Will MBIA be next to settle with Bank of America?


Bank of America CEO Brian Moynihan has made clear recently that he would like to start fresh regarding the bank's thorny legal problems.

He made a definitive statement with his bold move to settle with Fannie Mae this week, a deal that will stick the bank with $2.7 billion (pretax) in a representations and warranties provision to be recorded in the fourth quarter. That will pretty much wipe out earnings.

Fannie Mae wasn't the only entity embroiled in nasty litigation with the bank. The nastiest dispute likely remains the MBIA vs. Bank of America blood battle. It's fair to say that Bank of America has wrangled the upper hand.

TheStreet.com notes that, "MBIA has sued Bank of America, arguing the bank's Countrywide unit made false representations in mortgages it sold and MBIA agreed to insure. Meanwhile, Bank of America has challenged the insurer's separation into two separate legal entities in an attempt to protect its municipal insurance business from mortgage-related liability. If MBIA can't separate itself and can't recoup money from Bank of America, it could be in serious jeopardy. While such a scenario seems unlikely, Bank of America has far deeper pockets. So far, at least, the giant bank has succeeded in delaying the legal proceedings as MBIA continues to bleed cash."

All three MBIA sell-side analysts are bullish on the company, but the bull scenario requires the bank to settle with Bank of America, which isn't in position to pay a great deal right now. There isn't a consensus as to when a deal will be reached. The bank may first seek a deal to settle private label mortgage representation issues. In any case, the last thing either entity wants is to go to trial. The longer the dispute lingers, the worse MBIA's position becomes relatively.

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