NU Online News Service, March 15, 2:47 p.m. EST
Banks fighting the split of MBIA into two companies said they submitted affidavits from four former New York insurance superintendents stating that the department violated its duty by allowing the insurer to make the move.
James Corcoran, Edward Muhl, Gregory Serio and Richard Stewart, all working in private consulting practice today, were retained by the plaintiffs to dispute the action of New York State Superintendent Eric Dinallo in 2009 to allow the carrier to split the company in two.
Facing mounting losses because of the mortgage-backed securities it had insured—which had soured in the face of the recession—the company split its risks into two separate units. The healthier unit, named National Public Finance Guarantee Corp., would continue to cover municipal bonds. The other company would cover the now-soured mortgage securities.
In a statement from the plaintiffs, the four former superintendents said the insurance department "violated its core mission to protect policyholders" when it allowed the company to split.
The plaintiffs said the experts reviewed information that was not available until recently and concluded that the "department's approval process was rushed, deficient and perfunctory, and improperly relied on outdated, misleading and inaccurate financial information provided by MBIA."
In his affidavit, Mr. Corcoran said the action "creates a dangerous precedent for policyholders of New York companies."
Mr. Muhl said Mr. Dinallo had "abandoned his paramount duty to protect MBIA Insurance's structured-finance policyholders."
Mr. Serio faulted Mr. Dinallo for assigning one employee to the "impossible task of single-handedly analyzing the financial condition of MBIA insurance" and said he further failed to ask that employee for his conclusion.
Mr. Stewart said the department, by its actions, did not protect all of the MBIA's policyholders despite the fact that it was suppose to.
For its part, MBIA disputed the opinions of the superintendents and said its actions would hold up in court.
"Although MBIA and its counsel will respond to the materials filed by the banks in detail in due course, we believe that they are without merit and we remain confident that the court will affirm the New York State Insurance Department's decision to approve MBIA's transformation, which came after a thorough and careful analysis," said Chuck Chaplin, MBIA's president and chief financial officer, in a statement. "MBIA Insurance Corp. was solvent then and remains so today, two years and two unqualified audit opinions later."
While the banks are fighting the Armonk, N.Y.-based bond insurer over the company's split, MBIA has been fighting back. The insurer is embroiled in a number of suits against the banks, claiming that the mortgage-backed securities that it insured were not properly vetted, which violated the terms of the insurance agreement, and should not have been insured.
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