Matt Taibbi has been having great fun with the depositions in the MBIA suit against Countrywide/Bank of America. Banksters don’t normally like to look like idiots, but considering the alternative, shysters, they perhaps calculated that idiot was preferable. Or maybe they didn’t consider who their adversary is, MBIA’s Jay Brown. In my long ago and limited professional encounters with Mr. Brown, there was no denying that he was wicked smart.
That assessment does beg the question of how MBIA managed to get snookered by the banksters. On the other hand, the retired Mr. Brown returned to MBIA when it and other bond insurers such as AMBAC were going down in the initial stages of the financial meltdown and so far has kept it out of the bankruptcy courts. Based on the forgoing, it was tempting to project that the banksters are at a disadvantage. What gave me pause was MBIA’s claim: that Countrywide misrepresented its mortgage underwriting standards. It’s an odd claim for a surety bond insurer – particularly when the surety bond is a financial guarantee. That suggested to many that prevailing against BAC was a long-shot for MBIA. Until yesterday. As reported by Reuters, a court ruled in favor of Assured Guaranty Ltd against Flagstar Bankcorp.
Flagstar Bancorp Inc was ordered on Tuesday to pay $90.1 million to bond insurer Assured Guaranty Ltd in a contract dispute over loans underlying $900 million in mortgage-backed securities.
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Yves Smith’s reaction to the ruling begins with:
Wow, one of my big assumptions about mortgage putback cases has been turned on its ear, much to the detriment of Bank of America and JP Morgan. If you thought there were pitched legal battles on this front, a key ruling by Judge Jed Rakoff means you ain’t seen nothing yet.
She explains that this and other similar suits are “representation and warranty cases” or “put-back cases” and that bond insurers have “better put-back rights” than investors. Then she concedes:
The assumption among many who’ve looked at these suits is that they might not be worth all that much in the end. In past putback litigation threats (which until the crisis were settled after some initial rounds of jousting) was that it would be too costly for the plaintiff to make his case.
Why would so many have dismissed the robustness of standard representation and warranty clauses made to surety bond insurance companies? Have to disagree with Ms. Smith that “it would be too costly for the plaintiff to make the case.” The plaintiff’s in such cases are insurance companies and most of them are very large and well heeled enough to pursue such actions. The problem is that it’s rare (unprecedented?) for the “put-back” to come into play before the party that made the rep and warranty was bankrupt. For example, Enron’s surety bond companies paid out over half a billion dollars, but there was nothing to be recovered from Enron.
Two key elements make the rep and warranty robust. The onus is on the guarantor to 1) report any material adverse change/development to the surety bond company and 2) “cure”or fix the breach in accordance with the terms of the agreement. From the ruling in the Assured Guaranty v. Flagstar case:
The sole remedy of . . . [Assured] . . . againstFlagstar for the breach of a representation orwarranty with respect to a Mortgage Loan . . . is[Flagstar’s] obligation, subject to certain cure periods, to accept a transfer of a Mortgage Loan as towhich a breach has occurred and is continuing . . . or to substitute an Eligible Substitute Mortgage Loan[for the defective loan].
Game – Set – Match. Bravo Judge Rakoff.
Or what comes around – goes around. Some may recall that what precipitated the fall of AIG was the collateral calls by Goldman Sachs and other banksters. Those collateral calls were the “cure” remedy the banksters were legally entitled to when AIG breached its agreed to financial condition. Unfortunately for AIG and fortunately for the banksters, Casano’s little financial products operation sold credit-default swaps and not surety bond insurance.
If Bank of America’s legal team isn’t now sweating, they should be. As I said earlier, Jay Brown is wicked smart.
