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UBS Group AG (NYSE: UBS) is in focus this morning after filing a $200 million lawsuit against the Bank of America Corp (NYSE: BAC).

The Swiss banking giant alleges that Bank of America did not honor indemnification agreements related to risky mortgages issued by Countrywide Financial that BAC bought in 2008. 

The lawsuit, filed in the New York State Supreme Court, centres on mortgage-backed securities that UBS created using loans originated by Countrywide. According to UBS, Countrywide has agreed to indemnify the financial services behemoth against claims arising from poorly underwritten or fraudulent mortgages. 

UBS stock is roughly flat for the day at writing.

How did UBS reach the $200 million figure?

The aforementioned mortgage-backed securities have already resulted in significant financial repercussions for UBS. In 2013, the bank announced an $885 million settlement with the U.S. Federal Housing Finance Agency. 

Additionally, UBS settled with the Federal Home Loan Bank of San Francisco in 2016 for an undisclosed amount. Both settlements were related to Countrywide’s loans. 

Despite extended discussions with the Bank of America on compensation, including some $53 million in legal costs, UBS alleges that the second-largest U.S. bank refused to comply with its obligations. UBS did not, however, offer more colour on how it reached the $200 million figure. 

The case underscores the ongoing legal fallout from the 2008 financial crisis, particularly regarding residential mortgage-backed securities. However, UBS’s lawsuit is unique in that it seeks coverage for settlements related to these securities rather than direct liability for their diminished value.

Countrywide contributed to the financial crisis of 2008

Countrywide Financial, under the leadership of Angelo Mozilo, became the largest U.S. mortgage lender by focusing on subprime borrowers. Their lending practices, which often involved low initial monthly payments and minimal documentation requirements, contributed significantly to the housing bubble that ultimately burst, leading to the financial crisis and subsequent recession.

Bank of America’s acquisition of Countrywide for $2.5 billion in July 2008 has proven to be extremely costly. The bank has faced tens of billions of dollars in legal and other expenses related to both the Countrywide and Merrill Lynch acquisitions.

So far, Bank of America has not responded to requests for comment on the lawsuit. The case, filed as UBS Americas et al v Countrywide Home Loans Inc et al, will be closely watched by financial and legal experts as it could set precedents for similar crisis-era indemnification claims.

Shares of the Bank of America Corp are down on Wednesday morning. 

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