The game of legal cat-and-mouse between MBIA (MBI -0.16%) and Bank of America (BAC 0.45%) shifted today in favor of the Armonk, New York-based financial guarantee insurer.
In a rare scenario in which B of A was not the accused, a New York Supreme Court judge silenced the cries of multiple banks, including B of A, over MBIA's decision to bifurcate and restructure its business between municipal bonds and mortgage-backed securities in 2009. The banks claimed that the asset transfer was unfair because it left the entity exposed to deteriorating MBSes underfunded. The judge's decision was critical for MBIA as the pending ligation against it was hindering opportunities in the municipal markets. S&P recently cut its credit rating to junk.
The market knows a good legal decision when it hears one. MBIA's stock soared immediately after the decision was made public. While MBIA investors unquestionably cheered the decision, Bank of America and its investors were once again on the wrong end of a litigious situation. Although this ruling does not have any bearing on the other ongoing lawsuits between MBIA and B of A regarding alleged material misrepresentation by now bank-owned Countrywide's past mortgage operations, it should give MBIA slightly more leverage during any settlement negotiations because the company is no longer in a dire operational situation.
Given B of A's disclosure last week that the New York attorney general was jumping on the bandwagon of those claiming malfeasance by legacy Countrywide, the likelihood of a settlement seemed to have increased. Brian Moynihan and team have the ability to essentially close both cases with a settlement because the New York attorney general's case would be severely damaged without the legal proceedings that would become available if Bank of America and MBIA were to head to the courtroom. B of A investors did not seem to put much weight on the judge's decision as shares rallied from negative territory to finish higher on the day.
