Eighteen financial institutions have jointly sued MBIA over splitting its business in earlier this year, according to report from Dow Jones.

These institutions claimed that the firm's decision to split its businesses in early 2009 was fraudulent and left one of the units effectively insolvent.

The lawsuit was filed in New York state court. It was brought by U.S. and foreign banks, such as JPMorgan Chase & Co., Bank of America Corp., Morgan Stanley, Canadian Imperial Bank of Commerce, Barclays  as well as UBS, the report from Dow Jones said.

A spokesperson for the bond insurer had no comment on the lawsuit while the firm's executives have said that recent legal challenges to their restructuring are without merit

This particular case follows the suits similarly brought against the insurer recently by hedge funds as well as investment funds that own debt securities issued or insured by MBIA.

In February, MBIA split its trouble exposures to mortgage from its profitable U.S. municipal-bond insurance portfolio to resume writing municipal debt guarantees, said the report.

Meanwhile, the original MBIA Insurance unit was left with $10 billion in claims paying resources to back guarantees on around $240 billion in structured finance securities as well as non-U.S. bonds.Its rating was also downgraded to "junk" by the rating agencies, Dow Jones said.

The financial institutions are alleging that MBIA's split as well as the transfer of $5 billion in cash and securities from its main insurance unit to a dedicated muni-bond insurance firm was fraudulent  as well as an unlawful attempt to escape its contractual obligations to cover losses from MBS.

Many of the banks had bought credit derivatives from the firm, insuring them against losses on securities backed by subprime mortgage assets as well as commercial real-estate loans.

Banks that served as counterparties to MBIA were kept in the dark about the restructuring until it was complete and made public. So representatives from around 15 financial institutions complained to New York State Insurance Superintendent Eric Dinallo in mid-March. Dinallo approved MBIA's split.

Meanwhile, a few weeks ago, some representatives of the banks met with MBIA and insurance regulators to discuss the situation, according to the Dow Jones report.

While the bond insurer's business split disadvantaged policy holders because of its weakened insurance unit, the move has thus far benefited the holding company's shareholders as well as MBIA's top management, the lawsuit said.

Meanwhile, MBIA and insurance regulators have stated their internal projections and estimates of future losses imply the original insurance unit is still solvent.

But, the banks said they think that MBIA Insurance is undercapitalized. They added that it has no potential to write new insurance and will end up with more liabilities than claims paying resources.

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