Ambac Financial Group's settlement with JPMorgan Chase & Co. may set the stage for an even bigger residential mortgage backed securities case against Bank of America.
The holding company, whose subsidiaries including Ambac Assurance Corp., on Jan. 26 announced the settlement under which JPMorgan will pay $995 million in cash in return for releases of all claims by AAC and its segregated account. Ambac currently has another RMBS related case again Bank of America, which is still in the litigation process.
Mark Palmer, an analyst with BTIG LLC, said that the JPM settlement gives Ambac more fire power to craft a solution to satisfy the surplus note holders in the segregated account, which would facilitate the exit of the account from rehabilitation. Ambac set up the segregated account in 2010 to hold troubled liabilities following the collapse of the housing market. Ambac, which had been among the top municipal bond guarantors before the financial crisis, isn't writing new business. It still insures municipals, including a total of $2.2 billion of Puerto Rico bonds as of Nov. 30.
"We don't see this as solving that issue, as we think there needs to be more creativity in terms of the deal that gets worked out, like a security swap for example or whatever it may be," said Palmer. "The news does move it closer to that ultimate outcome. They are also seeking a reasonable settlement with Bank of America. The JPM settlement win may send a sign to Bank of America that Ambac is not the wounded duck they may have perceived it to be, and may give Ambac a stronger standing within that negotiation."
David Trick, chief financial officer of Ambac and Ambac Assurance and interim president and CEO of Ambac Assurance, said the settlement with JPMorgan validates the insurer's resolve and reinforces its confidence in remaining RMBS-related cases.
"We are very pleased with the successful conclusion of the RMBS-related litigation against JP Morgan," he said. "The settlement will have a positive impact on [claims paying resources], which is great news for all of our stakeholders."
Palmer said that amount at stake in the Bank of America case is double that in the JP Morgan case and that the big question is, will one deal lead to another?
"It's more about how the sides perceive each other," Palmer said. "This shows that Ambac has a plan in place, and that they can execute the plan, proven by JPM deal."
Ambac had a first lien case and second lien case against JPMorgan. In the second lien case, both contract claims and fraud claims were outstanding at the time of the settlement, the company said. Contract claims in the first lien case have been dismissed and the dismissal was confirmed on appeal. Fraud claims remained outstanding in the first lien case at the time of the settlement.
Ambac's primary cases against Bank of America, including its Countrywide Financial and First Franklin units, include both contract and fraud claims. Ambac has two other fraud-only cases against Countrywide.
Ambac said that it is hard to predict when the judge will decide to set a trial date in company's primary cases. Ambac Assurance, Countrywide and Bank of America filed notices of appeal in the primary Countrywide/Bank of America case.
"This settlement will have a positive impact on our fourth quarter 2015 operating results, as well as our claims paying resources," said Nader Tavakoli, Ambac's president and chief executive officer. "I want to thank our very capable legal and RMBS teams for their hard work and dedication in achieving this settlement. Today's announcement is but one example of our proactive efforts to address portfolio losses and enhance value for our stakeholders."
Palmer said Ambac is more open and transparent today than it was a few years ago.
"That, along with this news shows why some investors are gaining confidence in the company," he said.
