Why MBIA Shares Spiked

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of financial guarantee insurer MBIA (NYSE: MBI  ) rallied as much as 16% because a lawsuit similar to the one it currently has filed against Bank of America (NYSE: BAC  ) wound up going in favor of the insurance guarantor in a suit between Flagstar Bancorp (NYSE: FBC  ) and Assured Guaranty (NYSE: AGO  ) .

So what: Assured Guaranty sued Flagstar Bancorp over two securitizations, claiming that the bank had misrepresented the quality of its loans. The judge of this case, Jed Rakoff, ruled today that Flagstar had indeed breached its representations and warranties and threw out the argument that the loans would have defaulted anyway. Assured wound up winning $90.1 million in damages on roughly $900 million in disputed mortgage-backed securities.

Similarly, MBIA has sued Bank of America's Countrywide unit, alleging it made misleading representations when selling MBSes. While no guarantee of success, today's case definitely strengthens MBIA's resolve and could make Bank of America think twice about settling out of court.

Now what: While a big settlement would be icing on the cake for MBIA, it'd be another one-time profit that distracts us from the fact that there are relatively few quality loans out there worth insuring -- at least not enough to support its current valuation. Until we see the U.S. economy and the housing market both showing robust growth prospects, financial guarantee insurers are not a sector I'd suggest dabbling in.

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