BTIG analyst Mark Palmer hints at likely resolution of Ambac Financial Group, Inc. (NASDAQ:AMBC)’s pending mortgage-related litigation against Bank of America Corp (NYSE:BAC).

Ambac

Palmer is bullish that Bank of America Corp (NYSE:BAC) appears to be signalling intent to clean up its Augean litigation stables.

BofA’s litigation stance

Citing Ambac Financial Group, Inc. (NASDAQ:AMBC) CEO Diana Adams’ interaction with investors at meetings earlier this month, Palmer observes: “While her team had not seen movement from Bank of America Corp (NYSE:BAC) signalling its intention to settle litigation brought against it by the bond insurer, she was encouraged that the bank’s management continued to make it clear through both words and actions that it wanted to put its legacy mortgage-related legal issues behind it as soon as possible.”

Bank of America settles with FGIC

Bank of America Corp (NYSE:BAC) announced yesterday that it had reached a settlement with Financial Guaranty Insurance Co (FGIC) regarding outstanding litigation on second-lien residential mortgage-backed securities (RMBS). It had already paid about $900 million under this agreement, with another $50 million payable on completion of two remaining trust settlements.

“While FGIC received $584mm in cash in the settlement and bondholders will receive $365mm, the insurer stands to benefit from the payment to bondholders insofar as payments for which it would otherwise be responsible are defeased,” observes BTIG’s Palmer.

Bank of America’s litigation reserves – reading the tea leaves

The bank booked $6 billion in litigation expenses during the first quarter, of which $3.6 billion related to a settlement with the FHFA regarding mortgage securities sold to Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA).

The Wall Street Journal hinted that the additional $2.4 billion probably related to a multi-billion dollar settlement with the Justice Department relating to RBMS. In its press release the bank simply said it was “additional reserves primarily for previously disclosed legacy mortgage-related matters.”

Yet, the WSJ also said the settlement proposed by the Justice Department “was billions of dollars above the $2.4 billion in legal charges the company outlined Wednesday,” quoting people familiar with the discussions.

Conference call

Bank CFO Bruce Thomson confirmed on the conference call in the Q&A session that the $2.4 billion did not include any amount for the FGIC settlement:

“Betsy Graseck – Morgan Stanley

Couple of questions. One on the litigation reserve bill that you did in the quarter. You mentioned that FGIC and the trust settlement were fully reserved for. So that means that none of the $2.4 billion increase reserves in 1Q that you called out was for that settlement?

Bruce Thompson

That’s correct. As we said, substantially all of the $2.4 billion related to a bill in our litigation reserves for matters that we’ve disclosed previously.”

This could be positive for AMBC

BTIG’s Palmer refers to his February post on Bank of America Corp (NYSE:BAC)’s 10K filing that damages claimed by Ambac Financial Group, Inc. (NASDAQ:AMBC) “are in excess of $2.5 billion and include the amount of payments for current and future claims it has paid or claims it will be obligated to pay under the policies, increasing over time as it pays claims under relevant policies, plus unspecified punitive damages.” (Emphasis BTIG.)

Banks are known to be wary of making too many public revelations about their legal reserves, fearing that it might give the opposite party leverage in the litigation.

In such a situation one can only surmise that Bank of America Corp (NYSE:BAC) created a reserve potentially for settling its litigation with Ambac Financial Group, Inc. (NASDAQ:AMBC).