Bank of America Agrees to Another Massive Settlement Related to Countrywide Acquisition

It has been said that history repeats itself, first as tragedy, then as farce. For Bank of America, its acquisition of Countrywide has been a persistent melding of farce and tragedy. Earlier this year, Bank of America agreed to pay $11.6 and $8.5 billion to settle, respectively, with Fannie Mae (over mortgage-backed derivative investments) and the federal government (on behalf of home-loan borrowers). Now, Bank of America and bond insurer MBIA have agreed to a complex set of terms that will settle allegations related to MBIA’s insurance obligations as to the mortgaged-backed securities, a deal which includes payment of $1.6 billion.

Founded in 1973, MBIA’s business model focused on relatively low-risk insurance against municipal bonds defaulting. However, by 2008, MBIA had become at least as prominent in insuring mortgage-backed securities, including those generated by two Bank of America acquisitions, Countrywide (which generated the risky home mortgages) and Merrill Lynch (which created and sold securities backed by the Countrywide mortgages). MBIA found itself faced with having to pay in excess of $3 billion in claims to Merrill Lynch, but without the funds to avoid default. The settlement restructures MBIA’s obligations to Bank of America, and the $1.6 billion in cash will allow MBIA to stay in business.

Announcement of the deal led to a sharp increase in Bank of America’s per-share price, suggesting that analysts had expected the settlement to be even more costly for the bank. For MBIA, the settlement’s timing was at least as important as the amount, as MBIA was believed to have only enough cash to sustain its operations for a matter of weeks at the time of the settlement. The price of MBIA stock increased by 45% on news of the settlement, strongly suggesting that the cash infusion from the settlement didn’t merely benefit MBIA, it saved the company.