Report comment

[url=http://www.bloomberg.com/apps/news?pid=20601110&sid=auWr37TmxzBA]
[quote]Bank of America, JPMorgan Sue MBIA Over Unit’s Split (Update2)[/url] Bank of America Corp., JPMorgan Chase & Co., UBS AG and 15 more of the world’s largest financial companies sued MBIA Inc., saying the biggest bond insurer’s split of its guarantee business illegally cut their odds of getting paid on policies.


MBIA stripped $5 billion of assets out of its MBIA Insurance Corp. division to fund a new unit amid “an ongoing financial crisis that has made it increasingly likely that MBIA Insurance will have to pay out billions” of dollars, according to the complaint filed today in New York State Supreme Court in Manhattan.

The case adds to two previous lawsuits filed by funds over the February restructuring by Armonk, New York-based MBIA, which New York State Insurance Superintendent Eric Dinallo approved. Banks concerned that the split of the business hurt them had met with state regulators in March, David Neustadt, a spokesman for the New York State Insurance Department, said at the time.

The decision to move assets from the unit and “render it effectively insolvent was a blatant attempt to enrich MBIA Inc. and its management at the expense of MBIA Insurance and its policyholders,” Vince DiBlasi, a lawyer who represents the group at Sullivan & Cromwell LLP, said in an e-mailed statement.

The group also includes Barclays Plc, HSBC Holdings Plc, Citigroup Inc., Canadian Imperial Bank of Commerce, BNP Paribas, Royal Bank of Canada, Morgan Stanley, Sumitomo Mitsui Financial Group Inc., Societe Generale, Credit Agricole SA and Wells Fargo & Co. or their units.

‘In Secret’

The companies “are among the world’s leading financial institutions, which previously have worked with distressed insurers to reach negotiated solutions that maximized value and respected the interests of all stakeholders,” according to their complaint. MBIA’s restructuring, by contrast, was designed “in secret,” they said.

Kevin Brown, a spokesman for MBIA, and Neustadt declined to immediately comment.

MBIA Chief Executive Officer Jay Brown is seeking to use the restructuring to re-enter the municipal-bond business, after record losses on mortgage-backed debt amid the worst housing slump since the Great Depression.

Brown’s efforts to salvage MBIA, where he reclaimed the CEO title in 2008 after three years as chairman, also involve bids to recoup home-loan losses through the courts, with actions including suits against Bank of America and GMAC LLC.
Hedge funds run by Aurelius Capital Management and Fir Tree Partners alleged in their suit, filed March 11, that “the federal government is one of the largest victims of this looting,” after the U.S. agreed to share losses on some banks’ assets and injected capital into more lenders.

Martin Whitman’s Third Avenue Management LLC, MBIA’s second-largest shareholder as of Dec. 31, according to data compiled by Bloomberg, said in an April 6 suit that the separation devalued notes it holds that were issued in January 2008 by the unit in a bid to save its AAA ratings.

‘Without Merit’

MBIA believes that the previous litigation “is without merit and intends to contest it vigorously,” the insurer said in its quarterly earnings statement May 11.

Because New York regulators approved of the “transformation,” any challenge to it should be brought as a so-called Article 78 proceeding under which official actions are contested, not as a civil case, the company said.

Rob Haines, an analyst at CreditSights Inc. in New York, wrote in a report yesterday that the split is a “necessary step to sustain the company as an ongoing entity” and “unlikely to be scuttled,” based on his recent conversations with state regulators.

Officials told Haines that they had conducted “rigorous testing” of MBIA Insurance’s capital, he wrote. “While there is no quantitative test that dictates when such a transaction is acceptable, the superintendent is legally vested with a great deal of authority and discretion around these types of actions.”

Buyback Offer

Wisconsin Insurance Commissioner Sean Dilweg, who oversees competitor Ambac Financial Group Inc.’s main unit, said in a March interview that “we’ve always had concerns with splitting the book because you get into drawing lines and giving preferences,” referring to New York-based Ambac’s guarantees.

MBIA today offered to buy back preferred stock issued by the insurance unit for 10 cents on the dollar.

Brown said on a conference call yesterday that about 66 percent to 80 percent of his insurer’s losses on second-mortgage bonds and mortgage-related collateralized debt obligations, its two worst insurance categories, are tied to collateral that was “ineligible” to be included in the deals, and so its guarantee payouts may be recouped, either through negotiations or suits.

MBIA President Chuck Chaplin said on the call suits against it over the split “will likely have some impact on our marketing in the short run” as MBIA attempts to win new municipal-bond business with the National Public Finance unit.

The case is ABN Amro Bank N.V., Barclays Bank PLC, et al. v. MBIA Inc., MBIA Insurance Corp. and MBIA Insurance Corp. of Illinois, 601475/2009, Supreme Court of New York (Manhattan).

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net [/quote]