BofA may need litigation trust for lawsuits

When some analysts look at all of the litigation arising from Bank of America's (BofA) big role in the U.S. mortgage mess, they start thinking of asbestos and how thousands of lawsuits arising from that cancer-causing product brought down many manufacturers more than a decade ago.

The solution back then to dealing with claims filed by more than 750,000 workers exposed to asbestos was the creation of dozens of “asbestos settlement trusts,” which have paid out tens of billions dollars in damages. Some of them are still going strong today.

The asbestos trusts were seen as an innovative approach to deal with seemingly endless litigation and provide a measure of compensation to sick workers and their families. The system for dealing with claims also allowed some of the hobbled manufacturers to emerge from bankruptcy largely free of the crushing weight of lawsuits.

Now some investors in soured mortgage-backed bonds sold by BofA and advocates for struggling homeowners are wondering whether a similar strategy can be used to deal with litigation claims that Wall Street analysts estimate could cost the nation's biggest bank more than US$50 billion.

The idea of using the asbestos litigation wars as a model for dealing with the fallout from the financial crisis is more talk than anything else.

There's no indication an asbestos-style litigation trust is something BofA is actively considering at the moment.

But efforts to find a creative solution to Bank of America's multipronged exposure to Countrywide's ailing mortgage portfolio become more urgent with each downward tick in the bank's already depressed share price.

Just this week, Chris Whalen, a bank analyst and co-founder of Institutional Risk Analytics, was out calling for a Chapter 11 restructuring of Bank of America.

“You need to do something radical, which changes the framework so people can start thinking with their brains again,” says William Black, an associate professor of law and economics at the University of Missouri-Kansas City School of Law and former litigation director of the old Federal Home Loan Bank Board during the run-up to the savings and loan crisis of the 1980s.

Fresh Start

This is not the first time that some have talked about a litigation trust as a mechanism to deal with some of Wall Street's liability arising from the collapse of the U.S. housing market. In the early days of the financial crisis, regulators discussed the merits of using an asbestos-style trust to resolve potential litigation claims against the biggest U.S. banks. But regulators ultimately rejected the trust concept along with other novel ideas that were deemed either unworkable or politically untenable.

One appeal to a trust solution, according to proponents, is that it would be a way for a bank to essentially hive off its litigation liability and establish a mechanism for dealing with claims and litigation. The advocates suggest it would be a way for BofA to get a “fresh start” without involving a bankruptcy or a Federal Deposit Insurance Corporation-imposed receivership.

But an asbestos trust is no magic bullet either. The insurance industry continues to be plagued with new asbestos-related claims years after the trusts were created.

Credit rating agency Moody's Investors Service recently said after asbestos being a “back burner” issues for years, the U.S. insurance industry is recently seeing an uptick in new asbestos claims.

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