Buried in Unforeseen Costs, BofA Settles Countrywide Suit

(February 28, 2011) — A federal judge in Los Angeles has approved a deal for Bank of America to pay hundreds of millions of dollars to 33 investors, including pension funds, that filed a class action lawsuit against it for misleading investors about Countrywide’s deteriorating financial condition during the height of the financial crisis.

Bank of America, the biggest US bank by assets, will pay $600 million to the New York State Common Retirement Fund and New York City pension funds that sued Countrywide. Despite the settlement, some institutional investors involved in the suit have rejected the court settlement and are trying to settle with Bank of America on their own terms, The Los Angeles Times reported. Those that pulled out of the agreement include BlackRock, the California Public Employees Retirement System, T. Rowe Price Group, Nuveen Investments, and the Maryland State Retirement and Pension System.

Bank of America took control of Countrywide during the financial crisis. While Countrywide denied the charges, the firm settled the case as opposed to spending time and resources to defend it. “We are pleased that the judge approved the settlement as fair and reasonable,” Bank of America said in a statement.

The settlement deal comes from a class-action lawsuit that accused Countrywide of failing to fully disclose to pension funds details about the riskiness of its mortgage-backed bonds. Countrywide’s shares fell precipitously in 2007.

As a result, the financial firm had been the target of lawsuits by pensions who owned shares of Countrywide. In January, the State of Michigan sued Bank of America Corp.’s Countrywide Financial unit in a bid to recover $65 million for its public pension funds.

“Protecting the hard-earned dollars of Michigan taxpayers from fraud is one of my top priorities,” said Attorney General Bill Schuette in a statement. In the complaint, the Attorney General’s office claims that Countrywide had effectively become a subprime lender while telling investors that it continued to maintain stringent mortgage loan underwriting standards that differentiated it from its competitors and subprime lenders. While Countrywide assured the market that it should not be impacted by a downturn in the housing market, Countrywide’s stock price dropped about 90%, from over $35 per share to about $5 per share between March 12, 2004 and March 7, 2008.

As one of the largest pension systems in the nation, the State of Michigan Retirement Systems (SMRS) holds combined assets of approximately $47.5 billion. The complaint, filed in federal court in Los Angeles, is State Treasurer of the State of Michigan v. Countrywide Financial Corp.

The suit by Michigan follows a string of lawsuits involving state pensions suing financial firms for investment losses while the US housing market faltered. In November, Oregon sued former financial giant Bear Stearns & Co. to recover about $17 million in losses to the Oregon Public Employees Retirement Fund. Oregon Attorney General John Kroger was joined by Oregon Treasurer Ted Wheeler in bringing the suit.

The Oregon Attorney General alleged that the losses at Bear Stearns — accused of exaggerating the value and quality of the securities they sold — are directly attributable to misleading filings in connection with mortgage-backed securities. “We believe that these junk investments were intentionally mislabeled, and all Oregonians are still reeling from the economic fallout,” Oregon Treasurer Ted Wheeler said in a statement obtained by the Journal. “If you hurt Oregonians financially, we are coming after you.”