NEW YORK ( TheStreet) -- Bank of America ( BAC), Citigroup ( C), JPMorgan ( JPM) and other U.S. banks face claims of $10 billion from bond insurers, which allege misrepresentation and fraud.
Bond insurers including Ambac Financial Group ( ABK), Assured Guarantee ( AGO) and MBIA ( MBI) anticipate recovering more than twice as much as they did in 2008, when the financial crisis triggered insurance payments to units of the largest commercial and investment banks, which received bailouts from the government. Insurers recovered $4.2 billion in 2008. Ambac is pushing to get $2.6 billion, $1.9 billion of which stems from residential mortgage-backed securities, or RMBS, according to filings. Assured Guarantee reported $994.5 million, and MBIA $3 billion, including $1.9 billion related to RMBS, the companies said in recently released 2009 financial statements. As the credit crunch shook the financial system in mid-2008, bond insurers Ambac and MBIA paid billions of dollars to banks that had bought policies. Soon after, they suffered downgrades by credit-rating agencies, worsening the pain. Bond insurers typically operate on a pay-on-demand basis, leading to disputes over eligibility of payouts lasting long after the payments have been made. The mortgage crisis and downgrades kept Ambac and MBIA from selling policies, leading them to the brink of bankruptcy. Ambac is still struggling to ensure it has sufficient money to operate, though it has enough to satisfy insurance regulators. MBIA is in a slightly better position. Cash from the banks would provide a victory and a much-needed lifeline for the insurers. The bond insurers have alleged that underwriting policies were deliberately ignored or changed. In addition, they say existing delinquent accounts or those whose collateral value was overstated are common. The banks disagree, saying insurers knew the situation. However, motions to dismiss the suits have been met with little success. Bond insurers say they have strong cases against the banks. For now, they're focusing on well-capitalized big banks to recover cash. The insurers have completed reviews of the underlying loans and collateral they had insured, concluding that many of the transactions never met agreed-upon standards. Still, bond insurers' auditors, as with MBIA, caution that "the uncertainty inherent in the estimation of the financial effects of this matter is substantial." In other words, the insurers may get a lot less than they're hoping for.