AIG Sues BofA for 10 BILLION: Countdown to Bank Of America Deathwatch or Bailout 2.0?

The suit seeks to recover more than $10 billion in losses on $28 billion of investments, in possibly the largest mortgage-security-related action filed by a single investor.

It claims that Bank of America and its Merrill Lynch and Countrywide Financial units misrepresented the quality of the mortgages placed in securities and sold to investors, according to three people with knowledge of the complaint.

"When federal authorities don’t fulfill their obligation to enforce the law, they essentially give an imprimatur to the financial entities to do whatever they want and disregard the law,” said Kathleen C. Engel, a professor at Suffolk University Law School in Boston. “To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general.”
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A.I.G. also plans to file a request to intervene in the $8.5 billion settlement proposed in June by Bank of America and Bank of New York Mellon, which represents mortgage security investors including BlackRock and Pimco. Mr. Di Rita said on Sunday that large sophisticated investors have signed on to that deal.

A.I.G. plans to object to the deal because it believes the amount is too low and that Bank of New York’s role was rife with conflicts, according to the people with knowledge of A.I.G.’s plans.

Cases like A.I.G.’s may turn up information in interviews and document discovery that could be helpful to the government, though it is unclear if the Justice Department would seek to reopen closed cases.

Already, the private suits are revealing dubious activities. One case against Bear Stearns indicates that its employees put troubled mortgages into securitization trusts that it sold to customers, while simultaneously receiving reimbursement — known as apology payments — from the companies that originated the loans.