A group of banks seeking to prevent guaranty insurer MBIAInsurance Corp. from splitting into two companies says the companyunderestimated its losses by as much as $10 billion to the N.Y.State  Insurance Dept.

In papers filed with the Supreme Court of theState of New York in New York City this week, the 11 financialinstitutions that hold insurance policies covering collateralizeddebt obligations allege that the underestimated losses wererevealed during an analysis by BlackRock Solutions.

The plaintiffs further argue that then-N.Y. Superintendent ofInsurance Eric Dinallo failed to adequately review MBIA's numberswith an independent analysis firm, such as BlackRock.

If he had done so, the banks say, it would have become apparentthat a split of the company was not feasible.

In the recent BlackRock evaluation, a team of 20 financialexperts reviewed the MBIA's financial positionregarding its exposure to CDOs and found that future losses rangedfrom $13.8 billion to as much as $20.8 billion in a worst-casescenario.

"According to BlackRock's analysis, the expected insurancelosses on less than one quarter of MBIA Insurance's portfoliorendered MBIA Insurance deeply insolvent as of Dec. 31, 2008," thefiling says. "Indeed, the BlackRock loss projections put to restany notion that MBIA Insurance likely will meet the enormouspending liabilities on its structured-finance insurance policiesover the next 30 and more years."

In an e-mail statement, Chuck Chaplin, MBIA's president and CFO,says: "Although MBIA and its counsel will respond to the materialsfiled by the banks in detail in due course, we believe they arewithout merit and we remain confident that the court will affirmthe New York State Insurance Department's decision to approveMBIA's transformation, which came after a thorough and carefulanalysis.

MBIA sought permission to split the company in two, placing itshealthy municipal-bond insurance business in one company to benamed National Public Finance Guarantee Corp. while MBIA wouldretain the CDO coverage exposures.

The banks say that under that structure the insurer would nothave enough reserves to pay claims. The banks have filed an Article78 action against the insurance department to nullify thesplit.