MANHATTAN (CN) – AIG sued Bank of America, Merrill Lynch and Countrywide Financial for $10 billion Monday, claiming they fraudulently induced it to invest $28 billion in nearly 350 residential mortgage-backed securities from 2005-07, and that the defendants’ frauds “at every level of the securitization process” cost AIG “and ultimately American taxpayers” more than $10 billion.
The 187-page complaint in New York County Court contains 3 pages of fraud allegations in the Table of Contents alone.
The complaint, filed as world financial markets crumbled due to Standard & Poor’s downgrading of the U.S. government’s creditworthiness, claims the defendants snookered the rating agencies during the housing boom by providing them the same fraudulent materials they gave to AIG and other buyers: “To make matters worse, defendants provided to the rating agencies the same false credit metrics that riddled the Offering Materials, thus allowing defendants to engineer inflated credit ratings for the RMBS [residential mortgage-backed securities], which they also used to market the securities.”
The Table of Contents provides a guided tour of the allegations, which AIG is not the first to make against Countrywide, which Bank of America bought on the cheap after it collapsed, and Merrill Lynch, which Bank of America also bought after the fabled stockbroker was caught with its pants down during the market collapse.
As summed up by the Table of Contents, the defendants’ wrongdoing included:
Misrepresentations Regarding Loan Underwriting Standards and Practices; Misrepresentations Regarding Loan-to-Value and Combined Loan-to-Value Ratios;
Misrepresentations Regarding Owner-Occupancy;
Inflated Credit Ratings;
All Deals Have Suffered Significant Credit Rating Downgrades;
Defendants Ignored Stated Underwriting Guidelines;
Countrywide Ignored Its Underwriting Guidelines;
Countrywide Schemes to Increase Its Market Share But Pledges Continued Rigorous Underwriting;
Countrywide Cedes Its Underwriting Policy to the Market’s Lowest Common Denominator Through Its “Matching” Mandate;
Countrywide’s Use of “Exceptions” Guaranteed that Virtually Every Loan Would Be Approved;
Through Countrywide’s Matching Program and Its Use of Exceptions, “Saleability” Became the Sole Criteria Used to Approve a Loan;
Countrywide Abused the No-Documentation Loan Process and Falsified Loan Applications;
Countrywide Ignored Its Internal Risk Department Who Warned That Underwriting Standards Had Been Abandoned;
Countrywide’s Inflated Appraisals Skewed Loan-to-Value Figures Reported to Investors Like AIG;
Countrywide Encouraged Staff Through Compensation and Other Incentives To Put Borrowers Into Higher Risk Loans More Profitable to Countrywide;
Countrywide Developed Toxic “Exotic” Loan Products With Extreme Risk;
Countrywide Admits to Using Adverse Selection in Pooling Loans, Keeping the Best Loans For Itself;
Third-Party Due Diligence Firms Conclude that Countrywide Loans Are Defective;
Analysis by Parties With Access to Actual Loan Files Shows that Countrywide Abandoned Its Underwriting Guidelines;
Merrill Ignored Its Underwriting Guidelines;
Merrill Seeks To Increase Its Market Share;
Merrill Instructed Subprime Originators to Increase Their Origination Volumes and Originate Riskier Loans;
Merrill Waived Loans That Failed To Meet Underwriting Guidelines;
Bank of America Ignored Its Underwriting Guidelines;
Former Employees Confirm That Bank Of America Abandoned Its Underwriting Guidelines;
AIG’s Limited Access to Loan Files Confirms Bank of America Abandoned Its Underwriting Guidelines;
F. The Economic Downturn Cannot Explain the High Default Rates, Foreclosures, and Delinquencies in the Collateral Pools;
THE DEFENDANTS KNEW THEIR REPRESENTATIONS WERE FALSE;
Countrywide Knew Its Representations Were False;
Merrill Knew Its Representations Were False;
Bank of America Knew Its Representations Were False.
The complaint states: “Between 2005 and 2007, defendants fraudulently induced AIG to invest in nearly 350 residential mortgage-backed securities (‘RMBS’) at a price of over $28 billion. Driven by a single-minded desire to increase their share of the lucrative RMBS market and the considerable fees generated by it, defendants created and marketed RMBS backed by hundreds of thousands of defective mortgages.
“The Offering Materials used to sell the RMBS fraudulently misrepresented and concealed the actual credit quality of the mortgages by providing false quantitative data about the loans, thus masking the true credit risk of AIG’s investments. The Offering Materials also falsely claimed that the mortgages had been issued pursuant to objective underwriting guidelines. In fact, the loan originators, including defendants, encouraged borrowers to falsify loan applications, pressured property appraisers to inflate home values, and ignored obvious red flags in the underwriting process.
“The stated underwriting guidelines had been replaced by an undisclosed governing principle: Defendants would originate or acquire any loan that could be sold to third-party investors like AIG through RMBS securitization, no matter how risky. To make matters worse, defendants provided to the rating agencies the same false credit metrics that riddled the Offering Materials, thus allowing defendants to engineer inflated credit ratings for the RMBS, which they also used to market the securities. AIG, which suffered more than $10 billion in losses as a result of defendants’ misconduct, would not have purchased the securities if it had known the truth.”
AIG seeks rescission of contracts and compensatory and punitive damages for fraudulent inducement, aiding and abetting fraudulent inducement, securities and underwriting violations, negligent misrepresentation, and successor and vicarious liability.
Its lead counsel if Michael Carlinsky with Quinn Emanuel Urquhart & Sullivan.
Bank of America and Countrywide have been sued more than 1,300 times this year alone, according to the Courthouse News Service database, often on allegations similar to these.