(Updates with document excerpts in 10th paragraph.)
June 17 (Bloomberg) -- MBIA Inc. hid potential losses of as much as $950 million on commercial real estate debt as it sought New York regulators’ approval to restructure its insurance business in 2008, banks including Bank of America Corp. and UBS AG claimed in court papers.
New York insurance regulators were given an internal presentation that included “manual overrides” of loan data that dropped potential losses from the debt to zero, the banks said in a brief that was filed in redacted form in March and unsealed yesterday in state court in Manhattan. A manual override is the review of an individual loan to adjust loss estimates.
When making its case to the regulators, MBIA, once the world’s biggest bond insurer, deleted parts of a presentation originally given in November 2008 to the company board’s credit risk committee, the banks said. Those deletions showed that in a “more stressful economic environment” the insurer could have losses from the debt of as much as $950 million, according to the banks’ court papers.
The banks’ claim is “absolutely false” and regulators were told of both the overrides and the impact they had on loss projections, Marc Kasowitz, a lawyer for MBIA, said in an interview yesterday. David Neustadt, a spokesman for the state insurance department, declined to comment.
“The evidence is clear and unequivocal that all of the issues with respect to these overrides were clearly and unequivocally communicated to the insurance department, and the insurance department acknowledges that,” Kasowitz said. “It was not just disclosed, but it was discussed.”
Eric Dinallo, then the state’s insurance superintendent, approved the split in 2009, allowing Armonk, New York-based MBIA to move its guarantees on state and municipal bonds out of the unit that insured some of Wall Street’s riskiest mortgage debt.
Bank of America, UBS and other institutions sued MBIA and the state under New York’s Article 78, which allows court review of administrative decisions. The banks say the restructuring allowed MBIA to move $5 billion from the company’s MBIA Insurance Corp. unit into a new insurer in a bid to revive its business of guaranteeing state and municipal debt, leaving the old insurer insolvent.
The approval was based on a “rushed, cursory and inadequate” review of facts and on assumptions that at times were outdated and inflated, the banks claimed in the March filing.
The presentation MBIA made to the state in November 2008 did disclose that its analysis included overrides to its loss model, adjusting loss expectations for loans that were more than $100 million. Loans of such size historically defaulted less frequently and with less severity, MBIA said in the presentation, according to a copy included in the banks’ court filings.
What wasn’t in the documents presented to the state were estimates previously made to MBIA’s credit risk committee of what losses could be without the adjustments in a stressed economic environment, according to the documents in the banks’ filing. MBIA defined such an environment as including unemployment of 9 percent and a “severe prolonged recession.”
“If a more stressful economic environment ensues,” MBIA executives said in the documents presented to the risk committee, “material erosion to MBIA’s positions will occur and depending on large loan performance, losses to MBIA could range from $0-$950 million.” That passage doesn’t appear in the documents that the banks say were shown to regulators.
Kasowitz said a trial is expected in early 2012.
“We’re completely confident that the proceeding is going to uphold and approve the determination of the superintendent of insurance in approving the transformation,” he said.
The Article 78 case is ABN Amro Bank NV v. Dinallo, 601846- 2009, New York state Supreme Court (Manhattan).
--Editors: Andrew Dunn, Stephen Farr
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