Bank of America rescues an old enemy with $1.7b lifeline
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.
Frequently Asked Questions about this Article…
Bank of America and bond insurer MBIA reached a US$1.7 billion agreement to settle a long-running dispute over mortgage-backed securities. The package includes US$1.6 billion in cash to MBIA, a US$500 million loan, Bank of America surrendering about US$130 million in MBIA bonds, and warrants that could give the bank a 4.9% stake if exercised.
MBIA was at risk of being unable to meet its obligations within weeks, so Bank of America agreed to the deal to resolve the dispute, provide a financial lifeline, and convert its relationship from adversary to lender and potential equity investor in the insurer.
The fight stemmed from pre‑crisis transactions in which MBIA insured mortgage-backed securities tied to Merrill Lynch and Countrywide. MBIA claimed the mortgages performed poorly and accused Countrywide of misleading it and failing to repurchase defective loans; Merrill stood to collect large claims if MBIA had the cash to pay.
Under the deal the multibillion-dollar claims the institutions had against one another are effectively cancelled out, with Bank of America providing cash, credit and securities to MBIA as part of the resolution.
Bank of America said the agreement will reduce its previously announced first-quarter after-tax profits by US$1.1 billion (about 10 cents a share), but the bank also said the deal will improve its capital position.
MBIA shares jumped US$4.46, or about 45%, to US$14.29 on the news. Bank of America shares also rose, up about 64 cents, or 5%, to US$12.88.
The warrants give Bank of America the option to buy MBIA stock that, if exercised, would result in roughly a 4.9% ownership stake. For investors, that means the bank could become a small equity holder in MBIA as part of the settlement.
For everyday investors, the deal removes a major source of uncertainty by settling a long-running dispute and providing MBIA with a near-term lifeline to meet obligations. It also shifts some risk dynamics by making Bank of America a lender and potential shareholder in MBIA, while clearing the way for both firms to move forward without outstanding multibillion-dollar counterclaims.
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