* NY attorney general investigation may push BofA settle -
* S&P cuts rating on unit MBIA Insurance Corp to junk
* Shares rise as much as 7 percent
By Jochelle Mendonca
March 1 Shares of bond insurer MBIA Inc
rose as much as 7 percent on Friday as investors bet that a new
investigation into Bank of America Inc's mortgage
practices would pressure the bank to settle a $5 billion lawsuit
with the company.
Bank of America said in securities filing on Thursday that
New York State Attorney General Eric Schneiderman was
investigating the bank over the purchase, securitization and
underwriting of home loans by Countrywide Financial, which the
bank bought in 2008.
MBIA claims that Bank of America is responsible for the
writing of dodgy mortgages by Countrywide that were packaged
into bonds that MBIA had insured.
MBIA was stuck with huge losses when the loans went bad and
now wants the bank to buy back the mortgages.
BTIG analyst Mark Palmer said that if MBIA won its suit, the
accepted facts would make it easier for the New York attorney
general to make his case that Countrywide had engaged in fraud
and that the bank was now responsible.
That made it more likely that Bank of America would want to
reach a settlement, he said. Otherwise, it could end up losing
"If we were serving as general counsel of BAC, we would be
advising CEO Brian Moynihan in no uncertain terms that ... he
immediately move to settle all litigation with the bond
insurer," Palmer said in a client note.
Bank of America did not immediately respond to requests for
A settlement is vital for MBIA. The company said on
Wednesday there was a significant risk that its structured
finance insurance unit, MBIA Insurance Corp, would be put into
liquidation or rehabilitation by its New York regulator if it
was unable to settle its claims with the bank.
Standard and Poor's took notice and cut its financial
strength rating MBIA Insurance Corp by three notches to junk
status, with a negative outlook.
"Our rating action on MBIA Corp reflects our view that the
company will likely come under regulatory control over the next
12 months," S&P analyst David Veno said.
MBIA's bond holders are paying sky-high rates to insure the
company's debt. On Friday, it cost $1.71 million a year plus 500
basis points to cover the debt for five years.
MBIA shares were up 6 percent at $10.25 in early afternoon
trading on the New York Stock Exchange on Friday.