Banks fighting the split of MBIA Insurance Corp. into two companies said they submitted affidavits from four former New York insurance superintendents stating that the N.Y. State Insurance Dept. violated its duty by allowing the insurer to make the move.
Plaintiffs retained former top regulators James Corcoran, Edward Muhl, Gregory Serio and Richard Stewart, all working in private consulting practice today, to dispute the action of then-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.
A statement from the plaintiffs said the four former superintendents 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and concluded that the "department's approval process was rushed, deficient and perfunctory, and improperly relied on outdated, misleading and inaccurate financial information provided by MBIA."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 then failing to ask that employee for his conclusion.
Mr. Stewart said the department, by its actions, did not protect all of MBIA's policyholders.
For its part, MBIA disputed the opinions of the superintendents and said its actions would hold up in court.
Chuck Chaplin, MBIA's president and chief financial officer, said 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 that they should not have been insured.
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