NEW YORK ( TheStreet) -- MBIA ( MBI) shares lost more than 19% Tuesday as investors decided Bank of America ( BAC) gained the upper hand in a complex legal battle between the two companies, but it's too early to write off MBIA just yet. MBIA wants to tear up contracts it wrote agreeing to insure some $6 billion worth of mortgage bonds Bank of America's Countrywide unit sold in the years leading up to the 2008 subprime mortgage crisis. MBIA argued the bonds didn't live up to the terms of the insurance contract because the mortgages weren't what Countrywide claimed they were at the time MBIA agreed to insure them. Bank of America has countered MBIA by challenging its move to split off its municipal insurance unit from the entity that insured MBS. Analysts have been expecting Bank of America to pay some $2 billion to settle the case in exchange for dropping its lawsuit challenging MBIA's separation. MBIA claims Bank of America has been trying to run out the clock on the insurer, which has just $386 million in cash in its structured products unit--where the obligation to Bank of America lies. If that business runs out of cash, it won't be able to continue its challenge to Bank of America's mortgages. Last week, MBIA asked its bondholders to agree to amend their bonds to prevent a potential acceleration of debt obligations from the parent company should insurance regulators deem it necessary. Perhaps sensing some admission of weakness by MBIA in its preparation for such an outcome, investors sold MBIA shares following MBIA's request to its bondholders. In the three days following MBIA's request to amend the bonds, shares fell 8.6%. That steady selloff turned into a rout on Tuesday, after Bank of America announced an offer to buy the MBIA bonds at a 22% premium to where they were trading ahead of the offer, according to Bloomberg. Assuming Bank of America convinces a majority of the bondholders to accept its offer, the bank would succeed in blocking MBIA's bid to protect itself against the potential acceleration of debt obligations by the parent.
But such an event would hardly mean MBIA is out of bullets, says BTIG analyst Mark Palmer, who has a buy rating on MBIA and believes the selloff was unwarranted. He (along with credit ratings agency Standard & Poor's) continues to believe MBIA's structured products unit has sufficient liquidity to last well into 2013, which should be enough time to force a settlement with Bank of America. In fact, while the selloff in MBIA shares speaks to the market perception of MBIA's vulnerability, Palmer argues Bank of America's offer to buy the bonds at a premium shows it is actually the bank that is the vulnerable party. "It says something about the strength of MBIA's position that Bank of America is willing to shell out $100 million more than the bonds are worth," to block MBIA from amending its bonds, Palmer said. -- Written by Dan Freed in New York. Follow @dan_freed