The Dow’s at a new high, housing prices are rising, jobs are trickling back and banks that all-too-recently posed a catastrophic threat are once again a money-making opportunity.

On Wall Street, as in corporate boardrooms across America and in the luckier households, things are looking up.

So who wants to get back into the time machine and argue about the ultimate responsibility for liar loans, other sins of the recent past and the steep financial losses those are still generating? Who wants to invest in a company wading through a legal quagmire of mind-numbing complexity and mendacity, one that could see a major unit seized by a regulator unless it can strike a bargain with its main adversary? Who needs this, in 2013?

Investors in financial asset insurer MBIA (NYSE: MBI) do, apparently. And they haven’t done too shabbily lately as the stock has jumped from less than $9 in early February to more than $12 in response to a favorable legal decision and speculation about a watershed settlement.

The biggest beneficiaries of this reversal of fortune have been the private-equity firm Warburg-Pincus and Fairholme Capital Management, which between them own nearly half of MBIA’s shares.

Fairholme and its mutual funds are the baby of famed investor Bruce Berkowitz, named Morningstar domestic-stock fund manager of the decade in 2010 after delivering a 13.2% annualized return while the S&P 500 lost value.

Berkowitz hasn’t been shy about making his case for MBIA. He sees it as a value proposition that will be realized as claims for the financial crisis gradually diminish, MBIA’s long-running legal fight with Bank of America (BAC) over the misrepresentations made by BAC acquisition Countrywide is settled and a key MBIA subsidiary regains the right to insure new public borrowing.

Which may all come to pass, but the road from here to there is neither linear nor transparent, is in fact littered with financial and legal landmines. So it’s good to see big names like Berkowitz and Warburg on board, not because they can’t make mistakes but because they’ve presumably spent the six or seven figures on the legal and accounting colonoscopies that this investment warrants.

Berkowitz has said he follows two rules: Don’t lose money and Follow the first rule. So it must have taken a particularly liberal interpretation to watch MBIA shares slide from $10 to $7 in the fall as claims piled up and the fiscal cliff loomed and merely trim his stake a bit to 42.5 million shares, accounting for 4.8 percent of the Fairholme portfolio and 22 percent of MBIA’s common stock.

That faith was amply rewarded Monday when a New York State Supreme Court Judge dismissed an attempt by Bank of America and Societe Generale to contest a state-ordered 2009 restructuring that shielded the MBI assets guaranteeing public debt from claims by owners of residential and commercial mortgage-backed securities.

A separate suit by the same banks accusing MBIA of “fraudulent conveyance” in the restructuring remains alive. So does MBIA’s suit against Bank of America demanding that it cover its losses on BAC’s mortgage-backed assets based on the infamously self-serving lending and reporting practices employed by Countrywide in the latter stages of the housing bubble.

MBIA is facing losses of $5.6 billion on the credit derivatives it insured, a quarter of which remains unrealized and would just about eat through the $1.5 billion statutory capital if its claims-burdened MBIA Corp. subsidiary, which has just $345 million in liquid assets.

Meanwhile, the losses on the commercial mortgage-backed securities it foolishly insured in 2006-7 are expected to exceed the deductibles sometime this year, exposing MBIA Corp. to claims it might not be able to meet absent a multi-billion settlement with Bank of America. That could cause the subsidiary to be placed under state supervision. The municipal debt insurance arm as well as the parent holding company would likely remain going concerns in this scenario, but MBIA admits its operations would be disrupted and imperiled.

This “nuclear” option carries risks for Bank of America as well, which could see its claims denied by the state and MBIA’s research into Countrywide lending practices used in a recent probe launched by the New York state attorney general.

“Settlements occur when the perceived economic values converge. And there are substantial drivers that we think should suggest such a convergence. However, if that is wrong, both companies will be damaged as a consequence,” said MBIA CEO Joseph Brown on the recent conference call with regard to Bank of America.

MBIA would be damaged more than BofA, which incidentally has attracted three times as much of Berkowitz’s cash as an investment. But BofA does have the billions needed to make the whole fight go away without doing further damage to its bottom line and reputation.

So this is very much a binary situation where either MBIA settles with BofA and satisfies legacy financial claims or else regulators and the courts get more involved with all the uncertainties that entails. But the public insurer ring-fenced from the mortgage losses in 2009 could eventually recover enough to win the right to write new guarantees under either scenario. And that’s where the upside lies. The municipal borrowing market has only a couple of choices for such insurance currently, and is increasingly getting by without such backstops.

In the meantime, MBIA’s operations continue to lose money, though that’s a sideshow at the moment to the legal wrangling. There have been encouraging recent precedents on that all-important front, with other derivatives guarantors winning rulings against claimants.

Another bullish tell is that the corporate insiders who bought shares worth nearly $16 million in late December sold only a small fraction of that into the recent rally. The buyers of near-term out-of-the-money call options have also been busy of late. And nothing in the recent stock action suggests that Berkowitz or Warburg have meaningfully lightened up.

MBIA is like a prisoner of war left captive after the armistice has been signed – still in the hole and forced to relive old battles. But hope remains that one day it will be sprung and allowed to make a decent living.

Igor Greenwald is an investment analyst with The Energy Strategist.