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MBIA Bulls Differ on Bank of America Life or Death Deal

In Monday's note, Fong argued Bank of America will wait until it has concluded a separate but related $8.5 billion settlement reached with several large financial institutions, including Goldman Sachs (GS), Blackrock (BLK), PIMCOand the Federal Reserve Bank of New York over so-called "private label" mortgage securities. That settlement has been challenged by several parties, including the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, the Federal Deposit Insurance Corporation and New York state Attorney General Eric Schneiderman.

"We now believe Bank of America cannot pay MBIA an amount MBIA would deem fair while settling with the private label investors for just pennies on the dollar," Fong wrote Monday.

Fong nonetheless continues to recommend MBIA shares with an $18 12-month price target, though he does not address liquidity concerns in Monday's note. The shares were down 3.52% to $8.77 in afternoon trading Monday after a big run-up Friday.

While Fong was arguing Monday a settlement is likely to take a while, BTIG's Palmer reiterated his opposing view in a separate note published the same day.

In his note, Palmer contended Bank of America "really enters the danger zone," when New York State Supreme Court Judge Eileen Bransten finishes hearing oral arguments related to the question of whether Bank of America is to be held responsible for the actions of Countrywide prior to its acquisition of the lender in 2008.

Once those arguments--scheduled to occur Wednesday and Thursday--have concluded, "any day that Bank of America CEO Brian Moynihan walks into his office could be the one in which he is met with a headline about a precedent-setting summary judgment ruling on successor liability against the bank, after which he would face the unenviable task of explaining to the bank's Board of Directors and shareholders why he had allowed matters to advance so far," Palmer wrote. He concluded his note by arguing that, "for Moynihan and Bank of America , 'the end of the day' may finally have arrived."

That said, Palmer does not believe MBIA's liquidity position is as dire as some of the numbers may suggest.

"MBIA has been very creative in the past with tapping its resources," the analyst told me via email several days ago. He pointed to a two-part intercompany loan from the municipal bond subsidiary to the subprime mortgage unit as the prime example of such creativity, which, he argued, "exceeded the imagination of most observers."

An MBIA spokesman declined to comment on the timing of a settlement, or on the wide discrepancy between Fong and Palmer in their view of when a deal is likely.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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