How AIG's Suit on BofA Matters (AIG, BAC, GS, JPM, C, HBAN, RF)

Bank of America Corporation (NYSE: BAC) has rapidly turned into a runaway train.  The latest suit from American International Group, Inc. (NYSE: AIG) for $10 billion for its massive mortgage fraud is just the most recent thorn in the bank’s side.

What has happened is that the Countrywide acquisition has turned out to be the ultimate disaster.  The bank is going to potentially have to bring up the remaining Merrill Lynch unit heads to help remedy the situation.  By taking over Countrywide before it would have imploded rather than after it imploded, Bank of America’s hole in the balance sheet is one where nobody can tell you where the end is.

What is obvious is that Countrywide (and Merrill Lynch for that matter) is just the first. Most other indications show that competing banks are going to be sued by AIG as well.  If you recall, Goldman Sachs Group Inc. (NYSE: GS) has effectively been accused of betting against its trading partner clients (and worse) in the mortgage mess.

JPMorgan Chase & Co. (NYSE: JPM) was active in mortgages as well, but the bank at least had the highest credit quality customer base even at the peak of the mayhem.  Citigroup, Inc. (NYSE: C) is down 4.4% at $31.95, also on securitization fears even though Citi is believed to have less ultimate exposure here.

Some of the other banks which lost handily and still have more leverage than investors seeking safety may face some music today too.  Huntington Bancshares Inc. (NASDAQ: HBAN) is down around $5.10 after a $5.39 close and Regions Financial Corp. (NYSE: RF) is down only 2.5% at $4.97.

The big question is whether or not Brian Moynihan is going to be able to keep his role as CEO.  The mess was not his fault and it was inherited, but the situation here has grown and grown for the worse under his leadership.  If Moynihan does leave, there is still one man who won’t get to run the show: Angelo Mozilo.

At the end of the day, every bank and brokerage firm that sold mortgage products has a real defense against AIG.  If anyone should have known what they were buying, it should have been AIG.  The notion that AIG is taxpayer-owned for the most part does not really matter in that sense of the word.

JON C. OGG