’s $8.5 bln put-back deal
The biggest news to come out of Tuesday’s ongoing hearing to evaluate Bank of America’s proposed $8.5 billion settlement with investors in 530 Countrywide mortgage-backed securities trusts is that the Office of the Comptroller of the Currency gave Bank of America clearance to put Countrywide into bankruptcy if Countrywide’s liabilities threatened BofA’s existence. Or at least that’s what Kathy Patrick of Gibbs & Bruns, who represents 22 institutional investors that negotiated the proposed deal with BofA and Countrywide MBS trustee Bank of New York Mellon, said her clients were told by BofA Chief Risk Officer Terry Laughlin in 2011 as they tried to come to terms on a settlement of investor claims that Countrywide breached representations and warranties about the underlying mortgage loans. To my knowledge, Patrick’s assertion – which was intended to support her argument that MBS investors risked getting much less than $8.5 billion for their put-back claims – is, if true, the first tangible indication that Bank of America ever did more than hypothesize bankruptcy for Countrywide.
Objectors to the proposed settlement, meanwhile, scored points with their argument that BNY Mellon had options aside from acquiescing to what AIG counsel Michael Rollin of Reilly Pozner called “a sweetheart deal for BofA.” Both Rollin and his partner Daniel Reilly, who occupied most of the three hours of opening arguments by objectors (including 22 AIG-related entities, several Federal Home Loan Banks, the investment manager Triaxx and a variety of pension funds and local banks), emphasized that after the Countrywide MBS trustee received a demand letter from Gibbs & Bruns on behalf of major institutional investors, the trustee could simply have begun requesting loan files from BofA as the servicer of Countrywide MBS trusts, evaluating those loan files for material breaches, and demanding that Bank of America repurchase defective loans.
Rollin played a deposition clip from a BofA servicing executive, who said it was the bank’s official policy to repurchase loans that breached representations and warranties. That statement alone, Rollin said, proved the fallacy of arguments that BNY Mellon and the Gibbs & Bruns investor group could not have pierced the corporate veil to tag Bank of America with successor liability for Countrywide’s breaches. The trustee could simply have asserted put-backs to BofA as the servicer, Rollin suggested, without ever getting into the quagmire of successor liability. After all, the Reilly Pozner lawyers argued, the $8.5 billion settlement amounts to the put-back of only 2.5 percent of the 1.6 million mortgages underlying 530 Countrywide MBS trusts covered by the deal. Had BNY Mellon taken the alternative route of demanding the put-back of defective loans, they said, the trustee could have forced BofA to buy back a higher percentage of loans.
“The trustee wants your honor to believe that this settlement was the only way,” Rollin told New York State Supreme Court Justice Barbara Kapnick. “But it wasn’t the only way. There were other ways to achieve more.”
But for a hearing that is supposed to determine whether Bank of New York Mellon made a reasonable and good-faith decision to settle put-back claims on behalf of all 530 Countrywide MBS trusts, there was an awful lot of hostility exchanged Tuesday by lawyers for the two camps of MBS investors in the case, the Gibbs & Bruns group that negotiated the deal and the AIG-led coalition that opposes it.
Kathy Patrick, who delivered her opening argument first, set the tone when she addressed the objectors’ argument that her group had no business settling claims belonging to all Countrywide MBS investors. For one thing, she said, the breach of contract claims belonged to the trustee, not to certificate holders. And for another, her clients were the only investors to step up. After an initial group with the requisite voting rights in more than 100 trusts sent a letter demanding an investigation to BNY Mellon in 2010, Patrick said, news coverage brought additional institutions into the group. By the time negotiations began with BNY Mellon and BofA, she represented 22 major investors with $34 billion in holdings and 25 percent voting rights in 215 trusts.
The talks with BofA weren’t secret, she said. Nor was the investors’ forbearance agreement with BNY Mellon, which put off the declaration of an event of default: BofA put out a press release on the agreement and said that talks with investors were under way. Yet none of the objectors stepped up to participate in talks, according to Patrick. “They were wallflowers,” she said. “The wallflowers did not object. They did not step forward…. They let other people do the work.”
In fact, Patrick said, when Bank of America official Terry Laughlin, who is now its chief risk officer, spoke at an MBS investor conference in March 2011, he alluded to settlement talks. Then, according to Patrick, AIG was specifically asked to participate. Patrick asserted that AIG’s counsel from Reilly Pozner have misrepresented reality when they’ve told Judge Kapnick that, to the contrary, AIG was excluded from settlement negotiations.
Patrick called out an AIG in-house lawyer, a managing director in the insurer’s asset management group whom she called a “senior officer.” The AIG associate GC was in court Monday, Patrick said, and “heard the suggestion that AIG and others had been excluded. He let his lawyer make that argument. He knew it was not true.” The truth, Patrick said, was that “AIG was invited to participate (and) AIG said no.”
An AIG representative sent me an email statement in response to a query about Patrick’s assertion: “We strongly disagree with the position that AIG’s counsel made any inaccurate statement in court,” the statement said. “This point, like so many others raised by the settlement proponents, is a distraction, but if the court deems it relevant and admissible we look forward to a full and accurate airing of the truth.”
AIG’s lawyers at Reilly Pozner treated Gibbs & Bruns and its clients just as roughly when Reilly and Rollin gave their opening statements. Reilly’s theme was that BNY Mellon and the institutional investors caved in to Bank of America – or, to use his words, “cratered.” Patrick’s clients, including BlackRock, Pimco, The New York Federal Reserve, Freddie Mac and MetLife, initially demanded $50 billion from BofA and believed they had a realistic shot at $32 billion on realized and projected MBS losses of more than $100 billion, according to Reilly. Patrick was pushing hard on behalf of the investors. Then, according to Reilly, “the number cratered and there was no lawsuit” against BofA.
Reilly suggested that the reason for the mysterious “crater” might lie in BlackRock’s institutional relationship with Bank of America. The two held significant equity stakes in one another and “considered themselves strategic partners,” Reilly said, asking rhetorically whether BlackRock would ever have really sued BofA over put-backs. “The court will have the opportunity to decide,” Reilly said.
The AIG lawyer also implied that Gibbs & Bruns’s independence was compromised because Bank of America agreed to pay the $85 million the firm will receive if the settlement is approved (just as BofA is paying BNY Mellon’s lawyers at Mayer Brown). “We’re going to find out in this process when Bank of America agreed to pay the legal fees of Gibbs & Bruns,” Reilly said, suggesting that approval of the settlement by Gibbs & Bruns’s clients was related to the firm’s fees.
Kathy Patrick called both of Reilly’s implications – that BlackRock and Gibbs & Bruns were compromised in negotiations by relationships with Bank of America – “absurd and untrue.” BlackRock didn’t have undue influence on her 22-investor group; its stake in Countrywide MBS was roughly the same as Pimco’s, and neither of them was the biggest certificate holder in the group or on the investor steering committee. (Patrick also said that AIG’s counsel knows that fact.) And as for AIG finding out when BofA agreed to pay her firm’s fees, Patrick said, “they’re not going to find out anything – it’s already in the record.” The firm’s fees, she said, were negotiated after the $8.5 billion deal had been finalized. Patrick said there’s nothing unusual or untoward about the bank paying opposing counsel. “It’s customary in a workout or settlement for the party obtaining resolution to pay the fees,” she said.
Lawyers on opposite sides of big cases often seem pricklier about one another in court than they really are. I don’t think that’s true in this litigation. This time, things really do seem to be personal.
(This post has been corrected. A previous version incorrectly quoted what Patrick said about AIG’s associate general counsel.)
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