After more than four years in the legal system, MBIA Insurance Corp.’s suit against Bank of America is to go to summary judgment hearing on Dec. 12.
Some observers think that if MBIA wins on its breach of contract claims, Bank of America could be liable to pay MBIA Insurance $5 billion. If MBIA wins on claims of fraud and the judge awards punitive damages, Bank of America could be forced to pay MBIA Insurance some multiple of that.
In terms of the amount of money at stake, the suit is the “most important” of the bond-insurer representation and warranty breaches suits against companies that bundled real estate back securities before the recent recession, said Jonathan Carmel, portfolio manager at Carmel Asset Management.
If MBIA Insurance were to win a large monetary judgment, its sister company National Public Finance Guarantee would benefit in at least two ways. “The most immediate impact is that it [would] allow MBIA Insurance Corp. to repay its $1.6 billion loan from National,” said MBIA Inc. spokesman Kevin Brown.
Second, the ratings agencies have reduced their marks for National partly because they perceive that MBIA Insurance Corp.’s problems could affect National, which was created during the financial crisis to take over MBIA’s public finance book.
If MBIA Insurance were to resolve all pending litigation possibly through a settlement, than the rating agencies would be less focused on this issue, said BTIG managing director Mark Palmer. National could turn to the agencies and ask them to reconsider its ratings, currently in the low investment-grade category. With higher ratings National could start insuring new bonds again.
A favorable outcome for MBIA could benefit others in the moribund bond insurance industry. Recently, Bank of America has been fighting to keep a broad array of case documents confidential.
“If certain documents collected by MBIA during discovery are revealed to the public, they also will be made available to the many other plaintiffs who have filed lawsuits against Bank of America over breaches in representations and warranties in the mortgage loans sold into securitizations and thereby accelerate those suits,” Palmer wrote recently.
New York Supreme Court Justice Eileen Bransten has promised to finish writing a decision on what sealed documents should be made public by Dec. 18. The release of Bransten’s decision may take an additional week or two.
“MBIA is playing against time,” Carmel said. Time, on the other hand, is on Bank of America’s side, he said. Bank of America is trying to drag out the case as much as possible. MBIA Insurance, which is rated junk, could face a liquidity crisis at some point if it does not get a chunk of money from this case, either by court order or through a settlement with Bank of America, he said.
A few billion dollars is the “difference between a good quarter and a bad quarter for Bank of America,” Carmel said. “It’s life or death for MBIA.”
MBIA Insurance’s parent company MBIA Inc. recently had success with a “consent solicitation.” MBIA’s Inc.’s consent solicitation was launched to amend MBIA Inc.’s debt indentures to substitute National for MBIA Insurance Corp. in the cross default provision. MBIA Inc. paid a small fee to the bond holders who consented.
The maneuver will prevent an insolvency at MBIA Insurance from triggering an acceleration of MBIA Inc.’s debt. The acceleration could have pushed National’s parent MBIA Inc. into insolvency, though it would not have directly affected National..
However, if MBIA Insurance were to have a liquidity crisis before National’s loan to it is repaid, the loan would be subordinate to policy holder claims, Carmel said. The New York Department of Finance would have to decide how much the loan would be impaired. If the loan had a major impairment, that would be a major loss of statutory surplus for National, Carmel said.
Since the case was filed against Bank of America, Countrywide Home Loans, Countrywide Securities, Countrywide Financial Corp., and Countrywide Home Loans Servicing in 2008, the case has gone through the discovery process. Bransten has made several important rulings, nearly all in favor of MBIA, according to several sources. These rulings have been upheld on appeal.
The case is now in the summary judgment phase, where one or both sides ask the judge to decide the case or a large part of it.
On Dec. 12 and 13, the judge will listen to lawyer arguments about whether Countrywide allegedly misrepresented the quality of the mortgages underlying the securities that MBIA insured. On Jan. 9 and 10, the judge will hear arguments on whether, if Countrywide is found guilty, Bank of America is liable for paying claims because it bought Countrywide in January 2008.
The judge could rule on the summary judgment motions this winter. If she rules in favor of MBIA, she could award up to about $5 billion to it and that would end her handling of the case. That would be to reimburse MBIA for those securities it claims it was tricked into insuring and has had to make payments on or expects to make payments on, interest on its losses, and its attorney fees.
Alternately, she could make some other favorable ruling of law that might aid it in the trial phase. If she rules for Bank of America, it would limit MBIA’s option in a trial that would follow.
Palmer and Thomson Reuters reporter Alison Frankel, who has been reporting on the case, thinks it is possible that Bransten will decide the case on summary judgment.
If the case goes to trial MBIA plans to add arguments that Bank of America engaged in fraud. This would open the door, if MBIA convinced the judge of the fraud, for the court to award punitive damages that could be multiples of $5 billion. The trial would probably take place in the next few months.
Even if Bransten orders B of A to pay MBIA a large sum, that may not be delivered immediately. Several observers say they expect the bank would appeal the decision. At least 99% of the time in appeals, judges stay the award of monetary judgments pending appeal, Carmel said.
Complicating the struggle between Bank of America and MBIA Insurance is that the latter has insured commercial mortgage-backed securities for the former. Most of them are maturing from 2013 to 2017.
In a recent operating supplement, MBIA has projected total losses to all parties — not just Bank of America — of CMBS and collateralized debt obligations at $1.4 billion. Much of it would be owed by MBIA to Bank of America. This is another factor in any possible settlement between MBIA and B of A.
