MBIA has had strokes of luck lately, with the most recent positive developments coming from lawsuits filed against the company.
In the past several weeks, two banks holding MBIA policies dropped a lawsuit against the insurer that claimed the $5 billion restructuring of MBIA Insurance Corp. into two entities was fraudulent. The split resulted in one entity that insures municipal bond policies — National Public Finance Guarantee Corp. — and left MBIA Insurance holding riskier policies, such as MBS.
The two banks — KBC Investments and Credit Agricole — were part of a larger group of banks holding MBIA policies that are challenging the restructuring, claiming that the transfer of municipal bond insurance policies to National left them with the riskier assets. The original lawsuit was filed in May 2009 under the debtor and creditor law and common law.
The banks were also part of a group holding MBIA policies that were pursuing a separate Article 78 action against Eric Dinallo, former superintendent of the New York Insurance Department (NYID), claiming the regulator’s approval of the restructuring, which took place after MBIA Insurance lost its triple-A ratings in the financial crisis, was fraudulent.
The banks that dropped out this month dismissed both lawsuits, bringing the number of banks listed as plaintiffs in the case to nine from approximately 20 when the lawsuit was originally filed. The banks still named in the lawsuit include the Royal Bank of Scotland, BNP Paribas, HSBC Bank, Bank of America Merrill Lynch, Morgan Stanley, Natixis, Société Générale, UBS, and Wells Fargo.
In its filings, Credit Agricole and KBC did not provide reasons for dropping the lawsuits. Spokespersons for the banks did not return calls seeking comment.
In similar good news for the bond insurer, another plaintiff in a different case dropped its lawsuit. Aurelius Capital Management and Fir Tree Capital sued MBIA in 2009 over its transformation into two entities. Fir Tree recently dismissed the lawsuit without prejudice, but did not cite an explanation for the withdrawal. Aurelius Capital is still named as a plaintiff in the suit.
While MBIA declined to comment on actions regarding lawsuits, many speculate that settlements that are dropped with prejudice — like KBC and Credit Agricole — means a settlement could be near.
“Dismissing a settlement with prejudice means the claim cannot be refiled, so it typically means a settlement could happen,” said Manal Mehta, co-founder of hedge fund Branch Hill Capital, which own shares of MBIA in its funds.
“A number of counterparties have continued to drop out as MBIA enters settlements and commutations,” Mehta said. “This might be part of MBIA chief executive Jay Brown’s strategy to clean up exposures and to settle as much as possible. And it is likely that the transformation litigation will never go to trial.”
In mid-July, MBIA Insurance voluntarily dismissed with prejudice its case against Bank of America Merrill Lynch, and according to some reports, settled for an undisclosed amount two days later. A spokesman for MBIA declined to comment beyond confirming the lawsuit had been discontinued.
Brown has not named specific banks with which it expects to reach a settlement, but said in an earnings call that the Bank of America Merrill Lynch settlement with rival bond insurer Assured Guaranty increased attention from regulators and buoyed MBIA’s confidence that it will prevail in its pursuit of settlements.
Spokesmen for the bank policyholders, the NYID, and MBIA declined to comment.