A public hearing was scheduled by New York state lawmakers to “gather information on whether certain banks intentionally defrauded bond insurers about the creditworthiness of subprime mortgage-backed securities,” according to the Wall Street Journal. Joseph Morelle, who is the chairman of the New York State Assembly, said that he doesn’t “want to get ahead of (himself),” but if people were being mislead it’s “obviously problematic.”
The public hearing is asking bankers, insurance executives, and other expert witnesses to come forward and testify voluntarily at the February 16th hearing. The Wall Street Journal said “the hearing puts a new spin on the dispute between banks and bond insurers. Until now, banks have agreed to repurchase certain securities where they weren’t represented properly in documentation, and in some cases have compensated investors.”
Earlier this month Bank of America paid $3 billion to settle claims stemming from government-sponsored entities Fannie Mae and Freddie Mac “in connection with mortgages originated by Countrywide Financial Corp.” Separately, Bank of America is also dealing with private investors and bond insurers, saying “future claims could leave it on the hook for an additional $7 billion to $10 billion.”
The New York lawmakers are part of the legislature but have no law-enforcement powers so it might be up to the state attorney general and the New York Insurance Department to move forward, according to the Wall Street Journal.
Bond insurers would have to prove that “the banks had intent to defraud them” and would also need to show that “bankers who created the residential mortgage-backed securities knew they were violating their own underwriting guidelines, and then purposefully disguised the risks.”
“Insurance fraud is a criminal offense punishable by significant fines and/or imprisonment.”
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