Bank of America (BAC) last reported carrying its MBIA cds wraps at $1.3 billion. One thing one might feel confident in asserting, given that MBIA appears to be preparing a voluntary rehabilitation for MBIA Insurance, is that MBIA will under no circumstances make any payments in respect of BAC's cmbs cds, except in connection with a global settlement and commutation.
If BAC chooses not to settle and MBIA Insurance files for a voluntary rehabilitation (something I suggested was a possible tactical objective for MBIA five months ago at http://mbibaclitigtion.blogspot.com/2012/11/thoughts-about-mbiabac-post-consent.html), then BAC's cds wraps would be in default and impaired, and BAC would likely have to write off its entire $1.3 billion investment position in these wraps.
This amounts to a sunk cost that BAC has in an MBIA settlement of $1.3 billion. Put another way, BAC doesn't incur a dollar in out-of-pocket settlement expense unless and until the settlement with MBIA exceeds $1.3 billion.
BAC's direct potential exposure to MBIA is well in excess of $4 billion. In addition, BAC has additional exposure to MBIA in the form of the potential damage to BAC an adverse successor liability decision in the MBIA case might have on the Article 77 hearing (additional Article 77 exposure). How you might quantify this contingent additional Article 77 exposure is subject to dispute, but it is tangible and real.
Let's assume that MBIA is willing to settle its case for $3.3 billion, and commute BAC's cds at $1.3 billion. This implies a net payment by BAC of $2 billion (the excess over the amount BAC receives back in commutation) would resolve BAC's direct exposure of over $4 billion to MBIA and the additional Article 77 exposure.
Of course, if BAC doesn't settle, BAC may eventually face a judgment of over $4 billion to MBIA Insurance in rehabilitation and, because National's loan to MBIA Insurance is secured, BAC may still receive little or nothing in respect of its cds wraps, even after such a major MBIA Insurance recovery.
Assuming that BAC would prefer to avoid a $1.3 billion charge in this quarter, and pay $2 billion (net) to avoid well over $4 billion in MBIA direct exposure and additional Article 77 exposure, one wonders what questions the BAC board of directors are likely to have for BAC management if BAC management doesn't see the settlement light at the end of this endgame.