Many commentators have questioned why the MBIA (MBI) v Bank of American (BAC) mortgaged-backed securities (MBS) litigation has not been settled by now. This litigation consists of MBI's fraud and breach of representation and warranty (R/W) suit against BAC in connection with MBI's issuance of insurance guarantying timely payment of the mbs interest and principal, and BAC's suit against MBI and the New York State Department of Financial Services challenging the transformation of MBI, creating separate securitization and municipal finance guaranty subsidiaries.
Absent any examples of what the parties agreed to in nearly identical situations, as discussed below, one would anticipate that settlement negotiations of the fraud suit would likely involve offers and counteroffers in the range of approximately $1-5 billion, and settlement negotiations of the transformation suit and commutation of insurance wrapping BAC's commercial mbs would likely involve offers and counteroffers of approximately $.5-$2.5 billion. Big dollar amounts and big ranges. At first blush, difficult to settle.
Yet, BAC seems to be worsening its legal position, and hence its negotiating position, as the litigation continues. BAC has lost important rulings regarding whether, among other things, MBI must prove that BAC's R/W breaches caused the loans MBI insured to go into default, or whether these breaches merely adversely affected MBI's interest in insuring the mortgage pools, and whether MBI must identify each loan that breached BAC's R/Ws, or whether MBI can prove BAC's breaches and MBI's damages by resorting to a statistically significant sampling of all loans. On the horizon stands an important argument regarding parent BAC's successor liability for Countrywide's primary liability, another issue that BAC surely does not want to lose.
Moreover, as this litigation now stands in the shadow of an anticipated New York Attorney General (NYAG) template suit against BAC for all investor losses and for the integrity of the securities marketplace, all litigation losses BAC incurs are magnified by the ability of the NYAG to bring its much larger suit and use these BAC losses as proof of the NYAG's allegations and theories of the case by means of offensive collateral estoppel.
Given that there are such significant benefits for BAC to settle with MBI, isn't the absence of a settlement to date simply an example of the difficulty of settling such a large-scale, big money litigation? Aren't the barriers to reaching a negotiated settlement of this complex situation so high as to make litigation the only practical conflict resolution medium?
The answer is absolutely no! Indeed, these two interrelated actions between MBI and BAC share a huge advantage with respect to the likelihood of achieving settlement, as compared to the typical settlement negotiation that, from a mediator's perspective, make the BAC and MBI actions not only not difficult to settle, but particularly susceptible of settlement! To understand why, continue reading following the jump.
Among other things, I serve as a mediator for commercial disputes in the Commercial Division of the Supreme Court of New York, the same court where the MBI and BAC suits are being litigated. I have settled cases ranging from $25,000 to $2,000,000. You might think that given the size of these cases as compared to the MBI and BAC actions, it must be that much harder to settle the much larger MBI and BAC cases...but the exact opposite is true.
Every case on which I have served as mediator has involved a unique situation: this plaintiff suing this defendant over these particular facts involving a particular set of legal issues. While the mediator and the parties themselves can analogize their case to other cases that have been decided and otherwise appeal to reason (as well as to comparative advantages such as one's superior resources), there are never any nearly exactly similar and recent examples of settlements in which each of the parties has settled with a third part to hold up as an example of what each party found to be reasonable before.
Indeed, the task of the mediator is to engage in "reality-testing" of the parties' positions, in order to pull their mutually exclusive Venn diagrams of acceptable resolution closer together to create some overlap. But there are never any convenient examples to point to regarding what the parties themselves considered reasonable in prior nearly identical situations. (That would be too easy!)
So, it is this magical example that every mediator would love to pull out his hat involving a nearly identical case that each party found fit to settle with a third party, in order to cut short all of the strategic behavior and simply be able to say, "you agreed to this then, why not now?" This magic is never available to the mediator...but it is abundantly present to MBI and BAC in their litigation.
BAC itself has settled two fraud and breach of R/W claims with Assured Guaranty and Syncora involving cases which were highly similar to the MBI suit. BAC and MBI each can't reasonably argue that those settlements are not appropriate points of departure for the settlement of their fraud and breach of R/W suit. Of course, BAC would like to pay less, and MBI would like to receive more, than these two settlement amounts, as a percentage of alleged claims, but neither party can argue that these past settlements do not provide an appropriate ballpark amount around which to push and pull based upon appeals to facts that they believe are unique to their case.
While the settlement amounts in these cases are hard to discern with confidence, it seems that BAC was willing to pay somewhere in the neighborhood of two-thirds of the alleged claim amounts. Of course, MBI would argue that its case is closer to the commencement of trial, so that MBI should be entitled to more, while BAC will certainly have its counterarguments, but which party can realistically deny that this settlement percentage figure is not an appropriate point of departure?
Likewise, MBI has entered into about a dozen settlements of the transformation case with fellow plaintiffs of BAC and commuted MBI's insurance of their securitiztions in connection therewith. These cases were not just highly similar to the BAC action, they were the same action: the settling banks were fellow plaintiffs with BAC in the same case, although the risks presented by any commutation of their respective securitizations certainly can differ.
So again, neither BAC nor MBI can argue that the range of these settlements do not provide an appropriate ballpark range in which to pursue fruitful negotiation discussions. In each case MBI and a bank similarly situated to BAC found these settlement amounts reasonable.
The typical problem for the mediator is to put the parties in the same negotiating ballpark, so as to create an overlapping area within their two respective Venn diagrams of settlement opportunity. Often, the failure to reach settlement is precisely this inability to identify the negotiating ballpark based on examples of what the parties themselves considered reasonable settlements with respect to highly similar cases.
Not so with the two MBI and BAC suits. These suits are made for mediator magic.