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Bank of America Appeal Will Fail, So Buy MBIA: Analyst (Update 2)

Bank of America story updated with quote from MBIA spokesman.

NEW YORK ( TheStreet) -- Bank of America (BAC - Get Report)'s appeal of a recent ruling in litigation with monoline bond insurer MBIA (MBI - Get Report) is likely to fail, suggesting a buying opportunity in MBIA shares, according to an analyst report Thursday.

MBIA has accused Bank of America's Countrywide home loan unit of fraud and breach of contract related to 15 mortgage securities. On Jan. 3, New York State Supreme Court Justice Eileen Bransten ruled MBIA does not need to prove claims payments it has made on the securities were a direct result of the alleged misrepresentations. Judge Bransten also ruled the insurer can seek damages against Bank of America if it can prove it there were misrepresentations by the bank and that MBIA would not have written the insurance if the misrepresentations had not been made.

Bank of America appealed aspects of the ruling on Wednesday. The bank also appealed a similar ruling by Judge Bransten in a related case pitting Countrywide against another monoline bond insurer Syncora Holdings (SYCRF.PK).

"Although many aspects of the court's decisions were favorable to Countrywide, we believe that the court erred when it determined that MBIA and Syncora may be entitled to recover 'rescissory damages,' a remedy that is not recognized in the state of New York," said Bank of America spokesman Lawrence Grayson, summarizing the bank's appeals.

Rescissory damages are the losses to the bond insurers resulting from the insurance they extended, since Judge Bransten ruled that simply voiding the insurance would be "impractical."

Not surprisingly, MBIA spokesman Kevin Brown argues such damages should be allowed.

"The Court's opinion is well reasoned, consistent with New York law, and we are confident it will be upheld on appeal," he said. A Syncora spokesman did not respond to a request for comment.

Bank of America's filing for an appeal "was not unexpected, and there is really no downside for the bank to do so," BTIG analyst Mark Palmer writes in a note published Thursday, adding that it "represents option value" to the bank "and also would provide it with incremental leverage in a negotiation over the amount of a settlement with the bond insurer."
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