) --


(MBI) - Get Report

shares were up some 11% late Wednesday morning, apparently on investor optimism the bond insurer may be gaining the upper hand in a complex legal battle with

Bank of America

(BAC) - Get Report


MBIA wants Bank of America to assume responsibility for $6 billion worth of mortgage backed securities that MBIA insured. MBIA claims the mortgages, underwritten by Bank of America's Countrywide Financial unit, don't live up to representations made at the time they were chopped up into bonds and sold to investors. Bank of America, meanwhile, is challenging efforts by MBIA to change its corporate structure to prevent losses at MBIA Insurance, which insured the bonds, from affecting its healthier municipal bond insurance unit.

In the latest skirmish between the two companies, MBIA wants to amend the terms of certain of its bond issues in order to prevent a potential default by one of its subsidiaries, MBIA Insurance Corp., from triggering a "cross default," which would accelerate payments due on other obligations.

The deadline for holders of those bonds to agree to the amendment is 5 pm Eastern time on Wednesday.

Bank of America, on the other hand, is trying to block MBIA from amending the bonds, so it can turn up the heat on the cash-strapped insurer in the legal battle.

Bank of America has offered to pay 100 cents on the dollar for $329 million worth of MBIA bonds that pay a 5.7% coupon and mature in 2034. However, the bonds were quoted at just 80.5 cents on the dollar early Wednesday, suggesting bondholders may reject the Bank of America offer. On Thursday, following Bank of America's offer to buy the bonds, they traded at 87.5 cents.

One motive a bondholder might have to reject the offer would be to profit on MBIA stock, which would likely rally sharply if Bank of America's offer to buy the bonds fails. In a research note published Nov. 16, BTIG analyst Mark Palmer suggested investors could short the MBIA bonds and buy the stock (or a call option on it), and then agree to MBIA's amendment instead accepting the Bank of America offer.

"The trade would have to be structured such that the upside associated with the equity/call option would outweigh the net impact of the bond side of the trade," Palmer wrote.

Further trouble for Bank of America came on Wednesday with the

publication online

of 15500 pages of court documents from litigation between Bank of America and MBIA. MBIA and

Bloomberg News

have been trying to get the court to release still more documents, and a hearing on that question will take place Nov. 29.

The release of the documents may create larger headaches for Bank of America, since they could potentially be used by other plaintiffs making similar claims over problem mortgages sold by Countrywide.

At the very least, the documents may be an embarrassment for Bank of America. At one point during court testimony, a Bank of America executive who fears he may come across as not answering questions directly says "I don't mean to sound like Bill Clinton".

In a separate document, a different Bank of America executive concedes the bank is "famous...not in a good way."

Palmer and other analysts believe Bank of America will ultimately settle the case. Analysts have estimated a settlement will cost Bank of America roughly $2-3.5 billion, though they have been surprised by Bank of America's tenacity in fighting MBIA.

MKM Partners analyst Harry Fong, who like BTIG's Palmer recommends MBIA shares, believes Bank of America is fighting so hard because a settlement acceptable to MBIA might "set a bad precedent" for a

proposed $8.5 billion settlement

between Bank of America and several large institutional investors that is tied up in litigation.

Of the legal battle between MBIA and Bank of America, Fong writes, "We could easily paint a picture that shows this case, if it goes all the way to trial, will not reach a final conclusion until the end of 2014 or 2015."

A Bank of America spokesman did not respond to questions. An MBIA spokesman declined to comment.


Written by Dan Freed in New York


Follow @dan_freed

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