Bank of America: Mortgage Overhang Removal Winner

NEW YORK ( TheStreet) -- Bank of America ( BAC) was the winner among the largest U.S. banks on Monday, with shares rising over 5% to close at $12.88.

There were several reports last week of major investors dropping their objections to the bank's $8.5 billion proposed settlement in June 2011 of mortgage repurchase claims related to loans originally securitized by Countrywide Financial. Bank of America acquired Countrywide in 2008. The settlement was negotiated by Bank of New York Mellon ( JPM) as trustee, but was objected to by the Federal Home Loan Bank of San Francisco, American International Group ( AIG), the attorneys general of New York and Delaware and the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae ( FNMA) and Freddie Mac ( FMCC).

JPMorgan analyst Vivek Juneja said in a note to clients late on Friday that "this removes several objectors to the settlement - few others remain, most notably AIG." Juneja noted that "the hedge fund that started the objection process, Walnut Creek (Baupost), already withdrew its objection to the deal." He added that "there has been significant overhang on Bank of America's stock because of fears about this settlement being overturned and this should reduce some of those concerns."

More mortgage overhang was removed on Monday, when Bank of America and MBIA ( MBI) announced a "comprehensive settlement" of claims against the bank by the bond insurer. The bank agreed to pay MBIA $1.6 billion in cash and an additional $137 million to "remit to MBIA all of the outstanding MBIA 5.70% Senior Notes due 2034 that Bank of America acquired through a tender offer in December 2012."

Bank of America also agreed to "terminate all of its outstanding credit default swap (CDS) protection agreements purchased from MBIA on commercial mortgage-backed securities (CMBS), as well as terminate certain other trades in order to close out positions between the companies."

Bank of America said that as a result of the settlement, its 10-Q report for the first quarter will show lower first-quarter earnings than the company reported on April 17. First-quarter earnings will be lowered by $1.5 billion after tax, or 10 cents a share.

The bank also provided MBIA with a $500 million secured credit line. In return, MBIA agreed to issue warrants allowing Bank of America to purchase 9.94 million MBIA shares for $9.59 a share, which can be exercised at any time through May 2018. The warrants enable Bank of America to acquire up to 4.9% of MBIA's common shares.

The settlement is subject to the approval of the New York State Department of Financial Services, which the companies said was "expected to be received shortly."

"We are very pleased to have reached a comprehensive settlement agreement with Bank of America that improves the outlook for MBIA Insurance Corp. and sets the stage for MBIA subsidiary National Public Finance Guarantee Corp. to reclaim its leadership position in the U.S. public finance insurance market," said MBIA CEO Jay Brown ion his firm's press release.

"I appreciate Bank of America's efforts to arrive at a fair agreement that resolves a number of legacy issues for both institutions as well as the assistance provided by Superintendent Lawsky and the New York State Department of Financial Services," Brown said.

Investors are counting on the Bank of America deal to end MIBA's liquidity problems. The bond insurer's shares spiked 45% on Monday, to close at $14.29. This puts Bank of America "in the money" on its warrants, by $4.70 per MBIA share, or approximately $46.7 million.

Rafferty Capital Markets analyst Richard Bove said in an email that "the outlines of the settlement are significantly better than I expected. It had been my assumption that this lawsuit would cost Bank of America 2 billion dollars. It is considerably less than that".

Pressure on James Dimon

It has been widely reported that in the wake of last year's "London Whale" trading debacle and loss in its Chief Investment Office (CIO) of at least $6.2 billion, that bank regulators, including the Office of the Comptroller of the Currency and the Federal Reserve, have expressed distrust in the management team of JPMorgan Chase ( JPM).

At JPMorgan's annual meeting on May 21, investors will vote on whether or not to separate the bank's chairman and CEO roles. This move is supported by ISS Proxy Advisory Services, which last Wednesday said it was "supporting the shareholder proposal requesting an independent chair given the governance failure in connection with the CIO incident, the size and complexity of JPM's business, and the continued challenges faced by the company."

Rafferty Capital Markets analyst Richard Bove on Monday made a strong case for allowing Dimon to keep both the CEO and chairman titles. Bove wrote in a note to clients that "Jamie Dimon joined the executive team of JPMorgan Chase in 2005. In that year, JPMorgan earned $8.5 billion. In 2012, the company earned $21.7 billion. The pretax, pre-provision results per share went from $4.41 to $8.62 or a gain of 95.5%." Bove added that "from the end of 2005 to last Friday, the stock price has risen by 19.9%. In this same period the Keefe Bruyette banking Index has fallen by 39.5%. JPMorgan has outperformed its peers by approximately 60% over this timeframe."

JPMorgan's shares were up over 1% to close at $48.19. The bank on Monday was included among TheStreet's 10 Cheapest Bank Stocks to Forward Earnings.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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