Confidence Game - Christine Richard [158]
In early 2009, Jay Brown separated MBIA Insurance Corporation into two businesses with the permission of New York State Insurance Department Superintendent Eric Dinallo. The plan was for MBIA Insurance Corporation to keep the structured finance guarantees, including those on toxic subprime CDOs. Its rating was subsequently downgraded by Moody’s deep into junk. MBIA moved its U.S. municipal finance business to a new company called the National Public Finance Guarantee Corporation, which obtained an investment-grade rating.
Brown said that the company will survive its mistakes. In his letter to shareholders in the 2008 annual report, Brown cited something he called “the ninth wave,” a sailor’s term for a single, freakishly large wave. “Every so often, a giant wave comes long that either sweeps you under and annihilates you, or through skill and vision you successfully ride the wave farther than you’ve ever gone before,” Brown wrote. “I believe that time will prove that we have what it takes to endure for the long ride ahead.”
Not everyone is so sanguine about MBIA’s future, including some of its former allies. Brown’s decision to split the company in two caused Marty Whitman to file suit against MBIA in April 2009, and refer to MBIA management as “toxic.” Whitman owned surplus notes with a face value of $400 million as of September 2008. The notes, sold to help salvage MBIA’s triple-A rating, remain the obligations of MBIA Insurance Corporation, which has been left with the contracts on the CDOs and other subprime securities. The notes, which Ackman warned the public against buying, were quoted at 20 cents on the dollar in late 2009, implying that holders expected to lose 80 percent of their investment.
“MBIA sold us these surplus notes and then, to our surprise and distress, stripped away the principal assets as well as the only going concern operations within MBIA Insurance Corporation,” Whitman said. “That’s wrong, and a big disappointment to us, especially after we went to bat for them with our pocketbooks and more.”
In May 2009, 18 financial institutions, including Merrill Lynch, Citibank, JPMorgan Chase Bank, Morgan Stanley, and UBS, sued MBIA, accusing it of siphoning off assets that would be needed to cover claims on securities backed by mortgages in order to set up a new municipal bond insurance company. “As various commentators have observed, the credit markets expect that MBIA Insurance will ‘wither and die,’ thereby saddling policyholders . . . with billions in losses,” according to the suit. The banks also sued Eric Dinallo for approving the split. MBIA said in a statement that the suit lacked merit.
MBIA and the other bond insurers lashed back. MBIA filed a lawsuit against Merrill, saying the firm “resorted to a scheme of repackaging” mortgage securities and CDOs, which it knew would result in losses. The suit alleged that Merrill Lynch was aware that MBIA “stood to earn premiums of less than one-thousandth its nominal exposure.” Meanwhile, because MBIA “did not and could not perform a cost-effective loan-level valuation analysis of the ML-series CDOs, it relied on and trusted Merrill Lynch’s statements about the quality of the underlying loans.” MBIA also sued several mortgage originators, including Countrywide Financial, claiming it had been fraudulently induced to guarantee risky securities backed by home-equity loans and other types of home loans.
Courts will spend years untangling the billions and likely trillions of dollars of risk transfer now under dispute. FGIC’s lawsuit against IKB over its Rhineland Funding guarantee was dismissed in January 2009. The judge ruled that New York wasn’t the appropriate forum to hear a dispute between the U.K. subsidiary of a New York-based insurance company and a German bank (now owned by a Texas hedge