Bank of America secretly bailed out by Federal Reserve

Bank of America and the NY Fed

Most people have their own thoughts on what started the recession in 2008, but there’s a general acknowledgement that banks and mortgage lenders were responsible for a large part of it. Under-qualified home buyers were being granted mortgages that they ultimately weren’t able to pay back, causing a huge crash that crippled the economy. Many companies decided to retaliate and seek lawsuits against big banks, thinking they would have a strong case. But as AIG recently found out, the government sided with the lenders, ultimately granting a bailout and dismissing one from a great deal of liability.

In July of 2012, the Federal Reserve Bank of New York granted a bailout to Bank of America; however, this didn’t become publicly known until court filings were made late last week. The amount of the settlement is undisclosed, however AIG was seeking upwards of $7 billion in damages from Bank of America. The Fed threw its weight behind BOA and released the bank from any claims of fraud.

Protecting Bank of America from punishment

Shielding the bank from a punishment that many would say is well deserved is baffling, and even more seeing as no one seemed to know about it. Unfortunately for AIG, this slows their efforts to recover losses from those mortgage-backed securities.

In a letter from the Fed to AIG in October 2011, officials acknowledged that the company had a right to seek damages from BOA, however in December of last year, the Fed released declarations claiming the letter could not be interpreted as an agreement with Maiden Lane, the investment entity that AIG sold securities to.

The securities were sold to Maiden Lane well under face value, and during AIG’s attempt to regain those losses on the mortgage securities issued by BOA, the Fed shielded the bank from any resulting damages or punishment. The ordeal was unexpected to say the least, and may indicate a trend with the Fed, in that they will side with lenders in matters where companies are seeking damages from banks and other lenders.