Banksvmbia 5.15 Transcript
165
In The Matter Of: ABN AMRO v. DINALLO May 15, 2012 Supreme Court - New York County Original File ABN AMRO 051512.txt Min-U-Script®
Transcript of Banksvmbia 5.15 Transcript
In The Matter Of:ABN AMRO v.
DINALLO
May 15, 2012
Supreme Court - New York County
Original File ABN AMRO 051512.txt
Min-U-Script®
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2 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - CIVIL TERM - PART: 39
3 ----------------------------------------------------X ABN AMRO BANK N.V.; BARCLAYS BANK PLC; BNP
4 PARIBAS; CALYON; CANADIAN IMPERIAL BANK OF COMMERCE; CITIBANK, N.A.; HSBC BANK USA N.A.; JP MORGAN CHASE
5 BANK, N.A.; KBC INVESTMENTS CAYMAN ISLANDS V LTD.; MERRILL LYNCH INTERNATIONAL; BANK OF AMERICA, N.A.;
6 MORGAN STANLEY CAPITAL SERVICES INC.; NATIXIS; NATIXIS FINANCIAL PRODUCTS INC.; COOPERATIEVE
7 CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., NEW YORK BRANCH; ROYAL BANK OF CANADA; THE ROYAL
8 BANK OF SCOTLAND PLC; SMBC CAPITAL MARKETS LIMITED; SOCIETE GENERALE; UBS AG, LONDON BRANCH; and
9 WACHOVIA BANK, N.A.,
10 Petitioners,
11 -against-
12 ERIC DINALLO, in his capacity as Superintendent of the New York State Insurance Department, the
13 NEW YORK STATE INSURANCE DEPARTMENT; MBIA INC.; MBIA INSURANCE CORPORATION; and NATIONAL PUBLIC
14 FINANCE GUARANTEE CORPORATION (f/k/a MBIA INSURANCE CORP. OF ILLINOIS),
15
16 Respondents. ----------------------------------------------------X
17 Index No. 601846/09 60 Centre Street New York, New York
18 May 15, 2012
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20 B E F O R E:
21 HONORABLE BARBARA R. KAPNICK, Justice of the Supreme Court
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2 A P P E A R A N C E S:
3 SULLIVAN & CROMWELL, L.L.P.
4 Attorneys for the Petitioners 125 Broad Street
5 New York, New York 10004 BY: ROBERT J. GIUFFRA, ESQ.
6 MICHAEL H. STEINBERG, ESQ.
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8 KASOWITZ BENSON TORRES & FRIEDMAN, L.L.P. Attorneys for the MBIA Respondents
9 1633 Broadway New York, New York 10019-6799
10 BY: MARC E. KASOWITZ, ESQ. KENNETH R. DAVID, ESQ.
11 JOSHUA GREENBLATT, ESQ.
12 OFFICE OF THE ATTORNEY GENERAL
13 Attorneys for the State Respondents 120 Broadway
14 New York, New York 10271 BY: DAVID HOLGADO, ESQ.,
15 MARK E. KLEIN, ESQ. Assistant Attorneys General
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17 VICKI K. GLOVER, CSR, RMR, CRR
18 CLAUDETTE GUMBS, Official Court Reporters
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2 M O R N I N G S E S S I O N
3 THE COURT: Good morning.
4 MR. GIUFFRA: Good morning, your Honor. How are
5 you?
6 THE COURT: Good. How are you?
7 Okay. So, Mr. Giuffra, are you ready to go or are
8 you --
9 MR. GIUFFRA: Yeah, I'm all set to go. I have one
10 small request, your Honor. Can I move the podium here so I
11 can see you? Because I think over there we're kind of
12 blocked by all the equipment. Is that okay?
13 Thanks so much. I really appreciate it.
14 MR. KASOWITZ: Certainly no objection to that.
15 Just, I had neglected yesterday, your Honor, to
16 point out that we had another motion, and the motion that
17 we had, which I don't have to argue now but I just want to
18 note it for the record, it's a Frye motion directed to the
19 petitioners' expert BlackRock who we will be seeking --
20 we'll do it during argument -- seeking to exclude because
21 of a conflict of interest and they have an opaque black box
22 analysis that we can't discern. Counsel will be referring
23 to them, I'm sure, during their argument. So to try to
24 minimize any kind of objection or interruption during the
25 argument, I just wanted to note the objection upfront and
26 we'll argue it during our presentation.
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2 THE COURT: Okay.
3 MR. GIUFFRA: Your Honor, we'll respond after he
4 does.
5 THE COURT: Okay. We did read those papers so we
6 know that, of course.
7 MR. KASOWITZ: Thank you, your Honor.
8 MR. GIUFFRA: Good morning, your Honor.
9 THE COURT: Good morning.
10 MR. GIUFFRA: And we really welcome this
11 opportunity to present argument to the Court on why we
12 think the Court should grant this petition. My wife gave
13 me some advice last night; I'm going to try to follow it,
14 which is to speak slowly. Being from New York, I tend to
15 speak quickly. And we had a lot of slides going up and
16 down yesterday, and so I'm going to try to go through it at
17 a nice pace.
18 This will probably take several days. As your
19 Honor knows, the record in this case is voluminous.
20 There's probably more than 2000 pages of briefs and
21 affidavits and hundreds of exhibits, and the thing I'd
22 really like to do, your Honor, is to be helpful to you and
23 try to answer your questions about the evidence that's in
24 the voluminous papers that your Honor has.
25 My partner Mike Steinberg will be doing some of
26 the talking and so we'll be splitting that.
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2 My clients are financial institutions, your Honor,
3 but I think it's more important to think of them, they are
4 policyholders of MBIA Insurance. They are no different
5 than anyone else that has a policy with an insurance
6 company, whether it be a property and casualty company or a
7 health insurance company, they are policyholders. And this
8 case matters to other policyholders of MBIA Insurance and
9 other beneficiaries of MBIA Insurance, including pension
10 funds, public charities, educational institutions and, in
11 fact, this case matters, your Honor, to every policyholder
12 of a New York regulated insurance company.
13 For example, it matters to everyone who buys
14 insurance from a property and casualty insurer because, you
15 know, clearly MBIA Insurance was hit with a financial
16 hurricane, but if a property and casualty insurer got hit
17 with a real hurricane and the question would come up, well,
18 could you divide up the insurance company into those people
19 who live along the coast and were damaged and everyone
20 else, or if there was a nuclear accident or some other
21 disaster, the principles that we're talking about here
22 apply across the board, not just to this case.
23 Now, there's a lot of complexity in this case but
24 I think, your Honor, it also turns on fundamental fairness
25 and notions of due process and sort of a power of
26 government vis-a-vis private parties.
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2 Now, here, as your Honor well knows, the New York
3 Insurance Department, at the height of the financial crisis
4 when uncertainty was greatest, allowed MBIA Inc., which is
5 the holding company that owns MBIA Insurance, to divide the
6 company in half, and specifically they allowed them to take
7 $5 billion that was available to pay claims to all
8 policyholders of MBIA Insurance and basically use that
9 money to start a new insurance company which is now known
10 as National. It was first known as MBIA Illinois. They
11 changed the name to National. And as your Honor will hear,
12 one of the primary purposes of insurance regulation is to
13 prevent the owners of insurance companies, in this case
14 MBIA Inc., the holding company that owned MBIA Insurance
15 100 percent, from draining funds from those insurers.
16 Now, no insurance company likes to pay claims,
17 and, in fact, MBIA was extremely successful for 35 years
18 because they had a great track record of not having to pay
19 very many claims because they insured bonds. And when they
20 first started out they insured municipal bonds, and
21 municipal bonds don't default very often, and so they made
22 a lot of money. It was a great business. But over time
23 the profits from that business went down and they got
24 involved, like a lot of people did, banks, investors, and
25 they started sort of betting on the real estate boom and
26 stock prices -- and real estate prices kept going up and
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2 they started insuring these very complicated structured
3 products like CDOs, CMBS that we'll talk about.
4 Now, in the past, owners of insurance companies
5 when they looked like they were going to have to pay a lot
6 of claims have basically pulled the money out of insurance
7 companies and left insufficient funds to pay claims. And
8 as a result, the New York Insurance Law and the
9 Legislature, and there were hearings back in the '70s by
10 something called the Reubenhausen Commission -- I think
11 that's all discussed in some of the reports that your Honor
12 has -- where they basically put in a whole series of
13 procedures and laws, clear laws that were added to protect
14 policyholders from holding companies. And so, the purpose
15 of the Insurance Law --
16 If we could put up a document which has been
17 marked as PX 600 and slide 124.
18 Your Honor, this is the annual report of the New
19 York State Insurance Department. And if you actually look
20 at that document, it was when Mr. Dinallo, who was the
21 superintendent who approved this transaction, was the
22 superintendent. And what he -- what the Department
23 reported to the world in its annual report was its core
24 mission was to protect policyholders and make certain that
25 insurers maintain their solvency. Make certain. And as
26 your Honor will hear as we go through the evidence,
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2 including the statements made by Mr. Dinallo and
3 Mr. Buchmiller, here there was a substantial degree of
4 uncertainty in whether MBIA's models for projecting losses
5 and, therefore, setting its reserves, would be sufficient.
6 That's Mr. Dinallo's own words, "substantial degree of
7 uncertainty."
8 Your Honor will also see in the documents -- we
9 talked about it yesterday -- Mr. Buchmiller, who was the
10 sole person who was directed to do this review, kept using
11 the term "known unknowns." And when we go through his
12 e-mails in some detail, you'll see a hard-working civil
13 servant who was given a mission impossible task. But the
14 way the Insurance Department understood its responsibility
15 was, they must make certain with no limitations.
16 Now, the next slide, which is 125, which is from
17 the deposition of Mr. Moriarty, let me tell you a little
18 bit about Mr. Moriarty. He was a career person at the
19 Department, had been there for 30 years and was a highly
20 respected person. We took his deposition in September
21 2010. And Mr. Moriarty was asked:
22 "Am I correct that the paramount duty of the
23 Insurance Department is to protect policyholders?"
24 He agreed with that.
25 I asked him whether there was any other objective
26 more important, and he said that was the most important
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2 one. And I think the next -- and this is someone who had a
3 lot of experience in the Department and what the
4 Department's responsibilities were. And he said in
5 response to the question:
6 "Am I correct that the Insurance Department cannot
7 favor some policyholders at the expense of other
8 policyholders?"
9 He said: "That is correct."
10 Cannot favor.
11 And then I asked him: "Well, does the Insurance
12 Law reflect a policy of placing the rights of policyholders
13 above the interests of the stockholders that own those
14 insurance companies?"
15 He said: "Yes, I do."
16 He agreed with all of that.
17 Let's turn to slide 126.
18 This is a letter that Mr. Brown -- and Mr. J.
19 Brown was the CEO, he still is the CEO of MBIA. In fact,
20 he had been the CEO for a long time and then he had left
21 because his successor, essentially, had started really
22 going into insuring very risky structured finance projects
23 it turned out in retrospect. People didn't know that at
24 the time. Everyone thought they were Triple A rated, and
25 it turned out in retrospect, when the unexpected financial
26 hurricane came -- the exhibit number is. It's Exhibit 3
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2 from Mr. Brown's deposition.
3 MR. HOLGADO: In the plenary case, correct?
4 MR. GIUFFRA: It's a document that was sent to
5 Mr. Dinallo. I think it's something that's -- I may --
6 MR. HOLGADO: Was it an exhibit in this case, I'm
7 just asking?
8 MR. GIUFFRA: Yeah, I believe it was, according to
9 Mr. Wagener. Clearly, it's a letter that was sent to
10 Mr. Dinallo. I dare think that that's something that
11 shouldn't be in this case.
12 MR. HOLGADO: Okay.
13 MR. GIUFFRA: It certainly goes to Mr. Dinallo's
14 state of mind and what he understood that Mr. Brown
15 thought.
16 But, he basically said, Mr. Brown, that he
17 believed that the owner of an insurance company must, as a
18 fiduciary, act in the best interest of all policyholders.
19 And what happened in this particular case, and the reason
20 he wrote this letter - I'll talk about this a little bit
21 later - was, there was a hedge fund investor named Bill
22 Ackman who thought that MBIA's finances were not good and
23 he shorted MBIA and he badgered Mr. Dinallo about it. And
24 there was a book written about Mr. Ackman's activities
25 vis-a-vis MBIA. And at this point in time there was
26 discussion about essentially taking the municipal business,
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2 and Mr. Ackman said, well, why don't you stick it below
3 MBIA Insurance. It's called a stacked structure. So you
4 take one insurance company and then you split it in half
5 and you put the municipal part below it. The important
6 part about that though is, if there were any profits coming
7 from that municipal insurance company it would go up
8 through MBIA Insurance, so any benefit would go to the
9 policyholders of MBIA Insurance. Ultimately, your Honor,
10 both the Department and Mr. Brown opposed that plan
11 because -- and I'll show you some statements they made --
12 because they thought it wasn't fair to policyholders. And
13 this is at a point when the financial crisis was far less
14 severe than it became in February 2009.
15 It's important to sort of go back to that time.
16 That was a time, your Honor, when, you know, AIG had blown
17 up. The stock market had gone completely down. People
18 said that that was the most stressful time in American
19 economic history since the Great Depression. But that's
20 when the transaction was approved and that's an important
21 fact to keep in mind.
22 Now, your Honor, if I could put up -- this is the
23 New York Insurance Law. This is a really important
24 provision that we'll spend a lot of time talking about in
25 the next several days or weeks, and that's section 1505.
26 And this is a provision that was added to the law in the
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2 '70s, and this Reubenhausen Commission, which I mentioned
3 before, this was one of the outgrowths of what they were
4 doing. And one of our experts, Mr. Stewart, who was a
5 superintendent back then, he put an affidavit in to your
6 Honor, sort of talks about why this Reubenhausen Commission
7 was put in place, and there's a lot of material in the
8 record about the legislative history of this provision.
9 And it was added to the Insurance Law to protect
10 policyholders from situations where holding companies took
11 money out of the insurance company and left insufficient
12 funds to pay policyholder claims.
13 The statute's language is quite clear, and it
14 says, "Transactions within a holding company system are
15 subject to the following requirements: the terms shall be
16 fair and equitable." And those are terms, your Honor, that
17 courts apply all the time.
18 You know, it's hard to think of more plain
19 language than fair and equitable. And that's consistent
20 with what Mr. Moriarty said. He talked about the fact that
21 he couldn't favor one group of policyholders over another.
22 Now, the statute then goes on to say: "The
23 superintendent, in reviewing transactions pursuant to
24 subsections (c) and (d)" --
25 And the transactions that occurred here clearly
26 were within the holding company system because they involve
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2 a dividend up to the holding company, a stock redemption up
3 to the holding company, and then this really complicated,
4 and I'll talk about it, reinsurance transaction where
5 essentially the money of MBIA Insurance was used to create
6 another insurance company which then sold reinsurance back
7 to MBIA Insurance, and it offered no benefit to MBIA
8 Insurance at all.
9 Now, the statute says that the superintendent
10 shall consider, and the word "shall," up at the top it says
11 "shall" and down at the bottom it says "shall." It doesn't
12 say maybe. It says "shall." -- "shall consider whether
13 they comply with the standards set forth in subsection (a)
14 and (b)." So, it shall consider whether the terms of this
15 transaction are fair and equitable. And then the statute
16 goes on to say, and this is plain language that a court can
17 apply, and we'll talk a little bit about whether there's
18 any special expertise that's needed. "Whether they may
19 adversely affect the interests of policyholders." The
20 statute doesn't say, your Honor, will. It says "may."
21 "May." And that's because, your Honor, the Legislature was
22 concerned about the looting of insurance companies and the
23 misuse of claims paying funds that would be used to pay
24 policyholders.
25 Again, the reason this case matters, yes, it
26 involved banks, and you'll hear Mr. Kasowitz get up and say
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2 banks, but it involves everybody who has insurance with a
3 New York insurance company, and what decision is made here
4 will affect everybody, not just banks. It will affect
5 people who have property and casualty company insurance and
6 everyone else.
7 Now, "may adversely affect." What you'll find out
8 when we go through and you look at that approval letter,
9 which we talked a lot about yesterday, there's no
10 determination in that approval letter at all, not one, that
11 these transactions as a whole were fair and equitable. Not
12 one finding. And for that reason alone we think that this
13 decision should be annulled. Not one finding.
14 There's a determination where they say, well, the
15 superintendent didn't disapprove the reinsurance
16 transaction. Well, that's just one of the three
17 transactions. And as I read that statute, it says, shall
18 be fair and equitable and shall consider, and it's
19 important to keep in mind whether they complied with
20 subsections (a) and (b), and whether they may adversely
21 affect the interests of policyholders. That's not a
22 statute that has a lot of discretion in it.
23 And it's also important, your Honor, to keep in
24 mind that in the actual approval letter there's no citation
25 to Department precedent for a transformation transaction.
26 In fact, your Honor, the word "transformation" appear
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2 nowhere in the Insurance Law. The evidence in the record
3 shows that transformation was a term that MBIA came up with
4 transforming MBIA Inc., the holding company, so that it
5 would not have to pay all the claims that were due.
6 Now, your Honor, you'll also find out, if you look
7 in the administrative record that was certified by a man
8 named Mr. Benger, and he said this was the complete and
9 accurate record to look at, there's nothing in that
10 administrative record about, one, why they didn't apply
11 1505 to the entire transaction, and there's nothing in that
12 record at all that indicates that there's some sort of
13 longstanding policy of the Department.
14 Now, when people say, well, you defer to a
15 Department's interpretation of law, you do so maybe the
16 Department has a regulation. There's no Departmental
17 regulation about what that means. Nothing. And you'll
18 also find out when I run through it that Mr. Moriarty
19 describes in his testimony in this case that this
20 transaction, and this was someone who had been at the
21 Department for 30 years, as the first of its kind. The
22 first of its kind. That's not a longstanding precedent
23 that the Court must defer to.
24 Now, what the other side will do, they'll say,
25 well, we have an affidavit from Mr. Dinallo. That's what
26 we were fighting about that yesterday. That's an affidavit
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2 that wasn't part of the original certified administrative
3 record. And more importantly, it was written by someone
4 who has about as much standing as I do to interpret the
5 Insurance Law. Someone who's a partner in a law firm.
6 He's not in the Insurance Department. And if you wanted to
7 say what the meaning was that's different from the plain
8 language, which I don't think you can do anyway, it should
9 have been done at the time, not after the fact.
10 Now, there's another provision, your Honor, that's
11 important to keep in mind. Let me -- before I go further,
12 let me show you slide 128, which is PX 756. And this is
13 from Nelson Rockefeller's public papers, and it's the
14 report on, you know, the legislative history of this
15 provision. And back in 1969, when it was put in place, the
16 concern was dividends or other distributions being made by
17 a domestic insurance company to the holding company,
18 exactly what happened here, that would weaken the financial
19 soundness. Weaken the financial soundness. It doesn't say
20 anything in here about, well, they can pay claims. It
21 says, "weaken the financial soundness," "fair and
22 equitable," "may adversely affect." That's a pretty strict
23 set of rules and requirements that needed to be applied to
24 this particular set of transactions. And your Honor, as
25 your Honor well knows, in interpreting a statute you look
26 to the plain words and you look to the legislative history,
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2 and we put the legislative history before the Court.
3 Now, let's put up slide 129.
4 We spoke to Mr. Moriarty again at his deposition.
5 We asked him, you know, "Is the objective of the Insurance
6 Department in approving such transactions" -- and that's,
7 you know, dividends and the like -- "to ensure that the
8 insurance company has sufficient funds to pay claims of its
9 policyholders?"
10 And he says, "Ultimately, the fair and equitable
11 standard to protect the insurance companies is to not
12 jeopardize the ability of the insurer in any way" -- to not
13 jeopardize the ability of the insurer in any way -- "to pay
14 policyholders." And here, where the superintendent, by his
15 own statement in his affidavit submitted to your Honor,
16 said, "substantial degree of uncertainty."
17 Mr. Buchmiller's memo says, "known unknowns."
18 All of the risk here in the middle of the
19 financial crisis was being borne by the policyholders of
20 MBIA Insurance in what was described by MBIA as "Leave
21 Behind Co." I used this analogy before but I think it's
22 useful. Originally, you had all the policyholders and MBIA
23 Insurance, the public financial policyholders and the
24 structured finance policyholders and people who had
25 insurance related to airplanes and everything, and foreign
26 finance policyholders, they were all in one big boat. And
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2 when they bought the insurance they thought they were in
3 one big boat and that's the boat they were in. But when
4 the financial crisis hit, MBIA said, well, no, we're going
5 to leave you guys in the risky boat that's not in really
6 good shape and may have holes in it, and we're sending
7 everybody else into, the public finance policyholders, to
8 another new boat.
9 Now, obviously Mr. Dinallo and MBIA could have
10 gone to the New York State legislature and said, hey, pass
11 a transformation statute. Let's amend the law. But they
12 didn't do that. They didn't do that. You'll hear about
13 something called TARP and how the banks got money through
14 TARP. Well, your Honor, there was a statute that was
15 passed. It was signed by the President of the United
16 States. If this was something that they wanted to do, they
17 could have gone to the New York legislature and changed the
18 law, but they didn't do that.
19 Now, there's another provision, your Honor, that I
20 think is important to look at which becomes critical in
21 this case and that's Insurance Law section 1411. We'll
22 come back to these again and again. And that's slide 131.
23 One of the transactions that was done in this case
24 was a stock redemption. And what happened was, MBIA owned
25 all of the stock in MBIA Insurance. A hundred percent.
26 And so they essentially redeemed some of that stock and
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2 they still had a hundred percent ownership of MBIA
3 Insurance. And for doing the redemption, they got -- you
4 know, they took about a billion dollars out. Now, what's
5 interesting about that, your Honor, is when they did that
6 stock redemption, they had previously been doing
7 transactions in their preferred stock. And as everybody
8 knows, preferred stock is better than common stock, and
9 there was preferred stock in MBIA Insurance which was
10 selling for a heck of a lot less than the price that they
11 valued the redeemed shares. And that's a fact issue, your
12 Honor. That's something, I'm sure, that Mr. Kasowitz and
13 Mr. Holgado and I will disagree about, but in our view that
14 redemption price, and we have expert testimony in the
15 record about it, was wrong, and the notion that you could
16 redeem that stock for that small amount of money when you
17 were doing transactions and selling your preferred stock
18 and then doing a redemption for book value makes no sense.
19 But more importantly, the statute says it's got to be
20 reasonable and equitable. So again, the Legislature is
21 concerned about equities, the Legislature is concerned
22 about fairness, the terms that, you know, courts apply
23 every day.
24 Now, let me say a word, your Honor, about the
25 standard in this case. I think in a lot of ways what the
26 other side does is they talk about Article 78, the state
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2 always wins. That's sort of the subtext of much of their
3 message. Extremely high standard. You can't win,
4 Mr. Giuffra. Well, that's not in fact true. And I have to
5 admit, you've done a lot more Article 78 cases than I have.
6 But your Honor, Article 78 was put in place to codify
7 something that was called a writ of mandamus. It goes back
8 to the beginning of the State of New York, which actually
9 probably comes from England is my guess. I think it does.
10 And that writ of mandamus was intended to protect citizens
11 from mistakes and errors and other sorts of actions by
12 government that were wrong. Give them an opportunity to
13 come to courts like this and be heard.
14 Now, let's put up slide 184.
15 The law is clear that your Honor is clearly not a
16 rubber stamp. The law is also clear that this process
17 involves a genuine judicial function, and that's clearly
18 what's going on in this courtroom.
19 Let's put up 185.
20 The actual language of 7803 is important, I think,
21 to consider when you talk about what's going on here. Our
22 claims are under all three prongs of 7803. Our position,
23 your Honor, is that this set of transactions and this
24 approval letter was affected by error of law, and that's
25 something that doesn't have anything to do with arbitrary
26 and capricious. And if you've been listening to what
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2 everyone in this courtroom has been saying, arbitrary and
3 capricious, arbitrary and capricious. Error of law. And
4 in our view, particularly given that the approval letter
5 doesn't cite any law, there's no longstanding policy,
6 there's no longstanding interpretation for transformation
7 transactions, this is the first one, there's no deference.
8 Zero. And you should apply words like fair and equitable
9 the way judges do every day in courtrooms in this state.
10 Now -- and we believe, your Honor, that the
11 so-called dividend where they essentially took a billion
12 dollars and set it up through the holding company, we think
13 it violated the law, and it violated the law because
14 there's a statute we'll talk about which provides something
15 called the earned surplus test. What is earned surplus?
16 Essentially, it's the profit of the insurance company. And
17 the idea the Legislature put in place was that folks or
18 owners of insurance companies should not be able to pay
19 dividends to the holding company, get money out of the
20 insurance company so it can't be used to pay claims unless,
21 unless, your Honor, they were profitable, there was
22 something called earned surplus.
23 You'll hear, and this is, I think, an undisputed
24 fact, and we'll show you documents. What was the earned
25 surplus of MBIA Insurance before this transaction?
26 $1 million. $1 million. Yet, somehow they say they can
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2 pay a one billion plus dollar dividend. $1 million. $1
3 billion. In our view, that's a violation of the law. It's
4 a flat out violation of the law on that ground alone.
5 (Continued on next page.)
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2 MR. GIUFFRA: And again, it is important, your
3 Honor and I may have said this earlier, we are asking to you
4 annul the decision. What does that mean? It means the
5 decision is being knocked out, MBIA Insurance is not writing
6 any insurance. In fact they stopped writing insurance well
7 well before this transaction, so-called National is not
8 writing any insurance. So basically now, it is a bunch of
9 money that is in bank accounts and if your Honor were to
10 annul the decision, MBIA could go to what is called the
11 Department of Financial Services, do a new application, they
12 could apply on current financial information and we will see
13 if the current superintendent Mr. Laskey will or won't
14 approve an application.
15 And that is what the law says. When an
16 application and an approval process is not done properly,
17 you send it back and they redo it. And that is fair.
18 That is what the law wants, because the law wants people to
19 be protected when government makes mistakes.
20 The other provision, the stock dividend we talked
21 about, that is another error of law.
22 This reinsurance transaction, another error of law.
23 The failure to look and consider 1511, the
24 provision talking about fair and equitable for the entire
25 transaction, another error of law.
26 The fact that the approval letter itself is very
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2 conclusory, another error of law.
3 Let's turn to slide 186. I apologize. 1505, not
4 1511.
5 I think this is probably one of the more important
6 things that -- more important slides in terms of putting
7 this in proper perspective in our view.
8 People always talk about arbitrary and capricious.
9 We hear arbitrary and capricious. Making it sound as if
10 you can never win, the State always wins. That is in fact
11 not true and your Honor, we did a little research and if I
12 can hand it up to the Court, here are 36 times when New York
13 courts have --
14 THE COURT: Wait. Again --
15 MR. GIUFFRA: We will give it to the other side.
16 They have it.
17 THE COURT: What is it?
18 MR. GIUFFRA: It is a series of cases with the
19 actual cases behind them, where on 36 separate occasions,
20 New York courts have -- if I could just hand it up.
21 THE COURT: Just tell me what it is first.
22 MR. GIUFFRA: Your Honor, it is a list of
23 successful Article 78 petitions against the New York
24 Insurance Department and there are 36 of them.
25 If he wants to come up and come up with more of
26 them, that is fine, but your Honor said this was going to be
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2 an oral argument. In oral argument, it is fair to hand up
3 cases and that is what we would like to do.
4 MR. HOLGADO: It is also an 11-page brief where
5 they are characterizing the cases and if you want to have an
6 oral argument, you don't want to have more written
7 submissions, but I will leave it to your Honor.
8 THE COURT: I think when there are cases, you will
9 have time to take a look at the cases and see if you want to
10 respond to the cases. Since there is time between you, I
11 can accept something with cases. People can bring that up
12 --
13 MR. HOLGADO: It is not the cases. It is an
14 11-page brief in front of the cases, is all I am saying.
15 THE COURT: I will give you time to respond.
16 MR. GIUFFRA: I think the most important thing from
17 everyone's perspective is we want your Honor to have all of
18 the facts. They can respond. This is a really important
19 case and we want everybody to have all of the information.
20 The point being, on 36 separate occasions the
21 Superintendent of Finance had made decisions. The
22 arbitrary and capricious standard is one which is premised
23 on the basic and fundamental notion that yes, it applies,
24 but the government has to act on the basis of facts, so it
25 is not like if you're the government you can just sort of
26 make a decision and ignore the facts and so, our view is and
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2 I think this is probably, you know, the most important
3 single element of our presentation, that if the facts were
4 wrong, the arbitrary and capricious standard does not apply.
5 In fact, it shifts and the decision should be annulled.
6 Now, in the Brady case, Court of Appeals said the
7 agency before making a decision must make a careful and
8 painstaking assessment. "Of all the available evidence",
9 not some, not some little piece of it, not what the
10 applicant gives you, but "of all the available evidence".
11 The notion that, you know, a department that has been --
12 whose mission is to protect policy holders should make a
13 decision on the basis of less than all of the available
14 evidence, I think would send regulatory notions upside down.
15 Let's turn to the next slide, 187.
16 It makes the basic point, the Toys R Us case. No
17 deference to an agency for pure questions of legal
18 interpretation and the issues that we will be raising,
19 whether it is about the fair and equitable standard or the
20 reasonableness standard or the earned surplus test, no
21 deference, particularly when there isn't a longstanding
22 interpretation by the Insurance Department and they can't
23 point to one. There is nothing.
24 In fact, your Honor, if you look at how they try to
25 support their briefs, they cite to like a press release
26 issued by the Department after the approval letter. They
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2 should have put it in the approval letter.
3 It is also clear that the Court should effectuate
4 the plain language of the statute and I think that the Akin
5 case in the First Department was very important and it makes
6 the point that the opinion of the Insurance Department
7 counsel is not to be given any special weight.
8 And in our opinion, much of the argument that
9 you're hearing from the other side is give deference to our
10 legal views which were made up after the fact, and you don't
11 have to give deference to those. They are litigation
12 driven.
13 Let's turn to slide 188.
14 The law is clear, and there are literally dozens of
15 cases that say this, that agencies cannot base their
16 additions on factually incorrect bases. And your Honor,
17 this is the Byrne case, and this is a case, it is worth
18 looking at closely, I think it says a lot about Article 78
19 and what the First Department thinks about Article 78 and it
20 says "no judicial deference is owed to an agency's statutory
21 interpretation that is premised on an erroneous factual
22 conclusion."
23 The Basile case, arbitrary and capricious standard
24 agency action, that rests on quantitative analysis and there
25 is tons of quantitative analysis in this case based on false
26 assumptions is invalid and the Court held in Waterhouse must
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2 vacate agency action because the agency based its ruling in
3 part on an erroneous assumption and this case is riddled
4 with erroneous assumptions and errors of fact.
5 Your Honor said something that I agree with and the
6 fact -- if MBIA gave information to the Department and it
7 was wrong, was erroneous it is not a reason to annul.
8 Doesn't matter whether they did so purposefully or whether
9 they did so negligently. All that matters is that the
10 information was inaccurate the assumption was wrong. In
11 fact, the Silverman case and that goes way back to 1937, but
12 the First Department says the petitioner is entitled to a
13 peremptory order if the fact finder finds that with respect
14 to the truth or false city of the information allegedly
15 before the board. So your Honor, in order to sustain this
16 decision, you have to find that all of the information that
17 is before the department was accurate. All of the
18 information before the department was based on valid
19 assumptions. That is their burden. They keep talking
20 about my burden. The law is clear that there has to be
21 accurate information and the notion that an sage see
22 determination based on inaccurate information should be
23 sustained by the Court I don't think is consistent with the
24 law.
25 Now, let's turn to 189. This is a case, at First
26 Department case, VR Equities. Agency action undertaken
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2 "without regard to the facts which should have been a part
3 of the agencies determination is invalid. Should have in
4 part, should have been something they considered and the
5 Brady case, Court of Appeals decision makes it quite clear
6 that in properly exercising its discretion and that case
7 involved the New York Insurance Department, the Insurance
8 Department must first make a careful and painstaking --
9 careful and painstaking assessment of all the available
10 evidence. Not some of it, all of it. (That was in
11 quotes).
12 Let's turn to the next slide, 190.
13 The law is also clear that when agency deep arts
14 from it is prior practice, that is arbitrary, as a matter of
15 law. You can't act as administrative agency in a way that
16 will result in inconsistent treatment of similarly situated
17 parties. Your Honor, I think that First Department case in
18 Exxon is real important to our case, because the First
19 Department said you could not treat similarly situated
20 parties in an inconsistent way and there is no doubt on the
21 record before this Court that the policy holders left behind
22 by MBIA were not treated as well as the policy holders in
23 national and your Honor, the other side will get up and they
24 will say oh no, we made a determination there would be
25 sufficient funds to pay claims. First of all there is a
26 provision in the law which we will talk about which deals
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2 with solvency of insurance companies. That is a completely
3 separate provision from this fair and equitable provision
4 which was added to prevent exactly what happened here,
5 exactly what happened here, it is a completely separate
6 provision, so solvency does not equal fair and equitable and
7 that is a new reading that finds its way not in the approval
8 letter or the administrative record but in affidavits and
9 briefs written by respondents after the fact in response to
10 our legal arguments.
11 They can't side some departmental regulation and
12 that is why the Department that does not adhere to its own
13 prior precedents -- and you can't adopt different standards
14 for similar situations. That is arbitrary.
15 Now your Honor, we think we win Number One, because
16 the approval letter on its face is defective and if we could
17 just put up for a second PX 6. In many ways, your Honor,
18 this letter is the beginning and end of the case. It is a
19 very short letter. When you take out the caption and you
20 take out the last page, there is a lot of white space. It
21 is really only a nine-page letter and the evidence before
22 the Court has shown that Mr. Buckmiller, he never reviewed
23 this letter. Never saw it. That is what he testified to.
24 He is the guy doing the reviewing. The main man. Never
25 saw it. Nobody bothered to show it to him, but it was
26 shown to MBIA and MBIA got a draft of it. Mr. Buckmiller
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2 didn't.
3 Now, the letter on the first several pages
4 describes the transactions. The first is approval pursuant
5 to 4105 and talks about the distribution of this dividend to
6 MBIA, the holding company and it is for $1.147 billion.
7 Before that dividend, MBIA Insurance had one
8 million surplus -- and that 4105 has it and it satisfied a
9 and that is a reason to annul this decision.
10 The second approval was one for this stock
11 redemption and that was for $938 million and pursuant to
12 1411, and that was the reasonable and equitable statute that
13 I showed before and your Honor, that particular approval is
14 also -- should be struck down as a matter of law for two
15 reasons; One, it was a disguised dividend in a way to try to
16 end run and I will show you documents within the Insurance
17 Department back and forth within MBIA where there is a lot
18 -- a lawyer in the Insurance Department named Mr. Ginglass
19 and he spotted this issue, he said we have a problem here
20 and they started moving text, moving strategies around.
21 The problem, of course, is that the law, when it
22 was put in place, was intended to deal with all
23 distributions to a holding company and you could not end run
24 the statute. That is where the case matters, because yes,
25 this is the time with a case involving banks. Next time it
26 may be a casualty and insurance company. That is why all
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2 of the people are in this courtroom, because this is a big
3 deal to the interpretation of insurance law in this state.
4 Now, we will also talk about the fact as I
5 mentioned before that not only was it not reasonable and
6 equitable, but also the price that was paid was completely
7 made up, completely wrong, and that is an issue we have a
8 lot of testimony about.
9 Let's turn to the next page.
10 The next is this reinsurance transaction. There is
11 a lot of numbers below there and all of the things that are
12 happening and it is interesting they are described as 1, 2
13 and 3 and that is a transaction. You see that 1505 at the
14 top, you don't see 1505 in the other two transactions, just
15 that one. That is a legal flaw in this letter, because
16 that provision 1505 applies to all transactions done with
17 the holding company. The transformation which they call
18 it, there is not a single, single, single finding, holding,
19 ruling, anything in this entire letter saying that the
20 transformation as a whole was fair and equitable. Not one.
21 Now, the reinsurance transaction is odd, because
22 essentially what -- reinsurance is the idea that one
23 insurance company goes -- and in every case, anybody here
24 can talk about, will go to a completely separate insurance
25 company and say well, I have got these claims, can I
26 reinsure them with you and that other insurance company
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2 comes in and provides additional, additional insurance.
3 In this case, the company that bought the
4 reinsurance provided the money to fund the reinsurer and
5 when we talked to all of the different departmental people,
6 no one could cite a single precedent or that it had ever
7 been done. Just one. Unprecedented transaction.
8 Now, let's also turn to Page 3. Let's see how the
9 transactions are described. And this becomes important for
10 this whole notion of simultaneity, and they have actually
11 come up with a theory after the fact, after the fact, your
12 Honor, it is not in the administrative record as originally
13 certified, made up, this word simultaneity comes into the
14 whole thing and you will see, I will show you document after
15 document where it said steps and the approval letter on its
16 face says dividend and stock redemption, 2A, Number One,
17 transaction. The series of transactions described in the
18 application are designed to recapitalize Munico. Why did
19 they need to recapitalize Munico? The series of
20 transactions described in the application are designed to
21 recapitalize Munico. And that is when they do this really
22 weird reinsurance transaction that has never been done
23 before and they describe the stock redemption, see that in
24 the first paragraph your Honor? And they talk about the
25 redemption of the shares, how much money is being paid and
26 then you go down further and it says will contribute, that
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2 goes down further, how the money will be then put back down.
3 It goes up and it goes down from the holding company into
4 this new split transformation and then they talk about --
5 they talk about the stock redemption. What is interesting
6 is that -- the dividend, you see pursuant to the MBIA Corp
7 dividend MBIA Corp will declare, right in that second
8 paragraph, your Honor, now, this is probably, you know,
9 there is always tracks that are left when people are not
10 following the law and if you look at the reinsurance, the
11 first sentence is a track that -- a sentence that you don't
12 have a way around it. This is in their own approval letter,
13 their own approval letter. It says "once Munico is
14 recapitalized as described above," once Munico is
15 recapitalized as described above, and I think if you read
16 that to my, you know, five year old, but clearly my 8 or
17 9 year old, they would understand that once Munico is
18 recapitalized, means the first two things happened first, it
19 gets capitalized, the money goes in and then you do the
20 reinsurance transaction. This approval letter does not use
21 the word simultaneity anywhere in it. Not one place, not
22 one place, your Honor and they certainly knew how to write
23 it down. That is what they wanted to do. Because it has
24 never been done in New York State history, not once, not
25 once.
26 Now your Honor, the reason simultaneity matters is
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2 they are trying to get around the surplus test which knocks
3 them out and they concede, I think, your Honor that the
4 dividend could not happen as a stand alone transaction, they
5 will concede that, it is it was illegal as a stand alone
6 transaction. They will concede, I think, that the stock
7 redemption was an illegal transaction standing alone, could
8 not have been done and I think that -- I think they -- and I
9 think they will also concede that the reinsurance
10 transaction could not have been done standing alone.
11 In fact, Mr. Moriarty testified that there is no
12 way the Department would have approved this reinsurance
13 transaction standing alone. So these were all transactions
14 that the New York Insurance Law on its face completely
15 barred and what their theory is, is if you do them
16 simultaneously, you will take three illegal transactions and
17 make them into one legal transaction and we heard about
18 homeownership and who gets the loan first and -- but that is
19 not what the approval letter says. It says "once Munico is
20 recapitalized as described above, MBIA Corp will enter --"
21 will enter. It doesn't say anything about simultaneous.
22 Now, let's just go your Honor, I think we will go a
23 lot faster, to the Department's approvals. And they only
24 start on Page 6 and 7. That is it. Now, let's look at
25 the dividend there, the first one there. Put that up in
26 yellow, please.
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2 That is the entire approval for the billion dollar
3 dividend. I think it is 1.1 and change. And it talks
4 about right up at the top, 4105 prevents an insurer within a
5 12-month period from paying dividends in excess of ten
6 percent of surplus.
7 Now, you can't pay anything out of -- if the earned
8 surplus is more -- you can't pay a dividend except out of
9 earned surplus and in fact, the Insurance Department for
10 example, I think Mr. Moriarty testified that you could not
11 pay it -- if the earned surplus was one million, you could
12 not pay a $1 billion dividend.
13 Now, if you look at what they then say they say,
14 pursuant to the foregoing and based upon and this is in the
15 -- this is in the approval letter eight times and they just
16 repeat it up and down and it demonstrates the utter
17 importance, your Honor, of what was told to the Insurance
18 Department by MBIA.
19 It says, your Honor the representations contained
20 in the application, that is what they are acting upon and in
21 reliance on the truth of those representations. The
22 Department was acting in reliance on the truth of the
23 information that was being provided by MBIA. That was
24 critical to the entire case. To the entire approval.
25 That was the predicate of the approval. It had to be in
26 reliance on the truth. So once the information that was
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2 provided by MBIA turns out not to be true, the predicate for
3 the approval goes away. It goes away.
4 And then it talks about the fact that they acted in
5 reliance on the examination, and that was what Mr.
6 Buckmiller did, and then they have a finding. This is one
7 of the few findings in the entire document. It says based
8 on the truth of what they were told, based on what Mr.
9 Buckmiller did, it says they find that MBIA Corp will retain
10 sufficient surplus to support its obligations and writings.
11 That is very special technical Insurance Law speak.
12 What it means your Honor, is the following: We
13 talked a little bit yesterday about this idea of
14 policyholders' surplus and we will talk a lot more about the
15 errors that MBIA has admitted to; a 1.4 billion dollar error
16 in the submissions made to the Insurance Department. That
17 error allowed MBIA to pass the policyholder surplus test
18 because the -- MBIA Insurance is a financial guarantee
19 insurer and there is a provision in the law that says that a
20 financial guarantee insurer must maintain $65 million in
21 policy holder surplus.
22 Now, when you do the correction and you take out
23 the 1.4 billion dollar error, on their own corrected numbers
24 and I will talk a lot more about how they corrected them
25 over six weeks, a document they gave the Department in two
26 days that Mr. Buckmiller had barely looked at and told
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2 everybody at Beaver Street, it's okay, that is where the
3 insurance company is, he looked at it for barely a little
4 bit of time and MBIA, they know how important it is to
5 satisfy, this is right in the letter, that policy holder
6 surplus number goes, on MBIA's own numbers, from green to
7 red.
8 In fact it goes to like three 26 million I think
9 negative and it does that by year end in this transaction.
10 I should also add -- my colleagues remind me that
11 this error, this letter is deficient because it does not
12 even have a finding about the other earned surplus test.
13 There is two earned surplus tests in 4105. One is that 10
14 percent of end surplus, the one that we are talking about,
15 which is the requirement that the dividend be not, you know,
16 that there be sufficient earned surplus profit in the
17 insurance company to pay the dividend and that makes logical
18 sense because would you not want people to be paying
19 dividends for a holding company if there is no profit,
20 because it would hurt the policyholders of the insurance
21 company.
22 Basically, under stock redemption, this is all they
23 have, this will be a quick summary and I guess the business
24 that we are all in, there is a stock redemption, okay, again
25 that language about the representations contained in the
26 application and supporting submissions, and in reliance on
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2 the truth of those representations that every one in this
3 courtroom, what we can agree on is there were errors that
4 went as high as $1.4 billion here. $1.4 billion.
5 It talks about Mr. Buckmiller's review and there is
6 just a finding. No explanation, no nothing. Completely
7 and utterly conclusory, completely and utterly conclusory,
8 and they say we prove it and then they do the reinsurance
9 transaction, and the reinsurance transaction we see again,
10 the same language on the second paragraph, that says you
11 know, we are acting in reliance on the representations made
12 in the application and in supporting submission and in
13 reliance on the truth of those representations and
14 submissions and then, they once again rely on Mr.
15 Buckmiller's work, so it is the truth of what MBIA told
16 them, and Mr. Buckmiller's work that are the two linchpins
17 of this approval, but in any event, your Honor, the statute
18 would not allow this, because it wasn't reasonable and
19 equitable to MBIA Insurance policy holders.
20 Now, there is also, you see that Article 1505?
21 That is the only place you see that 1505 in the entire
22 approval letter. That is that provision that I talked
23 about, fair and equitable. It is no where else in the
24 entirety of the letter and all it says is that the parties
25 may enter into proposed holding company system transaction
26 if the superintendent does not disapprove the transaction
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2 after applying the factors set forth in 1505 and considering
3 whether the transaction -- and I love that word, may
4 adversely effect, may is a pretty low standard, your Honor,
5 very low, and then it says "based on the factors in the
6 Insurance Law," it has that fair and equitable one, and
7 also, does it -- may adversely effect, then it goes in
8 reliance on the truth of what they were told by MBIA. That
9 is critical to the decision. Mr. Buckmiller's -- and Mr.
10 Buckmiller's work.
11 There is no discussion in this approval letter of
12 prior precedence for what they did here, regulations that
13 they were relying upon. This was a one off transaction that
14 was unprecedented even -- and Mr. Moriarty will say one of a
15 kind.
16 Now, what is interesting also about the approval
17 letter is if you look at the signature page,it gets signed
18 by a man named Scott Fisher. Doesn't get signed by Mr.
19 Moriarty. Mr. Fisher was a lawyer who came over from the
20 Attorney General's office with Mr. Dinallo. He was not a
21 career insurance person, but he was kind of the quarterback
22 on this transaction and we will talk a little bit more about
23 that.
24 Now, we think your Honor should annul because the
25 approval letter on its face is defective and does not have
26 any language and they will say you don't need to have
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2 findings. In fact that is not true and there is a Third
3 Department case which just came down, which is a mandamus to
4 review case like this, called Office ice Building Associates
5 versus Empire Zone Design Board, 2012 New York Appellate
6 Division Lexis 3501 May 3, and it said "it is imperative
7 that the Board's determination contains sufficient
8 information to permit this Court to both discern the
9 rationale for the administrative action taken, and undertake
10 intelligent appellate review thereof."
11 And this particular approval does not have any of
12 that.
13 (Whereupon the following was transcribed by Senior
14 Court Reporter Vicki Glover.)
15
16
17
18
19
20
21
22
23
24
25
26
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2 MR. GIUFFRA: (Continuing) Now, I want to talk a
3 little bit just for a second as another ground for the
4 disapproval, and this is a summary of what we're going to
5 be talking about in the next several days is the errors.
6 As we talked about, the approval is premised on
7 the accuracy of the information, and as I indicated when we
8 went through the cases, it's a basic principle of
9 administrative law, and it's not based on who is wrong, who
10 is not, whether there was a mistake or whether there was
11 some bad motive. If there's an error, you have to annul
12 that decision. And that makes good sense because people
13 shouldn't have -- government shouldn't act on the basis of
14 misinformation, mistakes, errors. Just do it over. Which
15 is what we're asking for here, a do-over. Because I don't
16 think they can get this approval right now through the
17 current Superintendent of Insurance Mr. Lawsky and their
18 current position, which is why they're fighting this so
19 hard.
20 Now, here, your Honor, and if we can just put up
21 real quick slide 15.
22 This is an indication of the correction. The
23 error that was made, your Honor, involved $1.4 billion
24 dollars. It was a deferred tax asset correction, and
25 there's evidence that people within MBIA knew this was a
26 problem. And we can present that to the Court and we will
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2 do so.
3 And what happened was, Mr. Buchmiller wanted to
4 get a stress test done because, obviously, the economy was
5 in deep trouble and he was concerned about what would
6 happen and he wanted to see what they could withstand
7 because he was trying to do a good job and he essentially
8 asked them to run this stress test. They did the work on
9 the stress test over two days. And this evidence which
10 I'll show you, they knew this was all critical, it was a
11 green-light-red-light situation.
12 Now, when the extreme stress test is shown to the
13 Department the first time, it was positive 362. Positive
14 $362 million. And remember, respectfully, your Honor, that
15 $65 million I talked about? The Financial Guarantee
16 Insurance Company needed $65 million to support its
17 writings. And this, your Honor, is in the supplemental
18 affidavit of Mr. Greenspan, one of our experts, who is one
19 of the leading experts on monoline insurance companies, and
20 in fact, he was involved in a number of the monoline
21 restructurings that were done, including ones involving the
22 New York Insurance Department that were handled in a
23 completely different way than this one was. You'll here
24 about something called FGIC, Syncora, CIFG, New York
25 insurance companies. It wasn't done in secret.
26 Mr. Dinallo actually worked with the interested parties and
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2 the policyholders and they had third party reviews that
3 were done. Total opposite of what happened here. But
4 we'll get to that in a second.
5 So, this $1.4 billion error, your Honor,
6 basically, in simple terms, involved the fact that at this
7 point in time, 2009, the test was done, the numbers were
8 run in January, MBIA Insurance was making no money. It
9 wasn't earning anything. It had a lot of losses, but it
10 certainly wasn't making money. But they somehow made the
11 assessment, made the calculation that they would somehow
12 have a deferred tax asset, meaning money coming back as a
13 refund from the government, even though they weren't paying
14 any taxes, they weren't making any profits and there was no
15 foreseeable prospect of them getting any profits. So they
16 essentially went out and got this $1.4 billion. They stuck
17 it in the chart in the numbers and made the number go from
18 negative to positive.
19 Now, it's worse than that. Because what they then
20 did, they concede, they concede, your Honor, that that
21 number goes from 362 to 291. Negative. We think we win
22 the case on that in and of itself. They provided the
23 information. It wasn't accurate. The Department acted on
24 it. It was wrong. It's clearly a green-light-red-light
25 situation. It should be annulled on this ground alone, and
26 you can do it just on this. Pretty simple. They provided
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2 information. It was wrong. And it took this policyholder
3 surplus test from green to red.
4 What they then did was, and by the way, MBIA found
5 this, one of their outside people that were looking at this
6 whole thing. And we spent a lot of money on experts, they
7 spent a lot of money on experts, at least after the fact.
8 They didn't hire a third party, you know, independent
9 person to do a review at the time when they were doing this
10 approval. So what they did, your Honor, was, they had a
11 firm called AlixPartners. They discovered this, I think,
12 in July of last year. And then apparently, I find this
13 sort of interesting, no one tells the Insurance Department
14 until, like, October of last year. And then, as your Honor
15 may recall, remember we had to put off the papers a little
16 bit last fall because there were errors that were found and
17 they were affecting the financials and we did that? And
18 this was about when they were going to put in their papers
19 around Thanksgiving, it was all about these errors.
20 So what did MBIA do? They put a team of people
21 and they scanned through all their other -- all this
22 information and they tried to find other corrections after
23 the fact. And so they tried to move the number up. So
24 instead of the error being all the way down to where it
25 would have been a 767 error -- actually, over a billion
26 dollars. I guess 767, yeah, that would be over a billion.
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2 They basically -- yeah, it would be over a billion. They
3 find some correcting offsetting errors that we dispute some
4 of those corrections, and they make assumptions, like, oh,
5 in the future, oh, in the future the Department would have
6 let us release contingent reserves. Well, they're making
7 that assumption about something that never happened. The
8 Department didn't let them release contingent reserves.
9 In any event, your Honor -- and what's their
10 explanation for how this is okay? What did they do? They
11 tell Mr. Buchmiller about this and he's now working at the
12 National Association of Insurance Commissioners. He's no
13 longer at the Insurance Department. And they say
14 Mr. Buchmiller -- and Mr. Buchmiller sends an affidavit in.
15 Now, does Mr. Buchmiller speak to anyone about
16 MBIA about how this happened? No. That's his testimony in
17 his deposition. And he just writes an affidavit saying,
18 well, it wouldn't have affected my decision. Well,
19 materiality, your Honor, is not about whether somebody
20 after the fact who no longer works in the government, who
21 didn't have the information in front of him, says, oh, it
22 wouldn't have affected my decision. First of all,
23 materiality is not about whether it would have affected
24 your decision; it's about something might have been
25 important you would have wanted to know about at the time.
26 That's materiality. And that's a standard courts apply
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2 everyday, not some, you know, but for clause notion of
3 materiality.
4 But in any event, Mr. Buchmiller says that and he
5 hasn't even spoken to the people about how this happened.
6 And it turns out they make a presentation on the telephone
7 to the new Department of Financial Services. I believe
8 it's in early November. Mr. Chaplin who we'd like to have
9 testify, who was the CFO, and when we took his deposition
10 said they made some presentation.
11 So, you have a major error in a major transaction
12 and we don't think the Court should just look the other
13 way. Article 78 requires the Court in this situation to
14 annul because, look, they provided false information. It
15 was wrong. It was inaccurate. No one's disputing that.
16 Mr. Kasowitz will stand up and say, oh, it doesn't matter,
17 your Honor, Mr. Buchmiller says it wouldn't have changed
18 his decision. Mr. Buchmiller has no standing. He's not at
19 the Insurance Department anymore. And this error wasn't in
20 front of him at the time. All the cases we talked about
21 yesterday about it's got to be at the time.
22 You know, when MBIA decided to give this
23 information to the Department and do it over two days,
24 which is what they did, two days, rushed it through, and
25 I'll show you e-mails where they indicate they knew this
26 was a make or break for them, they can't come into this
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2 court and basically have you rubber stamp something on an
3 affidavit of someone who no longer works at the Insurance
4 Department. There's no precedent for it in New York State
5 and it would be wrong.
6 Now, your Honor, we'll talk also about something
7 called solvency. And the approval letter talks a little
8 bit about sufficient surplus to support obligations in
9 writing, and that's the only place you can see that. The
10 word "solvency," your Honor, isn't in that approval letter
11 at all. Not one place does the approval letter say
12 solvency. Not once. The words do not appear in the
13 approval letter and they can't make it appear now, unless
14 they have some magical powers that I don't know about. It
15 doesn't appear in the approval letter. And you saw in that
16 first slide, your Honor, that the whole purpose of the
17 Insurance Law is to protect policyholders and ensure the
18 solvency of insurance companies. It doesn't appear in
19 this. Now, they'll say we did a solvency analysis or did
20 solvency something.
21 Let's put up slide 19.
22 The Department in its answer said that MBIA
23 Corp.'s post transformation solvency was based on the
24 definition of insolvency provided for in section 1309.
25 Okay. Is that referenced in that approval letter? Not at
26 all. Not once.
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2 Now, what does 1309 say? I think that may be
3 slide 21. It talks about a two-part test.
4 Now, the Department and MBIA will sit up here and
5 say, oh, we found that they had enough money to pay claims
6 and that fair and equitable means enough money to pay
7 claims. That's basically the rule they want you to adopt.
8 Enough money to pay claims equals fair and equitable.
9 Enough money to pay claims equals fair and equitable. We
10 can show your Honor why the provision was added to the
11 Insurance Law, the Reubenhausen Commission, the concern
12 about looting of insurance companies. And that 1309
13 statute on solvency is a completely separate statute, a
14 completely separate protection for people who buy insurance
15 in New York State, like my clients did and like a lot of
16 other people who are relying on MBIA Insurance, not just
17 banks.
18 Now, there's two parts in this test.
19 It says, you have to find that they're solvent
20 "by an excess of required reserves and other liabilities
21 over admitted assets." That's the first part of the test.
22 And then the word "or" appears. And then it says, "or by
23 its not having sufficient assets" -- meaning to be
24 insolvent, if you didn't have sufficient assets -- "to
25 reinsure all your outstanding risks with other solvent
26 authorized assuming insurers." And it says, "shall be
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2 deemed insolvent." Legislature's words. Pretty plain
3 language as far as I look at it. And, your Honor, what
4 that says is, that if an insurance company doesn't have
5 enough money, that it can get another insurance company to
6 reinsure it to basically take the liability away from it,
7 it's insolvent. It's undisputed MBIA did not have enough
8 money to reinsure its book when this transaction was done.
9 It just did not, and there's public disclosure to that
10 effect.
11 Let's put up slide 23 and 24.
12 Now, you saw the slide.
13 Let's go back to 19 real quick.
14 The Department's determination. This is what they
15 told the Court. Sworn affidavit. They're stuck with it.
16 -- "of MBIA's post transformation solvency was based on the
17 definition of insolvency provided for in the Insurance
18 Law." That's what they told the Court. And they say,
19 "which the Department was required to utilize." There's no
20 discretion. They admit it. They're stuck with this. It's
21 an admission. It's in their answer.
22 Let's turn to 23 and 24.
23 Mr. Buchmiller:
24 "Did you perform a solvency analysis of MBIA
25 Insurance in connection with your work on the
26 transformation transaction."
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2 What does Mr. Buchmiller say?
3 "No, I wouldn't characterize it that way."
4 Mr. Moriarty, the deputy superintendent:
5 "Now, it's fair to say that Mr. Buchmiller did not
6 do a solvency analysis of MBIA Insurance, right?"
7 "If you mean Mr. Buchmiller did not do a
8 verification of the financial statements, i.e., a full
9 scope examination, that is correct.
10 "Was there any discussion of Mr. Buchmiller doing
11 a verification of the financial statements, i.e., a full
12 scope examination, prior to the approval of the
13 transformation transaction?
14 "Answer: There was a discussion; however, that
15 would have taken a year or more."
16 How can they possibly say they did a solvency
17 analysis, your Honor? How can they possibly say they did a
18 solvency analysis in their answer to the Court? How can
19 they say they did a solvency analysis in their answer to
20 the Court when their own key people, the two folks who put
21 in affidavits initially, say they didn't do it? They
22 certainly -- there's nothing in that approval letter that
23 says they did a 1309 solvency review. And they said that
24 was something they must have done. Must. That's their
25 words, not mine. And we'll put forward, your Honor, MBIA
26 SEC filings where MBIA itself conceded it couldn't pass
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2 that reinsurance test.
3 Now, let me say a word about, and this is
4 something your Honor raised last time we were here. Well,
5 you said, you know, if they didn't follow the way you
6 ordinarily do this kind of thing, that could be arbitrary.
7 Again, no transformation statute. Clearly, something that
8 was a very novel transaction, "one of a kind," to quote
9 Mr. Moriarty.
10 Now, let's -- if we could just put up slide 39.
11 Oh, I'm sorry. That's wrong. 93. Excuse me.
12 What this transaction was, your Honor, and you'll
13 hear this term a lot. That's something called a liability
14 based restructuring, and that's where based on the fact
15 that the insurance company has a lot of liabilities, we
16 split the book. And one of the things we'll talk about is
17 something called a National Association of Insurance
18 Commissioners. That's where Mr. Buchmiller works. And
19 Mr. Buchmiller will say that they usually have best
20 practices for other insurance commissioners and insurance
21 departments follow NAIC guidance because that's how rulings
22 and decisions and insurance companies operate in a lot of
23 states; you want to make sure you follow the rules. And
24 that's something our superintendent -- and we have, as your
25 Honor knows, four former superintendents have submitted
26 affidavits in this case.
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2 Now, we tried to find other transactions that were
3 at all like this one, just any transactions we could find.
4 And we actually asked MBIA, we asked Mr. -- we asked the
5 Insurance Department people. And here, these are some of
6 the more important ones that folks have talked about. One
7 involved CIGNA, one involved Lloyd's of London and another
8 one involves Crum & Forster, and I think Mr. J. Brown,
9 actually, it involves Xerox, and he was involved in that at
10 one point. He's the CEO. One of these liability based
11 restructurings. And the NAIC guidance talks about the
12 importance of doing a comprehensive financial review. And
13 the reason why is because when you split an insurance
14 company in half and you take basically -- and you create a
15 good insurer and a bad insurer, a dying insurer in this
16 case, you have to follow some rules when you do it. And
17 comprehensive financial review is pretty important. Not
18 sending one person in to, essentially, work for some number
19 of weeks by himself, no supervision, no assistance. He's
20 deciding his own review. That's not a comprehensive
21 review.
22 You know, Mr. Kasowitz talked a little bit about
23 BlackRock, and we'll talk about BlackRock and why they're
24 important in this case. In fact, while this transaction
25 was under consideration another deputy superintendent wrote
26 to MBIA and suggested that they use BlackRock. Said others
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2 have used BlackRock with success. That's because BlackRock
3 is the gold standard for doing valuations.
4 Now, they'll say that BlackRock was conflicted
5 because Merrill Lynch owned part of BlackRock and they
6 were -- you know. But the facts are, your Honor, that
7 BlackRock gets hired by the Federal Reserve, a separate
8 group called BlackRock Solutions. And what we did, we paid
9 $7 million -- absolutely true -- to hire BlackRock. And we
10 said, we want you to go out and do what you would have done
11 back in 2008 had you been hired by MBIA. And there's
12 evidence in the record, your Honor, that the Department
13 could have required MBIA to hire BlackRock, or a firm like
14 PIMPCO, a really big time financial company to go and do
15 this review. They could have done that and they chose not
16 to. They could have. And the Department could have made
17 them pay for it as a condition to the approval. So, they
18 didn't do that.
19 Now, BlackRock went and followed their normal
20 processes and procedures. They literally had a team of 20
21 people working six weeks. So, whereas they sent out one
22 person who maybe worked six weeks, BlackRock had 20 people
23 doing it. 20 people. And they came back and did an
24 analysis which shows that MBIA Insurance was wildly
25 insolvent at the time of this approval.
26 Now, let's talk about length of review. You'll
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2 get a lot of evidence and this is something that we'll put
3 before the Court. These other transactions, the reviews
4 were nine months and longer. You know, in this case
5 there's been a lot of sort of mushing of how long the
6 review was. And if you look real close at the first set of
7 briefs that were filed, people said, oh, it started in
8 February. February 2008. But then if you really press,
9 and in fact, Mr. Holgado will talk about what documents we
10 got. The application was filed in December. And if you
11 talk to Mr. Buchmiller, he did a little work in December
12 interviewing some people. Then, he basically went to a
13 meeting on the 23rd of December, and then he went on
14 vacation over Christmas and started work in earnest on
15 January 9th, and he was essentially done by February 11th.
16 And that's all supported by documents and e-mails. And he
17 was also doing some other things. And he will say, I did
18 this all by myself. I decided my own scope. Nobody
19 called -- he is not aware of anybody checking his work,
20 which is, you know, that error. And by the way, the
21 Insurance Department, your Honor, more than a thousand
22 employees. And you'll also find Mr. Buchmiller will say
23 there were other folks in the Insurance Department that had
24 experience in structured finance and valuing these really
25 complicated products. Did he consult with them in the
26 course of his review? No. And in fact, when you ask
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2 Mr. Buchmiller what he thinks about BlackRock, he'll
3 say they're very -- he describes them as the Warren
4 Buffett. He uses that expression. And in fact, apparently
5 during the course of this transformation transaction he
6 actually picked up the phone and called Mr. Paltrowitz, who
7 is the guy that we want to have be an expert and they would
8 like to block out. He didn't tell him he was working on
9 MBIA. He couldn't because MBIA wanted this transaction to
10 be done in secret, unlike all the other monoline
11 transactions that were being done around the same time.
12 Now, one of the issues that's up there is
13 policyholder notice to interested parties, and we'll talk a
14 lot about this undisputed transaction was done in secret.
15 They didn't consult with policyholders. They knew that the
16 policyholders were some of the most sophisticated and
17 experienced firms in the valuation of these products. That
18 the Department didn't want to know. In fact, the evidence
19 will be that Mr. Dinallo thought it would slow the process
20 down, and he claims he spoke to someone at Perella
21 Weinberg, which was a firm they hired in early 2008, to
22 help them because monolines were in big trouble. You would
23 think that if you hired a firm like Perella Weinberg to
24 advise you, that Perella Weinberg would have been involved
25 in this review. Mr. Buchmiller says no, not at all. No
26 Perella Weinberg. Makes no sense.
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2 Now, on the issue of BlackRock --
3 THE COURT: So what did you say they hired Perella
4 Weinberg to do?
5 MR. GIUFFRA: Perella Weinberg was to advise the
6 Department on monolines.
7 THE COURT: Not on this monoline? In general?
8 MR. GIUFFRA: In general. And your Honor reviewed
9 documents from Perella Weinberg.
10 THE COURT: Yes.
11 MR. GIUFFRA: And there's actually an engagement
12 letter that we have in the record where Perella Weinberg
13 could have done this kind of valuation work and been the
14 third party that was working for the Department instead of
15 sending Mr. Buchmiller out by himself, literally. It was
16 an impossible task and there are e-mails which we'll go
17 through describing it as mission impossible. The notion,
18 and one of the things Mr. Paltrowitz will talk about and
19 one of the things Mr. Greenspan will talk about, and
20 Mr. Greenspan worked on all of these monoline
21 restructurings, and they don't want my experts to testify,
22 they will tell the Court, your Honor, that it was
23 impossible for, you know, Albert Einstein or Warren Buffett
24 or anybody to do this review. One person, your Honor, they
25 had 1300 of these, some of the most complicated structured
26 products ever created by man. They were insuring 1300 of
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2 them. They had a valuation almost of $300 billion. And
3 they sent one person to go off and do it. And you know
4 what the testimony will be? He looked at one, in detail,
5 CDO transaction, he looked at one CMBS transaction and he
6 looked at one RMBS transaction. That's it. One of each
7 one. And in fact, the evidence will show, your Honor, it's
8 in the record, that Mr. Buchmiller himself said that's
9 ordinarily not a big enough sample size. It's not
10 ordinarily a big enough sample size. He knew it. He was
11 given an impossible task.
12 Now, they did not want to go to the banks, and
13 Mr. Kasowitz talks about, you know, yesterday there was
14 discussion about -- I'll wait, your Honor. Sorry if your
15 computer is not working.
16 (Pause in proceedings.)
17 THE COURT: Okay. Start talking.
18 MR. GIUFFRA: Testing 1, 2, 3.
19 THE COURT: Okay, it's fine.
20 MR. GIUFFRA: And so, your Honor, Mr. Kasowitz
21 talked about the banks doing redactions. One of the things
22 that was said earlier in this case to Justice Yates in
23 another courtroom in this place --
24 THE COURT: I just want you to know, I did speak
25 to him yesterday. He does send his regards, and he said
26 "Better you than me," meaning me.
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2 MR. GIUFFRA: Look, this is not an easy case. I
3 think that's one thing we can all agree on.
4 But, your Honor, a big thing was made about the
5 banks' marks. Mr. Kasowitz said the evidence will show
6 that the banks marked these products exactly the way MBIA
7 did. If you look at this record, he doesn't put any
8 documents forward. And all the banks, the ones that have
9 settled and the two that are left, he doesn't say that, you
10 know, they marked it exactly the same way that MBIA did.
11 The marks of the banks were way more negative than MBIA's,
12 and everyone knows that. The best they can do is they
13 cite, and you'll see this, your Honor. Maybe I'll just
14 give you a little preview. They'll cite a SocGen equity
15 analyst -- equity, stock -- who said, oh, it's a good time
16 to buy stock at the end of 2008. Yeah, it was a good time
17 to buy stock at the end of 2008. I wish I bought a lot of
18 stock at the end of 2008 because the stock market had gone
19 down to -- the Dow had gone to like seven or eight
20 thousand. That has nothing to do with whether the real
21 estate market and these products which have all gone, you
22 know, busted up all these banks which have lost billions
23 and billions and billions of dollars. One of the banks
24 that settled, UBS, lost $50 billion in these products.
25 And so, they could have gone and talked to the
26 banks. Mr. Buchmiller could have gone and talked to the
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2 banks. Mr. Buchmiller could have talked to -- you know,
3 they could have got Perella Weinberg, which was one of the
4 best firms around to do some work and they didn't do it.
5 Now --
6 THE COURT: I'll just tell you, in the next five
7 or ten minutes we'll take a break. So I'll let you choose
8 when that will be.
9 MR. GIUFFRA: Thank you so much, your Honor.
10 Now, an important fact, and Mr. Greenspan will
11 talk about this, there were other New York based monoline
12 insurance -- there's a whole monoline insurance business
13 and we should probably say what a monoline insurer is. A
14 monoline insurer is an insurance company that insures just
15 one line of business. And in MBIA's case, they originally
16 started out doing public finance insurance and, you know,
17 for 35 years it was a great business. I talked about that.
18 Then, the problem was the margins in the public finance
19 business were not so great. So they decided that what they
20 would do is get involved in doing structured finance. They
21 made a mistake.
22 Mr. Brown told people at the NYID during this
23 transaction that it was a management failure and a board
24 failure. They made a mistake. They got into this business
25 but, you know, if you're an insurance company and you make
26 a bet to insure something and it turns out bad, you don't
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2 stick it to the policyholder; you pay the insurance.
3 That's the whole point of being an insurance company.
4 People that bought MBIA Insurance were buying insurance
5 against the financial hurricane. Unfortunately, it
6 happened. This stuff was Triple A rated, some of it. And
7 that was what they insured. And all of a sudden it went
8 boom.
9 Now, other monoline insurers had problems, and I
10 think it's important also, your Honor, to get this out on
11 the table. MBIA Insurance as of the transformation in its
12 entire history, entire history, lost $690 million on public
13 finance. Thirty-five years. $690 million. They took $5
14 billion from MBIA Insurance. So, the notion that that
15 money was needed to pay public finance claims is
16 preposterous.
17 Here's an even better number, your Honor.
18 In 2008, you know how much money -- and it will be
19 right out of an MBIA document. Guess how much money they
20 paid on public finance claims, your Honor? $2 million.
21 I'll stop right here. Thank you so much.
22 THE COURT: Okay. Let's take a ten-minute break,
23 okay? And then we'll continue.
24 Thank you.
25 (Continued on next page.)
26
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2 THE COURT: Mr. Giuffra, just something I want to
3 bring up, just a procedural thing.
4 At the bottom or somewhere on the screens that
5 you're putting up, you have some information that I don't
6 know if you will ever give me a copy of those, but sometimes
7 you read from depositions. It would be helpful if you could
8 mention that on the record, so we have it, the page numbers
9 that you read from the depositions and if something is
10 attached to a particular affidavit, just make it easier for
11 me to find it later, to be able to find them, because there
12 is a lot of material back here.
13 So I think it is on the screen, but once the screen
14 goes away, we can't see it any more, okay?
15 MR. GIUFFRA: Your Honor, we will give you
16 tomorrow slides with all of those -- all of the slides, we
17 will give you copies of them and we made an agreement with
18 the other side, we will give them copies, we will give you
19 copies of the deposition testimony and I owe an apology to
20 Claudette working hard here and my wife told me I am still
21 speaking too fast, so I will try to slow down and then my
22 team -- I just want to be clear about one thing to be sure I
23 didn't misspeak on the error issue, that green light/red
24 light issue.
25 THE COURT: Yes.
26 MR. GIUFFRA: That refers to the extreme stress
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2 test that Mr. Buchmiller said was really a base case in
3 2009, because of the fact that the economy was in such deep
4 disarray, but that is -- I just want to make sure I was
5 clear on that.
6 THE COURT: Okay.
7 MR. GIUFFRA: Now, if we could put on the screen.
8 Your Honor, I put on the screen the September 2nd
9 testimony of Michael Moriarty. Mr. Moriarty on Page 188,
10 the career person, 30 plus years in the department, he knew
11 everything they pretty much had done and we asked him the
12 question "Would you agree that the transformation
13 transaction was an unprecedented transaction in the history
14 of the New York Department of Insurance?
15 There are some objections and then, he says "In
16 terms of a financial guarantee insurance company yes, it was
17 the first of its kind."
18 As I mentioned before, there were other issues with
19 financial guarantee companies in that period and they were
20 handled in a different way than this one was. The other
21 side will say MBIA was in a lot stronger condition, but your
22 Honor, our position is that under those NAIC guidelines,
23 National Association of Insurance Commissioners, things that
24 they should have done were to bring in a third party that
25 was independent. They had Perella Weinberg in their stable,
26 Perella Weinberg in their stable was able to do
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2 engagement-type work. Mr. Buchmiller, we put up that
3 testimony as we go through the process, never consulted
4 Perella Weinberg Weinberg, and Mr. Dinallo will talk a lot
5 about his relationship with Joe Perella. Mr. Dinallo worked
6 at Morgan Stanley and he met Mr. Perella at Morgan Stanley
7 and Mr. Perella is considered one of the more experienced
8 people on Wall Street and that firm obviously maybe could
9 have assisted them. They are not Black Rock, not PIMCO,
10 but they could have assisted them.
11 Second, they didn't follow the notion of getting
12 the policy holders involved. Let me talk about that just
13 for a second.
14 In the Court of Appeals decision, the Court of
15 Appeals said "There is nothing in the statute requiring
16 notice to policy holders."
17 THE COURT: You're talking about this case?
18 MR. GIUFFRA: Correct. Absolutely true. But
19 that is because what the Court of Appeals is looking at
20 their -- is there a notice to policy holder requirement for
21 a dividend? No.
22 For a stock redemption? No.
23 And for a reinsurance transaction? No.
24 Standing alone -- but as your Honor noticed in the
25 National Association of Insurance Commissioners guidelines,
26 it talks about due process considerations with respect to
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2 giving notice to people and there are many situations where
3 an agency acts and maybe it is not required to by the
4 literal terms of its statute, but by what it does and in
5 this case, our clients had insurance contracts with MBIA,
6 those were property, and in the nature of this transaction
7 and it is a claim that we have made, we believe that not
8 giving us notice violated the due process requirements and
9 that was not an issue that was ever presented to the Court
10 of Appeals, obviously, to deal with the completely separate
11 issue but that is an issue your Honor will have to at least
12 think about and decide and more importantly on that, your
13 Honor, is the fact that due process is something that is
14 important, it is a sort of protection that people have, that
15 goes beyond the statute and there are many situations,
16 dozens and dozens and hundreds where courts have struck down
17 governmental action even though a statute didn't expressly
18 require something on due process grounds and there certainly
19 was nothing preventing MBIA or the Insurance Department from
20 consulting policy holders, they certainly knew how to do it.
21 In fact, many of the policy holders who were part of this
22 process of dealing with the other monoline, and whatever,
23 were the same monolines.
24 They were the same people, Mr. Tinari here was
25 involved in multiple monoline instructions. He is the man
26 in the front row. He was involved in multiple monoline
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2 instructions and the Department knew who these people were
3 and they were doing this transaction without telling any
4 one.
5 Now, the other side will say oh, people knew there
6 was the prospect of a transformation transaction. We will
7 put up later during the course of the transaction, he left
8 MBIA, he was on the Board and they got problems because they
9 were so heavy and restructured and his protegee was pushed
10 out and he was brought back in in February of 2008, and he
11 said I will do this transformation and he talked about a
12 five-year time horizon and that is what was talked about,
13 not something that was going to happen in the middle of the
14 financial crisis when you think an insurer and regulator
15 would act more carefully, more slowly and talking about the
16 five-year time horizon, so there was certainly no notice,
17 and there is another factor that we will talk about and I
18 put those -- I was rushed yesterday, sort of fumbling
19 around, the whole notion of having an obligation by the
20 so-called good insurer or healthy insurer or holding company
21 to put money back into the insurance company that is left
22 behind and that is something that the guidelines talk about,
23 and in this particular case, the evidence will show that Mr.
24 Dinallo actually thought he had some sort of an agreement
25 with Mr. Brown and he said it repeatedly when I deposed him.
26 Well, in fact, when we talked to Mr. Brown, he said
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2 there was no such agreement, there is no agreement certainly
3 in that letter that we put forward, and my clients would not
4 be so nervous about this situation and all the other policy
5 holders of MBIA Insurance, which include people other than
6 banks if they knew there was to backstop from MBIA Inc or by
7 National and that is typically done, a back stop to protect
8 the policy holders in the company that is left behind. It
9 wasn't done here.
10 Now, and if fact, I will show you documents where
11 it was talked about, how there were benefits to the
12 policyholders of MBIA Insurance from these transactions and
13 I suspect the Department people sort of latched on to that a
14 little bit, but then MBIA sent another letter to the
15 Department which I will put it making it quite clear that
16 they had zero obligation to put money into MBIA Insurance.
17 Now, the other side will say Mr. Laskey, the new
18 superintendent of the Department of Financial Services, he
19 has the power to require that. I think if you were to talk
20 to the MBIA folks and we can put Mr. Brown on the stand,
21 that if Mr. Laskey required him to put money into MBIA
22 Insurance, he would have -- you would have another
23 Article 78 case to work with and he would have said that
24 would have exceed his powers and the former superintendents
25 would say we would like to have testify -- would say that
26 that is not a way to be an insurance regulator. You would
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2 put this kind of protection in the approval letter.
3 Now, let me say a word about the review. In the
4 NAIC guidelines, there is discussion about having the third
5 party review, some independent check. In this case, the
6 evidence will show and Mr. Buchmiller will say he was the
7 person doing the work. He didn't report -- he was one
8 person -- at one point he was reporting to Scott Fisher and
9 that was the lawyer that came over with Mr. Dinallo from the
10 Attorney General's office who is not an experienced
11 insurance regulator. People weren't checking his work.
12 The testimony that he gave us was that he decide
13 the scope of what he would do. He didn't consult with
14 Perella Weinberg. There was a lot of discussion about --
15 was there any triennial exam going on at the same time?
16 That triennial exam was not over until 2010, I believe in
17 May. They didn't wait until May of 2010. They wanted this
18 done in January of 2009 in the heat of the financial crisis
19 and in fact, the testimony will show that Mr. Dinallo
20 thought the exam team was involved and Mr. Buchmiller has a
21 different view of that and what is also interesting your
22 Honor is that while a woman named Glenda Gallardo who was on
23 the exam team and attended some interviews Mr. Buchmiller
24 conducted in February, she was not involved in this
25 according to Mr. Buchmiller, and the evidence will show your
26 Honor that there were other folks in the Department, Matti
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2 Peltonen and others who at least in Mr. Buchmiller's view
3 had some experience in valuing these super complex financial
4 instruments and Mr. Buchmiller didn't consult with them
5 according to Mr. Buchmiller's testimony at his second
6 deposition which we will put forward tomorrow -- on
7 Thursday.
8 So this was a one person review. One person
9 decided the scope of it, one person checked his work, one
10 person did all of the work. It would be like your Honor,
11 you know, you have 4- or 500 cases, he was supposed to look
12 at 1300 of the most complicated financial products ever
13 devised and he was going to make a judgment about whether
14 the core mission of the department would be, which is to
15 protect policy holders would happen and he did this all by
16 himself.
17 And you know, Mr. Buchmiller, if I could put up
18 slide 34, this is Mr. Buchmiller on January 28, 2009, this
19 is PX 60 at Page 48.6-2, interviews conducted by Mr.
20 Buchmiller, by tape, Justice Yates ordered the production of
21 these to us several years ago and this is Mr. Buchmiller
22 talking to Mr. McKiernan at the end of an interview and this
23 is January of 2008 -- 2010, I apologize, and Mr.
24 Buchmiller's last e-mail to his supervisors is
25 February 11th. We know that, and Mr. Buchmiller -- we
26 asked Mr. Dinallo and Mr. Buchmiller whether there was ever
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2 a -- did Mr. Buchmiller ever participate in a big meeting
3 with all of the other folks at the Department and presented
4 findings and he said no.
5 In fact, you know --
6 THE COURT: Off the record.
7 (Discussion off the record.)
8 MR. GIUFFRA: In fact I mentioned this before and
9 I think it is pretty telling, your Honor. Mr. Buchmiller
10 did not review a draft of the approval letter and he found
11 out about this by his own admission several days after the
12 approval. You would think that if Mr. Buchmiller was the
13 central figure in this, they would have at least, you know,
14 given him a draft of the approval letter to read. MBIA got
15 it, Mr. Rahm Emanuel, the general counsel, he got it under
16 copy of --
17 MR. KASOWITZ: Ram Wertheim.
18 He is in Washington --
19 THE COURT: He is in Chicago.
20 MR. GIUFFRA: Mr. Buchmiller, in his discussion
21 with Mr. McKiernan, and this is the very end of the process,
22 "we are trying to find the short cut to get to the decision
23 on transformation. You know, I mean, ideally in the great
24 scheme of things that would be the purpose of the
25 examination, validate reserves, et cetera, but you know, we
26 don't have that kind of time line."
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2 That is not my brief, that is Mr. Buchmiller's own
3 words and the other side says he was not rushed, but that is
4 what he is telling the guy who was -- who he was dealing
5 with most closely at MBIA, Mr. McKiernan, who we think
6 should be a witness before your Honor. He says we are
7 trying to find the short cut to get to the decision on
8 transformation.
9 Now, petitioners' expert, Mr. Greenspan, who is one
10 of the most experienced people in modeling -- looking at
11 these kinds of complex products, was involved with all of
12 the other monoline structuring that was going on at the same
13 time. He said to do the kind of work that would be
14 necessary here would require a very large team of people
15 working for weeks; not one person, not one person.
16 So your Honor, we think that the process that was
17 engaged in here by the Department was flawed, and is a
18 separate and independent ground from all of the other
19 grounds, the errors and the like for annulling this
20 decision.
21 In terms of the scope of review, if you could put
22 up slide 36. This is from Mr. Greenspan's affidavit,
23 March 11th, Figure 15. And Mr. Greenspan could go through
24 a lot more detail but this gives you a sense of what was
25 being looked at by Mr. Buchmiller and I will put in that
26 memo we talked about yesterday that we called the backdated
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2 memo. If you look at the first page, sort of down toward
3 the bottom, Mr. Buchmiller says he looked at three
4 transactions in detail. And that is this RFC 2007
5 transaction which is called RMBS, residential mortgage
6 backed securities, Broderick III, a CDO transaction, and
7 Abacus 13, CMBS, commercial buildings and the like. Those
8 were the three he looked at and there were at that time 1300
9 MBIA Insurance structured products and that was what he
10 looked at.
11 In terms of them even getting material, they only
12 got the transaction level detail on 23 percent of the
13 portfolio and we will talk about and Mr. Greenspan will talk
14 in a lot of detail about how the information that was
15 provided to the Department was stale. So for example, one
16 of the things Mr. Greenspan will run through in a lot of
17 detail for your Honor is how the RMBS that was being done by
18 MBIA was based on -- basically, they run the data on a
19 monthly basis and the date that that was being run here was
20 run in August, 2008 before Lehman Brothers blew up, before
21 AIG, before the world came to an end.
22 And I will show you a document, one of these
23 transcripts where Mr. Buchmiller is talking to someone at
24 MBIA and is doing the review and basically, they are all
25 standing around him as is he on this computer and they are
26 sort of -- is he driving the model. Of course, he is being
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2 told how to drive the model from the people at MBIA who have
3 every incentive to get this thing approved and there is one
4 point where it is very telling, where he could put more
5 current information in and basically, he goes and uses the
6 information that they had at the time. The old
7 information.
8 And that is classic, classic Article 78 material.
9 When you have more current information and you don't use it,
10 that is a reason why a court would annul a decision.
11 Now, let me show you to certain of -- slide 44.
12 You know, Mr. Buchmiller's e-mail, this is in February, he
13 is e-mailing Mr. McKiernan and Mr. Chaplin, and he wants
14 more information from them. And he said "The short version
15 of your task is, make us comfortable with the rest of your
16 structured finance surveillance and related modeling by
17 Tuesday." This is a huge company. Huge. Billions,
18 $233 billion of insured products, and the subject line your
19 Honor, it said our next drill downs ASAP, February 5th
20 e-mail, it is PX 67.
21 What does Mr. Buchmiller say at the end? "A tall
22 order: Cue up the music from Mission, Impossible." Our
23 view is that the task that Mr. Buchmiller was given was
24 Mission Impossible. No one could have done it. It was
25 too much work. It was impossible. It was impossible for
26 any one to protect policy holders, figure this all out, and
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2 by the way, he is doing it in the middle of the financial
3 crisis.
4 We will talk more about that, your Honor.
5 Now, just two other subjects that I want to talk
6 about in the summary part of my presentation and I am trying
7 to speak slowly --
8 THE COURT: That is fine. We are not shy up
9 here. If the court reporters need to you speak slower, I
10 assure you they will ask.
11 MR. GIUFFRA: So our position, your Honor, is
12 that this review was based on inaccurate and incomplete
13 information. And your Honor made the point, the intent of
14 MBIA, you know, whether they had good motives or bad motives
15 doesn't matter, but if they gave him wrong information and
16 if they gave him incomplete information, maybe through their
17 own mistakes and errors or whatever, that is all that
18 matters. If he did not have complete and full information,
19 this one man review team, that is a reason why the Court
20 needs to annul.
21 Let me give you just one sort of interesting
22 example and we will go into a lot more detail about this.
23 If we put up slide 63. Now, commercial mortgage
24 backed securities were a very risky part of MBIA's
25 portfolio. In these e-mails, we will talk about why Mr.
26 Buchmiller was very concerned about it and that was the last
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2 bit of work he was doing, right before the *parole and he
3 was very concerned about the fact that MBIA had zero
4 reserves, not one dollar, on CMBS and that was a transaction
5 at year end 2008. Zero reserves. Zero.
6 Our position is, your Honor and we have had
7 experts, teams of experts that we have paid lots of money
8 to, have gone through the documents and this is Greenspan's
9 supplemental affidavit, March of 2012, Figure 9 that we
10 believe and one thing that is interesting about Mr.
11 Buchmiller's memo that February 16th memo which he wrote in
12 March or April, is that he documented what he did and there
13 are e-mails and that is why we have been fighting so hard to
14 get e-mails, get the documents, because they tell the story
15 of what Mr. Buchmiller did or didn't do, what he was told
16 and what he was not told.
17 The quintessential stuff of an Article 78 case,
18 particularly one as important as this and Mr. Greenspan will
19 tell you that based on our observation of the record, based
20 on our observations of what was in Mr. Buchmiller's memos,
21 based on what Mr. Buchmiller's testimony was, it looks like
22 the -- and at this point in time, MBIA is obviously
23 concerned about RMBS and there is a bunch -- if you look
24 across the bottom there is a bunch of different names, it
25 says S&P, Lehman Base, Lehman Stress, Citi. Fitch.
26 Moody's. S&P. Lehman. RBS. Royal Bank of Scotland.
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2 Morgan Stanley. Fitch. RBS. Every one was trying to
3 figure out at this moment in time that this was a period --
4 trying to figure out what was going to happen to commercial
5 mortgage backed securities. All of the big investment
6 banks had teams and teams of people spending millions of
7 dollars trying to figure out what was going to happen. It
8 was in the middle in fact of the biggest financial crisis in
9 the country's history since The Depression and so, a lot of
10 this modeling which you will hear about, modeling, is
11 putting in assumptions into the models and in our opinion,
12 they should have done a solvency review and they did not do
13 one. What they did do is they basically tried and you will
14 hear this, your Honor, was the test that was put forward
15 was, were MBIA's modeling techniques best practices in the
16 monoline industry? That was the test they set for
17 themselves. MBIA's modeling techniques were best practices
18 in the monoline industry.
19 Let's sort of de-aggregate that a little bit.
20 Best practices in the monoline industry does not tell you
21 very much but that industry was on its back. MBIA and the
22 rest of the monoline industry had had a terrible, terrible
23 time projecting reserves -- projecting losses, their
24 prognostication skills were awful, and in fact, MBIA's
25 prognostication skills were awful and that is why they had
26 to take the large increases of reserves all during 2008.
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2 So the test that was put forward by -- for Mr.
3 Buchmiller was, are they best practices in this industry
4 that has not met -- that was completely wrong throughout
5 this whole period and certainly is not protecting policy
6 holders, it is certainly not insuring there is sufficient
7 funds and by the way, your Honor, we will talk about this.
8 These policies were supposed to go out for 45 years, some of
9 them and the amount of reserves they had at the time of the
10 transformation, $1.7 billion. That is it. For the whole
11 portfolio, 288 billion. That was it. They were basically
12 sent off in the MBIA life insurance life raft and there was
13 $1.7 billion, no more money coming in from MBIA Inc and they
14 made that clear and so basically at this point in time on
15 the CMBS and this is true across the board, a lot of detail
16 we will go into, they were running all of these internal
17 analysis applying assumptions of Wall Street firms and
18 Fitch, which is a rating agency, S&P a rating agency and
19 other experts trying to figure out what are the right levels
20 of reserves.
21 What do these folks do? They gave Mr. Buchmiller
22 the information that supported zero losses. They didn't
23 show him the numbers which were 10, 12, 14, 18 and
24 $22 billion in mortgages which would have wiped away this
25 $1.7 million. It is even worse than that, your Honor.
26 MBIA's own assumptions for doing these CMBS models,
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2 we will go into this in some detail, were based on a Lehman
3 Brothers work that was done in June and July of 2008. They
4 gave that to Mr. Buchmiller. What they didn't give to Mr.
5 Buchmiller, which they had in their files, was a September
6 Lehman Brothers analysis on CMBS. This is different from
7 the other Lehman study we will talk about. They didn't
8 give it to him, but had they given him that, it would have
9 shown that the assumptions they were running on their CMBS
10 models were wildly optimistic, but they didn't share all of
11 this information in our view with Mr. Buchmiller.
12 Let's turn to slide 65. We, in the course of the
13 work in this case, and this is Greenspan Supplemental
14 Figure 9, Page 65. Mr. Greenspan obviously had a team of
15 people. We paid them, we admit guilty, mea culpa, we spent
16 a lot of money going through this thing and those are some
17 other models that were run apparently by MBIA, all right?
18 And very recently, sort of on the verge of this
19 proceeding, let's turn to 67. We got a letter after I
20 deposed Mr. McKiernan, he is like the chief modeling guy at
21 MBIA, and Mr. McKiernan in his deposition said oh, I showed
22 some models to Mr. Buchmiller, I didn't let him keep them
23 and he looked at them for 20 minutes, 20 to 30 minutes.
24 We will go through it and lay it all out for you.
25 I got a letter from MBIA's counsel saying these documents
26 which were raised in the plenary had been produced in the
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2 plenary and then they basically reproduced the documents to
3 us in the MBIA Article 78 case; based on Mr. McKiernan's
4 claim that he showed these to Mr. Buchmiller. Okay.
5 Didn't give him a copy of them, but he said he showed them.
6 Now, that raises a separate question and let's go
7 back to slide 65.
8 The problem, of course is, is that why is Mr.
9 Buchmiller not talking about any of this in his memos? Why
10 is he not telling his bosses that on a -- that some of these
11 internal MBIA studies are showing potential losses of
12 $14 billion? Why is he not telling him that? Telling his
13 superiors that?
14 Our view is that we think this was probably a made
15 up story, and there is no evidence to support any notion
16 that it was shown to Mr. Buchmiller. If it was shown to
17 Mr. Buchmiller for 20 minutes and he didn't keep a copy,
18 that is interesting. It certainly wasn't in the
19 administrative record, it is not in the files of the
20 Insurance Department and Mr. Buchmiller certainly has not
21 testified that he saw numbers like that.
22 (Whereupon the following was transcribed by Senior
23 Court Reporter Vicki Glover.)
24
25
26
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2 MR. GIUFFRA: (Continuing) And so Mr. McKiernan
3 has to backfill and say, well, I showed a few pages, and
4 we'll show you what those pages look like.
5 Now, the yellow bars, your Honor, are essentially
6 the ones that they claim they showed Mr. Buchmiller, but
7 they obviously don't claim they showed him the rest.
8 Now, one of the things that MBIA will say is that
9 Mr. Buchmiller, and I think the Department has to say, was
10 an experienced person in modeling. And the question I
11 think one has to ask, if he's an experienced person in
12 modeling and they were doing all this work, why weren't
13 they sharing with him all the work they were doing? Why
14 weren't they sharing their modeling work with him, giving
15 him an opportunity to evaluate whether this was something
16 he should be considering in the course of his work? And so
17 there's sort of a disconnect. On the one hand he's very
18 experienced, and on the other hand they made the decision
19 on their own not to share things with him. And we're
20 entitled, cases make clear to show full and complete -- and
21 in fact, the approval letter on its face says it's premised
22 on the accuracy of the information. And your Honor knows
23 full well, speaking in half-truths is a problem. Your
24 Honor's decision in the ACA case makes that quite clear.
25 You can't tell someone half of the things; you got to tell
26 them everything.
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2 MR. KASOWITZ: I'm going to object, your Honor.
3 That's out of bounds argument for this proceeding and I
4 think your Honor's already ruled on that.
5 MR. GIUFFRA: Marc, I was only citing it as a
6 precedent.
7 THE COURT: Well, I know both your firms were
8 involved in that case but let's go on.
9 MR. GIUFFRA: So, your Honor, let's go back to
10 slide 36.
11 Now, those are the transactions that
12 Mr. Buchmiller, by his own admission, did a deep dive into.
13 And you see this one Broderick III. Now, there's been
14 discussion of a Lehman analysis that was done for MBIA, and
15 let me tell you about that analysis. In the fall of 2008,
16 MBIA went out and hired Lehman Brothers. It paid them
17 $3.75 million, which is why we think about the $7 million
18 paid to BlackRock? These Wall Street valuation people get
19 a lot of money. And so they basically hired Lehman, among
20 other things, to value what they thought were their worst
21 CDOs, the ones that had the biggest risk. And in part,
22 they wanted to do that valuation because they wanted to go
23 out and see if they could commute or settle some of those
24 transactions. Now, the person who was doing all of that
25 work was Mr. McKiernan, who is the principal contact for
26 Mr. Buchmiller at MBIA. Now, the evidence will show that
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2 MBIA thought it had Lehman's A-Team, really high quality
3 people. And there's no indication in the record that the
4 Lehman people did anything other than a top rate job. And
5 their report, your Honor, is a very thick document. It's
6 in the record. We'll show it in a second. And it's very
7 detailed and it has all kinds of fancy charts and graphs.
8 And they never told Mr. Buchmiller about that. And in
9 fact, you'll find out, your Honor, in the record there's
10 evidence where the Department is asking, hey, should we
11 hire BlackRock? Should we -- what other kinds of work are
12 you doing with third parties? In fact, in fact, your
13 Honor, there's a Department regulatory guidance comes out
14 in the middle of this whole period talking about third
15 party validation of reserves which makes sense. That's
16 good regulatory strategy because this is something where
17 people are trying to figure out what's happening in a very
18 difficult time.
19 So, let's turn to tab 83. Slide 83. Sorry.
20 And this is just a page from this Lehman report
21 dated September 12, 2008. It's Plaintiff's Exhibit 143 on
22 page 83. And the significance of this, your Honor, is that
23 one of the transactions that Lehman is looking at is
24 Broderick III. And in fact, Mr. McKiernan is literally
25 sitting next to Mr. Buchmiller and talking to him about
26 Broderick III and driving the model about Broderick III and
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2 this is one of the ones that he knows. Mr. Buchmiller
3 literally spent a number of days looking at Broderick III.
4 And the problem, your Honor, is that in his back pocket
5 Mr. McKiernan had this Broderick III analysis by Lehman
6 Brothers that shows that under any scenario this thing was
7 way, way bigger losses than what MBIA was projecting. You
8 know, as high at 9.6 billion, as low as 4.8 billion. Now,
9 Mr. Kasowitz will stand up and say, oh, the numbers must
10 have been wrong. Look at the ten percent home price
11 appreciation. That still shows a big loss. Well,
12 Mr. Greenspan, our expert, who knows a lot more about
13 valuation than any lawyer in this room, will tell you that
14 ten percent up, and then if you go back to normal house
15 appreciation you go to four percent. So for a while there
16 there would be big losses. And, in fact, any of the
17 scenarios that Lehman was running showed far bigger losses
18 than what MBIA was telling the Department.
19 Now, making the story even more troubling, MBIA
20 itself in December -- in December --
21 My team is telling me -- I want to be clear, your
22 Honor -- the 9.6 is not just for Broderick III. It's for
23 all 15 of the CDOs. The Broderick III losses are above
24 that right there.
25 In December, MBIA, they hired Lehman and later
26 Barclays to help them, and even when Lehman goes bust they
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2 use the same team because Lehman had really the A-Team in
3 doing this kind of valuation and also work in this area.
4 They hired this same team and they offer to settle three of
5 these CDOs. They pay Lehman Brothers $5 million for each
6 settlement.
7 Now, when the senior people at MBIA are deciding
8 whether they should pay tens of hundreds of millions of
9 dollars to settle these exposures, do they rely on their
10 own numbers or do they rely on the Lehman-Barclays'
11 numbers? They rely on the Lehman-Barclays' numbers in
12 evaluating and making a business decision. And this is
13 right when the Department is in MBIA.
14 So instead of, you know, sharing this information
15 with the Department, letting Mr. Buchmiller be the one who
16 makes the decision as to whether it's relevant or not, they
17 hide it from him. They don't share it with him. And
18 there's e-mails where people at MBIA are talking about the
19 fact that Lehman has a very dark view. They're talking
20 about not sharing with other people. And what I find
21 almost incredible is that while the CEO, Mr. Brown,
22 approved the $3.75 million to get all this work done, he
23 professes not to know about it, and the CFO professes not
24 to know about it.
25 Now, our Insurance Law experts will say that as a
26 matter of Insurance Law practice and policies, and we
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2 haven't spoken to Mr. Moriarty about this, and it would be
3 very interesting to know what he thinks, that if an
4 insurance company has a report from a reputable firm --
5 MR. KASOWITZ: Objection, your Honor. He's
6 talking about experts who haven't submitted affidavits in
7 this case.
8 MR. GIUFFRA: No. Mr. Corcoran has and that's
9 what he said.
10 MR. KASOWITZ: You're talking about former
11 superintendents?
12 MR. GIUFFRA: Yeah, former superintendents.
13 MR. KASOWITZ: So superintendents are experts?
14 MR. GIUFFRA: Yes, Marc. In fact, they've been
15 qualified as experts in other cases involving insurance --
16 MR. KASOWITZ: Thank you, your Honor.
17 MR. GIUFFRA: -- insurance policies.
18 THE COURT: We'll get to that.
19 MR. KASOWITZ: Thank you.
20 MR. GIUFFRA: And so, your Honor, the point is,
21 that former -- Mr. Corcoran, he served under Governor
22 Andrew Cuomo for seven years. He was the Superintendent of
23 Insurance. And they'll be saying, well, it's, you know.
24 So, Mr. Corcoran says in his affidavit submitted to your
25 Honor that his understanding of proper insurance
26 regulation, if you have a report like this in your files
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2 and you're an insurance company, you should be telling your
3 regulator about it. You shouldn't be hiding it,
4 particularly when you're relying on numbers. Not your own
5 numbers, but you're relying on these Lehman numbers to make
6 major business decisions. Major business decisions.
7 Spending hundreds of millions of dollars to settle claims.
8 And by the way, their own numbers were way lower than the
9 Lehman numbers and the Barclays numbers. And there's a
10 whole story where they have all sorts of people doing
11 things and they didn't share it with the Department. They
12 only gave the Department what they wanted the Department to
13 see.
14 MR. HOLGADO: Your Honor, I just want to point out
15 that your Honor has made clear that this case is not about
16 what MBIA did or did not conceal or show, but rather what
17 was actually shown and what was before the Department. I'm
18 going to let Mr. Giuffra continue. I just want to remind
19 him that your Honor was clear at the April 20th conference
20 that the focus of the plenary action is allegations about
21 concealment by MBIA.
22 THE COURT: Okay. Well, I think you made your
23 point on that, so why don't you move on? I kind of got it.
24 MR. GIUFFRA: I'll move on, your Honor. Other
25 than to say that we think the law requires complete and
26 accurate information. It doesn't even matter whether it
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2 was a mistake. And Mr. McKiernan may sit here and testify,
3 "I forgot about it." "I made a mistake." It doesn't
4 matter. It's not about his intent; it's about was
5 information available that should have been shared with the
6 Department and, in fact, they're using these numbers to
7 make big business decisions.
8 Let me talk a little bit about this issue of
9 simultaneity. Let's turn to tab 105. And this is the
10 whole idea of how these transactions were done. We talked
11 about this a little before when I walked through, this is
12 PX 6 which is the approval letter. And the approval letter
13 on its face describes the transactions as a series of
14 transactions. And then it has that language, "Once MuniCo
15 is recapitalized as described above, MuniCo and MBIA Corp.
16 will enter into" -- and our position, your Honor, the plain
17 meaning of those words are one of temporal movement.
18 Now, let's turn to 106.
19 This is again the fact that they describe it as a
20 series of transactions.
21 Let's turn to 107.
22 Now, the way the transactions work is I think
23 helpful, and this is PX 461. And it corresponds to step 3
24 of an exhibit that was given to the Department. And the
25 evidence will show that all of the communications in the
26 administrative record this is described as steps. And the
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2 step, the first step is the payment of the dividend up to
3 MBIA Inc. and it's 1.15 billion.
4 Let's do the next slide.
5 And the next slide.
6 And then the money goes down into this new
7 municipal corporation MuniCo.
8 Let's see the next slide.
9 And then they plan to issue -- this is as a part
10 of the transformation. And MuniCo also plans to issue
11 second-to-pay master trust policies in New York for the
12 benefit of the holders of policies being reinsured by
13 MuniCo as a result of the transformation. That's another
14 step in the process.
15 And then the next slide.
16 Then once MuniCo is recapitalized -- this is
17 another place in the letter. It's not described
18 simultaneously. They're describing it in the approval
19 letter on page 3 in a temporal way.
20 "Once MuniCo is recapitalized, MuniCo will
21 reinsure on a cut-through basis MBIA Corp.'s municipal
22 book." The word "simultaneity" is nowhere to be found in
23 this letter or in the prior administrative record. And why
24 we were fighting so hard yesterday was because they want to
25 come in after the fact and say simultaneity is somehow the
26 reason for the decision. These are our demonstratives,
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2 your Honor.
3 And if I could show just 112.
4 And then that again talks about, "Once MuniCo is
5 recapitalized, MuniCo will reinsure on a cut-through basis
6 MBIA Corp's municipal book."
7 Your Honor, as a technical Insurance Law matter
8 what that means is --
9 THE COURT: What does cut-through basis mean?
10 MR. GIUFFRA: That's what I wanted to talk about.
11 What it means is, the policies remain at MBIA
12 Insurance. So the public finance policyholders are still
13 at MBIA Insurance. But MBIA MuniCo, which is this
14 National, has reinsured their policies. And that means
15 that MuniCo is basically guaranteeing their claims. And
16 what's interesting about this transaction is the way the
17 cut-through reinsurance works because the policyholders are
18 still at MBIA Insurance. The public finance policyholders,
19 and again the statute talks about fair and equitable, they
20 got two lines of protection. They are protected in the
21 first instance by the money at National, MuniCo, and then
22 if National were to run out of money, they're protected by
23 whatever money is left in MBIA Insurance.
24 Maybe I should go through this a little because --
25 let's go to 105 again. 106. 107. I'm sorry.
26 So the first step is the payment of the dividend
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2 to MBIA Inc. And our position is that that dividend had to
3 be paid out of earned surplus, that as of the date of the
4 transaction the earned surplus was $1 million and they
5 couldn't pay. They couldn't -- they just couldn't do it.
6 And the reason why this earned surplus test is in the
7 Insurance Law is to protect policyholders from payments of
8 dividends to holding companies, which is exactly what
9 happened here in the middle of the financial crisis.
10 And then the next slide shows how there are other
11 assets, including the stock redemption asset. So you get
12 $2.28 billion goes from Insurance up to MBIA Inc. And then
13 the next slide shows how the money goes, the $2.28 billion
14 goes down to MuniCo Holdings and then down to MuniCo.
15 And then the next slide shows how MuniCo issues
16 policies on a second-to-pay basis for the benefit of the
17 policyholders in MBIA Insurance who are municipal holders.
18 This is how this cut-through reinsurance works. So it's
19 sort of like you stay with the same insurance company but
20 another insurance company provides you with another layer
21 of insurance protection. I think I've got it right.
22 And then 112 shows how there's money flowing back
23 and forth between MuniCo and MBIA Insurance. And
24 essentially what these folks will say is, oh, there's this
25 thing called the Ceding Commission, and then they talk
26 about an unearned premium, and that's the reserves that
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2 were over at MBIA Insurance that get released as part of
3 this transaction, and that's how the $5 million gets split
4 apart.
5 The problem is that this insurance company is
6 completely funded by MBIA Insurance completely. And that's
7 where it becomes an extraordinary transaction that no one
8 can cite a single precedent in the history of Insurance Law
9 that it's ever been done this way.
10 Normally, when people do a reinsurance transaction
11 it's with a separate company. So, in the case of MBIA
12 itself, in the middle of the financial crisis they took on
13 the bulk of FGIC, and they did so, your Honor, they were a
14 separate company that was separately capitalized, and that
15 was part of a transaction that Superintendent Dinallo and
16 the rest of his team worked on. But this cut-through
17 reinsurance is one where the party that's buying the
18 reinsurance and paying money for the reinsurance, MBIA
19 Insurance, has capitalized the reinsurer. So it's
20 essentially just a big circle where your own money is being
21 used to capitalize the reinsurer that then sells you
22 reinsurance. Well, you're not benefited by that. It's
23 just a shifting of money on an accounting basis.
24 Your Honor, I'm going to shift to another topic,
25 if I could.
26 So, I think in terms of the legal issues, your
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2 Honor, and again, these are not arbitrary and capricious.
3 The first question your Honor has to decide is was this
4 structure permissible under the New York Insurance Law, was
5 it consistent with the law against the payment of dividends
6 except out of earned surplus when MBIA Insurance -- I'll
7 show you some documents where in the Insurance Department's
8 administrative record there was only a million dollars in
9 earned surplus, yet they paid this big dividend. Was it
10 fair and equitable? Was the stock redemption fair and
11 equitable? Was it a disguised dividend? Something we
12 think it was. Because we'll show you, your Honor, how they
13 changed the structure of the transaction to sort of try to
14 fit it into the law. Was this reinsurance transaction --
15 and the statute says, "fair and equitable." "May adversely
16 affect." That's what the statute says. If a transaction
17 is not fair and not equitable and may adversely affect
18 policyholders, it can't go forward.
19 In addition, your Honor, obviously you have to
20 consider whether the Department had a rational basis for
21 these decisions. And so, that's something where in our
22 view the law is you look to, well, what was the record?
23 Was the accurate information provided? Was incomplete
24 information provided? And if inaccurate information was
25 provided, if there were inaccurate assumptions, then the
26 law makes quite clear the Court must annul. And it's
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2 not -- the whole arbitrary and capricious test only comes
3 into play if the information that the agency got was
4 complete and accurate. The whole idea of arbitrary and
5 capricious is that we shouldn't second guess policy
6 decisions that are made when the people have full and
7 complete information.
8 And, your Honor asked a question maybe a hearing a
9 little bit a ways ago, and it was the whole question of,
10 well, third parties. Can third parties bring Article 78
11 cases. And we will present to your Honor a number of cases
12 where third parties have brought Article 78 cases. And the
13 whole point here is that the policyholders of MBIA
14 Insurance, banks and others, had no notice of this, no
15 involvement in this. And they can't cite another
16 transaction like this in the history of New York State or
17 around the country where anybody's done a liability base
18 restructuring and they haven't gotten the policyholders
19 involved at all. Just did it on their own. And your
20 Honor, this was done in a period where there was massive
21 financial uncertainty, where home prices which had peaked
22 in 2006 were starting to fall, where Mr. Brown himself --
23 you know, they went into this business of insuring these
24 complicated products because they weren't making enough
25 money in the municipal side of the business, and
26 Mr. Brown --
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2 If you just put up PX 5. We'll get this. I
3 apologize.
4 Mr. Brown is talking to Mr. Buchmiller. You see
5 Mr. Buchmiller's name up at the top. These are the
6 documents we got from Justice Yates' discovery order. I
7 think the page is NYSID 1967. And Mr. Brown is telling the
8 Department - I think this was probably in December 2008 -
9 "If you look at the growth rates of the CDO book, the ABS
10 CDO book or the second lien book" -- that's RMBS -- "or the
11 CMBS book, all in an 18-month time period it shows that the
12 accelerator was down."
13 What that means, your Honor, is that what they
14 were doing was in 2006, in 2007 they were going and
15 insuring all of this very, very risky stuff, in retrospect.
16 They were betting that this was something they should be
17 getting involved in. And Mr. Brown himself said it was a
18 management failure, and later on I believe he says it was a
19 board failure.
20 And so the point is, as the real estate market
21 started to fall in 2007 and into 2008, more and more
22 homeowners defaulted on their mortgages and that,
23 obviously, had all kinds of effects on these very
24 complicated instruments. And so monolines started to have
25 to pay, like MBIA on RMBS, that's the first sort of place
26 where the losses fell. And although these RMBS were rated
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2 Triple A at one point in time, virtually every monoline in
3 2007 and into 2008, you know, they lost their Triple A
4 rating.
5 And the whole point of monoline insurance, your
6 Honor, is that you're essentially selling the balance sheet
7 of the monoline. So when the concept originally arose, it
8 would be, you had a municipality that was not a
9 particularly great credit; it would have a monoline insurer
10 like MBIA wrap its protection around the policy. And
11 Mr. Harrison Goldin we'd like to have testify, one of our
12 experts, former city comptroller, someone who is an expert
13 and was the Enron -- was involved in Enron and all the
14 biggest restructuring transactions and will talk about
15 solvency and the like. And Mr. Goldin will explain to the
16 Court how this all works. And also about how you do
17 solvency exams and don't do solvency exams. And his view
18 is, and we'll talk about that, because this was not what
19 you do.
20 But essentially, what the story will show, your
21 Honor, is that, you know, Mr. Dinallo, and folks like
22 Mr. Dinallo, they weren't blind to all of this happening.
23 Everyone knew it was happening. And in fact, in 2007, the
24 evidence will show, MBIA wanted to do a $500 million
25 dividend. It wanted to do a billion. He said no, I'm
26 cutting it down. I'm cutting out $500 million. This is in
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2 2007. He said, I'm not letting you do the dividend. But
3 then after AIG fails and the world has gone to hell in a
4 hand basket, he approves a $1 billion loan in that
5 reversal? But he said no. And what the story will also
6 show, your Honor, is that Mr. Dinallo was concerned...
7 Let's put up PX 24.
8 Mr. Dinallo was actually testifying in Congress in
9 February 2008. This is a year before the transaction. And
10 Mr. Dinallo is telling Congress and talking about the fact
11 that --
12 Do we have a page number on this?
13 This is Mr. Dinallo. And in his testimony he's
14 talking about monoline insurers.
15 And we can blow up the last part. Let's go up a
16 little bit.
17 And he's talking about the fact that he took
18 office in very late January, became -- this is 2007, I
19 believe. -- "and I became concerned in the early spring
20 when MBIA requested a billion dollar dividend." This is
21 January 2007 he takes over.
22 And he said that it was within the four corners of
23 the law and had previously been okayed by his predecessor.
24 And at that point in time MBIA Insurance was still Triple A
25 rated. This is the middle of 2007. And no monoline
26 insurer had been downgraded at that point. There really
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2 wasn't a concern about subprime. But he was beginning --
3 this is what Mr. Dinallo is telling Congress in February, a
4 year before the approval.
5 "I was beginning to have some concerns about the
6 economy and about the subprime area. It was extraordinary
7 but I reversed the decision. I cut it in half is what I
8 did. Based on where I thought we were."
9 Again, a year and a half before this approval.
10 And he talked about the fact that he was proud of
11 doing it, and in fact it was the right decision to do back
12 then.
13 And then he said, they came back and they
14 wanted -- you know -- and they said they requested another
15 500 million, the holding company. This is what holding
16 companies do. This is 2007, June and July of 2007. And
17 they're requesting another 500 -- and they requested that
18 $500 million and he said no.
19 So, I want to be clear.
20 What I'm saying is, he said no to the $500 million
21 in the middle of 2007. And he just said, "I'm not giving
22 it to you." And he also makes the point that at that point
23 in time, you know, the senior tranches of these products
24 had not been downgraded.
25 If you go to the next page, it talks about how --
26 Let's go to the next page, please.
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2 Oh, he doesn't have it. I apologize. We'll have
3 to get that.
4 Now, the basic point, your Honor, is that by year
5 end 2008, every monoline insurer had lost its Triple A
6 rating. In fact, your Honor --
7 If we could just, you know, quickly put up slide
8 127.
9 This is that fair and equitable I was talking
10 about before.
11 You can take it off now.
12 In fact, at this point in time this Bill Ackman,
13 the investor I was mentioning before, that big hedge fund
14 guy, he was shorting MBIA, and he was proposing doing this
15 so-called stacked structure whereby you basically split
16 MBIA Insurance in half. You take the public finance part,
17 you put it in the bottom of the stack, and then whatever
18 profits come out of MBIA, the public finance stacked
19 structure would go to benefit MBIA Insurance. And then
20 before it could go to the holding company it would have to
21 be used to pay claims of MBIA Insurance structured
22 policyholders. And that's a stacked structure which is a
23 much more conservative approach than what was adopted here
24 where they split the companies apart and there's zero
25 obligation for MBIA, National, or MBIA Inc., to put any
26 more money into MBIA Insurance.
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2 So, Mr. Ackman is beating the drum trying to get
3 folks to agree to this plan, this stacked structure. And
4 at that point in time --
5 Let's put up 132.
6 And this is in February, February 20th, 2008.
7 That's PX 28. It's from the Wall Street Journal. I think
8 your Honor can take judicial notice of this. And
9 Mr. Neustadt, whom you'll hear about during the course of
10 this, he was the press spokesperson for Mr. Dinallo. And
11 in fact, one of the briefs that were recently submitted,
12 when people were trying to come up with a policy rationale
13 for this transaction, they literally cite in the brief that
14 was submitted in the last week to your Honor talking points
15 prepared by Mr. Neustadt. Literally. It's not in the
16 approval letter, but it's in Mr. Neustadt's talking points.
17 Now, this is a year before the transaction and
18 Mr. Neustadt is putting out a statement on behalf of
19 Mr. Dinallo saying that this stacked structure, this
20 conservative stacked structure would mean, "a substantial
21 downgrade to the structured side. That's not good for one
22 group of policyholders, the banks. Our preference
23 continues to be finding a solution that would preserve
24 credit ratings for all policyholders."
25 In fact, if we turn, your Honor, to 133, MBIA put
26 out a statement. Now, what MBIA did, so if anyone
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2 questions whether the statement that was made by
3 Mr. Neustadt, as reported in the Wall Street Journal, was
4 accurate, if you look at PX 29, MBIA puts out a statement
5 attacking, and this is February 20, 2008.
6 PX 29.
7 MBIA repeats what Mr. Neustadt has said because
8 they don't like this stacked structure that's being
9 proposed by Mr. Ackman, and they say, "A spokesman for the
10 NYSID recently told the media that, 'Mr. Ackman's plan
11 splits the company and would likely lead to a substantial
12 downgrade for the structured side which would be bad for
13 the banks.' We would prefer a transaction that maintains a
14 top rating for the entire book, and that is what we
15 continue to work towards."
16 And then MBIA, in 2008 says, "We agree with the
17 Department spokesman who says that Mr. Ackman's proposal is
18 not a good one for one group of policyholders, the banks."
19 So the point, your Honor, is that a year before
20 this approval they are opposed to a transaction that would
21 have had a stacked structure, but a year later they agree
22 to one that actually splits the company in half, provides
23 no money going from MBIA Insurance -- from National, the
24 public finance company, into MBIA Insurance, and a
25 government agency can't completely switch its position. So
26 in 2007 no dividend. Early 2008, no splitting of the
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2 company, even in a stacked structure. And then when the
3 economy gets a lot worse they say, okay, it's okay, we'll
4 do it.
5 And so, your Honor, if I could take maybe a break
6 right here.
7 I think that it's just quite clear that what the
8 Department did here was engaged in a switch and a change
9 that's just not warranted. And whether it's based on the
10 way they play with the law, the way they ignore what they
11 said in the approval letter, whether they send one person
12 out to do a review where the person himself is describing
13 it as a shortcut review. That's his words; I didn't say
14 it. Where the Deputy Superintendent of Insurance is saying
15 our goal, our principal responsibility is protecting
16 policyholders and that we can't favor one group of
17 policyholders against another. And it's actually a basic
18 equal protection issue, constitutional equal protection.
19 Government agencies can't be treating one group of people
20 differently. And if you're going to, you got to at least
21 make sure they're being protected.
22 And what these folks will say is, oh, they made
23 sure that there would be sufficient assets to pay claims.
24 That's that $1.7 billion number you're hearing about. And
25 what's the basis for that decision? The basis for that
26 decision is, that Mr. Buchmiller determined by looking at
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2 three transactions in detail that MBIA's modeling
3 techniques were the same as everyone else, or maybe best
4 practices in the monoline industry. That was like, you
5 know, proved nothing. It's like saying, you know, a bunch
6 of bad drivers, you know, you drive like all the other bad
7 drivers. They could have gone out and used -- they could
8 have gone out and used Perella. They could have gone to
9 get -- they could have gone and got BlackRock. They could
10 have gotten someone else.
11 And then the troubling part beyond all of this is
12 the fact that the information that Mr. Buchmiller was
13 relying upon, and Mr. Greenspan will go through this
14 chapter and verse, was outdated. RMBS data was run in
15 August before Lehman, before the world came to an end for a
16 transaction that gets approved in February. And actually
17 what we've done, and what Mr. Greenspan has done, is
18 they've rerun the numbers. And those numbers when they're
19 rerun show huge losses. And, in fact, that information was
20 available to Mr. Buchmiller. And we'll put up for your
21 Honor the transcript where he says you can go to "A" or you
22 can do the other one, and he goes to the one that supports
23 the reserves that they're being told about.
24 So, your Honor, I will continue, if I can, after
25 lunch. But I think that it's quite clear that it's -- you
26 know, this is not about who was right and who was wrong.
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2 It's about, well, what does the law require. And the
3 relief we're seeking is the annulment of the decision. Go
4 back to Mr. Lawsky. If these guys want to reapply, they
5 can reapply. But the issue that your Honor confronts is
6 can you sustain this decision. Can you say that this was
7 based on accurate information? I don't think so. Can you
8 say that this was based on accurate assumptions? I don't
9 think so. Can you say that this was in compliance with the
10 law? I don't think so. And in fact, they've admitted,
11 your Honor, these errors. And the errors are as big as,
12 you know, over a billion dollars. And the best they can do
13 to try to paper it over is to say, well, Mr. Buchmiller
14 says it wouldn't have affected his decision; but the
15 problem is, Mr. Buchmiller didn't speak to anyone at MBIA
16 about these errors. He based it simply, your Honor, on
17 reading Mr. Chaplin's affidavit. And, in fact, when we
18 deposed Mr. Chaplin, someone we'd like to put on the stand
19 here, Mr. Chaplin had to literally describe for me what he
20 had done because it wasn't clear from the face -- these are
21 these corrections -- because it wasn't clear from the face
22 of the affidavit. Yet, Mr. Buchmiller's putting in an
23 affidavit saying I want to change my decision. Well,
24 that's not the standard for materiality.
25 And, so what we're seeking, your Honor, is to have
26 the Court annul this decision, not have a precedent like
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2 this that will affect policyholders outside the financial
3 services industry, will affect policyholders of property
4 and casualty insurers, and the Department should do it
5 right.
6 THE COURT: Okay.
7 MR. GIUFFRA: Thank you so much.
8 THE COURT: We're going to finish for now. I want
9 to speak to just the attorneys before we close the
10 courtroom. We will close the courtroom at 1:00. We'll
11 reopen the courtroom at 2:00, and as soon as everyone gets
12 set up, we'll continue.
13 Thank you. Have a nice lunch break. If just you
14 guys could come up, please.
15 (Sidebar conference off the record.)
16 (Luncheon recess taken.)
17 (Continued on next page.)
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2 A-F-T-E-R-N-O-O-N S-E-S-S-I-O-N.
3 THE COURT: Mr. Giuffra, before you start, perhaps
4 before the end of the afternoon could you repeat the cite
5 for the case that you mentioned this morning and maybe it
6 was wrong. It was a 2012 appellate decision? I don't
7 think we got it down right. You gave me a Lexis cite.
8 MR. HOLGADO: We cited it in in our papers. It is
9 2012 Westlaw 1537488.
10 THE COURT: Thank you. Great.
11 MR. HOLGADO: Office Building Associates. 2012.
12 Third department.
13 THE COURT: Thank you. All right.
14 MR. GIUFFRA: Good afternoon, your Honor.
15 THE COURT: Good afternoon.
16 MR. GIUFFRA: I am going to try to cite things in
17 the materials before your Honor that we think are relevant
18 as you asked to us do.
19 THE COURT: Okay.
20 MR. GIUFFRA: So I want to first put up, if I
21 could, slide 140. This is, your Honor, PX 1, and this is a
22 document that shows, this is from MBIA's annual report for
23 2008 and the document supports something that I was talking
24 about earlier today, which shows the breakdown of interest
25 on the principal payments.
26 THE COURT: Is there a problem?
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2 (Pause in proceedings.)
3 MR. GIUFFRA: So this is Plaintiff's Exhibit 1
4 from the annual report of MBIA and shows their payments on
5 structured finance products as well as public finance debts
6 as of the end of 2008 and this document is significant, your
7 Honor, for several reasons:
8 First, down at the bottom on the lower right hand
9 corner it says investment to date, and that number is
10 $669 million is the total amount of claims paid by MBIA
11 Insurance in its entire -- in its five-year history for
12 public finance debt and the Number 2 right next to it shows
13 the big amount of -- shows you the $2 million that was all
14 they paid in -- they paid $2 million in public finance
15 claims in 2008 and the total amount, if you do the entire
16 company as listed is 1 billion 477, so of the --
17 $1.477 billion in total claims paid by MBIA Insurance in
18 2008, 2 million related to public finance debt and then, the
19 other significant fact about the document is, and I
20 mentioned this before, the MBIA business model is very
21 dependent on the fact that they, like most insurance
22 companies, were not going to have to pay a lot of claims and
23 if you look at the difference between 2007 and then into
24 2008, it is a huge, huge increase in the amount of claims
25 that are being paid and those are being driven at least
26 initially by secondary mortgage backed securities which are
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2 at the top, which is largely home equity loans that get
3 packaged up into the mortgage backed securities and then the
4 other ones which are the direct RMBS would be more like home
5 mortgages directly as opposed to secondarily and then the
6 CEO would be going up -- and then the public structured debt
7 -- in 2008 it was only $2 million.
8 The next slide that I would like to put up, your
9 Honor, is 141, which is a presentation that MBIA CFO Chuck
10 Chaplin made to a JP Morgan Chase Morgan equity conference
11 and this document essentially shows what the expected gross
12 housing loss payment would be for MBIA Corp for structured
13 products.
14 The thing that is significant about the product and
15 maybe we could make it show up a little bit at the bottom,
16 you can't see the numbers. What it really shows, your
17 Honor, is it shows 2009 and 2010 and 2011 are the first
18 several years that are there and then what it shows, it goes
19 all the way out to 2054, making the point that these
20 exposures are very, very long, so when I said before the
21 $1.7 billion in reserves, they were supposed to last as far
22 as to 2054.
23 The next document, which is 143, this is a document
24 that is Greenspan affidavit Figure 14. It is an analysis
25 showing post -- as of year end, 2008, post transformation,
26 what the asset profile of MBIA Insurance is, and what the
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2 asset and exposure principal position is of national, which
3 is a new muni bond insurance company which shows that MBIA
4 Insurance, post transformation, has about $6.7 billion in
5 assets and National has about 6.77 billion in assets.
6 What is significant about this is the fact that it
7 then talks about the below investment grade insured exposure
8 of the two entities post transformation, going to the point
9 that I made before about the fairness of the split and what
10 your Honor will see is that the $26 billion is the amount of
11 below investment grade insured exposure that was left with
12 MBIA Insurance post transformation and comparing that to the
13 $3 billion in public finance below investment grade
14 exposure. So it basically shows that the amount of cash
15 that is left post transformation, the ratio of the below
16 investment grade insured exposure to assets, is 4 to 1 on
17 the MBIA Insurance, this so-called, the bad insurer, the
18 sick insurer or the dying insurer.
19 Now, the other side, the $6.77 billion in cash
20 shows there is almost more than twice as much cash left post
21 transformation than the amount of the below investment grade
22 insured exposure. It is our point that this demonstrates we
23 think that this was not a fair and equitable division of the
24 assets and liabilities of MBIA Insurance.
25 Essentially, what happened your Honor, to sort of
26 fast forward into the story was initially, when MBIA had
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2 discussions with the Insurance Department and Superintendent
3 Dinallo said this in his affidavit and also in his
4 deposition, he was opposed to doing the transaction.
5 As the year went on, his view changed and he became
6 more supportive of doing the transaction and by October,
7 MBIA was given a favorable signal from the Department that
8 they could file the application.
9 The application gets filed. Your Honor, this is
10 134, a slide, which is Plaintiff's Exhibit 588 and that is
11 the actual cover letter of the application which was sent to
12 Mr. Finer, who comes up in the chronology of the story and
13 MBIA is telling the Department that the purpose of the
14 project is simple: To promptly establish a US public
15 finance financial guarantee insurance company at a capital
16 adequacy level sufficient to provide lower cost funds to
17 public issuers and to assist in unfreezing the public
18 finance and infrastructure markets while preserving MBIA,
19 which is the insurer that our clients were left in as a well
20 capitalized highly solvent insurer.
21 When they filed the application they focused on
22 keeping the left behind insurance company as well
23 capitalized, highly solvent and the focus was on unfreezing
24 the public finance and infrastructure markets and we think
25 that the ultimate goal and responsibility of the Insurance
26 Department is to focus on policyholders and public policy
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2 objectives like this should have been, you know, addressed
3 at the State legislature.
4 There were a number of meetings held prior to the
5 application, a number of presentations made by MBIA to
6 Department officials and in the record are certain of these
7 presentations and I would just note in PX 242, it is 135, I
8 apologize, slide 135, PX 242 at record 15 and record 36.
9 This is in the administrative record of the Department, and
10 there is discussion of the subject of fraudulent conveyance
11 in the legal analysis and there is a question at the bottom
12 that says "Is the reinsurance by MBIA Insurance Corp of its
13 domestic public finance portfolio to MuniCo in exchange for
14 the proposed ceding commission and the related dividend
15 payment and return of capital a fraudulent conveyance under
16 applicable law?" And that is a document that was in the
17 administrative record.
18 We asked people about that during the depositions
19 and we really could not get a conclusive answer as to what
20 subjects were discussed, but it is clear that the subject of
21 fraudulent conveyance came up during the course of the
22 discussions between the Department and MBIA and you know,
23 our point is that they claim the stated purpose of the
24 transaction is to, you know, provide low cost funds to
25 public issuers and unfreeze the public finance markets and
26 also to preserve MBIA as a well capitalized highly solvent
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2 insurer.
3 Our position, your Honor, is that we think this is
4 an example like the kinds of examples that caused the State
5 Legislature to pass Article 15 of the Insurance Law to
6 protect policyholders from efforts by insurance holding
7 companies to pull money out of insurance companies when
8 there are a lot of claims to be paid and that would have
9 been a problem and that was the reason behind the wall.
10 Next, I would like to show your Honor again the
11 application, PX 242-4, 174. And there was discussion in
12 connection with this transaction about the ratings and
13 again, MBIA Insurance had been a triple rated insurer until
14 it was downgraded towards the end of 2008 and in discussion
15 with the application to the department, the plan was that if
16 MuniCo, that is the public finance insurance company would
17 have a AA rating and that MBIA Insurance, the left behind
18 insurance company would have a single A rating and that was
19 the intention of this transaction.
20 Once -- and so, your Honor, if you just look at the
21 numbers, it shows that the claims that -- the par
22 outstanding for municipal, for the MuniCo was $534 billion,
23 the policyholder surplus was 785, the par outstanding on the
24 other side was 244 billion versus policyholder capital and
25 surplus of 2.5 billion.
26 The important thing to remember is that I showed in
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2 the earlier slide the municipal portfolio was much less
3 risky and had far fewer -- okay.
4 Let me show you to slide 173, your Honor, which is
5 -- this is a research update that came out after the
6 transformation and right after the transformation, MBIA
7 Insurance Corp's ratings were lowered to -- and that is a
8 junk rating, not a single A rating and that is literally the
9 day after the transaction was announced, and S&P lowered its
10 counterpart credit financial strength on MBIA Insurance Corp
11 to BBB and then included an outlook negative and this is
12 immediately after the transaction. The transaction was made
13 public, I think, that day. And so, the promise that the
14 Insurance Department made that the transaction would result
15 in MBIA having a single A rating and it ended up with a junk
16 rating.
17 Let's turn to Deputy Superintendent Mr. Moriarty's
18 deposition of September 2, 2010 at Page 230, lines 10 to 18
19 and he was asked you would agree that post transformation,
20 National is a stronger entity than MBIA Insurance, right?
21 And the answer was, a better capitalized entity?
22 I said yes.
23 He said yes.
24 The point again being that post transformation, you
25 don't think that the action was equitable because one entity
26 was better capitalized and according to Deputy
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2 Superintendent Moriarty --
3 Again going to Deputy Superintendent Moriarty's
4 deposition at Pages 86, 87, 231 and 232, first question and
5 answer is.
6 And you would agree -- -- 142.
7 QUESTION: Why were the liabilities related to
8 MBIA's structured security /STREUPLTS too volatile to permit
9 the at traction of new capital at the time of the approval
10 of the transformation transaction?
11 ANSWER: We were in the midst of the financial
12 crisis here in the United States, which was essentially
13 driven by the problems in the mortgage market. And these
14 types of securities were very -- referring to the securities
15 MBIA was insuring, were very illiquid, were hard to price
16 and that is an important issue in terms of trying to figure
17 out what the proper loss reserve was and again were subject
18 to varying opinions as to their creditworthiness.
19 The point being why they needed to do this
20 transaction and then, I asked him any other reason why you
21 think that National is a stronger company than MBIA
22 Insurance and then, he said MBIA Corp has the structured
23 securities which at that time in the middle of the financial
24 crisis were a volatile -- taking projected losses not able
25 to be properly priced, again going to valuation, whereas the
26 muni book of business was more stable.
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2 Our point, your Honor, is again, they put the
3 structured policyholders in a much more volatile boat and
4 that is -- that is Deputy Superintendent Moriarty.
5 Then, of course, the question was, you know, so why
6 would National be a stronger company than MBIA Insurance
7 after the transformation transaction, even though MBIA
8 Insurance had a higher surplus to policyholders than
9 National and you saw that number in the application, and he
10 said "that was because the book of business at MBIA
11 Insurance Corp was more volatile."
12 So again, this is from Deputy Superintendent
13 Moriarty, basically post transformation, the volatile book
14 of business, the business that was harder to value was left
15 with MBIA Insurance.
16 Now, I would like to discuss the applications and
17 this is to make the point, your Honor, that sort of the
18 purpose of the application and what benefits would flow to
19 the policyholders at MBIA Insurance changed from the time
20 the application was filed to the end and that is important,
21 because one of the things that they have to show is a
22 adversely affect or fair and equitable.
23 And if you could put up 177. This again, is
24 another part of the application filed by MBIA and MBIA is
25 telling the Department in trial starting its application
26 that "transformation will also make MBIA Inc a stronger
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2 parent for MBIA by increasing MBIA Inc's overall financial
3 strength, flexibility and access to the capital markets" and
4 going down further, the point is made in the application
5 that "MBIA Inc's financial success is primarily tied to the
6 existing business of MBIA? That is the subsidy that was
7 split and basically makes the point in its current
8 configuration, MBIA Insurance was unlikely to be able to
9 write any new business in the foreseeable future.
10 So the point was that doing the split would create
11 this well capitalized and profitable sister company to MBIA
12 Insurance that would be devoted exclusively to public
13 finance and I think the last sentence is the most telling
14 and it says "thus, MBIA's policyholders will benefit from
15 MBIA's ownership by a holding company MBIA Inc which will
16 have access over time to profits from sources other than
17 MBIA's existing business."
18 So essentially, what they are telling the
19 Insurance Department is, if we keep these two companies
20 together, they can't write any new business. By splitting
21 them apart, the municipal bond insurance company will be
22 able to write new business and there might be a benefit,
23 they claim, will benefit in fact, to the people in the
24 structured business.
25 Now, after the transformation, they change the name
26 of MBIA Illinois which was the two -- to National, and you
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2 will hear a little bit about how we had an interest in
3 maintaining the MBIA brand, but after the transaction they
4 changed the name to National, which suggests that maybe that
5 branding was not so important.
6 Now, if I could put up again -- this is PX 242,
7 Page 4, the same application letter. 178. And again,
8 make the point to the Insurance Department that
9 "policyholders in MBIA Insurance," the left behind
10 policyholders will be insured by a company that remains part
11 of a group, the MBIA Inc group capable of taking advantage
12 of current market opportunities through the capitalization
13 of MuniCo, meaning there will be a benefit to the
14 shareholders of MBIA Insurance and that is the reason why
15 you should approve this transaction.
16 Then, and I think it is a very revealing document
17 and this is 179 on my slides and that is PX 242, Page 6 and
18 this is a letter that gets sent to the Insurance Department
19 by MBIA and the point of the letter is to clarify and
20 apparently, there had been a conference call with the
21 department where the Department requested additional clarity
22 be provided with respect to and this is the point that I
23 just raised before your Honor, that the policyholders at
24 MBIA Insurance corporation would be insured by a company
25 that remains a part of the group, capable of taking
26 advantage of current market opportunities.
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2 So the Insurance Department was, as it was supposed
3 to, focused on what were the benefits to MBIA Insurance
4 policyholders from this division of the two companies. And
5 the point then gets made that the intention, this is what
6 they are telling the Department, it was a conference call at
7 about this time, the intention of the quoted statement is to
8 express that following transformation, the value of the MBIA
9 group franchise will be increased by the existence within
10 the MBIA group of an active insurance subsidy, this new
11 municipal company that would be able to write new public
12 finance insurance business.
13 But then, the next sentence becomes critical in
14 understanding the story and it becomes very important in
15 understanding the mind set and the misassumptions of
16 Superintendent Dinallo, because then they say neither the
17 sentence quoted above, nor any other statement in the filing
18 is intended to imply that MuniCo will subsidized or
19 otherwise be required to support MBIA's operations following
20 transformation.
21 One of the points that we talked about this morning
22 was in the NAIC guidelines they talk about having
23 backstopped for the left behind insurance company when you
24 do a split of an insurance company and what MBIA is telling
25 the Department is that we are not committing to have any
26 sort of a requirement that MuniCo will subsidize or
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2 otherwise be required to support MBIA Insurance operations
3 following transformation.
4 So they are expressly disclaiming any obligation to
5 put money -- this is MBIA/National, any obligation to put
6 money into MuniCo and so, the question becomes, well, if the
7 purported benefit that is discussed in the initial
8 application December 5th is, well you will be part of this,
9 this family of MBIA entities and then, there is a -- the
10 Department is obviously, as it properly should have been
11 focused on this whole notion of you know, what is the
12 benefit to the policyholders in MBIA Insurance.
13 That is obviously something that an insurance
14 regulator will be focused on in doing this kind of
15 transaction and MBIA is making it quite clear that they have
16 no obligation to benefit in any way the policyholders in
17 MBIA Insurance.
18 When we spoke to Mr. Dinallo at his deposition and
19 asked him what were the benefit, the protection for the
20 policyholders at MBIA Insurance, he said that he had some
21 sort of an understanding with Mr. Brown, the CEO of MBIA Inc
22 that there would be course corrections and assets put into
23 MBIA Insurance if it turned out that the reserves, loss
24 reserves weren't sufficient to last until 2054.
25 And if we could put up slide 101, and this is Mr.
26 Dinallo's deposition February 1, 2012, at 24 Line 11 to 18,
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2 line 28, 9 to 11 and there is a lot of questions in the
3 record and Mr. Dinallo's deposition about this subject, this
4 is an important subject, both under the NAIC guidelines, the
5 Department of -- the New York Insurance Department was
6 asking about it, and MBIA had written this letter on
7 December 23rd, basically saying we have no obligation to put
8 more money and Mr. Dinallo, however, thought that the
9 Department could shunt or demand or prevent capital from
10 leaving the company to satisfy those claims.
11 And I asked him well, there is nothing in the order
12 about that and he said no, it wasn't explicit in the order
13 and one of the things that the guidelines talk about is, and
14 one of the things that our superintendents in their
15 affidavits talk about One, you want to get it in writing if
16 you're a regulator, because you don't want someone, when
17 you're out of office, to say you had a deal with the last
18 person and it is not worth anything, so the point was to get
19 all of the protections for policyholders in the approval
20 letter, in some sort of a side agreement that would insure
21 that policyholders at MBIA Insurance, some of whom had files
22 lasted out to 2054 would have protection and they again were
23 left with $1.7 billion in reserves, so Mr. Dinallo said I
24 think Brown, this is the CEO, acknowledged my position
25 around having those powers. And he did at one point say
26 there could be course corrections. That is an e-mail
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2 exchanged between the two of them, which we will show later
3 and then he says I have seen in my mind there are some
4 conversations where I kind of either remind Brown or point
5 out that if there is a problem on the structured obligation,
6 those are the obligations that my clients have, there could
7 be -- one could make adjustments and then, when we asked him
8 later and I kept pressing as to whether there was an
9 agreement of any sort, he said there was, and when I used
10 that term, he used that term or we both used that term.
11 That to me was absolutely clear in my mind and I do not
12 think -- and I do think, I do think that I had that
13 understanding with him.
14 Our point being, your Honor, when a regulator acts
15 as if the regulator has an assumption about why they are
16 acting and what protections were being put in place for
17 policyholders and it turns out those assumptions are wrong,
18 that is, you know, quintessential Article 78 issue and
19 again, going back to PX 242, which was 179, MBIA in fact had
20 told the Department in -- on December 23rd they would have
21 no obligation to subsidize or otherwise support MBIA's
22 operation. That is PX 242 at Page 6.
23 So then, your Honor, we put the question to Mr.
24 Brown at his deposition and that is slide 102 and this is
25 the February 16, 2012, deposition on Page 27, lines 4 to 9.
26 And the question was "Did you ever reach any kind of
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2 agreement with Mr. Dinallo about the obligation of either
3 MBIA Inc or National to contribute capital to MBIA Insurance
4 in the event it was unable to pay the claims to structured
5 policyholders? He said no.
6 And then the next slide, 103, same deposition, on
7 February 16th of 2012, Page 31, "Did you have an
8 understanding with Mr. Dinallo that in the event Corp, that
9 is MBIA Insurance Corp became insolvent, the Department
10 could require National to put capital into MBIA Corp and the
11 answer was no.
12 So there was no agreement, in fact, they had made
13 it clear, MBIA to the Department, that they had no
14 obligation to put money in. Mr. Dinallo approved this
15 transaction by his own admission and repeatedly during the
16 course of his deposition saying he thought there was some
17 ability to require and help some sort of agreement with Mr.
18 Brown and Mr. Brown denied any such agreement.
19 I think it is also interesting your Honor, to look
20 at some of the e-mail communications between Mr. Dinallo and
21 Mr. Brown in the approval sort of the time when the
22 application is pending.
23 And if we could put up 136. And Mr. Brown on
24 February 9th, which is about a week before the approval is
25 done, on February 13th, they get the draft of the approval
26 so they know this thing is pretty well in the hopper, and
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2 Mr. Brown is sending an e-mail to Mr. Dinallo, Wall Street
3 versus Main Street, and again, this goes to the fair and
4 equitable and you're not supposed to treat insurance
5 policyholders differently, regardless of who they are and
6 that is consistent with what Mr. Moriarty said he thought
7 the Insurance Law required, and he talked about the fact
8 that, you know, he said that the speech that the president
9 was giving at that point in time crystallizes our approach
10 to deal with 50,000 issuers and millions of bondholders
11 versus a dozen or so banks which are just looking for a few
12 dollars on the margin. Just a thought.
13 So you had the CEO of MBIA essentially telling the
14 superintendent this is some sort of Main Street/Wall Street
15 situation and his obligation is to protect policyholders,
16 regardless of who they are. And regardless of whether they
17 are Wall Street/Main Street or anything else, and it is
18 important to keep in mind as I showed you with the -- at the
19 outset of this afternoon they only had $2 million in public
20 finance losses in 2008.
21 And Mr. Dinallo at his deposition made a big point
22 about the fact oh, there was a lot of risk on the public
23 finance side. Mr. Buchmiller never did any looking at the
24 public finance side at all. Nothing. And Mr. Dinallo
25 said well that is how this division was done, there is all
26 of the risk on the public finance side and in fact, your
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2 Honor, Mr. Dinallo, you know, essentially was motivated
3 because he had some sort of a thought that maybe he would
4 have a benefit to you know, the municipal issuers of
5 securities and by unfreezing the markets, but his job is to
6 focus on policyholders first and foremost, the core mission
7 and again, if this was something he wanted to do, go to the
8 New York Legislature and have them pass the law and then on
9 the 10th, the next day he sends another e-mail to Mr.
10 Dinallo and this was the subject is Banks, and he says "I do
11 understand the modest potential negative reaction of a few
12 key banks to our plan, but the reality is we are nothing
13 more than a fly speck on the wall in the context of
14 financial issues they are facing."
15 And then he says "Simple fact is they are in no
16 position to complain about the steps that we are taking to
17 restore the US municipal market and improve the value of 553
18 billion of muni bonds held by millions of Americans",
19 meaning that if I split this up, the ratings on the bond for
20 people who are who own municipal bonds will go up and the
21 point being that an insurance superintendent should not be
22 treating one category of policyholders differently than
23 another and that is clearly what was happening.
24 On the day of the transformation, slide 138, Mr.
25 Brown has a different interpretation of the e-mail and we
26 think this was done and this is Exhibit 4, was done in order
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2 to protect the interests of stockholders and executives of
3 MBIA and he sent a letter to Mr. Coulter, member of the
4 board of MBIA who says "I need somebody to push the
5 wheelbarrow across the bank vault".
6 There is another e-mail that was sent on -- and
7 this is the last e-mail was PX 4, this is slide 145, and
8 this is an e-mail from a man named Kewsong Lee. Kewsong Lee
9 is a member of the board of, I believe -- a member of the
10 board of MBIA Inc and he was the person that made a big
11 investment in MBIA at -- before all -- before the real
12 troubles came and he basically is, this director of MBIA is
13 telling someone, MBIA has effectively split into two product
14 lines, structure finance and public finance subsidiaries.
15 These subjects are separate and distinct and bankruptcy
16 remote, therefore the tail risk of the structured business
17 no longer can drag down the entire entity. That is what a
18 board member was concerned about, that the structured risk
19 of the structured business would drag down the entire
20 entity.
21 (Whereupon the following was transcribed by Senior
22 Court Reporter Vicki Glover.)
23
24
25
26
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2 MR. GIUFFRA: (Continuing) And then he also makes
3 the point that separation also means that public finance is
4 no longer encumbered by the structured business and can
5 grow, and that this is good for public finance municipal
6 markets. And he said it also means MBIA is no longer dead
7 in the water.
8 Now, your Honor, there's another e-mail which I
9 think is particularly troublesome, and this is slide 146.
10 This is Plaintiff's Exhibit 231. And there's an e-mail
11 exchange between a financial analyst and another person at
12 Warburg Pincus, and they're discussing the transaction, and
13 then the e-mail gets forwarded to Mr. Brown by Mr. Coulter
14 who is on the board, and they're talking about what has
15 happened. And they're saying, now, look at what is being
16 put into National? $2.09 billion is being taken out of the
17 insurance company as a dividend going up to MBIA. And he
18 says, "a dividend." And then he says -- I think this is
19 pretty telling -- "Yes, the regulator has given the okay to
20 take this capital out and put it out of the reach of
21 policyholders of Insurance Co. This is huge for
22 shareholders." Huge. $9 a share is now protected from
23 claims that National does not choose to insure or reinsure.
24 So our point here is that this transaction wildly
25 benefits MBIA shareholders and there's someone who is
26 sending an e-mail, an analyst, discussing actually trying
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2 to quantify the dollar benefit.
3 And then they talk about, well, is it a
4 National -- he talks about another $2.89 billion paid to
5 National by Insurance Co. to get National to reinsure
6 insurance companies' munis, but not the structured finance.
7 That's a point I made before, which is that the reinsurance
8 agreement essentially involved National -- excuse me --
9 MBIA Insurance Corp., the entity that my clients belong in,
10 paid $2.89 billion to reinsurance, to National, to
11 basically provide protection for the muni book that was in
12 National. The point being that the total amount of claims
13 that were ever paid in the entire history of MBIA was $667
14 million.
15 So, the point is that, as PX 281 makes clear, this
16 reinsurance transaction was not fair. It was certainly not
17 fair and equitable. And it certainly was a transaction
18 that did adversely affect policyholders of MBIA Insurance.
19 In other words, essentially what happened to do
20 this reinsurance was, $289 billion was taken out of --
21 Let me restate it.
22 Money gets taken out of, about $2.2 billion
23 between the dividends and the stock redemption. The $2.89
24 billion is how you get to $5 billion. And that essentially
25 is a payment by MBIA Insurance to National for the
26 reinsurance. And what the reinsurance is, is a promise by
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2 National to pay liabilities owed by MBIA Insurance on its
3 then existing public finance book. Because as I discussed
4 before, the public finance book stayed within MBIA
5 Insurance. This is this cut-through reinsurance.
6 So, the point of this e-mail is that, you know,
7 they're making the point that there's basically another 12
8 to $13 a share being taken out of the reach of the public,
9 of the structured finance policyholders; meaning that they
10 know there's absolutely no way that $2.89 billion is going
11 to be what it really is with the reinsurance cost because
12 the total claims ever made in 35 years against MBIA
13 Insurance was $667 million and they had only paid $2
14 million in 2008. So they basically -- you know, talk about
15 overpaying for something.
16 Now, the reason this all becomes -- and then the
17 e-mail says, "This has the side effect of being a home run
18 for equity holders," meaning MBIA shareholders.
19 Now, the e-mail then gets forwarded by Mr. Coulter
20 to Mr. Brown, the CEO of MBIA Inc. And we have the full
21 e-mail, it's in the record. And Mr. Brown writes back, and
22 I think this is very telling, "Glad someone on the outside
23 could figure it out." So, Mr. Brown is essentially --
24 MR. HOLGADO: You said that's in the record, this?
25 MR. GIUFFRA: Yeah, it's in the materials we
26 brought to the Judge.
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2 MR. HOLGADO: I'm sorry. This is an e-mail from
3 Brown to David Coulter, you're talking about?
4 MR. GIUFFRA: Yes. Correct.
5 MR. HOLGADO: It's in the record?
6 MR. GIUFFRA: Well, it's not in the administrative
7 record. It's in the record before the Court. I apologize
8 if it was misconstrued.
9 MR. HOLGADO: Sorry. I just want to make sure --
10 THE COURT: Wait, wait, wait.
11 MR. GIUFFRA: Sorry. We're trying to be good.
12 So, your Honor, I think the point of this is that
13 you have basically a stock analyst describing what the
14 economics are of this transaction, talking about the fact
15 that what's going on here. There's this big dividend
16 that's getting paid to the holding company. Making the
17 point that the regulator has given the okay to take the
18 capital out and put it out of the reach of the
19 policyholders in the middle of the financial crisis.
20 Making the point that it's huge for shareholders. Making
21 the point that the $9 a share is protected from claims by
22 structured policyholders. And then it talks about this
23 $2.89 billion that gets paid by MBIA Insurance for the
24 reinsurance, which is obviously way too much money because
25 the $2.89 billion is insuring a book that in its entire
26 history has had $667 million in losses.
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2 Now, folks will stand up when I'm sitting and
3 they'll say, well, we looked at this and saw that it was
4 fair, it was comparable to other transactions. The
5 difference, and this is a critical point, in the other
6 transactions, there's a transaction involving FGIC which
7 MBIA did a reinsurance transaction with FGIC, but the
8 difference was that MBIA was a separate company from FGIC.
9 Here, you essentially have the company that is funding the
10 reinsurance, then buying the reinsurance with its own
11 money. So it's a complete circle. It's not a real
12 transaction. It's not a transaction that is one that can
13 withstand scrutiny. And the fact is that Mr. Brown is
14 saying, "Glad someone on the outside could figure it out."
15 Now, why do I think that's particularly relevant?
16 Obviously, it goes to the materiality of all this. When
17 people talk about materiality, they talk about how do
18 people talk about the information and the relevance. And
19 clearly, Mr. Brown understood what was going on here.
20 Let me put up, this is PX 3. This is slide 144.
21 And this is, again, you know, the day after the
22 transaction. This is when the transaction gets announced.
23 This is a Dow Jones newswire on February 18, 2009. And
24 Mr. Brown, the CEO, is talking about this transaction. And
25 essentially what he's saying is, and this is PX 3, "I would
26 expect some would be far more interested in commuting."
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2 And that's the structured policyholders, Brown said. They
3 will say, "Oh, my God, there is only 10 billion instead of
4 14 or 15 billion, maybe I better cut the settlement today."
5 What that essentially means is that Mr. Brown is
6 telling the world, and this is literally something that the
7 people in the Insurance Department certainly was available
8 to them, it's on the Dow Jones newswire, that by doing this
9 transaction, removing $5 billion in claims paying assets
10 from MBIA Insurance, policyholders of MBIA Insurance will
11 have an incentive to sell, commute their policies, take
12 less money than they otherwise would be entitled to because
13 there's $5 billion less.
14 So the danger here is, again, this kind of
15 transaction is very extraordinary, and when you split an
16 insurance company in half the concern is that the left
17 behind insurance company won't have sufficient assets to
18 pay claims. And the typical protection that one has is a
19 requirement that the holding company or the so-called good
20 insurer will put money into the left behind or sick
21 insurer, and no such agreement existed here. MBIA told the
22 Insurance Department it had no such agreement. And the
23 motivation of MBIA for doing this is revealed the day after
24 it gets announced, which is that Mr. Brown is saying there
25 is only 10 billion instead of 14 or 15 billion, maybe I
26 better cut a settlement today.
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2 Now, one issue that comes up, your Honor, in this
3 story is that Mr. Dinallo when pressed said, well, why did
4 you change your position. You were opposed to the split in
5 February, and then by the end of the year you're going
6 ahead and saying it's okay. His testimony will be, well, I
7 thought if I did this transaction the federal government
8 would allow MBIA to get TARP funds, Troubled Asset Release
9 Plan. That was the plan that the President and the
10 Congress went through. And if anybody wants to talk about,
11 well, the banks got money, well, it was done in broad
12 daylight, it was something that went through the
13 Legislature and people could comment on it and people voted
14 against it and people are still talking about it. But
15 unlike this transaction which no one knew about and it
16 didn't go to the New York State Legislature.
17 Now, the issue was, you know, asked Mr. Dinallo
18 why did you do this. And let's turn to tab 147. And he
19 says both in his deposition of February 1, at page 179, and
20 at lines 11 to 13, and then also in the affidavit that he
21 submitted to the Court he says that after Lehman Brothers
22 filed chapter 11, the federal government began taking an
23 increased role in responding to the financial crisis, and
24 that in October Congress enacted TARP, which created an
25 initial fund, $350 billion, that Treasury could have
26 employed to relieve the financial crisis. He thought the
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2 Department could present to Treasury a compelling case for
3 providing federal assistance to Financial Guarantee
4 insurers. Now, there's a couple of issues here which
5 happened by the time this transaction gets approved in
6 February. By the time the transaction gets approved in
7 February 2009, the TARP program is done. It's finished.
8 Second, in order to qualify for the TARP program you had to
9 be a bank. And last I looked, MBIA, at least at that
10 point, wasn't a bank.
11 Now, Mr. Brown, and this is slide 148, has exactly
12 the opposite story that Mr. Dinallo says. So
13 Mr. Dinallo -- again, let's put back 147 -- says, "I
14 changed my mind because of the prospect of TARP."
15 And then we put up 148, which is the deposition of
16 Mr. Brown, and this is his first deposition taken in this
17 proceeding ordered by Justice Yates, October 15, 2010, page
18 73, lines 12 to 17. And he's being asked at the
19 deposition, Well, why did they suddenly say that they would
20 support doing the application? Why did Mr. Dinallo change
21 his view? And according to Mr. Brown's deposition, "It was
22 finally when, as TARP was running down and it was -- became
23 clear to the Department that something was not going to
24 happen, it was going to involve the entire industry, is
25 when they finally gave us the okay to submit our
26 application." Meaning that there had been efforts made to
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2 get money to Financial Guarantee insurers from the federal
3 government in some way. And according to Mr. Brown, the
4 CEO of MBIA Inc., when it became clear to the Department,
5 the New York Insurance Department, that something was not
6 going to happen vis-a-vis the federal government, that's
7 when they got the go ahead to submit the application. It's
8 a completely opposite story from what Superintendent
9 Dinallo said.
10 Now, your Honor, the next slide, which is 149 --
11 maybe just to sort of explain, let me go back to two slides
12 before.
13 When we asked Superintendent Dinallo, you know,
14 what was the motivation, he says TARP was one of the
15 reasons why he changed his mind. Then, 148 you have Brown
16 saying they actually let them go forward when it became
17 clear that TARP money wasn't going to be used to help the
18 Financial Guarantee Insurance business.
19 And then, if we put up 149. This is PX 236.
20 And this is an e-mail in November. November 8,
21 2008, okay. So this is probably, they get the sort of go
22 ahead to submit the application in or around October, end
23 of October, I think October 30 there's a meeting. And then
24 they're e-mailing one another about this. And it appears
25 that the folks at the Insurance Department want MBIA to go
26 and press to get TARP money. And again, I think
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2 Mr. Dinallo on that point was very well-meaning. He
3 thought if I got the TARP money, the money could be used to
4 strengthen MBIA Insurance. It will help the people who had
5 insurance there. It would help everybody.
6 What did the MBIA folks talk about behind Mr. --
7 MR. KASOWITZ: Your Honor, I'm going to object.
8 I'm trying to restrain myself, which I have, but if you go
9 back to the earlier transcript, what Mr. Dinallo said very
10 clearly was, "federal assistance TARP or otherwise."
11 MR. HOLGADO: Exactly.
12 MR. KASOWITZ: He wasn't limiting it just to TARP.
13 So this whole argument that TARP was already done by the
14 time that Mr. Dinallo had in his mind the possibility that
15 transformation would in the future make MBIA eligible for
16 some federal assistance, it's built on a fallacy in what
17 Mr. -- in what counsel is arguing Mr. Dinallo actually
18 testified about.
19 I'm going to handle this in my presentation, but
20 if you show the question -- if you show the question to the
21 answer where TARP was bracketed, you'll see that that's
22 actually the real testimony.
23 MR. GIUFFRA: We can go back to it and I'll
24 actually talk about what the testimony was. When we asked
25 Mr. Dinallo about this, and we talked about, well, did you
26 think there was a chance they would actually get TARP
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2 money, what the record will show is that Mr. Dinallo in his
3 deposition, and I said, well, the TARP program was closed
4 down by that point. He said yes. They couldn't have
5 qualified for TARP. And he said, well, he actually said, I
6 had lived through AIG, and he said, I've seen miracles
7 happen. Literally, that's his words. Miracles happen.
8 And we'll get you tomorrow morning, your Honor, the actual
9 testimony so there's no question. And the point being that
10 this was some speculative hope. And in fact what they did
11 was, they ended up having, they had Governor Patterson
12 write a letter to the Treasury Department after this thing
13 was approved, which we'll put before your Honor tomorrow,
14 and it's clear they never made an application for any kind
15 of federal money that --
16 THE COURT: I just want to deal with your --
17 MR. KASOWITZ: Yeah, here's the question, your
18 Honor. If I can read it, I got it. However you'd like to
19 do it, your Honor.
20 THE COURT: Sure. Tell me what you're reading
21 from.
22 MR. KASOWITZ: I'm reading from Mr. Dinallo's
23 deposition. It's page 179. I don't have the exact line
24 here.
25 THE COURT: All right. Well, that's close enough.
26 MR. HOLGADO: Can we pull up the slide?
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2 MR. KASOWITZ: But the question is -- let me just
3 read it. I don't want to disrupt argument, but can I read
4 the question, if you like, your Honor?
5 "Question: How important was the possibility of
6 obtaining TARP or other federal assistance to one or more
7 MBIA entities to your approval of MBIA's transformation
8 application?"
9 My only point was, it wasn't limited to TARP.
10 THE COURT: I understand. I'll let him continue.
11 Why don't you just try -- if you're going to abbreviate,
12 just let me know where it stands.
13 MR. GIUFFRA: Okay. Your Honor, here's the actual
14 testimony.
15 MR. KASOWITZ: Back one page. There it is.
16 MR. GIUFFRA: Okay. No problem. I accept that.
17 Let's go to the next page, 180. And then it goes -- let's
18 go back to the previous page. Pull the full record in.
19 178.
20 I asked him, "Would you have approved MBIA's
21 transformation application, if there was no possibility of
22 obtaining TARP or any other assistance to one or more MBIA
23 entities?"
24 And then there's a lot of objections.
25 "I think -- it's hard to answer a hypothetical
26 like that. But I think there is --
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2 Can we go to the next page?
3 MR. HOLGADO: I'm going to object to this for the
4 reasons I objected at the time, your Honor. It's a
5 hypothetical.
6 MR. GIUFFRA: Let's go to the top of the next
7 page.
8 MR. HOLGADO: It's not supported by the record,
9 your Honor.
10 THE COURT: Excuse me. You can't keep yelling out
11 stuff.
12 MR. HOLGADO: Sorry, your Honor.
13 THE COURT: If you were going to make an
14 objection, stand up and make an objection. I know you're
15 all trying to let him make his presentation. So why don't
16 you reserve and why don't you deal with it, if you don't
17 mind --
18 MR. KASOWITZ: We'll deal with it on our argument.
19 There's been other times too, your Honor. I'm trying to
20 restrain here but sometimes it's just, you know...
21 THE COURT: Okay. Your objection is noted.
22 MR. KASOWITZ: Thank you, your Honor.
23 THE COURT: Mr. Giuffra.
24 MR. GIUFFRA: Let's go to 171, please.
25 This was a lot of the deposition because he made a
26 lot of the fact that there was some possibility. And he
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2 goes --
3 Let's go to the prior page.
4 "Do you know whether as of February 17" -- this is
5 page 170.
6 THE COURT: And this is your question of?
7 MR. GIUFFRA: Of Superintendent Dinallo.
8 THE COURT: Just so it's clear. The record is a
9 little messy right now.
10 MR. GIUFFRA: It's definitely me.
11 "Question: Do you know whether as of February 17,
12 2009, applications could have been made for TARP funding?"
13 Perfectly fair question. And there's an objection
14 to the form, and then let's put the answer up.
15 "I think -- I mean the record is what the record
16 is. I think that maybe by this time -- I don't know
17 whether the auto industry used the last bit of TARP
18 somewhere close in time to this. If you told me it was
19 January I wouldn't disbelieve you, but that was not the
20 only -- remember, by now I had lived through AIG and seeing
21 miracles work by Treasury. So there was all kinds of way."
22 So essentially what he's saying is --
23 MR. HOLGADO: Could you just read the rest of the
24 answer?
25 MR. GIUFFRA: Okay, let's keep going. I'm happy
26 to go.
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2 MR. HOLGADO: Please.
3 MR. GIUFFRA: "I was in discussions, which were
4 not -- I could see were not about MBIA, but I witnessed
5 Geithner, then president Geithner, go through various ways
6 that one could have the federal government assist financial
7 companies --
8 "So you know because it wasn't as if -- I was told
9 that there was a timeliness need, if you were going for
10 TARP. But then later on, exactly when this was all going
11 on I was in meetings at the Fed and I think maybe, I know I
12 went down to Treasury once where I either witnessed live or
13 statements were said around we can loan the governments
14 quadruple squared Triple A wrap, you know, to them. We
15 could buy out securities outright -- which is essentially
16 what happened with AIG. We can put up a sum certain -- I
17 mean, these were all ways.
18 "And then to the extent that TARP had a topic
19 matter kind of border around it, you know, maybe one needed
20 to get creative."
21 And I asked him this specific question.
22 "As of the time of the approval of the
23 transformation transactions, do you know whether the
24 deadline for approving of TARP funds had passed?"
25 Yes or no. And a lot of objections.
26 "I think that since -- I think recently -- I don't
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2 think. My recollection is that in preparation for this
3 deposition I have learned that. I did not recall knowing
4 that then. I recall being warned that -- let me finish, I
5 don't know -- there may have been a deadline as you say. I
6 thought what was going on there was an amount set aside and
7 it was being used up and I was speaking to the likes of
8 Tony Ryan and others, and they were giving me potentially
9 what wasn't entirely public, but how much money was left
10 and it was pretty clear that it was, quote, running out.
11 "So I don't know whether I woke up one day and
12 there was an article that said the deadline is over. I
13 don't remember that."
14 We can keep going on.
15 And the point, your Honor, is, that in November,
16 at least, there's an e-mail where MBIA folks -- and we can
17 put up, you know, PX 236 -- are essentially saying that
18 they've been clear with the Department about not supporting
19 TARP.
20 Now, the reason that becomes significant, your
21 Honor, is that in order to get federal assistance like what
22 happened with AIG, you have to give up equity. In the case
23 of AIG, AIG got a big bailout by the federal government,
24 many, many billions of dollars. I think my firm actually
25 worked on it, so I've got to make sure I don't get the
26 facts wrong. We did. But they gave up something like 80
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2 percent of the equity in AIG to get the TARP money. The
3 federal government conditioned the receipt of the federal
4 money on getting -- you know, giving up, you know, stock
5 basically, to the federal government, which is why the
6 federal government now is in the business of owning part of
7 AIG. And I think they did an offering in the last several
8 weeks, blah, blah, blah.
9 THE COURT: Okay. That's --
10 MR. GIUFFRA: Okay.
11 Now, your Honor, if we can then show you slide
12 150. This is Mr. Dinallo. And this is PX 233. And
13 Mr. Dinallo says, and the e-mail goes to -- can we put the
14 whole e-mail up there, if we can?
15 MR. HOLGADO: Please. That would be great.
16 MR. GIUFFRA: No problem.
17 And the date is year end. Let's go down to
18 where -- right there. And the people he's sending this to,
19 it's sort of interesting. He's sending the e-mail to
20 Mr. Swagel. And I believe that Titus Leung, he worked at
21 Perella Weinberg. So he's sort of advising him, at least
22 behind the scenes, the back stuff, but he's not doing
23 advice on what Mr. Buchmiller was doing.
24 And then there's discussion of --
25 MR. HOLGADO: The e-mail's on the next page. "As
26 you probably realized" --
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2 MR. GIUFFRA: Yeah, that's it.
3 "As you've probably realized, it looks like the
4 monolines project will have to wait for the next
5 Administration. We didn't run out of time but instead out
6 of money. I am making sure that the transition team has
7 everything, so hopefully they can make a quick decision on
8 whether/how to proceed after January 20."
9 Then it talks about the teams at Treasury and FRB
10 and New York Fed are still being in place," and that's the
11 e-mail.
12 Now, what's interesting --
13 MR. HOLGADO: Can we read the whole e-mail?
14 MR. GIUFFRA: I'm happy to read it all.
15 "I am making sure that the transition team has
16 everything, so hopefully they can make a quick decision on
17 whether/how to proceed after January 20. The teams at
18 Treasury and FRB and NYFed are still in place as well --
19 I'm the only one who will be leaving with the turnover. It
20 feels like this project is on the 5-yard line - the right
21 one, even - but now the next team will have to carry it the
22 rest of the way. I'll be at Treasury through January 20
23 and will let you know if anything" --
24 MR. HOLGADO: That's fine.
25 MR. GIUFFRA: Let's turn to slide 151.
26 Now, slide 151, I think it's important to look at
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2 the date of this. Let's go back to the one Mr. -- that's
3 year end. That's the one we read the whole part to the end
4 of the year, December 30th. Application's pending
5 throughout this time.
6 And then we go to PX 235.
7 And the Bond Buyer is reporting -- and, obviously,
8 PX 235, it's a publicly available document.
9 And the Bond Buyer is saying that, "Treasury
10 officials yesterday appeared to close the door on providing
11 direct assistance to monoline bond insurers as part of
12 their economic recovery programs."
13 And by that point, President Obama was in office.
14 And that's six days before the approval is publicly
15 announced. And, of course, the approval was not
16 conditioned on TARP money. So, what does happen, your
17 Honor, no question, Governor Patterson writes a letter to
18 the federal government after this transaction is done and
19 nothing ever happens. And, your Honor, that's because this
20 was -- this is just -- Mr. Dinallo may have wanted to get
21 TARP money. That may have been his objective. But there's
22 no evidence whatsoever that the MBIA folks had any interest
23 in TARP money because that would have diluted their
24 ownership of MBIA Inc. They didn't want it. And there's
25 an e-mail where they actually say we haven't made it
26 available.
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2 Would now be a good time if your Honor is taking
3 an afternoon break?
4 THE COURT: Do you want to take a break?
5 MR. GIUFFRA: Yeah, maybe just a little break for
6 maybe five minutes. Is that okay?
7 THE COURT: Yeah. We're going to have to stop a
8 little bit before 4:30 because your guys are going to clean
9 up a little bit for tomorrow. It's just that we have other
10 cases on and we don't want anybody to trip or mess anything
11 up. I understand my staff has already talked to everybody
12 and they know what to do, but they need a few extra minutes
13 to do it. So let's start again at 3:30. We'll go to about
14 4:15, okay?
15 MR. GIUFFRA: Thanks so much, your Honor.
16 (Recess taken.)
17 (Continued on next page.)
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2 THE COURT: Okay, Mr. Giuffra.
3 MR. GIUFFRA: Okay, your Honor.
4 We are in the home stretch for the day.
5 THE COURT: You get a break tomorrow.
6 MR. GIUFFRA: You know, it is funny, I was really
7 looking forward to Wednesday.
8 THE COURT: I knew that was going to work out.
9 MR. GIUFFRA: It worked out well.
10 I would like to talk a little bit about Mr.
11 Buchmiller's review and take you through a few documents.
12 MBIA filed its application on December 5, 2008.
13 And we asked in his deposition, if we could put up slide 59,
14 Mr. Brown -- and this deposition was taken in this case and
15 the Superintendent was present, it was taken on October 15,
16 2010 and just would like to call your Honor's attention to
17 Page 73. We asked Mr. Brown.
18 "When MBIA submitted its application for approval
19 of the transformation transaction, did you think that
20 application would be approved?"
21 And he said "I assumed based on the fact that we
22 had worked for the better part of almost a year at that
23 point thinking about it and modeling, that it had a high
24 probability of being approved."
25 So Mr. Brown, the CEO, thought the transaction had
26 a high probability of being approved when -- when it was
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2 filed and in fact there is an e-mail which we will show
3 tomorrow in October when Mr. Brown talks about Mr. Dinallo
4 and this is in our papers, went from being against it to
5 being for it in the October time frame.
6 Your Honor, if I could put up slide 33 and this is
7 from MBIA's sir reply brief and also, the Department's sir
8 reply brief and in both briefs, MBIA says that NYID had more
9 than sufficient resources, time and expertise to perform an
10 exhaustive, independent review and analysis of MBIA
11 Insurance's policies, procedures and loss reserving
12 methodologies and the Department on December 30, 2011, the
13 Department -- the Department's approval lacked a rational
14 basis, also lacked merit and the Department conducted a
15 thorough review and analysis that provided a factual basis
16 for the approval.
17 Our point being, your Honor, that I think the law
18 is that if the review was incomplete, missed things,
19 erroneous information, you would not have a rational basis
20 and therefore, you have to annul the decision.
21 This is an e-mail. This is slide 34. I think I
22 showed this before, but I think it is important. This is
23 Mr. Buchmiller having a discussion with Mr. McKiernan and we
24 believe this was January 28, 2009. This is a transcript we
25 received from the Department. It was ordered by Justice
26 Yates that we get these transcripts and Mr. Buchmiller is
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2 saying we are trying to find the shortcut to get to the
3 decision, and I think critically, he says ideally in the
4 great scheme of things, that would be the purpose of the
5 examination, validate reserves, et cetera, but you know, we
6 don't have that kind of time line.
7 If we turn to slide 35, this is Mr. Buchmiller's
8 deposition. Again, I made this point this morning, but I
9 want to show you the actual document that supports the
10 statements that I made and this is Mr. Buchmiller's
11 deposition on September 28th.
12 "Who determined the scope of your work in
13 connection with the transformation transactions?"
14 "I did."
15 Our point and the point that our experts would make
16 and it is in the reports which your Honor has, was that Mr.
17 Buchmiller should not have been the only person to determine
18 the scope of such an important review, that they should have
19 gone to Perella Weinberg, should have gotten some third
20 party to help them, but one civil servant should not be the
21 person trying to figure out how you do a review of a bond
22 portfolio that was as massive as this in the middle of the
23 worst financial crisis since The Great Depression and then,
24 Mr. Buchmiller -- and this is an internal department e-mail
25 and I think this is important, it is very revealing, this
26 February 11th e-mail at 2009, at 3:41 p.m. and I think at
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2 this point Mr. Buchmiller might have been up at MBIA's
3 office, he spent some time at MBIA's offices, and he is
4 reporting to Mr. Fisher, he is the lawyer from the Attorney
5 General's office who came over; Mr. Moriarty, who was the
6 Deputy Superintendent and Mr. Campani, Mr. Gingrass, a
7 lawyer at the Insurance Department and I showed you an
8 e-mail from him before and Mr. Levine, who was the senior
9 person, Mr. Davis and then Mr. Fisher, the Deputy
10 Superintendent.
11 So he is reporting back in the last formal
12 communication by Mr. Buchmiller to his supervisors and
13 again, two days later.
14 MR. HOLGADO: Mr. Gingrass is not a lawyer. He
15 said it a couple of times. It is just an honest mistake.
16 I wanted to clarify that.
17 MR. GIUFFRA: The reason I made the mistake, your
18 Honor, is I associated him with that issue about the early
19 surplus and he was talking about it, so I apologize.
20 THE COURT: Okay.
21 MR. GIUFFRA: Now, this is the last communication
22 from Mr. Buchmiller to his supervisors. We know two days
23 later, the draft of the application shows up at MBIA. They
24 get it on February 13th, and he says "I have looked to find
25 the best shortcuts --" and that is the same word he used,
26 shortcut in the interview with Mr. McKiernan, let's go back
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2 to that on 34, shortcut, so he says it both to an MBIA
3 official and then on the 11th to his own supervisors, and
4 then he says "call it risk focused" or "critical path" and
5 you will hear, it is in Mr. Buchmiller's affidavit, he talks
6 about risk focused exam and he was essentially trying to
7 figure out where the problems were.
8 Of course he had decided what the scope of his
9 review was and Mr. Greenspan in his report, which your Honor
10 has, goes through all of the problems with the scope of the
11 review and how you could not have done this with just one
12 person and then he talks about continuing the needles in
13 haystacks metaphor after MBIA's IPM, that is called short
14 portfolio management, those are the people in short
15 portfolio management, those are the people who did the
16 modeling for MBIA and Mr. McKiernan, who is an important
17 figure in this story. He was the head of that operation.
18 He was like maybe the Number Two guy. There is another
19 person ahead of him, but he is the one dealing with Mr.
20 Buchmiller and he said after MBIA's IPM gathered their
21 second lien and ABSCOE and other needles into one pile
22 called case reserves, the next step was to look for any
23 missing needles, bad credits, which means looking at all
24 their haystacks, which one person is looking in all their
25 haystacks and doing it basically between January 9th and
26 February 11th, because that is when he did all of the work,
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2 other than doing the interviews in December and I will show
3 this in excruciating detail to your Honor and he says
4 obviously, that is a bigger task to do and in less time than
5 with reserved credits wherein we focused on securitized
6 residential mortgages and Mr. Buchmiller in his last
7 communications to his supervisor, is saying in other words,
8 the scope is narrow.
9 He used the word shortcut twice and described the
10 scope as narrow.
11 Our point, your Honor, is that to survive
12 Article 78 you have to have a full and complete record and
13 we don't think that survives it at all.
14 On slide 36, that is a slide showing what Mr.
15 Buchmiller actually did and again, he looked at three
16 transactions in detail; that RFC transaction, the Broderick
17 and the Abacus transaction. It is undisputed that he did
18 not receive information about 76 percent of the entire
19 portfolio. He only got information about 23 percent and he
20 didn't look at any of the public finance issues, the public
21 finance exposure, but the point is that to send one person
22 in to look at an insured portfolio of $232 billion in
23 January in the middle of the financial crisis was a task no
24 one could accomplish.
25 Now, your Honor, if I could turn to slide 37.
26 This is another e-mail. Let's look at who it is being sent
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2 to.
3 Well, I can -- it is being sent to Scott Fisher, a
4 lawyer working on the transaction, kind of quarterbacking
5 it, and Rob Easton, general counsel at the Department, so he
6 is sending this e-mail not to, you know, and Easton was also
7 somebody who would come over with knowledge and he is is not
8 reporting this to the career people, but to two lawyers who
9 are basically quarterbacking this and the evidence before
10 your Honor will show that they were not insurance regulatory
11 experts by any measure, unlike Mr. Moriarty who was there
12 for 31 years.
13 This document you see has the same issue about
14 redactions, which we talked about yesterday and our
15 position, as your Honor knows, is that we think, I didn't do
16 the redactions and they are talking about -- one of the
17 things Mr. Buchmiller has talked about is solvency.
18 MR. HOLGADO: Your Honor, if I could interrupt?
19 We have actually produced an unredacted version of
20 this in those 58 pages that we briefed on March 9th. It is
21 within that production. I don't have for you the exact
22 dates in front of me. I was not prepared to give it to you
23 but I can get it to you and you guys know, but we have
24 produced it --
25 THE COURT: You can talk about it tomorrow, so you
26 will get the unredacted.
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2 MR. GIUFFRA: Absolutely, your Honor. Your Honor,
3 it is possible. No problem.
4 And he is discussing what they are doing and he
5 said, you know, we don't normally need to drill down that
6 far. Usually, we go by the ratings or the market value
7 which works here, and then he talks about it again, this is
8 February 3rd, which is eight days before his last
9 communication and he said roughly two to three days to a
10 week for the once over for each category, CMBS, CLO, EETC,
11 CMBS being commercial mortgage backed securities and CLO and
12 EETC as more complicated mortgage type products and then he
13 gets back to these -- actually, my mistake.
14 My colleague reminds me that we think EETC is et
15 cetera, because I know a little bit about structured
16 products, but I have never seen EETC.
17 So we can ask Mr. Buchmiller about this and then he
18 says -- and this goes to the whole point of the shortcut
19 reviews and limited reviews which is again, this is Mr.
20 Buchmiller's own words, he said I am trying to shorten that
21 cycle to fit transformation, I am trying to shorten that
22 cycle to fit transformation, an exam within the exam, by
23 focusing -- and this is absolutely critical and probably one
24 of the most important e-mails in this whole case, this line,
25 "by focusing on one deal from each category and which is
26 ordinarily not adequate sample size" and following IPM's
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2 "modeling" point there, your Honor, is that he only looked
3 at one deal from each of these categories, CMBS, CLO and
4 RMBS, and this document, your Honor, is PX 150.
5 Our position is that looking at just one
6 transaction in each category, when they had 1300 structured
7 products was not a sample size that made any sense. You
8 would have to look like the Black Rock folks did, send 20
9 experienced people in for six weeks and go over the place
10 and they could have made MBIA pay that money to have a third
11 party come in. They could have followed the guidance of the
12 National Association of Insurance Commissioners and they
13 could have done what was done in other transactions at all
14 like this.
15 They cannot cite a single transaction that bears
16 any resemblance to the MBIA transformation where there was
17 not a big independent firm that came in and did a review and
18 the point is, your Honor, that to make the judgment that Mr.
19 Buchmiller looks at one of each of these categories and his
20 analysis essentially was they are doing the modeling best
21 practices for the monoline industry, an industry that had
22 been woefully inadequate in --
23 MR. KASOWITZ: I will object to that, your Honor.
24 He keeps saying best practices for the monoline industry.
25 I don't know where Mr. Buchmiller said that for the monoline
26 industry. I think -- so I don't -- he keeps saying that is
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2 what he said, but I have not seen that is where he said
3 that.
4 THE COURT: Okay.
5 MR. GIUFFRA: We will deal with that tomorrow
6 morning and bring in the testimony.
7 MR. KASOWITZ: You will be here tomorrow.
8 MR. GIUFFRA: Not tomorrow. I will be sleeping
9 tomorrow.
10 THE COURT: I will be here.
11 MR. GIUFFRA: It is our point that the sample size
12 he looked at was not sufficient, and you don't have to take
13 our word for it. That is what Mr. Buchmiller said. He
14 said ordinarily not adequate sample size, and he decided the
15 sample size, they didn't talk to Perella Weinberg about what
16 the sample size was, they didn't go out to some expert and
17 say is this enough, should I look at ten CLOs or 20.
18 Nothing. He just looked at one from each category and said
19 that is not ordinarily an adequate sample size and then he
20 talks about -- a little bit more about what he is trying to
21 do and finish this thing, and he said I know they were
22 pushing hard for an answer three days ago. MBIA -- MBIA
23 wanted this thing done and there are documents we will put
24 before your Honor. They wanted it done sooner rather than
25 later and there is a document which talks about the sooner
26 rather than later mandate or words to that effect and they
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2 are pushing for an answer and it is now ASAP, so MBIA wants
3 this thing done ASAP and in another eight days, he is done,
4 he is sending his last e-mail to his supervisors and I think
5 -- then there are other reasons for us to decide sooner
6 rather than later and then the redacted portion, but if you
7 go back to the one right before, before that, this one --
8 MR. HOLGADO: The only thing I want to point out
9 is they do have this other document but that particular
10 redaction mentions his duty being to all policyholders, I
11 think he could have chosen the unredacted version and
12 decided not to perhaps --
13 A VOICE: We don't have it.
14 THE COURT: Why don't you work that out tomorrow,
15 okay?
16 MR. HOLGADO: Sorry, your Honor.
17 THe OCURT: You will work that out tomorrow.
18 MR. GIUFFRA: But again, he is telling his buddies
19 on February 11th, I looked to find the best shortcuts and
20 the scope was narrow and the sample size was too small, so
21 it is not us saying it, Judge, having an expert say he did a
22 shortcut review. It is not us saying the scope was narrow.
23 It is not us saying the sample size was not big enough.
24 That is what Mr. Buchmiller thought in real time.
25 Now, if I could put up slide 39. At his
26 deposition on February 2, I asked Mr. Buchmiller, did any
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2 one else at the Department assist you in attempting to
3 verify the accuracy of information that was provided to you
4 by MBIA? The answer is "Not that I recall."
5 This is a department of more than a thousand
6 employees, and he, by his own testimony, said there were
7 other people in the department who understood structured
8 finance and they sent one guy off to do this review.
9 Now, your Honor, the next document which is tab --
10 our slide 40, PX 7 and this is the December 22nd e-mail, two
11 documents, PX 7 and 516, I am sorry, and the February --
12 excuse me, the December 22nd e-mail is between Mr. Pastore
13 who is the senior person, who is the senior person at MBIA
14 and he is sending an e-mail to Mr. McKiernan, the guy who is
15 basically the primary contact for Mr. Buchmiller and in
16 describing Mr. Buchmiller, he basically says "these guys
17 don't have any subject matter expertise on STF", that is
18 structured finance mortgage, it forces you to find a spoon
19 fed approach.
20 Now, that is the way they are describing the
21 Department, at least right before they are about to deal
22 with this situation and he is about to start, they say the
23 guys from the Insurance Department don't have any subject
24 matter expertise in structured finance mortgage and you have
25 to find a spoon fed approach.
26 Now, one important point to keep in mind about this
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2 is, Mr. Pastore, he was, you know, deposed. He said oh, no,
3 no. I wrote a bad e-mail. I didn't understand. I found
4 that the guy had a lot of experience, but you know, Mr.
5 Buchmiller will testify that he had been doing work at MBIA
6 for some period of time, and they will say he knew a lot
7 about MBIA and he was involved in exams and the like. So it
8 wasn't like Mr. Buchmiller -- this was his first rodeo at
9 MBIA, and that is what people at MBIA are saying about Mr.
10 Buchmiller.
11 Now, tomorrow I will talk a little bit about this,
12 but it says "I will edit in the a.m., take out some things
13 and it will take too long today", but when Mr. McKiernan was
14 editing a document and taking out some critical information
15 that he then shows to Mr. Buchmiller on December 23rd and he
16 took a presentation that he gave to the company and took out
17 all of the bolded information and he said I will edit in the
18 a.m. and take out some things, and that was the edited
19 presentation given to Mr. Buchmiller.
20 Then on February 3rd, Mr. Pastore, and by this
21 point on February 3rd, you know, he had only been there for,
22 a fairly long period of time, he had been there for about
23 four or five weeks, he started on January 9th, they met him
24 on January 23rd and -- I am sorry, Mr. Pastore and Mr.
25 McKiernan, so that is -- this is PX 516, so you had Mr.
26 Pastore, who is the senior person, the treasurer of MBIA.
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2 My memory on the facts -- he is a treasurer of MBIA and he
3 is sending an e-mail to Mr. McKiernan, re loose ends and
4 this is a request made by Mr. Buchmiller, this is PX 516 and
5 he says "should be easy, but let's hold his hand for the
6 purpose of expediency."
7 So back in December when Mr. Buchmiller is about to
8 do his first big meeting and the first big meeting the
9 evidence shows was December 23rd, that is when they -- I
10 will show you how they edit this document. They are
11 describing him as not having subject matter expertise and
12 needing a spoon fed approach, and he had been there doing
13 work for weeks at least three weeks by that point, the 9th
14 -- January 9th to February 3rd, they are saying should be
15 easy, but let's hold his hand for the purpose of expediency;
16 so the point being he is the -- the treasurer of MBIA is
17 e-mailing the senior guy who is dealing with Mr. Buchmiller
18 and they are talking about hand holding and expediency in
19 connection with this document.
20 Now, if I could, your Honor, go to Tab 42. This is
21 an e-mail from Mr. Buchmiller on February 4, 2009, at
22 9:00 o'clock in the morning. This is PX 65 and in this
23 e-mail, Buckmiller is writing to Chaplin "Therefore, the
24 question is, what is the Superintendent's uncertainty
25 threshold?"
26 Our point being, this is the subject -- the known
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2 unknowns, that Chaplin again is the CEO of MBIA, and that is
3 the issue here, which is, should they have done a more
4 fulsome review? Should they have waited? Should they have
5 done more work?
6 And he is actually discussing with the regulating
7 entity who he is investigating and doing his review what is
8 the Superintendent's uncertainty threshold.
9 (Whereupon the following was transcribed by Senior
10 Court Reporter Vicki Glover.)
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2 MR. GIUFFRA: (Continuing) And that goes to the
3 same point we made before, your Honor, about, you know, was
4 the sample size big enough.
5 And then they go -- and this is Mr. Buchmiller --
6 "whether we, Superintendent, wait for a review of other
7 suspect sectors like CMBS, CLO and CDO squared which almost
8 slipped my mind."
9 So he didn't even start looking at these sectors,
10 and then another week later they're done. And the evidence
11 before your Honor will show that Mr. Dinallo actually spoke
12 about CDO squares when he was before Congress. That
13 testimony I showed you earlier. And Mr. Dinallo, and this
14 is, you know, in February 2008, is saying, you know, we
15 shouldn't let monoline insurers invest in these CDO
16 squares, which essentially are really super, super big,
17 complicated, risky, volatile CDOs. And in fact, the
18 evidence before your Honor shows that he never looked at
19 CDO squares, not at all, even though that was a type of
20 financial product that Mr. Dinallo thought monoline
21 insurers should not even be in the business of insuring.
22 Your Honor, another document, 43. And I know
23 we're getting to the end. This is again Mr. Buchmiller
24 and, you know, we have these tape recordings, and he's
25 talking to Mr. McKiernan. And this is February 9th, a few
26 days before, you know, his last e-mail. And we got this
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2 transcript from the Attorney General pursuant to Justice
3 Yates' order, and it's PX 1014 at page 69 and 70. And
4 Mr. Buchmiller is telling Mr. McKiernan:
5 "At this point, the big concern is we're -- we're
6 being asked to make a decision before we see an audited
7 financial statement, before the GAAP is out, um, you know,
8 so then, you know, a year from now, six months from now, in
9 hindsight, someone turns around.
10 "You know, something goes wrong. I say, you know,
11 'Why couldn't you wait three or four weeks for the audits
12 to come out?'"
13 And then he says, this is Mr. Buchmiller, "It kind
14 of looks like you were acting in haste."
15 And then he says, "And not just the political
16 people look stupid. The -- the career people look stupid."
17 So, you know, one of the things you'll hear about,
18 your Honor, is that they had audited financials and the
19 accountants said the financial statements were okay, but
20 they got basically something called a going concern opinion
21 and we deposed the accountants and it's in the -- my point
22 is, they got -- basically, the only thing the auditor said
23 was that they wouldn't go bust within a year.
24 MR. KASOWITZ: I don't think --
25 MR. GIUFFRA: Let me restate. I'll restate.
26 MR. KASOWITZ: May I make my objection?
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2 MR. GIUFFRA: I'll strike it. It's getting late
3 in the day. I have all this information in my head and
4 it's -- the point is they didn't --
5 THE COURT: Wait a second. Whenever you want to
6 stop, it's okay. I mean, five minutes here or there is not
7 going to make any difference. I know it's long to make
8 this kind of presentation, so whenever you want to stop.
9 He's stricken that from the record.
10 MR. KASOWITZ: Your Honor, just for ten seconds.
11 He reads certain parts of these transcripts
12 without other parts, you know, and then comes out with
13 these statements without any foundation whatsoever. Again,
14 I'm constraining myself all day long. I can do it on every
15 single document. We'll deal with it on our presentation.
16 I just want to note this for the record.
17 MR. GIUFFRA: Your Honor, our point being, they
18 did not wait for the audited financial statements. They
19 went ahead anyway. That's the point. And he was
20 discussing the fact that, you know, the big concern is
21 we're being asked to make a decision - this is on
22 transformation - before we see an audited financial
23 statement, before the GAAP is out. That's the point that
24 is being made by this. That's what he's telling -- that's
25 what he's telling Mr. McKiernan.
26 And then he says, "It kind of looks like you're
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2 acting in haste. And not just the political people look
3 stupid, the career people look stupid."
4 And your Honor, I'll just put one more up and I'll
5 stop. This is 49. I mentioned this before. This is
6 Mr. Buchmiller's deposition. September 28, 2010.
7 "When did you learn that the transformation
8 transaction had been approved?
9 "Answer: I believe it was one or two days after
10 the fact. The 18th or 19th."
11 And that's when it was public. Our point being,
12 he writes the e-mail on the 11th of February, you know,
13 pointing out the limitations on what he's done. He
14 doesn't -- he's not given a copy of the approval letter to
15 look at.
16 And we asked him.
17 I went back over his deposition in preparing for
18 this proceeding and I asked him: Did you talk to
19 Mr. Dinallo around the time when this thing was approved?
20 And he kept saying: I don't remember, I don't remember, I
21 don't remember. That's what he said multiple times. And
22 this certainly wasn't some big meeting where they all got
23 in a room.
24 And again, on the 13th, MBIA's general counsel had
25 a copy of the draft approval letter. So somebody must have
26 said go. And Mr. Buchmiller was not shown a draft of the
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2 approval letter, and nobody deigns to even tell him about
3 it until one or two days after the fact.
4 And with that, your Honor, I will close for the
5 day and thank you very much.
6 THE COURT: So, thank you. Whatever you need to
7 take with you, you'll take with you.
8 We'll start promptly at 10:00 a.m. Thursday
9 morning. Have a nice day tomorrow.
10 MR. GIUFFRA: Thank you very much, your Honor.
11 MR. KASOWITZ: Thank you, your Honor.
12 MR. HOLGADO: Thank you, your Honor.
13 (Whereupon, the proceedings were adjourned and
14 continued to May 17, 2012.)
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