New York Relied on MBIA-Hired Firm to Approve Revamp

New York insurance regulators relied on the opinion of a consulting firm hired by MBIA Inc. to determine that the insurer was solvent before approving its 2009 restructuring, said a lawyer for banks suing over the split.

The analysis by Bridge Associates LLC issued on Dec. 5, 2008, found that MBIA was “solvent and not impaired” under New York insurance law and that its underwriting and surveillance procedures were consistent with practices in the industry, said Michael Steinberg, a lawyer for Sullivan & Cromwell who represents the banks.

Bridge Associate’s opinion, which cost MBIA $1.15 million, was done in 2 1/2 weeks and was based only on information as of Sept. 30, 2008, Steinberg said. The suing banks have said the insurer concealed from regulators a $3.75 million study by Lehman Brothers Holdings Inc. that showed the company’s MBIA Insurance unit was insolvent and that a policyholders’ purported surplus of $3.3 billion was actually negative.

“The department didn’t do a solvency review,” Steinberg said in court today. “They didn’t have time.”

New York State Supreme Court Justice Barbara Kapnick is overseeing a nonjury trial in Manhattan on the banks’ claims that the Feb. 17, 2009, approval of MBIA’s proposal by then-Insurance Superintendent Eric Dinallo was based on misleading information and violated insurance law.

Misleading Information

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 Corp. and Societe Generale SA are the only banks left in the litigation after JPMorgan Chase & Co., Morgan Stanley, UBS AG 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.

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, Attorney General Eric Schneiderman’s office has said in filings in the case. The state and MBIA argue the insurance department’s approval is entitled to “deference.”

State Senate Probe

New York Republican state senators James Seward, chairman of the senate’s insurance committee, and Carl Marcellino said in a statement yesterday they were considering conducting an inquiry and holding hearings on MBIA’s restructuring.

At the outset of today’s proceedings, lawyers representing MBIA and the state insurance department urged Kapnick to ask whether the banks, their attorneys or consultants had prior knowledge of the statement or were involved in preparing it.

“We are entitled to these answers,” Marc Kasowitz, a lawyer representing MBIA, said. “We think this is improper and has potential consequences.”

Kapnick said it would be “of some concern” if the banks’ lawyers or lobbyists were involved, and asked Robert Giuffra, a Sullivan & Cromwell lawyer representing the banks, whether he had a hand in the statement. Giuffra responded that he learned about the press release from a reporter yesterday. The judge ordered the proceedings to continue.

The trial is scheduled to resume tomorrow at 10 a.m. New York time.

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

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