But given MBIA’s history — recounted, for instance, in the book Confidence Game by Christine Richard — and the outsized profits and compensation awarded to its executives as a consequence of its CDO and MBS products, I wonder whether this caricature is fair. This is particularly true when you consider that Bank of America inherited the culpability by acquiring Countrywide Financial in 2008.
I know this is somewhat of an amorphous angle, but how did you view the controversy? Was MBIA being unjustly bullied by Bank of America? Or was the latter perhaps just as much, if not more, of a victim here?
Herzeca: This is both a very interesting question and one that is hard to answer with any resemblance of objectivity.
If you argue that Bank of America Corp (NYSE:BAC) is unfairly being held to pay for Countrywide’s sins, you are ignoring that the bank acquired the mortgage originator in order to become the preeminent mortgage banker in the nation, and then took out a corporate vacuum cleaner and sucked up all of Countrywide’s mortgage business platform, leaving the company as a continuing litigation-defending shell. So there was an upside that Bank of America was seeking in its transactions with Countrywide, and I think it is hard for Bank of America to claim the high moral ground when it turns out that its profit-seeking bet turned out badly; unless you think too-big-to-fail banks should never be allowed to suffer from their mistakes.
On MBIA’s side, it clearly wrote improvident insurance policies, but it was the beneficiary of representations and warranties about these transactions. If MBIA had not insisted on these contractual protections, it would have been foolhardy as well as improvident, and MBIA was no fool, motley or otherwise.
Maxfield: Last but not least, what if anything will be the legacy of the MBS litigation in general and the MBIA v. Bank of America case in particular? Has it changed the legal landscape? What about the investing landscape for those interested in monolines? And finally, are there any lasting lessons that investors can take away from this that would be helpful down the road?
Herzeca: I believe investors should give monolines a look, especially if investors believe that the U.S. housing market is on the road to recovery. This might generate some reserve reversals that will improve the monlines’ financial positions over time. As well, there is the opportunity for some of these monolines to continue to achieve legal recoveries like the one MBIA got from Bank of America. Finally, if investors also believe that interest rates will rise, the municipal finance guaranty market should eventually recover. Having said that, this is an area that requires careful due diligence.
Maxfield: Christian, thank you very much for taking the time to answer these questions.
The article The “F” on Bank of America’s Report Card originally appeared on Fool.com and is written by John Maxfield.
John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America.
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