MBIA Settlement Approaches, Stock Soars, Triggers Circuit Breaker

Back in February, when looking at the CDS of MBIA, we observed the dramatic tightening in the corporate opco risk which had seen levels tighten from 55 pts upfront to 37, we speculated that "MBIA recently succeeded in making life for mortgage originators a living hell, after it successfully challenged, and was allowed to use statistical sampling in pursuing repurchase demands. While it is unclear how actively MBIA itself will pursue this strategy, which would be a viable way to pick up at least several additional points of recovery courtesy of fat-check settlements, the loophole has already opened the door for Allstate to sue both Bank of America and JP Morgan, confirming what everyone has known, namely that the two banks lied and misrepresented their products with impunity when offloading them to hapless investors." In other words, by doing to Bank of America first what the NY Attorney General is doing to the firm right now, it was only a matter of time before the Charlotte-based symbol of all that is broken with America's mortgage system (courtesy of the Counterywide Acquisition, rapidly becoming, if not already is, the worst purchase in M&A history) those long MBIA risk were sure to experience a windfall upon any settlement announcement... or even rumor. Which is what just happened earlier today after Bloomberg reported that "Bank of America Corp. (BAC), the biggest U.S. bank, has made a preliminary offer to bond insurer MBIA Inc. (MBI) aimed at settling a legal dispute tied to defective mortgages, according to two people briefed on the discussions."

Naturally the terms of the settlement are unclear, especially since the bank is currently fightning tooth and nail to not lose the ridiculously unfair $8.5 billion RMBS settlement previously discussed with the likes of PIMCO and Goldman. Based on our discussions with several sources the ultimate recovery to CDS, should MBIA purscue comparable pathways with all other mortgage originators, and win, could be worth another 15-20 points upfront to the OpCo. Translated into equity terms: a $30 price target could be well doable.

It goes without saying that MBIA stock surged on the news, and in fact triggered a 10% circuit break.

As for the CDS, per the last run just before the news we had a price of 32 up front. If the settlement happens, this is going to tighten a lot.

More from Bloomberg:

The two companies remain split on how much the Charlotte, North Carolina-based bank would have to pay to resolve the disagreement, said the people, who declined to be identified because the talks are private. Bill Halldin, a spokesman for Bank of America, and Kevin Brown of Armonk, New York-based MBIA declined to comment.

The lawsuit is among several between Bank of America and MBIA, which guaranteed Wall Street’s toxic mortgage debt. Bank of America bought Countrywide Financial Corp. in 2008 and Merrill Lynch & Co. in 2009, two of the largest participants in the market for subprime home mortgages.

It is only fitting that in this bizarro market, the only way to generate alpha is to pursue litigation recoveries in what will soon be uncovered to have been the most criminal capital market in the history of America. Alas, this means that for every banker fired, at least three lawyers will take their place.


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