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BlackRock Set for Final Clash with AIG on B of A Mortgage Deal

NOV 18, 2013 10:38am ET
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BlackRock Inc. and Pacific Investment Management Co. are among investors set to make their final push for court approval of an $8.5 billion settlement with Bank of America Corp. over mortgage bonds that opponents say resolves only a small portion of their losses.

Lawyers for the investor group, which also includes Goldman Sachs Group Inc., are scheduled to begin closing arguments today in New York state court in Manhattan about why the settlement should be approved over opposition from American International Group Inc. AIG calls the deal a “pennies on the dollar” settlement while investor losses totaled more than $100 billion.

“This settlement—which resulted from a process that reeks of collusion and is infected with countless disabling conflicts—could not become the hallmark of conduct for which future trustees strive, but rather the beacon for what should be avoided,” opponents of the accord said in court papers.

Final arguments by supporters and opponents will wrap up a hearing over the agreement that began in June before New York State Supreme Court Justice Barbara Kapnick. The hearing began two years after Bank of America reached the settlement to resolve claims over mortgages packaged into securities. The accord settles claims the loans backing the bonds didn't meet their promised quality.

For Charlotte, North Carolina-based Bank of America, the settlement is part of an effort by Chief Executive Officer Brian Moynihan to resolve liabilities tied to faulty mortgages that have cost the company about $50 billion in legal claims, including those the bank inherited with the purchase of home lender Countrywide Financial Corp. in 2008.

Rejection of the settlement could expose the lender to future lawsuits by investors looking to recover losses, said Isaac Gradman, an attorney at Perry, Johnson, Anderson, Miller & Moskowitz LLP who isn’t involved in the case.

“This one is really tough to call because it’s so unprecedented, it’s so broad in scope and it has such a major impact,” said Gradman. “Ultimately it comes down to her gut feeling whether the deal is reasonable and constructed in a reasonable way.”

Witnesses at the hearing included Bank of America Chief Risk Officer Terrence P. Laughlin, who testified that negotiations leading up to the deal were contentious.

Bank of New York Mellon Corp., the trustee for investors, is seeking approval of the settlement under Article 77, a state law that allows trustees to seek judicial authorization for their actions.

The case shows that years after the credit crisis, litigation related to mortgage-backed securities is continuing, said Mark Palmer, an analyst at BTIG LLC in New York.

“There is definitely an open question about whether BofA would have to cut a more expensive deal if the judge finds against Bank of New York Mellon and the settlement is scuttled,” Palmer said.

BNY Mellon and the investor group supporting the settlement argue the trustee’s decision to enter into the accord was reasonable and should be approved. The settlement benefits investors by giving them a known recovery instead of years of uncertain and costly litigation, they say.

“The objectors offer a pretend world: one in which there is an ostensibly perfect, riskless and larger result to be had through litigation,” the investors said in a court filing.

Opponents, who are bound by the settlement if it’s approved, say the process leading to the agreement was “plagued by conflict and collusion.” BNY Mellon’s law firm, Mayer Brown LLP, was conflicted because it regularly represents Bank of America, they said. The bank also didn’t investigate the strength of investor claims, according to opponents.

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