UBS (NYSE:UBS) has filed a lawsuit against Bank of America (NYSE:BAC) for $200 million, accusing the American banking giant of refusing to cover legal costs tied to risky mortgages issued before the 2008 global financial crisis. This legal battle marks a significant development in the ongoing fallout from the crisis, as UBS seeks indemnification for settlements related to mortgage-backed securities that went awry during one of the most tumultuous periods in financial history.
The Basis of UBS’s Lawsuit
The roots of the lawsuit can be traced back to the mid-2000s, when UBS, like many other financial institutions, bundled mortgages into securities for sale to investors. These mortgages originated from Countrywide Financial, a major U.S. mortgage lender that was acquired by Bank of America in 2008. UBS claims that Countrywide had agreed to indemnify it against any legal claims arising from the mortgages, particularly if they were underwritten poorly or fraudulently.
UBS has already faced substantial legal costs related to these mortgages. In 2013, the Swiss bank reached an $885 million settlement with the U.S. Federal Housing Finance Agency over claims that Countrywide’s mortgages had contributed to the collapse of the housing market. Additionally, in 2016, UBS entered into a confidential settlement with the Federal Home Loan Bank of San Francisco over similar issues.
However, despite extensive negotiations with Bank of America, UBS claims that the bank has refused to honor its indemnification obligations, which include covering approximately $53 million in legal fees. UBS is now seeking $200 million in damages, a figure that it says reflects the broader costs associated with these crisis-era mortgages.
Bank of America’s Response and the Broader Context
As of now, Bank of America has not publicly responded to the lawsuit or provided any comment on the matter. The complaint was filed in a New York state court in Manhattan, and it adds to a long list of litigation that has stemmed from the financial crisis, as various lenders and financial institutions have sought to assign blame for the collapse of residential mortgage-backed securities that were once considered safe investments.
The litigation landscape has been complex, with many cases revolving around whether lenders should be held liable for the steep decline in the value of these securities. UBS’s lawsuit is somewhat unique in that it seeks to recover costs related to settlements over these securities, rather than directly challenging the quality of the underlying mortgages.
The Role of Countrywide in the Crisis
Central to this lawsuit is Countrywide Financial, once the largest mortgage lender in the United States, which became synonymous with the subprime mortgage crisis. Under the leadership of Angelo Mozilo, Countrywide aggressively catered to subprime borrowers—those with less-than-perfect credit histories—offering loans with low initial payments and minimal documentation requirements.
These practices contributed significantly to the housing bubble that ultimately burst, leading to a severe downturn in home prices and triggering the financial crisis. When Bank of America purchased Countrywide in 2008 for a fire-sale price of $2.5 billion, it inherited not only the company’s assets but also its liabilities. The acquisition has since cost Bank of America tens of billions of dollars in legal fees and settlements, not just related to Countrywide but also due to the subsequent purchase of Merrill Lynch, another beleaguered financial institution, later that same year.
The Ongoing Impact of the Financial Crisis
The lawsuit filed by UBS is a reminder that the financial crisis continues to cast a long shadow over the global banking industry. More than a decade after the crisis, financial institutions are still grappling with the legal and financial consequences of the risky practices that led to the meltdown.
As the case progresses, it could set a precedent for how indemnification claims related to crisis-era mortgages are handled in the future, potentially influencing how banks approach similar disputes. For now, UBS’s lawsuit against Bank of America serves as a stark example of the lingering challenges that financial institutions face as they navigate the complex legal landscape shaped by the events of 2008.
The case, titled UBS Americas et al v Countrywide Home Loans Inc et al, will be closely watched by the financial industry, as its outcome could have significant implications for both UBS and Bank of America, as well as other institutions still dealing with the aftermath of the financial crisis.
Featured Image: Freepik
