Bruce Berkowitz is undoubtedly one of the most respected value investors in the game; when he makes a move, people pay attention. But it’s hard to ignore one common factor shared by some of his top holding — outstanding lawsuits. With all of the uncertainty surrounding the potential costs of these legal battles, it’s no wonder share prices are depressed, but is Berkowitz investing because of, or in spite of the lawsuits? Let’s take a look at the two biggest cases at hand and see how investors, like Berkowitz, should approach companies with legal battles in the future.
Two-for-one
Bank of America Corp (NYSE:BAC) is the No. 2 holding for Berkowitz’s Fairholme Fund. Not only have Fairholme and Bruce had to weather the storm from BAC’s Countrywide legacy issues, but also the more recent spat between the bank and another Fairholme holding, MBIA Inc. (NYSE:MBI). The insurer had a big win earlier this week when an appeals court ruling stated that the bank would be required to buy back securitized loans even if they were not in default. The ruling, which partially overturned a lower court ruling, noted that as long as MBIA could prove that the loan “materially and adversely” affected its interest, Bank of America would be required to repurchase the loan. The court panel also approved MBIA’s rights to recover “rescissory damages,” which was previously denied by the lower court ruling.
As expected, Bank of America Corp (NYSE:BAC) intends to appeal the case since it would set a precedent for other insurers to sue for the same reason. The bank’s most recent SEC filing stated that its current legal reserves for mortgage buyback losses would not be sufficient if the court ruled in favor of MBIA Inc. (NYSE:MBI), leading investors to worry about its ability to cover legal losses in the future.
Credit: Bank of America Corp (NYSE:BAC)
As if one wasn’t enough
Another notable insurer is also seeking to recoup losses from mortgage-backed securities sold by Countrywide and Merrill Lynch (both part of the current B of A) — American International Group Inc (NYSE:AIG). As the Fairholme Fund’s top holding, AIG enters the fray with a big incentive to win in court — $10 billion. But any progress in the case has been derailed as the parties try to determine if AIG has the right to sue in the first place. The securities were bought as part of the NY Fed’s bailout of AIG, which Bank of America Corp (NYSE:BAC) argues assumed the rights to sue when ownership changed hands. Though the Fed previously stated that it did acquire the rights, and AIG was out of luck, a recent statement from a Fed employee reversed that, saying that his previous comments were not meant to take anything away from American International Group Inc (NYSE:AIG). Only time will tell how this suit plays out, but either way, one of Berkowitz’s biggest holdings is going to lose.
