Shares of bond insurer MBIA Inc (MBI.N) rose as much as 7 percent on Friday as investors bet that a new investigation into Bank of America Inc's (BAC.N) mortgage practices would pressure the bank to settle a $5 billion lawsuit with the company.
Bank of America said in securities filing on Thursday that New York State Attorney General Eric Schneiderman was investigating the bank over the purchase, securitization and underwriting of home loans by Countrywide Financial, which the bank bought in 2008.
MBIA claims that Bank of America is responsible for the writing of dodgy mortgages by Countrywide that were packaged into bonds that MBIA had insured.
MBIA was stuck with huge losses when the loans went bad and now wants the bank to buy back the mortgages.
BTIG analyst Mark Palmer said that if MBIA won its suit, the accepted facts would make it easier for the New York attorney general to make his case that Countrywide had engaged in fraud and that the bank was now responsible.
That made it more likely that Bank of America would want to reach a settlement, he said. Otherwise, it could end up losing both cases.
"If we were serving as general counsel of BAC, we would be advising CEO Brian Moynihan in no uncertain terms that ... he immediately move to settle all litigation with the bond insurer," Palmer said in a client note.
Bank of America did not immediately respond to requests for comment.
A settlement is vital for MBIA. The company said on Wednesday there was a significant risk that its structured finance insurance unit, MBIA Insurance Corp, would be put into liquidation or rehabilitation by its New York regulator if it was unable to settle its claims with the bank.
Standard and Poor's took notice and cut its financial strength rating MBIA Insurance Corp by three notches to junk status, with a negative outlook.
"Our rating action on MBIA Corp reflects our view that the company will likely come under regulatory control over the next 12 months," S&P analyst David Veno said.
MBIA's bond holders are paying sky-high rates to insure the company's debt. On Friday, it cost $1.71 million a year plus 500 basis points to cover the debt for five years.
MBIA shares were up 6 percent at $10.25 in early afternoon trading on the New York Stock Exchange on Friday.
(Reporting by Tiziana Barghini; Editing by Theodore d'Afflisio and Ted Kerr)