Bank of America Corp. Chief Executive Officer Brian T. Moynihan, who once vowed to wage “hand-to-hand combat” in lawsuits over faulty mortgages, settled one big fight with MBIA Inc. yesterday as another remains unfinished.
The $1.7 billion agreement, which ends a five-year legal tussle with the bond insurer, removes another hangover from Bank of America’s 2008 takeover of Countrywide Financial Corp. While a separate $8.5 billion proposed settlement over claims tied to bad mortgages is awaiting court approval, it shows Moynihan’s strategy is working, analysts said. The lender’s shares climbed 5.2 percent, the most in five months.
“Bank of America had to get this done,” said Pri de Silva, senior banking analyst at CreditSights Inc. Among the bond insurers bringing claims against the Charlotte, North Carolina-based bank, MBIA was the “big kahuna. That leaves the private-label one as the last remaining,” he said, referring to the pending deal that’s being challenged in court.
The MBIA settlement moves Moynihan, 53, one step closer to breaking free of the toxic assets that he inherited with Bank of America’s purchase of Countrywide, whose lax standards and subprime loans led to claims of misconduct by investors who bought mortgage-backed bonds. The agreement limits the bank’s liability from bond insurers, one of three broad groups that sought to force it to buy back faulty mortgages, de Silva said.
Bank of America agreed to pay the equivalent of $1.7 billion to MBIA and take a 5 percent stake in the bond insurer, the companies said yesterday in separate statements. The lender also will provide a $500 million line of credit to an MBIA unit, while MBIA agreed to drop demands that soured home loans it had guaranteed be repurchased.
Bank of America also agreed to remit to the insurer $137 million of MBIA’s bonds that it bought in December during a tender offer. The lender bought the debt during an attempt to block bondholder consents to amendments that would have shielded MBIA from being dragged into bankruptcy by its cash-strapped insurance unit. A default notice filed by Bank of America was dropped as part of the settlement.
MBIA first sued Countrywide in 2008 in New York state Supreme Court in Manhattan for fraud and breach of contract related to the securitized home loans.
In January, the company signed an $11.7 billion deal with Fannie Mae, ending claims from government-backed mortgage finance firms, another of the three groups, said de Silva, whose firm is based in New York.
The bank already had settled with bond insurers Assured Guaranty Ltd. for $1.6 billion and Syncora Holdings Ltd. for about $400 million.
Moynihan said in November 2010 that the firm will engage in “hand-to-hand combat” to fend off demands before agreeing to a string of settlements.
The settlements contributed to the more than $40 billion that Bank of America has disbursed to satisfy claims stemming from faulty mortgages and foreclosures, which Moynihan calls “legacy issues.” The expenses have hobbled the bank’s profits, and investors have pressed him to say when they’ll end.
“Each time we can get past this, put a number on it, lock it up and throw away the key and move forward, it’s a positive for investors,” Marc Pinto, head of corporate bond strategy at New York-based Susquehanna International Group LLP, said in a phone interview. “There’s more certainty about the future.”
The unresolved $8.5 billion settlement remains the largest facing the bank, said Paul Miller, an FBR Capital Markets analyst. The proposed deal, filed almost two years ago by an investor group that includes Pacific Investment Management Co. and represented by Bank of New York Mellon Corp. as trustee, is set to be considered by a judge at a hearing starting May 30.
Miller, who has a market perform rating on Bank of America shares, said the MBIA settlement isn’t “very meaningful” because the stakes were smaller.
“They weren’t going to lose $20 billion in this case, they weren’t going to lose $5 billion,” he said. “Don’t get me wrong. I like the fact that you’re starting to clean some of these hurdles up, but the big one I want them to get rid of is this Bank of New York one.”
Separately, New York Attorney General Eric Schneiderman said yesterday that Bank of America and Wells Fargo & Co., the biggest U.S. home lender, violated terms of a nationwide mortgage settlement reached last year. Schneiderman said he plans to sue the banks unless a committee set up to monitor the settlement’s terms takes action.
Bank of America will revise its first-quarter earnings to book $1.6 billion in additional pretax charges, of which $1.3 billion stems from the MBIA settlement, the lender said yesterday. That will slash the period’s net income to $1.5 billion, or 10 cents a share, from the $2.6 billion, or 20 cents, reported last month.
The bank struck a smart deal in that providing funds to MBIA helps protect some of the lender’s bond investments guaranteed by the insurer, said Bill Smead, CEO of Seattle-based Smead Capital Management Inc., which oversees $430 million including Bank of America shares. MBIA contracts protected Bank of America and its subsidiaries from losses on commercial-mortgage debt.
“It appears that Brian Moynihan shrewdly, in the negotiation, the legal wrangling, has addressed that quite successfully,” Smead said in a phone interview. “He’s endorsing the viability of MBIA. They’re taking a stake in the company and they’re putting color in the cheeks of MBIA existing insurance that’s floating around out there.”
MBIA’s viability has been in question. The bond insurer said in February that there was “substantial doubt” about the ability of its MBIA Insurance Corp. unit, which backed some of Wall Street’s most toxic mortgage debt, to continue as a going concern unless it reached a deal with the bank.
Bank of America climbed 5.2 percent yesterday to $12.88, the most since Dec. 5 and the highest since April 2011. The stock gained 11 percent this year on top of its 109 percent advance in 2012, when it led the Dow Jones Industrial Average. MBIA rose 45 percent to $14.29 after climbing as high as $15.45, the biggest intraday jump ever.
“This comprehensive and important settlement is a very positive step forward for both Bank of America and MBIA,” Benjamin Lawsky, New York’s superintendent of financial services, said in a statement. “It resolves significant exposure and expensive litigation for Bank of America.”