American International Group Inc. argued on June 4 that aproposed $8.5 billion settlement between Bank of America Corp. andinvestors in Countrywide Financial Corp. mortgage-backed securitieswas not big enough.

The arguments came in the second day of a hearing before JusticeBarbara Kapnick in New York state court on whether to approve the2011 settlement.

Bank of America, which rescued Countrywide at the height of thefinancial crisis in 2008, agreed in 2011 to settle with investorswho said Countrywide had misrepresented mortgages underlying itssecurities.

A lawyer for AIG, one of a handful of entities objecting to thedeal, said the investors had first asked for $50 billion. "Why didthat number crater from fifty billion dollars down to eight?"Daniel Reilly, of the law firm Reilly Pozner, asked in his openingarguments.

Reilly also said that Bank of America had a strategicrelationship with BlackRock Inc, one of the investors that supportsthe deal, and with Bank of New York Mellon Corp , which is thetrustee for 530 trusts holding the securities in question.

Reilly said Kapnick will have to consider whether therelationships are the reason "why the number craters" and whyinstitutional investors never "seriously considered" a lawsuitagainst Bank of America. "This settlement amount is inadequate," hesaid.

Kathy Patrick, the lawyer who negotiated the settlement onbehalf of 22 institutional investors, defended the deal in heropening statement, saying it was the largest in the history ofprivate litigation and nearly twice the $4.8 billion thatCountrywide was worth.

Patrick, of the law firm Gibbs & Bruns, representsBlackRock, MetLife Inc, Allianz SE's Pacific Investment ManagementCo. (Pimco) and other investors.

Patrick said witnesses will testify that Bank of America ChiefRisk Officer Terry Laughlin warned bondholders during negotiationsthat Bank of America could put Countrywide into bankruptcy, leavinginvestors with a smaller chance of recovery.

"Mr. Laughlin told investors at the outset that they hadreceived clearance from the OCC to bankrupt Countrywide if that waswhat was necessary to protect Bank of America," attorney Patricksaid. The Office of the Comptroller of the Currency is theregulator for national banks.

Kent Smith of Pimco will be the first witness in the case,testifying on June 6 after a recess on June 5.

Laughlin is expected to testify later in the proceeding.

A spokesman for Bank of America declined to comment.

Derek Loeser, a lawyer representing the Federal Home Loan Banksof Boston, Chicago and Indianapolis, which are also objecting tothe settlement, said it did not provide enough money for the harmcaused.

"The liability is so huge that it was one of the factors thatbrought down the economy," Loeser, of Keller Rohrback, told thejudge in his opening.

Reilly, the lawyer for AIG, said the proceeding represented thelast phase of the 2008 financial crisis.

"You are making a determination as to whether the banks arewinners or the investors are," he told Kapnick.

On Monday, Matthew Ingber of law firm Mayer Brown, representingBank of New York Mellon Corp, said in his opening statement thatBNY Mellon agreed to the settlement because it was "a win for allinvestors."

Kapnick has set aside the first two weeks of June to hear thecase, and it is then expected to resume in July. A ruling couldtake months after the proceeding is over.

The case is In re: Bank of New York Mellon, New York StateSupreme Court, New York County No. 651786/2011.