* BofA remits MBIA bonds, gets warrants to buy 4.9 pct stake
* Settlement resolves all litigation and swaps liabilities
* MBIA shares close up 45 pct, Bank of America up 5.2 pct
By Karen Freifeld and Dan Wilchins
May 6 (Reuters) - Bank of America Corp has agreed to
pay $1.6 billion in cash to MBIA Inc and will receive
the right to buy a 4.9 percent stake in the bond insurer to
resolve long-running litigation, the companies said on Monday.
Bank of America will also remit $137 million worth of MBIA
senior debt it acquired in December and provide MBIA with a $500
million credit line as part of the deal.
The accord will settle all of the two companies' disputes,
including liability for MBIA as a counterparty in swap deals
with Bank of America. Bank of America will take a charge against
previously reported first-quarter earnings and its capital
ratios will rise under Basel III as a result of the deal.
MBIA shares rose as much as 57 percent on the news. By the
close, the shares were up 45 percent, at $14.29, while Bank of
America shares closed up 5.2 percent at $12.88.
The settlement marks Bank of America Chief Executive Brian
Moynihan's latest step to fix wide-ranging litigation related to
the financial crisis and relieves investor fears that MBIA might
face liquidation over the bank's claims.
In a statement, MBIA Chief Executive Jay Brown called the
deal a "significant milestone" for the company, which is in the
process of restructuring itself and risked running out of money
within months if it had not settled the Bank of America dispute.
"I think Bank of America was able to put some pressure on
and extract some clear leverage from the fact that MBIA looked
to be on the brink," said attorney Don Hawthorne, a partner at
Axinn, Veltrop & Harkrider who has represented clients in
mortgage-backed securities litigation.
"It's probably a good deal all around," he added, reflecting
that "MBIA obviously had a strong case and Bank of America had a
strong negotiating position."
MBIA had long been in the sleepy business of guaranteeing
municipal debt against default, but last decade it began
guaranteeing riskier structured bonds, such as repackaged
mortgage securities, in a bid to add revenue and profit.
That backfired as MBIA lost its top credit ratings and banks
sought to hold it liable for losses after the housing bubble
burst. Short sellers such as hedge fund manager William Ackman
argued MBIA lacked capital to cover structured finance losses.
To survive, MBIA won approval in 2009 from New York's
insurance regulator, now part of the state's Department of
Financial Services, to split into a municipal bond insurer to
underwrite new deals and a guarantor of structured finance
products that would handle old claims.
But 18 banks objected, saying it would leave MBIA insolvent
and unable to pay its mortgage-related claims.
Monday's settlement leaves Societe Generale as the
only bank still in that case. A spokesman did not immediately
respond to a request for comment.
In a statement, Benjamin Lawsky, New York's financial
services superintendent, said the deal was reached after more
than a year of negotiations. He called it "a very positive step
forward for both Bank of America and MBIA."
The deal came together after MBIA's board hired Blackstone
Group LP as an adviser, said a person familiar with the
matter, who was not authorized to discuss it publicly. A
Blackstone spokesperson did not immediately respond to a request
for comment on their role.
MBIA's structured finance unit could have been forced into
liquidation or rehabilitation had the Bank of America case
continued, the insurer said on Feb. 27. Brown said that month
that there was a "significant risk" of a regulatory proceeding.
In 2011, the municipal bond guarantee business lent $1.1
billion to the structured finance unit to fund settlements with
bond buyers, debt that over time grew to be $1.7 billion. But
the company's regulator refused to allow the structured finance
unit to borrow more.
MBIA will use proceeds from the Bank of America deal to
repay that loan, which stood at $1.6 billion as of May 2,
following a $110 million payment from a separate settlement with
Flagstar Bancorp Inc.
MORE LEGAL WOES
As part of the accord, Bank of America will receive warrants
to purchase 9.94 million shares of MBIA, or roughly 4.9 percent
of its outstanding stock, at a price of $9.59 per share. The
warrants can be exercised any time prior to May 2018.
Some investors saw Bank of America taking an equity stake as
a sign of confidence in MBIA's future.
Bank of America will take a charge of $1.5 billion, or 10
cents per diluted share, after taxes related to the settlement,
slicing its previously reported earnings per share in half.
Accounting standards dictate that it take the charge against
first-quarter earnings because it has not yet filed its 10-Q
report, Bank of America said.
The bank's Tier 1 capital ratio under Basel III standards
will rise by 10 basis points to 9.52 percent to reflect a
reduction in risk-weighted assets related to the MBIA swaps
being canceled. Its tangible book value per common share will
drop by 10 cents to $13.36.
The MBIA deal is just the latest settlement Bank of America
has reached to resolve crisis-era litigation.
Last month, the bank reached a $500 million settlement with
investors who claimed they were misled by its Countrywide unit
into buying risky mortgage debt. The second-largest U.S. bank
still faces litigation by the Federal Housing Finance Agency on
behalf of Fannie Mae and Freddie Mac, and by
insurer American International Group Inc.
Bank of America is also awaiting court approval of an $8.5
billion deal reached with investors in Countrywide
mortgage-backed securities. A hearing is scheduled to begin May
On Friday, the New York and Delaware attorneys general
dropped their objections to the deal. AIG and other parties
"I don't think anyone's going to ever at this point declare
victory," Bank of America Chief Financial Officer Bruce Thompson
said on a conference call last month. "We're moving through in a
pretty meaningful way this pipeline of items."
News of the Bank of America-MBIA settlement was first
reported by Dow Jones.