Walnut Place Drops Objections to $8.5 Billion BofA Deal; AIG Still Questions

By | July 24, 2012

Walnut Place, an entity that had challenged a proposed $8.5 billion settlement between Bank of America Corp. and investors in failed mortgage-backed securities, has withdrawn its objections to the deal.

The development on Monday was a step forward for Bank of America as it tries to clear up liability for toxic securities issued by Countrywide Financial Corp., the mortgage lender it acquired at the height of the financial crisis in 2008.

The agreement was reached in June 2011 between Bank of New York Mellon, acting as trustee, and institutional investors including BlackRock Inc., Metlife Inc. and Allianz SE’s Pacific Investment Management Co.

Walnut Place, a proxy for Boston-based hedge fund Baupost Group, had invested more than $1 billion in the securities. It did not participate in settlement negotiations and later complained that the deal was inadequate.

Baupost Chairman Seth Klarman declined to comment on Monday on why Walnut Place had withdrawn its objections. Walnut Place’s attorney, Owen Cyrulnik of Grais & Ellsworth, also declined to comment.

The decision came just weeks after a New York state appeals court upheld a decision dismissing a lawsuit brought by Walnut Place in February 2011 demanding that BofA buy back the loans.

Several of the soured residential mortgage-backed securities owned by Walnut Place were scheduled to be sold off in the secondary market on Tuesday, according to a database run by Empirasign Strategies, a New York-based capital markets data provider.

Representatives of Bank of America and Bank of New York Mellon declined to comment on the withdrawal of Walnut Place’s objections.

Kathy Patrick, a partner at Gibbs & Bruns, a Houston-based law firm that negotiated the settlement for the institutional investors, said it was a welcome development. With Walnut Place withdrawing, only a “small minority” of settlement opponents remain, she said.

But Dan Reilly, an attorney who represents American International Group Inc., which has also intervened in the proceedings, said Walnut Place’s decision will not end the case.

“We’re still going forward,” Reilly said. “We’ve got a hearing next week and all the issues that have been raised are still in play.”

The decision on whether to approve the settlement, which could become a template for deals with other banks that face similar claims, is before Justice Barbara Kapnick in New York state court in Manhattan.

Other objectors include the attorney generals of Delaware and New York, who have raised questions about whether the settlement is reasonable. The two attorney generals, through their offices, declined to comment on Walnut Place’s withdrawal.

Investors claim Countrywide breached promises about the characteristics and quality of loans underlying its securities. The risky loans became toxic when housing prices collapsed.

The accord covers mortgage pools with a $174 billion unpaid principal balance.

The distressed bonds, issued by Countrywide Home Loans in 2006 and backed by Alt-A pay option ARMs, were most recently trading at an average of about 60 cents on the dollar in the secondary RMBS market, according to Empirasign.

The case is In re: The Bank of New York Mellon, New York State Supreme Court, New York County, No. 651786/2011.

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