Tuesday, May 14, 2013

Summing Up, and What Next?

When I first invested in MBIA it's stock price (age-wise) was in elementary school.  Now, it is in high school, which is fine since I seem to recall middle school as being a drag. Probably won't wait for college, however.

What can we take away from the MBIA v. BAC saga? Well, I will not pursue the "Who Won?" line of inquiry.  Because in a settlement, both sides win...and lose.  So this monday morning quarterbacking seeks to separate winners from losers in a game of deception, creating more heat than light, but if you want spin, go to another site

Here's a few quick points that I find interesting, and a heads-up for what comes next.


BAC had the cards to win this game flat out, but BAC did horrendous due diligence and it cost BAC at least $1 billion.  BAC's strategy was to squeeze MBIA until MBIA Insurance Corp. was put into rehabilitation, but BAC didn't realize that MBIA had the opportunity to amend its debt indentures to render this rehabilitation much less adverse to MBIA than it could have been.

When you participate in a hostile transaction, the first thing BAC should have done was to do the black binder thing.  Prepare an exhaustive due diligence inventory of every document relating to MBIA, and analyze how BAC could best screw MBIA. 

This is hostile transactions 101.

You may say that this was just litigation, not a hostile transaction, but you would be wrong.  BAC deliberately undertook a litigation strategy to delay and thereby starve MBIA, and so BAC's strategy necessarily included a corporate component, namely how to make sure this financial strangulation process would best play out.  MBIA's corporate structure vulnerability became an essential component of BAC's litigation strategy.

BAC was undeniably stupid in not buying at the outset of the litigation MBIA bonds to establish consent blocking positions in as many MBIA outstanding note issuances as possible.  This would have brought MBIA to the table with no leverage whatsoever.

I have personally seen this stupidity play out at a major investment bank before.  Whenever a relatively minor deal involves the bank itself as principal, the bank always assigns the B team to run the deal, because there is no big bonus for the individual bankers who close that deal, because there is no fee earned by the bank when that deal closes.  That's the incentive structure at big banks; have the back benchers run our own deals since there is no scratch on offer for the A team; makes no sense to run a bank this way.  In this case, BAC's B team earned an F.


On the MBIA side, BAC's strategy was easily discernible and, therefore, could be planned against.  Yet, MBIA could not arrange financing sufficient to keep MBIA Insurance out of rehabilitation so as to run the litigation for another two years to win the $5 billion damage award that was available.  Were there no hedge funds who, based upon an analysis of the litigation, were willing to put up this bridge-to-litigation-award money on acceptable terms?  Apparently not.

What Next?

There is this from BAC's announcement of the MBIA settlement:  "[BAC's] litigation expense includes charges related to the MBIA Settlement as well as adjustments to litigation reserves for other monoline matters, primarily as a result of the experience gained in connection with the MBIA Settlement." 

Who is the most prominent unnamed monoline?


Now, think about Justice Bransten's summary judgment opinions, discussed by me previously at  MBIA Wins on the Law But Must Go To Trial. Has the Settlement Bid/Ask Spread Just Narrowed?   The opinions were a big win for MBIA on the merits, and something of a tactical loss insofar as summary judgment was not awarded.

But those decisions were huge assets for MBIA in its negotiation with BAC because it showed that the most likely outcome of a full trial before Justice Bransten would be that BAC would lose and pay full damages.

Now with the settlement, of course, those decisions are no longer assets for MBIA.  But in the wonderful alchemy of legal analysis, those decisions have become assets of Ambac (due to the persuasive power of the court's analysis), with no corresponding payment made by Ambac.

So the beat goes on, as Ambac continues its mbs fraud and putback litigation against banks, such as JP Morgan (with the NYAG looking over Ambac's shoulder in its own case against JPM), Nomura, Credit Suisse, and....BAC.  Oh, and Ambac's case against BAC is in front of Justice Bransten.

Double NB:  Ambac is just out of bankruptcy and its financial presentation is an utter mess.  Tread carefully or tread not.

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; AMBC.  Follow me on twitter.


  1. Christian...Thank you very much for publishing your great work on MBIA. I have profited in dollars and knowledge from your efforts.

  2. Christian, your research throughout the entire MBIA/BAC saga has been spectacular. Thank you for the amazing insight and expertise that you provided. Looking forward to hearing more about AMBC... and if you are possibly setting up a blog to follow it? -Mark