By Robert Romano — Does insurance giant AIG have the standing to sue Bank of America for fraud over some $7 billion of losses on mortgage-backed securities stemming from its acquisition of Countrywide in 2008?
Bank of America is saying no, that AIG, when it accepted a bailout from the New York Federal Reserve’s Maiden Lane II program, it transferred its right to sue to the New York Fed. But under New York law, AIG replied, an entity has to explicitly transfer its legal rights, which it did not.
At first, the New York Fed sided with Bank of America. An employee, James Mahoney, at first said the rights had indeed been transferred to the New York Fed. But then in March, he reversed his testimony, saying those legal rights had never been transferred.
In the interim time, the New York Fed, for a paltry $43 million settlement, had absolved Bank of America of any wrongdoing on those same $7 billion of losses on the same mortgage-backed securities. That’s a settlement of 0.6 percent of the actual losses on the securities — i.e. it was a bailout.
Obviously, that settlement depended on Mahoney’s original testimony. Now that the testimony has been reversed, it calls into question the settlement itself.
Americans for Limited Government President Bill Wilson called the case “remarkable,” comparing the switched Mahoney testimony to Luxembourg Prime Minister Jean Paul Juncker’s March 2011 declaration that “When it becomes serious, you have to lie.” Then, Juncker was justifying a lack transparency when banks posted losses in the Eurozone crisis to avert market implications.
“It looks like the New York Fed may be implementing the Jean Paul Juncker lie policy,” Wilson surmised. “It certainly raises the question. Are financial institutions like Bank of America so undercapitalized that they and federal regulators are willing to do anything to minimize losses and contain systemic risk, up to and including committing perjury in a court case?”
If so, that would be quite a scandal, Wilson said.
“The entire financial system rests on confidence, on trust. Everyone knows that there is not enough money in the system to settle all deposits at once. What averts a bank run is confidence that there will not be a bank run,” Wilson explained.
“When that confidence and trust is shaken, as in the New York Fed case, it calls into question all claims made by the central bank, including its assurances U.S. savings deposits will not be seized as they have been in Cyprus,” Wilson charged.
In answering press inquiries, Federal Reserve Chairman Ben Bernanke called a Cyprus-style seizure of savings “extremely unlikely in the United States,” citing the $250,000 Federal Deposit Insurance Corporation guarantee on deposits.
The underlying admission is that any deposits above the $250,000 are at risk of seizure or loss.
Of course in the case of massive bank failures, does anyone really believe that the FDIC, with just $25 billion of reserves could ever cover the potential loss of the trillions of dollars of savings in the system?
It appears highly doubtful. These proclamations inspire almost no confidence. Making the case of the New York Fed’s credibility all the more critical to the faith and trust the American people ought to put into the fractional reserve banking system.
Robert Romano is the Senior Editor of Americans for Limited Government.