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MBIA (MBI) notches a victory in its legal battle with Bank of America (BAC), an appeals court...

MBIA (MBI) notches a victory in its legal battle with Bank of America (BAC), an appeals court ruling BofA could be required to repurchase loans even if they aren't in default. It's a "huge win" for MBIA, writes Christian Herzeca, very similar to Assured Guaranty's victory over Flagstar bank.
Comments (32)
  • JayXu
    , contributor
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    Is there an end for these cr*ps?!
    2 Apr 2013, 03:24 PM Reply Like
  • John/Jack
    , contributor
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    Seems to me MBIA's entire case rests of their claim they didn't know what they were insuring. How odd for a company to admit they don't know their own business, and then sue their customers when that business fails. What a world.
    2 Apr 2013, 03:37 PM Reply Like
  • skibimamex
    , contributor
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    Actually MBIA relied on reps and warranties made by BoA (actually Countrywide) that it originated loans in accordnace with certain underwriting standards and that the originator had covenanted to repurchase any such loans that did not conform to the defined underwriting standards. MBIA did not insure the value of homes but rather sold its bond insurance to enhance the creditworthiness of the underlying loans in mortgage securitizations and in fact has paid out over $5B to back up its insurance to the bondholders. MBIA had a "put-back" to the originator who sponsored the secuirtization if in fact the sponsor falsely represented that it had complied with its own stated underwriting standards. That position was validated in each fo the judgements of Syncora and Assured Guaranty. The mortgage originators were rotten to the core. It is simply unfortuante that BoA "bought into" this liability when it bought and merged with Countrywide,
    2 Apr 2013, 06:40 PM Reply Like
  • wil3714
    , contributor
    Comments (1956) | Send Message
     
    Yes thats like buying BAC at $20 and saying I didnt know what I was doing can I get my money back now?
    2 Apr 2013, 07:51 PM Reply Like
  • JeffreyLangBoyd
    , contributor
    Comments (663) | Send Message
     
    Don't think you have everything right there. MBIA is asserting a number of different arguments for why they should be able to collect damages including fraud under the insurance law and common law fraud.

     

    I don't think there are many people who believe that MBIA lost money because they were defrauded. They lost money because housing prices declined and people didn't pay their mortgages. If MBIA only gets the benefit of the bargain, which is what I believe common law fraud typically calls for they don't get much of anything. So they are doing their best to collect in other ways. A key way MBIA was hoping to calculate damages for problems was rescission. In other words, pretend the agreement was never entered into because there was insurance fraud. The appeals court said that MBIA was not entitled to that sort of relief today.

     

    So MBIA still has some arguments. If they can show individual loans breached the rep and warranties they can collect even if the breach didn't cause the default. The appeals court said that MBIA did not have to show that the breach caused the default so in a sense MBIA has succeeded to an extent but they likely face a steeper path. So the question then becomes what portion of the loans breached and what amount of overcollateralization (if any) exists. I don't know the answer to those questions.
    2 Apr 2013, 10:05 PM Reply Like
  • Nikhil Kumar
    , contributor
    Comments (7) | Send Message
     
    No, MBIA's case rests on the claim that they were essentially defrauded by Countrywide. BAC should settle, no need to drag this out forever.
    3 Apr 2013, 06:19 AM Reply Like
  • Dirty Capitalist
    , contributor
    Comments (155) | Send Message
     
    I think that this might have been a bigger "win" a year or two back, but any loans that have not gone bad over this period may well be pretty solid and house prices are climbing rapidly so I don't think a ruling that BAC might have to buy back loans "even if they aren't in default" doesn't sound like that big a deal.
    2 Apr 2013, 04:38 PM Reply Like
  • SMQ
    , contributor
    Comments (21) | Send Message
     
    if mbi did not know why their executives getting paid so much .lawyers start making things up when they see someone like boa with deep pockets.disregarding the effect it has on ruining this country friom excessive law suits.
    2 Apr 2013, 05:41 PM Reply Like
  • SMQ
    , contributor
    Comments (21) | Send Message
     
    home prices go up and down like any other investment nothing is guaranteed ,when my stocks go down no one is expected to buy them back at purchase price ,i just wait till price of underlying investment goes up ,that is the definition of investment.
    2 Apr 2013, 05:49 PM Reply Like
  • Michael Bryant
    , contributor
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    Sell (BAC)!!!! They are crooks.
    2 Apr 2013, 10:10 PM Reply Like
  • benitus
    , contributor
    Comments (1962) | Send Message
     
    Michael....I beg to differ. Countrywide were the crooks, not BAC but its former execs were stupid to buy over Countrywide, apparently for its mortgage business (instead of growing its own), without sufficient diligence. So now, it's wrong for BAC to pay for the misdeeds of its bad acquisition and BAC should fight this case, instead of simply rolling over, because it may open the flood-gates for other unhappy customers to use this case as a legal precedent to file new claims on BAC. However, such developments will hit the stock of BAC in the near and mid-term (especially if BAC allocates charges for them) but long-term should still be good, especially if it's able to turn in good results. I expect the shorts to be out in full force to bring BAC back to its knees very soon but I hope that I'm wrong.
    3 Apr 2013, 07:06 AM Reply Like
  • Michael Bryant
    , contributor
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    Well, my sister is in a class action lawsuit against (BAC). I pulled out of (BAC) and went to (WFC).
    3 Apr 2013, 08:52 AM Reply Like
  • Renoira
    , contributor
    Comments (86) | Send Message
     
    So...why do you think should have to pay for the misdeeds of Countrywide? Perhaps PennyMac (PNMAC) which was a new corporation opened up by old Countrywide Executives? Except they do not have to take responsibility for Countrywide's previous fraud because they are a "another corporation."

     

    So then who should take responsibility for the well-documented fraud?
    3 Apr 2013, 03:33 PM Reply Like
  • Michael Bryant
    , contributor
    Comments (5619) | Send Message
     
    All I know it the (BAC) has some of the worst customer service among major banks and change ridiculous overdraft fees.
    3 Apr 2013, 09:53 PM Reply Like
  • Renoira
    , contributor
    Comments (86) | Send Message
     
    http://bit.ly/10tgtfD

     

    "NEW YORK (TheStreet) -- Prudential Financial (PRU) has sued Bank of America (BAC), alleging the bank and Merrill Lynch engaged in "racketeering" in connection with mortgage-backed securities sales, according to a Reuters blog post."
    4 Apr 2013, 02:40 AM Reply Like
  • benitus
    , contributor
    Comments (1962) | Send Message
     
    Michael....I wish your sister good luck in her fruitless pursuit. BAC is only for long-term investors, not for short-term traders, so if you can't wait, then you should get out of BAC. Compared to WFC, BAC has the potential to double itself with two years of consistently great results, so it's a cheap means of doubling our net worth, without much risk or exposure.

     

    Yes, it has been traded down by short sellers recently, which depressed its price from going above $13 (that will come when BAC commences its buyback program), but its resilience to bounce back comfirms the underlying support it enjoys. However, WFC is a great candidate to short, which I've done since it failed to go above $38, as I expect it to drift down below $36 at least but it can easily go below $35 before it turns up again.
    5 Apr 2013, 08:42 PM Reply Like
  • benitus
    , contributor
    Comments (1962) | Send Message
     
    Renoira....if fraud is indeed proven, then we should let the law deal with the perpetrators, which you should know, as a lawyer. What I'm trying to emphasize is that BAC shouldn't be made to pay for its decision to buy over Countrywide, as it would amount to punishing BAC's shareholders, which aren't responsible for the misdeeds of Countrywide. When a corporation takes over another, it isn't responsible for past business. It'll assume responsibility for ongoing contracts from date of acquisition, so it's a waste of time to sue BAC for past misdeeds of Countrywide. However, BAC will indeed be responsible for losses incurred after its takeover. This is basic contract law.
    5 Apr 2013, 08:55 PM Reply Like
  • benitus
    , contributor
    Comments (1962) | Send Message
     
    Michael...all banks have ridiculous overdraft fees and all of them used to engage in what is now unlawful activity of providing "free overdraft facilities" for new accounts, without explaining that overdrafts incur fees each and every time, and daily interest as well as penalties. Some banks like WFC charged new overdraft fees if the previous overdrafts are not covered after a week. I used to have an elderly neighbor who lived entirely on his own with his social security check, who was robbed blind of his entire account balances by WFC with such exorbitant overdraft fees, until they closed his account after he was in default by over $600. I took up his case and recovered every single penny from WFC but the poor fella died before receiving the check from WFC. For years, I've crusaded against this unlawful practice until it was eventually made into law by Congress but unfortunately, some small banks are still engaged in this unlawful practice.
    5 Apr 2013, 09:04 PM Reply Like
  • skibimamex
    , contributor
    Comments (443) | Send Message
     
    why shouldnt BAC shareholders be responsible for the decisions of its management? in this case, the decision was the merger with Countrywide. Sure they fired CEO, but that doesn't mean BAC simply says "sorry, mulligan". Every case of monoline insurer against sponsor/originator breaches fo reps and warranty that has been fully adjudicated has gone to the the monoline. this will be no different.
    6 Apr 2013, 03:28 AM Reply Like
  • JeffreyLangBoyd
    , contributor
    Comments (663) | Send Message
     
    Here is an article on a ruling from California saying no successor liability exists for BAC. The judge in that case applied Delaware law. One can make a bad argument under New York law or a really really bad argument under Delaware law that successor liability exists but ultimately I don't think that is the way it works out.

     

    http://bit.ly/14MttBw

     

    As for why, there are two key reasons I can think of:

     

    1) Not the law unless one chooses to really distort the law. That happens more frequently than it generally should so it could happen. The best write-up on the topic I've seen is from George Kuney. A link to something he did follows.

     

    http://bit.ly/16E84IZ

     

    2) Awful policy. Some (actually all) companies face large contingent liabilities because we do not know the future. Some are more obvious than others. The transactions taken by Bank of America are fairly common and done not to defraud creditors but to enable economically viable pieces of the acquired companies to continue operating. Without such legal structures commerce is greatly retarded. In oral arguments, the judge in the Countrywide case was talking about creating "new types of law" to enable Bank of America to be tagged with liability. I don't know, I don't like judges creating new law. More recently she has taken a different tack and appears sympathetic to bad arguments attempting to shoehorn existing law into the fact pattern. I suppose I'm more sympathetic to that type of approach but it is still bad policy as it will result in zombie companies and really isn't justice in my opinion.
    6 Apr 2013, 11:24 AM Reply Like
  • skibimamex
    , contributor
    Comments (443) | Send Message
     
    except that is the application of Delaware law by California case. the MBIA-BAC suit is being adjudicated under New York law where the concept of "de facto merger" is far more robust and with greater case law than Delawrare.

     

    Judge Branston has pretty much said that she was fed up with the repeated references to the California court ruling. "the courts of new York are just as capable of adjudicating the issues,"...and "surely counsel can find one single case in New York case law to cite to support its view, rather than be dependent upon one single judge's ruling in California."

     

    I assume that you know that MBIA is base din White Plains, New York, and also all the legal documents underlying the purchase agreements and the monoline's agreement with Countrywide cite New York law as the venue for law.

     

    At the end of the day, you and I are not going to judge the case but a federal judge in the State of New York will hold judgment and the case law for "de facto merger" in New York law (whose concept does not exist in Delaware law) is highly robust.
    6 Apr 2013, 02:00 PM Reply Like
  • JeffreyLangBoyd
    , contributor
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    Not sure I'd call New York law "robust" but yea there is more potential for finding de facto merger. Court hasn't ruled on whether or not Delaware or New York law applies. There are more layers but if Court holds Delaware law applies MBIA likely loses, if Court holds New York law applies they still probably lose but there is an outside chance they win.

     

    Judge Bransten's comments regarding the California case were made in 2010 early in the case. She was pretty much a loon if the truth be known. Her ruling on dismissal back then referenced at least one strict liability case which is just nuts. She had been hearing medical malpractice claims and then she moves to civil, gets assigned this case; recipe for disaster. She kept things a little more under control in 2012 but I still don't think she really understands many of the issues being litigated.

     

    Yea I know MBIA is in New York and the contracts call for New York law but Bank of America isn't a party to the contracts and isn't a New York corp. Most of the Countrywide entities are Delaware entities too. Doesn't mean I know how Judge Bransten will rule as to whether New York law applies or if it does whether or not she will hold de facto merger exists. As every single ruling she has made has gone MBIA's way I don' see any reason to expect anything different. In appeals I expect common sense will be re-established but we'll see.
    6 Apr 2013, 10:34 PM Reply Like
  • skibimamex
    , contributor
    Comments (443) | Send Message
     
    I agree that BAC has stronger position if based upon Delaware law, and likely wins, which historically provides greater protection for corporate veil (thus all the companies incorporated there).

     

    However I will claim ignorance on the issues as to whether New York vs Delaware law should apply, or what the justification for argument for Delaware law would be. It is less clear to me that in New York law that "MBIA still loses". BAC stripped all of Countrywide's assets, its people, and its goodwill and know how, in order to operate under one merged BAC mortgage origination and servicing platform. All settlements of Countrywide's contingent liabilities have been funded by BAC, including the source of funds to pay the proposed $8.5B private label RMBS securitization settlement. It would seem to a lay person (which I am) that the substance of what is going on is precisely the case law in New York cases of "de facto merger" standard from what I have read, and that the corporate veil that BAC is hiding behind in this instance is the "sham". However, both of us are speculating, or applying reasonably calculated guessing based upon our own respective due diligence, but neither of us will decide the case and as you say every single substantive ruling that the "loon" Judge Branston has made has gone MBIA's way - you may wish to add Judge Kapnick, and Judge Crotty to that menagerie too. Successor liability will be adjudicated soon enough on summary judgement so we'll see whose speculation was more on the mark.
    7 Apr 2013, 10:19 AM Reply Like
  • JeffreyLangBoyd
    , contributor
    Comments (663) | Send Message
     
    Your post indicates to me that MBIA has been very successful on the PR front. BAC did not "strip" all of Countrywide's assets.

     

    It has been a couple of years since I looked at the details but:

     

    1) The various entities of BAC that purchased the assets from the various Countrywide entities.
    2) The various BAC entities paid at least (actually they appear to have paid more) than fair value so I do not like calling it asset stripping. If they paid less than fair value or were aggressive in determining what fair value was then I would be fine calling it asset stripping but it was more than generous to potential Countrywide creditors.
    3) BAC did not fund settlements in a vacuum. They made capital contributions to what is by now are clearly an insolvent subsidiaries for a number of reasons. Two of the more obvious reasons (and there were others as well) were (1) political pressures and (2) they recognize how Judge Bransten might rule (ignore appeals for a moment) and that decision might have created a crisis of confidence which kills banks. It has some similarity to Arthur Andersen going under in that once you make the indictment, they are dead even if (as with Andersen) they eventually win when the court procedure is over. In such a situation it doesn't matter what the correct or right decision is, you settle the claims simply because the risks of not settling are too high. My single largest beef with Judge Bransten is that she did not recognize or care that the cavalier and incautious language that she used played an important role in forcing BAC to settle with all of these counter-parties.

     

    My speculation is that there is a 50/50 chance Judge Bransten says successor liability exists. Ultimately, is a terrible mistake and it likely gets overturned but as far as BAC is concerned it is largely over because they have settled with just about everyone. It would be an even worse shame if those settlements play a role in the decision making process of a judge who should know better but what can one do? You play the hand you are dealt as best you can.
    7 Apr 2013, 02:54 PM Reply Like
  • benitus
    , contributor
    Comments (1962) | Send Message
     
    Renoira...you should know that anybody can sue anyone for anything but they must prove their claim in court, so allegations of wrongdoing remain simply allegations and shouldn't be construed as fact, until proven as such. The only thing we must do is to resist such unfounded claims, rather than to ignore them, which would enable false claimants to obtain judgment for their claims. All it takes is to deny any and all claims and let the claimant prove its claim in court.

     

    Hence, PRU's legal proceedings against BAC and ML are simply desperate attempts to pin down responsibility for its losses because racketeering is a criminal offence, which is hard to prove and is best left to the DA to prosecute such alleged crimes. The only thing that PRU can do is to lodge a complaint (with appropriate evidence) to the DA's Office for them to investigate the complaint and take all necessary action. PRU can only sue for its actual losses if substantiated in court. Personally, I think this blog post is sowing lies to defame BAC and ML because PRU is not that stupid to make wild allegations of criminal activity (I used to work for them), as it shuns bad publicity.
    5 Apr 2013, 09:10 PM Reply Like
  • Renoira
    , contributor
    Comments (86) | Send Message
     
    While it is true that anybody can sue anyone for anything...with such an extensive record of lawsuits in it's legacy and the plethora of settlements that only serve as bribes against prosecution...where does B of A go from here?

     

    You are right, in a court of law these claims will be proven or disproven, but a court of law is not the only thing at stake here...there is also the court of public opinion which looks at the whole picture and evaluates the "reputation" and history of these large corporate entities and what improvements and concessions they are willing to make going forward to improve their reputations and business practices.

     

    B of A has a long legacy of honest banking policies and hard-working executives, but over the past several years and with the acquisition of Merrill Lynch and Countrywide it has suffered immeasurably. I believe it is that reputable legacy that keeps B of A going, even now.

     

    However, if they do not improve the past business in the wake of Countrywide's economic freefall, they will suffer the bad reputation brought to us by Countrywide...

     

    http://lat.ms/14Vz3C3

     

    With millions of homebuyers (RMBS) crying out for help, it is unlikely that B of A's reputation will improve very soon unless they find a way to work with the public to keep people in their homes.

     

    Al Capone was eventually brought down by tax-evasion, not RICO crimes, yet his legacy remains one of a mafia boss. We do not want this legacy for B of A...or is it just profits at any means?
    6 Apr 2013, 12:55 PM Reply Like
  • Michael Bryant
    , contributor
    Comments (5619) | Send Message
     
    As for suing for anything, I begin to question if too many bogus lawsuits are bankrupting the system. Who pays to set up the court, pay for the bailiff, and on. Sure, the defendant and prosecutor pays for the lawyer, but who pays for everything else. Not to mention you go to court and the lawyer just asks for an extension.
    9 Apr 2013, 10:59 AM Reply Like
  • benitus
    , contributor
    Comments (1962) | Send Message
     
    Renoira....if it's any comfort, you should stop worrying about BAC's future because they've cleaned up quite substantially the messy past (which they'll continue to accelerate such efforts, as they've been more willing to settle on without-prejudice basis than other banks) and they've got a strong hand at the helm in Brian.

     

    However, the mortgage crisis is far from over, which may get worse again, as Obama is engaged in getting lenders to bend their rules to accomodate his union backers. What is happening now to these so-called toxic assets (or bad mortgages) is to re-cycle them if they cannot be discharged or fore-closed (we used to call them re-financing but now, they've all kinds of exotic names, like loan modification, etc). My hope is that BAC will exercise prudence and enforce basic underwriting rules before they re-cycle bad mortgages, which I'm sure they are doing, or else, BAC won't be getting so much bad name-calling from unhappy people. As the old saying goes, it's better to be respected than to be popular.
    7 Apr 2013, 01:03 PM Reply Like
  • Renoira
    , contributor
    Comments (86) | Send Message
     
    Benitus,

     

    Wasn't that old saying one that the Mafia used? I prefer this one:
    Proverbs 22:1
    A good name is more desirable than great riches; to be esteemed is better than silver or gold.

     

    All I am saying is that if a business has to use fraud and RICO type tactics in order to be successful, then it is just a matter of time before they destroy the very foundation they were built upon...and all of those in their wake.

     

    I was a first hand witness to a family who was operating under the assumption that a court order would give them time to argue their case in court, when IN SPITE OF THE COURT ORDER, a B of A team (movers hired by B of A) came in and "trashed-out" this families home. This was in February...and this woman still does not have her belonging back, which includes all her clothing except what she was wearing to work at the time.

     

    Personally, I don't see how a "settlement" could make that situation any better. Yes, she has legal remedy, but on a human and civil rights level, she has to live knowing that even the laws will not protect her and her family.

     

    As far as modifications go...no one believes that a company that had the ability to "pull itself up by the bootstraps" can honestly lose all that paperwork, time and time again...especially, when it has been caught on tape that they have no intention of modifying.

     

    http://bit.ly/ZuTNzm

     

    I hope B of A will be prudent and stick to basic underwriting skills, also, but meanwhile...it wouldn't hurt if they remembered their humanity, because in the interim they also need to take responsibility for the mess they already have.
    8 Apr 2013, 08:53 AM Reply Like
  • Michael Bryant
    , contributor
    Comments (5619) | Send Message
     
    And they will never learn until shareholders and customers unite and bring them down to the ground.
    9 Apr 2013, 11:02 AM Reply Like
  • benitus
    , contributor
    Comments (1962) | Send Message
     
    Renoira..... I don't know what the Mafia had said before, but everyone who has been through leadership training will know that respect is necessary to be an effective leader and we can't be one if we're popular, which is why our illustrious leader is so ineffective because he's more concerned about his popularity than fixing the problems which is so glaring. The first principle about achieving consensus between opposing stands is to work on one piece at a time, rather than my way or the highway, and focus on what can be done, than to rely on gamesmanship, instead of blaming everyone else rather than himself when things don't get done. That's why Truman said "The Buck Stops Here" because decisions must be made (and few remembered that he made many), instead of the buck or, as they say, kicking the can down the road. (http://yhoo.it/Xzm6uZ). Truman is a man of courage and decisive action, whom Reagan was inspired by.

     

    Anyway, with regard to what to BAC, I'm very sure that the management recognizes that they need to clean up the mess (which they're doing) and enforce basic banking principles, to restore their battered image, so that they can reward their loyal shareholders.

     

    If BAC had defrauded anyone, they won't be able to cover things up and due process will catch up with the culprits involved. As a corporation, their mistakes included ineffective command and control that enabled individuals to engage in risky investments and failure to implement efficient and timely measures to defuse the messy fallout.

     

    I'm sure the man at the helm will take whatever responsibility that is necessary, or else, they won't be making settlements to resolve the outstanding disputes. At the same time, they can't be expected to roll and be kicked around, as they need to protect the shareholders interest, not just their jobs, so that their own interests would be protected also.
    8 Apr 2013, 12:19 PM Reply Like
  • benitus
    , contributor
    Comments (1962) | Send Message
     
    My last post had several typo errors and I'm still figuring out what was I thinking of before I can correct them, so read with a pinch of salt.
    9 Apr 2013, 12:24 PM Reply Like
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