After the market closed Friday, MBIA and the Royal Bank of Scotland filed a stipulation in New York State Supreme Court disclosing that RBS has dropped out of the bank group challenging the bond insurer's $5 billion 2009 restructuring. RBS's withdrawal from the litigation, following Wells Fargo's withdrawal earlier this month, brings the total number of banks in the litigation against MBIA down to seven, from the 18 that began the case.

Like all of the other banks that have dropped out of two parallel proceedings against MBIA, RBS didn't say it had reached a settlement with MBIA, but MBIA's CEO, Jay Brown, and other execs have previously referred to settlements in conference calls with analysts. It's not much of leap to infer a deal in which MBIA agreed to pay RBS some amount of money in exchange for RBS walking away from both the litigation and from MBIA insurance policies on RBS securities. (When a policyholder agrees to drop insurance coverage, it's known as a commutation.) On Monday, one MBIA analyst looked back at the bond insurers' third-quarter conference call, in which Brown disclosed that since Sept. 30, MBIA has reached commutation deals on $10.6 billion in commercial real-estate exposure. The analyst, Ticonderoga Securities, postulated that RBS and Wells Fargo policies were a big part of that $10.6 billion.

The commercial real-estate commutations, as Brown and MBIA CFO Chuck Chaplin told analysts on the third-quarter call, have reduced the bond insurer's exposure to "potentially volatile liabilities." There's also an argument that they've strengthened MBIA's position in its litigation against the bank coalition.

Here's why. The remaining banks are pursuing two parallel cases. One is a regulatory action asserting that the New York Insurance Commissioner did not adequately investigate MBIA's proposed restructuring -- in which the insurer segregated its liability for risky mortgage-backed securities from its more stable municipal bond business -- before approving the split. The other is a fraud suit against MBIA, claiming that the restructuring was a fraudulent conveyance because the MBS branch of the business doesn't have enough money to cover its liabilities. Both cases technically depend on MBIA's finances leading up to and at the moment of the restructuring. But as I've explained, a key element of MBIA's defense has been the argument that the insurer's actions since the restructuring are the best evidence that its restructuring was legitimate. To counter the bank group's cries of insolvency, MBIA argues that it hasn't missed a single payment on an MBS policy.

So removing billions of dollars in exposure to RBS and Wells Fargo could bolster MBIA's assertion that its MBS spin-off is a solvent business. Moreover, the more deals MBIA makes to resolve volatile commercial real-estate exposure, the better sense it has of its liability to the remaining banks in the litigation. Every settlement, in other words, makes the next commutation deal easier.

On the other hand -- and in the very complex interplay between MBIA and the banks that issued mortgage-backed securities there is always another hand -- MBIA's liquidity has declined, partly as a result of the payouts the insurer has made in commutation settlements. According to MBIA's third-quarter conference call, the insurer had only $824 million in highly liquid assets as of Sept. 30, down from $1.1 billion at the end of the second quarter. And that $824 million doesn't reflect the most recent settlements with Wells Fargo and RBS. The banks could well argue that MBIA is running out of money, as they've said all along that it would.

The remaining seven coalition members are a hard core of banks claiming billions in potential MBIA liability, including UBS, Societe Generale, Morgan Stanley, and Bank of America. Robert Giuffra Jr. of Sullivan & Cromwell, who is lead counsel to the bank group, told me Monday that RBS's withdrawal won't soften the resolve of the rest of the group. "The remaining banks are fully committed to pursuing the litigation and undoing MBIA's massive fraudulent conveyance," he said.

But two of the banks in Giuffra's group -- BofA and Morgan Stanley -- may have good reason to start thinking seriously about a deal with MBIA. They're both defendants in suits in which the insurer claims it was duped into writing MBS policies. And as I've reported (often), MBIA's case against BofA and Countrywide is on the verge of rulings that could devastate defenses for MBS issuers in general and BofA in particular.

Wouldn't it be something if they all laid down their swords?

(Reporting by Alison Frankel)