Since the summer of 2011, the insurance giant American International Group has been battling Bank of America over claims that the bank packaged and sold it defective mortgages that dealt A.I.G. billions of dollars in losses.
Now A.I.G. wants to be able to sue other banks that sold it mortgage-backed securities that plunged in value during the financial crisis. It has not said which banks, but possibilities include Deutsche Bank, Goldman Sachs and JPMorgan Chase.
But to sue, A.I.G. first must win a court fight with an entity controlled by the Federal Reserve Bank of New York, which the insurer says is blocking its efforts to pursue the banks that caused it financial harm.
The dispute illustrates the web of financial instruments that A.I.G. and the federal government became tangled in as the insurer nearly collapsed in 2008 and required a vast taxpayer bailout. It also shows the complexity of apportioning blame, five years after the financial crisis, and making wrongdoers pay for their share of the harm.
According to a lawsuit filed Friday, A.I.G. is seeking a declaration from a New York state judge that it has the right to pursue “billions of dollars of fraud and other tort claims that exist against numerous financial institutions,” even though Fed officials have said A.I.G. gave up that right.
“If I were the general counsel of A.I.G., I would seek this kind of declaratory judgment,” said Henry T. C. Hu, a former regulator who is now a professor at the University of Texas School of Law. “I don’t know whether I’d win, but it’s certainly worth trying.”
Much of A.I.G.’s rescue was needed because it didn’t have money in 2008 to cover guarantees that it sold banks in case the complex securities in their portfolios defaulted. But the latest dispute centers on a less familiar part of the bailout — the part in which reserves were removed from A.I.G.’s life insurance units and replaced with what turned out to be troubled mortgage securities.
The securitized housing loans lost value so fast when the bubble burst that some of A.I.G.’s life insurers risked being shut down by state insurance regulators. The Fed stepped in instead, and A.I.G.’s current lawsuit centers on the relationship that formed between the insurer and its rescuer as a result.
The Fed paid about $44 billion to extricate A.I.G.’s life insurance units from soured trades, and set up a special entity, Maiden Lane II, to buy the plunging mortgage securities for $20.8 billion. Those securities had an original face value of $39.3 billion.
Maiden Lane II is the sole defendant in A.I.G.’s lawsuit. The complaint says that at the moment Maiden Lane II bought the securities, it locked the insurance units into an $18 billion loss — the difference between the securities’ face value and their price in late 2008, arguably the bottom of the market. A.I.G. attributes a large chunk of its losses to the mortgage securities that it bought from Bank of America. It sued the bank for $10 billion in August 2011.
But one of Bank of America’s defenses is that A.I.G. lacks standing, having given its litigation rights to Maiden Lane II.
Last month, for instance, two senior Fed officials submitted declarations saying they believed that as part of the sale of assets to Maiden Lane II, A.I.G. had agreed not to go after any of the banks.
That prompted A.I.G. to file its suit, arguing that when it sold the tainted assets to Maiden Lane II, it did yield some litigation rights, but not the ones giving it the right to bring fraud complaints against the banks that put the securities together.
A.I.G. said those banks had misled its life insurance and money management businesses regarding the quality of the securities, and “obtained artificially high credit ratings” so the securities would pass the life insurers’ investment rules.
A.I.G.’s lawsuit is separate from one that until late last week it considered joining, which argued that the New York Fed acted unconstitutionally during the bailout, harming the insurer’s shareholders.
That lawsuit was filed in 2011 by Maurice R. Greenberg, a former chief executive of A.I.G. and a major shareholder. Mr. Greenberg had hoped the company would join the lawsuit, but the possibility that A.I.G. would sue its rescuer drew sharp criticism and A.I.G.’s board decided against it.
The new suit isn’t seeking financial compensation from the Fed.
The New York Fed, which has sole control of Maiden Lane II, declined to discuss the matter and has not yet responded to the complaint. A hearing on the arguments in the Bank of America case is scheduled for Jan. 29 in U.S. District Court for the Central District of California.
A.I.G. did not name other banks it would take action against, but it bought mortgage-backed securities from banks that included Deutsche Bank, Goldman Sachs and Bear Stearns, which was acquired during the financial crisis by JPMorgan. Much of the securities were sold to A.I.G. by Lehman Brothers, which collapsed in September 2008.
A.I.G. watchers are intrigued by the newest chapter of the story.
“A.I.G. has a credible claim that they’re pursuing aggressively,” said Michael J. Aguirre, a San Diego lawyer who is representing a California couple who argue the Fed was bilked when it bailed out A.I.G. “The question now is how aggressive the Fed is going to be on pushing back.”
“Is the government going to say, ‘We’re not pursuing these claims, but we’re not going to let anybody else pursue them either — we’re just going to let the banks walk away with fraud profits?’ ” he added.
Although it received relatively little scrutiny, the life insurance part of A.I.G.’s bailout was costlier than the better-known part involving A.I.G.’s Financial Products unit, which sold the notorious guarantees, known as credit-default swaps.
In 2011, A.I.G. tried to buy back the entire pool of mortgage securities from Maiden Lane II, but its offer, about $15 billion, was rejected.
Subsequently other bidders acquired all the assets, and last February the New York Fed announced it had made a $2.8 billion profit on its roughly $20 billion investment in the rescue entity. Terms of the bailout called for it to give one-sixth of any profit to A.I.G.
Maiden Lane II no longer holds any of the mortgage securities and is winding down its affairs.
