Bank of America (BAC) has agreed to pay the bond insurer MBIA $1.6 billion to settle a five-year-old dispute over losses related to soured mortgage-backed securities.
In addition to the cash payment, the agreement stipulates that BofA will provide the bond insurer a credit line of $500 million and that MBIA will offer BofA warrants to purchase a 4.9% stake in MBIA's holding company, BofA said Monday. The warrants will give BofA the option to purchase shares at $9.59 a share, a 33% discount to MBIA's Monday closing price.
BofA will also close out the open transactions between the two companies, by remitting to MBIA the debt it acquired through a December 2012 offering, terminating all the credit-default swaps it purchased on commercial mortgage-backed securities and closing out other positions with the insurer.
The settlement must be approved by the New York State Department of Financial Services, BofA said. New York Financial Services Superintendent Benjamin Lawsky called the proposed settlement "a very positive step forward" for both companies and a positive outcome for the financial system.
"It resolves significant exposure and expensive litigation for Bank of America, while also giving MBIA a path forward," Lawsky said in a statement Monday.
The announcement comes less than a week after New York State Supreme Court Justice Eileen Bransten denied both companies a motion for summary judgment on the question of whether B of A is liable for the $4.5 billion of mortgage-backed securities made by Countrywide Financial. B of A acquired Countrywide in 2008.
MBIA filed the lawsuit in September 2008, claiming Countrywide fraudulently induced it to insure the securitizations by misrepresenting the underlying loans.
B of A's shares were up more than 5%, to $12.88, on Monday afternoon following the news of the settlement. MBIA's shares rose 45%, to $14.29.
BofA will record a $1.6 billion charge in the first quarter of 2013, $1.3 billion of which will be related to this settlement and the remainder to other businesses, it said. The charge reduces its first-quarter earnings to $1.5 billion from the $2.6 billion it announced last month. The settlement will increase its Tier 1 ratio by 10 basis points, to 9.52%, due to the termination of the credit-default swaps.
MBIA has sued more than a dozen banks over losses it suffered during the financial crisis. Last week, it agreed to a $110 million settlement with Flagstar Bancorp (FBC) in Troy, Mich., over allegations that the bank misrepresented mortgages packaged into securities that MBIA insured.
MBIA did not immediately respond to a request for comment.