Bond insurer MBIA’s chief attorney told a judge Thursday that the process the New York State Insurance Department (NYSID) and MBIA took to split the company was long and public.
Not only did the banks now suing the insurer know of the process, according to MBIA attorney Marc Kasowitz, but at certain points the banks actually supported company’s transformation.
Kasowitz made these and other points at the start of presenting MBIA’s defense in a lawsuit by Bank of America and Société Générale. The banks are trying to reverse the NYSID’s split of MBIA into two parts in early 2009.
The banks’ attorney has said the steps leading to the transformation were done quickly, in secret, and without bank input, Kasowitz told Judge Barbara Kapnick. All of the claims are false, he said.
Discussions between MBIA and NYSID of possibly transforming the insurer started in February 2008, nearly a year before the actual split occurred, Kasowitz stated. An attorney with MBIA’s law firm at the time, Dewey & LeBoeuf, stated in an affidavit that following February 2008 she had months of discussion with NYSID.
On Feb. 25, 2008, in a published analyst note, a Société Générale analyst said of the proposed transformation, “We had suggested a split.”
“This is one of the few ways to equitably raise new capital given the problems in assessing structured credit risk at present,” the analyst wrote. The split “could achieve rating stability and would facilitate capital-raising.”
On Feb. 26, 2008, in a public research note from its securities section, Bank of America commented on the proposed MBIA transformation saying, “We believe such a separation is feasible.”
Kasowitz noted that it went on to say, “We applaud MBIA for its decisiveness under CEO Jay Brown’s leadership.”
Another Bank of America research note from March 9, 2008, said that MBIA was considering a split into two units.
On March 28, 2008 a Bank of America employee sent an email to other BofA employees saying that MBIA’s transformation was a “high priority.”
In spring of 2008 the rating agencies downgraded MBIA, making it impossible for it to issue new insurance for either municipal bonds or structured finance, Kasowitz told the court. The idea behind the split of the company was to allow the part handling public finance to get high enough ratings to write new policies, he said.
On June 6, 2008, a Bank of America employee wrote in an e-mail that the MBIA split might occur “sooner than expected.”
Meanwhile, in 2008 NYSID engaged in a normally scheduled review of MBIA’s business, Kasowitz told the court.
Kasowitz presented other evidence to the court of the public and protracted nature of the department’s consideration of MBIA’s split.
On another topic, Kasowitz said the banks’ attorneys have argued it was impermissible for the regulator to consider things besides the interests of the policyholders.
When NYSID was considering transforming MBIA, the economy was contracting sharply and municipalities were having a hard time selling bonds, Kasowitz said. The department wanted to “unfreeze” the municipal bond market by getting MBIA active at insuring bonds again.
There is nothing in insurance law that prevents the NYSID from considering social or economic policy goals in its decisions, Kasowitz said.
He noted that the officially stated first goal of the National Association of Insurance Commissioners is to “protect the public interest.
