AIG Says It Will Sue BofA on $10 Billion in Mortgage Losses

(Updates with complaint in the second paragraph.)

By Hugh Son and Noah Buhayar

Aug. 8 (Bloomberg) — American International Group Inc., the bailed-out insurer, plans to sue Bank of America Corp. to recover more than $10 billion in losses on mortgage bond investments. The bank dropped 8.2 percent in New York trading.

AIG bought more than $28 billion in residential mortgage- backed securities marred by a “massive fraud” from Bank of America and businesses it took over including Countrywide Financial Corp. and Merrill Lynch & Co., the insurer said in a draft copy of a complaint obtained by Bloomberg News.

“Bank of America’s fraud caused billions of dollars in damage to AIG and we are bringing this suit today to protect AIG and the taxpayers’ stake in it,” Mark Herr, a spokesman for New York-based AIG, said in a statement. “This is not the first lawsuit that AIG has filed against counterparties that have sought to profit at our expense, and we anticipate that it will not be the last.”

AIG took U.S. government bailouts starting in 2008 to avert a collapse after losses tied to subprime home loans and insuring mortgage bonds. Bank of America, which repaid its government aid in 2009, has lost more than 38 percent this year in New York trading through last week as Chief Executive Officer Brian T. Moynihan reached settlements with loan buyers and insurers who claim the firm’s Countrywide unit created defective mortgages.

BofA’s ResponseBank of America slid 67 cents to $7.50 in New York Stock Exchange composite trading as of 10:02 a.m., after falling as much as 9.6 percent. AIG fell 5.4 percent to $23.75.

The bank rejects the insurer’s “assertions and allegations,” said Larry DiRita, a spokesman for the Charlotte, North Carolina-based lender, the biggest in the U.S. by assets.

“AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets,” said DiRita. “It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors.”

AIG bought about 350 separate residential mortgage-backed securities created and sold by Bank of America between 2005 and 2007, according to the suit. The insurer’s losses on these securities contributed to distress that led up to its rescue, the company said.

The insurer relied on offering materials prepared by Bank of America that “grossly understated” the risks of loans tied to the securities AIG purchased, according to the draft.

A copy of the filing wasn’t immediately available in electronic court records. The insurer’s plans were reported by the New York Times today.

AIG was first rescued in September 2008 after losses on housing-market bets by the Financial Products unit. The bailout was revised at least four times, swelling to $182.3 billion as the U.S. extended more credit and lowered the interest charged.

The insurer repaid the last $21 billion it owed to the Federal Reserve Bank of New York and the U.S. Treasury Department converted its preferred stake into 92 percent of the AIG’s common stock in January. The holding was reduced to 77 percent in May in a share sale.

–Editors: Rick Green, David E. Rovella

To contact the reporters on this story: Hugh Son in New York at +1-212-617-7872 or hson1@bloomberg.net; Noah Buhayar in New York at +1-212-617-8619 or nbuhayar@bloomberg.net

To contact the editor responsible for this story: David Scheer at +1-212-617-2358 or dscheer@bloomberg.net

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