[Vision2020] Pimps, Whores Working In Dark Allies

[Art Deco]

 [image: The New York Times] <http://www.nytimes.com/>

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February 16, 2013
Don’t Blink, or You’ll Miss Another Bailout By GRETCHEN
MORGENSON<http://topics.nytimes.com/top/reference/timestopics/people/m/gretchen_morgenson/index.html>

MANY people became rightfully upset about bailouts given to big banks
during the mortgage<http://topics.nytimes.com/your-money/loans/mortgages/index.html?inline=nyt-classifier>crisis.
But it turns out that they are still going on, if more quietly,
through the back door.

The existence of one such secret deal, struck in July between the Federal
Reserve Bank of New
York<http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_bank_of_new_york/index.html?inline=nyt-org>and
Bank
of America<http://topics.nytimes.com/top/news/business/companies/bank_of_america_corporation/index.html?inline=nyt-org>,
came to light just last week in court filings.

That the New York Fed would shower favors on a big financial institution
may not surprise. It has long shielded large banks from assertive
regulation and increased capital requirements.

Still, last week’s details of the undisclosed settlement between the New
York Fed and Bank of America are remarkable. Not only do the filings show
the New York Fed helping to thwart another institution’s fraud case against
the bank, they also reveal that the New York Fed agreed to give away what
may be billions of dollars in potential legal claims.

Here’s the skinny: Late last Wednesday, the New York Fed said in a court
filing that in July it had released Bank of America from all legal claims
arising from losses in some mortgage-backed securities the Fed received
when the government bailed out the American International
Group<http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html?inline=nyt-org>in
2008. One surprise in the filing, which was part of a case brought by
A.I.G., was that the New York Fed let Bank of America off the hook even as
A.I.G. was seeking to recover $7 billion in losses on those very mortgage
securities.

It gets better.

What did the New York Fed get from Bank of America in this settlement? Some
$43 million, it seems, from a small dispute the New York Fed had with the
bank on two of the mortgage securities. At the same time, and for no
compensation, it released Bank of America from all other legal claims.

When I asked the Fed to discuss this gift to the bank, it declined. To
understand how the settlement happened, we must go back to the dark days of
September 2008. With the giant insurer A.I.G. teetering, the government
stepped in. As part of the rescue, A.I.G. sold mortgage securities to an
investment vehicle called Maiden
Lane<http://www.newyorkfed.org/markets/maidenlane.html>II overseen by
the New York Fed. A.I.G. was bleeding from its toxic
mortgage holdings, many of which were issued by Bank of America, and it
received $20.8 billion for securities with a face value of $39.2 billion.

In 2011, aiming to recover some of that $18 billion loss, the insurer
sued<http://www.nytimes.com/2011/08/08/business/aig-to-sue-bank-of-america-over-mortgage-bonds.html?pagewanted=all&_r=1&>Bank
of America for fraud. The case, filed in New York state court, sought
$10 billion in damages from the bank, $7 billion of that related to
securities that A.I.G. sold to Maiden Lane II. Bank of America, for its
part, argued that A.I.G. had no standing to sue for fraud on the Maiden
Lane securities. With the sale, Bank of America contended, the right to
bring a legal claim against the bank for fraud passed to Maiden Lane II.
That entity, controlled by the New York Fed, never brought fraud claims
against the bank.

Not so fast, said A.I.G. Under New York law, which governs Maiden Lane II,
an entity has to explicitly transfer the right to sue for fraud, it said.
The original agreement between the New York Fed and A.I.G. never specified
such a transfer, the insurer contended.

To settle this question, A.I.G. filed a separate lawsuit against Maiden
Lane II in a New York court last month.

A.I.G.’s $10 billion fraud case against Bank of America, meanwhile, was
moved to federal court. For pretrial purposes, the bank asked that Mariana
R. Pfaelzer, a federal judge in the central district of California, oversee
aspects of the case involving the bank’s Countrywide unit, which was in
California. Its request was granted. On Jan. 30, Judge Pfaelzer said she
would rule on the issue of who owns the legal claims.

Initially, in an October 2011 letter to A.I.G., the New York Fed agreed
that the insurer had the right to seek damages under securities laws on
instruments it sold to Maiden Lane II.

But more recently, the New York Fed began helping Bank of America battle
A.I.G. In late December, the New York Fed provided two declarations to the
bank. One stated that Maiden Lane II had “intended” to receive all
litigation claims relating to the mortgage securities, meaning that it
alone would have had the right to sue. Another said that the October letter
was not an interpretation of the Maiden Lane agreement.

But Jon Diat, an A.I.G. spokesman, said in a statement that “A.I.G. and the
Federal Reserve Bank of New York never discussed or agreed on any transfer
of A.I.G.’s residential mortgage-backed securities fraud claims to Maiden
Lane II.” He added that A.I.G. believes “it is the rightful owner of these
claims and remains committed to holding Bank of America and other
counterparties responsible for the harm caused.”

LAST week, the New York Fed opposed A.I.G.’s efforts to have the question
of who owns the legal rights decided in New York, whose law governs the
Maiden Lane II agreement, rather than in California. It was in this filing
that the New York Fed disclosed its confidential July 2012 deal with Bank
of America, releasing it of any liability arising from fraud in the Maiden
Lane II securities.

Let’s recap: For zero compensation, the New York Fed released Bank of
America from what may be sizable legal claims, knowing that A.I.G. was
trying to recover on those claims.

To anyone interested in holding banks accountable for mortgage
improprieties, the Fed’s actions are bewildering. If the Fed intended that
Maiden Lane II own the right to sue Bank of America for fraud, why didn’t
it pursue such a potentially rich claim on behalf of taxpayers? The Fed
made $2.8 billion on the Maiden Lane II deal, but the recovery from Bank of
America could have been much greater. Why did it instead release Bank of
America from these liabilities and supply declarations that seem to support
the bank in its case against A.I.G.?

The New York Fed would not discuss this matter, citing the litigation. But
taxpayers, who might have benefited had the New York Fed brought fraud
claims, deserve answers to these questions.

In an interview, Senator Sherrod Brown, Democrat of Ohio, who serves on the
Banking Committee, said the New York Fed’s behavior in this case
“underscores that the more we learn about these bailouts, gifts and
advantages that Wall Street gets, the clearer it becomes that one set of
rules applies to the largest megabanks and another set of rules to the
smaller financial institutions and the rest of the country.”

A court will decide who actually owns these particular fraud claims against
Bank of America. But the issue of Bank of America’s responsibility for
paying for the misdeeds of Countrywide during the financial crisis remains
much at issue. The New York Fed is among a group of institutions that
agreed in 2011 to settle with the bank for pennies on the dollar over
mortgage securities its Countrywide unit misrepresented as high quality
when they were sold.

That deal, for $8.5 billion, has not been approved by the court. Other
mortgage securities investors have objected to it, calling the amount too
small.

A New York Fed spokesman said it supported the settlement because it would
generate significant value without potentially high litigation costs.

But Walker F. Todd, a former official at the Federal Reserve Bank of
Cleveland, warned: “As a public entity, the Federal Reserve needs to take
its custody of public funds seriously enough to ask for more than merely
nominal compensation when it is giving up things of value to a bank holding
company. If the central bank starts releasing binding legal claims for
nominal compensation, it looks like just one more element of the secret or
back-door bailout of the banking system.”

Sure does.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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