New York state regulators’ approval of MBIA Inc. (MBI:US)’s restructuring in 2009 was based on inaccurate and incomplete information, said a lawyer for banks seeking to overturn the decision.
The bond insurer ran dozens of internal analyses forecasting billions of dollars in potential losses from investments in commercial mortgage-backed securities, yet provided regulators with only five scenarios showing “zero losses,” Robert Giuffra said today in opening arguments of a nonjury trial before New York State Supreme Court Justice Barbara Kapnick.
“They only gave the department what they wanted the department to see,” Giuffra said. “If inaccurate information was provided, if there were inaccurate assumptions, then the law is quite clear that it should be annulled.”
Bank of America Corp. (BAC:US) and Societe Generale SA (GLE) claim the approval of Armonk, New York-based MBIA’s restructuring by the state’s insurance superintendent was based on misleading information and violated the law.
More than a dozen financial institutions sued MBIA and the state insurance department in 2009 over the restructuring. Bank of America and Societe Generale are the only banks left in the litigation after JPMorgan Chase & Co. (JPM:US), Morgan Stanley (MS:US), UBS AG (UBSN) and others dropped out.
The banks claimed the restructuring harmed them as policyholders by transferring $5 billion in assets out of the MBIA unit that insured risky mortgage debt, exposing the banks to potential losses. Bank of America and Societe Generale have another lawsuit pending against MBIA while MBIA is suing Bank of America over mortgage loans.
Giuffra said MBIA concealed from regulators a $3.75 million study by Lehman Brothers Holdings Inc. paid for by the insurer. The study showed that its MBIA Insurance unit was insolvent and that a policyholders’ surplus of $3.3 billion was actually negative, the banks said in a court filing.
The regulators’ review process was “flawed,” Giuffra said, as the department only studied 1 percent of the portfolio of MBIA Insurance’s 1,300 structured-finance products and failed to examine the company’s audited financial statements.
Giuffra argued that Jack Buchmiller, a former supervising risk management specialist in the department, was given a “mission impossible” task of analyzing the restructuring by himself -- quoting an e-mail Buchmiller wrote in February 2009 before the approval.
Buchmiller told MBIA officials in the e-mail to “cue up the mission impossible music” while requesting more information about structured finance products, according to an affidavit dated Feb. 7.
Buchmiller was a “hard-working civil servant” who was given a job not even Albert Einstein or Warren Buffett could do, Giuffra said.
“No one could have done it,” Giuffra said. “It was too much work.”
Buchmiller, who may be called to testify in the case, said in the affidavit that the banks’ characterization of the e-mail is incorrect.
Buchmiller said in the affidavit that he was referring to the fact that MBIA “had a series of difficult tasks it needed to complete in short order” to convince him that its loss models on collateralized debt obligations backed by commercial mortgage-backed securities, were sound, “much like the team of agents from the ‘Mission: Impossible’ television series.”
Giuffra will resume his opening argument on May 17. The trial is expected to last two to four weeks.
The case is ABN Amro Bank v. Dinallo, 601846-2009, New York State Supreme Court (Manhattan).
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