One mortgage-bond investor testified yesterday that BofA officials, in 2011, threatened to put Countrywide Financial, which then-CEO Ken Lewis (above) scooped up in 2008, into bankruptcy if demands for $25 billion in damages weren’t lowered. (AP)
Bank of America boss Brian Moynihan was thisclose to punting on costly mortgage nightmare Countrywide Financial, according to new testimony.
Bank officials threatened to put Countrywide, which Bank of America bought in 2008, into bankruptcy — risking years of litigation — during heated negotiations with bondholders over soured mortgage-backed securities, one witness testified yesterday.
Kent Smith, an official at bond powerhouse Pacific Investment Management Co., who represented some bondholders in negotiating the $8.5 billion pact in 2011, said the deal is in the “best of interest of clients to support” — but noted that arriving at a settlement wasn’t easy.
His testimony came during day three of a trial over whether a New York court should approve an $8.5 billion settlement between BofA and investors over bonds issued by Countrywide. The settlement is opposed by an investor group led by AIG.
Smith testified that BofA risk officer Terry Laughlin — in a moment of pique — threw across a table an analysis by bondholders estimating BofA’s liabilities at a whopping $25 billion.
Laughlin then convened a smaller gathering of bondholders, including Smith, in a separate room to explain that BofA had “taken steps” with its regulators to place Countrywide into bankruptcy if it couldn’t cut a better deal with bondholders.
Laughlin said that the bank felt that it should not be held responsible for Countrywide’s mortgage underwriting missteps.
The risk officer’s tactics ultimately worked, with 22 institutional bondholders, including Pimco and BlackRock, signing on to the $8.5 billion settlement.
Kathy Patrick, a lawyer with Gibson & Bruns, representing the 22 bondholders who agreed to the initial settlement, questioned Smith in an effort to show that bondholders did not have a relationship with BofA that would have compromised the integrity of the negotiating process.
Patrick was trying to show that the negotiations were far from easy and that negotiations were at times heated.
Daniel Reilly, who represents one big settlement objector, AIG, cross-examined Smith for about an hour before the hearing wrapped up for the day.
Reilly is expected to continue his questioning of the bond firm official this morning.
After what’s expected be at least another week or two of testimony, Manhattan State Court Judge Barbara Kapnick is slated to make a ruling in the next month or two.