$8.5B Bank of America Mortgage Settlement Approved, With Asterisks (Update 4)

Updated from 3:42 pm to include comment from Fitch Ratings and closing share prices.

NEW YORK (TheStreet) -- Bank of America (BAC) won approval of most of a highly controversial $8.5 billion mortgage backed securities (MBS) settlement that had been viewed as the major legal hurdle for the bank as it looks to put the subprime housing crisis behind it, but AIG (AIG), one of the principal objectors to the deal, said the case was "far from over."

New York State Supreme Court Justice Barbara Kapnick approved the bulk of the June 29, 2011 settlement between Bank of America and several of the world's largest financial institutions, an investor group that included Pimco, Blackrock (BLK), Goldman Sachs (GS) and the Federal Reserve Bank of New York, for pennies on the dollar over objections of AIG and other mortgage backed securities holders. However, while Kapnick found BNY Mellon (BK), the trustee representing the investor group, "did not abuse its discretion in entering into the Settlement Agreement and did not act in bad faith or outside the bounds of reasonable judgment," she found it "acted unreasonably or beyond the bounds of reasonable judgment" in settling certain loan modification claims, according to her order released Friday.

A statement from an AIG spokesman said the insurer was "pleased that the Court refused to approve the proposed settlement in its entirety and found that the trustee acted unreasonably in agreeing to compromise billions of dollars of investor claims." It added: "we respectfully disagree with the other aspects of the Court's ruling, which are not supported by the record and which set a dangerous precedent that could eliminate important protections for investors. This case is very far from over because the settlement will not take effect until a variety of potential post trial motions and appeals are resolved."

A Bank of America spokesman wrote via email, "we are pleased that the court approved the settlement. We believe any outstanding issues raised in the opinion can be addressed without undue delay."

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