NEW YORK, June 6 Mortgage bond investors got "the best deal that was available" when they agreed to an $8.5 billion settlement with Bank of America Corp in 2012, an executive who helped negotiate the deal said Thursday.
The proposed deal would compensate investors who bought mortgage bonds issued by Countrywide Financial Inc, a unit of Bank of America, after the bonds went bad in the financial crisis.
Justice Barbara Kapnick is presiding over a hearing, which began in state court in New York this week, to decide whether to approve the deal.
While bolstering the case that the deal should be approved, Tuesday's testimony from Pacific Investment Management Co's (Pimco) Kent Smith provided a window into a difficult period for Bank of America, whose shares fell sharply after it rescued Countrywide in 2008.
Smith, Executive Vice President at Pimco and a member of the committee that negotiated the deal, said it was in the best interests of the investors and rejected the notion that the committee capitulated.
"It's an outstanding deal," Smith said. "I don't feel it was the bondholder group that caved. Bank of America did."
Smith also dismissed a suggestion made on Tuesday by a lawyer for investors who object to the deal, who said the committee agreed to a low number in part because BlackRock, one of the committee members, has a relationship with Bank of America.
He said the suggestion was a little ridiculous and offensive, noting that BlackRock is Pimco's largest competitor. Pimco is owned by Allianz SE.
THREAT OF COUNTRYWIDE BANKRUPTCY
Smith said the negotiations, which began in February 2011, took place under a threat that Bank of America would simply put Countrywide into bankruptcy if its exposure became too great.
Bank of America's chief risk officer, Terry Laughlin, told the committee that the bank had approached its regulator, the Office of the Comptroller of the Currency, about a bankruptcy filing for Countrywide, Smith said.
Bank of America told the committee that, without its support, Countrywide would soon exhaust its ability to pay, Smith said.
Smith was the first witness to be called in the hearing, which started on Monday and could run into July.
On Tuesday, a lawyer for American International Group , which did not take part in the settlement, argued that the settlement was too small. The lawyer, Dan Reilly, asked during his opening statement why investors had first asked for $50 billion then settled for $8.5 billion.
In his testimony on Thursday, Smith said negotiations were testy to start with. At one point, Bank of America's Laughlin threw a presentation back across the table at the investors.
At a meeting April 18, 2011, the committee demanded $12 billion, Smith said. Bank of America offered $4.8 billion. Investors then countered with $11.7 billion, and Laughlin said Bank of America's best offer would be $6.5 billion.
The investors soon made an "$8.5 billion take it or leave it, fill or kill" offer, Smith said. Bank of America later asked if they'd consider $7 billion. The committee said no. Then the bank requested to pay over time. The committee again refused. The group also refused to release the bank from claims for securities fraud.
"It's my assessment we got the best deal that was available," Smith said.
The settlement was made in June 2011 with 22 institutional investors, including Pimco, BlackRock and Metlife Inc. AIG and several Federal Home Loan banks have objected to the deal, calling it inadequate. If approved, it would be binding on them all.
The case is In re: Bank of New York Mellon, New York State Supreme Court, New York County No. 651786/2011.