Banksvmbia 5.24 Transcript

7/31/2019 Banksvmbia 5.24 Transcript

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12 SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK: TRIAL TERM PART 393 - - - - - - - - - - - - - - - - - - - - - X

ABN AMRO BANK N.V.; BARCLAYS BANK PLC;4 BNP PARIBAS; CALYON; CANADIAN IMPERIAL

BANK OF COMMERCE; CITIBANK, N.A.; HSBC5 BANK USA, N.A.; JPMORGAN CHASE BANK, N.A.,

KBC INVESTMENTS CAYMAN ISLANDS V LTD.;6 MERRILL LYNCH INTERNATIONAL; BANK OF

AMERICA, N.A.; MORGAN STANLEY CAPITAL7 SERVICES INC.; NATIXIS; NATIXIS FINANCIAL

PRODUCTS INC.; COOPERATIEVE CENTRALE8 RAIFFEISEN-BOERENLEENBANK B.A., NEW YORK

BRANCH; ROYAL BANK OF CANADA; THE ROYAL9 BANK OF SCOTLAND PLC; SMBC CAPITAL

MARKETS LIMITED; SOCIETE GENERALE;10 USB AG, LONDON BRANCH; and WACHOVIA

BANK, N.A.,11

Petitioners,12

- against -13

ERIC DINALLO, in his capacity as14 Superintendent of the New York State

Insurance Department; the NEW YORK15 STATE INSURANCE DEPARTMENT; MBIA INC.;

MBIA INSURANCE CORPORATION; and16 NATIONAL PUBLIC FINANCE GUARANTEE

CORPORATION (f/k/a MBIA INSURANCE17 CORP. OF ILLINOIS),

18Respondents.

19 - - - - - - - - - - - - - - - - - - - - - XIndex No.09/601846

20 Article 78 60 Centre StreetNew York, New York

21 May 24, 2012

22BEFORE:

23HONORABLE BARBARA R. KAPNICK,

24 Justice.

25

26


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APPEARANCES:4

SULLIVAN & CROMWELL, L.L.P5 Attorneys for the Petitioners

125 Broad Street6 New York, New York 10004

BY: ROBERT GIUFFRA, ESQ.7 MICHAEL H. STEINBERG, JR., ESQ.

MICHAEL T. TOMAINO, JR., ESQ.8 BRIAN T. FRAWLEY, ESQ.,

Of Counsel9

10

KASOWITZ BENSON TORRES & FRIEDMAN, L.L.P.11 Attorneys for the Respondents

1633 Broadway12 New York, New York 10019-6799

BY: MARC E. KASOWITZ, ESQ.13 KENNETH R. DAVID, ESQ.

JOSHUA GREENBLATT, ESQ.14 Of Counsel

15

16 OFFICE OF THE ATTORNEY GENERAL FOR

THE STATE OF NEW YORK17 120 Broadway

New York, New York 1027118 BY: DAVID HOLGADO,

MARK E. KLEIN,19 Assistant Attorneys General

20

21

22NINA KOSS,

23 BARBARA STROH, CSR, CRR, CMROFFICIAL COURT REPORTERS

24

25

26


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1 Proceedings2 T13 THE COURT: Okay, before we start, a few4 things that we've been spending some time on that I5 said I would talk to you about before Mr. Kasowitz6 started his presentation.7 So we're back to dealing with the public8 interest privilege which I allowed you to argue, I9 thought, pretty extensively on Tuesday afternoon.

10 First of all, to the extent Mr. Giuffra, that

11 you have argued at this stage of the game that the

12 public interest privilege really shouldn't apply to

13 this case, in looking back at, as much as I could look

14 back at all the papers you have given me, and referred

15 to, it seems very clear to me that Judge Yates, who we

16 all refer to all the time because he had so much

17 involvement at the beginning of this case for a long

18 time in this case, and JHO Bradley, to some privilege

19 reviews, and myself, who did some privilege review of

20 documents, have all already found that the public

21 interest privilege does apply to this case.

22 I don't think you can now argue -- I think

23 it's law of the case, and I don't think you can now

24 argue that it doesn't apply to this Article 78 because

25 it's termination of the agency is what is at issue.

26 I mean I know that's your argument. I


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1 Proceedings2 appreciate, it but I think we're past that, and it's3 already been established as law of the case. I think4 we can get on from there.5 Also, to the extent that you have argued --6 and I believe argued on Friday -- that some of the7 subsequent things that happened in this case, like the8 affidavits of Mr. Buchmiller and Mr. Dinallo, that were9 submitted as part of the surreply papers waived the

10 public privilege interest as to certain subject matters

11 and trying to learn as much as I could about the public

12 interest privilege in the past couple of days, it's

13 become pretty clear to me that this is not a privilege

14 that attaches to subject matters but is a privilege

15 that attaches to a communication or perhaps to a

16 document but not to a subject matter.

17 So while I will accept your argument that they

18 may have waived -- and I know Mr. Holgado doesn't agree

19 that they waived it at all, but where they may have had

20 waived the privilege as to some particular document and

21 communication, it's not because he said one thing.

22 He waived it as to everything that involves

23 solvency of MBIA or the financial condition of MBIA or

24 Mr. Buchmiller's review because that would be

25 everything involved in this case, so I disagree with

26 that concept.


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1 Proceedings2 I think that the cases are clear that the3 privilege attaches to the communication, and there is a4 few cases, not a lot because it's not a privilege that5 is dealt with a lot, but there is a case from the First6 Department in 1993, the Martin versus Gross case.7 That cites a Court of Appeals case called8 Cirale, C-I-R-A-L-E, versus 80 Pine Street Corp., 359 New York 2d 113, and the cases seem consistent that say

10 that the privilege attaches to confidential

11 communications and not to subject matters.

12 It says: "The public interest is a flexible

13 term and what constitutes sufficient harm to the public

14 interest, though, as to render the privilege operable,

15 must, of necessity, be determined on the fact of each

16 case."

17 So it's very clear that this is a very

18 fact-specific case, specific kind of a review, and even

19 the case that, Mr. Giuffra, you cited to, matter of

20 Jasmine G, 35 A.D. 3d 604, which was an A.D. 2d

21 department case from 2006, that was a juvenile

22 delinquency proceeding in Family Court in Kings County,

23 and New York City Department of Probation was involved.

24 Apparently a witness testified that a

25 supervisor in the department had overrode his

26 dispositional recommendations after reviewing some


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1 Proceedings2 documents and, therefore, the Appellate Division found3 that, because the department actively participated in4 the dispositional hearings and its testifying witness5 affirmatively placed the particular they are called PAT6 material -- I think that's not really relevant -- at7 issue by stating that the supervisor overrode his8 dispositional recommendation after reviewing the9 juvenile scores as a result of that, they found that

10 the department had waived any public interest privilege

11 or any privilege under any other particular law barring

12 disclosure of that particular communication, those

13 particular scores, but I think it just does not attach

14 to the subject matter. It just attaches to the

15 document.

16 As we know, as we were reminded the other day,

17 and Mr. Kasowitz asked me for discovery in an Article

18 78, you don't just get discovery. You have to request

19 of the court leave of discovery, as opposed to a

20 plenary action, where anything relevant, possibly

21 relevant potentially be discoverable. 3101 is one

22 thing, but Article 78 is something very different.

23 At the beginning of this case counsel and

24 Judge Yates drafted some parameters for how the

25 discovery was going to proceed in this case and,

26 obviously, as time went on, it was somewhat expanded,


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1 Proceedings2 but most of that was done with Judge Yates.3 I hope he won't get mad at me for blaming him4 for all this stuff. I'm not blaming him, but that's5 what happened.6 So I tried to look over the materials that you7 gave to me about what happened with this February 168 memo, which has become a big issue here, that memo to9 file that was dated February 16 that we all agreed was

10 not completed until something after February 16, and

11 there is no dispute that Judge Yates did review the

12 redactions that were taken by the Insurance Department

13 in that document.

14 But, there doesn't seem to be any evidence

15 that Judge Yates actually conducted that as a public

16 interest privilege review.

17 Rather, he was reviewing it just in the

18 context of what he was going to allow, what he wasn't

19 going to allow, and I really think that for me to

20 appropriately make any comment about that particular

21 document, with all the things that I've read, that I

22 need to look in camera at the unredacted document, the

23 unredacted February 16 memo.

24 So to the extent you can call your big staff

25 back at the Attorney General's Office and get somebody

26 to walk over here and get that to us as soon as


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1 Proceedings2 possible, that would be helpful because it's very hard3 for me because I'm supposed to be looking on a document4 basis, to not have the things that are redacted to try5 and figure out what's going on.6 I think that would be the best way for me to7 deal with it as to that document.8 As to the other documents, Mr. Giuffra, that9 you mentioned in your letter of May 21, Mr. Holgado did

10 provide redacted and unredacted copies of those e-mails

11 to us yesterday.

12 We reviewed them last evening for public

13 privilege. I did not speak to Mr. Holgado, and I

14 didn't take any further argument. I was just looking

15 at them based on everything we know, the affidavits and

16 all the testimony we've had.

17 Hopefully, I will get something to you later

18 in the day. I think I would like to look at the other

19 document also because I don't want to be inconsistent

20 in any of my rulings.

21 I already said the other day that I wasn't

22 going to start opening up other discovery because that

23 was inappropriate, and I made that ruling, so there was

24 a cutoff line. I was going to deal with things that

25 Mr. Giuffra put in his letter but not in anything past

26 that.


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1 Kasowitz-MBIA Respondents2 So, yes.3 MR. HOLGADO: I just want to let you know,4 your Honor, we'll, at the very latest, hopefully, get5 that unredacted version of that memo to you during the6 lunch hour. Hopefully, sooner, and I'm not certain I7 can get it before then, but I would hope by lunch.8 THE COURT: Okay, I appreciate that. So I9 think that deals with all the issues that you raised on

10 public interest privilege for now. So that we can now

11 proceed with MBIA's presentation here, right? Mr.

12 Kasowitz, you're up.

13 MR. KASOWITZ: Thank you, your Honor.

14 Your Honor, Mark Kasowitz for the MBIA

15 Respondents.

16 Your Honor, we now have a new definition of

17 chutzpah. We have Bank of America which in 2008 was

18 bailed out to the tune of tens of billions of dollars

19 in taxpayer money, based on a single weekend of

20 meetings among Federal regulators, asking this court to

21 overturn Superintendent Dinallo's approval of MBIA's

22 transformation and approval that was based on a

23 year-long investigation, including weeks of intensive

24 department review on site at MBIA's headquarters.

25 Superintendent Dinallo approved the

26 transformation because he found that it fully protected


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1 Kasowitz-MBIA Respondents2 the interests of MBIA's policyholders, including these3 banks, and because he found that the transformation4 would serve the public interest by helping to unfreeze5 the public finance markets.6 That is, the markets for the bonds that7 finance schools, roads, infrastructure projects.8 Those markets had been disrupted by the9 financial crisis which had been precipitated in no

10 small part by these banks themselves, and after helping

11 themselves to those tens of billions of taxpayer

12 dollars, doled out after a single weekend of meetings,

13 the banks now have the chutzpah to base their challenge

14 to the approval of transformation, which, your Honor,

15 didn't involve a dime of taxpayer money, on what

16 amounts to nothing more than nitpicking the extensive,

17 conscientious and year-long effort of the department.

18 Your Honor, we've heard Mr. Holgado describe

19 very effectively the extensive and conscientious job

20 that the department did in reviewing and approving the

21 transformation.

22 I think it's difficult to come away from Mr.

23 Holgado's presentation with any conclusion other than

24 that the banks cannot come close to meeting their heavy

25 burden of demonstrating that the department's approval

26 of the transformation was arbitrary and capricious.


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1 Kasowitz-MBIA Respondents2 Your Honor, Mr. Holgado's presentation was so3 persuasive and he made so many of the points that we4 were prepared to make because it was based on the5 undisputed facts in this case, that we fought long and6 hard about whether we even needed to stand up and make7 a presentation at this point.8 Well, your Honor, as the court probably knows9 by now, it's really hard for us to sit quietly in our

10 seats, so, with the court's indulgence.

11 THE COURT: I didn't think you were just going

12 to do that.

13 MR. KASOWITZ: I thought long and hard about

14 it, your Honor, but, with the court's indulgence, there

15 are some additional things that we would like to bring

16 to the court's attention which we believe will confirm

17 with even greater force the conclusion that there is no

18 conceivable basis for disturbing the superintendent's

19 decision in this matter.

20 Your Honor, as we've heard, the banks say that

21 pretty much everything the department, everything

22 Superintendent Dinallo and everything Mr. Buchmiller

23 did was wrong from start to finish, the banks say the

24 way the department thought about the transformation,

25 the way they reviewed it, the way they discussed it,

26 the way they handled it, the way they approved it, how


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1 Kasowitz-MBIA Respondents2 many people worked on it, how much time was spent on3 it, all of that was wrong.4 And not just wrong, according to the banks,5 but irrational and arbitrary and capricious. The banks6 even go so far as to cast aspersions on Superintendent7 Dinallo's motives for approving the transformation.8 They say he was politically ambitious and that9 he was catering to political interests. And they even

10 go so far as to imply that he really just wanted to get

11 a job at one of MBIA's law firms.

12 Your Honor, there is not a scintilla of

13 evidence to support any of these charges. To the

14 contrary, the evidence is absolutely clear that

15 Superintendent Dinallo fulfilled his duties in an

16 entirely exemplary, conscientious and rational manner.

17 Your Honor, I have to admit that I found it

18 especially interesting when the banks' counsel said

19 last week that the banks aren't in this case just for

20 themselves. They're also in it for all policyholders

21 of insurance companies.

22 They said that at page 120 of the hearing

23 transcript. Bank of America and Societe Generale, two

24 of the largest and most rapatious banks in the world,

25 are really in this case for the little guy.

26 That's pretty rich, your Honor. And, by the


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1 Kasowitz-MBIA Respondents2 way, your Honor, if Bank of America, for example, is3 really in this case for other policyholders, then4 perhaps the first thing that it should do is to return5 to MBIA insurance for the benefit of all its6 policyholders the $5 million it owes MBIA insurance for7 MBIA's broad and put-back claims against the Bank of8 America that are pending in another courtroom in this9 building.

10 Your Honor, the banks are throwing as much mud

11 against the wall as they possibly can in the hope that

12 something will stick. But it doesn't.

13 We have already seen that during the Attorney

14 General's presentation. After we have completed

15 reviewing the evidence, the evidence of the undisputed

16 facts, we believe it will be even clearer, if that were

17 possible, that none of what the banks say comes close

18 to establishing any basis under Article 78 for

19 disturbing the superintendent's approval in any way.

20 Your Honor, the banks' overarching theme in

21 this proceeding is that Mr. Dinallo didn't have the

22 authority as superintendent of insurance to do anything

23 other than to protect what the banks say were the

24 interests of existing policyholders.

25 The banks say that the superintendent didn't

26 have the authority to approve the transformation


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1 Kasowitz-MBIA Respondents2 because one of its purposes was to help unfreeze the3 public finance markets.4 If you listen to the banks, your Honor, you5 would think that it is impermissible for the Department6 of Insurance to concern itself with any broad policies7 or goals.8 The banks actually take the position here that9 approval of the transformation should be reversed

10 because the superintendent did not have the authority

11 to take any action to serve the public interest or to

12 insure the stability of financial or insurance markets.

13 The banks really say that the only thing that

14 the superintendent cares about is whether they, as

15 existing policyholders, get paid.

16 Your Honor, I would have thought that it would

17 have been an uncontroversial and, indeed, a bedrock

18 principle of government service, that the

19 superintendent of insurance, one of the state's

20 highest-ranking officials, has the authority and,

21 indeed, the obligation to take into account, in

22 addition to the interests of existing policyholders,

23 interests such as the health and viability of insurance

24 companies operating in New York State, the availability

25 of insurance coverage in critical markets and the

26 overall health and welfare of the financial markets,


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1 Kasowitz-MBIA Respondents2 the insurance markets and the public interest as a3 whole.4 Your Honor, the banks claim otherwise, but5 they're wrong. In fact, the legislature of this state,6 in Insurance Law section 201 has made it very clear7 that the superintendent has been given extremely broad8 power and discretion, namely, the rights, powers and9 duties in connection with the business of insurance in

10 this state, express or reasonably implied by the

11 Insurance Law, or any other applicable law of this

12 state.

13 There is nothing in the Insurance Law that

14 supports the bank's position that the superintendent is

15 limited solely to protecting the interests of existing

16 policyholders.

17 The principal support the banks originally

18 propounded for this position are the affidavits of four

19 former superintendents whom the banks designated as

20 experts in this case.

21 For example, one of the former

22 superintendents, James Corcoran, submitted an affidavit

23 in which he said: "The stated public policy reason for

24 then-Superintendent Dinallo's approval of the

25 transformation, the reinvigoration of the municipal

26 bond market in New York and nationwide, was not within


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1 Kasowitz-MBIA Respondents2 the department's statutory mission and did not justify3 Mr. Dinallo's violation of his paramount duty to4 protect and to treat fairly and equitably the interests5 of all existing policyholders of MBIA Insurance,6 including its structured-finance policyholders."7 Your Honor, these are the same four former8 superintendents that the banks bally-hooed to the media9 when they submitted their reply papers in this

10 proceeding.

11 The banks informed The Wall Street Journal at

12 that time, in March 2011, that: "Four former New York

13 State insurance superintendents said they wouldn't have

14 approved the 2009 restructuring of MBIA bank that split

15 the bond insurer into two companies, according to court

16 papers filed on Sunday.

17 "Lawyers representing a group of 11 banks,

18 which earlier sued to challenge the legality of MBIA's

19 business split, submitted statements from the former

20 insurance regulators to bolster their arguments that

21 the New York State Insurance Department improperly

22 allowed the restructuring to proceed.

23 "The former superintendents, James Corcoran,

24 Edward Muhl, Gregory Serio and Richard Stewart, whose

25 collective tenures leading the Insurance Department

26 span two decades, said they wouldn't have approved the


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1 Kasowitz-MBIA Respondents2 acknowledged that a superintendent could act to protect3 the public interest and promote the competitive4 markets.5 Let's turn to his testimony:6 "Question: Good. And to promote the public7 interests."8 And, in fact, you have acted to promote the9 public -- to protect the public interest and promote

10 the competitive markets when you were the

11 superintendent of New York Department of Insurance,

12 correct? There's an objection.

13 "Answer: Yes."

14 Indeed, Mr. Serio testified that it was well

15 within the superintendent's authority to seek to

16 achieve goals for the greater public good, such as

17 reestablishing lower Manhattan after the 9/11 attacks.

18 Let's see the next slide.

19 "Question: I understand that. I'm asking --

20 I'm asking what you said your job was. That was to

21 protect the public interest, correct?

22 There's an objection.

23 "Question: Correct?

24 "Answer: Yes. In that case I guess you could

25 consider the public interest to try to reestablish

26 lower Manhattan."


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1 PROCEEDINGS - KASOWITZ2 T23 MR. KASOWITZ: And, your Honor, earlier we saw the4 former Superintendent Corcoran stated in his affidavit that5 the reinvigoration of the municipal bond market was not6 within the Department's mission because he claimed it did7 not protect the interests of existing policyholders, but8 when he was in office, Mr. Corcoran actively pursued9 policies that he believed were in the public interest, which

10 he admitted had quote, nothing to do with existing

11 policyholders, close quote. That's at the Corcoran

12 transcript at 284.

13 Your Honor, these former Superintendents had to

14 admit that the Superintendents' authority extended beyond

15 the mere strict interest of existing policyholders because

16 that's exactly what the Department's mission statement says.

17 Take a look at the website.

18 The Department's mission is to protect

19 policyholders and to promote the continued development of a

20 sound, fair and robust insurance industry. Moreover, the

21 NAIC mission statement, which the banks try to make so much

22 of, squarely confirms the first regulatory goal of an

23 insurance department is to protect the public interest.

24 Let's read it.

25 Our mission, the mission of the NAIC is to assist

26 state insurance regulators individually and collectively in

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1 PROCEEDINGS - KASOWITZ2 serving the public interest and achieving the following3 fundamental insurance regulatory goals in a responsive,4 efficient and cost effective manner, consistent with the5 wishes of its members.6 The first, the first fundamental insurance7 regulatory goal that the NAIC lists, protect the public8 interest; second, promote a competitive market; third9 facilitate the fair and equitable treatment of insurance

10 consumers; fourth, promote the reliability, solvency,

11 financial solidity of insurance institutions, and fifth,

12 support and approve state regulation insurance.

13 As Mr. Holgado correctly pointed out, the

14 affidavits of the four Superintendents, former

15 Superintendents amount, at most, to legal opinions on the

16 ultimate issue before this Court, all of which as a matter

17 of law is inadmissible.

18 But, their deposition testimony concerning what

19 they did as Superintendents, gives the lie to the banks'

20 complaint that Superintendent Dinallo has exceeded his

21 authority. That testimony also exposes the affidavits of

22 the former Superintendents for what they really are.

23 What they really are, your Honor, is impermissible

24 second guessing, Monday morning quarterbacking. For those

25 of us who are football fans, these former Superintendents,

26 to the extent that they questioned what Superintendent

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1 PROCEEDINGS - KASOWITZ2 "Answer: That is the case. But, the only thing3 that I could suggest to you that Dick's a very bright guy,4 very knowledgeable, did a lot of background review on this5 when he was writing, and probably making these kinds of6 quotations, but he was not there in my office working on7 these matters as I was. These are things that he had no8 idea --9 MR. GIUFFRA: Could you continue reading, Mr.

10 Kasowitz?

11 MR. KASOWITZ: "Question: Just as -- "

12 MR. GIUFFRA: No, no.

13 MR. KASOWITZ: Excuse me. I will read what I would

14 like to read.

15 MR. GIUFFRA: That wasn't the rule when I was in

16 this --

17 THE COURT: I will let him do some reading. Why

18 don't you read that page if you want to read it. I did

19 allow --

20 MR. KASOWITZ: I am delighted to read the rest of

21 it. I want to get this answer out, but I am fine with the

22 rest of it.

23 "Just as Mr. Stewart was not in your shoes when you

24 approved Lloyd's Equitas, you were not in the shoes of Mr.

25 Dinallo when he approved MBIA's transformation, right?

26 "That is correct."

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1 PROCEEDINGS - KASOWITZ2 What would you like me to read?3 MR. GIUFFRA: The part in the yellow.4 MR. KASOWITZ: "The main one I would suggest,5 though I agree with a great majority of what Dick Stewart6 would say, he was unaware that I held Lloyd's, the new7 Lloyd's, to stand behind the old Lloyd's in the event there8 was any liability (sic) of Equitas to pay --9 THE COURT: "Any inability".

10 MR. KASOWITZ: "Any inability to pay policyholders'

11 claims."

12 Major difference and, as far as I am concerned, he

13 probably was unaware of it at that time.

14 MR. GIUFFRA: Thank you Marc. Appreciate it.

15 MR. KASOWITZ: Now, we are going to deal with the

16 Lloyd's Equitas precedent later on.

17 We are going to bring to the Court's attention the

18 further testimony that Mr. Muhl gave where he said that even

19 though Lloyd's was standing behind Equitas, it was the

20 members of Lloyd's, the names who were standing behind

21 Equitas, and as a practical matter, it would have been

22 impossible for policyholders to have gotten recourse against

23 those names who were living all over the world, but we will

24 deal with that later on and we will read all of it.

25 So, your Honor, I think the point here is very

26 clear. It's hard to put it any better, I think, than

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1 PROCEEDINGS - KASOWITZ2 former Superintendent Muhl put it. When you are the Acting3 Superintendent, you are invested with the responsibility and4 the obligation to make the ultimate calls about insurance5 matters in this State and the State Legislature defers to6 the acts and responsibilities of the Superintendents and to7 their judgement in making decisions.8 The last thing that the law permits is a second9 guessing of those decisions by former Superintendents,

10 experts, lawyers, and indeed, your Honor, we are going to

11 present this respectfully, even the Courts here in approving

12 MBIA's transformation.

13 Superintendent Dinallo was seeking to further

14 public interest goals. The transformation was intended to

15 strengthen the overall MBIA company which would, in fact,

16 provide additional protection for MBIA's existing

17 policyholders, including the banks, as Mr. Dinallo has

18 testified, and as we heard Mr. Holgado describe earlier this

19 week.

20 The transformation also was intended to

21 reinvigorate the moribund segments of the State's insurance

22 industry, the monolines. It was also intended to address

23 one of the adverse impacts of the financial crisis by

24 helping to unfreeze the public finance markets.

25 What has prevented all of that from happening, your

26 Honor, has been the litigation commenced by the banks.

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1 PROCEEDINGS - KASOWITZ2 Now, at this point, sixteen of the original banks have now3 dismissed themselves from this litigation. It's time for4 this litigation to be dismissed, so that the5 Superintendent's goals can be achieved, so that MBIA can6 start writing new municipal finance business, and the7 economy can be assisted as it needs to be, as Superintendent8 Dinallo intended it to be, through the unfreezing of the9 public finance business.

10 Your Honor, we have listened to the banks argue

11 that the Department approved transformation, which the banks

12 claim was unprecedented based on --

13 THE COURT: One second.

14 You are blocking that door. Don't stand in front

15 of the door. Sorry, Mr. Kasowitz, I had to take care of the

16 public interest in the courtroom.

17 MR. KASOWITZ: To which we pay great deference,

18 your Honor.

19 The banks here argue that the transformation was an

20 unprecedented transaction and one of the things that they

21 have argued time and time again, was that the transformation

22 was done in secret, that the review and approval of it was

23 done in secret, and that that secret review was so rushed,

24 that it was inadequate and fatally flawed.

25 Your Honor, those contentions are belied by the

26 undisputed facts of the record here. They are belied by

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1 PROCEEDINGS - KASOWITZ2 arbitrary and capricious, and where the undisputed facts3 demonstrate just the opposite.4 What I will do next, your Honor, is to take the5 Court through the story of transformation from the time the6 idea of transformation was first conceived in early 2008,7 through the approval of the transformation, a year later in8 February 2009.9 What we will see, your Honor, will confirm what Mr.

10 Holgado showed us earlier in the week and what the banks try

11 to obscure, namely, that the transformation was thoughtfully

12 conceived as a necessary and important response to the

13 financial crisis, that it was conscientiously reviewed and

14 commented upon for almost a year, not only by the

15 Department, your Honor, but as you will see and contrary to

16 what the banks have told you, by the banks themselves, and

17 that it was properly approved by Superintendent Dinallo

18 because it would protect the interests of MBIA's

19 policyholders, including these banks, while at the same time

20 helping to unfreeze the public finance markets.

21 Your Honor, following up on Mr. Holgado's

22 presentation, I will also address the arguments made by the

23 banks and show none of those arguments, either alone or

24 together, come close to satisfying the burden that the banks

25 have here.

26 Let's turn to the transformation story.

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1 PROCEEDINGS - KASOWITZ2 Just a couple of seconds about MBIA's business that3 your Honor knows MBIA issues essentially two forms of4 financial guarantee insurance -- the bond insurance business5 guarantees a payment of principal and interest on public6 finance bonds, such as municipal bonds that finance public7 works operations and the like, and the structured finance8 products, such as collateralized debt obligation, also9 mortgage backed securities.

10 The structured finances products that the MBIA

11 insures include a number of different sectors; RMBS that are

12 made of mostly second-lien credits, and it also provides

13 insurance on securities, on SMBS in the commercial

14 collateralized RDO.

15 The of affidavit Chuck Chaplin, MBIA's CFO, goes

16 through this in detail in mostly paragraphs 9 through 12, if

17 your Honor wants to take a look at it.

18 "The crisis in the financial markets, including the

19 deterioration of the U.S. residential market began in 2007

20 and had adversely effected MBIA and numerous other financial

21 institutions, some of which are, unlike MBIA, but including

22 the Bank of America, received enormous bailouts.

23 The crisis, of course, was not anticipated by

24 pretty much anyone, least of all by these banks, and not

25 only was it not anticipated, after it began there was

26 widespread disagreement and debate among the financial

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1 PROCEEDINGS - KASOWITZ2 institutions and the economists and analysts about how long3 the crisis would last and how deep it would go.4 Nonetheless, your Honor, the banks, as you have5 heard, have accused MBIA and the Department of grossly and I6 suppose, irrationally, underestimating the crisis and its7 potential effect on MBIA. That's not so, your Honor.8 MBIA economic assumptions in December of 2008, when9 it files its application for approval of the transformation,

10 through February 2009 when the Department approved that

11 application, were eminently reasonable and indeed,

12 conservative.

13 As I will explain in detail, MBIA and the

14 Department fully considered the issues the banks have raised

15 and the Department concluded entirely reasonably, that the

16 assumptions being used by MBIA at that time were appropriate

17 and sound.

18 While the banks stand here with 20/20 hindsight and

19 argue MBIA and the Department were underestimating the

20 severity of the financial crisis and should be have been far

21 more pessimistic in the fourth quarter of 2008, one

22 prominent analyst was saying at that time, among others,

23 that he had never been more bullish, and that the bonds

24 represented and that bonds represented the investment

25 opportunity of a lifetime.

26 That analyst was James Montier. He said those

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1 PROCEEDINGS - KASOWITZ2 things on November 25th, 2008, about ten days before MBIA3 filed its application with the Department, and he worked for4 none other than Societe Generale. His statements are5 reported and quoted in Exhibit 39 to the deposition of the6 banks' expert James Corcoran.7 What's interesting about this report, your Honor,8 is that Mr. Montier had formerly been referred to as a bear,9 and he had been bearish on the economy and smart. So, I

10 guess he was a smart bear.

11 At or about this time, he is quoted as saying that

12 he had quote, never been more bullish, that he, and that he

13 viewed bonds as the investment opportunity of a lifetime.

14 So, your Honor, the very same banks that are

15 accusing MBIA of not being sufficiently pessimistic in its

16 loss projections for bond guarantees in the fourth quarter

17 of 2008, those banks had never been more bullish about the

18 economy at that time.

19 And, exactly at that time, while it may be easy for

20 the banks today with four years of hindsight to say now MBIA

21 should have been projecting far greater losses in late 2008,

22 those banks were whistling a far different tune back then.

23 Now, this issue of predicting the future is an

24 issue which comes up time and again in the banks papers, and

25 we have seen some of it during the course of this hearing.

26 There have been suggestions and arguments that

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1 PROCEEDINGS - KASOWITZ2 Superintendent Dinallo believed, when he gave the approval3 that MBIA's projections were inherently uncertain or that4 they were inherently incapable of being precise. We will5 look exactly at the right language.6 The point here, your Honor, is this: First, of all7 and we will show this, Superintendent Dinallo believed that8 MBIA's projections and the analysis that Buchmiller had done9 and others had done with respect to those loss projections,

10 were eminently reasonable, and he made, at paragraph 61, of

11 his affidavit, and entirely reasonable and realistic

12 statement that at that time, as at other times, it was

13 difficult, in fact, it was impossible for MBIA, for the

14 Department, or for anyone else, to predict the future, which

15 created some uncertainty in projections.

16 That's why they are called "projections", your

17 Honor. Projections are just that -- an attempt by someone,

18 in the case of MBIA, by people in its, in its business and

19 in the case of the Superintendent of insurance in this case,

20 Mr. Buchmiller, and others, to try to ascertain whether the

21 projections of losses that are being made are reasonable,

22 whether the methodologies that are used in determining what

23 those losses are are reasonable.

24 What Superintendent Dinallo said and said very

25 clearly was, you can't predict the future. The only way

26 that you can tell what's happened in the future is after the

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1 PROCEEDINGS - KASOWITZ2 future is done in hindsight.3 So, the banks, having nothing more than hindsight4 to work on, and being unable to criticize the5 extraordinarily conscientious and exhaustive work that the6 Department did in analyzing this transaction and Mr. Holgado7 did an excellent job in describing that, we will go into8 some highlights of it in a little while, having nothing9 more, what the banks fasten on is well, these were difficult

10 times.

11 This was an enormous crisis and because these

12 projections are -- there is always uncertainty with them,

13 then the only answer that follows from that is do nothing.

14 Superintendent Dinallo should have done nothing. He should

15 have waited for months and months and months and months of a

16 tri annual exam, more than additional year of a tri annual

17 exam to be done, in order to make any kind of decision or,

18 he should have gone out and hired Black Rock -- but he

19 should have done nothing.

20 The whole point of Superintendent Dinallo's action

21 here, your Honor, this goes to heart of it, he saw the worst

22 crisis since the Great Depression. He saw that the bond

23 guarantee business was literally deteriorating. He saw that

24 there was one bond insurer that was much healthier than the

25 others, and there was a legitimate and real possibility to

26 enable that bond insurer to begin to write new public

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1 PROCEEDINGS - KASOWITZ2 finance business, and he studied and had his department3 study in detail what the, what the data points were for that4 bond insurer and then he approved the plan that they had5 come to.6 He approved it because it was the right plan and7 because it was the right policy and because it would have8 protected all of the policyholders, both on the structured9 finance side and on the government finance side.

10 Now, your Honor, one of the bases that before

11 the -- before MBIA conceived of this proposal to do the

12 transformation, it sought to meet the challenges posed by

13 the financial crisis in another way. It began raising new

14 capital between December 2007 and February 2008.

15 In fact, MBIA Inc., the parent, raise up to 2.85

16 billion dollars in additional capital, pursuant to a series

17 of stock offerings and surplus note issuances.

18 As Superintendent Moriarty has explained, over the

19 past two years the MBIA entities have entered into

20 transactions to solidify their capital position and mitigate

21 against further deterioration.

22 Specifically, those transactions included, on

23 January 16th, 2008, MBIA Corp issued one billion dollars in

24 surplus notes due January 15th, 2033. On February 6, 2008,

25 Warburg Pincus agreed to purchase up $750 million of

26 convertible participating stock, and on February 13th, 2008,

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1 PROCEEDINGS - KASOWITZ2 MBIA Inc. completed a public offering for the sale of 94.63 million dollars, million shares of MBIA Inc. common stock at4 $12.15 a share, for the total net proceeds of approximately5 1.1 billion dollars.6 Also, in late 2008, MBIA issued preferred stock to7 a trust to secure additional $400 million in capital.8 Approximately 2.5 billion of the capital raised by9 MBIA Inc. between December 2007 and late 2008, was invested

10 in MBIA insurance or was used to support liabilities of MBIA

11 Inc., that were insured by MBIA insurance.

12 So, to further address the effects of the financial

13 crisis, MBIA also began discussing with the Department, a

14 possible restructuring of MBIA's insurance business, a year

15 before the transformation transaction was approved in

16 February 2008, when MBIA former CEO Jay Brown returned to

17 the company as its Chairman and CEO.

18 In February 2008, MBIA retained Jane Boisseau, an

19 insurance loss specialist, with 25 years of experience, in

20 connection with this potential restructuring, and on

21 February 19th, 2008, Mr. Brown, a lawyer to MBIA

22 shareholders, noted that MBIA had successfully raised

23 capital in response to the financial crisis, but made clear

24 that the structure of the financial guarantee industry needs

25 redesign.

26 The next day, February 20th, 2008, Mr. Brown met

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1 PROCEEDINGS - KASOWITZ2 with Superintendent Dinallo, and discussed with him a3 proposed concept for restructuring MBIA, which included the4 basic elements of what would become the transformation.5 Two days later, on February 22, 2008, MBIA and its6 counsel, including Ms. Boisseau, met with the7 representatives of the Department, including the8 Department's financial and advisors, Perella Weinberg and9 Fried Frank, to describe to the Department how a possible

10 restructuring of MBIA could work in order to address the

11 freezing of the public finance markets.

12 MBIA explained to the Department at that meeting,

13 that the public finance market was frozen, and that to help

14 unfreeze it, MBIA would separate its public finance business

15 from its structured finance business, and as Ms. Boisseau

16 states her affidavit, this February 22nd meeting was, quote,

17 only the beginning of months of discussions involving the

18 Department and MBIA regarding MBIA's business plans,

19 including its restructuring proposal and its financial

20 condition.

21 As she states, during subsequent months of planning

22 and discussion, MBIA and her law firm worked closely with

23 NYID to develop a proposal that would he create a new public

24 financial insurance entity, while simultaneously insuring

25 that all MBIA policyholders would be treated fairly and

26 equitably, and that both insurers would be sound, solvent

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1 PROCEEDINGS - KASOWITZ2 and well capitalized.3 The restructuring proposal that was discussed at4 the February 22nd meeting involved interdependent5 transactions, the result of which would create a separate6 and new viable public finance insurance company, that would7 be able to write new business, while preserving MBIA8 insurance as a well capitalized, highly solvent insurer.9 MBIA provided a Power Point presentation to the

10 Department at the meeting, which set forth the key

11 components that ultimately comprised the transformation as

12 approved by the NYID.

13 While some of the components and the overall

14 structure of the transformation would change over time, the

15 presentation provided an initial overview of the statutory

16 standards and regulatory requirements governing the proposed

17 transaction.

18 The Department discussed extensively with the MBIA

19 representatives the statutory standards and the regulatory

20 requirements that MBIA would have to satisfy in order to

21 perform the affiliated transactions that would ultimately

22 comprise the transformation.

23 And, as Ms. Boisseau states, the proposal primarily

24 involved affiliated transactions of a type for which she had

25 sought and obtained approval many times in her 25-year

26 practice before the Department.

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1 PROCEEDINGS - KASOWITZ2 Now, your Honor, one of the advantages of telling3 the story of transformation as it unfolds, is that we get to4 see what actually happened, rather than what the banks say5 happened years later.6 So, for example, we have learned the banks'7 counsel's argument that the transformation transactions did8 not occur simultaneously and that MBIA's argument that they9 did, and that the Department's argument that they did, is

10 nothing more than a post hoc rationalization raised for the

11 first time in litigation, and never discussed

12 contemporaneously at the time of the transformation.

13 Your Honor, Mr. Holgado did a very good job of

14 going through some of the evidence that showed that the

15 banks' post hoc claim with respect to how the transaction

16 worked was wrong, and that evidence included MBIA's

17 application for approval of the transformation which

18 specifically provided that the transformation would be

19 simultaneously done.

20 But, your Honor, there is also evidence that even

21 predated the application, that related to the simultaneous

22 nature of this transaction.

23 Now, at the -- already at the February 2008 meeting

24 that we have been discussing, MBIA counsel Boisseau,

25 discussed with the Department the components of the deal and

26 the dividend and share redemption and reinsurance agreement

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1 MBIA Respondent-Kasowitz2 T33 We were not viewing this as a transaction that4 would be sequenced in a specified chronological5 sequence.6 Ms. Boisseau continued at paragraph 69 through7 70 of her affidavit: "I explained that MBIA believed8 that the various components of the restructuring were9 interdependent and should be viewed as occurring

10 simultaneously.

11 "I explained that if the NYID believed that

12 it was important to describe or perform the transaction

13 sequentially, then we would be happy to prepare

14 presentation materials to reflect whatever sequence the

15 NYID believed was appropriate.

16 "In the absence of a preference or

17 requirement by the NYID that MBIA Insurance should

18 sequence the steps in a prescribed order, I explained

19 that we felt that these affiliated transactions, like

20 others involving multiple components, should be viewed

21 as occurring simultaneously."

22 Following this explanation, NYID

23 representatives present at the meeting indicated that

24 the transaction worked as a simultaneous transaction.

25 From that point on, our understanding with the

26 NYID was that the transformation was being viewed by

BARBARA STROH, CSR, CRR, CMR


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1 MBIA Respondent-Kasowitz2 the NYID and MBIA as a simultaneous, rather than a3 sequenced, transaction, and that the various ways of4 describing the components of the transaction in one5 order versus another order was intended solely as6 discussed above, for purposes of identifying specific7 components of a multi-part transaction.8 And deputy Superintendent of Insurance9 Moriarty has testified in this case clearly that he,

10 quote, "looked at the transactions as taking place

11 simultaneously as part of the overall goal of, again,

12 affecting the establishment of National as an

13 affiliate."

14 Moriarty also testified that department

15 understood that the transformation transactions

16 occurred simultaneously when the department approved

17 them on February 17.

18 So, your Honor, the testimony of Ms. Boisseau

19 and Mr. Moriarty shows the fact that the transformation

20 components would occur simultaneously was not any post

21 hoc explanation as the banks would try to have the

22 court believe.

23 Rather, it was explicitly and fully vetted and

24 addressed by MBIA and the department at least a year

25 prior to the transformation approval.

26 Now, your Honor, from the beginning of this



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1 MBIA Respondent-Kasowitz2 case and during their argument in this hearing, the3 banks never miss an opportunity to accuse MBIA and, for4 that matter, the department, of being engaged in some5 secret scheme to foist the transformation upon the6 unsuspecting banks, who the banks claim they therefor7 had no opportunity to voice their views about.8 The banks' counsel said just the other day to9 your Honor that the banks had no notice of this.

10 Indeed, the purported secrecy of this

11 transformation scheme and the banks' inability to

12 express their view on transformation to the department

13 have been mantras of the banks since this case started.

14 The banks have told this court repeatedly, and

15 to cite just a couple of examples, in December 2001 --

16 slide 24 -- the banks told the court: "As your Honor

17 well knows, the transformation transaction was done in

18 secret."

19 In their recent sursurreply brief the banks

20 again say that: Quote, "Mr. Dinallo cited to approve

21 in secret and without any input from affected

22 policyholders, one of the largest liability-based

23 restructurings of an insurer in U.S. history."

24 In fact, your Honor, the purported secrecy of

25 the transformation was one of the main arguments in the

26 bank's appeal to the Court of Appeals from the



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1 MBIA Respondent-Kasowitz2 dismissal of the plenary proceeding by the First3 Department.4 There the banks argued: "To avoid billions in5 additional losses, MBIA, Inc. senior executives devised6 a secret plan to divide its principal subsidiary, MBIA7 Insurance, into a healthy insurer of low-risk public8 finance products and a dying insurer of toxic9 structured finance products.

10 Secret plan? What the banks were telling the

11 Court of Appeals and this Court is that MBIA hid the

12 transformation plan from them, that they were

13 blindsided by it when it was approved by the department

14 in February 2009, and the reason that the supposed

15 secret plan was important to the banks' argument, your

16 Honor, is that the banks say that if they had had

17 notice of the transformation, they would have commented

18 on it, they would have made their opposition known, and

19 they say now that they would have prevented it from

20 happening.

21 According to the banks, it was, therefore,

22 arbitrary and capricious of Superintendent Dinallo not

23 to have given them notice and an opportunity to voice

24 their objections.

25 But, your Honor, this secrecy argument turns

26 out to be absolutely false. The banks knew all along



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1 MBIA Respondent-Kasowitz2 about the proposed transformation.3 The undisputed facts -- and the banks haven't4 shared these facts with the court. Even though they5 are based on the bank's own documents, the undisputed6 facts are that the banks knew about the proposed7 transformation all along.8 They knew about it when it was first discussed9 in February 2008, they soon learned about its structure

10 and timing.

11 They had more than an ample opportunity to

12 comment and raise any issues about it with the

13 department, MBIA or anyone else.

14 In fact, your Honor, the banks did comment on

15 it. They did comment on the transformation proposal.

16 They commented on it a lot.

17 You will see, your Honor, that these banks in

18 particular, the banks that are left in this case, Bank

19 of America and Societe Generale, these two banks

20 commented on it, and they supported the idea of

21 transformation.

22 They thought it was a good idea. They

23 applauded Brown, MBIA's CEO and chairman, for coming up

24 with the idea.

25 That's right, your Honor. The very same banks

26 that are in this courtroom trying to demonize MBIA and



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1 MBIA Respondent-Kasowitz2 its executives for a plan the restructure their3 business in extraordinarily difficult economic times,4 these very same banks, at the time the transformation5 proposal was made, liked the idea and supported it.6 We'll show you the quotes. The banks didn't7 show you the quotes because it totally undermines their8 position here, but we'll show you these statements.9 So, your Honor, on February 25, 2008, a full

10 year before the transformation was approved, Mr. Brown

11 publicly announced in a letter to MBIA shareholders and

12 in a press release that MBIA intended to restructure

13 the company in such a way as to insure public and

14 structured finance -- as to insure public and

15 structured finance business from separate operating

16 entities."

17 On that very same day, on the very same day

18 that MBIA sent that letter, February 25, 2008, a year

19 before the transformation, one of the two banks left in

20 this case, SocGen issued a credit research report

21 discussing that very same public announcement by MBIA

22 of the proposed transformation.

23 Here is what SocGen said on February 25, 2008:

24 "We expect splitting the insurers is likely to succeed,

25 given that a split is now actively under discussion, as

26 it is likely to please regulators, could achieve rating



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1 MBIA Respondent-Kasowitz2 stability and would facilitate capital raising."3 Further: "This is one of the few ways to4 equitably raise new capital, given the problems in5 assessing structured credit risk at present.6 "We had suggested a split, raising new7 capital for the municipal business after allocating8 sufficient to maintain the structured credit business9 following the announcement of the insurance regulator's

10 involvement."

11 While we're on it, how is it that these banks

12 get up in court and claim repeatedly that

13 transformation was a secret and claim that

14 Superintendent Dinallo abused his discretion by keeping

15 this information from them, which they claim left them

16 with no opportunity to voice their views about it.

17 It's ridiculous, your Honor. As this document

18 shows, the banks knew about MBIA's plans to apply to

19 the regulators for approval of the transformation a

20 full year before approval was granted.

21 And not only did they know about it. On the

22 date that MBIA announced their intention to do it, they

23 went out and they issued their own opinion about what

24 MBIA was planning to do.

25 From the looks of it, your Honor, the way I

26 see it, they thought it was a pretty good i dea.



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1 MBIA Respondent-Kasowitz2 Let me see. They said that -- well, they3 thought it would work. That's one thing. And they4 said that this idea, this split could achieve ratings5 stability and would facilitate capital raising.6 Of course, your Honor, capital raising was7 critically important to financial institutions like the8 banks and like MBIA and, like the other Monolines at or9 about this time, given the financial crisis that the

10 country and, in fact, the whole world was in.

11 But then they go on, your Honor. I think

12 their use of language here is very, very important:

13 "This is one of the few ways to equitably raise new

14 capital, given the problems in assessing structured

15 credit risk at present."

16 "Equitably," your Honor. Equitable. That's

17 one of the key concepts in this Article 78 proceeding,

18 one of the key determinations that the court will make

19 is whether or not the banks will be able to sustain

20 their heavy burden of demonstrating that somehow all of

21 this was equitable and not rational.

22 But I'll tell you, the part that gets me the

23 most, you know, because I've been in this litigation

24 for three years, your Honor, and I've been sitting and

25 listening to these banks tell me, and their lawyers

26 tell me, and tell my client, and tell the world and put



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1 MBIA Respondent-Kasowitz2 it out in press releases and publish it in Greece that3 this was a secret kabbala, some sinister kabbala by4 MBIA and the superintendent that was foisted on them.5 Well, here you have SocGen, an employee of6 SocGen on February 25, 2008 saying that not only is it7 a good idea. He's trying to take credit for it: "We8 had suggested a split." Credible, your Honor.9 Credible.

10 So, was that it? This little idea kind of

11 pops up in February 2008, the folks that are in this

12 courtroom, I think one of the SocGen executives was

13 introduced to you by the banks' counsel earlier on, was

14 this just like a passing glimmer, and they just never

15 heard about it again? Both these banks?

16 Well, not quite, your Honor, because the next

17 day Bank of America weighs in. They waited until a day

18 after the announcement, the day after SocGen issued

19 their public report.

20 Their report came out on February 26. What

21 did Bank of America have to say about this? Here's

22 what they said in a letter -- this is February 26,

23 2008:

24 "In a letter to owners issued late yesterday,

25 MBIA's CEO Brown stated that the company will

26 restructure to separate its public and structured



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1 MBIA Respondent-Kasowitz2 finance businesses into two separate entities."3 Sounds like transformation, your Honor.4 "The company plans to do this as soon as5 possible" -- as soon as possible, they plan it -- "but6 within five years and only under the condition that it7 can protect the interests of all of its stakeholders.8 "We believe such a separation is feasible,9 although likely complex. The most reasonable split

10 would be intermunicipal and nonmunicipal businesses,

11 but we believe it would be best to even further divide

12 the structured finance business into different products

13 with different risk characteristics and tails."

14 Well, they liked it, too, your Honor. They

15 liked it too, B of A. They said that they believe that

16 such a separation is feasible, and they even go so far

17 as to say that the most reasonable split, the most

18 reasonable split would be into, you know what, your

19 Honor?

20 It would be into the very two components that

21 Brown and MBIA had planned to split it into: The

22 municipal and nonmunicipal businesses.

23 Credible. Bank of America liked it, too.

24 They use words like "reasonable" and "feasible" to

25 describe how they felt about it.

26 It doesn't sound like a surprise to me, your



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1 MBIA Respondent-Kasowitz2 Honor, but let's look at what B of A said because they3 put a little cherry on top. Not only did they like it:4 "We" applaud MBIA for its decisiveness under CEO5 Brown's leadership."6 MR. GIUFFRA: Do you want to read the next7 line, Mark?8 MR. KASOWITZ: "We applaud MBIA for its9 decisiveness under Brown's leadership."

10 Well, that's a lot different, your Honor, than

11 what I've been hearing from B of A about Mr. Brown and

12 about Mr. Brown's company, MBIA, in this litigation.

13 I will read next the line: Moreover, CEO Jay

14 Brown's interests are closely aligned with

15 shareholders."

16 Well, they are supposed to be, your Honor.

17 That's what CEOs do. And at this point in time, a year

18 before -- just as soon as this proposal was announced

19 and a year before -- about a year before it was

20 approved, these good folks at B of A knew about it.

21 And they even knew the basic terms of it.

22 Your Honor, they even knew that MBIA was going to try

23 and do it as soon as possible, and to the extent that

24 they had any problems with the absolutely

25 uncontroversial doctrine that the CEO of MBIA was

26 acting in interests aligned with his shareholders, they



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1 MBIA Respondent-Kasowitz2 didn't say a damn word about it, not here, and as you3 will see, for this entire period of time up until the4 time that the application was made, and even after.5 They didn't say boo about it.6 You know, it might be a good time for a break,7 your Honor.8 THE COURT: That's what I was going to say.9 Thank you. Let's take a ten-minute break, and then

10 we'll continue.

11 MR. HOLGADO: Thank you, your Honor.

12 (Short recess taken)

13 (Continued on next page)

14 (End of Take 3)

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1 PROCEEDINGS - KASOWITZ2 T43 THE COURT: Just so it's official on the record,4 counsel and I had discussed this before, and we are not5 going to have a session here tomorrow, for a lot of reasons.6 So, we are not going to, so everybody can enjoy a7 four-day holiday weekend, and we will continue on Tuesday8 morning. People can stop asking Ray that question. Okay.9 I just want to make that official.

10 Mr. Kasowitz, you may continue.

11 MR. KASOWITZ: Thanks, your Honor.

12 When last we left off, we were looking at some of

13 these reports issued by B of A and Soc Gen concerning the

14 knowledge they had of MBIA's transformation, dating back to

15 really the time that the transformation proposal was first

16 conceived, really back to February 2008, and saw the

17 e-mails, the reports, and we will look at the e-mails in

18 awhile, concern the fact that Soc Gen and B of A knew about

19 the transformation proposal, had knowledge of the basic

20 structure of the proposal, commented on the proposal,

21 commented favorably on the proposal, and as we said in one

22 instance that we have seen so far, tried to take credit for

23 it.

24 So, you know, one of the things that the banks

25 argued during the course of their presentation was that all

26 of this was in secret -- of course it wasn't -- but, in

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1 PROCEEDINGS - KASOWITZ2 addition, what I think is significant about these documents,3 your Honor, is that during their presentation the banks make4 this, I think there was some comment made to the effect of,5 you know, the good thing about contemporaneous statements6 and documents and e-mails is that they are made at the time,7 not made years later, and they reflect what people really8 knew or were saying, as opposed to what positions they are9 taking in litigation.

10 I think that is precisely the significance here in

11 contrast to these arguments advanced to this Court and in

12 contrast to arguments advanced to the Appellate Division and

13 the Court of Appeals, that all of this was a secret.

14 In fact, these documents show that that was --

15 nothing could be further from the truth. So, you know, in

16 a way this goes back to where I started, your Honor --

17 chutzpah.

18 This is really sort of more than chutzpah -- people

19 taking a position not only that they didn't know, but that

20 the idea was so nefarious and so outrageous and so

21 prejudicial, in fact, the facts are exactly the opposite.

22 Sort of, you know, chutzpah is a nice word to describe it.

23 So now, let's turn to -- why don't we turn to the

24 continuation of sort of this story.

25 The next thing you see, in the early spring of 2008

26 is that the banks are continuing to look at all of this and

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1 PROCEEDINGS - KASOWITZ2 analyze it. So, I think that's slide 31.3 On March 9th, the B of A folks are issuing another4 heads up, another -- they are issuing another heads up.5 This is March 9th, 2008. I think I will read it.6 But, what is interesting is this isn't just a7 question of the two banks who are left in this case, you8 know, analyzing something afar, your Honor.9 This is, this heads up, heads up reflects the fact

10 that they were sitting right with MBIA, right with the CEO

11 and Chairman of MBIA and talking to him. Unbelievable.

12 What a secret. What a clandestine, what a clandestine

13 scheme.

14 So, let's read it.

15 "We met with MBIA's Chairman and CEO Jay Brown on

16 Friday, at a meeting held for Self Side (ph) analysts. We

17 came away from the meeting more confident that the company

18 is focused on the right things -- on the right things --

19 namely, returning to new business generation, albeit slowly,

20 and determining and implementing the right operating

21 structure over the next several years.

22 "We look at MBIA as a company in -- see if I have

23 that -- we look at MBIA as a company in transformation and

24 one that should stabilize over the next several quarters,

25 particularly if it retains its AAA ratings and visibility

26 into loss trends and the macro picture for the U.S.

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1 PROCEEDINGS - KASOWITZ2 increases."3 I like this one. "We applaud MBIA for its4 decisiveness under CEO Jay Brown's leadership, and for the5 banks' counsel. Moreover, CEO Jay Brown's interests are6 closely aligned with shareholders."7 Moving on, "MBIA continues to have, after8 discussions with the rating agencies surrounding its plan of9 action, including the structure of the company -- " I will

10 comment on these things, but let me get through it first.

11 "Mr. Brown reiterated his plan to split MBIA into

12 at least two operating units within the next five years. A

13 restructuring, in our view, will take time, given the

14 regulatory issues and the need to appease both shareholders

15 and policyholders."

16 So, let me go back to the beginning of this because

17 I think this is a document which ends up being critically

18 important in the analysis of whether or not there was

19 something egregious, something so irrational, so arbitrary

20 and capricious, perpetrated by the Superintendent of

21 insurance, in cahoots with MBIA, with respect to this

22 transformation transaction.

23 Those are all the things that we have been hearing

24 in this courtroom, first in Justice Yates' courtroom, for a

25 little bit of time in Justice Sherwood's courtroom, and now

26 in this courtroom during the past three years.

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1 PROCEEDINGS - KASOWITZ2 I must tell you, your Honor, that I have shown up3 and from the very first day of argument in this case, there4 have been all manner of accusations hurled at MBIA by the5 banks.6 Originally, it was 18 banks, now it's just two, but7 the accusations were ones that I had a difficult time8 listening to, that my clients had engaged in some kind of9 fraudulent scheme, that my clients had engaged in some kind

10 of secret conspiracy with a regulator, that my client was

11 trying -- and this is an argument that I haven't mentioned

12 yet today, but that has absolutely been advanced in all the

13 papers and in Court hearings -- that my client is trying to

14 line its own pockets at the expense of policyholders and the

15 like.

16 That, it's all being done, this whole argument that

17 it was being done in secret, as part of some kind of

18 clandestine scheme, was sort of the patina of accusation and

19 of egregious misbehavior that the banks advanced, to try to

20 give some oomph to the arguments they were making.

21 In fact, there is no oomph to the arguments. As

22 Mr. Holgado pointed out earlier in the week, we will go into

23 a little bit more of that.

24 There is no oomph to the arguments, and there is

25 not a shred of truth that there was some egregious scheme by

26 MBIA and its executives in conspiracy with the Department to

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1 PROCEEDINGS - KASOWITZ2 foist this on this these poor, unexpecting victim banks.3 Let's look at what they were saying back in the4 spring of 2008.5 First, they meet with Mr. Brown. I think that's6 significant. It's not just a question of them reading a7 press release that MBIA has issued, not a question just of8 that.9 They met with him and apparently, he is, you know,

10 they went up to Armonk or maybe -- MBIA also has an office

11 in the City -- and they went over to see him and, you know

12 what? He let them in. He didn't stand behind the door,

13 you know, cowering in a little corner saying I will not talk

14 to you, I have a conspiracy.

15 Conspirators don't meet with the people they are

16 seeking to defraud. They don't meet with the people they

17 are seeking to victimize, but he met with them. I bet

18 others met with him too. That's the first thing -- they

19 met.

20 Second thing, this is when I first saw this

21 document. I said wow this is surprising. "We came away

22 from the meeting more confident that the company is focused

23 on the right things."

24 Does that sound bad? Doesn't sound bad to me.

25 Sounds good. Sounds like they are focused on the right

26 things. B of A is saying the company, as a result of their

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1 PROCEEDINGS - KASOWITZ2 meeting with Mr. Brown, where he was talking about the split3 up of the company, was focused on the right things. Sounds4 good.5 Namely, returning to the new business generation,6 albeit slowly -- remember, we are going through a really,7 really difficult time here in the spring of 2008. It is8 the -- we are, the country and the whole world is heading9 into this really difficult time -- is in a difficult time,

10 not heading into it.

11 It is a difficult time, and moving on, and "we came

12 away from the meeting more confident that the company

13 essential focused on the right things, namely returning to

14 new business generation, albeit slowly."

15 Here is the part I really like -- "and determining

16 and implementing the right operating structure over the next

17 several years."

18 I don't even need to comment on that. That's,

19 that sounds like they really like this concept, the

20 splitting up of the company. But then, this is good.

21 Because, you know, I have sat here, again for three years in

22 this courtroom or other courtrooms and I have listened to

23 the banks make the argument, and I have sat in depositions

24 with their expert witnesses, former Superintendents, and

25 heard them make the argument as follows:

26 What's transformation? There is nothing in the

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1 PROCEEDINGS - KASOWITZ2 toward the beginning, at the beginning of the presentation3 today, that was this idea of making predictions about the4 future.5 And, the banks have leveled, as one of their6 criticisms against the review and analysis of7 transformation, the claim that MBIA had made somehow flawed8 projections of losses, flawed and not just flawed, but9 really flawed. That's what they say.

10 You all were, you know, hopelessly optimistic and

11 you were too optimistic in your projections and for that we

12 need to, we need to reverse transformation. That's I am

13 paraphrasing, but that's certainly one of the arguments they

14 made.

15 I pointed out earlier in the argument that, in

16 fact, these Petitioners were optimistic. In fact, I think

17 I pointed to a report from a Soc Gen executive who had

18 formerly been a bear, very bearish on the economy and in

19 November of 2008 he became bullish on the economy. Never

20 about a better time to invest in bonds, is what he said.

21 And, the report about that indicated that he had

22 been actually notoriously bearish, but smart. We will call

23 him the "smart bear".

24 But, at or about this time, just several weeks

25 before MBIA had submitted their application for approval of

26 transformation, he was saying that things were looking up.

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1 PROCEEDINGS - KASOWITZ2 to do that because we have seen the testimony from the3 banks' own experts, former Superintendents, all of whom said4 he did, and also, a transaction that would benefit MBIA's5 policyholders, both, both the structured finance and the6 public finance policyholders and something that was going to7 be good for the public, because in order to do business you8 need to build things and in order to build things, you need9 to have bonds, and in order to have bonds, your Honor, you

10 need to have guarantees, and I will get to that in an a

11 couple of minutes.

12 (Continued on next page.)

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1 MBIA Respondents-Kasowitz2 T53 The point here, your Honor, is just this:4 That on March 9, 2008, you have B of A saying that:5 "We look at MBIA as a company in transformation and one6 that should stabilize over the next several7 quarters" -- optimistic.8 It looks like they're pretty optimistic about9 it, your Honor. Your Honor, not that it should

10 stabilize over the next several quarters --

11 "particularly if it retains its triple A status and

12 visibility loss trends and the macropicture for the

13 United States."

14 So you don't have B of A at this point in time

15 saying it's all over. It's terrible. It's going --

16 we're heading to a depression.

17 In fact, they didn't know, just like we didn't

18 know. But they're pretty optimistic here. So that's

19 the other thing that I think is significant about this

20 heads-up from B of A.

21 That's in addition to, of course, this issue

22 of applauding Mr. Brown for his decisiveness and his

23 leadership.

24 That's an important point here, your Honor.

25 It goes to another point that the banks have talked

26 about here. That's simply this: The banks have taken



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1 MBIA Respondents-Kasowitz2 e-mail from a Justin Klein at B of A to some other3 people at B of A, and the subject is MBIA.4 In this e-mail it reflects discussion between5 Mr. Klein and the CFO of MBIA, who was Chuck Chaplin,6 and the treasurer of MBIA, who was Fred Pastore.7 So, there doesn't seem to be a lot of doubt or8 questioning being expressed in this e-mail about what9 was happening.

10 "MBIA eventually intends to split the company

11 with municipal and structured business being written

12 from separate operating entities, with both having

13 adequate capital, both entities will ideally be AAA

14 rated."

15 "The first priority of this initiative is to

16 build a capital cushion sufficient to support both

17 business units.

18 The new structure is expected to increase the

19 agility of the business units and transparency to

20 constituents and the market. I like that:

21 "Transparency to constituents and the market.

22 "The company has announced a five-year

23 timeframe to complete this separation, although the CFO

24 indicated in our conversation that the restructuring is

25 a high priority and would likely occur sooner than five

26 years."



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1 MBIA Respondents-Kasowitz2 So, to the extent that the banks say that this3 is all somewhere off in the future, we don't know if4 and when it's going to happen, when you look at the5 language of what they're saying, based on the meetings6 that they were having, they knew that this was a7 priority for MBIA, and the MBIA folks are saying, look.8 We're going to do this for the next five years, but9 we'd like to do it sooner.

10 And we're going to see some other documents

11 here, your Honor, that talk about the banks' knowledge

12 of almost exactly when it's going to happen.

13 Now, we all know that in June, as MBIA's work

14 on the transformation plan was proceeding, Standard and

15 Poors and Moody's downgraded their financial strength

16 ratings for MBIA, as they did for a number of other

17 monolines, and they downgraded beneath AAA.

18 As a result of those downgrades, MBIA

19 Insurance was not able to write financial guarantee

20 insurance in either the public finance markets or the

21 structured finance markets.

22 Both of those at that time, your Honor,

23 really, as a practical matter, required AAA ratings in

24 order to proceed.

25 So, that really sort of -- that resulted in

26 the freeze in the public finance markets that we have



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1 MBIA Respondents-Kasowitz2 new business.3 Now, whether or not at some point, depending4 on what happened in the overall economy and the global5 economy, MBIA insurance would be able in the future to6 write new business, who knows at that point?7 The idea was that it would have more than8 enough capital to take care of the obligations of its9 policyholders, and that's the determination that the

10 superintendent made, and it was an important and a

11 correct determination.

12 Now, one of the -- well, I'm going to turn --

13 I'll do this in a little bit more detail later, but --

14 in fact, I will turn to it later.

15 Let me get back to B of A. Immediately after

16 this downgrade, B of A, which had been following this

17 very closely, issued another report.

18 I think that was on June 6: "We believe the

19 business model as it exists today will likely have to

20 change in order for bond insurance to remain a viable

21 business."

22 I'm going to jump down to a second, and then

23 I'm going to go back: "MBIA's CEO Jay Brown stated

24 that perhaps the bond insurer will have to split its

25 company into separate entities sooner than expected."

26 So there can't be any claim here by these



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1 MBIA Respondents-Kasowitz2 banks that, okay, well, we understand that there's3 going to be -- that there's a plan to have a4 transformation. We know that the MBIA is going to be5 making an application for that with the superintendent6 of insurance, but this could be five years off, you7 know, given the recent events, the fact that there was8 a downgrade that made the need for, and the impetus of,9 doing this transaction even more pressing.

10 Just five days after that report, MBIA issued

11 a letter to its shareholders which said, among other

12 things: "We will assess one key action item at this

13 point, which is to continue to pursue opportunities to

14 support the bond insurance market as a whole in

15 conjunction with the New York State Insurance

16 Department and other stakeholders.

17 "In addition, we will assess what would be

18 required by us by the rating agencies and regulators to

19 use one of our two fully licensed subsidiaries as an

20 AAA subsidiary for new public finance business."

21 So, there is no doubt that this is moving

22 ahead.

23 On June 19 MBIA issues a press release. The

24 press release a very clear: "We are moving forward

25 with" -- it says "out," but it's our -- our

26 "transformation plan which we will pursue in



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1 MBIA Respondents-Kasowitz2 little bit because I'm doing this chronologically. I3 think it's sort of the most -- at least to me it's the4 way that makes the most sense.5 About the time that all of this was happening6 and it was out in the public realm, especially with7 these banks, that this transformation plan was being8 worked on and worked on hard, the department was at9 work.

10 One of the things that the department was

11 doing was continuing its risk surveillance with respect

12 to MBIA in accordance with the obligations that the New

13 York State Insurance Department had to continue to

14 maintain vigilance with respect to the insurance

15 companies that are subject to its jurisdiction.

16 We've heard argument in this case that the

17 analysis -- that the review and analysis and work that

18 was done with respect to transformation was very, very

19 flawed.

20 The arguments that the banks have made is that

21 it was rushed, it was in secret, it was flawed, and

22 ultimately -- and there have been suggestions that

23 there were ulterior motives on both sides and the like.

24 One thing that -- well, all of that is wrong,

25 your Honor, and one of the glaring facts -- just to

26 kind of pick apart the puzzle here, one of the glaring



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1 MBIA Respondents-Kasowitz2 They were working in connection with the3 surveillance, the financial surveillance of Monoline4 insurers.5 You've heard Hampton Finer's name raised both6 by the banks and discussed by Mr. Holgado. We're going7 to talk about him a little bit later, too.8 So let's see. "This is the e-mail: "Sorry I9 couldn't get back to you sooner."

10 This is to Mr. McKiernan at MBIA:

11 "To put it too briefly, we need to see

12 everyth

Banksvmbia 5.24 Transcript

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Transcript of Banksvmbia 5.24 Transcript