MBIA Tells Court Restructuring Protects All Policyholders

MBIA Inc.’s 2009 restructuring was approved by New York regulators because it protected all policyholders, including the banks challenging the decision, a lawyer for the bond insurer told a trial judge.

Banks suing MBIA can’t prove their argument that the approval of the restructuring was “arbitrary and capricious,” Marc Kasowitz, an attorney with Kasowitz Benson Torres & Friedman LLP representing Armonk, New York-based MBIA, told a state judge today in Manhattan.

“The banks are throwing as much money as they can at the wall in the hope that something will stick,” Kasowitz said.

Justice Barbara Kapnick of state Supreme Court is hearing a nonjury trial on claims by Bank of America Corp. and Societe Generale SA that the February 2009 approval of MBIA’s proposal by then-Superintendent Eric Dinallo was based on inaccurate and incomplete information and should be annulled.

More than a dozen financial institutions sued 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 other banks dropped out.

The banks claim the restructuring exposed them to losses as policyholders by transferring $5 billion in assets out of an MBIA unit that insured risky mortgage debt.

Another Lawsuit

The case being tried by Kapnick is a challenge to the approval brought under the state’s Article 78 law, which allows challenges of administrative decisions. Bank of America and Societe Generale have another lawsuit pending against MBIA, and MBIA is suing Bank of America over mortgage loans.

David Holgado, a lawyer in state Attorney General Eric Schneiderman’s office, earlier this week asked Kapnick to dismiss the lawsuit, saying the approval was rational and based on an “extraordinary” analysis by a former Insurance Department official, Jack Buchmiller.

The banks have argued that Buchmiller’s analysis was rushed and based on inaccurate and incomplete information provided by the company.

Kasowitz said the approval was based on a yearlong state investigation that included weeks of on-site review at MBIA’s headquarters by Buchmiller and other department officials, who had so much access to the company that they were given internal e-mail addresses.

‘Unfettered Access’

“These people who were reviewing MBIA’s financials had close and unfettered access,” Kasowitz said.

The banks’ arguments that the restructuring was a “secret plan” about which they weren’t notified conflicts with statements issued in February 2008 after MBIA announced the proposal, including a Bank of America equity research note that said it was “feasible and reasonable,” Kasowitz said.

“This secrecy argument turns out to be absolutely false,” Kasowitz said. “The banks knew all along about the proposed transformation.”

The trial began May 15 and is expected to last two to four weeks. Lawyers for the banks made their opening statements last week, and attorneys for the state completed theirs earlier this week. Kasowitz is scheduled to continue his arguments when the proceedings resume on May 29.

Documents Access

Separately, MBIA won access to documents the bond insurer is seeking in its lawsuit against Bank of America and its Countrywide Financial unit over mortgage loans. MBIA says the information is relevant to claims that it insured loans that were riskier than promised.

New York State Supreme Court Justice Eileen Bransten ordered Countrywide to produce materials about fraud investigations by a former employee who was fired and accusations by an ex-employee of fraud in Countrywide’s loan origination process, according to a decision filed today and dated May 15. The judge also ordered the production of meeting minutes of three Countrywide senior management committees.

The cases are ABN Amro Bank v. Dinallo, 601846-2009; ABN Amro v. MBIA, 601475/2009; and MBIA Insurance v. Countrywide, 602825/2008; New York state Supreme Court (Manhattan).

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