(MintPress) – While government bailouts provided to banks caught up in the mortgage foreclosure mess are often spoken about in the past tense, a new report indicates the New York Federal Reserve is still letting big banks off the hook.
Documents released through a settlement reached between Bank of America and the New York Federal Reserve reveal the bank was relieved of its legal obligation relating to sales and losses in mortgage-backed securities, according to the New York Times.
The settlement was revealed after American International Group (AIG) filed a lawsuit against the Fed for the purpose of clarifying it had not sold mortgage securities to the bank — a clarification necessary for its case against Bank of America.
What was revealed in those court filings is a problem for AIG — an expensive problem, as it was attempting to sue Bank of America to the tune of $7 billion for the sale of “toxic” mortgage holdings.
Through a twisted web of bailout and mortgage-backed security sales, AIG will likely be prevented from seeking losses related to mortgage security purchases from Bank of America in the heart of the mortgage crisis.
Because AIG sold mortgage securities to Maiden Lane II, a body of the Fed, Bank of America claimed AIG didn’t have the legal grounds to sue for a debt it no longer possessed. AIG claims the sale to Maiden Lane II was part of the bailout agreement with the Fed, nullifying Bank of America’s argument. That was the crux of its lawsuit against Bank of America.
“AIG and the Federal Reserve Bank of New York never discussed or agreed on any transfer of AIG’s residential mortgage-backed securities fraud claims to Maiden Lane II,” AIG Spokesman Jon Diat told the New York Times in a statement.
The debacle dates back to the 2008 market collapse, when AIG was bailed out — partially — by the Fed. As part of the bailout agreement, Maiden Lane II was created “to buy residential mortgage-backed securities from AIG and ease liquidity strains,” according to Reuters.
It turned to Bank of America to make up the difference and sued the company for $10 billion in damages — $7 billion related to securities purchased from the bank.
Whatever the argument is now, it doesn’t seem to matter.
The Fed, for reasons unknown, relieved Bank of America in July from its legal obligations relating to mortgage-backed securities losses. This allowed the bank off the hook, essentially. At the same time, the Fed received a $43 million payment from Bank of America relating to disputes with just two mortgage security cases, according to the Times.
The Fed declined to comment to the New York Times, citing pending litigation. It also did not issue statements to Reuters News Agency in January, when a lawsuit was filed against the Fed on behalf of AIG seeking clarification that AIG did not transfer billions to Maiden Lane II.
To skeptics, it looks a lot like a government bailout of Bank of America.
“To anyone interested in holding banks accountable for mortgage improprieties, the Fed’s actions are bewildering. If the Fed intended that Maiden Lane II own the right to sue Bank of America for fraud, why didn’t it pursue such a potentially rich claim on behalf of the taxpayers? The Fed made $2.8 billion on the Maiden Lane II deal, but the recovery from Bank of America could have been much greater,” contends Gretchen Morgenson of the Times.