MBIA Reaches Another Settlement

One more bank, BNP Paribas, has withdrawn its case against MBIA Inc. (MBI). BNP Paribas had filed a lawsuit against MBIA regarding its 2009 business restructuring.

This withdrawal comes after both the parties reached an out-of-court settlement. BNP has also dropped the case against The New York State Insurance Department, which approved the restructuring.

The Story Behind

It all started before the financial crisis in 2008. Though MBIA mainly focused on municipal bonds, it branched out of its traditional business by guaranteeing and selling a large number of credit-default swaps (“CDS”) on commercial mortgage backed security (“CMBS”) and other structured financial products during the U.S. real estate market boom.

The eventual housing market collapse triggered MBIA’s CDS default and the huge claims leading to $4.6 billion of losses in 2007 and 2008 raised questions about MBIA's survival. Therefore, in 2009, MBIA decided to split itself into two units – a municipal guarantee business named National Public Finance Corp. and a structured finance unit.

Though the $5.4 billion restructuring was designed to protect MBIA's municipal bond business from its structured finance unit, which suffered losses from insuring mortgage debt, a group of 20 banks objected to the restructuring. They claimed that the restructuring will leave insufficient capital with MBIA, rendering it unable to cover the huge guarantees it made to holders of billions of dollars of structured finance securities, including securities tied to risky mortgages.

Recent Developments

In the past year, several banks including units of Wells Fargo & Co. (WFC - Analyst Report), Credit Agricole SA and KBC Groep NV have dropped their lawsuits after MBIA reached a settlement with them. While last month Morgan Stanley (MS - Analyst Report) withdrew its objection for restructuring and settling the legal charges, UBS AG (UBS - Analyst Report), Societe Generale Group, Natixis still continue to be plaintiffs in the lawsuit. Thus a total of 14 banks have reached an agreement with MBIA.

The case involving Countrywide Financial, a unit of Bank of America Corporation (BAC - Analyst Report) is also under development. The New York judge’s ruling earlier this week tilts the case in MBIA’s favor. As per the ruling, MBIA only needs to prove that it was misled by Countrywide regarding the nature of its securities. The company is expecting to close the case against BofA soon.

Ramifications of the Pending Litigation

The pending litigation challenges have constrained MBI’s ability to gain better ratings and generate new U.S. public finance financial guarantee insurance business. Management does not expect to write significant new financial guarantee insurance business prior to an upgrade of National’s financial strength ratings.