Moody’s: Bankers’ Suit Against MBIA Could Help & Hurt Insurer

NU Online News Service, March 28, 2:49 p.m. EDT

If bankers are able to upset the restructuring plan of MBIA that splits the company into two insurers, one MBIA entity would be helped, but it would probably harm the company as a whole, Moody's Investors Service says.

The rating agency makes this point in light of a recent report from four former New York State insurance superintendents who say the department violated its duty by allowing the insurer to split itself into two companies.

The four former regulators were hired by the 12 banks challenging MBIA over its restructuring plan. Under the plan, MBIA Insurance would retain all of the residential mortgage-backed securities (RMBS) policies it wrote guaranty insurance business for that have resulted in a heavy claims burden on the company. The other company, National Public Finance Guarantee Corp., would continue to cover its healthy municipal bonds business.

If the plan, which is going before an administrative court judge in New York under an Article 78 hearing, is overturned, MBIA Inc. would have access to the financial resources of National Public.

Moody's says if the banks are successful in their motion, the result would be credit negative for MBIA Inc. and for National Public. However, the result would be credit positive for MBIA Insurance.

Moody's notes that the current lawsuits have had a negative impact on National Public because the company has been unable to write "any significant new business in the municipal market." It has also hurt MBIA Inc., which depends on National Public for dividend income.

Moody's further notes that seven of the original 19 banks have withdrawn from the suit after coming to settlements with MBIA.

However, the continuation of the legal action by the remaining banks "is an indication that MBIA's ultimate structure and the true risk profile of the various entities of the group may not be known for quite some time."