New York Sets Hearing To Review Fraud Claims By Bond Insurers
First Published Thursday, 27 January 2011 06:48 pm
- © 2011Dow Jones
By Katy BurneOf DOW JONES NEWSWIRESNEW YORK -(Dow Jones)- New York State lawmakers have scheduled a public hearing next month togather information on whether certain banks intentionally defrauded bond insurers about thecreditworthiness of subprime-mortgage-backed securities.Leading the charge is Joseph Morelle, member of the New York State Assembly and chairman of itsstanding committee on insurance. He held a hearing in mid-December on the demise of those so-calledmonoline insurers at the hands of mortgage-related deals."We don't want to get ahead of ourselves," said Morelle in an interview Thursday. "But if there was aneffort to mislead people underwriting these insurance policies, that is obviously problematic."So far, the insurance committee is calling on bankers, insurance executives and other expert witnessesto testify voluntarily at the Feb. 16 hearing in New York City. It does have the power to subpoena firms,however--something it has used infrequently in the past.The list of invitees has not yet been finalized, according to Morelle's office.The hearing puts a new spin on the dispute between banks and monoline insurers. Up to now, bankshave agreed to repurchase certain securities where they were not represented properly indocumentation, and in some cases have compensated investors.Bank of America Corp. (BAC) in particular has been faulted for the way it represented certain securities.Earlier this month, the firm wrote a $3 billion check to settle claims from government-sponsored entitiesFannie Mae and Freddie Mac in connection with mortgages originated by Countrywide Financial Corp,which BofA purchased in 2008.BofA is dealing with private investors and monolines separately. The firm increased its capital reservesat the end of the fourth quarter to $5.5 billion, partly to set aside an additional $1.1 billion for thoseclaims. It added that future claims could leave it on the hook for another $7-10 billion--the upper rangeof its forecast.New York lawmakers' decision to up the ante could discredit even that estimate. Morelle said while thecommittee is part of the legislature and has no law-enforcement powers, it could take the matter upwith the State Attorney General and the New York State Insurance Department.The Insurance Department is already considering a formal investigation into whether banks committedinsurance fraud by misrepresenting material facts on structured-finance deals, as first reported by theWall Street Journal last month. It is acting on a series of referrals from different monolines.