New York Fed Protects Bank of America Corp (BAC) From Big, Bad American International Group, Inc. (AIG)

Just when investors thought the lawsuits over the shoddy mortgage loans and mortgage-backed securities plaguing Bank of America Corp (NYSE:BAC) might soon become merely a bad memory, a nasty bit of news showed up. A recent article in The New York Times reports that last summer, the Federal Reserve Bank of New York, unbeknownst to almost everybody, absolved B of A of liability in some MBSes it sold to American International Group, Inc. (NYSE:AIG), which were then purchased by the FRBNY.

Secret meetings, ongoing lawsuits
These securities were part of the AIG bailout, and they became one of the ingredients in the Maiden Lane II portfolio. If this sounds familiar, that’s because these documents were aired in a New York courtroom as part of the lawsuit filed against the New York Fed in an effort to sustain its right to sue B of A over those shaky MBSes.

According to AIG’s suit, however, the FRNBY somewhat mysteriously told Bank of America last December that AIG had sold its litigation rights along with the securities. Meanwhile, a 2011 lawsuit filed by the insurer against B of A regarding $10 billion of toxic MBSes — $7 billion of which were tucked into Maiden Lane II — is still pending.

For its part, Bank of America has asked a Los Angeles federal judge to dismiss AIG’s claim, saying that the insurer “long ago signed away” litigation rights during the bailout. But AIG states that it never explicitly signed away those rights — and as it turns out, “long ago” was actually last July.

A good deal for B of A?
Since the New York Fed sent a letter to AIG in October 2011 upholding the insurer’s right to pursue claims on those securities, AIG seems to have a valid point. As the article point out, however, the FRBNY began telling B of A another story last December, releasing the bank of liability, while asking nothing in return. Why would the Fed make such a deal with the bank, knowing the pending litigation? Did the New York Fed also make promises to other banks such as Goldman Sachs Group, Inc. (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM), which AIG may also be planning to sue?

On the surface, this looks like a favorable outcome for Bank of America. Taking that $7 billion claim off the table should make investors happy and save the bank some cold, hard cash. After all, it was a very big deal in August 2011 when AIG first filed the $10 billion lawsuit, causing the bank’s shares to tank until Warren Buffett stepped in with a $5 billion infusion to calm the waters.