Summary
- New York Court of Appeals found in favor of Ambac in decade-long legal struggle against Bank of America.
- Ambac stock jumped at the news of the ruling.
- Analysts expect continued upward trend for Ambac, either from winning in court or a settlement from BoA.
The key concept in negotiation is finding the Zone of Possible Agreement (or ZOPA) – the gap between what is acceptable for either counterparty to sacrifice in order to get what they want. In a salary negotiation, you may want your boss to pay you $2.5 million per year while your boss would rather you work for free. Reality is usually somewhere in the middle.
But if one party decides to reject reality, the other side has to choose if they walk away from the negotiation or get aggressive to leverage their counterparty into the ZOPA. And to resolve one of the worst lingering grievances from the financial crisis, Little Engine That Could bond guarantor Ambac may have just succeeded with the latter.
Between 2004 and 2006, Countrywide Financial lured Ambac to insure more than 375,000 individual mortgages. One of Countrywide’s dirty tricks was defrauding bond insurers who supplied the financial safety net for risky mortgages, and Ambac got stuck with claims of more than $600 million on $1.68 billion of securities. When Countrywide was acquired by Bank of America in 2008, it inherited those claims but decided it didn’t want to pay the debts.
So, BoA has spent the last decade tying Ambac up in court. BoA’s leaders have been banking (pardon the pun) on the idea that if they made life difficult enough for Ambac, they would just walk away from the negotiating table. The ploy didn’t work. Because this month the New York state’s court of appeals issued a ruling that preserves Ambac’s claims of breach of contract and fraudulent inducement against Countrywide/Bank of America. This is a follow-up from another favorable ruling Ambac won that I wrote about in January.
Moreover, the ruling cuts the primary-liability claims against Countrywide from the contingent secondary-liability claims against BoA. Previously, all claims would have been addressed at the same trial. But now, Ambac can take CW to court on the primary-liability claims and then proceed to trial against BoA, which revolves around whether BAC is jointly liable for judgements against CW. The ruling also eliminated a jury trial in favor of a bench trial for the any claims against Bank of America once the Countrywide claims are settled.
MKM analyst Harry Fong called the decisions “a major appellate court win,” noted that Ambac now had “much more leverage in any negotiated settlement over its R&W (representations & warranties) lawsuit.” The market reacted well too: Ambac’s stock went up 2.6 percent the day of the ruling – and if you’re a gambler, expect that to go up even higher once BoA coughs up the dough.
BTIG predicts the stock will crest upwards to $26/share, after hovering in the $19 to $20 range. BTIG analysts wrote that this was a “positive development” and expects the court to schedule a trial. BoA could request permission to appeal, and cause further delays, but the odds of that are increasingly unlikely. “We continue to believe a settlement is the most likely outcome,” they concluded.
