MBIA 2008 Loss Projection at Least $12 Billion Short, Banks Say

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When New York regulators approved MBIA Inc.’s 2009 split, the bond insurer’s projected losses on structured-finance guarantees were at least $11.8 billion short, according to 11 banks seeking to annul the move.

A BlackRock Inc. unit, hired by the banks for their lawsuit to analyze potential claims against the insurer at the time of the regulators’ review, estimated MBIA faced at least $13.8 billion in possible losses on $50.1 billion of securities backed by home loans and commercial real estate, according to filings yesterday in New York state Supreme Court. The regulators lacked a basis to approve the restructuring because MBIA at the time had loss reserves of about $2 billion, the banks argue.

The banks, including UBS AG, Bank of America Corp. and Royal Bank of Scotland Plc, are fighting a split that moved more than $5 billion from the company’s MBIA Insurance Corp. unit into a new insurer in a bid to jumpstart its business of guaranteeing state and municipal debt. MBIA and other bond insurers, which sold guarantees to the banks, were shut out of the market after rising losses on mortgages they backed prompted ratings firms to strip them of their top rankings in 2008.

“According to BlackRock’s analysis, the expected insurance losses on less than one quarter of MBIA Insurance’s portfolio rendered MBIA Insurance deeply insolvent as of December 31, 2008,” the banks said.

Chuck Chaplin, MBIA Inc. President and Chief Financial Officer, said the banks’ arguments “are without merit and we remain confident that the court will affirm the New York State Insurance Department’s decision to approve MBIA’s transformation, which came after a thorough and careful analysis.”

‘Was Solvent Then’

“MBIA Insurance Corp. was solvent then and remains so today, two years and two unqualified audit opinions later,” he said in an e-mailed statement.

The filings yesterday follow affidavits disclosed March 13 in which four former New York state insurance regulators hired by the banks’ lawyers said they wouldn’t have approved the restructuring.

The banks sued under New York state’s Article 78, which allows court review of state administrative decisions, to challenge former insurance Superintendent Eric Dinallo’s authorization of the split in February 2009. 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 a 187-page court filing.

Ron Klug, a spokesman for the state insurance department in Albany, New York, declined to comment. Dinallo couldn’t be reached for comment, said Suzanne Elio, a spokeswoman for Debevoise & Plimpton LLP, the law firm Dinallo joined in December.

Appeal Pending

The banks separately sued the bond insurer to challenge the restructuring in a lawsuit dismissed by a lower court. The appeal of that suit, which claimed MBIA made the split to avoid its obligations to policyholders and to defraud creditors, will be argued in the state’s highest court May 31.

BlackRock Solutions, an advisory services unit of the New York-based asset manager, reviewed $50.1 billion of securities guaranteed by MBIA, including “most or all” of the residential mortgage-backed securities it insured, according to the banks and an affidavit from Mark Paltrowitz, a managing director who oversaw the review.

Worst-Case Scenario

Using the same 5.03-percent rate that MBIA used to partially discount its projected claims payouts, BlackRock estimated potential losses as of the end of 2008 of $13.75 billion in its “base” case and $20.7 billion in a worst-case scenario.

The banks, though, are arguing that MBIA inflated its discount rate by excluding cash and short-term investments when calculating the rate, understating its loss reserves.

Using a lower discount rate, BlackRock estimated losses of $17.3 billion to $25.9 billion.

Merrill Lynch & Co., whose parent, Bank of America Corp., and an affiliate, are plaintiffs in the banks’ lawsuit, owns 7.1 percent of BlackRock, according to the asset manager’s website. Barclays Plc, which was part of the suit before withdrawing last year, owns 19.7 percent, according to the website.

At one point during the superintendent’s discussions with MBIA, Hampton Finer, deputy superintendent in the insurance department under Dinallo, recommended to MBIA executives that an outside firm be hired to review the securities backed by the insurer, according to a copy of an e-mail filed by the banks in the case.

‘Not Recommending’

“We are not recommending a particular valuation provider, but others have used BlackRock with some success,” Finer said in a November 2008 e-mail.

In a reply to the e-mail, William Fallon, MBIA’s chief operating officer, said the company would obtain a solvency opinion from Bridge Associates LLC and a fairness opinion from Raymond James & Associates Inc.

“Please let us know if there is any other information that you require,” Fallon said in the e-mail.

The cost to protect against a default by MBIA Inc. rose after the banks’ court filing, according to London-based market data provider CMA.

Five-year credit-default swaps on the company climbed 2.63 percentage points to a mid-price of 14.6 percent upfront, CMA data shows. That’s in addition to 5 percent a year, meaning it would cost $1.46 million initially and $500,000 annually to protect against losses on $10 million of MBIA debt for five years.

The Article 78 case is ABN Amro Bank NV v. Dinallo, 601846-2009, New York state Supreme Court (Manhattan).

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