Bank of America Corp. was sued by American International Group Inc. for more than $10 billion over an alleged "massive fraud" on mortgage debt, causing the bank's shares to tumble 20.3 per cent amid worries it cannot manage a deepening litigation morass.
Shares of the largest U.S. bank fell to their lowest since March 2009, wiping out roughly one-third of the bank's market value, or in excess of $32 billion, over the last three trading days.
The shares declined $1.66 to $6.51 in New York trading, after earlier falling to $6.31.
"A lot of people think the bank will have to raise capital, and any major capital raise will be massively dilutive," said Paul Miller, an analyst at FBR Capital Markets. "The bank just can't get its hands around the liabilities it's facing."
Monday's slide came amid the broad market decline that followed Standard & Poor's downgrade of the U.S. credit rating. AIG's shares fell $2.52, or 10 per cent, to $22.58.
The lawsuit may complicate Bank of America chief executive Brian Moynihan's effort to contain losses from the bank's $2.5-billion purchase in July 2008 of Countrywide Financial Corp., the U.S.'s biggest mortgage lender.
That purchase, engineered by Moynihan's predecessor Kenneth Lewis, is now considered a disaster for Charlotte, N.C.-based Bank of America because of the costs of litigation and writing down bad loans.
Moynihan "inherited a ton of excess baggage," including Countrywide, which has become "a sinking ship," said Michael Mullaney, who helps invest $9.5 billion at Fiduciary Trust Co., in Boston, which has sold nearly all its shares in the bank. "Bank of America's stock price will remain under duress."
Tony Plath, a finance professor at the University of North Carolina at Charlotte, said investors may be surmising that drastic action will be needed.
"If the stock trades at $6 or $7, there's just no way they can raise capital without just wiping out existing shareholders," he said.
The AIG case is among a growing number of lawsuits by investors seeking to hold banks responsible for losses on soured mortgages that contributed to the financial crisis.
AIG expects to pursue other litigation to recover losses from counterparties that "sought to profit at our expense." Taxpayers still own 77 per cent of the New York-based insurer, which received $182.3 billion of government bailouts.
In its complaint, AIG accused Bank of America and its Countrywide and Merrill Lynch units of misrepresenting the quality of its mortgage-backed securities, including more than $28 billion it bought, and lying to credit rating agencies about the underlying loans.
AIG said it examined 262,322 mortgages that backed 349 offerings it bought between 2005 and 2007, and found the quality of 40.2 per cent of the mortgages was significantly inferior to what had been represented.
"Defendants were engaged in a massive scheme to manipulate and deceive investors, like AIG, who had no alternative but to rely on the lies and omissions made," said the complaint, filed in the New York State Supreme Court in Manhattan.
Bank of America rejected AIG's allegations.
"AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets," spokesperson Lawrence Di Rita said.
"It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors."
According to the New York Times, AIG is preparing similar lawsuits against other banks.
Shares of the largest U.S. bank fell to their lowest since March 2009, wiping out roughly one-third of the bank's market value, or in excess of $32 billion, over the last three trading days.
The shares declined $1.66 to $6.51 in New York trading, after earlier falling to $6.31.
"A lot of people think the bank will have to raise capital, and any major capital raise will be massively dilutive," said Paul Miller, an analyst at FBR Capital Markets. "The bank just can't get its hands around the liabilities it's facing."
Monday's slide came amid the broad market decline that followed Standard & Poor's downgrade of the U.S. credit rating. AIG's shares fell $2.52, or 10 per cent, to $22.58.
The lawsuit may complicate Bank of America chief executive Brian Moynihan's effort to contain losses from the bank's $2.5-billion purchase in July 2008 of Countrywide Financial Corp., the U.S.'s biggest mortgage lender.
That purchase, engineered by Moynihan's predecessor Kenneth Lewis, is now considered a disaster for Charlotte, N.C.-based Bank of America because of the costs of litigation and writing down bad loans.
Moynihan "inherited a ton of excess baggage," including Countrywide, which has become "a sinking ship," said Michael Mullaney, who helps invest $9.5 billion at Fiduciary Trust Co., in Boston, which has sold nearly all its shares in the bank. "Bank of America's stock price will remain under duress."
Tony Plath, a finance professor at the University of North Carolina at Charlotte, said investors may be surmising that drastic action will be needed.
"If the stock trades at $6 or $7, there's just no way they can raise capital without just wiping out existing shareholders," he said.
The AIG case is among a growing number of lawsuits by investors seeking to hold banks responsible for losses on soured mortgages that contributed to the financial crisis.
AIG expects to pursue other litigation to recover losses from counterparties that "sought to profit at our expense." Taxpayers still own 77 per cent of the New York-based insurer, which received $182.3 billion of government bailouts.
In its complaint, AIG accused Bank of America and its Countrywide and Merrill Lynch units of misrepresenting the quality of its mortgage-backed securities, including more than $28 billion it bought, and lying to credit rating agencies about the underlying loans.
AIG said it examined 262,322 mortgages that backed 349 offerings it bought between 2005 and 2007, and found the quality of 40.2 per cent of the mortgages was significantly inferior to what had been represented.
"Defendants were engaged in a massive scheme to manipulate and deceive investors, like AIG, who had no alternative but to rely on the lies and omissions made," said the complaint, filed in the New York State Supreme Court in Manhattan.
Bank of America rejected AIG's allegations.
"AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets," spokesperson Lawrence Di Rita said.
"It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors."
According to the New York Times, AIG is preparing similar lawsuits against other banks.
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