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The move left banks and other investors who had bought insurance on the complex structured bonds from MBIA with losses.
Some banks have settled with MBIA and other bond insurers, and recouped some money on the insurance. Others, such as the 11 banks in this case, have continued to seek to overturn the move, which included a transfer of $5bn of capital.
The four former superintendents for the New York State Insurance Department reviewed documents that were also filed to the court.
Edward Muhl, who held the position between 1995 and 1997, said the split benefited one part of MBIA and its shareholders and management at the expense of remaining policyholders of MBIA insurance. “I’m not aware of any provision in the [law] authorising such an extraordinarily harmful transaction to policyholders,” he said.
In 2009, Eric Dinallo, the New York insurance superintendent who approved the MBIA split, said at the time he hoped new capital could be invested in MBIA after its troubled policies were isolated. “We hope this will help reinvigorate the municipal bond market,” he said.
This has not happened. Instead, MBIA policyholders have continued to question its legality.
Bond insurers, regulated at state level, play only a small role in the US municipal bond market, which is facing growing defaults. Ambac, the second-biggest bond insurer before the crisis, has filed for bankruptcy.
MBIA has struggled to return to its traditional municipal bond insurance business amid the cloud of litigation that hangs over it.
The banks’ case is being brought under New York’s Article 78. In general, the burden of proof the state’s supreme court needs in such cases to overturn officials’ decisions is very high. MBIA is expected to file documents in its defence in the coming months. In July, the court might consider whether to hold a trial.
Chuck Chaplin, president and chief financial officer at MBIA, said it would “respond to the materials filed by the banks in detail in due course”. “We believe that they are without merit and we remain confident the court will affirm the decision to approve MBIA’s transformation, which came after a thorough and careful analysis.”
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