Business

Spank of New York

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Back in 2009, Bank of New York Mellon chief Bob Kelly boasted that his bank had little exposure to the mortgage-market mess that toppled Lehman Brothers and nearly pushed other big financial firms off a cliff.

Now it appears nothing could be further from the truth.

BNY Mellon is getting hit with a barrage of lawsuits accusing the bank of fraud for failing to fulfill its role as overseer for investors in hundreds of billions of dollars worth of mortgage-backed securities that were bundled together by Wall Street banks.

“Investors have every reason to hire their own lawyers,” says Chris Whalen, a financial analyst with Institutional Analytics. “If you have a busted mortgage securitization trust, and your trustee has a conflict and can’t enforce your lien, it’s a straight-up fraud claim. It’s going to get ugly for Bank of New York.”

Amid the turmoil, BNY Mellon ousted Kelly at the end of last month, blaming his management style. But some analysts believe his ouster is another CEO scalp claimed by the ongoing mortgage-securitization scandal.

BNY Mellon — which bills itself as a “banker’s bank” — wasn’t involved with underwriting subprime loans or structuring the complex investments that nearly brought down the global financial system and continue to plague other big financial firms.

BNY Mellon has no oversight or responsibility for the credit quality of the loans.

But the bank is in big trouble now amid allegations it failed to live up to its obligations as the trustee by assuring the securities were created in accordance with state laws and failing to operate in the best interests of its investors — including 530 residential mortgage investment pools from BofA’s Countrywide unit — while pledging it had.

Legal experts say BNY Mellon, the 11th largest US bank, essentially put a target on its own back this summer by signing off on an $8.5 billion investor settlement with Bank of America that included a side agreement giving the trustee indemnity for supporting the deal — interpreted by many as a signal that BNY Mellon was more worried about shielding itself from liability than looking out for the investors it’s supposed to protect.

“It made me realize that Bank of New York never got these mortgage files,” says one lawyer involved in an investor suit against the bank. “That’s a huge no-no in pooling agreements.”

New York Attorney General Eric Schneiderman sued to block the deal, which was negotiated by BNY Mellon on behalf of 22 institutional investor giants holding the soured securities and would end up paying many other investors nothing. The AG accused the bank of failing to represent the interests of investors and, worse, of fraud for failing to ensure that the mortgage pools were created in accordance with state law and for failing to notify investors that the Countrywide mortgages were in trouble.

Other investors have filed similar suits. For now, the status of the $8.5 billion settlement is in limbo while a judge decides whether to approve one group’s motion to move the case from state to federal court.

Allegations of fraud “are simply untrue,” says BNY Mellon spokesman Kevin Heine. “We will defend our actions and are confident that the facts and law are on our side. We believe that as trustee we’ve acted at all times in the best interests of investors.”