AIG told to focus on Bank of America litigation first
American International Group (AIG)'s suit against Maiden Lane II, the vehicle created by the Federal Reserve Bank of New York to buy toxic mortgage debt from the US insurance leviathan in 2008, was halted late last month.
AIG is seeking a judgment on whether it owns the litigation claims relating to the securities, and so whether it is able to prosecute Bank of America and recoup its losses.
A New York judge put the tort claim dispute on hold while a Los Angeles federal court decides on AIG's $10bn lawsuit against Bank of America.
But while rejecting AIG's bid, US District Judge Lewis Kaplan said that "on the face of it" some of the New York Fed's and Maiden Lane's actions "perhaps are unattractive and, indeed, wrongful".
AIG alleges that Bank of America wilfully misrepresented the quality of $26bn of mortgage-backed securities it sold to the insurer before the 2008 financial crash.
But the New York judge ruled that, were AIG to win its case against Bank of America in the California court, proceedings against Maiden II would be a waste of time.
The judge said there was no justification for two courts deciding if the bank owes the insurer recompense or damages, adding that AIG had a chance to appeal.
AIG claimed that between 2005 and 2007, the banking sector ditched underwriting guidelines and ignored credit quality metrics and package securities while knowing that the underlying securities were sub-prime.
Maiden Lane II bought over 850 tranches of mortgage securities from AIG for $21bn in order to ease liquidity in December 2008. AIG said that it lost approximately $18bn, since the assets were actually worth $39bn.
The insurer sued Bank of America in August 2011, asking for $10bn in damages and accusing it of conducting a "massive fraud". But in December 2012, the New York Fed said that when Maiden Lane II bought the securities from the insurer in 2008 it also acquired all litigation claims relating to the mortgage debt. AIG was bailed out by the US government for $182bn. The bailout was fully paid off last year.