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AIG strikes back: $3.7 billion lawsuit likely against Morgan Stanley

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Brendan Bordelon Contributor
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American International Group (AIG) is expected to sue a number of massive financial institutions for fraud over toxic mortgage-backed securities the banks provided to the insurance company before the 2008 financial crisis.

The Financial Times reports that a court case is brewing between AIG and Morgan Stanley over the $3.7 billion in bad bonds the megabank sponsored or underwrote between 2005 and 2007. After settlement talks reportedly broke down, the insurer terminated an agreement with the bank and told it to expect a lawsuit in the coming days.

Sources told the Times that AIG is also in talks with “a number of other banks” who certified similarly destructive mortgage-backed securities. Some of these banks may also see lawsuits by the end of the year.

AIG was one of the world’s most powerful financial insurers before the crisis, but required a $85 billion federal bailout in 2008 after bad mortgage bonds — provided by banks like Morgan Stanley — brought the company to the brink of financial ruin. That bailout was finally repaid last year.

Morgan Stanley won’t be the first bank sued by AIG. In August 2011 the company sued Bank of America for $10.5 billion, arguing that the bank deliberately pushed mortgage securities “marred by fraud, misrepresentations and omissions.”

It also won’t be the first bank recently sued over bad bonds. The last few weeks have seen a slew of lawsuits against financial institutions accused of peddling toxic mortgage-backed securities, none bigger than the federal cases against JPMorgan Chase.

The largest US bank by assets, JPMorgan has already paid the Federal Home Finance Agency $4 billion over bad bonds sold to Fannie Mae and Freddie Mac by Bear Stearns and Washington Mutual, two banks acquired by JPMorgan during the crisis. JPMorgan is the only major bank to be heavily targeted by federal regulators, leading some to speculate the suit may be politically motivated.

An additional $9 billion settlement is reportedly in the works with the Department of Justice, who is suing on behalf of a variety of institutional investors. AIG is not part of that lawsuit, raising the possibility it may pursue its own legal challenge against JPMorgan.

AIG’s aggressive pursuit of damages is partially due to the conditions of their federal bailout, which required the insurer to sell its nearly worthless mortgage-backed securities at fire sale prices. Other financial institutions held onto theirs, recouping some of their losses as the housing market slowly gained ground after 2008.

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