Banksvmbia 6.1 Transcript

7/31/2019 Banksvmbia 6.1 Transcript

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NINA KOSS - OFFICIAL COURT REPORTER

1 (Pages 1457 to 1460)

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SUPREME COURT OF THE STATE OF NEW YORKCOUNTY OF NEW YORK: TRIAL TERM PART 39- - - - - - - - - - - - - - - - - - - - - XABN AMRO BANK N.V.; BARCLAYS BANK PLC;BNP PARIBAS; CALYON; CANADIAN IMPERIAL BANKOF COMMERCE; CITIBANK, N.A.; HSBC BANK USA,N.A., JP MORGAN CHASE BANK, N.A.; KBCINVESTMENTS CAYMAN ISLANDS V LTD.;MERRILL LYNCH INTERNATIONAL; BANK OFAMERICA, N.A.; MORGAN STANLEY CAPITALSERVICES INC.; NATIXIS; NATIXIS FINANCIALPRODUCTS INC.; COOPERATIEVE CENTRALE

RAIFFEISEN BOERENLEENBANK B.A., NEW YORKBRANCH; ROYAL BANK OF CANADA; THE ROYAL BANKOF SCOTLAND PLC; SMBC CAPITAL MARKETS LIMITED;SOCIETE GENERALE; UBS AG, LONDON BRANCH; andWACHOVIA BANK, N.A.,

PETITIONERS,- against -

ERIC DINALLO, in his capacity as Superintendentof the New York State Insurance Department; theNEW YORK STATE INSURANCE DEPARTMENT; MBIA INC.;MBIA INSURANCE CORPORATION; and NATIONAL PUBLICFINANCE GUARANTEE CORPORATION (f/k/a MBIAINSURANCE CORP. OF ILLINOIS),

RESPONDENTS.- - - - - - - - - - - - - - - - - - - - - X

INDEX NO: 601846/09 60 Centre StreetNew York, New YorkJune 1, 2012

BEFORE: HONORABLE BARBARA R. KAPNICK, Justice

APPEARANCES:

SULLIVAN & CROMWELL, LLPAttorneys for Petitioners125 Broad StreetNew York, New YorkBY: ROBERT J. GIUFFRA, JR., ESQ.

MICHAEL H. STEINBERG, ESQ.WILLIAM WAGENER, ESQ.MARIE LOUISE HUTH, ESQ.

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1 PROCEEDINGS2 KASOWITZ, BENSON, TORRES & FRIEDMAN, LLP

Attorneys for Respondents3 1633 Broadway

New York, New York4 BY: MARC E. KASOWITZ, ESQ.

KENNETH DAVID, ESQ.56

OFFICE OF THE ATTORNEY GENERAL7 Attorneys for State Respondents

120 Broadway8 New York, New York

BY: DAVID HOLGADO, ESQ.9 MARK KLEIN, ESQ.

JOSHUA GREENBLATT, ESQ.10

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NINA J. KOSS, C.S.R., C.M.15 BARBARA STROH, C.S.R., C.M.

Official Court Reporters16

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1 PROCEEDINGS - STEINBERG

2 THE COURT: Good morning.

3 MR. HOLGADO: Good morning, your Honor.

4 MR. STEINBERG: Good morning.

5 THE COURT: Well, I guess Mr. Kasowitz will get

6 here.

7 MR. KLEIN: He will be here shortly, your Honor.

8 I will try to take his place for a few minutes.9 THE COURT: You want to sit in his chair?

10 MR. KLEIN: I don't care to do that.

11 MR. GREENBLATT: It's off limits.

12 THE COURT: You know your limits.

13 Good morning, Mr. Steinberg.


15 THE COURT: We will let you continue.

16 MR. STEINBERG: Thank you, your Honor.

17 Before I begin, I would like to sort of revisit

18 what I have covered so far to get to where we are.

19 Yesterday, I showed you again the two tests of

20 solvency under Insurance Law Section 1309, being the

21 subjective loss assessment test, and the objective market22 based reinsurance test.

23 We also talked about the State Respondents'

24 argument that the objective and market based reinsurance

25 prong of 1309 should be disregarded, because it would have

26 meant that during the 2008 and 2009 time period, the very

Page 1460


2 period at issue here, application of the reinsurance test

3 would have meant that every Financial Guarantee insurer was

4 insolvent.

5 But, as I hope I showed you, that wasn't such a

6 far-fetched possibility. The very affidavit submitted by

7 Mr. Moriarity --

8 (Whereupon, Mr. Kasowitz is present at counsel

9 table, at this time.)


11 THE COURT: Good morning.

12 MR. STEINBERG: The very affidavit submitted by Mr.

13 Moriarity in this proceeding described the extensive efforts

14 undertaken by the New York Insurance Department to

15 stabilize, and I quote, a number of FGIs and prevents the

16 collapse of the financial guarantee insurance industry and

17 that's Mr. Moriarity's affidavit at paragraph 20.

18

The idea that that application of the statute would19 have meant that every FGI was insolvent, doesn't seem so

20 far-fetched after all.

21 In any event, as I showed you, the legislature left

22 it to the Superintendent's discretion for such troubled

23 times. Although the first part of the statute says, "when

24 an insurer fails either one of the insolvency tests, and the

25 insurer shall be deemed insolvent, the Superintendent

26 nevertheless, has the discretion regarding how next to


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2 (Pages 1461 to 1464)

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2 proceed."

3 And finally yesterday, I hope we put to rest the

4 notion that the reinsurance prong of Section 1309 is a dead

5 letter or should be treated as such.

6 First, the State Respondents want you to believe

7 that the reinsurance test of 1309 has never been used.

8 MBIA's experts, in turn, relied upon that assertion.9 But, as a matter of law, of course the case law is

10 clear, that the repeated disregard of the plain statutory

11 language isn't a license to keep on disregarding it. The

12 law is the law, and it's to be enforced whether early or

13 late.

14 Second, and as a matter of fact, it turns out that

15 the reinsurance test isn't quite as dead as the state

16 Respondents stridently have suggested.

17 I showed you a brief from the Executive Life

18 Insurance Company of New York, in the New York action filed

19 in Nassau County earlier this year by the New York Attorney

20 General's office on the behalf of Financial Services, the

21 successor to the New York Insurance Department. That's PX22 1252.

23 As we all saw on that brief, the Department argued

24 exactly the opposite of what is being argued here.

25 In that brief, the Attorney General's office wrote,

26 quote, an inability to assume and to reinsure all of ELNY's

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2 policy obligations under the reinsurance and assumption

3 agreement is simply a reflection of the fact that ELNY's

4 assets are insufficient for the reinsurance of all its

5 policy obligations in a solvent corporation," the very

6 definition of insolvency under Section 1309 of the Insurance

7 Law.

8 In ELNY, in that Executive Life case, the policies

9 themselves had become, in essence, uninsurable. That is

10 because when you are looking at a market based test, you get

11 a check, you get to look at what the values would be.

12 Your Honor will recall that I spoke to you a couple

13 of weeks ago about how the New York Insurance Department

14 didn't independently assess MBIA's solvency under the first

15 prong of 1309, the subjective test that considers the loss

16 reserves judgements.

17 Instead, they relied on the solvency opinion

18provided by Bridge. I am not going to belabor the points19 here, as I am sure you noticed the Respondents didn't have

20 much to say about Bridge during their presentation.

21 They offered nothing to dispute the facts that

22 there were errors in Bridge's analysis, that the two and a

23 half weeks allotted to Bridge to conduct its assessment was

24 far less than the time needed to do a real solvency test.

25 Bridge didn't conduct any stress tests. The Bridge

26 opinion was based on September 30th, '08 data that was

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2 nearly five months old at the time of the approval and

3 Bridge did not test MBIA's subjective judgements.

4 Instead, Bridge accepted MBIA's judgment without

5 question in those every one of those Executive assessments.

6 And, the State actually has acknowledged there was a serious

7 disconnect between Mr. Dinallo's belief that Bridge were

8 experts, and Mr. Buchmiller's more dismissive view of9 Bridge.

10 Your Honor, before I turn on to my next subject,

11 yesterday you asked me a question about whether or not the

12 New York Insurance Department and thus MBIA, could rely for

13 its solvency determination in connection with the

14 transformation, could they rely on the statutory examination

15 that was under way at MBIA during the time of the

16 transformation review.

17 I didn't want to speak out of turn yesterday

18 because I wanted to remind myself on the point, but I went

19 back to the exam report, which is, I will just refer your

20 Honor to it -- it's PX 84 -- and that report of examination

21 that was commenced in September 2008 was prepared as of22 December 31, 2008.

23 In other words, that is the exam report that does

24 not consider, in the statutory time period that it is

25 evaluating, the events thereafter or have a forward looking

26 view towards solvency.

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2 It treated, in that very report, the transformation

3 as a subsequent event and it didn't consider the

4 transformation on MBIA's financial condition.

5 So, the exam report, finished 15 months after the

6 approval letter, doesn't help us here either.

7 Now, your Honor, I am going to turn next to a

8 subject that I talked with you about before, and which

9 received some coverage over the past few days, and this is

10 the subject of earned surplus.

11 Earned surplus, you will recall, is contained in

12 the Statute 4105, and 4105(a), just to remind the Court --

13 let's put up slide two. This is what I broke down into what

14 I called the "stop sign" and "speed limit".

15 To remind the Court, the 4105(a) has the

16 prohibition, the flat out prohibition, you cannot declare or

17 distribute any dividend to shareholders except out of earned

18surplus. Then, there is a speed limit test. And, the19 speed limit test describes how much you can allow to be paid

20 out of earned surplus.

21 And, in both and only in connection with the, what

22 I call the speed limit part, that can be waived by the

23 Superintendent -- and let's go to slide three.

24 The New York Insurance Department has acknowledged

25 that the earned surplus requirement is binding on all

26 dividends. This is just from our transcript on May 21,


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4 (Pages 1469 to 1472)

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2 filing that was filed on November 5th, 2008. I want to

3 focus on that date -- November 5th, 2008.

4 The $1 million number, that is for the period

5 ending December 31st, that comes from a regulatory filing

6 after the transformation on February 24, 2009, but is

7 looking as of 12/31/08.

8 So, the question that, at least this brings in my9 mind, is how does one examine the measurement date? What

10 is the date that you are to look at to evaluate earned

11 surplus?

12 And, your Honor will recall that Mr. Holgado chided

13 me a little bit, and said I must have missed this in law

14 school where you talk about a dicta opinion and holding in

15 an opinion he showed you, the 1985 General Counsel's opinion

16 from the Insurance Department. And, in that General

17 Counsel opinion -- and let's pull out the whole thing.

18 So, this is Exhibit 239. Let's put it up. Now,

19 this is Petitioner's Exhibit 239.

20 And, the point of this, which I will go through and

21 in some detail, is that you measure earned surplus for22 dividend purposes based on the latest statement filed with

23 the Superintendent.

24 And, I am going to get to the holding. It's here,

25 but I will give it out. The holding from this opinion,

26 which I know your Honor will review on your own, but it's

Page 1470


2 the proscribed last statement on file, "the last statement

3 on file determines the amount of earned surplus available

4 for distribution." That's the stop sign provision.

5 Now, let's walk through it just a bit.

6 First of all, let's go to the top. This is a

7 February 8th, 1985 Office of the General Counsel opinion and

8 this relates to a situation where apparently, I don't think

9 there was actually an insurance company called John Smith

10 Incorporated, but the John Smith Incorporated Insurance

11 Company had a problem.

12 Because, the Department review of the company's

13 John Smith Incorporated, December 31 -- highlight the first

14 paragraph. Sorry, go to the second one -- sorry about that.

15 The Department's review of the company's

16 December 31, 1983, March 31, 1984, and January 30, 1984

17 statements filed with the Department, show a negative

18unassigned fund.19 The Department, New York Insurance Department,

20 advised the company on October 17th that the dividend in

21 question appears to have been distributed in violation of

22 4105. 4105 is the statute we have been discussing.

23 And, the company, of course, had a response. They

24 are not going to say oh, no, we agree. They come up and

25 say, with respect to dividends, this is the indented

26 paragraph, the position of the company was, the Insurance

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2 Law does State that no dividends can be issued except out of

3 earned surplus. They acknowledge that.

4 But then they say, we are enclosing a copy of the

5 John Smith Insurance Company certified financial statement

6 for the year 1983, which demonstrates net income of $50,319.

7 Therefore, the 50,000 dividend issued earlier in this year,

8 in fact, was out of earned surplus. Okay.9 So, they say hey, I have a certified financial

10 statement and I am golden. Let me go.

11 Well, the Department had a different view about

12 that. And, the Department advised the company that the use

13 of certified financial statements is unacceptable,

14 unacceptable in determining the amount available for

15 dividend distribution.

16 Instead, we are going to come to this, the holding,

17 the prescribed last statement on file determines the amount

18 of earned surplus available for distribution.

19 (Continued on next page.)

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1 Petitioners-Steinberg2 T23 That's the opinion of the Office of General4 Counsel.5 Of course, the company writes back. They6 don't agree, and they say -- let's go to the outer7 indented paragraph: "We've reviewed 4105 of the8 insurance laws and do not find the use of the certified9 financial statements as unacceptable in determining the

10 amount available for dividend distribution.11 "The part of 4105 that refers to statements on12 file with the superintendent refers to the limitation13 as to 10 percent of our surplus policyholders, which14 was satisfied by the amount of our dividend."15 They're referring to the speed limit test.16 Your Honor will recall that when we talked about the17 first sentence of 4105, what I told you when we

18 discussed it was that that provision did not say what19 was the measurement date.20 Instead, the measurement date was referenced21 in what I call the speed limit provision. So they're22 making that point. They're making the precise point I23 told your Honor was going to be an issue.24 Now, the Office of the General Counsel cites25 4105. I'm not going to read it again. It cites26 definitions of earned surplus.


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BARBARA STROH, CSR, CRR, CMR

5 (Pages 1473 to 1476)

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1 Petitioners-Steinberg2 Let's go to the next page. Then it cites3 adjusted net investment income, it cites surplus, it4 does all the things and gets to -- this is the5 paragraph that Mr. Holgado cited to you.6 He cited "having reviewed the correspondence."7 They dispute that they didn't meet the earned surplus

8 test at all as a matter of accounting. They got it9 wrong as a matter of accounting.

10 You know, sort of like the line at the end11 that said an insurer cannot mix and match accounting12 schemes. It's sort of like that.13 Nevertheless, that's when Mr. Holgado stopped,14 and he said that I was relying on dicta. But you know15 what? In fact, the opinion goes on. It says: "The16 company's reading of the underscored portion of the17 foregoing provision of section 4105 to the effect that18 the surplus to policyholders figure is determined from19 the company's filed statement, while earned surplus is20 determined from a certified financial statement, is an

21 unsupported assertion inconsistent with the statute22 together accounting scheme intended by the legislature23 to govern the operations of insurers."24 Let's go back to the first page, so we can see25 where they talk about what was underlined in 4105. Go26 back to the first page, that indented part right there.

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1 Petitioners-Steinberg2 That's what they underline, "the speed limit3 is a test." They're saying no, no, no, you're wrong on4 this.5 Going back to the other page -- just pull it6 out. Don't read the reference anymore. Here's what7 the Office of the General Counsel writes: "The evident8 purpose of the foregoing underscored language is to set9 the parameters and to simplify the computations used in

10 declaring a shareholder dividend, based upon a11 statutory statement required to be filed under the12 Insurance Law and recognized by the legislature,13 bearing in find that earned surplus is a component of14 the unassigned funds (surplus), which in turn is a15 component of surplus to policyholders.16 "One cannot attempt to extrapolate language17 referring to surplus to policyholders without

18 considering the component parts of surplus to19 policyholders.20 "Thus -- here's the holding -- "pursuant to21 section 41050, the source of dividends is limited to22 the earned surplus, which is a component of surplus to23 policyholders."24 Now, this goes back, again, to the first page,25 your Honor, that I pointed to you at the very beginning26 that says that, in the fourth paragraph: "The last

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1 Petitioners-Steinberg2 statement on file determines the amount of earned3 surplus available."4 That is the -- go back to the first page, the5 fourth paragraph. Highlight on December 20. It's that6 last sentence, your Honor: "The prescribed last7 statement on file determines the amount of earned

8 surplus available."9 That -- this is PX 239. That last statement

10 on file was filed on November 5, 2008, and that has the11 $189 million number.12 Now, the New York Insurance Department's13 current disregard of its own general counsel's opinion14 is entitled to no deference."15 I'll cite sort of classic language from16 Skidmore versus Swift, which is a United States Supreme17 Court case on the subject of deference to18 administrative agencies, and that's 323 U.S. 134 at19 page 140:20 "An agency's rulings, interpretations and

21 opinions, while not controlling upon the courts by22 reason of their authority, do constitute a body of23 experience and informed judgment to which courts and24 litigants may properly resort for guidance."25 But it's sort of worse than that here, your26 Honor, because what they're saying is that the guidance

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1 Petitioners-Steinberg2 on file with the Office of the General Counsel, upon

3 which insurers and others rely, can be disregarded, and

4 that is actually arbitrary and capricious. It is a

5 substantial change from the prior practice.

6 A decision -- I will cite from Knight versus7 Amilcon, a 68 N.Y. 2d 975, 1986 opinion: "A decision

8 of an administrative agency who has neither adhered to9 its own prior precedents nor indicates its reason for

10 reaching a different result on essentially the same

11 facts is arbitrary and capricious."

12 Now, it's not just the case that we're arguing

13 this because this is some obscure fact. MBIA's own14 filings repeat and identify that they agree and are

15 filed in accordance with the Office of the General16 Counsel guidance.

17 Let me have slide 6. I have taken these items

18from -- this is the MBIA, Inc. Q-3 2008 10-Q, of19 course, filed with the United States Securities and

20 Exchange Commission.21 "In the 10-Q from Q-3 2008 they disclose to

22 the public as of September 30, 2008 MBIA Corp.'s23 dividend capacity under Insurance Law was approximately

24 $189 million."25 Again, in the 10-K, the annual report for

26 2008: "As of December 31, 2008, MBIA Corp.'s dividend


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6 (Pages 1477 to 1480)

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1 Petitioners-Steinberg

2 capacity under Insurance Law was approximately $1

3 million."

4 Finally, the MBIA Insurance 2008 annual

5 statement, which, as I told your Honor, got filed just

6 a week after the transformation transaction was

7 approved: "In accordance with (3) above on the amount

8 of dividends that can be paid in a 12-month period,9 MBIA Corp. has 1.1 million of dividend capacity at

10 December 31, 2008."

11 If you are looking to MBIA, like the Office of

12 General Counsel opinion, it looks to what is the last

13 statement on file, not some other number.

14 Now, what did respondents say to get around

15 the fact that MBIA Insurance's dividend capacity, as of

16 its last statement, was, at most, $189 million at the

17 time of the transformation? You'd better have some

18 pretty good evidence.

19 Let's put up slide 7. So I've sort of

20 catalogued our evidence, and I'm cataloguing the NYID's

21 evidence.22 We have an Office of General Counsel opinion,

23 we have the MBIA's 2008 Q3 10-Q, 2008 10-K, the annual

24 statement filed with the New York Insurance Department.

25 We've got an e-mail from Ken Gingrass which

26 I'm going to come back to. I mentioned it in my

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1 Petitioners-Steinberg2 presentation before on earned surplus. I think it will3 fit better with the story, and I continue, but what is4 it that they have on the other side of this?5 They have, your Honor, an exhibit that they6 showed to your Honor that -- the state did -- was7 called MRX 907, and an MBIA document.8 Now, MRX 907, let's go to the next slide,9 slide no. 8, please. This was a document related to

10 Progressive and the National Continental Insurance11 Company that was shown to you.12 There are a bunch of problems associated with13 this document, your Honor. I have listed them there,14 and I'm going to walk through them. It has never been15 authenticated. It was a violation of confidentiality16 for, apparently, MBIA to have it.17 This is a document that comes up from MBIA.

18 MR. HOLGADO: I'm going to object specifically19 to that assertion. I'd like to know the foundation for20 that.21 MR. STEINBERG: I'm going to get there. This22 comes from MBIA's files. We're going to walk through23 all of this.24 MR. HOLGADO: Again, this is not true. This25 was used at a deposition of Mr. Serio by an MBIA26 questioner, but it does not come from MBIA's files.

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2 MR. STEINBERG: Please, I'll get to this.

3 MR. HOLGADO: These were actually questions

4 for Mr. Klein at Mr. Serio's deposition.

5 THE COURT: Let's hear what he has to say.

6 MR. STEINBERG: Thank you, your Honor. Thank

7 you, your Honor.

8 I'm just pointing out -- you see the document9 control number on the bottom? They're sponsoring it.

10 It's MBIA NYS EXP 631A. That's not A for--

11 MR. HOLGADO: It's --

12 MR. STEINBERG: I has an A, it's an expert

13 production, whatever. It's not coming from the New

14 York Insurance Department.

15 It wasn't produced by them for reasons I'm

16 going to get into in a moment. It is an incomplete

17 document. There are mistakes in it. There are

18 unexplained -- I won't call them alterations. I will

19 call them discrepancies.

20 It is contradictory, it is unsigned, it is

21 ineffective, and it contradicts the exam report on file22 for the National Continental Insurance Company. I'm

23 going to now walk through and show you every single one

24 of those failings.

25 MR. KASOWITZ: If I might, your Honor, the

26 document didn't come from our files. It came from the

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1 Petitioners-Steinberg2 Insurance Department, and I guess the only point that I3 would make about it is, if this was such a -- I'm4 presuming that the banks attended this deposition and,5 presumably, if they did attend this deposition, and if6 there were all of these purported defects with respect7 to this document, I'm quite confident -- I wasn't at8 the deposition, but I'm quite confident that all of9 these purported defects and failings were raised as of

10 the time of the deposition as objections and the like,11 so.12 MR. STEINBERG: We will get to that.13 THE COURT: Let him finish his comment.14 MR. STEINBERG: Thank you your Honor.15 MR. KASOWITZ: I'll direct my comments to the16 court. I think counsel should as well.17 So if there are -- I guess our position would

18 be that if there are places in the record at the19 deposition where all of these purported issues were20 raised, I think that that's probably the right way to21 do it.22 THE COURT: Excuse me.23 All right, again, you will have an opportunity24 to discuss this further. I'll listen to what you said.25 If you're going to make an objection, I'd rather you26 just stand up and say objection, rather than start


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7 (Pages 1481 to 1484)

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2 talking. It's very hard for the record, which they're

3 trying very hard to make.

4 MR. HOLGADO: Yes, your Honor.

5 THE COURT: I just need you to do that.

6 MR. KASOWITZ: It's fine, your Honor. They

7 said it was a document from our files.

8 It wasn't from our files. It was a document9 that was produced from the Insurance Department with

10 respect to this expert, so that's just misleading to

11 say it's from our files. We'll deal with it.

12 MR. HOLGADO: In addition, it's a violation of

13 confidentiality. The demonstrative has a question

14 mark. I'm curious what the foundation is.

15 THE COURT: Why don't we hear what he has to

16 say, and then we can deal with it, okay?

17 MR. STEINBERG: Thank you, your Honor. Let's

18 start with the most basic fact. They say it's been

19 authenticated.

20 In fact, the only person that was shown this

21 document was former Superintendent Serio, who was shown22 this at his deposition, and he did not recognize this.

23 This is slide 9.

24 "Have you seen this document or any part of it

25 before today?

26 "Answer: I can't recall that.

Page 1482

1 Petitioners-Steinberg2 "Question: Does this document refresh your3 recollection that while you were superintendent of4 insurance of the State of New York, the National5 Continental Insurance Company made an application to6 the department for approval of an extraordinary7 dividend and for approval of a stock redemption at that8 time same time?9 "Answer: It does not."

10 Now, Mr. Holgado on May 22, 2012, at page 90111 of the transcript, told your Honor that Mr. Serio12 himself approved the transaction.13 Let's put up exhibit 907. Let's flip to it14 much let's flip to the very last page of it because15 we're going to be spending a little bit of time on it.16 This is an unsigned approval letter that17 doesn't have Mr. Serio's name. It has someone named

18 Steve Wade. It is unsigned. I will come back to that.19 Now, how does this document get here? This is20 my question of confidentiality. Let's go to slide 10,21 please.22 They are saying, you heard MBIA counsel saying23 it came from the files of the New York Insurance24 Department.25 Well, your Honor will recall that under26 Article 15 of the New York insurance laws one of the

Page 1483

1 Petitioners-Steinberg2 provisions where the application here was produced and3 afforded confidential treatment, right, this4 application was confidential.5 So, too, 1505C. Now, we have cited from 1504.6 That's an application under 1505C, but 1504C is the7 provision of the New York Insurance Law that says that

8 describes the confidentiality.9 The reason why I have the question mark is

10 because there's an exception to it, but we have not11 seen it.12 It's superintendent -- the New York Insurance13 Law 1504C says: "The superintendent shall keep the14 contents of each report made pursuant to this article15 and any information obtained in connection therewith16 confidential and shall not make the same public."17 Now, there is an exception here, your Honor.18 It is you can't do it "except without the prior consent19 of the controlled insurer, to which it pertains unless20 the superintendent" -- you could do it "under consent

21 or unless the superintendent, after notice and an22 opportunity to be heard, shall determine that the23 interests of policyholders, shareholders or the public24 will be served by the publication thereof."25 The reason why I have the question mark is I'm26 waiting to see the order. I'm waiting to see the

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1 Petitioners-Steinberg2 consent of the National Progressive Northeastern

3 Insurance Company or the National Continental Insurance

4 Company that would allow publication of this document.

5 Now, of course, this, again, raises something

6 we've been battling in this case a lot. It's what we7 call the sword-shield problem, where some things, they

8 give us, and some things they don't, and it's9 selective.

10 But let's go to slide 11 because there are

11 some inconsistencies in this document itself. Now,

12 let's actually put up the document. Let's go back to

13 MRX 907, and this is a document that is dated November14 14, 2001, your Honor.

15 This is a document dated November 14, 2001.16 It has a notation around the side. Let's highlight

17 that. "SW/EC." There's an "11/26/01" notation. Then

18there's a notation which I think says "received19 11/16/01."

20 I can sort of guess, but I don't know, that21 the "SW" is Steve Wade to whom this is provided. And

22 he indicates or makes a notation on 11/26/01, but23 there's another notation on 11/16/01.

24 But what's interesting in my mind, your Honor,25 is that part of this document at page 6/3/22 -- so it's

26 about the fourth page of this document, you see in the


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8 (Pages 1485 to 1488)

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1 Petitioners-Steinberg2 corner -- let's blow it up a little bit more, and let's3 yellow that.4 That says "SDP 11/6/01." I don't know who5 SDP" is. I don't know -- you know, maybe they missed6 the 6. Maybe it's a 4.7 MR. HOLGADO: Maybe it's a 10.

8 MR. STEINBERG: Exactly.9 MR. HOLGADO: Maybe it's a 16.

10 MR. STEINBERG: Maybe it's a lot of things.11 But we don't know.12 So, now, what is also interesting about the13 letter -- let's go to the second page of it. It14 describes what is contained in the letter, and that's15 in the very bottom paragraph, I guess in this case the16 penultimate one:17 "Information supporting this request for18 approval of extraordinary dividend and return of19 capital is attached annual pro forma financial20 statements showing the effect of the dividend and

21 return of capital and NCIC's and PNEIC's 2000 annual22 statements and the second quarter 2001 statutory23 statements."24 As to the romanette 2 (ii) documents, those25 are not here. Those are not here. They did not26 provide, as part of MRX 907, those documents, haven't

Page 1486

1 Petitioners-Steinberg2 seen them, not there. So, therefore, not complete.3 Moreover, the pro forma financial statements4 showing the effect of the dividend and return of5 capital -- let us go to the fourth page of this6 document. This is a document that Mr. Holgado showed7 you. This is a pro forma statutory balance sheet. It8 has actual results of 6/30/01.9 You see that header there? It has a projected

10 12/31 number, and I want to focus on, this is as of11 June 30.12 Now, if you turn to the next page, again, sort13 of same thing, a pro forma sheet, actual results as of14 6/30 projected as of 12/31. That is -- this one has15 that which I don't understand the "11/6/01 SDP" in the16 corner. Don't know. Unexplained.17 Now, what's interesting to me is actually that18

the next page, your Honor, has actual results for19 9/30/01. That is not one of the listings of what this20 document was to contain in the second page.21 So I just don't know where this document came22 from , and this one is -- now, you will recall that Mr.23 Holgado talked about how you were looking at the 6/3024 results versus the 12/30 results.25 I'm going to talk about it in a minute, but,26 in fact, there were apparently 9/30/01 results, and

Page 1487

1 Petitioners-Steinberg2 what comes out of this -- because I'm coming back to it3 --you see the earned surplus for quarter 3 '08 on the4 right-hand side middle of the page? Actual unassigned5 funds? It seems to get to $8 million.6 Now, if you look -- and a now it says, of7 course, earned surplus for quarter 3 is 1 million and

8 77, but that isn't really quarter 3 because if you look9 at the projected numbers, that looks to come from that.

10 (Continued on next page)11 (End of take 2)12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Page 1488


2 T3

3 MR. STEINBERG: I am just, I am sort of perplexed

4 by this.

5 What we do have, is they say the earned surplus, as

6 of 12/31, would be over eight million dollars. The actual

7 unassigned funds as of 9/30 would be $7 million. This is a

8 bit of a mystery, your Honor.

9 THE COURT: Can I ask you, when did you first see

10 this document?

11 MR. STEINBERG: We saw it at the Serio deposition.

12 THE COURT: When was that?

13 MR. STEINBERG: The date of that would have been

14 last July. And, your Honor, they have never used it for

15 this purpose until this trial.

16 So, you will get your chance. Please.

17 THE COURT: I asked a question. He answered it.

18You have something to say, say it later. You can't call out19 answers.

20 MR. STEINBERG: So, now, let me sort of, they

21 wanted to use this document to contradict the New York

22 office of, the Insurance Department, Office of General

23 Counsel's opinion on when you can -- once the when is the

24 measurement date, because Mr. Holgado said look, they didn't

25 have enough money, they paid it any way because they had

26 these projections, look, this is all swell.


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9 (Pages 1489 to 1492)

Page 1489


2 I wanted to show your Honor the $7 million number

3 because, and let me, sorry, let me find this for a moment.

4 I am handing out to counsel a document that we have marked

5 as Exhibit 1271, which is the report on examination of the

6 National Continental Insurance Company.

7 If I may hand it up to your Honor?

8 (Handed).9 MR. STEINBERG: Now this, your Honor, is

10 Exhibit 1271, which we will put up as slide 12.

11 This is the report where the Insurance Department

12 goes through and identifies -- go back please -- identifies,

13 does an exam and sort of identifies what happened over the

14 period and evaluates dividends, among other things that it

15 looks at.

16 Now, what if you -- go back to the very first page.

17 I am sorry, let's go back to the mystery exhibit of 907, the

18 mystery exhibit of 907. Let's blowup the first page that

19 shows what the request is for.

20 They are asking for an extraordinary dividend, you

21 see it in the very first line, of up to $8 million. Okay.22 That's what they want, the extraordinary dividend of up to

23 $8 million.

24 Now, let us put up the exam report that has been

25 marked as PX 1271, and let's go to the page. Let's put it

26 up as a slide. I will go to the slide. Let's do that.

Page 1490


2 Now, let's go to the next one, Roger. This is slide 12.

3 So, I took from the letter payment of extraordinary

4 difference -- sorry.

5 I took this from -- let me go back. I just want to

6 make sure you are following completely, and I just lost you.

7 The last page of Exhibit 907 is this unsigned

8 approval letter. Let us go back to that. Let's blow this

9 up.

10 This letter refers to your letter of November 14th,

11 2001, where you requested that the insurance company be

12 permitted to pay an extraordinary dividend in the amount of

13 $8 million to its parent.

14 Right now, we don't -- if you look at the next

15 paragraph -- we don't object to the redemption of shares and

16 payment of an extraordinary, extraordinary blank -- it's,

17 there is a little bit of a typo there, of eight million

18dollars.19 Now, what does the exam report say about this?

20 Your Honor, let's go to the exam report 1271, slide

21 12.

22 The exam report, your Honor says, there was an

23 extraordinary dividend in 2001 of $6 million. $6 million.

24 Your Honor, not $8 million -- $6 million. And that, it's

25 quizzical to me too, your Honor, this unsigned letter says

26 $8 million, the exam report, 1271, says $6 million.

Page 1491


2 Now let Lieutenant me go full circle. We go back

3 to 907, and we go back to the page that, I don't know from

4 whence it came, keep going, it's the, it's not the pro

5 forma, it's this page.

6 Blow up the right hand side of the page.

7 They have actual unassigned funds which is being

8 equivalent to earned surplus of seven million dollars.9 So, let's assume that this is actually as genuine

10 as the dollar bill in my pocket. This is, would be in

11 excess of the $8 million of earned surplus. That would

12 work.

13 I am not vouching for this document. I have no

14 idea from whence it came, but I want to go back to one other

15 point.

16 That letter is unsigned. The approval letter

17 which has typos in it, let's go back, let me go to slide 13.

18 It has a typo. "The extraordinary -- " blank --

19 "of 8 million", it is inconsistent with the record, the

20 report and it is unsigned.

21 Unsigned means something in this context, your22 Honor. The Insurance Law Section 3002, which we have

23 talked about before with you, "whenever there is any

24 provision of this chapter, the Superintendent is authorized

25 to grant any approval, authorization or permission or to

26 make any other order, such order shall not be effective

Page 1492


2 unless made in writing and signed."

3 Signed by the Superintendent or, by his authority.

4 We don't have a signed version of this, your Honor.

5 We just don't, and it's inconsistent with the file.

6 If there was any doubt "regulation one and order is

7 an official act of the Superintendent of particular

8 application, including approval and like official acts

9 having legal consequences."

10 That letter has legal consequences. It is what is

11 allowing the dividend to occur.

12 So, this is a long winded way, and I appreciate

13 your Honor's patience, of saying we have no idea how to

14 solve the mystery of that document. But, whatever it is, it

15 doesn't help them.

16 Now, I want to turn, your Honor, and I am going to

17 be brief on this point, to the measurement date does not

18apply. This is a hypothetical point.19 What happens, how do you make the measurement date

20 not apply here? And how the Respondents want to make the

21 measurement date not apply is to say simultaneity.

22 So, even if we throw out the Office of the General

23 Counsel's measurement date, MBIA Insurance did not have

24 1.147 billion earned surplus before the transformation.

25 And, you have heard a lot about simultaneity over

26 the past weeks, and most of it focused on language. We


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10 (Pages 1493 to 1496)

Page 1493


2 point out all the language, all the evidence that supports

3 that the transactions were sequenced. Respondent pointed to

4 a couple of instances where other language was used and they

5 argue the application showed it was simultaneous.

6 We showed that the argument that the approval

7 letter -- I know your Honor is going to read this -- I am

8 not going to go through it. It's just, I am not going to9 spend my time here with your Honor focusing on words of

10 sequence, nor am I going to discuss, spend my time pointing

11 out that Jane Boisseau, has double or triple hearsay

12 problems on her quote unquote, of her understanding on the

13 Department's view of simultaneity.

14 I invite your Honor to look at that affidavit for

15 that.

16 I am not going to spend time here showing how

17 Respondents have avoided language from the application that

18 supports our points, but I am confident the Court is going

19 to go back and look at all of this.

20 Instead, I am going to focus on something where I

21 think I can help the Court in your analysis.22 I want to focus on some numbers. Let's put up

23 slide 14.

24 Now, what I have done is, there was an earlier

25 e-mail and this is -- this is good, it's in the morning.

26 It's not in the late afternoon, and copy has been made.

Page 1494


2 What I am focusing you on, there is a December 15th, 2008

3 e-mail from Kenneth Gingriss at the New York Insurance

4 Department, who is looking at pro formas that describe this

5 transaction.

6 This is from the administrative record. It's a

7 242-20, the 242-20, and this is the e-mail back I will start

8 with. I will start with the financial statement first

9 because I want to sort of get to that.

10 If you look, this is an MBIA Corporation statutory

11 basis statement of admitted assets, liability, and capital

12 and surplus, as of September 30th, 2008. So, they take the

13 September 30th numbers and then they perform a

14 transformation analysis based on it.

15 Now, I am going to tell you from the outset that

16 this analysis, the numbers in it prove to be wrong. But, I

17 am not relying on the numbers for that. I am relying on

18the numbers for a different point.19 They came back on the next day and said oh, we left

20 out some numbers. It actually turns positive. Everything

21 is good, everything is swell.

22 What I am relying on is the methodology that the

23 Department looked at to say up to -- to follow the earned

24 surplus numbers because it is important.

25 Now, the New York Insurance Department focused on

26 earned surplus after each of the component transactions.

Page 1495


2 If you look on this exhibit, I have highlighted the bottom

3 line, the proverbial bottom line that says "earned surplus

4 after each transaction".

5 And, in the upper left hand part, there is a

6 beginning balance, and then there are three transactions,

7 the dividend of stock, a reinsurance agreement and a

8 dividend of share redemption.9 What happened first was when, in the, if you did

10 the MBIA Illinois dividend as the first transaction, you see

11 up at the top it says 185. That 185, because it's being

12 dividended up, out of earned surplus, taken away, you have

13 to deduct for that.

14 Well, if you deduct for that, you get a negative

15 12. Again, I am focusing on the methodology, not the

16 numbers. It came up in the very first instance with a

17 negative. Okay.

18 But then they said, oh, we have this reinsurance

19 agreement and in the reinsurance agreement there is a

20 release of contingency reserves, which I will come back to.

21 There is a seeding commission of $492 million and look, in22 the next line, you add those two together and you get 14 --

23 one billion four hundred sixty eight thousand in the third

24 step.

25 But then, I am going to dividend out 1.124 billion,

26 and that's going to leave me $324 million of remaining

Page 1496


2 earned surplus. Okay.

3 It's, there were three different steps and they

4 followed the earned surplus in each.

5 So, the starting earned surplus was greater than

6 zero, the ending earned surplus was plus 324 million.

7 What does The Department say?

8 "Dear Ms. Tam and Ms. Boisseau, this proposal does

9 not seem to work legally. MBIA Insurance does not have

10 sufficient earned surplus to dividend the stock of MBIA

11 Illinois, as MBIA Insurance is left with an earned surplus

12 of negative 12 after the dividend."

13 These sequences matter, your Honor. It was

14 illegal. I told you the next day they came back and came

15 up with a different set of numbers. That is not my point.

16 Now, this conclusion is sort of not surprising and

17 I hope puts to rest the view that we can have all of these

18simultaneous transactions and mortgage transaction where19 everyone is sitting around the table, release liens, handing

20 out money, do this, do that. That's not the point, your

21 Honor. Each component of a mortgage transaction is lawful

22 on its own.

23 But here, the use of simultaneity, a mushing this

24 together, looking at the start and end only, would be used

25 to avoid the legal requirements of Section 4105.

26 Now, your Honor, I have some bad news. The bad


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12 (Pages 1501 to 1504)

Page 1501


2 created on the last -- this is the last pro forma in this

3 transaction and it's from the administrative record.

4 Now, if you look, your Honor, at the reinsurance

5 agreement column, to the left of it unassigned surplus.

6 New Co. contingency reserve one billion three hundred

7 fifty-seven thousand. Okay. That's the release of

8 contingency reserves, and then there is a ceding commission9 of $497,000,000. That is the ceding commission that got

10 paid back to MBIA Insurance company as reimbursement for

11 their efforts in writing the insurance policies in the first

12 place.

13 The total of those listed in the earned surplus

14 item here essential $1,855,000,000. That is the total of

15 1357 plus 497 plus the one that is to the left of the 1855.

16 Okay.

17 In other words, they included that to get to the

18 1,855,000,000 contingency reserve that their accountant both

19 put in his expert report and put in the, and testified to at

20 his deposition was not possible. That number is not a

21 basis for earned surplus and that's what he has testified22 to.

23 The 497 million, we can debate that again on an

24 accounting matter, when it was earned, whatever, but

25 whatever that is, whatever that is, we know that 497 million

26 is less than the dividend that was 1.147 billion here.

Page 1502


2 That's what we know.

3 Now, there is just not enough earned surplus.

4 And, without, without that, we can talk about simultaneity,

5 we can talk about all of that, but this is from their

6 accounting expert, your Honor and this MBIA's accounting

7 expert.

8 Respondents have never explained how they could

9 create earned surplus from the transformation. In fact,

10 and I noted this at the beginning, Mr. Kasowitz pointed out

11 from our brief, where we called it legal alchemy. Mr.

12 Kasowitz is right, I need to change it. It's actually

13 illegal alchemy. They made something out of nothing and it

14 wasn't right.

15 Your Honor, I will turn to one other topic here

16 this morning. I am going to turn to the topic of Black

17 Rock. I hope to be brief about this. I have some things

18to say, but I will endeavor to be brief.19 And, I will admit that I was sort of surprised by

20 the attacks on Black Rock. Both the NYID and MBIA

21 expressed nothing short of moral indignation that we could

22 not, that we did not discuss with the Court or bring to the

23 Court's attention conflicts of interest. I was taken aback

24 by that. I really was surprised.

25 I guess I was not as surprised by MBIA's taking

26 that position, but I was sort of more surprised that the

Page 1503


2 Department did.

3 Petitioners have asked in this case a very direct

4 question -- what if MBIA had hired Black Rock?

5 We did not ask, although the Respondents both

6 pretended there was a different question asked. They all

7 said what if the Department hired Black Rock. That wasn't

8 the question.9 Why didn't the Department use third parties to

10 analyze this complex data? It can't be that there was no

11 time, because Black Rock said it could do it with plenty of

12 time.

13 But instead, both the Department and MBIA have come

14 to a new reason why it would have been inappropriate to

15 engage the most prominent third-party analyst in and the one

16 that the Department itself originally put forward, Black

17 Rock.

18 This is, of course, back peddling, but what's

19 worse, it's contrary to the evidence and it's contrary to

20 something else -- common sense.

21 You both heard Mr. Holgado and Mr. Kasowitz22 attacking Black Rock as being conflicted because they

23 supposedly were too closely aligned with the policyholder

24 Petitioners here. Right.

25 I mean, and the only thing that Black Rock was

26 close to being, it was too close to, was too close to being

Page 1504


2 right. We showed you the numbers. We showed, in their

3 $14 billion, and based on case losses on just 25 percent of

4 their exposure, we showed you how Lehman's based case losses

5 on the same deals were worse.

6 So, if you are really trying hard to close your

7 eyes to some eye popping losses, I guess you better come up

8 with a real good excuse why we should disqualify Black Rock.

9 We heard Black Rock was conflicted. I guess Lehman

10 was conflicted and Raymond James and Perella Weinberg

11 couldn't be used, so everybody was conflicted, your Honor,

12 everybody except MBIA.

13 Now, let's just do address and quickly dispose of a

14 factual point.

15 The NYID obviously knew about a supposed conflict

16 and yet, they still suggested using Black Rock for a

17 third-party analysis. Let's put up slide two.

18 This is just, I want to point this out, Black Rock

19 buys Merrill Lynch, Merrill Lynch had an interest in Black

20 Rock. That was a deal, was announced on --

21 THE COURT: Bank of America.

22 MR. STEINBERG: Bank of America buys Merrill Lynch.

23 Merrill Lynch had the interest in Black Rock, September 15,

24 2008. Public deal, not secret, nothing. Everybody knows

25 about it.

26 Mr. Finer tells MBIA in November, roughly two


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13 (Pages 1505 to 1508)

Page 1505


2 months later, that you know, we may want to have a

3 third-party analysis. Others have used Black Rock with some

4 success and it would assist us in our fair and equitable

5 determination.

6 It's hardly the case, your Honor, that the New York

7 Insurance Department felt that this was such a grave

8 conflict that Mr. Finer wouldn't have put this forward two9 months after that deal was announced. But, that's okay, we

10 will get to that.

11 Now, MBIA claims that these, that Black Rock is

12 riddled with conflicts of interest in this situation. But,

13 I think, before we get to the issue of whether there were

14 real conflicts, let's think about this really hard.

15 Let's ask the question, were there, in fact,

16 conflicts that prevented Black Rock's exclusions from

17 analyzing this?

18 (Continued on next page.)

19

20

21

22

23

24

25

26

Page 1506

1 Petitioners-Steinberg2 T43 Absolutely not. What was the supposed4 conflict?5 As I understood their argument, the supposed6 conflict was that a BlackRock affiliate, i.e.,7 BlackRock Solutions -- BlackRock affiliate, not8 BlackRock Solutions, held client investments that might9 in turn be insured by MBIA.

10 So let's think about it. So BlackRock, which11 invests on behalf of its clients trillions of dollars12 in assets, and among those assets invested for other13 clients may be policies insured by MBIA.14 So I thought about that conflict for a little15 bit and the moral outrage that we received, and here's16 what I came out with: Your Honor, how dare we suggest17 that a firm that might have an interest in protecting18

policyholders have a place at this table?19 Right? How dare we? It is galling. It must20 have been horrible, your Honor, that a firm somehow21 aligned with the interests of the policyholders, not22 the shareholders, would actually be able to participate23 in valuing the most highly volatile structured finance24 instruments that our clients paid insurance on.25 That is terrible. I guess I should have just26 left MBIA, the stockholder, to be the only participant

Page 1507

1 Petitioners-Steinberg2 in discussions with the New York Insurance Department.3 It is horrible that I didn't think it was4 compelling enough to raise any conflicts. I'm sorry5 about that. I thought that it was sufficient that they6 were even arguably aligned with policyholders.7 But, you know, including policyholders in this

8 dialog actually seems like a pretty good idea.9 You know what? It's such a good idea, that

10 under the New York Insurance Law, it's part of that11 law.12 You heard argument about how the department13 can delegate out its regulatory function. But you know14 what? The argument is actually wrong. Section 310 of15 the New York Insurance Law actually welcomes16 policyholders to scrutinize the financial condition of17 insurers on behalf of the department.18 Here is section 310(a)(1): "Whenever,19 pursuant to any provision of this chapter, the20 superintendent shall determine to examine the affairs

21 of any insurer or other person, he shall make an order22 indicating the scope of the examination and may appoint23 as examiners one or more persons not employed by any24 insurer or interested in any insurer, except as a25 policyholder. You could appoint someone aligned with a26 policyholder to conduct the exam."

Page 1508

1 Petitioners-Steinberg2 No great surprise there, your Honor. They're3 the interested people. They're the people to be4 protected, not the stockholders. Not the stockholders.5 The policyholders.6 Now, not only is the exclusions of BlackRock,7 for conflict reasons, inconsistent with the8 department's primary duty, but it's also inconsistent9 with Insurance Law 310 itself.

10 Now, Mr. Kasowitz has stated it would be11 difficult to think of a third-party consultant that has12 more conflicts of interest in this situation than13 BlackRock, and that's from May 24, 2012 at 11:22, lines14 13 through 20.15 As this court is already aware from the other16 action pending before your Honor, BlackRock has shown17 itself to not be shy about confronting banks, including18

in the Article 77 case.19 I'm not going to dwell on it, but you know all20 about it. BlackRock and Pimco brought claims against21 banks, including B of A, on behalf of BlackRock's22 clients.23 BlackRock and Pimco brought claims because24 their clients wanted to assert claims.25 I want you to keep that in mind because it's26 sort of an important point in this case. In other


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14 (Pages 1509 to 1512)

Page 1509


2 words, BlackRock and Pimco are being criticized because

3 they have put their clients' interests, to whom they

4 are fiduciaries, ahead of the interests of the

5 stockholders.

6 I think there's a lesson to be learned in

7 there somewhere, and maybe we can find some insurance

8 statutes that sort of bear on that issue.9 But I would say that, look. At the end of the

10 day MBIA makes the assertion, as the shareholder, that

11 they should have been the only one participating in it.

12 And they actually had the guts to argue that

13 someone who might have an interest aligned with the

14 policyholders should be excluded from the process at

15 the onset.

16 And the chutzpa, to use Mr. Kasowitz's words,

17 I guess what he meant is that Mr. Finer had some

18 chutzpa to suggest that MBIA hire BlackRock to enable

19 the department to make its fair and equitable

20 determination.

21 Maybe that's why the department never made22 that determination, but Mr. Giuffra will come back to

23 that.

24 MBIA's position on BlackRock is that the best

25 modeling firm in the world should be excluded in favor

26 of using the biased views of MBIA.

Page 1510


2 MBIA, who acknowledges that they have a

3 fiduciary duty but has engineered this transaction

4 which benefitted its shareholders, to the detriment of

5 its policyholders, actually has the guts to come in and6 argue that someone who might protect policyholders

7 should be excluded from the conversation.

8 I have a different word from chutzpa for that.

9 It's a shonda, and I will translate that for both the

10 benefit of Mr. Giuffra and Mr. Holgado, but a shonda is

11 a shame. It is a deep abiding shame, and it is a

12 shonda for MBIA to argue such a thing.13 Now, of course, MBIA--

14 THE COURT: The court reporters have told me

15 that they're getting a whole new dictionary out of this

16 case.

17 MR. STEINBERG: And it's S-H-O-N-D-A.

18No, of course, MBIA would not be the first to19 raise the question of conflicts with BlackRock, and we

20 would at least have expected that MBIA and the Attorney

21 General's Office would at least give the complete22 picture of any conflicts and perhaps explain why

23 BlackRock was perfectly acceptable for all the

24 contemporaneous monoline restructurings that MBIA told

25 you about and the department approved but now

26 apparently is wildly conflicted.

Page 1511

1 Petitioners-Steinberg2 So let us put up slide BR 4, and I won't read3 this -- I am going to read this, your Honor, actually.4 The GAO -- okay, yes, thank you.5 Mr. Paltrowitz' expert report, affidavit6 indicated that BlackRock Solutions had been hired by7 Ambac, CIFG and Syncora, all of the ones that were

8 insolvent and on the verge of rehabilitation in late9 2008 and 2009.

10 On January 22, 2009 the Department of11 Insurance announced that they had approved various12 agreements to commute trouble credit default swaps and13 reinsure municipal bonds of CIFG.14 Where was BlackRock at the table there?15 BlackRock was at the table on behalf of the monolines,16 your Honor. The monolines.17 BlackRock Solutions -- I'll talk about it in a18 minute. When they want to talk about a black box, what19 that means is, among other things, BlackRock tries to20 give its best advice to everyone who asks, everyone who

21 pays for it.22 That's why governments and central banks and23 the largest financial companies in the world trust24 BlackRock Solutions.25 Now, your Honor, if this is a convenient point26 to stop, I want to very quickly end, and then turn the

Page 1512


2 table over, if that is acceptable to your Honor.

3 THE COURT: Yes, so should we take a short

4 break?

5 MR. STEINBERG: A very short break right now,6 because I want to make this shorter, you know.

7 THE COURT: All right, so we'll take a

8 ten-minute break.

9 MR. STEINBERG: Thank you, your Honor.

10 (Short recess taken.)

11 THE COURT: Okay, have you got anything more

12 interesting to talk about?13 MR. STEINBERG: Yes, exactly. After

14 accounting earned surplus and solvency, anything could

15 be better; I agree with your Honor.

16 But I am going to talk to you about black

17 boxes for a minute, and MBIA simply proclaims that

18BlackRock could not have been relevant when Mr.19 Buchmiller was doing his review because Mr. Buchmiller

20 was only interested in MBIA's model because he could

21 witness every calculation firsthand.22 But MBIA's own model makes use of third-party

23 software such as Intex, which is itself not fully

24 transparent.

25 Mr. Buchmiller testified that he called Mr.

26 Paltrowitz to ask questions about structured finance


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15 (Pages 1513 to 1516)

Page 1513


2 modeling in the course of his MBIA review.

3 So the notion that blackRock's methodology

4 made its views irrelevant is contrary to the evidence,

5 and that's from Mr. Buchmiller's second deposition at

6 pages 194 to 196.

7 In any event, page 9 of the now unredacted

8 Buchmiller and backdated memo says that loan level9 statistical models such as those of BlackRock are,

10 quote, "probably better but more complex," end quote.

11 This comment, of course, was redacted until

12 last week.

13 Now, MBIA argues that every other analysis of

14 its likely losses, Lehman, FSI, BlackRock, were all

15 unimportant because they are all black boxes.

16 While BlackRock's RMBS model is a computerized

17 model, it's not quite a black box.

18 Petitioner gave respondents the outputs of the

19 model. They could provide the input. They could do

20 whatever they want.

21 The fact is we gave them an opportunity to run22 BlackRock's models and test those conclusions.

23 Their actual expert, James K. Finkel, managing

24 director at Duff & Phelps, never did so, but we

25 understand some of his assistants did.

26 So while MBIA's expert purports to criticize

Page 1514

1 Petitioners-Steinberg2 BlackRock's model, he personally never logged onto the3 system.4 He, likewise, declined to use his own model to5 validate MBIA's loss estimates or BlackRock's.6 Respondents also deposed Mr. Paltrowitz for7 eight hours, had every opportunity to ask Mr.8 Paltrowitz about anything to do with its model.9 He explained BlackRock's model as as

10 transparent as its clients wish, and these clients are11 awfully sophisticated.12 BlackRock provides as much information as the13 clients want about the millions of computations that14 underlie its conclusions.15 Calling something a black box, your Honor,16 doesn't make it unreliable or irrelevant. It means17 that it's more complex than a simple XL chart, and

18 people whose expertise is sought out to -- and a block19 box is a way of saying that it is proprietary20 information.21 In other words, that somebody spent millions22 and millions of dollars to invest in this system, not23 just run an XL chart.24 Just because something is not easily seen does25 not mean it's not valid or worthless.26 So let's be basic. I can look at a bicycle.

Page 1515

1 Petitioners-Steinberg2 I can see precisely how it works. I can see the3 pedals, I can see the chain, I can see the gears, I4 know how it works. No black box there.5 My car? A little bit more complicated. I can6 open the hood, I can see the parts, I know where the7 oil goes, I know where the gas goes, I know where the

8 radiator fluid goes, I sort of know how it works.9 But it's gotten a little bit more complicated

10 in recent years. But I still can trust it for11 propulsion.12 But, man, when I get on an airplane, I am13 putting my life in just God's hands because I cannot14 see how a jet engine works. I see a big turbine. I15 don't know how the fuel injections work, I don't know16 how they ignite it, how they run it. I know nothing.17 But that doesn't mean that the jet-propelled18 engine is any less safe because I can't see it and poke19 around with it before takeoff.20 Now, this basic common-sense observation is

21 confirmed by the leading case from the Court of Appeals22 on the admissibility of expert evidence from23 proprietary methods.24 That is the People versus Wesley case, and in25 that case the Court of Appeals approved DNA testing26 using proprietary methods.

Page 1516

1 Petitioners-Giuffra2 "Despite," to quote the Court of Appeals in3 People v. Wesley, "little peer review of 'proprietary4 DNA testing methods,' the court held that DNA evidence5 is admissible because it was not the Court's function6 to determine that the evidence is true. That should be7 left to to trier of fact."8 Now, we live in a complicated world, but that9 complexity is what enables us to advance.

10 We all won't understand every single thing,11 but somebody did, and someone could, and you could12 check it, and if you wanted to investigate it -- if13 they wanted to investigate the models, they could have14 run they will, they could have changed the inputs.15 But we're talking about complicated and, you16 know, highly-invested-in assets.17 By the way, the ultimate test under Frye is18

acceptability. BlackRock -- there is no one disputing19 that BlackRock's models, its analysis is the most20 highly valued in the world.21 If they had any valid criticism of the actual22 loss estimates that BlackRock produced, they would have23 offered them.24 They didn't because they can't.25 Thank you, your Honor.26 THE COURT: Thank you.


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18 (Pages 1525 to 1528)

Page 1525

1 Petitioners-Giuffra2 iterating to a solution," Mr. Buchmiller says "3003 million is close enough to the statutory minimum4 surplus of $65 million to be an acceptable5 break-the-bank scenario."6 (Continued on next page)7 (End of take 4)

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1 PROCEEDINGS - GIUFFRA

2 T5

3 MR. GIUFFRA: Then, he goes on to say, given that

4 they had reasonably demonstrated all Co. New York can

5 survive a significant and continuing bear market with a

6 reasonable expectation of liability even under very, if not,

7 extremely distressed conditions.

8 That's page 284 of the Bate stamp numbers.

9 Slide 15.

10 This is right on, this is page 33 of the memo, your

11 Honor. This is something that, your Honor, were the

12 unredactions of.

13 Mr. Buchmiller is saying, quote, although

14 personally more pessimistic about Federal regulatory and

15 legislative responses to the current financial panic and

16 economic downturn, I have, for my purpose here, accepted

17 MBIA's assumptions above, as they are closer to the February

1817th consensus than mine again."19 What we know, not what we fear. Then, the

20 critical sentence, "however, when a choice was available, I

21 opted for the most pessimistic scenario, for example, Lehman

22 stress case for contingency reserves and MBIA's stress and

23 extreme cases.

24 Extreme stress clearly was the most pessimistic

25 analysis that MBIA showed to Mr. Buchmiller, and he talked

26 about it in memos to his superiors and also, in his final

Page 1527


2 backdated memo, and he did so repeatedly.

3 Now, the Respondents try to move the goal post here

4 to create a test that they think they can pass -- that's

5 positive statutory capital instead of positive policyholder

6 surplus.

7 Now, the State, in support of that position and

8 let's put up slide 18.9 They cite the fact that the Department only acted

10 because there would be sufficient statutory capital to meet

11 the letter and spirit of the Insurance Law.

12 They focused on statutory capital, according to Mr.

13 Holgado, as being the touchstone of solvency. Let's turn

14 to the next line.

15 What is statutory capital? Statutory capital is

16 policyholders surplus, plus contingency reserves. What the

17 Department does, they focus on the press release, your

18 Honor.

19 I think one of the telling things about this case

20 is that the sentence of relying on the press release, not on

21 a certified administrative record, as opposed to what is22 actually the approval letter -- the approval letter, and

23 your Honor, the only place where even the word comes up

24 under the dividend, talks about sufficient surplus.

25 Doesn't talk about statutory capital. Statutory capital is

26 something that's in the press release.

Page 1528


2 MR.HOLGADO: Could we just, if your Honor, if we

3 could make clear the approval letter makes clear that is the

4 actual language of the statute of 4105(a) and so that's why

5 it's tracking that language as well.

6 MR. GIUFFRA: Absolutely. In fact, your Honor,

7 that's a very good point.

8 This is about the statutes that needed to be

9 complied with here -- statutes that were put in place to

10 protect policyholders from stockholders of holding companies

11 that owned insurance companies.

12 4105 is one of the multiple provisions in the

13 Insurance Law intended to protect policyholders, whether

14 they be banks, property owners or ordinary folks from

15 insurance companies.

16 That's why this provision is important. That's

17 why Mr. Steinberg talked about it so much this morning, and

18it uses the word "surplus".19 Now, let's put up slide 20.

20 We talked to Mr. Buchmiller and we asked him, this

21 is his February 2nd, 2012 deposition, pages 26 and 27.

22 "Question: But, would it be fair to say again, in

23 connection with your financial review of MBIA, you pay close

24 attention to the policyholder surplus projections that were

25 made by MBIA in connection with the various stress scenarios

26 that were provided to you?


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19 (Pages 1529 to 1532)

Page 1529


2 "Answer: Generally yes, I did."

3 MR.HOLGADO: Page?

4 MR. GIUFFRA: Pages 26 and 27.

5 Why was that? Well, again, it is a threshold and

6 the question your Honor, the next question is, this is Mr.

7 Buchmiller's words and certainly goes clearly to the

8 question of materiality.9 "Question: When you say "threshold", what did you

10 mean specifically?

11 "Answer: Well, if it falls below 65 million, best

12 I recall, the statute allows the Department or the

13 Superintendent to instruct the insurer to stop writing

14 business and repair its surplus.

15 "Similarly, if it's below zero, surplus is

16 negative. They would also want to plan an action to

17 restore surplus to its proper level, minimal level, I should

18 say."

19 So, the notion, your Honor, that surplus is somehow

20 not important and that statutory capital is the key

21 financial metric, is belied by what Mr. Buchmiller said at22 his deposition, it's belied by the approval letter, it's

23 belied by the rules governing Financial Guarantee Insurance

24 insurers, it's belied by 4105 and, your Honor, essentially,

25 to sustain this decision, your Honor would have to find that

26 error, which was $1.4 billion, and took basically the

Page 1530


2 policyholder surplus within a year, actually by the end of

3 the year the transaction was approved, from green to red,

4 was immaterial. MBIA's own expert conceded it was.

5 Let's put up slide 21.

6 The original, the original extreme stress number as

7 of year end 2009, had a positive policyholder surplus of

8 $362 million. The correction takes it indisputably to

9 $291,000,000. That assumes, your Honor, that they apply a

10 5.23 discount rate.

11 Sort of a little bit of an exchange you may recall

12 about whether the right number was 5.23 or 4.03. We

13 actually, the number is lower than that, but if you apply a

14 5.03 discount rate, the number goes to 424 million negative,

15 and that's with all of the corrections that were made by

16 MBIA over four months when they attempted to address this

17 supposedly immaterial error.

18So, your Honor, under MBIA's own corrected numbers,19 it goes from 362 million positive, to 291 million negative

20 and that's what this 5.23 discount rate is. If you use the

21 5.03 discount rate, the number goes to 424 negative and

22 then, on the right hand side you see FTI updated extreme

23 stress corrected. I will spend some time after lunch

24 talking about this.

25 There has been a lot of argument about battles of

26 experts and battles of black boxes versus green boxes versus

Page 1531


2 yellow boxes. All FTI did, your Honor, was take MBIA's own

3 financial information, and use the information that was

4 available as of year end 2008, the most currently available

5 information.

6 Essentially made the decision, where Mr. Buchmiller

7 would talk about it, when I put an eight in or put a 12 in,

8 and they use the most currently available information and9 they ran it through MBIA's model and they come up with

10 negative $2 billion using that 5.03 discount rate.

11 We will talk about why New York cases, including

12 two decisions of the Court of Appeals, make it quite clear

13 an agency must use the current information that is available

14 and certainly, to use information that was, if there ever

15 was a time in the history of the United States when someone

16 doing a financial review should have used the most current

17 information, it was clearly in the early part of 2009, after

18 we had gone through the heat of the worst financial crisis

19 in 50 years, particularly if you were an insurance regulator

20 and your mandate was to protect the policyholders.

21 Now, that $2 billion number, negative policy22 surplus of $2 billion, that's just correcting, your Honor,

23 and using the most currently available information for 17

24 RMBS transactions -- just 17 RMBS transactions.

25 Now, let's turn to 22.

26 Even if, your Honor, you were to try to use this

Page 1532


2 statutory capital under their extreme stress scenario, MBIA

3 could absorb only a billion dollars more in losses until

4 they would be, they would be bust with no contingency

5 reserve, and that also, your Honor, we will talk about the

6 fact that MBIA's models assumed no commercial mortgage

7 backed losses -- zero.

8 Now, one of the arguments that's been bandied about

9 here, is that Mr. Greenspan didn't go forward and make a big

10 deal about this in his report.

11 Mr. Greenspan is not an accountant. His report

12 was focused on essentially running MBIA's model with the

13 most currently available information and he basically showed

14 that you turn the number, almost by $2 billion.

15 So, we were looking for a simple, straightforward

16 argument. We didn't know it did not have visibility into

17 this error.

18Now, Mr. Greenspan, when he was deposed said, he19 wasn't certain about the error and the claim seems to be

20 somehow he had an obligation to, you know, put everything in

21 his expert report that might be an issue.

22 But, I think the more telling point, your Honor, on

23 materiality, is that the evidence, your Honor, is that

24 MBIA's experts found this error in July of last year. As I

25 recall, Mr. Kasowitz raised an issue with the Court either

26 in early October, I think late October, it was right before


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21 (Pages 1537 to 1540)

Page 1537


2 one of your affidavit. You see down at the bottom it says

3 the Department's examiners had no duties related to the

4 Department's review of the transformation? Do you see that?

5 Yes, that's a true statement. Yes."

6 Turn to the next slide.

7 Mr. Buchmiller on September 28th, 2010, your Honor.

8 "Question: So, it would be fair to say that no9 one in the Department assisted you in connection with your

10 review of the financial condition of MBIA Insurance in

11 regard to the Department's review of the transformation

12 transactions?

13 "Answer: Yes, that would be generally true."

14 Slide 19.

15 MBIA's counsel made a big deal about the fact that

16 Mr. Buchmiller supposedly had a running start, your Honor,

17 and started really working on his review in July 2008. At

18 one point we heard that the review really was a year long

19 review. There was documents indicating a year long review.

20 Our view, your Honor, the real review started

21 probably January 9th and was done by February 11th.22 But, this is an e-mail that was shown to the Court.

23 Any materials that were given to Mr. Buchmiller in July of

24 2008, as far as we can tell, are not in the administrative

25 record.

26 Now, let's put up and let's focus, your Honor, it's

Page 1538


2 July 16, 2008, 2:29 P.M.

3 The subject is MBIA's portfolio.

4 So, the MBIA folks start sending e-mails amongst

5 each other later that day. Let's put up 29.

6 Actually, put up the whole document so the Court

7 can see it.

8 Mr. Buchmiller, your Honor, is apparently having

9 some involvement on July 17th and there is e-mails that are

10 being sent among senior management at MBIA that afternoon.

11 This is the bottom of the document.

12 MR. HOLGADO: What's the exhibit?

13 MR. GIUFFRA: MBIA plenary 2.

14 MR. HOLGADO: This is not a PX?

15 MR. GIUFFRA: It's not a PX document. This is a

16 document that we are responding to the other side's

17 presentation.

18Let's go to, actually go to the bottom. The19 original chain, your Honor, Mr. Kasowitz, go to the second

20 page.

21 Right at the bottom is the original e-mail that was

22 put before the Court. As you may recall, that's the one

23 Mr. Kasowitz focused on.

24 Let's turn to the next e-mail. Go to the next

25 page.

26 This is from Mr. McKiernan to Mr. Sonkin, Mr.

Page 1539


2 Fallon and Mr. Wertheim. So, that's basically some of the

3 most senior people in MBIA, including the general counsel, I

4 believe, and Mr. Fallon I think was the President at that

5 point, and Mr. Sonkin was the head of this insured portfolio

6 management, was McKiernan's boss.

7 And, Mr. McKiernan is writing to senior management.

8 He is saying, quote, this is one hell of a request to turn9 around this quickly. Can't be done, but we will provide

10 what we can. Obviously, giving the FOIL issue we are

11 facing, giving them our models gives me pause. Ram, who

12 references you crafting a document, which I assume related

13 to anything we give them being a trade secret, et cetera, if

14 any of you have comments or concerns, please let me know,

15 but we are scheduled to be at the -- must be a typo -- BYID

16 at 2:30 tomorrow.

17 Go to the next e-mail -- one up.

18 Then, Mr. Sonkin writes back, to keep you aware, I

19 am concerned about the scope of this request and where it

20 can lead. Ram is aware and needs to guide us, but I don't

21 see this as the educational process it may have been22 originally represented to be."

23 And then, the e-mail gets sent, this e-mail from

24 Mr. Sonkin gets sent to Mr. Brown. Mr. Brown writes back,

25 not as advertised, but my guess with the SCA, CIFG situation

26 looming in the next few weeks, they want an eye level

Page 1540


2 confidence. Maybe Ram, you should have a call with Jack.

3 Then, Mr. Sonkin then writes back to Mr. Brown, "already

4 following back in interim A.M. Will have enough for form,

5 but I want it somewhat limited for the initial

6 certification."

7 It goes back and comes back to Mr. Brown, quote, we

8 should mention Wachovia deal as some evidence, so we know

9 what we are talking about."

10 The answer is "agree".

11 The point is, we are making, your Honor, is that

12 the presentation was made that somehow this review started

13 in July. There is no evidence to support that, that we are

14 aware of.

15 The review started, there were interviews in

16 December, but the real work started on, on January 9th.

17 Now, let's sort of go forward.

18If, in fact, your Honor, Mr. Buchmiller had been19 working at MBIA for many months, and working closely with

20 MBIA's insured portfolio management team, it certainly

21 raises a question about the following e-mail. Let's put up

22 number 30.

23 This is an e-mail that was sent, I think we showed

24 it to the Court previously. This is an e-mail from Mr.

25 Pastor to Mr. McKiernan. This is PX number seven and there

26 is going to be a meeting on the 23rd, your Honor, with Mr.


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24 (Pages 1549 to 1552)

Page 1549

1 Petitioners-Giuffra2 weeks he'd already spent looking at CMBS and RMBS.3 The next day, your Honor, Mr. Fischer, who is4 the only person Mr. Buchmiller can describe as someone5 who is supervising him, is basically telling Mr.6 Buchmiller, quote:7 "It seems likely that Eric will make a

8 decision on the reorganization this week -- probably on9 Thursday, assuming that he approves, we'll need to

10 provide the approval quickly.11 "Whatever formal memo you were anticipating12 preparing would need to be done as a part of the13 approval process.14 "Your final work product doesn't absolutely15 need to be done prior to the approval, but it should16 come shortly thereafter."17 The point, your Honor -- and we didn't have18 this e-mail -- is Mr. Buchmiller is telling him it's19 going to take me weeks to look at CMBS, to look at20 CLOs. It will take more time than it took to look at

21 CDOS and RMBS.22 They're basically telling Mr. Buchmiller that23 Mr. Dinallo is going to make a decision this week. He24 certainly doesn't seem to be too interested in waiting25 to go find out what's happening with Mr. Buchmiller's26 review of CMBS.

Page 1550

1 Petitioners-Giuffra

2 In fact, Thursday, your Honor, would be

3 December 5, two days later -- I mean, excuse me.

4 THE COURT: February.

5 MR. GIUFFRA: February 5. It would be two6 days later. That's what Thursday would be on the

7 e-mail. We've done the math.

8 So Fischer is telling this to Mr. Buchmiller,

9 that Dinallo likely is going to make a decision on

10 February 5, and, your Honor, as you may recall, MBIA

11 had asked for approval by January 31 because they were

12 concerned that the Bridge and Raymond James opinions13 were becoming stale.

14 Now, let's turn to slide 36. On February 5,

15 your Honor, Moody's issues a report talking about CMBS,

16 and Moody's says, among other things, quote:

17 "Commercial property values declined sharply

18in 2008 and are expected to continue falling over the19 next 12 to 24 months.

20 "Not surprisingly, delinquencies on CMBS loans

21 are also on the rise." And he talks about them22 expecting, down at the bottom, the deals from

23 vintages-- that's from 2006 to 2008 vintages -- "will

24 experience losses of approximately 5 percent on

25 average."

26 Let me read both, so we're clear: "Conduit

Page 1551

1 Petitioners-Giuffra2 and fusion transactions from the 2006 through 20083 vintages were generated to an expected loss of about 24 percent.5 "Given recent developments in the global6 economy and the forecasts for U.S. commercial real7 estate in 2009 and beyond, Moody's now expects the

8 deals from these vintages will experience losses of9 approximately 5 percent on average."

10 This is a big shock and something that causes11 Mr. Buchmiller to say, I've got to do some more work.12 They want to make a decision on, literally, this day.13 As you will recall, your Honor, there was an14 e-mail we put before the court where MBIA folks are15 reporting to each other that this Moody's study spooked16 the hell out of Mr. Buchmiller, spooked the hell out of17 him. I put it before the court previously.18 That's let's put up no. 37. This is the19 February 11 e-mail which is the last e-mail that Mr.20 Buchmiller sends.

21 We've talked about this before, but he says,22 quote: "After

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