Three banks suing MBIA Inc. accused the bond insurer of deliberately withholding damaging financial projections from insurance regulators who were evaluating its transformation.

The banks' law firm, Sullivan & Cromwell LLP, made the accusation against MBIA in a sur-sur-reply memorandum of law filed confidentially on March 16. The Supreme Court of the State of New York, County of New York, where the case is being heard, made the memorandum public Monday.

MBIA and other financial guarantors experienced severe losses after insuring mortgage-backed securities. When the recession hit in 2008, real estate values plunged, unemployment spiked, and many homeowners stopped making payments on their mortgages. The securities turned out to be worth far less than had been promised.

Many banks asked MBIA to fulfill its pledge on insuring the securities, putting financial pressure on the company.

To help deal with its economic troubles, the company decided in 2009 to place its municipal insurance business into a new unit.

In response to MBIA's split, more than a dozen plaintiffs, mainly banks, sued MBIA. Over time, several of the banks have dropped out after reaching settlements with MBIA.

Bank of America Merrill Lynch, Natixis, and Société Générale are suing MBIA Inc., MBIA's two subsidiaries, the New York State Insurance Department, and Eric Dinallo in his former capacity as department superintendent. UBS remains in litigation with MBIA amid speculation it will eventually notify the court of its intention to drop out of the case.

"Discovery has shown that [MBIA's] executives concealed from the NYID [in the run-up to NYID's approval of MBIA's transformation] the analyses of independent experts, retained by MBIA, making clear that MBIA's financial condition was far worse than its executives represented," Sullivan & Cromwell wrote in its memorandum.

According to the memorandum, in September 2008, Lehman Brothers told MBIA that present-value losses on 15 insured collateralized debt obligations would be more than $7.7 billion, even if housing prices immediately stopped declining. MBIA did not reveal Lehman Brothers' analysis to the department, according to Sullivan & Cromwell.

FSI Capital told MBIA that losses on second-lien residential mortgage-backed securities would be three times higher than MBIA had expected, Sullivan & Cromwell stated. This estimate of $3.4 billion was not conveyed to the insurance department, the law firm said.

MBIA's own internal analyses estimated losses on insured commercial mortgage-backed securities between $1 billion and $20 billion, Sullivan & Cromwell said. However, it only provided estimates with zero CMBS losses to the insurance department, the firm said .

In their memorandum, Sullivan & Cromwell quoted from a 1907 decision, writing that when "an agency's approval 'is based upon false information,' petitioner 'may have a remedy through mandamus to right the wrong which he has suffered.' " The banks claim that because the insurance department approved MBIA's transformation on incorrect information, they have the right to have the transformation overturned.

Responding to Sullivan & Cromwell's memorandum, MBIA director of corporate communications Kevin Brown wrote, "The banks' allegations are contrary to the facts. The New York State Insurance Department was given unfettered access to MBIA's books, records, and personnel, and conducted a thorough, independent, and comprehensive investigation prior to approving MBIA's transformation. That approval was proper in all respects, and we remain confident that we will prevail at trial."

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