The future of MBIA, the monoline insurer of mortgage-backed securities and municipal bonds, among other things, is in peril and likely dependent on the outcome of litigation, according to Floyd Norris in his Jan. 6 New York Times article, “MBIA Fights Banks for Its Life.” Standard & Poors reportedly downgraded MBIA to junk status and warned that its “capital adequacy is very weak.”
One piece of the litigation puzzle centers around MBIA’s “transformation” into two groups ? one that covers municipal bonds and is secured by all of its assets, and the other covering foreign bonds and structured products like mortgage-backed securities, which is secured by only some of its assets. The transformation was approved by MBIA’s regulator, the New York State Insurance Department.
A number of banks, however, believe that the transformation impairs their contractual rights to payments from MBIA, and have filed a suit in New York State Court challenging the department’s approval, which was based on the department’s finding that MBIA was solvent. The banks contend that MBIA has been insolvent for a couple of years, that the proposed transformation was not made public until after it was approved, and that the department knew all of this. The insurance department was ordered to turn over inter-departmental emails that might shed light on these contentions to a judge for review, but that order has been appealed by the department.
“They seem to be fighting hammer and tong to avoid any public disclosure of the internal basis of their decision, said one of the banks’ attorneys, adding that the regulator’s “so-called thorough review was window dressing.”
On another front, MBIA has sued a number of Wall Street banks alleging they misrepresented material facts about the mortgages that backed the securities MBIA insured, specifically that the loans did not meet stated underwriting criteria.
Last year, MBIA disclosed that it would have to pay out $107 million more than expected on mortgage-backed securities claims. Subsequently, this amount was lowered. Norris writes: “How could that be? It was simple: the company increased the amount it expected to get from the banks.” But the outcome of that litigation is speculative, and MBIA’s disclosures “have raised eyebrows both a the S.E.C. and at the Public Company Accounting Oversight Board.”
In short, it appears that MBIA’s ability to stay in business is unlikely unless its transformation survives legal challenge and it wins its lawsuit against banks that have millions of dollars of claims against it.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.