BAC-WT - Bank of America Warrants

[racemize]

I'm basically pretending that I will exercise these at expiry, so I'm not using any model for the warrant price.  Here's the spreadsheet I've been using:

 

https://docs.google.com/spreadsheet/pub?key=0AgQF2qHCHXxsdG9lQkJ5TDlHd3FoX0JrYlV6MmlNMlE&output=html

 

Given this simplistic model, that's why I'm trying to figure out how the warrants will act when they are in the money but not very close to expiry.  Thanks for posting the spreadsheet, I'll give that a look.

 

Edit: Ok, looking at the spreadsheet/model, I'm trying to avoid using pricing based on implied volatility type metrics and instead just think through it rationally.  Granted, the market may not work that way, but I'd rather just understand the reality than the prices these models produce.

[MYDemaray]

Fair enough.  I think that most people who are buying the warrants believe are assuming that valuation multiple will be somewhere around 1x book and that book value will have grown by time of expiration (or variations on this theme).  As such, they've selected the warrants since the price meets the hurdle rate in your spreadsheet.  Others who have stuck with common may be trying to avoid total loss knowing that they can't predict when the market will recognize BAC's value in addition compensating for negative things that might unexpectedly happen.

[racemize]

Fair enough.  I think that most people who are buying the warrants believe are assuming that valuation multiple will be somewhere around 1x book and that book value will have grown by time of expiration (or variations on this theme).  As such, they've selected the warrants since the price meets the hurdle rate in your spreadsheet.  Others who have stuck with common may be trying to avoid total loss knowing that they can't predict when the market will recognize BAC's value in addition compensating for negative things that might unexpectedly happen.

 

Sure, on board with that, the particular thing I'm trying to figure out is what the warrant does when it is already in the money (i.e., that the warrant purchasers assumptions have played out or very nearly played out).

[MYDemaray]

it should move dollar for dollar with the stock....

[MYDemaray]

on another note -- anyone go through the motions for summary judgment?  Thoughts?  I'm almost done with MBIA and moving on to Countrywide next.  So far, Countrwide looks pretty, pretty bad...

[racemize]

it should move dollar for dollar with the stock....

 

I'm not sure it should, e.g., see the reasoning provided above.  In other words, the warrant has different leverage than the common, so deviates from common returns based on expected growth, even once in the money.

[MYDemaray]

sorry...by dollar-for-dollar, I literally meant dollar-for-dollar, not percent for percent.  Since delta will be a 1.0, if BAC moves $1, BACWTA should also move by $1, though the warrant will move by a greater percentage (this is all theory, by the way and we know what Yogi said about theory vs. practice...).

[racemize]

sorry...by dollar-for-dollar, I literally meant dollar-for-dollar, not percent for percent.  Since delta will be a 1.0, if BAC moves $1, BACWTA should also move by $1, though the warrant will move by a greater percentage (this is all theory, by the way and we know what Yogi said about theory vs. practice...).

 

Does that assume that the warrant is only worth common - strike?  My concern is that that model doesn't really work due to the leverage you can get with the warrants.  The problem is that the comparison of warrant and common is based on what you think the final price is at expiry, so it should move according to that assumption alone with a floor at common-strike.  I'm not totally sure what that movement looks like, but it seems like it is different from just changing lockstep with common.

 

Here's a thought experiment, let's say we assume it is worth $30, and for ease of calculation, that we always think it is worth 30 dollars, throughout the life of the warrant (which is pretty unlikely, as the closer it gets, the more likely it will increase, or not, in the reverse sense.  Whatever though, let's assume we are perfectly accurate about it hitting 30 in all time periods):

 

                          common price        implied warrant price at $30 assumption (A) warrant price using common-strike (B)

Time period 1:  $5                          $2.78                                                            0 (N/A)

Time period 2:  $10                        $5.58                                                            0 (N/A)

Time period 3:  $15                        $8.35                                                            $1.70

Time period 4:  $20                        $11.13                                                          $6.70

Time period 5:  $25                        $13.91                                                          $11.79

Time period 6:  $30                        $16.70                                                          $16.70

 

Ok, so (A) is completely linear, but does not move dollar for dollar with the common--instead, the future growth is already priced in, so it actually moves less (and in percentage terms, it gets the same as common because of the assumption).  In (B) its exponential(ish) due to the catch up once "in the money".  I suspect the real price movement will be an average between the two (since it is not 0 now and later the actual growth won't be priced all the way in). 

[Arden]

on another note -- anyone go through the motions for summary judgment?  Thoughts?  I'm almost done with MBIA and moving on to Countrywide next.  So far, Countrwide looks pretty, pretty bad...

 

Please elaborate. Also, would be great if you could add a link.

[Arden]

Found it:

http://mbia.com/investor/publications/Plaintiffs_Memorandum_of_Law_%20Summary_Judgment%20_redacted.pdf

http://mbia.com/investor/publications/Countrywides_Memorandum_of_Law_%20Summary_Judgment_redacted.pdf

 

I hope you read both sides' argument, because viewing them, it seems both sides have good points. I'd bet this goes to trial.

[JRH]

Alison Frankel (@alisonfrankel):

 

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=58521&terms=@ReutersTopicCodes+CONTAINS+'ANV'

 

Christian Herzeca (@cherzeca):

 

http://mbibaclitigtion.blogspot.mx/2012/10/bank-of-americas-idiotic-litigation.html

[xazp]

The MBIA litigation is very important to MBI investors (since it has a $2Bn market cap) and not so important to BAC investors. 

 

The Countrywide filing says MBIA guaranteed $21Bn of their loans, of which 80% are fully paid off or currently still paying.  So roughly they're arguing about something like $4Bn on the face value of loans. 

 

If you assume that MBI's suit has some substance, then (just like the Gibbs/Brun lawsuit) you take into account the following:

A) what fraction of those loans have material defects that should be charged back to BAC?  30%?  50%?  80%?

B) of those loans, how many payments have already been made; and

C) what is the remaining collateral on the loans

 

For A), MBIA is claiming 56% of their samples have been defective.  For B+C, following from other cases, I think it's around 50% collateral leftover.  So circa 25% of face value would be given to MBI, assuming MBI is correct on their legal arguments. 

 

Which puts this whole thing at around $1Bn, I think.  I could be wrong, but, I don't think it's a big deal if I am.

 

They're welcome to put back performing loans to BAC.  They're likely at a higher interest rate than whatever BAC is issuing now. 

 

Found it:

http://mbia.com/investor/publications/Plaintiffs_Memorandum_of_Law_%20Summary_Judgment%20_redacted.pdf

http://mbia.com/investor/publications/Countrywides_Memorandum_of_Law_%20Summary_Judgment_redacted.pdf

 

I hope you read both sides' argument, because viewing them, it seems both sides have good points. I'd bet this goes to trial.

[Parsad]

The MBIA litigation is very important to MBI investors (since it has a $2Bn market cap) and not so important to BAC investors. 

 

The Countrywide filing says MBIA guaranteed $21Bn of their loans, of which 80% are fully paid off or currently still paying.  So roughly they're arguing about something like $4Bn on the face value of loans. 

 

If you assume that MBI's suit has some substance, then (just like the Gibbs/Brun lawsuit) you take into account the following:

A) what fraction of those loans have material defects that should be charged back to BAC?  30%?  50%?  80%?

B) of those loans, how many payments have already been made; and

C) what is the remaining collateral on the loans

 

For A), MBIA is claiming 56% of their samples have been defective.  For B+C, following from other cases, I think it's around 50% collateral leftover.  So circa 25% of face value would be given to MBI, assuming MBI is correct on their legal arguments. 

 

Which puts this whole thing at around $1Bn, I think.  I could be wrong, but, I don't think it's a big deal if I am.

 

They're welcome to put back performing loans to BAC.  They're likely at a higher interest rate than whatever BAC is issuing now. 

 

Found it:

http://mbia.com/investor/publications/Plaintiffs_Memorandum_of_Law_%20Summary_Judgment%20_redacted.pdf

http://mbia.com/investor/publications/Countrywides_Memorandum_of_Law_%20Summary_Judgment_redacted.pdf

 

I hope you read both sides' argument, because viewing them, it seems both sides have good points. I'd bet this goes to trial.

 

I believe from comments that were alluded to in previous conference calls and interviews, BAC has offered significantly less than $1B...I'm guessing probably around 250-300M.  I bet they settle around 700-800M.  Cheers!

[racemize]

xazp, any thoughts on the impending BAC suit from the NYAG (similar to current JPM suit)?

[MYDemaray]

good thoughts xazp...almost through the Countrywide piece.  Any thoughts on whether BAC settles...also the number your citing ($700M) seems a lot lower than many MBI longs are hoping for, am I right?

[valuecfa]

The MBIA litigation is very important to MBI investors (since it has a $2Bn market cap) and not so important to BAC investors. 

 

The Countrywide filing says MBIA guaranteed $21Bn of their loans, of which 80% are fully paid off or currently still paying.  So roughly they're arguing about something like $4Bn on the face value of loans. 

 

If you assume that MBI's suit has some substance, then (just like the Gibbs/Brun lawsuit) you take into account the following:

A) what fraction of those loans have material defects that should be charged back to BAC?  30%?  50%?  80%?

B) of those loans, how many payments have already been made; and

C) what is the remaining collateral on the loans

 

For A), MBIA is claiming 56% of their samples have been defective.  For B+C, following from other cases, I think it's around 50% collateral leftover.  So circa 25% of face value would be given to MBI, assuming MBI is correct on their legal arguments. 

 

Which puts this whole thing at around $1Bn, I think.  I could be wrong, but, I don't think it's a big deal if I am.

 

They're welcome to put back performing loans to BAC.  They're likely at a higher interest rate than whatever BAC is issuing now. 

 

Found it:

http://mbia.com/investor/publications/Plaintiffs_Memorandum_of_Law_%20Summary_Judgment%20_redacted.pdf

http://mbia.com/investor/publications/Countrywides_Memorandum_of_Law_%20Summary_Judgment_redacted.pdf

 

I hope you read both sides' argument, because viewing them, it seems both sides have good points. I'd bet this goes to trial.

 

I believe from comments that were alluded to in previous conference calls and interviews, BAC has offered significantly less than $1B...I'm guessing probably around 250-300M.  I bet they settle around 700-800M.  Cheers!

 

I suspect it will take a bit more than that.

 

However, i would be satisfied with MBIA getting only its cross-loan $ figure covered by settlements and having all parties agree to not contest the split. MBIA doesn't need a big number in all these cases to be a winner. But it seems to me MBIA may actually be so confident, that it is going for the split as well as significant remaining value in the structured finance corp. Leaving significant value in both companies (National & MBIA Insurance Corp). Judging by recently filed SJ motions, i can see why they may be so confident. Yet, I would still prefer a settlement and putting all this behind them.

 

Also, MBIA alleges that the reps & warranties breach rate is higher as has been quoted  in past court docs. The 56% breach rate applies to summary judgement. In my opinion, this is an effort on MBIA's part for a quick fix.

 

 

As to the breaches themselves, as described in the report of MBIA's re-underwriting

expert, Mr.Steven J.Butler, there are over 49,OOO defects in a random sample of 6,OOO mortgage

loans (consisting of 400 loans from each of the 15 Securitizations) (the "Random Samples").

96.8% of the mortgage loans in the Random Samples contained one or more serious defects,

including credit defects, appraisal-related defects, compliance defects, and data errors, that

meaningfully and substantially increased the credit risk associated with the loan.

 

Although MBIA is confident that it will substantiate those findings at trial, in this motion, MBIA seeks

summary judgment only on a subset of those findings (amounting to a breach rate still well in

excess of over 50%) where the breach of the representations and warranties is indisputable, and where such breaches had an equally clear material and adverse impact on MBIA's interests in the affected mortgage loans by increasing the credit risk of such loans. Each of these undisputed categories is summarized below:...

[xazp]

I think I said a billion, and Parsad said $700M.  That's just a back of the envelope based on how other settlements and lawsuits have played out. 

 

I personally spend little effort on MBI, because it's a very small piece of the overall litigation puzzle.  Out of $800Bn of unpaid balances, MBI represents approximately half a percent.  So MBI isn't a needle-moving piece of litigation for me, unlike the Fannie, Gibbs Brun, etc, cases.  BAC has settled with two other monolines, and reserved for MBI on that basis - and that seems reasonable to me.  If the final outcome is within a billion of their reserves, it's not something I'm going to sweat. 

 

The case is fairly complicated, because there are multiple suits between the parties.  So for example, BAC says they bought insurance from MBI, and that MBI owes them money for their insured bonds.  BAC is also contesting the separation of the 'good' and 'bad' parts of MBI.  I do think it's unusual that MBI seemingly has booked litigation winnings - I regard that as aggressive accounting.

 

---

 

Someone asked about the NYAG presumed lawsuit against BAC.  I have not read the JPM complaint, so, I can just give my gut reactions.  If someone has better information, feel free to correct me. 

 

1)  The existing countrywide settlement seems to indicate that parties could bring fraud suits, but, that the $8.5Bn settlement would offset any costs.  So I think (not positive) that the over/under for the NYAG would be the $8.5Bn settlement.

 

Fraud is hard to prove, and I don't see it as being super likely that he's going to be able to improve upon that settlement.  Could be wrong, and I won't know until I see what he's dug up in his complaint. 

 

Remember the fraud statute of limitations in NY state is 6 years.  I believe they entered a tolling agreement part-way through 2012, which means that anything before mid-2006 is past the statute of limitations.  So roughly he's already too late on 1/3 of the trusts. 

 

If this were a slam dunk case, I think they'd have filed it years ago.  That's my general feeling about these cases.  Countrywide was a disaster in 2007, and it took 5 years to realize it?  Now when the statute of limitations is crippling some of the cases?  I think most of these are opportunistic - no one seemed to think they had a case in 2008, 2009, or 2010.  Shrug.  We'll see...

 

 

 

 

 

good thoughts xazp...almost through the Countrywide piece.  Any thoughts on whether BAC settles...also the number your citing ($700M) seems a lot lower than many MBI longs are hoping for, am I right?

[MYDemaray]

I am just catching up here, so forgive me if I'm behind but in the motion for summary judgment, BAC's main argument against fraud is basically that a sophisticated party has a duty to conduct diligence, particularly when it has access to facts and furthermore when it has suspicious or notice that R&W's should not be relied upon.  Not only did MBI cease their own loan-level diligence circa 2004, but they did not request a single loan file which they had access too, or pay attention to the third-party diligence sent to them by Countrywide (in fact, they inked the policy in many cases before receiving it). 

 

To make out its case for fraudulent inducement, MBIA must prove by clear and

convincing evidence "a representation of a material fact, the falsity of that representation,

knowledge by the party who made the representation that it was false when made,justifiable

reliance by the plaintiff, and resulting injury."  Centro Empresarial Cempresa S.A.  v.  America MBJA Ins.  Corp.  v. CountJywide Home Loans, Inc.  Countrywide Mem.  of Law (Mot.  Seq.  No.  _)

Index No.  602825/08

Page 19 o/45

M6vil, S.A.B.  de C. V , 17 N.Y.3d 269, 276 (2011) (emphasis added).

11

"As a matter of law, a

sophisticated plaintiff cannot establish that it entered into an arm's length transaction in

justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means

of verification that were available to it, such as reviewing the files of the other parties."  UST

Private Equity Investors Fund, Inc.  v.  Salomon Smith Barney, 288 A.D.2d. 87, 88 (1st Dep't

2001).  The Court of Appeals has emphasized that where, as here,

the facts represented are not matters peculiarly within the party's

knowledge, and the other party has the means available to him of

knowing ... the truth or the real quality of the subject of the

representation, he must make use of those means, or he will not be

heard to complain that he was induced to enter into the transaction

by misrepresentations.

 

 

Then they refer to JPM

 

MBIA readily admits the import of these due diligence findings in another RMBS-related

complaint that it filed earlier this week against J.P. Morgan.  ln the J.P.  Morgan Complaint,

MBIA alleges that an RMBS underwriter committed fraud by failing to share with it the thirdparty due diligence finn's findings, which allegedly suggested that "approximately one-third of

the loans in the sample had not been originated in compliance with [the lender's] loanunderwriting guidelines or with applicable laws."  J.P. Morgan Complaint ~ 4, Holland Aff., Ex.

268.  According to MBIA, had it been aware of these results, it "never would have issued" the

policy because it would have understood that loans in the pools failed to comply with R&Ws.

!d.~ 8.  But in this case, MBIA was provided with Countrywide's third-party due diligence

results.  Those results also flagged, on average, approximately one-third of the loans in each

sample. !d. W 4, 42, 45, 51 , 57.  Accordingly, by its own admission in the J.P. Morgan

Complaint, MBIA could not have justifiably relied on the accuracy of Countrywide's R&Ws.

 

I haven't read the NYAG complaint against JPM, but to the extent that they are trying to prove fraud, and BAC is properly characterizing the standard, and gave access to loan files and third party analysis, so long as they were transacting with sophisticated parties and not widows and orphans it seems that fruad might be harder to prove.  I am a layman and have no experience in these matters, so perhaps someone else can comment.  That's simply my impression having read the two requests.  Sorry about the formatting

[MYDemaray]

 

Fraud is hard to prove, and I don't see it as being super likely that he's going to be able to improve upon that settlement.  Could be wrong, and I won't know until I see what he's dug up in his complaint. 

 

 

One of my friends was an investigator on WaMu.  He worked on that case for 3 years.  At the end of the day he said...lots of stupid things were done, but building a case is very difficult.  NYAG seems to be the reality-TV post for AGs...you go there to make a name for yourself.  Thanks Spitzer.

[valuecfa]

I am just catching up here, so forgive me if I'm behind but in the motion for summary judgment, BAC's main argument against fraud is basically that a sophisticated party has a duty to conduct diligence, particularly when it has access to facts and furthermore when it has suspicious or notice that R&W's should not be relied upon.  Not only did MBI cease their own loan-level diligence circa 2004, but they did not request a single loan file which they had access too, or pay attention to the third-party diligence sent to them by Countrywide (in fact, they inked the policy in many cases before receiving it). 

 

To make out its case for fraudulent inducement, MBIA must prove by clear and

convincing evidence "a representation of a material fact, the falsity of that representation,

knowledge by the party who made the representation that it was false when made,justifiable

reliance by the plaintiff, and resulting injury."  Centro Empresarial Cempresa S.A.  v.  America MBJA Ins.  Corp.  v. CountJywide Home Loans, Inc.  Countrywide Mem.  of Law (Mot.  Seq.  No.  _)

Index No.  602825/08

Page 19 o/45

M6vil, S.A.B.  de C. V , 17 N.Y.3d 269, 276 (2011) (emphasis added).

11

"As a matter of law, a

sophisticated plaintiff cannot establish that it entered into an arm's length transaction in

justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means

of verification that were available to it, such as reviewing the files of the other parties."  UST

Private Equity Investors Fund, Inc.  v.  Salomon Smith Barney, 288 A.D.2d. 87, 88 (1st Dep't

2001).  The Court of Appeals has emphasized that where, as here,

the facts represented are not matters peculiarly within the party's

knowledge, and the other party has the means available to him of

knowing ... the truth or the real quality of the subject of the

representation, he must make use of those means, or he will not be

heard to complain that he was induced to enter into the transaction

by misrepresentations.

 

 

Then they refer to JPM

 

MBIA readily admits the import of these due diligence findings in another RMBS-related

complaint that it filed earlier this week against J.P. Morgan.  ln the J.P.  Morgan Complaint,

MBIA alleges that an RMBS underwriter committed fraud by failing to share with it the thirdparty due diligence finn's findings, which allegedly suggested that "approximately one-third of

the loans in the sample had not been originated in compliance with [the lender's] loanunderwriting guidelines or with applicable laws."  J.P. Morgan Complaint ~ 4, Holland Aff., Ex.

268.  According to MBIA, had it been aware of these results, it "never would have issued" the

policy because it would have understood that loans in the pools failed to comply with R&Ws.

!d.~ 8.  But in this case, MBIA was provided with Countrywide's third-party due diligence

results.  Those results also flagged, on average, approximately one-third of the loans in each

sample. !d. W 4, 42, 45, 51 , 57.  Accordingly, by its own admission in the J.P. Morgan

Complaint, MBIA could not have justifiably relied on the accuracy of Countrywide's R&Ws.

 

I haven't read the NYAG complaint against JPM, but to the extent that they are trying to prove fraud, and BAC is properly characterizing the standard, and gave access to loan files and third party analysis, so long as they were transacting with sophisticated parties and not widows and orphans it seems that fruad might be harder to prove.  I am a layman and have no experience in these matters, so perhaps someone else can comment.  That's simply my impression having read the two requests.  Sorry about the formatting

 

I agree that fraud will be very difficult for MBIA to prove, as i think i mentioned in my OP. I'm not yet convinced they will win the fraud aspect of the case, but do acknowledge that it is possible given the docs reviewed so far...yet i also think it is a risk BAC would most definitely want to avoid.

[Rabbitisrich]

I agree that fraud will be very difficult for MBIA to prove, as i think i mentioned in my OP. I'm not yet convinced they will win the fraud aspect of the case, but do acknowledge that it is possible given the docs reviewed so far...yet i also think it is a risk BAC would most definitely want to avoid.

 

Herzeca's argument, in JRH's link, is that the NY AG case is important because of reduced standards of proof and using collateral estoppel to piggyback on private cases. If he's right, then the AG doesn't have to develop sophisticated arguments and rigorous discovery. He just has to leverage whatever findings emerge from private cases to "seek disgorgement of the defendant's ill-gotten gains."

 

Alison Frankel (@alisonfrankel):

 

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=58521&terms=@ReutersTopicCodes+CONTAINS+'ANV'

 

Christian Herzeca (@cherzeca):

 

http://mbibaclitigtion.blogspot.mx/2012/10/bank-of-americas-idiotic-litigation.html

 

Thanks, JRH. Normally these two are in rough agreement, but Frankel has a very different take on BAC's argument with respect to the reps and warranties claim.

 

 

MBIA, its brief argued, can only sue over about 19,000 loans for which it has already provided Countrywide with a notice of deficiency. That's what the contract between MBIA and Countrywide requires, according to Countrywide, and it can't be held liable for breaching the contract when MBIA failed to comply with notice provisions.

Countrywide's summary judgment theory, in other words, would eliminate a huge percentage of MBIA's potential breach-of-contract recovery by excising the sampling and extrapolation MBIA relies upon. It's a bold theory, though I'm not sure it will fly with the judge: Why would she have permitted sampling only to repudiate it as a basis of liability?

 

 

The only relief available to MBIA is repurchase of the loans MBIA has already noticed as deficient, Countrywide argued, citing Rakoff's summary judgment opinion in Assured v. Flagstar and U.S. District Judge Paul Magnuson's ruling in a Minnesota case brought by the MBS trustee U.S. Bank. In Friday's brief, Countrywide asked Bransten to rule that it has no liability to MBIA -- under the insurers put-back or rescissory damages theories -- for the 370,179 loans for which MBIA has not sent the bank a particularized notice.

Moreover, according to Countrywide, MBIA can't claim fraud because the bond insurer knew exactly what it was getting when it agreed to back those 15 Countrywide-sponsored offerings between 2004 and 2007. MBIA's CEO, Jay Brown, even warned the company that the quality of underlying loans was on the decline, yet according to Countrywide, MBIA decided in around 2004 to drop its own underwriting standards so it could get into the MBS game.

 

"There is no need for a trial about whether misrepresentations were made, because the undisputed evidence shows that MBIA did not justifiably rely on Countrywide's allegedly false representations," the Countrywide brief said. It invited Bransten to do away with MBIA's fraud claim entirely, granting summary judgment to Countrywide.

[xazp]

Just FYI, on fraud, this case is worth reading:  http://newsandinsight.thomsonreuters.com/Legal/News/2012/03_-_March/NY_appeals_court_raises_fraud_bar_for_sophisticated_investors/

 

This is NY, and "Instead, in a message repeated, oh, 10 or 20 times in the court's 37-page decision, the appellate panel said that the bar for sophisticated investors to cry fraud is very high indeed."

 

I call this the "grandmother rule" which is, it's easy for a company to defraud your grandma, but it's pretty hard for one company to defraud other large companies. 

 

--

 

Note: the reason that people are now crying NY state fraud is it's virtually the only avenue left that has not passed the statute of limitations.  And even that is borderline and I'd estimate about 1/3 of the trusts are beyond that statute.  NY state fraud is hard to prove, but, it's all they got if they wanna file a lawsuit now. 

 

 

 

I am just catching up here, so forgive me if I'm behind but in the motion for summary judgment, BAC's main argument against fraud is basically that a sophisticated party has a duty to conduct diligence, particularly when it has access to facts and furthermore when it has suspicious or notice that R&W's should not be relied upon.  Not only did MBI cease their own loan-level diligence circa 2004, but they did not request a single loan file which they had access too, or pay attention to the third-party diligence sent to them by Countrywide (in fact, they inked the policy in many cases before receiving it). 

 

To make out its case for fraudulent inducement, MBIA must prove by clear and

convincing evidence "a representation of a material fact, the falsity of that representation,

knowledge by the party who made the representation that it was false when made,justifiable

reliance by the plaintiff, and resulting injury."  Centro Empresarial Cempresa S.A.  v.  America MBJA Ins.  Corp.  v. CountJywide Home Loans, Inc.  Countrywide Mem.  of Law (Mot.  Seq.  No.  _)

Index No.  602825/08

Page 19 o/45

M6vil, S.A.B.  de C. V , 17 N.Y.3d 269, 276 (2011) (emphasis added).

11

"As a matter of law, a

sophisticated plaintiff cannot establish that it entered into an arm's length transaction in

justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means

of verification that were available to it, such as reviewing the files of the other parties."  UST

Private Equity Investors Fund, Inc.  v.  Salomon Smith Barney, 288 A.D.2d. 87, 88 (1st Dep't

2001).  The Court of Appeals has emphasized that where, as here,

the facts represented are not matters peculiarly within the party's

knowledge, and the other party has the means available to him of

knowing ... the truth or the real quality of the subject of the

representation, he must make use of those means, or he will not be

heard to complain that he was induced to enter into the transaction

by misrepresentations.

 

 

Then they refer to JPM

 

MBIA readily admits the import of these due diligence findings in another RMBS-related

complaint that it filed earlier this week against J.P. Morgan.  ln the J.P.  Morgan Complaint,

MBIA alleges that an RMBS underwriter committed fraud by failing to share with it the thirdparty due diligence finn's findings, which allegedly suggested that "approximately one-third of

the loans in the sample had not been originated in compliance with [the lender's] loanunderwriting guidelines or with applicable laws."  J.P. Morgan Complaint ~ 4, Holland Aff., Ex.

268.  According to MBIA, had it been aware of these results, it "never would have issued" the

policy because it would have understood that loans in the pools failed to comply with R&Ws.

!d.~ 8.  But in this case, MBIA was provided with Countrywide's third-party due diligence

results.  Those results also flagged, on average, approximately one-third of the loans in each

sample. !d. W 4, 42, 45, 51 , 57.  Accordingly, by its own admission in the J.P. Morgan

Complaint, MBIA could not have justifiably relied on the accuracy of Countrywide's R&Ws.

 

I haven't read the NYAG complaint against JPM, but to the extent that they are trying to prove fraud, and BAC is properly characterizing the standard, and gave access to loan files and third party analysis, so long as they were transacting with sophisticated parties and not widows and orphans it seems that fruad might be harder to prove.  I am a layman and have no experience in these matters, so perhaps someone else can comment.  That's simply my impression having read the two requests.  Sorry about the formatting

 

I agree that fraud will be very difficult for MBIA to prove, as i think i mentioned in my OP. I'm not yet convinced they will win the fraud aspect of the case, but do acknowledge that it is possible given the docs reviewed so far...yet i also think it is a risk BAC would most definitely want to avoid.

[valuecfa]

MBIA, its brief argued, can only sue over about 19,000 loans for which it has already provided Countrywide with a notice of deficiency. That's what the contract between MBIA and Countrywide requires, according to Countrywide, and it can't be held liable for breaching the contract when MBIA failed to comply with notice provisions.

Countrywide's summary judgment theory, in other words, would eliminate a huge percentage of MBIA's potential breach-of-contract recovery by excising the sampling and extrapolation MBIA relies upon. It's a bold theory, though I'm not sure it will fly with the judge: Why would she have permitted sampling only to repudiate it as a basis of liability?

 

Moreover, even as to the few hundred loans in the Securitizations which CHL eventually

agreed to repurchase, it dragged out its approval of such repurchases over a period ofperiod of 6

to 18 months-far beyond the 90 days CHL had to repurchase these loans under the Transaction

Documents. Rather than respond to MBIA's repurchase demands in a timely manner, [REDACTED]...

During this time while Countrywide shirked its contractual obligations and its

repurchase approvals trickled in, MBIA dutifully complied with its contractual obligations under

its unconditional and irrevocable Insurance Policies and made hundreds of millions of dollars in

payments.

 

Worse yet, Countrywide deliberately designed and orchestrated a strategy to frustrate

the repurchase process, both before MBIA commenced this litigation and continuing through the

present. Countrywide's overarching goal in responding to repurchase demands was to reduce

exposure and limit losses to the company, rather than adhere to its contractual repurchase

obligations.72 In implementing that goal, when Countrywide evaluated such repurchase

demands, it did not perform a good faith analysis ofthe loan but rather employed a[REDACTED]

.

Countrywide also invented new standards and requirements for repurchase approvals even

though such standards and requirements were not contained in the Transaction Documents.74

Rather than evaluate each loan submitted for repurchase to determine whether it complied with

the representations and warranties, Countrywide limited its review of loans to only those defects

identified in the repurchase request and ignored any other defects it uncovered during its review

that were not cited in the repurchase demand.

 

I think MBIA has great rebuttals to all of BAC's "reasons". It's all there in both motions. I think this SJ was the weakest defense, and somehwhat self incriminating for a few reasons, that BAC has provided thus far.

 

And as Manal Mehta recently claimed: "In a truly bizarre motion for summary judgment, Bank of America made a startling admission that, on average, 29.4% of loans included in Countrywide securitizations failed to meet representation and warranties in the MBS prospectus".  can find what he is referring to on pages 13 & 27 of the BAC SJ.

 

-

In full disclosure, I own some BAC warrants, as well as MBI common/options in personal and managed accts.

[Arden]

 

I personally spend little effort on MBI, because it's a very small piece of the overall litigation puzzle.  Out of $800Bn of unpaid balances

 

 

xazp- I'm looking at the annual report and can't find a summary of  the legal proceedings - Are you saying the sum of the face values of all lawsuits against BAC is 800 Bn against reserves of 16 Bn? Where can you see this?

[xazp]

Interesting twist vs. AIG:  http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=58600&terms=@ReutersTopicCodes+CONTAINS+%27ANV%27

Essentially, BAC says when AIG sold all their countrywide securities to the Fed, they lost their right to sue over those securities.  Makes sense to me ...

 

Arden: http://crapstocks.com/files/BAC/2011-Q3-presentation.pdf

page 32 shows you the break down of original face value & remaining for various classes of the RMBS litigation, the MBI is a part of the monoline bucket, as you can see it's the smallest of 7 buckets - a fraction of the total. 

 

In aggregate, $2.1 trillion of original face value, $800Bn unpaid remaining, $29 Bn in either paid or reserves. 

Of this MBIA appears to be about 1% of original face, less than 1% unpaid remaining, with unknown reserves (though they say they allocated reserves similar to their existing settlements). 

 

 

 

I personally spend little effort on MBI, because it's a very small piece of the overall litigation puzzle.  Out of $800Bn of unpaid balances

 

 

xazp- I'm looking at the annual report and can't find a summary of  the legal proceedings - Are you saying the sum of the face values of all lawsuits against BAC is 800 Bn against reserves of 16 Bn? Where can you see this?