Tuesday, March 5, 2013

Here's an Interesting Thought Experiment: AIG Buys MBIA

I have posted here that it makes sense for Bank of America to (BAC) settle with MBIA before Justice Bransten issues her primary and successor liability opinions, in order to preserve BAC's leverage in seeking judicial approval before Justice Kapnick of the $8.5 billion settlement with institutional mbs investors.  A key issue to be considered in connection with this approval is whether BAC has successor liability for Countrywide's liabilities, and an adverse ruling by Justice Bransten has the potential to upset the settlement, as discussed here.  I also believe that it is more likely than not that BAC will lose on the motion regarding successor liability, as discussed here. One of the more prominent objectors to this settlement is AIG.

If you think about the interplay between the two proceedings, MBIA's action against BAC and AIG's objection to the settlement, the interests of MBIA and AIG are divergent, even antagonistic.  AIG would like to see MBIA not settle with BAC in order to have Justice Bransten issue an adverse successor liability holding.  MBIA would like to use the pendency of the institutional investor mbs settlement hearing as leverage to extract a settlement with BAC before that hearing commences at the end of this May.

Wouldn't the interests of MBIA and AIG both be served if AIG proposed to acquire MBIA for a premium to its current price, to account for the prospect of MBIA's potential settlement with BAC, and then the merged MBIA/AIG used its resources to continue both of their litigation actions against BAC until final judicial resolution?  How would that strike BAC?

Suppose AIG proposed an all stock acquisition of MBIA for $20/share.  This should satisfy MBIA management's short term price objectives, and then MBIA could manage its financial guaranty business for the long term having access to AIG's superior resources.

AIG's upside would be both short term, to the extent both MBIA and it are successful in their legal actions against BAC, and long term insofar as the combined entity would automatically become a reinvigorated participant in the financial guaranty business.

The cost to AIG of acquiring MBIA would be easily digestible, even if the purchase price amounts to more than just a bad day for AIG.


  1. this is nothing short of brilliant --

  2. can someone please call Bruce Berkowitz and give him this brillant idea