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Who's Next On AIG's Legal Hit List?

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Last week, Morgan Stanley (NYSE: MS  ) reported in an SEC filing that it may be sued by American International Group (NYSE: AIG  ) over mortgage-backed securities. The potential suit would mark another attempt by the insurance behemoth to recoup some losses generated by the allegedly misrepresented securities. With some litigation already pending, what other big names could be on AIG's legal docket to-do list?

The list so far
Morgan Stanley would be the second big bank targeted by AIG, which is involved in a $10 billion suit against Bank of America (NYSE: BAC  ) . That case has had many twists and turns, but remains unresolved since being filed in 2011. The case revolves around $28 billion in mortgage-backed securities, which AIG alleges Bank of America and its Countrywide and Merrill Lynch divisions fraudulently misrepresented.

Via the AIG v. Bank of America proceedings, the insurer has confirmed that it has the right to sue issuers of residential mortgage-backed securities, even though the securities were sold to the Federal Bank of New York during the company's restructuring.

Though it's impossible to know what AIG's specific allegations against Morgan Stanley will be before the lawsuit is actually filed, there's a high probability that the claims will mirror the Bank of American action. Morgan Stanley sold $3.7 billion in residential mortgage-backed securities to AIG between 2005 and 2007. If AIG uses the same percentage to calculate damages as it did in the case against Bank of America, the insurer may ask for as much as $1.3 billion in damages from Morgan Stanley, which is 36% of the total securities sold.

Who's next
In order to figure out who might be next on AIG's hit-list, it may help to look at the insurer's RMBS portfolio before the walls came tumbling down. As of December 2007, AIG had $70.9 billion in RMBSs (at cost) with private institutions, of which only a third were subprime. The largest category of the insurer's RMBS portfolio was in the Alt-A tranche, which includes large, nonconforming loans. Though generally used for purchases of investment properties or vacation homes, the tranche has some hazy guidelines as to what can be included.

So far, AIG may have laid claim to $31.7 billion in RMBSs between its current suit with Bank of America and the potential filing against Morgan Stanley. That leaves $39.2 billion of its portfolio as either fairly represented or grounds for future litigation.

One of the names not mentioned yet by AIG is JPMorgan Chase (NYSE: JPM  ) . The megabank does note that it has outstanding litigation regarding the issuance and underwriting of $117 billion in mortgage-backed securities by JPMorgan Chase, Bear Stearns, or Washington Mutual. JPMorgan Chase also noted in its quarterly filing that it has outstanding tolling agreements that could result in litigation. That is exactly the situation that Morgan Stanley faces now, since the company had an existing tolling agreement with AIG, which the insurer recently terminated.

A long list?
It would be difficult to name more potential candidates for AIG's legal team to engage, but there is one easy statement to make -- the insurer is not shy when it comes to seeking damages. Be sure to keep an eye out on the company's progress with Bank of America, as well as new court documents for either Morgan Stanley or JPMorgan Chase.

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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 14, 2013, at 8:28 AM, Mike123 wrote:

    This is another mundane example of an insurance company refusing to pay out. The responsibility of the insurer is to vet the risk before insuring the risk...that is why they have actuarials in abundant supply.

  • Report this Comment On November 14, 2013, at 8:58 AM, todd6109 wrote:

    The piranha's have to cannibalize to survive. Feeding on the 99% is becoming a loser's game. As always they need to look for the deep pockets to keep the cash flowing in - who else are they gonna turn to?

  • Report this Comment On November 14, 2013, at 3:27 PM, tedwarrenlives wrote:

    How does the US Citizen sue Congress?

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