Bank of America story updated with quote from MBIA spokesman.NEW YORK ( TheStreet) -- Bank of America ( BAC)'s appeal of a recent ruling in litigation with monoline bond insurer MBIA ( MBI) 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.
Still, Palmer goes on to argue that "MBIA possesses the leverage that comes with its possession of the damning details about Countrywide's breaches of representations and warranties that have undoubtedly emerged during the discovery process." He further contends that Bank of America's "strategy regarding mortgage put-backs would be severely undermined if those details were released during a trial," adding "that card trumps any near-term leverage that
Bank of America can create with an appeal that we believe it is likely to lose anyway." "Mortgage put-backs" refers to bonds backed by mortgages that Bank of America sold, but which are now being challenged by the bondholders, who argue that the mortgages were fraudulent or in some way did not meet the criteria originally promised. Repurchasing those bonds is likely to cost Bank of America some $40 billion, according to a Jan. 5 report from Citigroup analyst Keith Horowitz. Palmer believes Bank of America "ultimately will settle with MBIA in order to avoid the damaging revelations that would come out in a trial and supercharge the efforts of other mortgage put-back plaintiffs (the state attorneys general, AIG ( AIG), the German Landesbanks, etc.) to receive large recoveries." Bank of America shares opened higher on Thursday, dipped into negative territory mid-morning and were flat at $7.35 in afternoon trading. MBIA shares were off by 2.18% to $12.09 in afternoon trades. Palmer, who covers MBIA argued in his note that investors should "view any weakness in the stock today as a buying opportunity." -- Written by Dan Freed in New York. Follow this writer on Twitter.