Before Thursday night, opposition to Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors consisted of a handful of investor groups represented by a handful of law firms. Even if you counted the six Federal Home Loan Banks that have moved to intervene but haven’t yet gone on record opposing the deal, intervenors represented less than 7 percent of all Countrywide MBS noteholders. The 22 gargantuan institutional investors that negotiated the settlement were a much more potent force.
That all changed when New York attorney general Eric Schneiderman -- in a move that stunned deal proponents — filed an explosive motion to intervene in the $8.5 billion settlement. Schneiderman didn’t just register his opposition to the proposed settlement, which he said had been reached “without ever giving beneficiaries or their representatives an opportunity to test [whether] the proposed settlement is reasonable.” He went far, far beyond mere opposition: Schneiderman accused the Countrywide MBS trustee, Bank of New York Mellon, of breaching its fiduciary duty and said that Bank of America may have aided and abetted the breach. And to show that he was serious about those assertions, Schneiderman actually filed counterclaims against BNY Mellon along with his intervention motion.
The countersuit — a truly revolutionary filing — alleges three causes of action against BNY Mellon, in what is thought to be the first time the AG has accused an MBS trustee of fraud. Schneiderman claimed the bank breached its duty to investors because the settlement includes indemnification for the trustee — a “direct financial benefit” for BNY Mellon, according to the AG’s filing. Schneiderman also asserted that BNYM let down Countrywide MBS investors long before proposing the $8.5 billion settlement, by failing to notify certificate holders that underlying Countrywide mortgages were in default. Finally, the New York AG accused Bank of New York Mellon of securities fraud under New York’s Martin Act.
Schneiderman didn’t claim that New York pension funds actually have a stake in the Countrywide MBS trusts. Instead, he claimed standing under the parens patriae doctrine, asserting that he intervened “to protect the interests of the public and absent investors.” And that raises a question that Bank of New York Mellon — once it recovers from the shock of the AG’s filing — is sure to argue to Judge Barbara Kapnick as she weighs whether to approve the proposed settlement. Are investors — and the public at large — better off if the New York AG kills the proposed BofA settlement?
There are a lot of ways to look at the question. In the narrowest interpretation, will investors be able to recover more money for breach of warranty claims against Countrywide than they would under the settlement? Maybe. There have only been a few investor put-back cases filed against Countrywide, mostly by David Grais of Grais & Ellsworth, and they’re not far enough along to lay odds on their success. Mayer Brown, which represents BNY Mellon in the BofA proposed settlement, argues that a lot of obstacles stand between Countrywide noteholders and a windfall recovery from Bank of America. Those range from the loan-by-loan evaluation investors will have to make of individual underlying mortgages to Bank of America’s claim that it’s not liable for Countrywide’s failings.