A trial appealing the New York State Insurance Department’s split of bond insurer MBIA Inc. ended Thursday with the plaintiffs’ attorney arguing that since the department relied on incorrect facts in approving the split, it must be undone.
Bond insurer MBIA experienced major losses on mortgage-backed securities following the housing bust and it petitioned the department to allow it to split into two companies. One of the companies was to focus on insuring municipal bonds.
In February 2009, the NYSID approved the transformation. In June 2009, several banks sued MBIA and the department, seeking to reverse the transformation and claiming the split reduced the value of their insurance.
The hearing that ended Thursday was for one of two cases challenging the transformation.
Along with MBIA and its two subsidiaries, the NYSID and Eric Dinallo, in his former capacity as department superintendent, are defendants.
On Thursday, Robert Giuffra Jr., attorney for the remaining plaintiffs Bank of America and Société Générale, said an MBIA error in calculating projected taxes benefited MBIA in a calculation of projected losses. The error allowed MBIA to come up with an estimate of losses that is $1.4 billion more optimistic than warranted, he said.
Giuffra acknowledged that MBIA has pointed out other errors in the original loss projections. These other errors, if true, would reduce the level of the original error to a still substantial $650 million, Giuffra said.
“The courts have repeatedly said that when there is an error of this magnitude, then annul,” Giuffra told Judge Barbara Kapnick.
Giuffra presented excerpts from five court decisions stating that if state decisions are based on erroneous facts, than the decisions should be overturned.
MBIA’s goal in the split was to benefit one set of policy holders over another set for the benefit of the company’s shareholders, Giuffra said.
Regarding the groups he is representing in the insurance company split appeal, Giuffra said, “This time it is banks, next time it will be hurricane victims. … The fundamental job of insurance is to protect policyholders.”
At this trial on May 29, MBIA’s attorney, Marc Kasowitz, addressed the responsibility of the state to insurance company policyholders. Policyholders do not have the right to all of an insurance company’s assets, he told Kapnick. They have the right for the insurance company to pay them for all justifiable claims. The NYSID found that MBIA would be able to do that if it was split, Kasowitz said.
If the banks’ argument was right, then any use of money except for policyholders would be discrimination, Kasowitz said. Insurance companies could not do a dividend, redeem shares or even write new business.
Kasowitz has also said the goal of MBIA’s split was at least partly to help unfreeze the market for municipal bond insurance in the midst of the financial crisis in early 2009.
At the end of Thursday’s trail, Kapnick told the lawyers that it would take time to review all of the case’s documents. She noted that she was also working on other cases.
Earlier in the trial, Kapnick, a judge in the New York State Supreme Court for New York County, said she expects an appeal of her decision, regardless of how she rules.
