Was there mortgage-related misbehavior at Bank of America and its various after-acquired subsidiaries? I wasn’t there, but on public information, I mean, sure, why not. Some days it looks like there was mortgage fraud everywhere. But whereas everyone else is all “sorry about the mortgage fraud” and “here is a large settlement,” BofA is not into that. When you accuse them of mortgage fraud, they take the fight to you. They did that with Fannie Mae, refusing to sell it any new mortgages just because Fannie thinks BofA should be buying back some of the old mortgages it mmmmaybe fraudulently sold Fannie. And they’re doing it with MBIA, suing the bejesus out of them just because MBIA is suing the bejesus out of BofA over mortgage fraud.

But that’s old news; the new news is this Bloomberg article about how BofA is opening another front in the MBIA battle. You should read it because it is amazing. Here is the story so far, from BofA’s offer today:

  • Bank of America1 bought $6.15 billion notional of insurance/CDS contracts against (surprisingly?) commercial mortgages from MBIA Insurance Corporation, which everyone calls “MBIA Corp.,” and which is a subsidiary of MBIA Inc., which is a public company and which everyone calls just “MBIA.” There’s a deductible, and BofA hasn’t yet eaten through it, so these policies are all outstanding and untouched though dicey-looking.
  • Bank of America2 also bought a lot of insurance against home loans that it packaged, also from MBIA Corp.; those loans were terrible, MBIA Corp. has paid off some of the insurance, and now it’s suing to get it back because fraud fraud fraud fraudy fraud fraud.
  • Meanwhile MBIA did some internal rejiggering, taking its nice relatively sensible municipal-insurance business, called National Public Finance Guarantee Corp. (everyone calls it “National”), out of MBIA Corp., and put it directly under MBIA, leaving MBIA Corp. with mostly terribleness like Bank of America mortgage insurance. This, one assumes, was done in preparation for casting MBIA Corp. into the fires of Mount Doom.
  • BofA is suing over that of course: it wants to have access to National’s nice juicy business if MBIA Corp. decides not to pay off its various insurances.
  • MBIA – the public company – also has some bonds outstanding. Those bonds accelerate if MBIA Corp. becomes insolvent, because when they were issued it was a “significant subsidiary” and you don’t want to hold holding-company bonds when all of the subsidiaries are bankrupt. Again, remember MBIA Corp. used to be a whole thing with a whole business and now is more a husk of BofA wreckage.
  • So MBIA is offering those bondholders a payment of 1% of principal to get them to move their cross-defaults from MBIA Corp. – husk! – to National – nice muni-insurer business! – in further preparation for the voyage to Mount Doom.
  • Pictures!
  • At first it was all:

  • Then it was like:

  • Now MBIA wants it to be:

So far so good. If you are an MBIA bondholder, you would probably agree to the consent because (1) you get paid 1%, and 1% is more than 0%, and (2) you’d rather be able to accelerate your bonds on an insolvency of National (a thing) than MBIA Corp. (a husk). But you’d even rather rather get paid 100 cents on the dollar for your bonds and get rid of them, because (1) as of last week they were trading at 63-78 cents on the dollar in light trading, and 100 is more than 63 or even 78, and (2) really, 100 is quite a lot more than 78, you’d be pretty happy with that kind of windfall.

Here is where Bank of America comes in. They launched a tender offer today to buy all the bonds3; if they can get 51% of them, then they can block the consent and keep the cross-default to MBIA Corp. Which means that if MBIA Corp. is bankrupted or otherwise put into insolvency proceedings, then the bonds will default and MBIA – the public parent company – will have to either come up with the full $329mm face amount of the bonds or declare bankruptcy. Which would be worse for business than just casting off that husk.

For BofA, they have to overpay for up to $329mm of bonds by ~30 cents on the dollar, for a wasted $100mm or so.4 In exchange, they get to not have their $6 billion or so of CDS defaulted5; more to the point, perhaps, they get to put pressure on MBIA in zillions of dollars of residential mortgage fraud litigation. Is that worth $100 million? Probably. I’d say imagining the look on MBIA’s collective faces upon the announcement of this tender offer was worth at least $20 million to BofA. They live for this shit, apparently.

I mostly bring this up because it’s fun. Isn’t it? Everyone looks at least a little crummy and it is altogether fitting and proper and pleasantly Coasean to let them fight it out amongst themselves using money rather than courts, or at least as an adjunct to courts.

What is the right answer? I dunno. MBIA’s plucking its good-ish National business out of its bad-ish MBIA Corp. business is a pretty shoddy thing to do to its MBIA Corp. policyholders. It was also a pretty shoddy thing to do to these bondholders, who now cross-default to a husk-ish thing rather than a good-ish thing; there’s a certain satisfaction that MBIA is getting caught in its efforts to make that shoddy thing right with those bondholders. I am a fan of any effort to prove that you can’t get around contracts as easily as you think you can – and I’m always a sucker for people who want to spend hundreds of millions of dollars to buy securities to prove that they’re right on principle.

Bank of America Offers to Buy MBIA Bonds to Block Amendment [Bloomberg]
MBIA Announcement and Consent Solicitation
Bank of America Announcement and Offer To Purchase

1. In the form of Merrill Lynch.

2. In the form of Countrywide.

3. Actually all of one series; another series has locked up a big holder to consent so it’s not worth trying I guess.

4. Couldn’t BofA pay, like, 90 cents on the dollar? Meh, the holders list has a lot of real-money insurance guys who presumably don’t mark these things to market so I guess they’d rather hold a thing worth 70 than sell it for 90? That’s a good gig if you can get it. Incidentally price and holders data is from Bloomberg (MBI 5.7 corp HP, MBI 5.7 corp HDS).

5. How big a deal is this? MBIA notes (page 37 here) that they have $1.5bn in fair value CMBS liability at fair value as of September 30, 2012; that’s about $16 billion in notional (page 115). Sooooooo ballpark BofA”s $6bn of notional as $600mm in fair value that MBIA is expected to owe them? I dunno I assume this data is findable.

57 comments (hidden to protect delicate sensibilities)
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Comments (57)

  1. Posted by New BAC Idea Guy | November 13, 2012 at 6:41 PM

    So you're saying there's a chance that we are creating some value? Thanks, it's nice to hear that every once and a while.

  2. Posted by Thain's lackey | November 13, 2012 at 6:55 PM

    I can do that for the low low price of $1.22 million

  3. Posted by Guest | November 13, 2012 at 6:56 PM

    Finance is a zero-sum game, so any value you create has to be destroyed by UBS.

  4. Posted by qwestion | November 13, 2012 at 7:03 PM

    Pshaw. That won't even buy his drapes and custom commode.

  5. Posted by Edmond_Dantes | November 13, 2012 at 7:16 PM

    When Critics say we are a nation of paper-shufflers, creating little to no economic value, this I think, is what they have in mind…

  6. Posted by fraenkel | November 14, 2012 at 8:42 AM

    good job Matt Levine, who are you?

  7. Posted by MBIA Exec | November 14, 2012 at 9:34 AM

    If BofA successfully blocks the consent solicitiation, I will turn around and put MBIA Corp into Ch. 11 the next day so BofA takes a 60-65 point haircut on their $329mm of bonds purchased at par (MBIA AA recovery 35/40). And then maybe throw in some allegations of sexual misconduct w B. Moynihan to the mix of lawsuits while I'm at it, just because. Your move!

  8. Posted by BofAuslyjusttakesit | November 14, 2012 at 10:01 AM

    Ballsy. You don't often see this from a BofA. I would've loved to be a fly on the wall at BofA deliberations and at MBIA when they heard about it.

  9. Posted by Compliment guy | November 14, 2012 at 10:03 AM

    oh and nice job on the charts and captions

  10. Posted by Joe Murphy | January 23, 2013 at 2:41 PM

    bac is interfering with the livelihood of mbi. actually trying to put them out of business in order not to pay them reimbursement for the loans that they knew were not the quality financial instruments that they purported them to be. I smell a huge settlement!!!

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