MBIA Insurance Corp. and LaCrosse Financial Products have filed a lawsuit against Merrill Lynch, Pierce, Fenner and Smith Inc. and Merrill Lynch International over $5.7 billion of credit-default swap contracts.
MBIA alleges Merrill Lynch made misrepresentations over the credit quality of collateral underlying the structured finance products MBIA insured, according to the lawsuit filed in New York Supreme Court. The lawsuit concerns structured finance products created by Merrill between July 2006 and March 2007.
MBIA wants the court to void credit-default swaps it made with Merrill Lynch and to force Merrill Lynch to pay damages for losses on other CDS MBIA made with other counterparties on the structured finance products created by Merrill Lynch.
MBIA insured the credit-default contracts the counterparties signed with LaCrosse, a special purpose vehicle.
MBIA estimates its losses are “in excess of several hundred million dollars” on the four collateralized debt obligations.
“Today’s action is consistent with our intention to pursue all available remedies against those parties whose improper actions have directly resulted in substantial losses for MBIA and its shareholders,” chief executive officer Jay Brown said in a statement. “Although we will honor all legitimate claims by third-party policyholders, in this case Merrill Lynch is both the beneficiary of some of our policies and the party who improperly induced MBIA to issue these policies. Consequently, we are asking the court to rescind the contracts with Merrill Lynch and require them to compensate us for our payments to other counterparties.”
