Legal

The folks who follow every development in the mega-billions poker match between Bank of America and the bond insurer MBIA have this week been buzzing even more loudly than usual about the prospect of a global deal. Tuesday's settlement between MBIA and Morgan Stanley leaves BofA as the most important remaining member of the dwindling bank group challenging MBIA's 2009 restructuring. There's a de facto deadline of Dec. 30 for settlements in that case, since that's the day New York's top financial regulator, Benjamin Lawsky of the Department of Financial Services, has to file a key response to the banks' allegations. Both Lawsky and MBIA execs have been very clear: They want resolution. So the pressure is on BofA to make a deal.

Moreover, MBIA really needs a global settlement with BofA, in which the bank not only drops out of the restructuring case but also ponies up to resolve the bond insurer's mortgage-backed securities claims. MBIA filed an 8K with the Securities and Exchange Commission Thursday, disclosing the good news that its commutation deals have wiped out $20 billion in exposure, including more than $10 billion its has eliminated just in the fourth quarter of 2011. The bad news in the filing, however, is that MBIA's payments to banks have exceeded its statutory loss reserves by $500 million, and the insurer may not have enough liquidity to reach more settlements. Remember, MBIA has already booked a $2.8 billion anticipated recovery on MBS put-back claims. Clearly, the bond insurer is counting on getting some big money from BofA on the MBS side.

The wild card in this poker game is loss causation and MBS liability for BofA (and other issuers). You'll recall that in early October, New York State Supreme Court Justice Eileen Bransten heard arguments on a summary judgment motion by MBIA in its case against Countrywide. MBIA asked the judge to rule on the issue that will determine the magnitude of bank exposure to MBS claims by bond insurers: Are the banks liable for misrepresenting the underwriting on loans in underlying mortgage pools starting from the day they signed deals with monoline insurers? Or can the banks cite the economic crisis -- and not their own deficient underwriting -- as the reason so many mortgage loans have gone bad? Bransten's reasoning on loss causation could swing billions, or even tens of billions, of dollars of liability between the banks and the monolines.

Banks, bond insurers, and MBS investors have been waiting anxiously for the judge's loss causation ruling since that October hearing. But Friday is Bransten's last day in chambers before she leaves for a vacation that will keep her out of court until after New Year's. So with BofA and MBIA looking at a December 30 deadline for settlement in the restructuring case, is there a chance that a global deal will moot Bransten's loss causation ruling in the MBS case?

Never fear, MBS players. Even if MBIA and BofA settle, Bransten still has to rule, thanks to Syncora. MBIA's case against Countrywide gets all the ink, but the much-smaller bond insurer Syncora also has an MBS case against Countrywide -- and has also moved for summary judgment on the loss causation issue. Syncora counsel Donald Hawthorne of Debevoise & Plimpton argued for an expansive interpretation of bank liability at the October hearing before Bransten, alongside MBIA counsel Philippe Selendy of Quinn Emanuel Urquhart & Sullivan.

Unless BofA also reaches a deal with Syncora, come January it and other MBS issuers are going to have to face the consequences of a crucial ruling from a judge who has so far sided against the bank at just about every turn.

A BofA spokesman declined comment.

(Reporting by Alison Frankel)

(A previous version of this story stated that Peter Calamari of Quinn Emanuel argued loss causation. It was Philippe Selendy.)