Of the 18 banks that challenged MBIA’s restructuring in 2009, only two – Bank of America and Société Générale – remain. On Monday, unless there’s a last-minute settlement this weekend, they will finally go to trial in New York State Supreme Court to argue that New York state insurance regulators should not have approved MBIA’s split, which stripped $5 billion in capital from MBIA’s crippled structured-finance insurance business.
But exactly what shape the trial will take – and what relief BofA and SocGen can ultimately obtain – remains unclear. Bank lawyers from Sullivan & Cromwell, MBIA counsel from Kasowitz Benson Torres & Friedman, and state lawyers from the office of New York Attorney General Eric Schneiderman are all preparing for a proceeding whose parameters have not been set. The banks call it a trial and continue to insist they are entitled to call expert witnesses such as former state insurance officials, who would opine on the adequacy of former Insurance Superintendent Eric Dinallo’s vetting of MBIA’s restructuring. MBIA and the state say the proceeding, brought under an expedited process known as Article 78, should be limited to a few witnesses with direct knowledge of the regulatory investigation. Justice Barbara Kapnick, who is overseeing the case, has called the trial “a glorified oral argument, with some testimony, the crucial testimony, to support it.”
Kapnick agreed at a hearing on Apr. 20 to permit witness testimony at the trial, but she didn’t specify who could be called as a witness. Nor did she set firm rules when she held a conference call this week with all of the parties. So the first order of business Monday will almost certainly be argument on motions to define the trial, though it’s just as likely that the lawyers will end up fighting over the witnesses one by one, as they are proposed. Kapnick has set aside 16 trial days over four weeks for the proceeding.
MBIA has spent more than $1 billion to settle with the 16 other banks that were part of the original coalition challenging its restructuring, including, most recently, Natixis, UBS, Morgan Stanley and Royal Bank of Scotland. According to MBIA’s quarterly filing with the Securities and Exchange Commission on May 10, the insurer has shed tens of billions of dollars of exposure through those deals. In just the first five months of 2012, MBIA commuted $11.5 billion of exposure.
But the insurer’s structured-finance arm, MBIA Insurance, has had to borrow from its better-capitalized municipal bond division, MBIA National, to fund those settlements. Last fall MBIA Insurance took out a $1.1 billion secured loan from MBIA National, at the time it announced a settlement with Morgan Stanley. According to its May 10 filing, MBIA Insurance has borrowed an additional $443 million from MBIA National in the last two months.