MKM Partners We believe Bank of America may finally have its back against the wall with the

only reasonable outcome being to settle with MBIA. There is little doubt that MBIA Insurance Corp., MBIA's (ticker: MBI) legacy structured-finance unit, will be taken over by the New York Department of Financial Services if it does not secure an economic settlement with Bank of America (BAC). This takeover does not affect MBIA's common shareholders or its senior debt holders. We have noted in other reports that a takeover of MBIA Insurance Corp. may not necessarily be beneficial for Bank of America, as its commercial mortgage-backed securities (CMBS) wraps were written on a "credit default swap (CDS) insurance form" and not on a "financial guaranty insurance" form. It is believed that insurance regulators may view an "insurance" contract as senior to a "CDS" contract. Now, we are even more certain that, if Bank of America or any other CDS insurance holder "pushes" MBIA Insurance Corp. into rehabilitation, there is a very high likelihood that Bank of America will recover significantly less, if anything, on its MBIA-wrapped CMBS exposures than it could secure if it entered into a negotiated settlement. MBIA added a new risk factor in its recent 10-K filing. It reads as follows: "CDS counterparties may seek to terminate CDS contracts insured by MBIA Insurance Corporation and make market-based damage claims (irrespective of whether actual credit-related losses are expected under the underlying exposure), which claims could aggregate to $7.0 billion or more. The company believes such an acceleration would likely eliminate any residual value in MBIA Insurance Corporation." This risk factor may have severe consequences for Bank of America with respect to potential recoveries on its CMBS wraps. If MBIA Insurance Corp. enters into rehab, Bank of America's claims may not only be junior to financial-guaranty policyholders, but may be lumped together with other CDS mark-to-market claims that could amount to over $7.0 billion, even if there is no "real" loss. -- Harry Fong -- Darren Marcus