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  • Writer's pictureKirk Hartley

Will Mass Tort Claims Take Major Banks Into Insolvency ?

Will litigation liabilities overwhelm Countrywide and/or Bank of America and force one or more entities into insolvency? That’s the question posed by Steven Davidoff in a DealBook post which presents various allegations drawn from AIG’s recent lawsuit against the bank. AIG’s complaint details various inter-bank transactions which could be characterized as fraudulent transfers.

Wall Street used to watch and bet on share prices as litigation claims took down former manufacturers facing mass tort claims from past asbestos-containing products. Now the scene has changed as Wall Street firms are themselves targeted as having committed massive, tortious frauds. If there is an insolvency, the liability estimation hearing certainly would be interesting.

Set out below are some of the key excerpts as culled by DealBook:

"The complaint filed by A.I.G. against Bank of America describes these transactions: On June 2, 2008, Countrywide Home Loans, a subsidiary of Countrywide Financial, sold Countywide Home Loans Servicing, another subsidiary, to NB Holdings, another subsidiary that was wholly owned by Bank of America. Bank of America paid Countrywide Home Loans for this sale by issuing it a note for $19.7 billion. Countrywide Home Loans Servicing was the actual subsidiary of Countrywide that serviced almost all of Countrywide’s mortgage loans. Countrywide Home Loans also sold a pool of residential mortgages to NB Holdings for $9.4 billion. On Nov. 7, 2008, Countrywide Home Loans sold the rest of its assets to Bank of America for $1.76 billion.

Separately, Bank of America also acquired notes worth $3.6 billion from Countrywide Financial’s bank and the equity in a number of other Countrywide subsidiaries. Bank of America also assumed $16.6 billion of Countrywide’s debt and guarantees.

If the A.I.G. complaint accurately describes these transactions, it means that the net effect was to leave Countrywide Financial and Countrywide Home Loans without assets, except the $11.16 billion payment and the $19.7 billion and $3.6 billion notes ($34.46 billion total). Countrywide’s liabilities stayed with the Countrywide.

Bank of America turned Countrywide into a shell with assets of $34.46 billion, part of it in the form of loans from Bank of America. Once the settlements exceed this amount, Countrywide is out of money. Again, the exact amount is uncertain and this is an approximation, but it appears that Countrywide’s remaining assets are rapidly being subsumed by litigation claims and other liabilities related to the financial crisis."

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