Bank of America rescues an old enemy with $1.7b lifeline

Bank of America and MBIA, the troubled bond insurer, have reached a $US1.7 billion agreement to settle a long-running dispute over mortgage-backed securities that hit problems in the financial crisis.

The deal, announced on Monday, provides a lifeline to MBIA, which risked being unable to meet its obligations in a few weeks' time. The agreement will turn the bank from bitter foe to equity investor in, and major lender to, the insurer.

The battle between the two financial giants began in transactions before the financial crisis between MBIA and two companies — Merrill Lynch and Countrywide Financial — that Bank of America acquired during the crisis.

Merrill Lynch was in a position to collect billions from the insurer — if it had enough cash to meet its obligations. But it seemed unlikely that MBIA could come up with the cash unless Countrywide agreed to pay billions to settle claims that it had misled the insurer regarding the quality of mortgages in securitisations insured by MBIA, and had failed to honour its obligations to repurchase those mortgages.

Now the multibillion-dollar claims the institutions had against each other will be cancelled out. Bank of America will pay $US1.6 billion in cash to MBIA, and will lend the company another $US500 million. It acquires warrants that, if exercised, would give the bank a 4.9 per cent stake in the insurer. In addition, the bank will surrender to MBIA about $US130 million in MBIA bonds.

Bank of America said the agreement would reduce its previously announced first-quarter after-tax profits by $US1.1 billion, or 10¢ a share, but would improve its capital position. MBIA indicated the settlement would have little impact on its profits, but said its first-quarter results, scheduled for release on Thursday, would be delayed.

MBIA soared on word of the settlement, rising $US4.46, or 45 per cent, to $US14.29. Bank of America shares surged US64¢, or 5 per cent, to $US12.88.