Two New York Senate committee chairmen have raised the possibility of investigating bond insurer MBIA Inc.’s behavior when it applied for a transformation of the company during 2008 and 2009.
Senate Insurance Committee chairman James Seward and Senate Investigations and Government Operations Committee chairman Carl Marcellino on Wednesday issued a news release saying they were “considering conducting an inquiry and holding hearings related to the company’s 2009 restructuring that was approved by the former New York State Insurance Department.”
A trial began this week in New York Supreme Court in which two banks are suing MBIA over the division of the company into two parts, a municipal bond insurer and a subsidiary that insured asset-backed securities owned by the banks.
“The ongoing litigation [between two banks and MBIA] pertains to allegations that MBIA withheld material information from the State Insurance Department when MBIA sought the department’s approval for the company’s restructuring,” the press release states.
“The New York State Senate has an obligation to ensure regulated entities provide New York’s state government with complete and accurate information, which is particularly necessary when an insurance company seeks approval to restructure itself in a way that could negatively impact policyholders and-or customers,” the press release continues.
“At this point [the senators] are just trying to keep an eye on the court hearing and if it turns out there is a need for a Senate hearing, then they would move forward,” said Jeffrey Bishop, spokesman for Seward.
At Tuesday’s court hearing, the banks’ attorney, Robert Giuffra Jr., told the judge that when MBIA applied to the NYSID to be split, it hid the most up-to-date analysis by Lehman Brothers of projected commercial-mortgage-backed securities losses at MBIA.
Giuffra also spoke of when the department put MBIA through a hypothetical stress test in the transformation application. The insurer’s $1.4 billion error when calculating the value of tax benefits from losses allowed it to pass the test when it otherwise would have failed, he said.
“Today’s announcement from the New York State Senate reflects one of many false allegations by the banks that we will address in the course of the Article 78 hearings that began earlier this week,” MBIA said in statement. “As acknowledged by the Department of Financial Services in their filings with the Court, the department had full and unlimited access to information in connection with their evaluation of transformation.
“We remain confident that the court will uphold the New York State Insurance Department’s approval of transformation in the Article 78 proceeding brought by Bank of America and other banks almost three years ago. We intend to fully cooperate should the Senate decide to proceed with an inquiry or hearings.”
MBIA lead attorney Marc Kasowitz sent a letter to the judge late Wednesday complaining about the press release. He noted that it appeared after years of coverage of the banks’ allegations and two days after the court hearing had started.
If the bank’s law firm, Sullivan & Cromwell LLP, was involved in the preparation of the press release, then the firm may be violating New York State’s rules of professional responsibility for lawyers, Kasowitz told the judge. He asked the judge to ask the banks’ attorneys on Thursday whether they or their agents were involved with the preparation of the press release.
After the senators released their press release, Giuffra released his own, saying: “We look forward to continuing to present our case and are confident that both the law and the facts on our side.”
