At several points in time, it looked as if the fracas between Bank of America (NYSE:BAC) and monoline insurer MBIA (NYSE:MBI) would never be settled, as first MBIA sued B of A, then the bank sued MBIA. At long last, the two have settled on the issue of $3 billion of disintegrating loans on which MBIA was forced to pay, and the deal comes not a moment too soon to save the bacon of each company -- each for different reasons.
MBIA nearly fell into the abyss
Crippled by huge payouts and no cushion to fall back upon, MBIA has been limping along, hoping against hope that settlement monies from the likes of Bank of America would appear in time to save the company from seizure by the New York Department of Financial Services. Though other banks, such as Wells Fargo and Morgan Stanley, have settled their respective suits regarding decomposing loans with the mortgage insurer, B of A steadfastly refused to ante up.
Last week, it looked as if the troubled mortgage unit was only inches away from being taken over by regulators. This move may have lent credence to Bank of America's claim that the splitting of the ailing mortgage part from the healthy bond insurance section was doomed to failure, thus strengthening the bank's position.
B of A had its own fish to fry
And, yet, the parties and Benjamin Lawsky, head of the NYDFS, worked tirelessly through the weekend to strike a deal -- despite B of A's insistence on more than one occasion that it would never settle with MBIA. What changed?
Another legal hassle that is somewhat tied in with this suit is that of the disputed $8.5 billion settlement between Bank of America and 22 investor groups. The upcoming Article 77 hearing in Manhattan, which will decide whether or not the trustee Bank of New York Mellon (NYSE:BNY) was remiss in agreeing to this deal on behalf of the investors, will decree whether B of A pays the agreed-upon amount, or possibly much, much more.
Why, possibly, much more? Because, when the court recently ruled against summary judgment for MBIA, the judge also let New York law decide whether the big bank has successor liability for Countrywide. This was seen as a win for MBIA supporters, even though a trial will be necessary to untangle that mess. Meanwhile, the same question applies to the $8.5 billion settlement, since, as noted by BTIG analyst Mark Palmer, the deal was struck based upon the notion that B of A did not have such responsibility in respect to Countrywide.
Settling with MBIA means this issue will never be raised, and therefore will not be used against the bank in the other claim's proceedings. Considering the depth and breadth of the Countrywide problem, the $1.7 billion settlement with MBIA was a pittance -- and a cheap way to avoid opening a can of worms that could cost the bank billions more than it could ever afford.
As for MBIA, Lawsky has publicly stated that the insurer is no longer considered insolvent. It doesn't happen very often, but this settlement was a definite win-win.