The remaining bank policyholders suing bond insurer MBIA Inc. have requested that the New York Insurance Department hire an independent expert to analyze expected future losses in MBIA’s structured finance portfolio.
Robert Giuffra, partner at Sullivan & Cromwell, wrote a letter on behalf of the bank policyholders to Benjamin Lawsky, the superintendent of the insurance regulator.
The letter stems from a lawsuit filed in May 2009 by a group of banks charging that the $5 billion restructuring of MBIA Insurance Corp. into two entities was fraudulent. The split resulted in one entity that insures municipal bond policies — National Public Finance Guarantee Corp. — and left MBIA Insurance holding riskier policies, such as mortgage-backed securities.
The group of banks holding MBIA policies challenged the restructuring, claiming that the transfer of municipal bond insurance policies to National left them with the riskier assets.
The banks were also part of a group holding MBIA policies that were pursuing a separate Article 78 action against Eric Dinallo, former superintendent of the NYID, claiming the regulator’s approval of the restructuring, which took place after MBIA Insurance lost its triple-A ratings in the financial crisis, was fraudulent.
For its part, MBIA sued many of the banks in return for misrepresenting the soundness of the mortgage loans that the banks had MBIA insure.
The letter by Giuffra, dated Jan. 11, says, “The bank policyholders believe that MBIA Insurance is insolvent and rapidly depleting its limited remaining capital. If MBIA is confident that MBIA Insurance is solvent, then MBIA should have no bona fide concern about an independent evaluation of MBIA Insurance’s expected future losses.”
He continues, “Because MBIA Insurance’s losses have far exceeded its loss reserves, the bank policyholders believe there is no basis to continue to rely on the demonstrably flawed loss reserving methodologies of MBIA’s self-interested executives.”
The letter also asks for a review of transfers from MBIA Insurance to MBIA Inc., “including the extent to which such transfers have been used to fund MBIA’s exorbitant executive compensation scheme.”
A spokesman for the NYID declined to comment.
A spokesman for MBIA said, “Although the banks have been predicting MBIA Insurance Corp.’s imminent demise for almost three years, it remains solvent and fully capable of meeting all of its expected obligations. Their letter conveniently ignores the fact that MBIA has continued to pay all of its claims, including claims and commutation payments to 14 former plaintiffs and that Bank of America, one of the remaining plaintiffs, has failed to pay MBIA approximately $3 billion in contractually due putback claims. As the Article 78 trial approaches, the desperation of the few remaining banks has become increasingly clear.”
Since the lawsuit was filed in 2009 by the bank policyholders, most of those banks have settled with MBIA. Most recently BNP Paribas announced a settlement with MBIA.
Late last year, Morgan Stanley and MBIA dropped lawsuits against each other. MBIA paid Morgan Stanley $1.1 billion. HSBC also settled with MBIA, with the insurance company forking over $30 million. Last fall, the Royal Bank of Scotland and Wells Fargo reached a settlement with MBIA as well.
The remaining plaintiffs against MBIA are Bank of America Merrill Lynch, Natixis, Société Générale, and UBS — down from the approximately 20 plaintiffs listed when the lawsuit was filed.
