Four weeks ago, Bank of America Corp. reached an $8.5-billion (U.S.) settlement it hailed as a step forward in putting mortgage liabilities behind it. But New York's attorney general is sending strong signals he could try to reshape the deal or even scuttle it.
The settlement, which requires court approval, could provide a template for other banks hoping to settle investor claims on residential mortgage-backed securities that went bust in the financial crisis. Bank of America agreed to resolve nearly all repurchase claims tied to mortgage bonds backed by loans from its Countrywide Financial unit.
Almost as soon as the ink was dry on the pact, though, New York attorney general Eric Schneiderman began to look into the deal. The investigation is part of his office's broader examination of banks' roles in the mortgage crisis.
The agreement was struck by trustees on 530 mortgage bonds with $174-billion in unpaid principal. It is backed by 22 big investors, including Pacific Investment Management Co. and BlackRock Inc. , which argued the bonds were stuffed with risky home loans that should not have been sold.
Some investors complain the pact is rife with conflicts and is a bad deal for them – although a plum one for the bank. At least four investor groups have filed court papers saying they might object to the deal.
If Mr. Schneiderman also challenges the settlement, it could have to be renegotiated – likely at a greater cost to Bank of America, analysts say. According to a court filing on Tuesday by a group of investors who oppose the deal, Mr. Schneiderman is close to deciding whether to intervene.
"The Attorney General's office has asked us to inform the court that it is completing its analysis," wrote David Grais, an attorney for an investor group known as Walnut Place LLC.
Danny Kanner, a spokesman for Mr. Schneiderman, declined to comment.
Critics of the settlement say Bank of New York Mellon Corp. , which served as trustee for the mortgage pools covered by the settlement, secretly negotiated a deal on behalf of investors without their input. They argue BNY Mellon had a conflict of interest because it was indemnified by a Countrywide unit for costs and liabilities arising from its duties as trustee.
In his first seven months on the job, Mr. Schneiderman has embraced the title "Sheriff of Wall Street" that comes with the attorney general post, a position previously held by New York Governor Andrew Cuomo and Eliot Spitzer before him.
He has emerged as a key player in the negotiations between banks and state and federal regulators over alleged shoddy foreclosure practices. Mr. Schneiderman has insisted any settlement over those practices not give banks broad releases from being sued over other mortgage issues.
Under the state's Martin Act, an expansive anti-fraud statute, Mr. Schneiderman has broad subpoena power. He could use the law to gather information to evaluate the fairness of the Bank of America deal, said Isaac Gradman, an attorney who advises investors in mortgage securities.
"He certainly has a lot of power and ability to bring to the surface unappealing information about the banks," Mr. Gradman said. "That alone could give him leverage to have a seat at the table."
Still, it is unclear if Mr. Schneiderman has the power to intervene. He needs permission from a court to officially insert himself into a case. If Mr. Schneiderman does not intervene on behalf of certificate holders in the soured securities, he might argue the deal does not benefit investors at large and he should be considered an interested party as their advocate.
"There are some aspects to this deal, which the attorney general may or may not consider to be in the public interest," said Beth Kaswan, an attorney for pension fund investors seeking to intervene in the case.
In a letter to the judge on July 13, Mr. Schneiderman's office hinted at its strategy. The office opposed an order sought by BNY Mellon that would limit intervenors to certificate holders and other interested parties, wrote special deputy attorney general Maria Filipakis.
"Such an order could have a substantial adverse impact on the interests of the State of New York," Ms. Filipakis wrote.
BNY Mellon responded in a subsequent court filing that its proposed order is not intended to limit any interested party from seeking to intervene.
Bank of America and BNY Mellon declined to comment about the possibility of Mr. Schneiderman's involvement in the case. Kathy Patrick, an attorney who helped negotiate the deal for investors, did not return a call seeking comment.
The settlement requires the approval of New York State Supreme Court Justice Barbara Kapnick, who set an Aug. 30 deadline for objections to it.
Mr. Schneiderman has sent letters asking institutional investors who agreed to the accord for the names of their clients that have ties to New York such as pension funds and charities. The letters, obtained by Reuters, have fueled speculation Mr. Schneiderman might intervene and object to the settlement.
By asking for information, Mr. Schneiderman might be trying "to nudge some activity," said Thomas Adams, an attorney at Paykin Krieg & Adams, who specializes in securitization issues.
The price tag ultimately could rise for Bank of America if Mr. Schneiderman exerts influence, said Chris Gamaitoni, a mortgage finance analyst with Compass Point Research & Trading.
"If they are able to subpoena information and conduct a deep analysis, that would be a negative point for the bank," he said.