NEW YORK/CHARLOTTE, North Carolina (Reuters) - Bank of America Corp shares plunged more than 20 percent on Monday, capping a three-day rout in which the largest U.S. bank lost nearly one-third of its market value.
Monday's decline was triggered by a $10 billion lawsuit from American International Group Inc alleging a "massive" mortgage fraud.
The action raised new concerns about burgeoning losses related to the bank's $2.5 billion purchase of Countrywide Financial Corp in 2008 and prompted questions about the stability of the bank's management team.
"The bank just can't get its hands around the liabilities it's facing," said Paul Miller, an analyst at FBR Capital Markets.
He said investors fear the bank will have to raise equity to cover potential losses, diluting existing shareholdings.
Bank of America spokesman Jerry Dubrowski countered that the bank has adequate reserves to buy back mortgages if necessary and is comfortable with its strategic plans.
"We don't think we need to raise capital to run our businesses," he said. "We have the right strategy and management team in place."
In a separate court filing on Monday AIG, challenged an $8.5 billion agreement Bank of America reached in late June to end litigation by several large investors who bought securities backed by subprime Countrywide loans.
New York Attorney General Eric Schneiderman and other investors have previously tried to block that accord, saying the settlement amount is too small.
Bank of America shares closed down $1.66 at $6.51 after earlier plunging to $6.31, their lowest since March 2009. More than $30 billion of the company's market value has been wiped out since August 3.
Monday's drop came amid a broad market selloff, led by financial stocks, on the first trading day after Standard & Poor's downgraded its rating of U.S. government debt.
The shares of Citigroup Inc, another large bank, fell 16.4 percent to $27.95.
The cost of insuring Bank of America debt against default, an indicator of potential trouble at companies, rose roughly 50 percent on Monday to a level higher than several of the bank's main rivals, data provider Markit said.
It now costs $310,000 a year to insure the bank's bonds for five years, compared with $143,000 for the bonds of JP Morgan Chase & Co, the second largest U.S. bank.
AIG's lawsuit also upped the ante for Bank of America Chief Executive Brian Moynihan, who is struggling to contain losses from the Countrywide deal engineered by his predecessor, Kenneth Lewis.
"Brian Moynihan and the management team have not gained the confidence and trust of investors," said Jonathan Finger, whose Finger Interests Number One Ltd in Houston owns BofA stock and was a vocal critic of Lewis.
Moynihan is scheduled to participate in a public conference call on Wednesday hosted by Fairholme Capital Management LLC, one of its largest shareholders.
"Brian will have to give the performance of his life," said Tony Plath, a professor at the University of North Carolina at Charlotte, where Bank of America is based.
Moynihan's saving grace might be that the bank's board has no obvious candidates to replace him, said Miller of FBR Capital Markets.
Some large investors appeared to have avoided some of the debacle.
Hedge fund manager David Tepper, who has made a fortune betting against financial company shares, sold nearly half of his stake in Bank of America during the second quarter, according to a regulatory filing from his company, Appaloosa Management.
"Bank of America's stock price will remain under duress," said Michael Mullaney, who helps invest $9.5 billion at Fiduciary Trust Co in Boston and who said his company has sold nearly all its BofA shares.
Analysts said the market attack will get close scrutiny from U.S. regulators, given the size and importance of Bank of America to the banking system and the economy. The bank took $45 billion of federal bailout money during the financial crisis of 2008, which it later repaid.
"I have no doubt that the Fed and the Treasury Department are watching this closely," said Bert Ely, an independent banking consultant.
A spokesman for the Office of the Comptroller of the Currency, a part of the Treasury Department that regulates national banks, declined to comment. The Federal Reserve did not immediately respond to a request for comment.
In its lawsuit, AIG accused Bank of America and its Countrywide and Merrill Lynch units of misrepresenting the quality of its mortgage-backed securities, including more than $28 billion bought by AIG. The insurer also said the bank lied to credit rating agencies about the underlying loans.
AIG said it examined 262,322 mortgages underlying 349 offerings bought between 2005 and 2007 and found 40.2 percent of the mortgages were significantly inferior to what had been represented.
"Defendants were engaged in a massive scheme to manipulate and deceive investors," said the lawsuit, filed in a New York state court in Manhattan.
Bank of America said the insurer has only itself to blame.
"AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets," spokesman Lawrence Di Rita said. "It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors."
The AIG lawsuit is the latest in a growing number from investors seeking to hold banks responsible for losses on soured mortgage securities that contributed to the 2008 financial crisis.
AIG, which received $182.3 billion of government bailouts and is 77 percent owned by U.S. taxpayers, said in a statement it expects to pursue other litigation to recover losses from counterparties that "sought to profit at our expense."
According to The New York Times, AIG is preparing a lawsuit against Goldman Sachs Group Inc, which received $12.9 billion as one of the biggest beneficiaries of the government bailouts. Goldman spokesman Stephen Cohen declined to comment.
In addition to the plunge in the shares of Bank of America and Citigroup, other banks with heavy declines on Monday included JPMorgan Chase, which fell 9.4 percent, and Goldman, which lost 6 percent. AIG shares fell 10 percent, or $2.52, to
The law firm Quinn Emanuel Urquhart & Sullivan filed the AIG complaint. Michael Carlinsky, who signed the AIG complaint on behalf of the law firm, did not immediately respond to a request for comment.
The AIG lawsuit is American International Group Inc et al v. Bank of America Corp et al, New York State Supreme Court, New York County No. 652199/2011.
The other case is In re: The Bank of New York Mellon in the same court, No. 651786/2011.
Additional reporting by Ben Berkowitz, Dave Clarke, Kristina Cooke, Lauren Tara LaCapra, Ciara Linnane, Andrew Longstreth and Sakthi Prasad; editing by John Wallace, Phil Berlowitz and Andre Grenon