Shares in Bank of America (BofA), one of the largest high-street banks in the US and the owner of the investment bank Merrill Lynch, plunged by almost a fifth amid fears the company will have to raise more money to cope with mounting legal problems.
AIG, the insurance giant that was nationalised during the 2008 financial crisis, launched a $10bn lawsuit claiming BofA perpetrated mortgage fraud on a massive scale in the years before the crisis broke. AIG insured derivatives based on mortgage-backed securities, whose underlying mortgages, the lawsuit claimed, were far riskier than BofA ever admitted.
Many of the mortgages were written by Countrywide, the subprime lender BofA acquired in 2008. BofA, through its own operations and those of the firms it acquired, accounts for one in five of the mortgage securities sold between 2005 and 2007.
According to the almost-200-page complaint, filed in a New York court yesterday, four out of 10 of the underlying mortgages differed significantly from what investors and AIG had been led to expect.
The commencement of legal proceedings by AIG means BofA's attempts to draw a line under the mortgage crisis have not worked. AIG is also objecting to an $8.5bn legal settlement that BofA signed in June with many of the world's largest fund management firms over the same toxic mortgage investments. On top of that settlement, BofA also put aside an additional $5.5bn to cover further legal actions.
Mike Mayo, the highly respected banking-sector analyst at Crédit Agricole, turned negative on BofA shares yesterday, warning the bank could have to raise new money to stay ahead of capital requirements and in order to restore its dividend.
In lunchtime trading, BofA shares were down more than 17 per cent.