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

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  2. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
  3. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  4. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  5. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  6. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  7. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  8. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  9. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  10. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center