(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Agnes T. Crane
NEW YORK, May 7 (Reuters Breakingviews) - Bank of America's (BAC.N) legal settlement with bond insurer MBIA pays for itself, and then some. Agreeing to resolve disputes over losses from old toxic sludge cheered shareholders on both sides. The bank led by Brian Moynihan is forking out $1.7 billion, but added $6.9 billion of market value on Monday. MBIA scored nearly $900 million of extra equity on top of BofA's check. Leaving the crisis behind can still yield dividends.
The bad blood stretches back five years to a time when bond insurers and lenders were desperate to contain mounting losses from dodgy mortgages. In 2008, MBIA sued BofA and other banks for creating the monstrosities it insured. BofA then turned around and accused MBIA of trying to weasel out of claims by splitting its operations into a "good" insurer that guaranteed municipal debt and a "bad" one stuck with the dross. Monday's settlement wipes the slate clean.
Bank of America will pay MBIA $1.6 billion in cash and hand over $137 million worth of the insurer’s own bonds that the bank bought as part of its legal maneuvering. Moreover, the bank will tear up claims on commercial mortgage-backed securities that MBIA insured. The payout isn't small – it decreases BofA's first-quarter net income by about half – but is a lot less than the $5 billion of economic damages MBIA was originally claiming.
MBIA, meanwhile, gets cash it desperately needs. Last month, Moody’s Investors Service said the company might run out of money to cover claims. Worse, the "good" unit was in jeopardy because it lent $1.7 billion to its troubled twin. By dropping the lawsuit, MBIA can pay off the inter-company loan and avert a regulatory bailout.
That explains the 45 percent surge in MBIA stock following the news. The 5.2 percent gain in BofA shares, worth four times the amount of the settlement, is a reminder of just how much value investors will put on some degree of certainty. It's a lesson that shouldn't be lost on banks. BofA is still entangled in a number of other lawsuits, including the threat of a new one on Monday from New York's attorney general. They're not easy to escape, but doing so can be surprisingly cost-effective.
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- Bank of America said on May 6 it would pay bond insurer MBIA $1.7 billion to settle longstanding lawsuits between the two companies. BofA also said it would extend a $500 million line of credit to the bond insurer. MBIA, meanwhile, granted the bank warrants to buy 9.94 million shares of common stock at an exercise price of $9.59. MBIA's shares rose 45 percent to $14.29 while Bank of America's increased 5.23 percent to $12.88.
- Moody's Investors Service in March had put MBIA on notice for a potential downgrade, claiming the insurer may not be able to meet claims related to commercial mortgage-backed securities.
- Bank of America statement: newsroom.bankofamerica.com/
- MBIA statement: investor.mbia.com/releases.cfm
- Reuters: MBIA, Bank of America reach $1.6 billion cash settlement [ID:nL2N0DN0XA]
- For previous columns by the author, Reuters customers can click on [CRANE/]
(Editing by Jeffrey Goldfarb and Martin Langfield)
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