As part of its first quarter earnings announcement, Bank of America (NYSE: BAC) announced that it reached its first significant agreement to resolve a non-GSE claim regarding shoddy mortgages. Though it is a positive development insofar as acknowledging responsibility and helping move things back toward normal, it may still be too little too late for the mortgage insurers.

Tutorial: Investing Concepts

The Deal with Assured Guaranty
Bank of America announced that it had reached an agreement with Assured Guaranty to resolve the insurer's claims against Bank of America for saddling it with billions of non-complying mortgages. The agreement covers a total of 29 first and second-lien residential mortgage trusts with an original exposure of nearly $36 billion and a current principal at risk of just under $11 billion.

Under the agreement, Bank of America will make a $1.1 billion cash payment to Assured Guaranty and enter into a loss-sharing arrangement. This reinsurance agreement will reimburse Assured Guaranty for 80% of its losses on the 21 first-lien transactions until the collateral losses exceed $6.6 billion. All in all, that part of the agreement looks to have an expected value of about $500 million right now ... assuming things do not get dramatically worse. (For related reading, see 2010: A Year Of Banking Dangerously)

It's Not Over Yet
The terms of this deal do highlight just how easy Freddie Mac (Nasdaq: FMCC) and Fannie Mae (Nasdaq: FNMA) went on Bank of America back in January when they struck a bargain to resolve mortgage put-back disputes. (For more on this topic, see Bank Of Americas Incredible Shrinking Liability). Perhaps this should not be all that surprising; it stands to reason that corporations with shareholders to answer to would be more demanding than government entities that are still carrying out a government policy to get the banks back on their feet.

All of that being said, this mess is clearly not over yet. In fact, it was only about a week ago that Assured Guaranty sued Flagstar Bancorp (NYSE: FBC) for more than $100 million tied to breached warranties on bad mortgages.

And that's how this is going to continue to play out for the foreseeable future. Bank of America is almost certainly in discussions with other insurers like MBIA (NYSE: MBI), and it seems to make more sense to strike relatively favorable bargains like this latest deal with Assured Guaranty than to fight it out in court where the banks are likely to lose and face high legal bills in addition. (For more, see The Bright Side Of The Credit Crisis.)

Too Little Too Late?
Assured Guaranty's stock reacted well to the news of this settlement (as did MBIA's), but it is an open question as to whether these companies are worth a look for aggressive investors. Ratings agencies like S&P and Moody's are skittish and seem bent on reestablishing their credibility with some new-found toughness. That matters quite a lot because if Assured Guaranty and MBIA lose their ratings, they will basically be out of the game when it comes to writing new business and they will go into runoff.

Oh, and let's not forget the muni bond market. While the predictions of doom and gloom made a few months ago are likely highly overheated, defaults are nevertheless not out of the question. Moreover, the new issue market has been weak and that hasn't done this company any favors.

The Bottom Line
It has to be irritating to bond insurance company shareholders that so much of these companies' futures rests on the actions of rating agencies; companies that themselves have been shown to be highly flawed if not occasionally inept. Still, that is how it is. Assured Guaranty would seem to have a decent chance of making it out of this mess, but there are no guarantees and the entry of companies like Berkshire Hathaway (NYSE: BRK.A) into the market would be a definite problem.

On the other hand, the major banks seem to be slouching their way towards better balance sheets and more normalized credit. Other large banks like Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC) still have significant messes of their own to resolve, but if today's Bank of America news is any indication, things are definitely moving in that direction.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Is Now the Right Time to Buy Brazilian Stocks?

    Examine the current state of the economy of Brazil, and learn why there may be some reasons for investors to look for a rally in Brazilian stocks.
  2. Stock Analysis

    Will WYNN Continue to Rally?

    Wynn Resorts has experienced a rally recently. Will it remain a good bet?
  3. Stock Analysis

    Don't Be Fooled by the Market's Recent Rally

    The bulls won for a bit in early October, but will bears have the last laugh?
  4. Stock Analysis

    Will Twitter's Stock Find its Wings Soon?

    Twitter is an enigma to many investors, but its story is pretty straightforward.
  5. Investing Basics

    How to Think About Seasonality Trends

    Investors benefit when company research incorporates seasonality trends that predict relative strength and weakness throughout the calendar year.
  6. Stock Analysis

    8 Solid Utility Stocks for a Bear Market

    If you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
  7. Stock Analysis

    Why Phillips 66 (PSX) is a Solid Long-Term Bet

    Here's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
  8. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  9. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  10. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  1. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  2. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  3. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  4. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  5. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  6. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!