MBIA yesterday said a lawsuit filed Wednesday by a number of financial institutions accusing it of an “unlawful restructuring” of its insurance operations is “without merit”.

As it has done in response to earlier lawsuits over the restructuring, MBIA reiterated that the New York Insurance Department approved the transaction. A group of hedge funds had already sued claiming the split advantaged public finance policyholders at the expense of structured finance policyholders, while one of MBIA Insurance Corp.’s largest surplus note holders also filed a lawsuit.

Under the restructuring, MBIA split its public finance and structured finance books. MBIA Insurance Corp. of Illinois — now National Public Finance Guarantee Corp. — took responsibility for the public finance obligations and also received $5 million, while MBIA Insurance retained its structured finance book.

MBIA said that it undertook the restructuring to form a domestic public finance company that could generate new business and help municipal issuers.

“Taxpayers will also benefit, which is especially important at a time when they have already provided substantial assistance to some of the plaintiff banks,” MBIA said in a statement.

The plaintiffs, which include financial institutions such as Citigroup, JPMorgan Chase, and Bank of America, said Wednesday they also wanted to help the municipal market and bondholders. They criticized MBIA for working in secret to design the restructuring, rather than talking to all stakeholders.

The plaintiffs say MBIA left them with structured finance guarantees from an “effectively insolvent shell company” in MBIA Insurance in part to pressure them into settling their claims.
In a report earlier this week, analysts at CreditSights said their discussions with the New York Insurance Department have led them to believe the restructuring plan is “unlikely to be scuttled.”

They also said they believe MBIA Insurance can meet its obligations of the structured finance book in the intermediate term.

“While significant uncertainty remains regarding MBIA’s national subsidiary, we believe the separation of the public finance and structured finance book is a necessary step to sustain the company as an ongoing entity,” the analysts wrote.


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