MBIA Inc. shares surged after the bond insurer agreed with Bank of America Corp. to dismiss a lawsuit over protection against mortgage-debt defaults, prompting speculation that the two firms are near a wider settlement of claims tied to soured subprime home loans.
The suit is among several between Bank of America, the firm that bought Countrywide Financial Corp. in 2008 and Merrill Lynch & Co. in 2009, and MBIA, which guaranteed Wall Street’s toxic mortgage debt. The companies agreed to voluntarily dismiss the case, not bring it again and pay their own legal fees, according to a filing yesterday in New York state court.
“This is likely a precursor to a wider, comprehensive settlement which resolves all outstanding litigation against Bank of America and MBIA,” said Manal Mehta, a partner at Branch Hill Capital, a San Francisco-based hedge fund that invests in Armonk, New York-based MBIA. “Any meaningful settlement would have dramatic positive implications for the credit quality of MBIA.”
MBIA rose 58 cents, or 6.9 percent, to $9.04 as of 4:15 p.m. in New York Stock Exchange composite trading. Bank of America, based in Charlotte, North Carolina, and the biggest U.S. lender by assets, slipped 14 cents to $10.21.
MBIA sued the bank to unwind or recover payouts on $5.7 billion of credit-default swaps and related insurance sold against collateralized debt obligations. The firm, the largest bond insurer during the 2008 financial crisis, claimed that efforts by Merrill Lynch to market the swaps contracts were part of a scheme to offload deteriorating loans from 2006 and 2007.
Breach of Contract
Kevin Brown, an MBIA spokesman, and Bill Halldin of Bank of America declined to comment.
Bank of America Chief Executive Officer Brian T. Moynihan, 51, is working to stanch losses tied to takeovers led by his predecessor Kenneth D. Lewis. Moynihan announced $20.4 billion in second-quarter charges last month, including an $8.5 billion deal with institutional investors and $5.5 billion set aside for future claims. That followed earlier settlements with Fannie Mae and Freddie Mac and bond insurer Assured Guaranty Ltd.
“We will fight and represent your interest to the point where we got the interests represented,” Moynihan said in a June 1 conference. “There is a point where fighting doesn’t have any value.”
Bank of America had $6.2 billion set aside as of the first quarter to cover claims from insurers and bond buyers, who said that the lender created mortgages based on false or missing information. There were $13.6 billion in outstanding claims at the time, $5.3 billion of which came from bond insurers, the bank said.
MBIA has booked $2.7 billion in estimated recoveries on its balance sheet for mortgage-bond repurchase claims as of the first quarter, the firm said in a May filing. The insurer said it believes it is entitled to collect the full $4.6 billion of losses it has incurred on the debt. Through September, MBIA had paid out $2.5 billion on mortgage securities sponsored by Countrywide, Chief Executive Officer Jay Brown said in February.
Bank of America and Merrill Lynch are among financial institutions challenging a 2009 split of MBIA Insurance Corp. that moved the insurer’s municipal bond guarantee business into another unit, claiming that the restructuring was intended to defraud policyholders.
The bank’s suits were “posturing to get a better price on repurchase settlements rather than actually wanting to get the MBIA split undone,” said Robert Haines, an analyst at CreditSights Inc., in an interview.
An eventual settlement may cost Bank of America “in the higher end” of a $2 billion to $3 billion range, Haines said.
Banks including Barclays Plc, JPMorgan Chase & Co. and Royal Bank of Canada have dropped out of the banks’ challenge of MBIA’s restructuring. In addition to the fraudulent conveyance suit, the banks also are suing under New York’s Article 78, which allows court review of state administrative decisions.
The cost to protect against defaults by both MBIA and its MBIA Insurance unit dropped amid the settlement speculation. Five-year credit-default swaps on the parent company fell 2.6 percentage points to 17.9 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $1.79 million initially and $500,000 annually to protect $10 million of obligations for five years.
Swaps on MBIA Insurance fell 1.6 percentage point to 31.3 percent upfront, CMA prices show.
The case is MBIA Insurance Corp. v. Merrill Lynch, Pierce, Fenner & Smith, 09601324, New York State Supreme Court, New York County (Manhattan).