BofA/Merrill’s mortgage-backed securities morass

In multiple cases, banks accused of misleading investors and “dollar rolling”

Just days after Countrywide Financial was in the news again thanks to Allstate Insurance Co.’s lawsuit against it to recoup $700 million in losses on mortgage-backed securities, a federal judge ruled that Bank of America and its Merrill Lynch unit will face a pair of similar lawsuits brought by a group of union and public employee retirement funds.

Yesterday, U.S. District Judge William Pauley named the Pennsylvania Public School Employees' Retirement System as the lead plaintiff in a case against Bank of America that combines three cases alleging the bank of improperly processed foreclosures and hid mortgage debt exposure.

The suit contends that Bank of America engaged in the process of “dollar rolling,” through which it disguised risk by transferring mortgage debt to a separate entity with an agreement that it would buy back that debt after issuing its quarterly statements.

In the other case, last week U.S. District Judge Jed Rakoff ruled that the 1,800 investors, who bought 301 tranches of mortgage-backed securities from February 2006 through September 2007, will be allowed to go forward with their suit against Merrill Lynch.

Whereas Allstate alleged Countrywide ignored its underwriting guidelines, the investors accuse Merrill Lynch of having issued documents for $16.5 billion of certificates that omitted material facts and contained untrue statements, including that the mortgages were in accordance with those same underwriting standards.

The cases are Public Employees’ Retirement System of Mississippi et al v. Merrill Lynch & Co et al and Pennsylvania Public Employees’ Retirement System v. Bank of America Corp et al. Both cases are in the Southern District of New York.

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