Amid the furor last week over whether AIG would thumb its nose
at its federal rescuers and join former chairman Hank
Greenberg's $25 billion constitutional case against the United
States, a curious side deal by AIG and Greenberg's Starr
International was mostly overlooked. Last year, as government
lawyers prepared motions to dismiss Starr's suits against both
the United States and the Federal Reserve Bank of New York, AIG
signed an agreement with Starr that kept the insurer out of the
fray -- even though one of the most powerful defenses against
the claims Starr was asserting on behalf of AIG was that
Greenberg's lawyers had served the requisite presuit demand on
the corporation's board.
We still don't know exactly why AIG agreed to the side deal
with Greenberg and we probably won't ever get a direct answer
now that AIG is out of the case. (AIG's board voted Wednesday to stay out of Starr's Fifth Amendment "takings" case and Starr
lawyer David Boies of Boies, Schiller & Flexner subsequently
said Greenberg won't sue the board for breach of duty.) But a
filing Friday by AIG shows that the insurer has its own
megabucks dispute under way with the Federal Reserve. That could
be one of the reasons AIG didn't help the government defend
against Starr's suits -- and, more importantly, at this point,
it could affect AIG's $10 billion claims against Bank of
America, as well as BofA's proposed $8.5 billion
breach-of-contract settlement with holders of Countrywide
mortgage-backed securities.
AIG's new filing, styled as a New York State Supreme Court
complaint against the New York Federal Reserve's Maiden Lane
special purpose vehicle, requests a declaration that in 2008,
when the Fed paid $20.8 billion to acquire AIG's mortgage-backed
portfolio through the Maiden Lane vehicle, Maiden Lane did not
acquire AIG's rights to sue MBS issuers for securities fraud.
(The Fed has since sold off the Maiden Lane MBS portfolio, at a
profit of more than $2 billion.) The complaint explains that the
suit is a response to recent declarations by Fed officials in
AIG's case against Countrywide, which (as I've told you) Bank of
America has moved to dismiss on the grounds that the Fed, and
not AIG, owns the fraud claims AIG has asserted.
What's really fascinating, however, is the suit's discussion
of AIG's long-running feud with the New York Fed over which of
them has the right and the responsibility to bring MBS issuers
to account. AIG's new filing suggests that if the Fed's
interpretation of the Maiden Lane transaction is correct, then
the Federal Reserve Bank has failed American taxpayers by
neglecting to bring securities fraud claims against BofA. So
while AIG's suit, in one sense, is yet more litigation
gamesmanship with its archenemy Bank of America, the insurer's
dispute with the Fed also raises some really serious policy
questions about federal bailouts. Can taxpayers count on the Fed
-- which, of course, has extremely complex relationships with
U.S. banks -- to sue those banks for fraud on their behalf? And
if not, should the Fed leave the right to sue with the
bailed-out company, but pay less for the securities?
This particular dispute dates back to the fall of 2011, when
New York Fed general counsel Thomas Baxter sent a letter to AIG
counsel Michael Carlinsky of Quinn Emanuel Urquhart & Sullivan.
Baxter took note of AIG's suit against Bank of America and asked
Carlinsky to confirm that the suit did not make any claims based
on supposed breach of contract by BofA. The Fed GC didn't
discuss it in his letter, but it's important to remember that in
the fall of 2011, the Fed and AIG were on opposite sides of the
fight over Bank of America's proposed $8.5 billion
breach-of-contract, or put-back, settlement with holders of
Countrywide notes. The Fed's Maiden Lane vehicle, you will
recall, was part of the noteholder group that negotiated the
deal with BofA. AIG, on the other hand, was one of the most
prominent objectors to the proposed settlement.
In a response to Baxter's letter, AIG GC Thomas Russo
confirmed that the insurer wasn't bringing put-back claims based
on securities it had sold to Maiden Lane and wasn't demanding
that Bank of America buy back securities AIG didn't own. But he
also said that AIG has the right to bring so-called "rescissory"
damages, seeking cash for the value of securities AIG was
supposedly duped into buying. In a series of ensuing letters,
AIG and the Fed tried and failed to reach an understanding of
precisely what the Maiden Lane purchase agreement had to say
about the suit AIG had brought against BofA.
In October 2012, the bank's lawyers at Reed Smith and
Munger, Tolles & Olson filed a motion to dismiss AIG's claims
against Countrywide that specifically cited AIG's release of
fraud claims to the Fed. (The Countrywide piece of AIG's case
was severed from claims against BofA and Merrill Lynch and sent
to the Countrywide MBS multidistrict litigation before U.S.
District Judge Mariana Pfaelzer in Los Angeles.) After AIG's
lawyers at Quinn Emanuel filed a response that disclosed the
letters AIG had exchanged with the Fed and argued that the Fed
had conceded ownership of the fraud claims, BofA submitted
rebuttals from former Fed vice president James Mahoney and Fed
deputy GC Stephanie Heller.
In Mahoney's declaration, the former Fed official, who
negotiated the Maiden Lane deal, said the Fed's intent was to
retain all litigation claims stemming from the MBS it bought
from AIG. Heller's declaration said that AIG was misrepresenting
the end result of the letters between the Fed and AIG in the
fall of 2011. The Fed, she said, never agreed that AIG had the
right to bring securities fraud claims, and "when the exchange
with AIG turned into a negotiation, the FRBNY discontinued its
dialogue with AIG concerning this matter as the FRBNY was not
interested in negotiating a new allocation of claims or other
after-the-fact agreement."
Those declarations led to AIG's new complaint, which shrugs
off Mahoney's "vague" assertion and says Heller's argument that
the Fed walked away from discussions with AIG in the fall of
2011 "is difficult to reconcile with how sophisticated counsel
typically behave in matters involving billions of dollars." If
the Fed really disagreed with the position AIG outlined in its
final letter, AIG said, "its counsel would not have remained
silent while AIG asserted its unambiguous position and the
(BofA) action advanced."
The Fed certainly hasn't acted like it owned billions of
dollars of securities fraud claims against BofA, AIG argued in
the declaratory judgment complaint. It never tried to intervene
in AIG's case and, unlike the Federal Deposit Insurance
Corporation and the Federal Housing Finance Agency, didn't file
its own securities case against BofA or Countrywide. Instead,
the complaint pointed out, the Fed has sided with BofA in the
proposed $8.5 billion put-back deal, in which AIG is now the
leading objector. The Fed actually asked AIG in a letter in October 2011 to drop its objections to the put-back settlement,
which the Fed accused AIG of using as leverage in its securities
litigation against BofA. (AIG responded in November 2011 that it
wasn't objecting just for leverage but was "pursuing all avenues
of recovery" against BofA.)
With the ownership of the securities claims already briefed
before Judge Pfaelzer in AIG's case against BofA, I'm not sure
AIG can seriously expect a declaratory judgment ruling in New
York state court before Pfaelzer decides the question. There are
optics to consider, though. State Supreme Court Justice Barbara
Kapnick is scheduled to hold hearings on whether to approve
BofA's $8.5 billion deal in May, with AIG's lawyers at Reilly
Pozner leading opposition to the deal. By filing its declaratory
judgment suit against the Fed in the same court, AIG underlines
its argument that the Fed and other noteholders in its group
were too quick to reach a deal with Bank of America.
(Reporting by Alison Frankel)
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