Wednesday, November 28, 2012

How Does Your BATNA Look Now, Bank of America?

I have recently posted about a mediator's perspective of the MBIA v. Bank of America (BAC) litigation here, as well as a possible strategy for MBIA to "mail the keys" to MBIA Insurance (Securitization Sub) here.  It occurs to me that it might be best to consider these posts together in an analysis of how BAC might view the value provided it by a negotiated settlement agreement, as compared to what BAC might consider to be the value of its "best alternative to a negotiated agreement" (BATNA).

The term, BATNA, was first introduced in the seminal Fisher and Ury text, "Getting to Yes."  They posited that whenever parties in conflict seek to negotiate a settlement, they will compare the value and benefits provided to the party by the settlement (settlement value) to the maximum value and benefits that may be obtained by the party by pursuing some strategy other than settlement (the party's BATNA).  Typically in a litigation context, this would involve continuing the litigation through to court resolution, or pursuing settlement at a later time thought to be more propitious for the party.

In my last mediator's perspective post, I provided a framework by which I thought both MBIA and BAC could obtain from settlement what they needed, although not necessarily all that they wanted.  In that post, just to give some concreteness to the discussion, I assigned a notional value to BAC of this settlement at a negative (that is, a net payment to MBIA) $2 billion.

Assuming that this settlement value is correct for the sake of analysis, BAC would compare this settlement value to the value of BAC's BATNA.  It is not difficult to assess how BAC views its BATNA; BAC has pursued a litigation strategy of dragging the proceedings out and litigating every issue in an effort to wear down and impoverish MBIA, thereby using its superior resources to force MBIA to accept what MBIA would consider to be an "uneconomic" settlement.

If BAC were to prevail in the Article 78 proceeding, or if a rehabilitation or insolvency proceeding of Securitization Sub would create a cross-default to MBIA's public debt, BAC's litigation posture and its ability to pursue its BATNA would be substantially strengthened, and BAC's threat to continue the litigation would create significant pain for MBIA.  So one might consider that if these options remained available to BAC, BAC would value its BATNA as substantially greater than settlement value (ie a lesser net payment to MBIA than $2 billion). 

However, it appears that BAC will lose the Article 78 (though we must wait for Justice Kapnick's decision to be sure), and MBIA eliminated the cross-default scenario with its recently completed note consent solicitation.

Now, let's consider how BAC might view its BATNA's value if MBIA suggests in a settlement negotiation that MBIA is prepared to "mail the keyes" of Securitization Sub to the New York Department of Financial Services, as discussed in this post.

First, it is important to distinguish between NYDFS liquidation and rehabilitation proceedings. When I refer to the "mail the keys" strategy, I am referring to a voluntary rehabilitation proceeding initiated under Section 7402(l) of the NY Insurance Law.  In order to understand what a voluntary rehabilitation of Securitization Sub would look like, this FAQ site on FGIC's website is a good place to start.  Essentially, the rehabilitator (NYDFS or its designee) would come up with a rehabilitation plan for Securitization Sub, much like a debtor-in-possession federal bankruptcy proceeding.

The rehabilitator of Securitization Sub would be charged with maximizing MBIA's recoveries in its fraud damages suits against BAC and other mbs issuers, and would have the power to classify claims (such as BAC's cds) and provide for the timing and payment of these claims in a manner that is fair to those claimants and in the best interest for the rehabilitation of Securitization Sub. In other words, the rehabilitator could marshall Securitization Sub's assets and defer payment on its claims in a manner that will give Securitization Sub-in-rehabilitation the staying power to carry on MBIA's litigation against BAC as long as necessary.

It should be plain to see that this could quickly become the realization of BAC's biggest nightmare: a turning-around-of-the-litigation-tables in which the rehabilitator determines that it is in the best interest of the rehabilitation if Securitization Sub pursues MBIA's litigation straight through to final decision and appeal, and that all Securitization Sub claimants would have to await payment until these litigation proceeds are realized and the rehabilitated Securitization Sub is able to make equitable payment to all claimants (including repayment of MBIA's $1.6 billion secured loan to Securitization Sub).

Just consider what this should do to BAC's calculation of the value of its BATNA?  If I were BAC at a settlement negotiation with MBIA and I heard that MBIA was threatening to commence a voluntary rehabilitation proceeding, I would consider this to be a credible threat.  Indeed, one might think that BAC has shown us that it recognizes this as a credible threat by publicly stating that any successful consummation of the MBIA consent solicitation would make a rehabilitation proceeding of Securitization Sub "more likely".  

In any "full litigation mode" rehabilitation plan pursued by NYDFS, one might consider that BAC's BATNA should be valued much less than its settlement value (ie resulting in a much greater net payment to MBIA).  Moreoever, any "full litigation mode" rehabilitation plan would also expose BAC to further damaging legal precedents for its other existing and potential litigations (see here and here).

So, how does your BATNA look now, BAC?

NB:  this blog is not intended to be investment advice, and should not be relied upon by anyone to constitute investment advice.  Investing is a tough game, and everyone must do and "own" their own work, because you will certainly own your investments.

Disclosure: long MBI.  Follow me on twitter.

No comments:

Post a Comment