BAC-WT - Bank of America Warrants

[ShahKhezri]

This is R&W case, if you do an offering and the issuer's data is faulty (which in this case it clearly was)...it's that party's fault. 

[ERICOPOLY]

There was enough information available by 2007 that you knew many of these securities were shit.  Cheers!

 

Unless the guys are MBIA are indeed the biggest rubes on the planet.  Is that what they claim to be?  :D

[Kraven]

The question not asked is if these loans were like any other loan that the monolines insured, would there be any discussion by MBIA or any afterthought in the insurance premiums they charged?  Countrywide is guilty, but so is MBIA for not doing their due diligence.  They aren't suing because there was fraud, but because they failed to protect their shareholders and accepted inordinate amounts of risk for the premiums charged.  There was enough information available by 2007 that you knew many of these securities were shit.  Cheers!

 

In a reps and warranties case it's black and white though.  Either the rep was breached or it wasn't.  Reps and warranties aren't about blame, they are simply risk shifting mechanisms.  I completely agree that MBIA was not innocent in all of this - no one involved really was - however, that's not what's being litigated.  BAC breached the reps.  End of story.  They owe whatever the documents say they owe.

[benchmark]

The question not asked is if these loans were like any other loan that the monolines insured, would there be any discussion by MBIA or any afterthought in the insurance premiums they charged?  Countrywide is guilty, but so is MBIA for not doing their due diligence.  They aren't suing because there was fraud, but because they failed to protect their shareholders and accepted inordinate amounts of risk for the premiums charged.  There was enough information available by 2007 that you knew many of these securities were shit.  Cheers!

 

In a reps and warranties case it's black and white though.  Either the rep was breached or it wasn't.  Reps and warranties aren't about blame, they are simply risk shifting mechanisms.  I completely agree that MBIA was not innocent in all of this - no one involved really was - however, that's not what's being litigated.  BAC breached the reps.  End of story.  They owe whatever the documents say they owe.

 

If it's really that black and white (I'm not a lawyer), why would it take this long for the suit? and why isn't BAC reserving all that's been claimed by MBIA?

[ShahKhezri]

Exactly, if the data was in fact correct and MBI insured mortgages that turned into crap because of a severe economic recession, that's MBI's fault.

 

There have been road shows before, where one bad chart with faulty data was in a deck, and the entire road show had to be stopped, data correctd, rating agencies/investors, you name it all aware.  If the data were kept faulty and the deal went bad, the bank would be held liable.

[ERICOPOLY]

I take it the "duty to mitigate" doesn't apply here with respect to MBIA entering these contracts despite reason to suspect that Countrywide loans were substandard?  Is that some other area of the law?

[ShahKhezri]

I take it the "duty to mitigate" doesn't apply here with respect to MBIA entering these contracts despite reason to suspect that Countrywide loans were substandard?  Is that some other area of the law?

 

That's a good question, I don't know.  I don't know the language in MBIA's contracts.  I just know from a bank's perspective, the level of due diligence involved, the servicing reports, etc. 

 

The way I think about it, if these assets were kept on the banks own balance sheet instead of securitized, what would the bank do in that position?  Well, they would go to workout, then if they were perfected by assets with UCC filings, etc, they would liquidate and would have something to fall back on.  It might be 10 cents on the dollar or more, or less.  However, these assets were securitized and went from the banks balance sheet to investors...this is where the put-backs come in. 

 

If it's really that black and white (I'm not a lawyer), why would it take this long for the suit? and why isn't BAC reserving all that's been claimed by MBIA?

 

BAC has reserved, I just don't think they have reserved to what MBIA has accounted for on their B/S.  I was explaining to a friend, it's rare to be involved in a situation where resolution represents 200% of equity for one company and after tax ~less than 2% for the other.  Also, litigation takes a while, the BP oil spill was black and white, but that took a long time.  Another company that was discussed on this board that I never invested in GYRO, I believe litigation took a long time on that as well. 

 

Disclosure: I own BAC and MBI.

[berkshiremystery]

Interesting video from Bloomberg that only a few companies will provide most of the earnings growth next year in the S&P500 and BAC is one of them.

 

http://www.bloomberg.com/video/why-buy-the-whole-basket-when-you-can-buy-the-best-9hkKeDoXSWamwDRIcad4ng.html?cmpid=yhoo

 

[mpauls]

The question not asked is if these loans were like any other loan that the monolines insured, would there be any discussion by MBIA or any afterthought in the insurance premiums they charged?  Countrywide is guilty, but so is MBIA for not doing their due diligence.  They aren't suing because there was fraud, but because they failed to protect their shareholders and accepted inordinate amounts of risk for the premiums charged.  There was enough information available by 2007 that you knew many of these securities were shit.  Cheers!

 

Clearly, MBIA failed at underwriting, however, their legal counsel appear to have done their job drafting/amending contracts.  Ultimately, countrywide, did indeed commit underwriting fraud, among other things-and irrespective of MBIA's incompetence, the contracts clearly state that policies are to be put back or otherwise cancelled in the event of fraud (e.g. misrepresentations).

[mpauls]

Also, the Justices overseeing the litigation can't just decide without seeing the case through.  They have to go through the motions until each party have made their case.  BAC have played the delay game, which is why this has taken so long.  Smart previously; stupid now. 

[Kraven]

The question not asked is if these loans were like any other loan that the monolines insured, would there be any discussion by MBIA or any afterthought in the insurance premiums they charged?  Countrywide is guilty, but so is MBIA for not doing their due diligence.  They aren't suing because there was fraud, but because they failed to protect their shareholders and accepted inordinate amounts of risk for the premiums charged.  There was enough information available by 2007 that you knew many of these securities were shit.  Cheers!

 

In a reps and warranties case it's black and white though.  Either the rep was breached or it wasn't.  Reps and warranties aren't about blame, they are simply risk shifting mechanisms.  I completely agree that MBIA was not innocent in all of this - no one involved really was - however, that's not what's being litigated.  BAC breached the reps.  End of story.  They owe whatever the documents say they owe.

 

If it's really that black and white (I'm not a lawyer), why would it take this long for the suit? and why isn't BAC reserving all that's been claimed by MBIA?

 

If it was one loan and one breach of rep, that would be an easy case.  This is hundreds of thousands of loans and various breaches.  Given the breadth of the case and the sheer number of loans and breaches, it is virtually impossible to figure out every breach.  There will be dozens of reps in a mortgage purchase agreement involved in a securitization.  It is administratively impossible to go loan by loan, rep by rep.  That's one of the delays.  MBIA is arguing that a sampling of the loans and corresponding breaches are representative of the pool as a whole.  BAC is arguing no.  That is one reason for the delay.  There are real issues to be litigated.  It isn't crystal clear exactly what is owed given the size of the matter.

[MrB]

More quick and dirty. Double check Goodwill/(Goodwill + TBV) MV/TBV

 

Interesting table. Does your definition of TBV differ from what is listed in the companies' financials? According to BofA's latest 10-Q, the TBV per share is 13.48. At yesterday's closing stock price of 9.90, MV/TBV is about 0.73. JPM's MV/TBV works out to 1.09 at yesterday's close of 41.09, quite a bit less than the 1.33 listed in the table. MV does stand for market value, right?

Reuters data

MV=market value

[Kraven]

I take it the "duty to mitigate" doesn't apply here with respect to MBIA entering these contracts despite reason to suspect that Countrywide loans were substandard?  Is that some other area of the law?

 

A duty to mitigate would generally be in a different context.  In a commercial matter it generally has to do with ensuring that things are used in a way that maximizes their potential as best as someone can.  An example is a lease.  Say you're Best Buy and you have a lease on a huge building and you've decided you don't need it anymore given the current environment.  The problem is though that it's a 10 year lease.  You are on the hook for the 10 years, but if you walk away the landlord does not have the right to just sit there and collect rent for the next 10 years.  They are required to use reasonable efforts to re-lease the building.  Now you will be required perhaps to pay for their costs in doing so along with rent along the way, but they need to do it.  What is reasonable?  Who knows.  Could be placing ads, hiring a realtor, what have you.  If they try and try and can't re-lease it you are SOL, but they need to try.  As a matter of public policy no one wants an empty building sitting around when there is someone else out there who would take it if they only knew it was available.  We wants things to go to their highest and best use, if possible.

 

In this case, it's an on/off switch.  Reps aren't about assessing blame or intent.  They are about risk shifting, that's it.  The rep was either breached or it wasn't.  It typically isn't going to be difficult to figure out whether it was.  The loan file was complete or it wasn't.  The LTV was under X% or it wasn't.  As mentioned in the post above, one of the problems here is figuring this out for hundreds of thousands of loans and dozens of reps applicable to each loan.  It's not really possible.  Of course in good times one would never think this would have been a problem.  In the past it would have been a loan here or there that causes trouble.  So it was very easy to determine.  Here, not so much. 

 

Again, one never knows what a court will do though.  Take unconscionability for example.  That came out of old leasing agreements and the like with very poor (mostly minority) people.  There would be lease agreements where if you missed a payment for any reason whatsoever, you lost everything you had put in and the item was immediately taken back.  The contractual language was clear.  The company was in the "right".  However, the courts determined it to be so unfair that they wouldn't enforce the contract.  The parties weren't in equal bargaining positions.  Obviously that isn't the case here, but it is certainly possible a court could rule in "equity" (i.e. not by law) that MBIA was a bad actor too and they just can't enforce the contract.  Hard to see that happening here as it was one very large bank on the other side.  But you never know.  Litigation is never a slam dunk.

[biaggio]

Kraven, thanks for the explanation. Very enlightening!

 

 

[xazp]

In a reps and warranties case it's black and white though.  Either the rep was breached or it wasn't.  >>

 

Have you read the reps & warranties for MBIA?  I haven't.  If you have, post them because you seem pretty confident. 

 

I have tracked down R&W for other pieces of litigation, and I don't find it black and white at all.  I am paraphrasing but I remember these portions:

 

* (in all CAPS).  THESE SECURITIES ARE SUBPRIME AND HAVE A HIGH RISK OF DEFAULT

* Countrywide did not verify the income levels or occupations of some of these mortgages

* Countrywide has the right to include mortgages below the stated LTV at their discretion.

 

So when I read all these disclaimers, I left not knowing why anyone would buy these mortgages.  They have disclaimers for everything.  Yes, our "goal" is LTV of X%, but we have the right to put in other mortgages at our discretion.  Yes, we think income levels are at this level, but we explicitly don't do anything more than ask the people "how much income do you make?" 

 

After I read the documents (and they were not for MBIA), I concluded it was a tough call on who would win.  Most of the monolines settled for a fraction of their "ask" and I think that is reflective of what the documents really say.  But I have not read MBIA, you seem certain, so ... show me?  The R&W's I read were so full of frankly holes I couldn't make sense of who would buy this crap, nor how you could resolve litigation.  It read to me like an IPO prospectus that said "our accountants said our numbers are wrong, we agree, good luck investing!"

 

The R&W for the GSE's are a different matter - in those cases, the GSEs have a much stronger set of R&W which is why they are getting paid.

 

 

 

 

The question not asked is if these loans were like any other loan that the monolines insured, would there be any discussion by MBIA or any afterthought in the insurance premiums they charged?  Countrywide is guilty, but so is MBIA for not doing their due diligence.  They aren't suing because there was fraud, but because they failed to protect their shareholders and accepted inordinate amounts of risk for the premiums charged.  There was enough information available by 2007 that you knew many of these securities were shit.  Cheers!

 

In a reps and warranties case it's black and white though.  Either the rep was breached or it wasn't.  Reps and warranties aren't about blame, they are simply risk shifting mechanisms.  I completely agree that MBIA was not innocent in all of this - no one involved really was - however, that's not what's being litigated.  BAC breached the reps.  End of story.  They owe whatever the documents say they owe.

[onyx1]

Kraven, thanks for the explanation. Very enlightening!

+1,  thanks for the insight Kraven.

 

What are your thoughts on materiality with respect to the R&W liabilities? Your earlier post seems to support MBI's argument that any identifiable breach is grounds for a putback.  BAC responds by arguing that if the loan has not defaulted or if it has defaulted for a reason not plausibly tied to the breach trigger, there is no putback liability.  Reasonable people (or in this case, unreasonable!) people can disagree here and I understand both arguments.  But the question that clouds MBI's argument, in my opinion, is that in the negotiated R&W terms there is a specific carve out for breaches that are non-material.  How can MBI credibly argue that all breaches are material when they clearly expected otherwise at the time of the original agreement?

[Kraven]

In a reps and warranties case it's black and white though.  Either the rep was breached or it wasn't.  >>

 

Have you read the reps & warranties for MBIA?  I haven't.  If you have, post them because you seem pretty confident. 

 

I have tracked down R&W for other pieces of litigation, and I don't find it black and white at all.  I am paraphrasing but I remember these portions:

 

* (in all CAPS).  THESE SECURITIES ARE SUBPRIME AND HAVE A HIGH RISK OF DEFAULT

* Countrywide did not verify the income levels or occupations of some of these mortgages

* Countrywide has the right to include mortgages below the stated LTV at their discretion.

 

So when I read all these disclaimers, I left not knowing why anyone would buy these mortgages.  They have disclaimers for everything.  Yes, our "goal" is LTV of X%, but we have the right to put in other mortgages at our discretion.  Yes, we think income levels are at this level, but we explicitly don't do anything more than ask the people "how much income do you make?" 

 

After I read the documents (and they were not for MBIA), I concluded it was a tough call on who would win.  Most of the monolines settled for a fraction of their "ask" and I think that is reflective of what the documents really say.  But I have not read MBIA, you seem certain, so ... show me?  The R&W's I read were so full of frankly holes I couldn't make sense of who would buy this crap, nor how you could resolve litigation.  It read to me like an IPO prospectus that said "our accountants said our numbers are wrong, we agree, good luck investing!"

 

The R&W for the GSE's are a different matter - in those cases, the GSEs have a much stronger set of R&W which is why they are getting paid.

 

I have nothing to show you as I don't have their documents.  You are mixing up disclosure with underlying documentation.  Things you refer to like these securities are subprime and Countrywide didn't verify income levels, those are risk factors from a prospectus.  You are confused.  Those are not R&W.  There is a huge difference.  Risk factors are about disclosing material (and not so material) risks to potential investors in SECURITIES.  The litigation we are discussing has nothing to do with securities, it has to do with the underlying mortgages that have been securitized.

 

A rep and warranty IS black and white so long as properly drafted.  It speaks to a moment in time.  It says as of the date of this contract (or some other date as specified), X is true and correct, or Y is not true and correct.  R&W are never "full of holes".  Again, you read disclosure, not the underlying agreement which would not typically be summarized.  The R&W here are in an underlying agreement.  Either MBIA piggybacked on a mortgage loan purchase agreement or the same (or virtually the same) reps were made in the insurance agreements or CDS.  Either way it's the same.  A rep will say, for example, "All Loans [defined as the loans subject to the agreement] have an LTV under X%, except for those Loans set forth on Schedule 1".  Another rep will say "All Loans have full and complete loan files."  You get the picture.

 

I haven't seen their documents, but I've seen dozens like them.  Reps are all the same, believe me.  I'm not talking about the specific requirement (i.e. LTV under what amount), but the reps in a mortgage related deal are all the same at a 10,000 foot level.  What is difficult is what I pointed out above.  Assume a mortgage securitization from 2006-2007 had 35 R&W.  I forget the exact number, but assume MBIA has sued over 500,000 loans.  It's not humanly possible to examine 500,000 loans for 35 potential breaches.  Whether or not something has been breached *should* be clear, but it takes work.  Is there a complete loan file?  That takes time to look through, maybe 10 min to do a crappy job, maybe an hour (?) to do a more complete job.  That's one rep, one loan. 

 

Some of the reps aren't so clearcut such as a loan being originated in a legal, proper and customary way.  That's not something that is so easy to see and must be determined by examining the documents and the facts and circumstances.  In any case, it doesn't take multiple breaches to require the putback, just one per loan (subject to whatever the documentation says of course).  This is why MBIA is arguing for and getting the ability to project the sample on the whole.  No one EVER assumed it would come to this.  It's just not possible to examine each loan.  Hope this helps.

[Kraven]

Kraven, thanks for the explanation. Very enlightening!

+1,  thanks for the insight Kraven.

 

What are your thoughts on materiality with respect to the R&W liabilities? Your earlier post seems to support MBI's argument that any identifiable breach is grounds for a putback.  BAC responds by arguing that if the loan has not defaulted or if it has defaulted for a reason not plausibly tied to the breach trigger, there is no putback liability.  Reasonable people (or in this case, unreasonable!) people can disagree here and I understand both arguments.  But the question that clouds MBI's argument, in my opinion, is that in the negotiated R&W terms there is a specific carve out for breaches that are non-material.  How can MBI credibly argue that all breaches are material when they clearly expected otherwise at the time of the original agreement?

 

Sorry, I don't mean to ignore any kind of materiality requirement.  Obviously that is another issue that is subject to litigation and at the end of the day will only be resolved by a court.  In this context, it's probably a stretch for MBIA to claim all breaches are material.  They of course aren't all of the same level of materiality.  But in my view anything that goes to the crux of the matter, i.e. the very quality (or lack thereof!) of the mortgages being securitized, is a material breach.  So in my mind, anything having to do with LTVs, ability to repay, etc. is certainly material.  An incomplete loan file, for example, may or may not be.  MBIA has certainly demonstrated more than enough material breaches in their sample.  Do you disagree?

[benchmark]

Some of the reps aren't so clearcut such as a loan being originated in a legal, proper and customary way.  That's not something that is so easy to see and must be determined by examining the documents and the facts and circumstances.  In any case, it doesn't take multiple breaches to require the putback, just one per loan (subject to whatever the documentation says of course).  This is why MBIA is arguing for and getting the ability to project the sample on the whole.  No one EVER assumed it would come to this.  It's just not possible to examine each loan.  Hope this helps.

 

Thanks for the explanation. If R&W contract are standard, and MBIA persuade the judge to agree for them to project a sample on the whole, can't BAC just argue/appeal that MBIA needs to go through each loan and drag the process forever?

[mpauls]

Here is a copy of an "Insurance Agreement".

 

http://www.scribd.com/doc/114773293/CFC-MBIA-Insurance-Agreement

[Kraven]

Some of the reps aren't so clearcut such as a loan being originated in a legal, proper and customary way.  That's not something that is so easy to see and must be determined by examining the documents and the facts and circumstances.  In any case, it doesn't take multiple breaches to require the putback, just one per loan (subject to whatever the documentation says of course).  This is why MBIA is arguing for and getting the ability to project the sample on the whole.  No one EVER assumed it would come to this.  It's just not possible to examine each loan.  Hope this helps.

 

Thanks for the explanation. If R&W contract are standard, and MBIA persuade the judge to agree for them to project a sample on the whole, can't BAC just argue/appeal that MBIA needs to go through each loan and drag the process forever?

 

Standard in the macro sense.  That is, the same types of R&W will be in each of these types of agreements.  The actual "triggers" (i.e. what LTV, etc.) and exact language will of course be different on a deal by deal basis.  Each deal is unique . .  and it's not.  Most MBS deals use a pretty standard set of base documents, adjusted of course in light of the financial crisis, but in terms of the deals subject to this litigation, all pretty standard.  A blackline (i.e. a marked copy showing changes from one document to another) can be run very cleanly so that the changes are easily identifiable.

 

Part of the R&W process in a deal is due diligence.  A party will list out all these R&W and the party required to make them has to come back and either agree to it, argue against it or change it.  So that tells you something.  If a party says "we can't make a rep that says all loans are below X% LTV", then you know that at least some loans aren't below it.  Again, though, it's just risk shifting.  There is no right or wrong, that's the part people don't understand.  In a vacuum there's nothing that says a reasonable party should accept 80% LTV or 81% LTV or 70% LTV.  It's all about what you can bear.  If I'm the buyer and I must have the loans meet certain parameters then that's the line I draw - the mechanic for drawing that line is via the R&W.  In terms of BAC arguing that MBIA needs to go through each loan, I believe they did argue that and lost.  It's an impossible task.  Typically a court will not require an impossible task that effectively renders the contract worthless.

 

 

[Parsad]

U.S. judge says FHFA cases against banks can proceed.  Cheers!

 

http://finance.yahoo.com/news/u-judge-says-fhfa-cases-220343898.html

[onyx1]

Kraven, thanks for the explanation. Very enlightening!

+1,  thanks for the insight Kraven.

 

What are your thoughts on materiality with respect to the R&W liabilities? Your earlier post seems to support MBI's argument that any identifiable breach is grounds for a putback.  BAC responds by arguing that if the loan has not defaulted or if it has defaulted for a reason not plausibly tied to the breach trigger, there is no putback liability.  Reasonable people (or in this case, unreasonable!) people can disagree here and I understand both arguments.  But the question that clouds MBI's argument, in my opinion, is that in the negotiated R&W terms there is a specific carve out for breaches that are non-material.  How can MBI credibly argue that all breaches are material when they clearly expected otherwise at the time of the original agreement?

 

Sorry, I don't mean to ignore any kind of materiality requirement.  Obviously that is another issue that is subject to litigation and at the end of the day will only be resolved by a court.  In this context, it's probably a stretch for MBIA to claim all breaches are material.  They of course aren't all of the same level of materiality.  But in my view anything that goes to the crux of the matter, i.e. the very quality (or lack thereof!) of the mortgages being securitized, is a material breach.  So in my mind, anything having to do with LTVs, ability to repay, etc. is certainly material.  An incomplete loan file, for example, may or may not be.  MBIA has certainly demonstrated more than enough material breaches in their sample.  Do you disagree?

 

No, but materiality in this case, like art, is in the eye of the beholder.  For example, a loan file is complete except for a missing valid notary.  The homeowner losses his job and defaults. Material?  My understanding is that MBI says yes.  BAC of course says no (but likely in more colorful language!)  Here, I agree with BAC.

 

Another example,  with a R&W of 70% LTV,  the borrower makes timely payments for two years but losses his job and life savings in the stock market crash of 2009.  In a distressed real estate market, the home is sold and the loan recovers 50% on the dollar.  A re-appraisal today suggest that the LTV was closer to 75% LTV.  Is the 5% LTV difference material?  MBI says yes and demands BAC take back the entire loan.  BAC says not so fast!  Setting aside the difficulty of a years-later re-appraisal, the most we should be on the hook for is 5%, and to saddle us with the entire 50% loss is unjust because the 5% LTV was not material to the homeowners inability to pay!  Here I agree with BAC but accept that this example is less clear that the first, and my opinion is likely colored by the fact that I am long BAC and have no position in MBI.

 

The examples are the crux of the R&W disagreements.  What is your opinion?

[Kraven]

No, but materiality in this case, like art, is in the eye of the beholder.  For example, a loan file is complete except for a missing valid notary.  The homeowner losses his job and defaults. Material?  My understanding is that MBI says yes.  BAC of course says no (but likely in more colorful language!)  Here, I agree with BAC.

 

Another example,  with a R&W of 70% LTV,  the borrower makes timely payments for two years but losses his job and life savings in the stock market crash of 2009.  In a distressed real estate market, the home is sold and the loan recovers 50% on the dollar.  A re-appraisal today suggest that the LTV was closer to 75% LTV.  Is the 5% LTV difference material?  MBI says yes and demands BAC take back the entire loan.  BAC says not so fast!  Setting aside the difficulty of a years-later re-appraisal, the most we should be on the hook for is 5%, and to saddle us with the entire 50% loss is unjust because the 5% LTV was not material to the homeowners inability to pay!  Here I agree with BAC but accept that this example is less clear that the first, and my opinion is likely colored by the fact that I am long BAC and have no position in MBI.

 

The examples are the crux of the R&W disagreements.  What is your opinion?

 

Materiality is in the eye of the beholder to some extent.  However, in a contractual context it is one of those things that only a court can determine.  As you said, MBIA will say aye and BAC will say nay.  So which is it?  The contract may or may not provide some guidance, but at the end of the day that is only helpful in litigation unless one party agrees (they rarely do).  So a judge needs to determine whether something is material or not.

 

So a couple more points.  You are confusing R&W with covenants.  It's a very common misunderstanding.  A R&W is a statement as of a specific point in time.  The contract will be clear what point in time that is.  Usually it will be the date of the agreement, but can be as of an earlier date.  A covenant on the other hand is a promise if you will to do something on an ongoing basis.

 

Using your example of a 70% LTV, a rep says "As of the date of this agreement all loans have an LTV of 70% or less."  A covenant, on the other hand, says "All loans shall have an LTV of 70% or less until this Agreement terminates or, with respect to each loan, such loan has a principal balance of 25% or less of its principal balance on the date hereof, whichever is earlier."  In the first example, it's on/off.  Did all loans have an LTV of less than 70% on the date of the agreement (and that date only)?  The second example says was there any time from the date of the agreement until whenever that any loan exceeded a 70% LTV.  So what happens in the future in a rep means nothing.

 

Remember again reps are about risk shifting, that's it.  It's all about how you and I as parties to the contract agree to divvy things up if you will.  There's no right or wrong.  You sell the loans to me and I may say (and parties did) that I don't care what the LTV on the loans is.  So that rep wouldn't be there in our case. 

 

In terms of materiality, the judge will decide, but here's some things to think about.  Think of materiality in a general sense as what would be meaningful to a reasonable person in doing something.  So in an investment context materiality in a general sense means would the item be meaningful to a reasonable person in terms of making the investment.  Would it change your view on making the investment if you had knowns? I would think that if I am buying a pool of loans to securitize (or economically taking the risk of the mortgages in MBIA's case) and I need to meet certain parameters then if I set an LTV of 70% that's an important business item and reasonable people would have felt the same way.  If it wasn't, then the trigger would have been set somewhere else.  It's a fine line, because if there is a materiality trigger and the loan was 70.3% LTV, that perhaps isn't material, but if the majority of loans weren't even under the trigger, even if just a little over, then maybe that is material.

 

A missing valid notary in a loan file?  That may or may not be material.  It's more difficult than I think you are giving it credit for.  One missing item for one loan, maybe not a big deal, but if substantial numbers of loans have missing items then perhaps that's a different story (remember the rep will say "All loans have true and complete loan files.")  You might then say, well, you weren't going to review all the loan files anyway and would have still gone forward.  True.  But that's not the point.  You took this risk on.  You could have phrased the rep as "All loans have substantially complete loan files", for example.  But you see where it spirals out of control, because what is that?  Another item for the judge to rule on.

 

So it doesn't matter what happened years later.  We are looking at one moment in time.  That's why BAC has a losing argument.  If things like LTVs were breached AT THE TIME, it doesn't matter what happened.  Think of it this way.  MBIA agreed to take on the risk of wrapping an MBS that they thought had a certain profile.  If the LTVs and all kinds of other things were out of whack, then they didn't get the benefit of their bargain. 

 

Does this make sense?

[wisdom]

Regarding MBIA v BAC

 

Think of what happens when you purchase insurance -

1) Would your insurance provider cover your loss if you misrepresented facts on your insurance application?

2) What are the precedents/standards in the insurance industry?

3) Does an insurance company verify all facts when taking any risk on or do they rely on your statements?

4) Did MBIA and BAC have a similar relationship?