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BofA outlook gains visibility with MBIA settlement

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Bank of America and MBIA, the bond insurer, have finally buried the hatchet. The two had been locked in a complex legal battle, each with their own crisis-era grievances against the other. On Monday, it was all resolved with BofA agreeing to pay MBIA $1.7-billion (U.S.). Both will benefit.

MBIA shares rose 45 per cent to $14. The deal saves its structured finance unit from a takeover by its regulator. MBIA had sold credit default protection to BofA on mortgage debt and losses on those bonds could have overwhelmed the MBIA unit. But it's a net settlement, reflecting those payments.

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And, the deal unlocks value at MBIA's municipal bond insurer – its former core business and best shot at a future. The cash portion ($1.6-billion) will enable the repayment of an intercompany loan made by the muni business to MBIA's structured finance business, which houses mortgage exposure. After that, the muni insurer has a standalone book value of $25 a share.

BofA, in turn, was being sued by MBIA for reimbursement on soured home loans arranged by Countrywide that were bundled into bonds that MBIA also insured.

Speculation was rife that the outcome of this dispute might threaten a separate $8.5-billion settlement BofA has with investors. Monday's deal alleviates this risk. Questions about whether that settlement would stick have been fodder for BofA bears. If it were to fall apart, the bank could be forced into loan repurchases in excess of its reserves. BofA shares rallied 5 per cent. However, a state judge still has to approve the $8.5-billion settlement in a hearing set to begin in late May.

While the MBIA deal is an important step, BofA bears are unlikely to quit until the bigger settlement is definitively resolved. MBIA, for its part, is a step closer to selling muni insurance again – if there are any buyers left out there.

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