BoA Setback Regarding Bank of NY
Yves Smith
Naked Capitalism
10-19-11
Bank of America Setback: $8.5 Billion Mortgage Settlement Successfully Removed to Federal Court (Updated)
Bank of America can’t win for losing.
Readers may recall the Charlotte bank tried arranging a settlement for a troublingly wide range of liability issues with its securitization trustee, Bank of New York, purportedly on behalf of investors. This deal looked like a victory for BofA, since it covered virtually all of the old Countrywide securitizations.
As we indicated the deal stank to high heaven, in part because Bank of New York itself has liability to investors on these very same trusts and BofA gave Bank of New York an expanded indemnification. That’s called a bribe, folks. And on top of that, Bank of New York is effectively the house RMBS trustee for BofA, so it isn’t surprising that Bank of New York might be a tad responsive to the wishes of a major, ongoing client.
The deal is subject to a so-called Article 77 hearing, and a raft of parties objected, not just quite a few investors, but also the FDIC and the attorneys general of New York and Delaware. The hearing was due to take place before a New York judge (this was treated as a state law matter) who has proven to be very bank friendly in the past.
One of the investor attorneys, David Grais, petitioned to have the case removed to Federal court. The drill is that the case is automatically removed, but the other side can and pretty much always does move to have the case returned to the original court. It is the judge in the new venue who hears the arguments and decides whether to keep the matter in his court or not.
The Federal judge decided to keep the case. Per Reuters (hat tip Buzz Potamkin):
Manhattan federal Judge William Pauley on Wednesday decided to keep a proposed $8.5 billion settlement over Bank of America Corp’s mortgage-backed securities in federal court, potentially lengthening the deal’s consummation….
“The settlement agreement at issue here implicates core federal interests in the integrity of nationally chartered banks and the vitality of national securities markets,” Pauley’s written order said in part.
“Lengthening the deal’s consummation” is an awfully optimistic conclusion. Most experts not only expect any deal to take two to three years to get done, but the odds are high, given the number of objections, that the deal is likely to be reopened, which means at a minimum it will cost BofA more dough. When you renegotiate a deal, there is no assurance it will get done.
Update. Whoa, the press report is even more misleading, in its terse fashion, than I realized. Get a load of the opening paragraph. The judge is not happy with the procedural move the parties to the settlement took. In particular, he stresses that Article 77 hearings (which set a very high bar for making objections) are exotic, and not appropriate for this sort of deal. He clear states that they are typically used only for “mere matters of administration” and pretty much have never been used post the 1960s.
And if you read the filing, he is ALSO not at all pleased with how Bank of New York has operated to pretend it is acting on behalf of investors yet refusing to say who they are. It looks like he will take a hard look at the deal and see signs that the parties to the deal have not operated in good faith. Just look at how he characterizes Bank of New York’s conduct. For instance: “…fearing that the trusts’ claims against Countrywide and Bank of America would lapse as a result of Bank of New York’s torpor…” Wow. This does not look promising for BofA, and Bank of New York may deservedly take it in the chin for its past conduct.
Scribd doc:
Pauley Ruling on Keeping $8.5bn Settlement in Federal Court – 10-19-2011
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