New York Asks Judge to Dismiss MBIA Restructuring Challenge

A lawyer for New York asked a judge to dismiss a challenge to the approval of MBIA Inc.’s 2009 restructuring, saying that the state insurance department’s decision was rational.

David Holgado, an attorney for the New York Attorney General’s office who is representing the insurance department and former superintendent Eric Dinallo, said there is a “very low bar” for cases under the state’s Article 78 law, which allows court review of administrative decisions.

“The bar may be low but the department cleared the bar with room to spare,” Holgado said during his opening argument today.

New York state Supreme Court Justice Barbara Kapnick in Manhattan is overseeing a nonjury trial on Bank of America Corp. and Societe Generale SA’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., Morgan Stanley, UBS AG and others dropped out.

Potential Losses

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.

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 banks have argued that the approval was based on the “flawed” analysis of Jack Buchmiller, a former insurance department official who now works for the National Association of Insurance Commissioners.

‘Knowledgeable Employee’

Lawyers for the banks said Buchmiller’s analysis was completed in less than three months and was based on “inaccurate and incomplete information” provided by MBIA, which the banks said concealed a Lehman Brothers study showing its MBIA Insurance was already insolvent.

Holgado argued today that Buchmiller was the department’s “most experienced and knowledgeable employee” regarding insurance of structured financial products and had more than 22 years of experience working at commercial banks before joining the department.

Buchmiller reviewed investments insured by MBIA to make his analysis, including commercial and residential mortgage-backed securities, and conducted more than 30 hours of interviews with company employees and officials during more than dozen visits to the insurer’s headquarters, Holgado said.

Buchmiller also reviewed models of reserves for other insurance policies written for structured-finance securities to determine whether the assumptions used by MBIA were reasonable and fact-based, Holgado said.

‘Extraordinary’ Diligence

Buchmiller testified in depositions and affidavits that he had as much time as he needed to conduct the review, which needed to be “thorough but also expeditious” because of the state of the economy at the time, Holgado said.

“The amount of diligence was extraordinary,” Holgado said.

The trial, which began May 15, is expected to last two to four weeks. Lawyers for the banks presented their opening arguments last week.

The cases are ABN Amro Bank v. Dinallo, 601846-2009 and ABN Amro Bank NV v. MBIA Inc., 601475-2009, New York state Supreme Court, New York County (Manhattan).

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