Bank of America, and its subsidiaries, Merrill Lynch and Countrywide, will face a $10 billion lawsuit from the American International Group in what the New York Times calls "possibly the largest mortgage-security-related action filed by a single investor." AIG claims that about four out of ten mortgage securities were made to look better than they were by Bank of America, leading to $28 billion in losses during the financial crisis. In lieu of Justice Department prosecutions, investors have filed some 90 lawsuits with demands totaling at least $197 billion. The AIG suit comes on the heels of the government finding no evidence of criminal wrongdoing in its investigation of Washington Mutual.
"When federal authorities don't fulfill their obligation to enforce the law, they essentially give an imprimatur to the financial entities to do whatever they want and disregard the law," said Kathleen C. Engel, a professor at Suffolk University Law School in Boston. "To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general."
But as the Times notes, even when losses are recovered, because the charges are not criminal, "It is exceedingly rare that such deals require money to come from the pockets of corporate executives or directors." Instead, the people paying up are "innocent parties," like shareholders, "who have already been hurt by the questionable conduct."
In response, though they had not yet seen the suit, Bank of America called AIG "the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors."