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AIG Drops Lawsuit Against New York Fed Over Financial Bailout

Source: A.M. Best

Posted on 03 Jun 2013 by Neilson

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AIG lawsuit against Fed GovAmerican International Group Inc. has agreed to dismiss its lawsuit against the Federal Reserve Bank of New York related to the financial bailout the company received during the 2008 financial crisis.

AIG agreed to dismiss its lawsuit without prejudice in a May 28 filing with the U.S. District Court for the Southern District of New York. AIG filed suit against the New York Fed in February, seeking a court order that said the company retained the right to file suit after receiving the taxpayer-funded bailout.

When AIG faced the liquidity crisis, the U.S. government stepped in with a bailout that allowed AIG to transfer toxic residential mortgage-backed securities with a face value of $39.3 billion to Maiden Lane II, a special purpose vehicle controlled by the Federal Reserve Bank of New York, for $20.8 billion. Maiden II was named in AIG's lawsuit against the New York Fed.

AIG's decision to drop the suit is the latest twist in the complex litigation involving the company that began with the bailout.

Last week, a federal judge in Los Angeles confirmed that AIG has standing to bring claims against Bank of America Corp. for the residential mortgage-backed securities that were sold to Maiden Lane II.

In April, the Second Circuit Court of Appeals ruled AIG's mortgage fraud lawsuit should be heard in New York state court. AIG and Bank of America have been fighting over whether AIG's 2011 lawsuit should be heard in state or federal court. AIG sued Bank of America for $10 billion, alleging the bank knowingly engaged in misconduct when selling thousands of defective residential mortgages. Those mortgages, which backed securities, experienced "unprecedented" rates of defaults and foreclosures, which in turn affected the securities when the market collapsed in 2008, according to AIG's complaint.

In related litigation, Bank of America settled with the Federal Reserve of New York for an undisclosed amount. At issue in that case is who owns the right to sue over $18 billion in residential mortgage-backed securities that AIG bought, securities that led in part to AIG's 2008 liquidity crisis that sparked a federal government bailout. Under the terms of its settlement with Bank of America, the New York Fed agreed not to sue on any of the tort claims that AIG seeks to advance, according to court papers.

On the afternoon of May 31, shares of AIG were trading at $44.62, down 3.44% from the previous closing price.

Most AIG subsidiaries currently have a Best's Financial Strength Rating of A (Excellent).