Bond Insurer MBIA Inc. Sued by the World’s Leading Financial Institutions

The world’s largest financial companies, including Bank of America (BAC), JPMorgan (JPM), Morgan Stanley (MS), Barclays PLC and UBS AG have filed a lawsuit in New York state court against  MBIA Inc. (MBI) – claiming the biggest bond insurer’s decision to split  businesses earlier this year was fraudulent and left one of the units effectively “insolvent.”

From WSJ: The banks allege MBIA’s split and the transfer of $5 billion in cash and securities from its main insurance unit to a dedicated muni-bond insurance company was “fraudulent” and “an unlawful attempt to escape” its contractual obligations to cover losses from souring mortgage securities.
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Banks that were counterparties to MBIA were kept in the dark about the restructuring until it was complete and made public.

“Our lawsuit simply seeks to ensure that policy holders receive what they have paid premiums for: contractually guaranteed insurance protection,” said Vince DiBlasi, a lawyer at Sullivan & Cromwell who is representing the banks suing MBIA.

About time. Insurance regulators should do more to protect policyholders. The split was clearly beneficial only to the bond insurer and its management at the expense of MBIA policyholders and the insurance clients.

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