NEW YORK (Reuters) – Bond insurer MBIA Inc's restructuring during the financial crisis must be annulled because it was based on bad information, a lawyer for banks challenging the restructuring said on Tuesday.
Robert Giuffra, a lawyer for Bank of America Corp and Societe Generale, made the argument in his opening statement in a case the banks brought against MBIA and the state insurance department to overturn the 2009 restructuring.
The reorganization of the Armonk, New York-based bond insurer, once the largest U.S. bond insurer, segregated MBIA's troubled structured-finance business from its traditional municipal bond insurance business.
The banks, which claim they were given no notice of the split, sued MBIA and the New York state insurance department, saying that, as policyholders, they were harmed when $5 billion was siphoned from the MBIA unit that insured mortgage debt.
“They thought they were all in the same boat,” Giuffra said. “When the crisis hit, MBIA said, 'We're going to leave you guys in a listing boat that may have holes in it,'” while public finance policyholders were sent “a new boat.”
State Supreme Court Justice Barbara Kapnick in Manhattan is presiding over the non-jury proceeding. She is expected to decide whether the insurance department's approval of the split was “arbitrary and capricious.”
Giuffra said that standard only applies if the approval was based on accurate information.
“This case is riddled with erroneous assumptions,” Giuffra said. “If the facts were wrong, the arbitrary and capricious standard doesn't apply.”
Giuffra also argued the transaction was based on a flawed one-person review by Jack Buchmiller, an analyst at the state insurance department who reviewed the restructuring.
“We're trying to find the shortcut to get to the decision on transformation,” he quoted Buchmiller saying on Jan. 28, 2009.
The state insurance department reviewed only 1 percent of the MBIA Insurance unit's structured-finance portfolio, Giuffra said, and it never saw a $3.75 million analysis by Lehman Brothers paid for by MBIA, which showed MBIA had far greater losses than the bond insurer was telling the department.
The Lehman study showed MBIA Insurance unit's supposed policyholder surplus of $3.3 billion was a negative, according to the banks.
The restructuring was approved by Eric Dinallo, then superintendent of the insurance department, on Feb. 17, 2009.
The insurance department was combined with banking oversight to form the New York State Department of Financial Services in 2011.
According to transcripts quoted by Giuffra, Buchmiller expressed concern about making a decision before seeing an audited financial statement. If the approval were called into question, it would look like the department had acted in haste, Giuffra quoted Buchmiller as saying on Feb. 9, 2009.
Lawyers for MBIA and the state, who have said the insurance department acted properly in approving the split, will present their case to the judge after the banks.
The banks' opening arguments are scheduled to continue on Thursday. The case is expected to last up to four weeks.
The case is ABN Amro Bank NV et al v. Dinallo, New York State Supreme Court, New York County, No. 601846/2009.
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