NY AG Schneiderman intervenes in BoA/BoNYM RMBS settlement

Originally posted at AMERICAblog

Gretchen Morgenson reports:

The New York attorney general is moving to block a proposed $8.5 billion settlement struck in June by Bank of New York Mellon and Bank of America over troubled loan pools issued by Countrywide. A lawsuit filed late Thursday accuses Bank of New York of fraud in its role as trustee overseeing the pools for investors.In papers filed in New York State Supreme Court, lawyers for Eric T. Schneiderman, the attorney general, contended that Bank of New York misled investors about its conduct as overseer of the securities. The bank also breached its duties to investors by agreeing to the deal with Bank of America, according to the complaint, because the trustee is conflicted and “stands to receive direct financial benefits” as a result of the agreement.

Questioning the fairness of the deal, the attorney general’s lawsuit said that it could “compromise investors’ claims in exchange for a payment representing a fraction of the losses” that have been suffered by investors.

David Dayen highlights some key takeaways:

This is a major allegation. Schneiderman is saying that the game-playing with securitizations, which has been well-documented, represent violations of securities law on the part of the trustee and the originator of the loans. They knowingly sold junk to investors and violated their own agreements. And now they’re trying to whitewash it through a settlement where the bank and the trustee are colluding with one another. As Schneiderman says, “the Trustee stands to receive direct financial benefits under the Proposed Settlement.”And here’s the real bombshell: Schneiderman alleges that Bank of New York Mellon was aware that Countrywide failed to transfer loans properly to the trust. This means they sold what amounted to non-mortgage backed securities to investors, who should then be granted the full value of these bonds back. The pooling and servicing agreements governing the loan transfers are very precise, and were violated in this case, according to the AG.

We’ll see how this plays out in the courts, but it’s clear that Eric Schneiderman is one of the few real cops on the beat policing Wall Street. His actions here could have serious consequences to the ongoing 50 state attorneys general negotiations being lead by Iowa AG Tom Miller, who has sought to immunize banks from the consequences of robosigning and foreclosure fraud in exchange for a small cash settlemen. While the Miller negotiations have sought to move past this lawlessness (look forward, not back!), Schneiderman’s actions demonstrate the impossibility of a global settlement being anything but a disservice to homeowners, investors, and the American public. There needs to be more investigation and real accountability. Schneiderman’s intervention in the Bank of New York/Bank of America settlement is a strong start.

Yves Smith at Naked Capitalism has more about what Schneiderman is doing and what the consequences of his actions should be.

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