The BofA settlement blowback has already begun. If you’ve been following my recent posts (here and here) about the proposed Bank of America (“BofA”) settlement involving the Bank of New York (“BoNY”) and the Kathy Patrick-led investor group (the “Investor Group”), you know that I suspected that we would see a number of challenges levied against various aspects of the accord. However, I never expected these challenges to come so quickly or from so many different angles.
Let’s take a quick rundown of the various responses we’ve seen already:
- Walnut Place. The first investors to challenge the proposed pact were various entities going by variations on the name Walnut Place. Represented by litigator David Grais, the Walnut Place entities already made waves back in February by filing a $1+ billion lawsuit, not only against BofA to force loan repurchases, but also against BoNY because it “unreasonably failed” to force BofA to incur buy back loans. In its February lawsuit, Walnut Place alleged that Countrywide had made false representations about 1,432, or nearly 66 percent, of the 2,166 loans it investigated. The Walnut Place LLCs were set up to allow certain unnamed hedge funds to pursue repurchases anonymously.On July 5, these entities moved to intervene in the BofA settlement on three general grounds: 1) the settlement amount is too low; 2) the investor group pushing for the settlement is conflicted; and 3) BoNY did not represent all investors because it negotiated the settlement in secret with certain investors without consulting others. The full petition is available here. According to the WSJ, David Grais is “in discussions with other investors about also moving to intervene.”
- Public Pension Fund Committee. Also on July 5, a group of public pension funds issued a press release stating that they would file a petition in New York Supreme Court to intervene and take discovery on the fairness of the BofA settlement. According to Bloomberg, the funds that have asked to intervene include the Policemen’s Annuity & Benefit Fund of Chicago, the Westmoreland County Employee Retirement System, City of Grand Rapids General Retirement System, and City of Grand Rapids Police and Fire Retirement System.David Scott, the attorney representing the Public Pension Fund Committee, stated that, “Public pension funds purchased billions of dollars of Countrywide mortgage backed securities. They need to be given a seat at the table to make sure that the settlement is fair, reasonable and in the best interests of the entire class of investors.” The Committee has voiced several concerns regarding the accord, including: 1) no public pension funds were included in the Investor Group; 2) many in the Investor Group have “significant ongoing business dealings with Bank of America, raising conflict-of-interest concerns”; 3) the settlement proceeds are being allocated through the payment waterfall, providing some investors with a windfall gain while not compensating others for actual losses; 4) the settlement does not provide notice and ability for investors to opt-out; and 5) the settlement provides broad indemnification for BoNY.
- Rep. Brad Miller. On July 8, 2011, Congressman Brad Miller (D-N.C.) sent a letter to the FHFA, as conservator of Freddie Mac and Fannie Mae, expressing concerns regarding the BofA settlement. In the letter (full version available here), Miller questions whether the value of the settlement (approximately two cents on the dollar based on the original value of the Countrywide RMBS and five cents on the dollar based on the current value of the securities, according to the letter) was adequate and whether investors should be permitted to opt out of the settlement, as they would with a class action.The letter further notes that, “The polar star for FHFA in the conservatorship of [Freddie and Fannie] must be minimizing taxpayer losses. I have urged that FHFA zealously pursue all available legal claims to limit those losses, including claims against issuers of ‘private-label’ mortgage-backed securities, such as the RMBS subject to the proposed settlement.” Miller then asks acting FHFA director Edward DeMarco several questions regarding the settlement.First, would the FHFA be joining investors who are objecting to the settlement? In connection with this question, Miller points out investor challenges stating that 60% of BoNY’s trustee business comes from BofA, that BoNY would be indemnified under the agreement, and that BofA and BoNY have denied the investors loan-level information to determine whether reps and warranties were breached with respect to the RMBS. Miller notes that, “Independent investigations show that perhaps two-thirds of the mortgages did not comply with the representations and warranties.
Second, Miller asks DeMarco what has become of the 64 FHFA subpoenas issued roughly one year ago. Miller states that he understands that “very little information has been provided in response to the subpoenas,” and asks whether the subpoenas pertained to the Countrywide RMBS, whether BofA and BoNY have complied with those requests, and whether the FHFA intends to take additional action to determine whether it should support the settlement.
Third, Miller asks whether the FHFA has tolling agreements with BofA and other potential defendants, given that the statute of limitations may be expiring with respect to put-back claims.
Finally, Miller asks what information the FHFA will make available to the public, or at least Congress, for the purposes of providing oversight of the actions of the FHFA. These are all excellent questions, in particular the questions regarding the 64 FHFA subpoenas. The FHFA has superior subpoena power over private litigants, and can force banks to turn over substantial information about the underwriting of the toxic loans at issue. While the FHFA seemed like it was going to exercise this authority to investigate put-back issues when it issued scores of subpoenas one year ago, why has almost nothing been reported regarding these subpoenas since then? And what has the FHFA done with the information (if any) that it has received? Has it shared that information with private investors managing the retirement and pension funds of ordinary Americans? As Miller notes, “It is important that the American people know that their government is acting on their behalf, not on behalf of powerful financial institutions. It is important that the public and Congress be able to assess whether the enterprises settled claims that would limit taxpayer losses on a tough, arm’s length basis, rather than providing another indirect subsidy to the banking industry.”
- New York Attorney General. On July 12, New York AG Eric Schneiderman sent letters to the 22 institutions in the Investor Group, asking for information “regarding participation by both your firm and clients” in the BofA settlement. In addition to the fact that investors will not be able to opt out, The New York Times suggests that a driving force behind this challenge may be the evidence that the deal will speed up foreclosures for BofA-serviced properties. Schneiderman has already made a name for himself by opting out of the broad AG effort to reach a settlement with the major servicers over foreclosure problems and launching his own investigation. This latest action is a further signal that the New York AG will continue to pursue a broad and independent investigation of mortgage securitization issues, including potentially lodging his own challenge to the BofA deal. Speculation has abounded that other state AGs may follow suit in challenging the accord over Countrywide RMBS, as they have with respect to the proposed servicer settlement, but nothing has been reported as of yet.
- TM1. On July 13, a third investor group sought to intervene in BoNY’s petition for approval of the BofA settlement. Again, it was an anonymous group of investors represented by David Grais. This group is proceeding under the name TM1 Investors, LLC, and states in its filing that it is not convinced that BoNY adequately protected its rights in negotiating the accord. “After much investigation, TM1 believes that many of the loans that Countrywide sold to the trust in which it owns securities did not comply with the representations and warranties” made about them, its lawyer David Grais wrote in the filing. Grais further stated that TM1 was considering suing BofA separately to enforce repurchases related to the MBS that were once worth over $400 million.
- Six Federal Home Loan Banks. Also on July 13, the Federal Home Loan Bank (FHLB) branches in Boston, Chicago, Indianapolis, Pittsburgh, San Francisco and Seattle sought to intervene in the BofA settlement. The banks said that they had received “very little information” to help decide whether the Countrywide settlement was fair. They noted that they had paid more than $8.8 billion, a sum exceeding the entire settlement amount, for securities in 73 trusts backed by home loans from Countrywide. Several of the FHLBs have been active in the MBS litigation space, having filed separate actions against various securitization participants for violations of securities law (see articles on the Pittsburgh, San Francisco, and Seattle FHLBs). Interestingly, the FHLB of Atlanta is part of the Investor Group. The Reuters article on the FHLB challenge quotes Sharon Cook, a spokeswoman for the Atlanta FHLB as saying, “The federal home loan banks operate independently. We support the settlement, and the right of other federal home loan banks to further evaluate it.”
In addition to these challenges, the proposed settlement has also brought with it an intriguing array of sideshows. For one, WSJ reports that BofA has said that the settlement will not be final until the IRS signs off. The trusts are currently granted favorable REMIC status, and BofA wants to make sure it won’t engender additional liability for violating REMIC requirements based on the payment of settlement funds into the Trusts. Another drama that has unfolded is the back and forth over whether David Grais was offered an opportunity to participate in settlement negotiations with BofA, BoNY and the Investor Group. Grais has said that his clients were not offered a chance to participate, while BoNY’s lawyers now say that he was invited to the table, but opted instead to file the Walnut Place lawsuits. A third piece of controversy has surrounded the whopping $85 million contingency fee that Kathy Patrick and her firm, Gibbs & Bruns, stand to receive if the deal goes through. The Naked Capitalism blog has cited this figure as evidence that Patrick “is working for the deal,” and not for the investors she purports to represent, while The New York Times’ Deal Book blog was prepared to award Patrick a “lawyer of the day award” for staring down BofA and winning the $85 million payday.
If BofA’s strategy was to force any potential challengers to come out of the woodwork and enable the bank to resolve all Countrywide RMBS put-back issues in one fell swoop, it appears that this strategy is working. Certainly, this proposal has managed to stir affected RMBS investors from their collective slumber and convinced them that they must take action, or watch their claims disappear for 9 cents on the dollar (based on an assessment by Moody’s). By bringing all potential litigants together to fight it out over these liabilities in a single proceeding, BofA is hoping that it can put these legacy Countrywide issues behind it. Already, commentators have begun congratulating the lawyers from BofA and BoNY for their election to proceed under Article 77, pointing to the high “abuse of discretion” hurdle that challengers face under this special proceeding for express trusts. However, this vehicle has never been applied to RMBS Trusts of this scope or nature, and the trust agreements don’t specifically provide the trustee with the power to settle claims–especially as to Trusts where the Investor Group lacks standing.
If the would-be intervenors have their way, they may throw a monkey wrench in BofA’s plans, either by forcing BofA to throw more cash at the problem, or by convincing Judge Kapnick to release their bonds from the settlement. The latter would force BofA to continue litigating these released claims in a piecemeal fashion. Ultimately, the conflicts of interest present for BoNY and the Investor Group, the less-than-transparent manner in which the deal was negotiated, and the less-than robust investigation that was performed as to these claims provide ample cause for Judge Kapnick to take a hard look at whether the settlement is kosher under Article 77. One need only read the opinion of BoNY’s “expert,” who found that only 36% of Countrywide loans likely breached reps and warranties, and that of those, only 40% would likely be bought back by BofA (based on inapposite experience from the GSE’s pursuit of putbacks and a phony loss causation haircut), to see that even under an abuse of discretion standard, this deal will be no easy sell for BofA, either to investors or to the New York courts.
Indeed, the 3% gain in BofA’s stock price after news of the settlement leaked was all but erased once news of the subsequent petitions to intervene came out. Based on the number of challenges and issues raised by affected entities, it appears that it will take several years before this settlement is approved, if at all. As some indication, BofA has included language in the settlement agreement allowing it to withdraw from the settlement if it is not approved by 2015. With big names lining up on both sides of this issue, the proceedings should make for entertaining drama as they play out (see BoNY’s website on the settlement to follow along with the latest); just don’t expect a resolution anytime soon.