Bloomberg News

Banks Suing Over MBIA Restructuring Finish Opening Arguments

May 18, 2012

Lawyers for banks seeking to overturn New York state regulators’ approval of bond insurer MBIA Inc.’s restructuring in 2009 completed their opening arguments after three days.

New York State Supreme Court Justice Barbara Kapnick in Manhattan is overseeing a nonjury trial on Bank of America Corp. (BAC:US) and Societe Generale SA (GLE)’s claims that the February 2009 approval of MBIA’s proposal by then-Insurance Superintendent Eric Dinallo was based on inaccurate and incomplete information and therefore violated state insurance laws and should be overturned.

More than a dozen financial institutions sued Armonk, New York-based 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 and others dropped out.

The banks claim 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.

‘Not Fair’

“It simply was not fair and equitable to do a transaction that had no benefits to structured finance policyholders and many benefits to MBIA Inc. shareholders, executives and public finance policyholders,” Robert Giuffra, a lawyer with Sullivan & Cromwell LLP representing the banks, said in court today.

The trial, which began May 15, is expected to last two to four weeks. Lawyers for the state are scheduled to begin presenting their arguments on May 21.

Attorney General Eric Schneiderman’s office has said in filings that the insurance regulator approved the restructuring after finding that all policyholders would be protected while a well-capitalized insurer would be established for the municipal bond market. The state and MBIA have argued the insurance department’s approval is entitled to “deference.”

The bond insurer ran dozens of internal analyses forecasting billions of dollars in potential losses from commercial mortgage-backed securities, yet provided regulators with only five scenarios showing “zero losses,” Giuffra said.

Concealed Study

MBIA concealed from the regulators a $3.75 million study by Lehman Brothers Holdings Inc. paid for by the insurer that showed that its MBIA Insurance unit was insolvent and that a policyholders’ surplus of $3.3 billion was actually negative, Giuffra said.

Regulators didn’t do their own solvency review and instead relied on the opinion of Bridge Associates LLC, a consulting firm hired by MBIA for $1.15 million that found that the company was solvent, Sullivan & Cromwell attorney Michael Steinberg said.

The Bridge Associates study, issued Dec. 5, 2008, was done in just 2 1/2 weeks and was “stale,” as it was based on information through the third quarter of 2008, more than four months before the restructuring was approved, Steinberg said.

Lawyers for the banks have argued that the approval was based on the analysis of Jack Buchmiller, a former department official who now works for the National Association of Insurance Commissioners, who they say was given a “mission impossible” task of analyzing the restructuring by himself -- quoting an e-mail Buchmiller wrote in February 2009.

‘Cue Up’

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 a Feb. 7 affidavit.

Buchmiller, who may be called to testify in the case, said in the affidavit that the banks’ characterization of the e-mail is incorrect.

He 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.”

The regulators’ process was “flawed,” as Buchmiller only reviewed 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 said.

The case is ABN Amro Bank NV v. MBIA Inc. (MBI:US), 601475-2009, New York state Supreme Court, New York County (Manhattan).

To contact the reporters on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net; David McLaughlin in New York at dmclaughlin9@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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