Bank of America stock falls 20 percent after $10 billion lawsuit

Bank of America stock fell 20 percent on Monday, as investors fled from a $10 billion lawsuit that the insurance giant American International Group filed against BofA on the sixth-worst trading day in Dow history, the Huffington Post reported today.

Financial stocks were hit hard, but none worse than BofA, the LA Times reported, which lost a fifth of its stock value. Bank of America was worth more than $50 a share before the 2008 financial crisis, and is down more than 50 percent this year.

"It was a perfect storm, with the downgrading of U.S. debt, the downgrading of Fannie and Freddie and the AIG lawsuit," said Paul Miller, managing director of FBR Capital Markets & Co. "It just becomes a death spiral. The same things happened to these companies in 2008."

In today's trading, however, BofA  recovered some, jumping 7.5 percent to $7, Reuter's reported.

AIG said Monday it sued Bank of America for more than $10 billion, saying the bank sold residential mortgage-backed securities that were overvalued, the Associated Press reported on Monday.

Bank of America denied the allegations, saying AIG "recklessly" chased high returns, and was big and sophisticated enough to know the risks.

AIG said Bank of America and two companies that were later swallowed by the bank, Countrywide and Merrill Lynch, sold the insurance company $28 billion in securities backed by home mortgages between 2005 and 2007, at the height of the housing boom.

AIG claimed that of the 260,000 mortgages it examined, 40 percent of the house "metrics" were false.

In one case, a borrower said she had been the owner of a construction business for 25 years, which would have made her 10 years old when she took ownership, AIG said.

Bank of America spokesman Lawrence Grayson blamed AIG.

"AIG is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors," Grayson said.

Adding to the downward spiral at BofA, the  S&P downgraded the debt of mortgage financing firms Fannie Mae and Freddie Mac, both of which loaded up on Countrywide's risky subprime home loans, the LA Times reported. BofA owns Countrywide.

BofA, which agreed in January to pay Fannie and Freddie $3 billion to buy back delinquent loans, disclosed Friday that the companies were demanding more — "in numbers that were not expected," the bank said.