MBIA Inc. is defending itself against a new lawsuit.
On Monday mortgage-backed securities investors CQS ABS Master Fund Ltd., CQS Select ABS Master Fund Ltd. and CQS ABS Alpha Master Fund Ltd. sued MBIA Inc. and its subsidiaries MBIA Insurance Corp. and National Public Finance Guarantee Corp.
In the suit CQS claimed that MBIA Inc.’s division of its business into MBIA Insurance Corp. and National Public Finance Guarantee Corp. in 2009 was “fraudulent under New York Debtor and Creditor Law” and thus illegal.
“Like the other challenges to MBIA’s transformation, we believe that this lawsuit is without merit and intend to vigorously defend it,” responded MBIA director of corporate communications Kevin Brown.
The new suit, in the United States District Court for the Southern District of New York, is a new legal attack on MBIA’s transformation. In March 2009 Aurelius Capital Master Ltd. and Fir Tree Partners sued MBIA in federal court over the insurer’s transformation. By summer 2012, both these parties had exited the suit against MBIA.
Meanwhile, in 2009 a range of banks and financial firms sued MBIA in New York State court over the transformation. The legal efforts essentially took the form of two cases. One, the Article 78 case, had a trial in May and June, and is waiting for the judge’s decision. The other, called the Plenary Action case, is moving towards a trial.
Three CQS plaintiffs own $1.75 billion in MBIA-insured residential mortgage-backed bonds.
The 2009 transformation of MBIA was intended to move MBIA Insurance’s viable assets, including insured municipal bonds, away from the “exploding claims of structured product policyholders,” the CQS plaintiffs wrote in their court complaint. MBIA Inc. transferred $5.4 billion from MBIA Insurance to a MBIA unit. This money would ultimately end up with a unit that would be independent from MBIA Insurance — National Public Finance Guarantee.
“The restructuring left MBIA Insurance with an unreasonably small amount of capital to operate its business and with liabilities to its policyholders that substantially exceeded its claims-paying resources,” CQS wrote.
In its suit CQS is asking the court to annul the funds transfers, declare all branches of MBIA liable to pay its claims, have MBIA pay attorneys’ fees, and an additional unspecified “relief” sum.
In other bond insurer news, bond insurer Assured Guaranty is seeking an additional rating agency to rate its business.
After a long process in 2011, Standard & Poor’s lowered Assured Guaranty to AA-minus from AA-plus.
On March 20, Moody’s Investors Service put Assured on review for a downgrade from its Aa3 rating. While Moody’s reviews are usually resolved in 90 days, it is now just a week short of six months since the start of the review without any action.
Assured Guaranty has had to suffer the consequences of Standard & Poor’s and Moody’s actions, said Assured Guaranty president Dominic Frederico at a conference on Sept. 5. Assured cannot bring the agencies’ ratings to a court of appeals, he noted. “I can look at both agencies and say for a whole host of reasons both have made critical fundamental mistakes, but they don’t have to correct them.”
“One of our ... strategies ... was to get additional ratings on our operating companies. And our theory was if you have two ratings, people are going to pick the lower of the two. If you have three or more, they’ll pick the consensus of the ratings that you have.”
A.M. Best has released a draft methodology regarding rating monoline financial guarantors. The firm is seeking public comment on the methodology until Oct. 4.
