Bank of America’s $8.5 Billion Settlement Hit With Legal Challenge

A group of 11 mortgage-bond investors have filed a challenge to Bank of America’s proposed $8.5 billion settlement with holders of its subprime mortgage securities.

(July 5, 2011) — A group of 11 mortgage-bond investors have challenged Bank of America’s proposed $8.5 billion deal with investors who bought subprime mortgages through the bank’s Countrywide Financial subsidiary, the Wall Street Journal has reported.

The group, calling themselves Walnut Place but at this point otherwise remaining anonymous, filed a challenge in New York County Supreme Court attacking the deal’s fairness.

The filing marks the first legal challenge against what would have been the banking industry’s largest single settlement stemming for the 2008 housing market collapse. Bank of America agreed on June 29 to a $14 billion settlement with embittered investors who purchased unsound subprime mortgages through the bank’s Countrywide Financial subsidiary. Walnut Place appeared to only have challenged the $8.5 billion allocated to a group of larger investors led by Pacific Investment Management Co. (PIMCO), BlackRock, and the Federal Reserve Bank of New York.

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The filing by Walnut Place highlighted three major objections to Bank of America’s proposed settlement. The first is over the size of the proposed deal. Although the $8.5 billion represents more than the bank has made in collective profits since the financial crisis, the group argues that the bank owes its investors much more. “[Bank of America’s subsidiary] Countrywide may be liable to repurchase loans with unpaid principal balances of as much as $242 billion. The $8.5 billion that Countrywide and Bank of America have agreed to pay is therefore only a small fraction of the potential liability that they would have faced in litigation on behalf of the trusts.”

Walnut Place’s second objection in the filing is that serious conflicts of interests marred the integrity of Bank of America’s deal. “[M]any of these 22 investors have substantial ongoing business relationships with Bank of America other than their ownership of certificates in Countrywide-sponsored trusts. For example, BlackRock Financial Management, Inc., is one of the 22 investors. During the time in which the Settlement Agreement was being negotiated, Bank of America owned up to 34 percent of BlackRock….Many other of the 22 investors also have substantial business dealings with Bank of America or its subsidiaries other than their ownership of certificates in Countrywide-sponsored trusts.”

The final objection is to the secretive, non-adversarial nature of the settlement negotiations. The group also singled out Bank of New York Mellon, the trustee for the Bank of America bondholders, for the most criticism.

“Walnut Place has serious concerns about the secret, non-adversarial, and conflicted way in which the proposed settlement was negotiated and about the fairness of the terms of the proposed settlement….In short, despite the fact that BNYM owes at least the same duties to Walnut Place that it owes to every other certificateholder in the 530 Countrywide-sponsored trusts, BNYM is asking this Court to approve a settlement that it negotiated in secret and that would release Walnut Place’s claims without its consent while it is in the middle of an active litigation…”

To contact the aiCIO editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a>

(July 5, 2011) — European pension schemes are planning to de-risk, according to new research by Aon Hewitt.

Its findings — outlined in its Global Pension Risk Survey 2011 — revealed that pension funds around Europe have placed de-risking at the top of their list of priorities. The survey discovered that more than half of respondents are looking to fund their deficits solely through employer contributions. Meanwhile, the survey noted that risk is being taken in a more sophisticated way than in previous years; today, employers are seeking alternative asset classes to provide higher returns with lower risks.

Furthermore, a quarter of respondents have no policy regarding interest rate or inflation risk hedging.

Spurred by increasing life expectancy and regulations pressure, the urgency to de-risk is prevalent among pensions worldwide, reflected in a study last year by MetLife which showed that sponsors and trustees are struggling to develop strategies for managing longevity risk.

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“While it’s apparent that scheme sponsors and trustees show a good understanding of the impact that longevity risk poses to their schemes and their organisations as a whole, they seem unable to manage this important risk on their own,” said MetLife Assurance chief executive Dan DeKeizer in the company’s UK Pension Risk Behaviour report.

DeKeizer said that part of the reason scheme sponsors and trustees have faced obstacles managing longevity risk on their own has been due to a lack of understanding regarding available options.

MetLife’s UK pension risk behavior index analyzed how 89 trustees and sponsors viewed 18 investment, liability and business risks that impacted their pensions. The research studied how well those schemes felt they were handling their risks. A majority of respondents acknowledged that “despite an estimated £1 trillion of assets being exposed,” they had failed to manage longevity risk successfully.

More recently, a study last month by Allianz Global Investors revealed a different order of priorities among European schemes, with interest rate risk topping concerns. Among pension funds and other institutional investors in Europe, government credit risk ranked as the second-biggest threat to investments. Of the 156 respondents surveyed, about 47% of respondents cite government credit risk as a considerable risk and about 15% as a huge risk.

Perception of risk varied by location, the study showed. Investors in Austria, France and Italy are most concerned about sovereign debt risk largely as a result of bailout packages granted to Greece, Ireland and Portugal. Meanwhile, British and Scandanavian investors view declines in market prices as well as interest rates as the main risks.

The perceived threat of inflation among European investors was also reflected in a Mercer survey in May that showed European pension funds are buying inflation-protected instruments to guard their portfolios from increasing inflation. The investment consultancy’s annual European Asset Allocation Survey of more than 1,000 European pension funds with assets of over $812 billion found that compared to last year, an overwhelming 80% of respondents are now more concerned about the threat of rising inflation.

“Protection, through acquiring inflation hedging assets (such as inflation bonds and swaps), looks to be expensive and there is a risk that such investments provide ‘insurance’ for events that never actually happen,” Tom Geraghty, Mercer’s head of investment consulting for Europe, Middle East and Africa, commented in a statement. “Pension funds also need to understand the extent to which their liabilities are affected by higher inflation. In some cases, inflation caps may mean that higher inflation is less negative for pension schemes than might be expected,” he said, noting that it is imperative that schemes understand how their liabilities are impacted by various inflation scenarios.

To contact the aiCIO editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742