Bank of America Corp could put its Countrywide Financial unit into bankruptcy if it fails to win court approval for an $8.5 billion settlement with mortgage investors, a bank executive said on Monday.
Chief Risk Officer Terrence Laughlin was testifying at a hearing in New York state court on whether to approve the deal, which would settle claims by investors who said Countrywide misrepresented the mortgages underlying bonds they bought.
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During negotiations leading up to the June 2011 settlement, Bank of America threatened to put Countrywide, which it had rescued at the height of the financial crisis in 2008, into bankruptcy. That possibility was still on the table, Laughlin said on Monday.
"One of the options that was available to us and continues to be available to us was to put Countrywide into bankruptcy," Laughlin said.
Laughlin represented Bank of America at negotiations with institutional investors, including BlackRock Inc, MetLife Inc and Allianz SE's Pacific Investment Management Co (Pimco).
American International Group Inc and a handful of other investors are challenging the deal, saying it offers only pennies on the dollar.
Laughlin said on Monday he wasn't bluffing when he told the investors during negotiations that Bank of America could declare Countrywide bankrupt if liabilities became too great.
"I never bluffed during the course of this negotiation," Laughlin said.
However, he denied that he or anyone else at Bank of America had discussed a Countrywide bankruptcy with the bank's regulator, the Office of the Comptroller of the Currency.
"What I said was that, in my opinion, I would not see the regulators being any impediment to bankrupting Countrywide."
That appeared to be slightly at odds with the opening statement last week of Kathy Patrick of Gibbs & Bruns, a lawyer for the institutional investors who said witnesses would testify that Laughlin told investors the bank received clearance from the OCC to put Countrywide into bankruptcy.
The first witness in the hearing, Pimco executive Kent Smith, said last week that Laughlin "gave us the impression that he had approval of his regulator to file Countrywide into bankruptcy."
Scott Waterstedt, a MetLife executive who also testified Monday, said that when Bank of America threatened the bankruptcy of Countrywide, "I certainly considered it a risk."
The OCC has declined to comment.
A lawyer for AIG, the lead objector to the deal, last week asked why the negotiators had settled for $8.5 billion when they had initially asked for $50 billion.
Since then, witnesses have said that $50 billion was not an actual demand in the negotiations.
Laughlin said Bank of America entered into the negotiation never thinking it would pay as much as $8.5 billion. The bank initially offered about $1.5 billion, he said. In April 2011, the investor group was demanding $12 billion to $16 billion.
When the investors' demand came down to a take-it-or-leave-it $8.5 billion, Bank of America worried that, if it didn't accept, the investor group would say publicly that settlement talks had ended.
"I was concerned they would begin revealing and making claims that would affect the Bank of America stock price," Laughlin said.
The case is In re: Bank of New York Mellon, New York State Supreme Court, New York County No. 651786/2011.