Morgan Stanley's MBIA exposure would have accounted for as much as 15 percent of the firm's risk-weighted assets under Basel III, and the risk may have lasted for more than 10 years, Howard Chen, a Credit Suisse Group AG analyst, wrote in a note to investors.
Buyback Speculation
The deal increases the likelihood that Morgan Stanley will buy back shares or increase the dividend next year, according to Ed Najarian, an analyst at International Strategy & Investment Group Inc. Morgan Stanley has authorization for $1.6 billion of share repurchases. The firm hasn't bought back any stock in the first nine months of this year, and would need regulatory approval to do so.
Bank of America Corp., the second-biggest U.S. lender by assets, made a preliminary offer to MBIA earlier this year aimed at settling their legal dispute tied to defective mortgages, two people briefed on discussions said in July. The companies were split on how much the Charlotte, North Carolina-based bank would have to pay to resolve the disagreement.
About two dozen banks and investment firms sued MBIA and regulators after the 2009 split of its main bond-insurance unit into two businesses. The division created a new company holding the state and municipal-bond guarantee business the insurer seeks to maintain, and left the old unit holding soured mortgage-backed debt that caused them to be shut out of the market. Lenders claimed the restructuring was a "fraudulent conveyance" that rendered the old insurer, MBIA Insurance Corp., insolvent.
Ending Lawsuits
Units of Wells Fargo & Co., Credit Agricole SA, KBC Groep NV, HSBC Holdings Plc, and Royal Bank of Scotland Group Plc have pulled out of the suits in the past four months, according to court papers. Funds run by New York-based Fir Tree Partners dropped out of a similar lawsuit by hedge funds and Third Avenue Trust, also based in New York, ended a separate case in October. Five of 18 banks that sued MBIA and the New York State Insurance Department including UBS AG, BNP Paribas SA, and Bank of America are still fighting the split.
"The remaining plaintiff policyholders will continue to fight to restore the billions fraudulently taken from MBIA Insurance," Robert J. Giuffra, lead counsel for the banks and a partner at Sullivan & Cromwell LLP in New York, said in a separate statement.
Settlements
Banks have discontinued litigation as MBIA negotiates settlements over the credit-default swaps it sold to the lenders to protect against losses on mortgage securities and other debt. MBIA said Nov. 10 that it had settled $10.6 billion of transactions since Sept. 30 at an undisclosed cost, bringing the amount of bets terminated this year to $23 billion.
The cost to protect against a default by the MBIA unit that sold the guarantees fell. Credit-default swaps eased 8 percentage points to a mid-price of 35 percent upfront as of 9:37 a.m. in New York, according to broker Phoenix Partners Group. That's in addition to 5 percent a year, meaning it would cost $3.5 million initially and $500,000 annually to protect $10 million of MBIA's debt.