It's one of the peculiar realities of business: two parties can spend years aiming for one another's jugular vein and end-up partnering when they find cooperation is in the best interest.
That's the way it appears the litigation soap opera between MBIA and Bank of America has ended after they resolved their differences and announced a settlement, ending four years of finger-pointing and personal attacks.
When the housing market imploded in 2008, bringing down the rest of the economy, MBIA, along with FGIC and Ambac, found themselves facing huge losses from insuring credit default swaps (CDS). The CDS covered bundles of mortgages that investors traded as profitable investment vehicles with little risk—so they thought. The players in these investments assumed that mortgage underwriters were writing loans to people who could afford them, and if a couple went bad the bulk of good ones would keep the bundle healthy. But the greed mongers underwrote a lot of bad loans. No one knew how extensive the problem was until the economy tanked.
Clinging for life, MBIA came up with an ingenious solution for survival: separate its troubled portfolio of CDS from its healthy municipal bond business. That set off rounds of litigation as banks feared losing the security of the reserves insuring the bonds and MBIA, feeling hoodwinked, sought to end its insurance contracts, pretty much saying, if we insured “A” rated risks—why did so many blow-up in our face?
Over the past four years, MBIA accused the banks of manipulating New York State legislators to conduct an investigation of MBIA; the banks accused MBIA of lying to regulators about its financial position to get a favorable ruling on the split; Bank of America attempted to gain influence over MBIA through the purchase of the insurer's senior notes, and attorneys for the two sides got into some nasty squabbles in court questioning one another's integrity.
Finally, we have a settlement. Bank of America paid MBIA $1.7 billion and the two agreed to commutation of $7.4 billion in insurance policies that covered CDS. Bank of America also extended a $500 million loan to MBIA.
There's the irony, after four years of litigation MBIA gets what it wanted and then becomes a Bank of America customer. MBIA comes out as a winner, and Bank of America gets a new client.
It just so happens that as this went on last week the CEO of Enron, Jeffery Skilling, was in the news seeking to have his sentence reduced. There was that period around 2000 when Skilling and others were producing corporate malfeasance every day in the news. A few executives went to jail then, but the hit to the economy wasn't as hard. The question for today's malefactors is when will we see those who almost sank the rest of us held to account?
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