Bank of America, UBS Renew Demand for MBIA Insolvency Review

Four banks suing MBIA Inc. over the insurer’s 2009 restructuring renewed a request to a regulator to assess the finances of a unit that guaranteed toxic mortgage debt, citing “substantial additional evidence” it’s insolvent.

The lenders, including Bank of America Corp. and UBS AG, asked Department of Financial Services Superintendent Benjamin Lawsky for a “qualified” expert to review expected losses for MBIA Insurance Corp. The banks said they had data that “clearly demonstrates” the unit “cannot satisfy its policyholder claims in full,” Robert Giuffra, the banks’ lead counsel and a partner at Sullivan & Cromwell in New York, said in a Jan. 11 letter to Lawsky.

The banks, which bought guarantees from the insurer on securities tied to home loans, sued Armonk, New York-based MBIA and the state insurance regulator in 2009, claiming MBIA’s restructuring left it undercapitalized and possibly unable to pay future claims. Fourteen of an original 18 plaintiffs withdrew from the suits after settling with the insurer separately. Societe Generale SA and Natixis SA are the other two banks still fighting the split.

“Although the banks have been predicting MBIA Insurance Corp.’s imminent demise for almost three years, it remains solvent and fully capable of meeting all of its expected obligations,” Kevin Brown, an MBIA spokesman, said in an e-mail. MBIA has continues to pay claims, including payments to the 14 former plaintiffs, he said. Bank of America owes MBIA about $3 billion in mortgage put-back claims, according to Brown.

Initial Review

The lawsuits include one under New York’s Article 78, which allows court review of the state administrative decision approving the MBIA restructuring. The evidence presented by the banks wasn’t part of the insurance department’s initial review of the insurer when it approved the restructuring, Giuffra said in the letter. The Article 78 proceeding trial is scheduled to start on Feb. 27.

David Neustadt, a spokesman for the New York Department of Financial Services, declined to comment.

Five-year credit-default swaps on the MBIA Insurance unit fell 0.9 percentage points to 22.9 percent upfront as of 3:20 p.m. in New York, according to data provider CMA. That’s in addition to 5 percentage points a year, meaning the cost to protect $10 million of the company’s obligations against default fell to $2.29 million upfront and $500,000 annually.

Contracts on MBIA Inc. declined 0.7 percentage point to 7.9 percent upfront, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Earlier this week, a spokesman for the state financial services department said Paris-based BNP Paribas SA will withdraw from the suits challenging the restructuring, sending the swaps to the lowest since Nov. 2008.

The banks’ letter was reported earlier today by the Wall Street Journal.