American International Group (AIG) recently filed suit in the New York State Supreme Court in Manhattan in an attempt to gain a declaratory judgment affirming its right to sue the originators of the faulty residential-backed mortgages that led to its collapse (and subsequent bailout) during the 2008 financial crisis. The sole defendant in the suit is Maiden Lane II, an entity created by the Federal Reserve during the crisis to assist AIG with its bailout. Maiden Lane II purchased AIG’s bad mortgages, bolstering its liquidity.
AIG claims that it retained its right to sue the banks that sold it the allegedly faulty securities during the mortgage crisis, but according to the complaint, the Federal Reserve informed the insurer in December that all litigation claims arising from the mortgages had transferred to Maiden Lane II as a condition of the purchases. AIG is not seeking monetary damages in the current suit, but it is hoping for clarification that it can move ahead with possible lawsuits against several financial institutions. The company has been embroiled in a legal battle with Bank of America since 2011 over faulty residential-backed mortgages that the latter inherited with its acquisition of Countrywide Financial in 2008 (discussed here), and it may be looking to sue Deutsche Bank, JPMorgan, and Goldman Sachs as well.
AIG’s apparent positioning for a courtroom showdown with Bank of America also raises questions about the extent to which the bank can face multiple liabilities on the same mortgages—it is already facing multiple suits over the same pools of bad mortgages, which effectively means that there is no longer a ceiling on the liabilities it could face. Regardless of which company prevails in AIG’s current action against Maiden Lane II, the victor is expected to sue Bank of America for roughly $7 billion in damages.
AIG’s action also comes on the heels of its board considering joining a $25 billion lawsuit by former Chief Executive Maurice “Hank” Greenberg against the government over the handling of its bailout. Despite deciding against joining, the move provoked a furor among the government and tax-payers appalled at the insurer’s brazenness.