AIG Makes Case for Its Ability to Sue Banks over MBS; Clashes with Fed

American International Group contends it never forfeited its right to sue mortgage bankers that sold it virtually worthless mortgage-backed securities, and the insurer says a Federal Reserve official has made inconsistent statements to the court on the matter.

AIG is claiming that it is owed perhaps $10 billion from the banks.

AIG’s statement is contained in a March 28 filing related to its case against BankAmerica, the successor to Countrywide Financial, and Merrill Lynch in federal court in California.

The suit was filed in January in New York State Supreme Court, in Manhattan, but the case was transferred to Los Angeles in February in order to consolidate all MBS claims against Countrywide.

AIG is at odds with the Federal Reserve Bank of New York regarding whether the insurer gave up its ability to sue the mortgage bankers when it transferred the mortgage-backed securities in question to Maiden Lane II—a facility set up by the Fed to relieve AIG of the toxic assets as part of the government assistance the insurer received beginning in 2008.

In the current court battle, AIG is arguing that the Fed had earlier allowed it to pursue the lawsuits against the banks, but later supported the banks by stating that AIG lost its ability to recoup its losses through lawsuits when it turned the securities over to the Fed via MLII.

Indeed, the latest March 28 AIG brief asserts that March 18 testimony by a Federal Reserve Bank of New York official, James Mahoney, “retreated” from assertions made in a December brief on behalf of BankAmerica. In that declaration, Mahoney asserted that “[t]he FRBNY and ML II intended for ML II to receive all transferable and assignable benefits associated with the securities and related instruments, including litigation claims associated with those securities or their acquisition by AIG.”

But, AIG says in the filing, “In his March 18 deposition, he backpedaled, admitting that when the [MLII deal] was negotiated, he and the FRBNY were utterly ‘unaware of any actual [fraud or tort] claims that may have existed,’ and he was not ‘even thinking about the concept that AIG may have had tort claims.’”

The AIG brief further says that Mahoney “never discussed with anyone at the FRBNY, ML II, or AIG the idea that AIG was somehow giving up its [tort] claims by reference to ‘Related Instruments.’”

AIG lawyers also cite testimony by the insurer’s negotiators involved in the creation of Maiden Lane II that “unequivocally establishes that the assignment of AIG’s tort claims was not even discussed” by the Fed and AIG. “We did not negotiate it; we did not intend to transfer it,” AIG’s lead negotiator, Christopher Swift, says in the filing.

The AIG filing also cites the testimony of Steven Manzari, a senior vice president of the FedBankNY, that “he did not recall any discussion leading up to the execution of the ML II documents about AIG somehow giving up its rights to try to seek any recovery from anyone for the loss of the $17 billion” AIG sustained on the transfer of the residential mortgage-backed securities to ML II as part of the deal.

Maiden Lane II was mostly liquidated late year at a total value of 30 to 50 cents on the dollar.

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