Banksvmbia 6.4 Transcript

185
In The Matter Of: ABN AMRO v. DINALLO, MBIA June 4, 2012 NYS Supreme Court Reporters Original File 060412.txt Min-U-Script®

Transcript of Banksvmbia 6.4 Transcript

Page 1: Banksvmbia 6.4 Transcript

In The Matter Of:ABN AMRO v.

DINALLO, MBIA

June 4, 2012

NYS Supreme Court Reporters

Original File 060412.txt

Min-U-Script®

Page 2: Banksvmbia 6.4 Transcript

1616

1

2 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: TRIAL TERM PART 39

3 - - - - - - - - - - - - - - - - - - - - - X ABN AMRO BANK N.V.; BARCLAYS BANK PLC;

4 BNP PARIBAS; CALYON; CANADIAN IMPERIAL BANK OF COMMERCE; CITIBANK, N.A.; HSBC

5 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 CAPITAL

7 SERVICES INC.; NATIXIS; NATIXIS FINANCIAL PRODUCTS INC.; COOPERATIEVE CENTRALE

8 RAIFFEISEN-BOERENLEENBANK B.A., NEW YORK BRANCH; ROYAL BANK OF CANADA; THE ROYAL

9 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 as

14 Superintendent of the New York State Insurance Department; the NEW YORK

15 STATE INSURANCE DEPARTMENT; MBIA INC.; MBIA INSURANCE CORPORATION; and

16 NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION (f/k/a MBIA INSURANCE

17 CORP. OF ILLINOIS),

18 Respondents.

19 - - - - - - - - - - - - - - - - - - - - - X Index No.09/601846

20 Article 78 60 Centre Street New York, New York

21 June 4, 2012

22 BEFORE:

23 HONORABLE BARBARA R. KAPNICK,

24 Justice.

25

26

Page 3: Banksvmbia 6.4 Transcript

1617

1

2

3 APPEARANCES:

4 SULLIVAN & CROMWELL, L.L.P

5 Attorneys for the Petitioners 125 Broad Street

6 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. MARY-LOUISE HUTH, ESQ.,

9 Of Counsel

10

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

12 1633 Broadway New York, New York 10019-6799

13 BY: MARC E. KASOWITZ, ESQ. DANIEL R. BENSON, ESQ.

14 KENNETH R. DAVID, ESQ. JOSHUA GREENBLATT, ESQ.

15 Of Counsel

16

17 OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF NEW YORK

18 120 Broadway New York, New York 10271

19 BY: DAVID HOLGADO, MARK E. KLEIN,

20 Assistant Attorneys General

21

22

23 NINA KOSS,

24 BARBARA STROH, CSR, CRR, CMR OFFICIAL COURT REPORTERS

25

26

Page 4: Banksvmbia 6.4 Transcript

1618

1 State Respondent-Holgado

2 FT1

3 THE COURT: Good morning, everybody.

4 (Everyone responds "Good morning, your

5 Honor").

6 THE COURT: Like they say in the Broadway

7 shows, would everybody please turn off their cell

8 phones.

9 We will start with you, Mr. Holgado, this

10 morning.

11 MR. HOLGADO: Thank you, your Honor. Good

12 morning.

13 THE COURT: Good morning.

14 I'm going to endeavor today, your Honor, to,

15 in a couple of hours or so, maybe a few hours, address

16 many of the arguments made by the banks during their

17 two-day rebuttal argument that took place on Thursday

18 and Friday of last week.

19 Your Honor, I'm mindful this has been a long,

20 hard slog for us all. I'll try to be as brief as I

21 can. At the same time, there are a lot of things that

22 need to be said about the banks' rebuttal.

23 I'm first going to discuss the flawed factual

24 arguments that the banks made during their rebuttal.

25 Then, your Honor, I'm going move on to their flawed

26 legal argument.

Page 5: Banksvmbia 6.4 Transcript

1619

1 State Respondent-Holgado

2 We'll start with the facts. Your Honor, first

3 of all, a great amount of time has been spent during

4 this entire oral argument, not only during the banks'

5 rebuttal but during they are initial presentation as

6 well, and in fairness, even during Mr. Kasowitz's

7 presentation, there's been a lot of time spent on

8 issues such as what did the banks know or not know

9 about the transformation and when: Did they know it in

10 advance of the transformation being approved, and what

11 did MBIA tell them or not tell them.

12 To be clear, Mr. Kasowitz addressed these

13 issues as well because, your Honor, how can he not do

14 so? They were such a feature of the banks' papers,

15 both their reply and their sursurreply papers, and such

16 a feature of the banks' initial presentation, your

17 Honor, all this talk about a secret transformation

18 plan, that I suppose Mr. Kasowitz could not sit idly by

19 and let them go unchallenged just because they happened

20 to be irrelevant to this Article 78 proceeding.

21 But make no mistake about it, these notice

22 issues, just like all of the internal MBIA e-mails and

23 other documents that were not before the department

24 that are being cited by the banks, are not relevant to

25 this proceeding.

26 The Court of Appeals has made clear that no

Page 6: Banksvmbia 6.4 Transcript

1620

1 State Respondent-Holgado

2 notice was required to be given to the banks before the

3 department approved the transformation application and

4 no hearing was required to be held.

5 The Court of Appeals made this clear, your

6 Honor, because the Insurance Law also makes this clear

7 or, more properly, the absence of any such procedural

8 requirements in the Insurance Law makes this clear, and

9 the Insurance Law knows how to give these requirements,

10 and we showed you some statutes where they do make that

11 clear, statutes that are not it issue here.

12 So, your Honor, the banks' counsel stated last

13 week that after seeing all of the evidence Mr. Kasowitz

14 put forth about how the banks knew about

15 transformation, the banks' counsel said, quote: "I was

16 thinking, you know, maybe there's going to be a motion

17 for reconsideration to the Court of Appeals that

18 somehow we knew about all this."

19 Well, perhaps it is the banks who would like

20 the Court of Appeals to reconsider this part of their

21 opinion, your Honor.

22 The Court of Appeals said: "Nor do we see a

23 provision in the Insurance Law that required the

24 superintendent to provide notice and an opportunity to

25 be heard to plaintiffs" -- that's the petitioners.

26 They are plaintiffs in that case -- "before he approved

Page 7: Banksvmbia 6.4 Transcript

1621

1 State Respondent-Holgado

2 the transformation."

3 Now, your Honor, another point I want to make

4 about the banks' argument about this being a secret

5 before we move on from it because, as I said, it's not

6 really relevant, is that, in connection with their

7 argument about that, they made an assertion that seems

8 actually to relate to an argument we're making in this

9 proceeding and the state respondents.

10 And that argument, your Honor, is that the

11 department did not rush into its approval of

12 transformation as I'm rushing through this presentation

13 actually.

14 Indeed, your Honor, this approval was the

15 culmination of a year-long process both in terms of the

16 changes in circumstances over that time period and the

17 department's measured response to those circumstances

18 as they evolved over time.

19 In particular, your Honor, we have pointed to

20 the fact that the department had discussions with MBIA

21 about a transformation-like restructuring beginning in

22 February 2008, a year before the approval, and that, of

23 course, the department was closely monitoring MBIA's

24 financial condition throughout this year-long period.

25 Now, it had, of course, been doing that all

26 along, but in 2008 especially it stepped up those

Page 8: Banksvmbia 6.4 Transcript

1622

1 State Respondent-Holgado

2 efforts and was monitoring MBIA even more closely.

3 We've argued, your Honor, that, in doing that

4 over this year-long period, and even before

5 transformation application was made, that the

6 department gained familiarity with MBIA's exposures and

7 their modeling practices.

8 We have made those arguments, and Mr.

9 Kasowitz's focus on this earlier period from 2008, you

10 know, was more about this notice issue.

11 While that's compelling for the plenary, it's

12 not particularly relevant for this 78, as I just

13 mentioned.

14 But the banks' assertion in response to that

15 in their rebuttal was such a flawed one, your Honor,

16 and such a wrong one, that I need to respond to that

17 briefly.

18 So the banks assert, your Honor, as one of the

19 reasons why these e-mails and these reports, analysts'

20 reports from Bank of America and Societe Generale that

21 Mr. Kasowitz showed, you know, that started even as

22 early as the beginning of 2008, that they're not

23 relevant.

24 The reason Mr. Giuffra, the banks state

25 they're not relevant is that the discussions between

26 MBIA and the department, they say, in February of 2008

Page 9: Banksvmbia 6.4 Transcript

1623

1 State Respondent-Holgado

2 about a transformation-like restructuring proposal,

3 that somehow those discussions had nothing to do with

4 the transformation that was ultimately the subject of

5 MBIA's December 2008 application.

6 But this assertion, your Honor, flies in the

7 face of the banks' own prior representations in this

8 very proceeding.

9 Again, as to the banks' statements about what

10 should be made part of the record in this proceeding,

11 it would show your Honor, in connection with our

12 motions in limine, that these statements were made,

13 again, when it suited the banks. They were made in the

14 course of demanding expansive discovery from the

15 respondents.

16 I want to show what Mr. Giuffra, the banks'

17 counsel, said during the September 22, 2010 conference

18 before Justice Yates when Mr. Giuffra was fighting to

19 get internal department e-mails from a 17-month period

20 beginning as early as February 2008.

21 Here's what he said: "There are meetings that

22 went on starting in February 2008, where Mr. Brown" --

23 that's Jay Brown -- "was making presentations to Mr.

24 Dinallo.

25 "Now, those communications and what

26 discussions they had at those meetings but, more

Page 10: Banksvmbia 6.4 Transcript

1624

1 State Respondent-Holgado

2 importantly, the private discussions and the private

3 e-mail communications and what was meant and who said

4 what to whom is critical to this case."

5 Indeed, your Honor, in the discovery request

6 that the banks thereafter served with leave of court on

7 October 1 of 2010, those are the discovery requests,

8 your Honor, that led to that JHO review.

9 Those are sought documents exactly this far

10 back, back to February 2008, and now, when MBIA shows

11 evidence that the banks don't like from what far back,

12 just as when we, the state respondents, present a

13 compelling argument to your Honor about the measured

14 response that the department took, and the evolving

15 response to the situation in hand, now the banks try to

16 disown these assertions of how critical to this case

17 communications from this time period are.

18 They should not be let off the hook that

19 easily, your Honor.

20 Okay, so the banks also claim, your Honor,

21 that there is a conflict between Mr. Dinallo's

22 testimony that various other individuals at the

23 department other than Mr. Buchmiller were involved in

24 supervising or overseeing the financial review of the

25 transformation, the review of the transformation, and

26 that the exam team was a resource for Mr. Buchmiller as

Page 11: Banksvmbia 6.4 Transcript

1625

1 State Respondent-Holgado

2 well.

3 They claim that there is a conflict between

4 all that testimony that Mr. Dinallo gave on those two

5 issues and Mr. Buchmiller's testimony, where he said

6 things to the effect of how he was not aware of Mr.

7 Finer's precise role -- that was the word that was

8 used, do you know what his 'role' was -- that he was

9 not aware of his role in connection with

10 transformation, or Mr. Buchmiller's testimony that the

11 exam team did not have any, quote, unquote, "duties

12 with respect to transformation."

13 Well, your Honor, Mr. Buchmiller is a very

14 precise person, and when you ask him a question, he's

15 going to answer it precisely.

16 So Mr. Buchmiller stating that he did not know

17 what Mr. Finer's exact role was in connection with the

18 transformation review, this is, again, a couple of

19 levels above him -- Mr. Finer, he's top executive

20 level -- him saying that your Honor is not the same

21 thing as stating that Mr. Finer had no role.

22 Indeed, Mr. Finer, along with other senior

23 department officials, was one of many recipients of Mr.

24 Buchmiller's frequent status reports both at in-person

25 meetings, orally and via e-mail.

26 So instead, your Honor, all Mr. Buchmiller was

Page 12: Banksvmbia 6.4 Transcript

1626

1 State Respondent-Holgado

2 really saying was that it was not necessarily for him

3 to see exactly what Mr. Finer's role was. It was not

4 for him to say it then, and he was not going to be the

5 one to say it now.

6 Similarly, your Honor, when Mr. Buchmiller

7 stated that the exam team did not have any, quote,

8 unquote, "duties on transformation," he was not saying

9 that the exam team members were not in any way a

10 resource for him in connection with his review or that

11 they were not there alongside him during the. Again,

12 rather than show you, your Honor -- I will let him

13 speak.

14 MR. GIUFFRA: Your Honor, could we have a cite

15 to the record, because it sounds like counsel is

16 testifying for Mr. Buchmiller.

17 THE COURT: Well, do you have anything

18 specific?

19 MR. HOLGADO: I'm going to be showing you some

20 quotes, your Honor, but I think, you know, I'm

21 characterizing his testimony in the ordinary meaning of

22 what that testimony said.

23 He showed you the testimony. I don't have

24 pinpoint cites to those right in front of me, but the

25 testimony is before the court. I'm saying how I read

26 it. This is attorney argument, your Honor.

Page 13: Banksvmbia 6.4 Transcript

1627

1 State Respondent-Holgado

2 So, your Honor, again, rather than show you

3 all of Mr. Buchmiller's and Mr. Dinallo's testimony and

4 their contemporaneous statements on this issue, the

5 banks showed you just what he was referring to, this

6 select excerpts from Mr. Buchmiller and his first

7 deposition.

8 Here, your Honor, is some of what they didn't

9 show you. He want some cites in the record. Let's

10 show him. We showed a lot of them, your Honor. I'm

11 not going to go through them all to you again.

12 In fact, we showed a lot of e-mail updates

13 that show -- and Mr. Finer was on a lot of those

14 updates showing who was involved in supervising and

15 overseeing Mr. Buchmiller's review.

16 But let's show you some things again. Just

17 briefly, this is Mr. Buchmiller in his affidavit. He

18 said: "I frequently communicated with senior

19 department officials to update them on the progress of

20 my review."

21 Mr. Dinallo, your Honor -- I'm sorry. Yes,

22 let's go to this. This is Mr. Buchmiller's deposition

23 as well. This is actually from the same deposition,

24 your Honor, that Mr. Giuffra pulled these other quotes

25 from. The question was:

26 "Question: Did you ever speak to Mr. Dinallo

Page 14: Banksvmbia 6.4 Transcript

1628

1 State Respondent-Holgado

2 about the department's consideration of MBIA's

3 application for approval of the transformation

4 transactions?

5 "Mr. Buchmiller: Yes.

6 "Question: Did you have more than one

7 discussion with Mr. Dinallo?

8 "Mr. Buchmiller: There were several meetings.

9 Eric was certainly at some of them.

10 "Question: Do you remember when these

11 meetings were held?

12 "Mr. Buchmiller: It was in that timeframe,

13 from December to February, mid-February."

14 Your Honor --

15 MR. GIUFFRA: Could you keep going, actually.

16 MR. HOLGADO: You showed this slide in my

17 initial presentation, Bob, so this is not a surprise.

18 Your Honor --

19 MR. GIUFFRA: Your Honor --

20 MR. HOLGADO: Is this what we're going to do

21 today?

22 MR. GIUFFRA: This is page 507.

23 THE COURT: You guys did that to him a little

24 bit, so.

25 MR. HOLGADO: Okay, do you have a cite.

26 MR. GIUFFRA: This is page 57, line 2.

Page 15: Banksvmbia 6.4 Transcript

1629

1 State Respondent-Holgado

2 "Question: What was the first time you spoke

3 -- let me restate that. Did you ever speak to Eric

4 Dinallo about the -- did you ever speak to Mr. Dinallo

5 about the department's consideration of MBIA's

6 application for approval of the transformation

7 transactions.

8 "Objection to form.

9 "Question: Answer that yes or no, please.

10 "Answer: Yes.

11 "Question: When did you speak to Mr. Dinallo?

12 "Answer: I don't recall a specific meeting or

13 date.

14 "Question: Was it in '08 or '09?

15 "Answer: I'm not sure."

16 MR. HOLGADO: Then there were several meetings

17 leading to it, and he was certainly at some of them.

18 Okay, indeed, your Honor, here's actually Mr.

19 Dinallo testifying about what Mr. Finer's role was.

20 This is slide 99 -- yes; I'm sorry.

21 It's just the second quote on slide 99. These

22 are slides we already showed your Honor, but Mr.

23 Dinallo said: "In the days leading up to the

24 department's formal approval of the application, I met

25 several times with the department's senior staff,

26 including Mr. Finer, to discuss various factors

Page 16: Banksvmbia 6.4 Transcript

1630

1 State Respondent-Holgado

2 pertinent to my decision, including Mr. Buchmiller's

3 analysis."

4 Okay, as for the exam team, your Honor, and

5 the testimony that Mr. Giuffra showed from his

6 deposition about the, quote, unquote, "duties that they

7 didn't have on transformation," here's one of Mr.

8 Buchmiller's e-mails to department staff, including,

9 again, these same exam team members regarding his

10 transformation review.

11 This is on January 30, 2009. He said: "My

12 colleagues here at MBIA's offices, Glenda" -- that's

13 Glenda Galardo -- "Jim" -- that's James Murphy -- "and

14 Karen Gard have not had a preview of this e-mail but

15 have been working with me on these issues, attending

16 virtually all of the meetings, etc.

17 Finally, your Honor, here's another e-mail

18 from Mr. Buchmiller. We showed you this already as

19 well. This is a February 11 e-mail regarding this

20 review of the CMBS sector.

21 Again, this includes his fellow exam team

22 members on the e-mail, and I will show you the actual

23 e-mail. That shows at the very end you see Glenda

24 Galardo, James Murphy, Karen Gard, and here's what he

25 says.

26 He says: "The PRP" -- that's the property

Page 17: Banksvmbia 6.4 Transcript

1631

1 State Respondent-Holgado

2 exam team; that's those three individuals --

3 "participated, but this e-mail reflects only my

4 preliminary review."

5 So maybe, your Honor, it wasn't their duty to

6 participate, but they did participates.

7 So, the testimony the banks have repeatedly

8 relied on for their arguments, it just does not prove

9 what they want it to.

10 Now, moving on to another subject, your Honor

11 may recall that when the Raymond James opinion came up

12 during my initial presentation, your Honor asked me,

13 what's that about?

14 I explained that it was a fairness opinion

15 about the terms of the reinsurance agreement between

16 MBIA Corp. and National and how those terms were

17 consistent with an arm's length transaction. That was

18 the opinion that they gave.

19 A couple of brief points that I want to make

20 again about that. First of all, the banks actually

21 brought up Raymond James during their rebuttal

22 argument, and they cited some excerpts from the opinion

23 which noted all of the things that it was not: That it

24 wasn't opining on the fairness of the transformation as

25 a whole or as to whether the dividend and the stock

26 redemption portions of the transformation were legal.

Page 18: Banksvmbia 6.4 Transcript

1632

1 State Respondent-Holgado

2 We agree with these things, your Honor.

3 That's not what it was opining on. It was opining on

4 the reinsurance agreement.

5 This is not a revelation. Indeed, the banks

6 have never once challenged the substance of the Raymond

7 James opinion.

8 What they did do, however, on rebuttal, your

9 Honor, in fact, was they held up the FGIC MBIA

10 reinsurance agreement as an example of a transaction

11 that was appropriate in comparisons to the reinsurance

12 agreement at issue here.

13 That deal was fine, they said, because it was

14 arm's length. It was done with a third party.

15 But what you didn't hear them mention, your

16 Honor, was what we mentioned back when your Honor asked

17 me that initial question about Raymond James.

18 What they didn't mention is that Raymond James

19 found in this opinion that the price paid by MBIA Corp.

20 to National in the reinsurance agreement -- in the

21 transformation reinsurance agreement was actually a

22 better deal for MBIA Corp. than the deal that FGIC got

23 from MBIA.

24 So, your Honor, what the banks are left with

25 are just only two things they can really say to

26 distinguish the FGIC MBIA Insurance agreement and the

Page 19: Banksvmbia 6.4 Transcript

1633

1 State Respondent-Holgado

2 one at issue in the transformation.

3 These distinctions, your Honor, collapse of

4 their own weight given the other evidence in this case.

5 The first of those distinctions, your Honor,

6 that they make -- that they try to make is that the

7 reinsurance agreement here was done with an affiliate

8 within the holding company system.

9 But, your Honor, not only does the Raymond

10 James opinion make clear that this is not a meaningful

11 distinction, since the price paid was an arm's length

12 one, nonetheless.

13 Not only that. We have also heard unrebutted

14 testimony from Superintendent Dinallo as to why it was

15 actually a better solution for MBIA Corp. to do this

16 reinsurance agreement transaction with an affiliate,

17 since that would mean that the assets associated with

18 the policies would not go out the door of the holding

19 company system for good.

20 Okay, so the second distinction that the banks

21 try to make, your Honor, between FGIC and this

22 reinsurance agreement are that here the reinsurance

23 agreement was done at the same time as this dividend

24 and this share redemption.

25 Specifically that that share redemption and

26 that dividend went up to Inc. and then back down to the

Page 20: Banksvmbia 6.4 Transcript

1634

1 State Respondent-Holgado

2 very affiliate who assumed the obligations in that

3 reinsurance agreement.

4 But we've already shown your Honor an example

5 of exactly those same two things happening: A share

6 redemption and a dividend up to the parent and then

7 down to the affiliate at the same time.

8 Indeed, that example involving NCIC -- I'm

9 going to talk about it later -- was during the

10 administration of one of the banks' own experts.

11 Moreover, we showed you how approval of the

12 dividend and the share redemption in that NCIC case

13 were actually conditioned on the money being sent back

14 down to the affiliate, the sister company, again for

15 the same reason, because they didn't want it going out

16 the door.

17 MR. GIUFFRA: Your Honor, same objection. Is

18 there anything in the record before this court, or this

19 counsel testifying?

20 MR. HOLGADO: I'm not sure of the objection,

21 your Honor, to be honest.

22 THE COURT: I mean you're looking for specific

23 references. I mean I don't think he's testifying.

24 He's making his final arguments. So if he's not going

25 to cite anything, he's not going to cite anything, and

26 I'll have to find it somewhere else or not, as the case

Page 21: Banksvmbia 6.4 Transcript

1635

1 State Respondent-Holgado

2 may be.

3 MR. GIUFFRA: That's the point, your Honor. I

4 don't think he's cited anything specific for what he's

5 saying.

6 MR. HOLGADO: Your Honor, I am citing some

7 things. I'm not putting them before you yet. That's

8 part of my big finish.

9 It's in the letter, your Honor. It's in the

10 NCIC approval letters, it's in other documents I'm

11 going to show you about NCIC.

12 THE COURT: Okay.

13 MR. HOLGADO: I'll talk more about that in a

14 while.

15 For now, your Honor, this shows how that

16 second distinction that the banks are trying to make

17 between FGIC and this reinsurance agreement is also a

18 distinction without a difference.

19 Okay, so, your Honor, your Honor ruled on May

20 25 that Mr. Buchmiller's final memorandum, the 59-pager

21 should be produced in this proceeding in an entirely

22 unredacted form.

23 In a few minutes I'd actually like to go

24 through a lot of his newly unredacted portions of that

25 file memo to show just how much they support all of the

26 things that the state respondents have been arguing in

Page 22: Banksvmbia 6.4 Transcript

1636

1 State Respondent-Holgado

2 this case.

3 But first, your Honor, I want to highlight

4 some language that the banks seemed to think was so

5 significant from these new portions. Let's go to page

6 9 of the file memo.

7 This is in the middle of that page, your

8 Honor. The reference is the sentence beginning with:

9 "We are aware."

10 It says: "We are aware of only a few vendors

11 and practitioners using the former method (which is

12 probably better but more complex).

13 "The former method that's being referred to

14 here is the loan level method of modeling RMBS."

15 The banks claim that this is somehow an

16 admission that Mr. Buchmiller made, and the department

17 should have used BlackRock.

18 Now, the banks did not want to emphasize that

19 language at the start of the sentence, your Honor, the

20 language before what's in the parentheses, where Mr.

21 Buchmiller makes clear that we are aware of only a few

22 vendors and practitioners that are even using that

23 approach, only a few.

24 That doesn't sound to me, your Honor, like

25 enough to be treated as the standard by which all loss

26 modeling should be judged by in order to be considered

Page 23: Banksvmbia 6.4 Transcript

1637

1 State Respondent-Holgado

2 in line with industry practices.

3 (Continued on next page)

4 (End of take 1)

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Page 24: Banksvmbia 6.4 Transcript

1638

1 PROCEEDINGS - HOLGADO

2 T2 MR.HOLGADO: And that's especially the case, your

3 Honor, if the few, the few who are using that approach, have

4 a black box and will not share that their methodologies with

5 anyone, with anyone, even MBIA people who hire them, let

6 alone regulators, like Mr. Buchmiller and the Department.

7 So that, your Honor, is why Mr. Buchmiller uses the

8 word "probably". He doesn't know. He can't know. They

9 won't let him know.

10 We covered this point earlier, your Honor, in my

11 initial presentation. I won't belabor it now, but as I

12 noted before, and Mr. Buchmiller also testified at his

13 deposition to this effect, financial institutions such as

14 Black Rock, were not willing to share their methodologies

15 with Mr. Buchmiller. The banks conceded as much during

16 their initial presentation, your Honor.

17 So, given that the whole purpose of Mr.

18 Buchmiller's financial review was to assess the analytical

19 soundness and reasonableness of MBIA's loss modeling

20 methodologies, whatever could have been shared with him from

21 these financial institutions or would have been shared,

22 would have been of a very limited benefit for his review.

23 In other words, he couldn't compare MBIA's

24 methodologies against the methodologies of these financial

25 institutions, if the financial institutions would not share

26 theirs with him, the banks.

NK

Page 25: Banksvmbia 6.4 Transcript

1639

1 PROCEEDINGS - HOLGADO

2 Mr. Buchmiller's statements on page 33 of this file

3 memo that he opted for the most pessimistic scenario, they

4 argue this was somehow contradicted by the fact that there

5 existed more pessimistic views out there and he did not

6 quote unquote, opt for them.

7 Well, they are simply misreading what he said.

8 Let's look at page 33. Actually, I want to start with the

9 top of 33 first. We will get to the part they quote.

10 This is what it says at the top. In other words,

11 all of the above involves both MBIA and the Department make

12 certain baseline assumptions about an unknown and unknowable

13 future.

14 Let's go further down on page 33 now, to the

15 paragraph from which the banks pull the language they like.

16 Actually, let's read all of that language now, your Honor.

17 Mr. Buchmiller says, "although personally more

18 pessimistic, personally more pessimistic about Federal

19 regulatory and legislative responses to the current

20 financial panic and economic downturn, I have, for my

21 purpose here, accepted MBIA's assumptions above, as they are

22 closer to the February 17th consensus than mine."

23 "Again, what we know, not what we fear." He says

24 "again", because that phrase actually appears a few times

25 throughout the document, your Honor.

26 Here is the language they cite. "However, what

NK

Page 26: Banksvmbia 6.4 Transcript

1640

1 PROCEEDINGS - HOLGADO

2 choice was available, I opted for the most pessimistic

3 scenario -- for example, Lehman's stress case for CMBS and

4 MBIA's stress and extreme stress."

5 It is clear from this document, your Honor, that

6 Mr. Buchmiller's talking about MBIA's assumptions. He even

7 notes at the start of this that he is personally more

8 pessimistic about some things, in particular the success of

9 the government's response to the recession. He is more

10 pessimistic than MBIA is.

11 When he talks about opting for the most pessimistic

12 scenario, he talks about when a choice was available. He

13 is talking, when he uses those words, your Honor, about a

14 choice among the alternative assumptions that MBIA itself

15 was utilizing.

16 The reason we know this is because right after

17 that, your Honor, he references MBIA's stress scenarios for

18 the residential sectors. That's the last bit. When he says

19 Lehman stress case for CMBS, that's one of the two studies,

20 your Honor, that MBIA used for its CMBS loss model.

21 So, simply put, your Honor, Mr. Buchmiller is not

22 suggesting with this language that he should opt for the

23 most pessimistic view of MBIA's losses that exists anywhere.

24 We know which ones those are, your Honor. Those are things

25 like the Lehman ABS CDO analysis that the banks have relied

26 on.

NK

Page 27: Banksvmbia 6.4 Transcript

1641

1 PROCEEDINGS - HOLGADO

2 I guess there is also Black Rock, if you believe

3 Mr. Paltrowitz' after the fact testimony, testimony about

4 what Black Rock would have said.

5 There is also Bill Ackman, the short seller, who

6 had been self-servingly and basically arguing that MBIA was

7 insolvent for years, well before transformation.

8 But, Mr. Buchmiller explains why I need not opt for

9 those views in this same paragraph, your Honor, when he

10 essentially says, MBIA's assumptions are closer to the

11 February 17th consensus than even his own.

12 Okay. Now, one other brief note on this.

13 During the banks' rebuttal, your Honor, they

14 asserted Mr. Buchmiller did not actually know about other,

15 and in some cases, more bearish predictions for MBIA's

16 losses.

17 In support of that argument, the only thing they

18 focused on, your Honor, what is -- is what MBIA told the

19 Department, what MBIA showed Mr. Buchmiller.

20 What they ignore however, was that Mr. Buchmiller

21 was made aware of other loss modeling methodologies and

22 other opinions on MBIA's exposures or the types of exposures

23 of MBIA from a lot of sources other than MBIA. This file

24 memo makes that clear and Mr. Buchmiller makes that clear,

25 that's exactly what he did.

26 Let's just look at one example of that. It's in

NK

Page 28: Banksvmbia 6.4 Transcript

1642

1 PROCEEDINGS - HOLGADO

2 this same file memo, literally on the page before the one

3 you were just looking at.

4 It starts with a sentence, "I believe, I believe

5 MBIA's fundamental approach is correct, or at least

6 reasonable and among best practice, based on our knowledge

7 of other FGI's practices and meetings, research and/or

8 presentations by Andrew Davidson & Company, Rudder

9 Associates, New Oak Capital and other acknowledged experts,

10 despite differences among them."

11 He acknowledges the differences, your Honor. We

12 went through more examples of this in the record on our

13 initial presentation. I won't belabor that either, but

14 that's one example.

15 As long as we are on the file memo now, your Honor,

16 I think it's worth now going through the newly unredacted

17 portions that the banks were so interested in seeing -- in

18 your Honor seeing.

19 They wanted to them see themselves. Because, your

20 Honor, once they saw them, it was noteworthy how little of

21 what was in these former redactions they actually wanted to

22 show the Court.

23 Noteworthy, but not surprising as these formerly

24 redacted portions fully support the Department's approval

25 and the Department's reasons underlying that approval.

26 Just go to page one. This, your Honor, is the

NK

Page 29: Banksvmbia 6.4 Transcript

1643

1 PROCEEDINGS - HOLGADO

2 mystery period comma, and the redacted language that

3 followed it. He said, "I don't find evidence that MBIA

4 Insurance Corporation of New York is inadequately reserved

5 based on what we know as of -- what we know as of today, mid

6 February of 2009, but not on what we might also fear as of

7 today, because reasonable men may differ on those."

8 The Department does not regulate based on fear, but

9 rather on facts. That's what he is saying. That is, in no

10 way, inconsistent with the arguments the State Respondents

11 have advanced, your Honor, particularly regarding the

12 inherent uncertainty in loss projections, which I will

13 address again in a second.

14 Go to page five of this same memo. This is an

15 interesting one. Here, your Honor, Mr. Buchmiller is

16 mentioning how every sector of the monolines insured

17 portfolio might experience higher losses.

18 He specifically says -- he puts "every" in italics

19 and then specifically mentions U.S. Public Finance -- that's

20 the muni side. That's the liabilities that's being

21 transferred along with these assets to National. That's

22 what National is taking on.

23 Mr. Buchmiller is expressing some concern over the

24 potential uncertainty of the amount of those losses, so to

25 the extent that the banks have been complaining that too

26 much was sent over to the municipal side, to National, this

NK

Page 30: Banksvmbia 6.4 Transcript

1644

1 PROCEEDINGS - HOLGADO

2 actually directly contradicts that argument, your Honor.

3 Now, move on to page 23 and 24 of the memo. Now,

4 after talking about RMBS and ABD CDO and some of the

5 fallacies of construction within them, your Honor, he

6 mentions how the CMBS side, the commercial mortgages, those

7 securities are also CDOs, and so they also have very similar

8 construction, in some ways, to RMBS, and so he asks a

9 rhetorical question.

10 "All of these same fallacies of construction

11 suggests the CMBS could be a disaster equal to RMBS, so why

12 isn't it? Is it only a difference in cycle stage? It's

13 too early to tell, but if my deduction is correct, then the

14 answer lies in the difference in underwriting in origination

15 standards between residential and commercial real estate."

16 Again, your Honor, in his affidavit and in his

17 deposition, Mr. Buchmiller makes these same points. That,

18 underwriting standards were maintained, that there was not

19 the same erosion, and that therefore, not the same

20 expectation of loss.

21 This is the directly supporting why he made peace

22 with MBIA CMBS loss modeling in this case.

23 Now, while we are on this page, your Honor, the

24 banks have also argued that Mr. Buchmiller did not look at

25 the other sectors of MBIA's exposure at all. Those were

26 the words.

NK

Page 31: Banksvmbia 6.4 Transcript

1645

1 PROCEEDINGS - HOLGADO

2 They cited, your Honor, page one of the final memo

3 for this proposition. I think they should look at this page

4 too though.

5 Here is what he said under other structured

6 finance -- these are all the other sectors. He said, we

7 discussed their surveillance in various other sectors in two

8 meetings of several hours each on Friday, February 6th.

9 Then, he goes on to say, "I did not have time to

10 delve into these extensively prior to the decision."

11 So, he doesn't say, your Honor, he didn't look at

12 them at all. He said he didn't delve into them as

13 extensively as the three key ones. He even explains why

14 after that. He says, separately, none are as material from

15 a solvency standpoint.

16 This is, this is, you know, this is entirely

17 consistent with his other testimony on that case -- in this

18 case.

19 Now, your Honor, in fact, let's actually, the words

20 "from a solvency stand" are interesting because this relates

21 to another of the banks' assertions on rebuttal that, in the

22 course of arguing the approval letter, doesn't have any

23 findings in it, and that we are somehow stuck with that. I

24 will address that in awhile.

25 The banks also assert, the file memo itself from

26 Mr. Buchmiller has no findings in it. Here is what Mr.

NK

Page 32: Banksvmbia 6.4 Transcript

1646

1 PROCEEDINGS - HOLGADO

2 Steinberg said about that.

3 He said, "there is not a finding in Mr.

4 Buchmiller's memo that the requisite items, the 309, are

5 met. " There is no discussion that he admitted assets.

6 There is no discussion of the solvency analysis.

7 Now, again, this is before they have had a chance

8 to correct the transcript, your Honor. I think, first of

9 all, it might, ought to say the 309 are met. Might say

10 discussion admitted assets -- probably should say "of the

11 admitted assets".

12 But, your Honor, one thing Mr. Steinberg actually

13 did say was 309 instead of 1309. I was here for that. I

14 think he will be the first one to tell your Honor he meant

15 to say 1309 and not 309.

16 But, I think that's noteworthy because, as I will

17 discuss a bit later, the banks tend to conflate those two

18 provisions of the Insurance Law and they are very, very

19 different.

20 But, for now, let's key in on the assertion that

21 banks' counsel made that there was no discussion of the

22 solvency analysis or of solvency in Mr. Buchmiller's memo

23 because perhaps, the banks should take a closer read of page

24 24 in the memo.

25 Again, we just looked at this. Separately, none

26 are as material from a solvency standpoint. Can there be

NK

Page 33: Banksvmbia 6.4 Transcript

1647

1 PROCEEDINGS - HOLGADO

2 any doubt, your Honor, this was the focus of this

3 transformation review and that Mr. Buchmiller was making

4 findings about solvency in this memo?

5 Go to page 31 actually now of the memo. This is,

6 this is good stuff here. This shows, your Honor, the duty

7 to policyholders that the Department and Mr. Buchmiller take

8 very seriously. Here is the language.

9 In talking about the extreme scenario outcomes, Mr.

10 Buchmiller makes clear that no Insurance Department

11 Superintendent would allow dividends or surplus, no

12 payments, if it meant insolvency.

13 Then, in a footnote that precedes that, after, it's

14 the footnote 95, it talks about, after saying the four

15 resulting outcomes, Mr. Buchmiller makes clear we should

16 only be looking at the one outcome.

17 He says, for us, it's only one outcome that we not

18 allow. It's based, we basically have four alternatives; I

19 call allow dividends and surplus, no payments, allow one,

20 but not the other or, you don't allow either.

21 He is saying we should only be looking at the don't

22 allow either. If we are in an extreme stress world, the

23 Department won't allow those types of things. We do not

24 allow dividends or note redemption, along a worst case path.

25 Then, your Honor, let's go now to page 32, which we

26 have talked a lot about this concept, and it's confirmed

NK

Page 34: Banksvmbia 6.4 Transcript

1648

1 PROCEEDINGS - HOLGADO

2 again by Mr. Buchmiller's memo. Somewhere between known

3 unknowns, and unknown unknowns, is what the future holds.

4 How bad and how long will this recession be? Will it

5 become a depression?

6 The entire universe of economists and pundits can't

7 answer that one with any certainty. Again, uncertainty,

8 your Honor, in future predictions. We are not making this

9 up as we go along.

10 Let's go to page 33 in fact. We just showed you

11 this sentence as well. It supports this same point.

12 In other words, all of the above involves both MBIA

13 and the Department making certain baseline assumptions about

14 an unknown and unknowable future.

15 So, your Honor, it's not just the newly unredacted

16 portions of the file memo that support all of the arguments

17 the State Respondents have been making, it's also these

18 e-mails that your Honor removed redactions from.

19 Let's show a couple of those. Let's go to, this is

20 NYSID 295. This is a Jack -- e-mail from Jack Buchmiller

21 on February 2, 2009.

22 The banks showed your Honor this e-mail in order to

23 argue that somehow this review was a rushed one. In fact,

24 the e-mail below has Scott Fischer saying "okay, since you

25 said you have some holes to fill in, let's postpone the

26 meeting until Jack has a chance to finish."

NK

Page 35: Banksvmbia 6.4 Transcript

1649

1 PROCEEDINGS - HOLGADO

2 Jack says "no, let's proceed. To clarify filling

3 in a few gaps is no reason to delay. I think it's a good

4 time to debrief. It's more a matter of connecting a few

5 dots along what appears to be a very straight line that we

6 followed along these past few weeks and I have little doubt

7 they will fill in satisfactorily."

8 It then goes on to mention, they are very on top of

9 their modeling overall, and that CMBS is probably better

10 structured than RMBS because, as he said, no one was lured

11 to sleep with CMBS. These are again, completely consistent

12 with all the arguments that we have been making.

13 Let's go to a different e-mail. Go to NYSID 3001.

14 This is an e-mail from, the next day, from Scott Fischer to

15 the banks. The banks made much of this, your Honor.

16 "It seems like Eric will make a decision on the

17 reargument this week, probably on Thursday" -- that means

18 February 5th, your Honor. And it says, "whatever formal

19 memo you are anticipating preparing would need to be done as

20 part of the approval process. Your final work product

21 doesn't absolutely need to be done prior to the approval,

22 but it should come shortly thereafter."

23 In response to this, your Honor, above this, Mr.

24 Buchmiller sends a draft of his e-mail. Sorry, a draft of

25 his memo, his formal memo, which against this began, it

26 evolved, your Honor. It was a series of e-mails. Then, it

NK

Page 36: Banksvmbia 6.4 Transcript

1650

1 PROCEEDINGS - HOLGADO

2 was a three page memo. Then it was a five page memo, which

3 is actually the one he attaches here, and then became a six

4 page one, and then ultimately, your Honor, became this 33

5 page one, 59, with exhibits, that has been now produced in

6 its entirely, entirely unredacted form.

7 He is sending a draft of this memo, as it stands

8 now, in response to Mr. Fischer's e-mail and again, he is

9 conveying the upshot of what he has done. As he said in

10 his other e-mail, we just discussed filling in the gaps is

11 no reason to delay.

12 In fact, your Honor, if we pull up NYSID 3007, this

13 was also unredacted. It's another e-mail response from Mr.

14 Buchmiller later in the day to the same e-mail from Mr.

15 Fischer. We can page ahead to the next few pages. This is

16 the six page version -- several hours later, on

17 February 3rd.

18 Now, this is before, your Honor, he has looked in

19 depth at the CMBS sector, which will become his focus for

20 most of the rest of the time between February 3rd and the

21 Department's approval.

22 We have seen that he sent a long e-mail about his

23 CMBS review on February 11th -- the e-mail that the banks

24 are fond of calling Mr. Buchmiller's last communication to

25 the Department's staff about his review.

26 In fact, it's simply one of the last written

NK

Page 37: Banksvmbia 6.4 Transcript

1651

1 PROCEEDINGS - HOLGADO

2 communications, but more important, your Honor, the banks

3 make much of, much of Mr. Fischer's having noted in the

4 lower e-mail, Mr. Dinallo might approve the transformation

5 as early as that Thursday February 5th.

6 Well, that's not what happened. So, what exactly

7 is the banks' point? That the Department was nearing a

8 decision at that time? It was thought they might approve

9 at that time, and then instead, they waited another week or

10 two so that Mr. Buchmiller could get comfortable with the

11 CMBS sector? That doesn't sound very arbitrary and

12 capricious to me, your Honor.

13 In fact, pull up quickly the February 11th e-mail

14 that I was, that I was talking about a second ago.

15 Here is the language they key in on for this

16 argument -- that he was rushed.

17 Says, "after last Thursday's meeting I was working

18 against the deadline. Obviously, this isn't sufficient time

19 to go as broad or as deep as we would hope to do in a normal

20 examination."

21 We have talked about this language already too, but

22 briefly again, this is not Mr. Buchmiller saying he needs

23 more time. This is Mr. Buchmiller saying that obviously,

24 he considers this an obvious, obvious point, not a

25 revelation, not a plea for help, not a plea for more time,

26 but obviously, the review he is doing is not as broad and

NK

Page 38: Banksvmbia 6.4 Transcript

1652

1 PROCEEDINGS - HOLGADO

2 not as deep as the full scope solvency examination under

3 Insurance Law 309, the normal examination that he refers to,

4 the one that takes 12 to 18 months to do.

5 Now, the banks have tried to tie this statement and

6 this e-mail, that was over a week after the other e-mail we

7 just looked at from Mr. Fischer, they tried to tie these two

8 e-mails together to suggest somehow Mr. Buchmiller did not

9 have enough time to complete the review, but here is that

10 deposition testimony from Mr. Buchmiller that the banks

11 really don't like, your Honor.

12 Slide 54.

13 "Question: When you first started working on the

14 transformation transaction in mid December, that's 2008, did

15 you have any understanding of how much time you had to

16 complete your work?

17 "Mr. Buchmiller: There was no deadline or

18 schedule that I was aware of.

19 "Question: At any time, did you ever learn of a

20 deadline or schedule for the completion of your work?

21 "Mr. Buchmiller: No.

22 "Question: Is it your testimony that, sitting

23 here today, you had an unlimited amount of time to review

24 the transformation transaction?

25 "Mr. Buchmiller -- " I bet the timing on this is

26 better in the audio -- "well, I mean, by "unlimited" you

NK

Page 39: Banksvmbia 6.4 Transcript

1653

1 PROCEEDINGS - HOLGADO

2 mean my natural life? I had as much time as I needed to

3 work on transformation."

4 Now, your Honor, while we are on the subject of

5 selective citation, the banks also cherry pick some of the

6 evidence we relied on during the State's presentation

7 discussing why the Department's reasons for approval are not

8 post hoc -- not post hoc rationalization.

9 The banks showed you how, how some of those things

10 we cited for your Honor, were actually a couple of months or

11 a week or a day after transformation and thus still, quote

12 unquote, post hoc.

13 (Continued on next page.)

14

15

16

17

18

19

20

21

22

23

24

25

26

NK

Page 40: Banksvmbia 6.4 Transcript

1654

1 State Respondent-Holgado

2 T3

3 MR. HOLGADO: The final memo that we were just

4 discussing from Mr. Buchmiller -- that's one of those

5 documents, as we know, it wasn't completed until

6 several weeks after the transformation.

7 But, your Honor, the banks seem to have

8 ignored the rest of our presentation because, with

9 respect to every one of those reasons that the state

10 respondents note for the approval, we walked the court

11 back through the evidence to a point in time that

12 predated transformation.

13 Indeed, in some cases we walked it back to the

14 time the application was filed, and in other cases we

15 went even further, all the way back to February 2008.

16 Here's actually some of the evidence we relied

17 on that Mr. Giuffra then used in his rebuttal.

18 I think he took a quote, here, your Honor,

19 extremely, extremely out of context, and I really,

20 really think we should look at this in detail. Let's

21 put it up. This is MRX 1143, and it's page 8.

22 I want to go to the second paragraph and then

23 blow all that up until he's done with his long answer.

24 It's actually better to show the question; I'm

25 sorry, Bunky. Show the question, too. Here's the

26 question that --

BARBARA STROH, CSR, CRR, CMR

Page 41: Banksvmbia 6.4 Transcript

1655

1 State Respondent-Holgado

2 THE COURT: Where is this from?

3 MR. GIUFFRA: What's the date of it.

4 THE COURT: I think that's what he's going to

5 show.

6 MR. HOLGADO: You used this document; I used

7 this document.

8 Your Honor, this is, I believe, April.

9 THE COURT: I'm allowed to ask.

10 MR. HOLGADO: No, no, of course, of course.

11 I'm answering your Honor, for sure.

12 It's the April 28, 2009 transcript that we're

13 showing you here. It's Thompson Reuters. It's a

14 transcript of an interview that Mr. Dinallo gave in

15 front of hedge fund employees.

16 This is before the petition was even filed

17 but, yes, after transformation, and I want to go down

18 to page 8 and the question that Mr. Giuffra showed.

19 What Mr. Giuffra showed first, actually, was

20 -- he cited a quote in this excerpt as Mr. Dinallo

21 somehow suggesting that the MBIA transformation or that

22 Federal assistance to FGIs was something that all the

23 proposals that had been done up to that point -- and he

24 was trying to imply even the one that Governor

25 Patterson had done two months before, at Mr. Dinallo's

26 urging, that all those proposals were for the benefit

BARBARA STROH, CSR, CRR, CMR

Page 42: Banksvmbia 6.4 Transcript

1656

1 State Respondent-Holgado

2 of the shareholders of those FGIs, for the shareholders

3 of MBIA, not for the policyholders, okay, but for the

4 shareholders, and that's the real purpose behind

5 transformation. That's what they showed you, this

6 court.

7 MR. GIUFFRA: Your Honor, I think what I said

8 was that by April, when this issue came up -- just look

9 at the last paragraph. That's from Mr. Dinallo, not

10 from me, that Mr. Dinallo was saying, "and if it's

11 going to the operating company, that's about

12 policyholders, and there's been no showing at that

13 moment, probably, that those policyholders absolutely

14 need it.

15 MR. HOLGADO: Which policyholders?

16 MR. GIUFFRA: I am going to tell you. He's

17 saying, in fact, I'm almost certain, all proposals have

18 it going to the holding company. That's what I read to

19 your Honor.

20 MR. HOLGADO: Thank you for summarizing that.

21 Your Honor, that's exactly what I want to show you.

22 Look at the question. Look at what this question

23 says, look at what this whole answer is about.

24 The journalist says: I have a quick question

25 about life insurance. I wanted to ask you also

26 about -- an NAIC matter but with the life insurers two

BARBARA STROH, CSR, CRR, CMR

Page 43: Banksvmbia 6.4 Transcript

1657

1 State Respondent-Holgado

2 things: Obviously, they've been under a bit more

3 stress than property casualty. That's also not FGIs.

4 "First of all, do you expect life insurers to,

5 or do you think life insurers are in need of TARP

6 relief?"

7 His entire answer, your Honor, goes on to

8 explain why he doesn't, why he thinks they're not as

9 stressed as FGIs, why the Federal assistance that is

10 being sought by life insurers, the proposal so far by

11 life insurers would benefit the shareholders, rather

12 than the policyholders.

13 The reason to understand that is easy. You're

14 not helping the policyholders if you don't need the

15 funding or the backing to protect the policyholder,

16 but, rather, it's on top of what you already have.

17 You aren't in the same condition where you

18 need it to help policyholders. Instead, it's just

19 going to go to a surplus that you already have and

20 eventually go out the door to shareholders. That's all

21 he's saying.

22 So he actually says at the end -- what's the

23 very end? Can you scroll down just a little. Well,

24 it's in there somewhere.

25 They're talking about something I don't

26 understand, is what said. In any case, it's about life

BARBARA STROH, CSR, CRR, CMR

Page 44: Banksvmbia 6.4 Transcript

1658

1 State Respondent-Holgado

2 insurers, not about FGIs, and I think the banks quoted

3 this as very misleading for that reason, your Honor.

4 It doesn't in any way stand for the

5 proposition that the department or Mr. Dinallo thought

6 that the Federal assistance sought in connection with

7 the transformation or, indeed, the Federal assistance

8 that was sought for FGIs in general was in any way

9 sought for the benefit of shareholders, as opposed to

10 policyholders. Okay.

11 Regrettably the banks did essentially the same

12 thing, your Honor, with selective quotation of a

13 February 2009 news article which quoted -- which was

14 quoting Federal officials and talked about Federal

15 officials and their potential assistance to FGIs.

16 The banks tried to argue, your Honor, that

17 based on one of these excerpts from this article, in

18 fact, at the very beginning of it there, was no longer

19 any possibility of Federal assistance to FGIs as of

20 February 11, 2009.

21 But let's actually call up the exhibit, your

22 Honor, they used, PX 235. What they wanted your Honor

23 to read was the first line, which is not a quote from a

24 Treasury Department official but just a statement from

25 the bond buyer publication.

26 It says: "Treasury Department officials

BARBARA STROH, CSR, CRR, CMR

Page 45: Banksvmbia 6.4 Transcript

1659

1 State Respondent-Holgado

2 yesterday appeared to close the door on providing

3 direct assistance to monoline bond insurers as part of

4 their economic recovery programs."

5 But, as you see, a few paragraphs down, your

6 Honor, from that language, it tells a different story.

7 It quotes Mr. Geitner of Treasury: "We are open to

8 suggestions."

9 Now, yes, they hadn't been convinced yet on

10 any good idea, that -- no idea that had been presented

11 to them at that point.

12 But this is entirely consistent, your Honor,

13 with Mr. Dinallo's testimony, both in his affidavit and

14 at his deposition, that the Federal officials like Mr.

15 Geitner had told him consistently told him even from

16 mid-2008 all the way through to 2009, your Honor, that

17 they needed to see a split of the FGIs books before

18 they could consider providing Federal assistance to

19 either or both of the books.

20 And no split had happened at this point. So

21 he had not at this point been presented with what they

22 consider a viable proposal, a good idea.

23 But they were still open to suggestions, and

24 that, your Honor, is exactly what Governor Patterson

25 and Mr. Dinallo did in the days following the

26 transformation.

BARBARA STROH, CSR, CRR, CMR

Page 46: Banksvmbia 6.4 Transcript

1660

1 State Respondent-Holgado

2 They made suggestions for Federal assistance

3 to the FGIs, not just for the municipal policyholders,

4 your Honor, but for the structured finance

5 policyholders, the banks, for them as well.

6 And they did that after having done exactly

7 what the federal government had said was a sine qua non

8 of any proposal for any Federal assistance to the FGIs.

9 Your Honor, now would be a good time for a

10 break, short break, as I'm going to move on to the

11 banks' flawed legal arguments. If it's a little early,

12 I could start now, but it's also a good stopping point

13 for me.

14 THE COURT: If you want to, that's fine.

15 Okay, so why don't we take ten minutes and then

16 continue.

17 MR. GIUFFRA: Thank you, your Honor.

18 (Short recess taken)

19 THE COURT: All right, are you ready to

20 continue?

21 MR. HOLGADO: Thank you, your Honor. Good

22 morning still.

23 Your Honor, I've finished now going through

24 the banks' flawed factual arguments. I am going to

25 spend a little bit more time than that on what seems to

26 be a greater focus of the banks' rebuttal case, which

BARBARA STROH, CSR, CRR, CMR

Page 47: Banksvmbia 6.4 Transcript

1661

1 State Respondent-Holgado

2 was a litany of legal arguments that are also flawed.

3 The first one of these related to some

4 supposed materiality standard that the banks now want

5 to impute into Article 78 of the CPLR and into the

6 jurisprudence of Article 78, even though it does not

7 appear. The word materiality is not a term that

8 appears in either of those two things, your Honor.

9 We have employed the word here. The word

10 material -- and I guess I should be careful when I use

11 the word because then they can take it and run with it,

12 your Honor.

13 I've used the term before in talking about,

14 say, the Lehman ABS CDO analysis, how it's not material

15 unless the department in their determination would be

16 automatically irrational if they didn't review it.

17 That that's the kind of material I meant.

18 Well, your Honor, we talked a lot actually in

19 my presentation about how there can't be a showing that

20 that was material or that the errors were material

21 errors.

22 With respect to those errors, your Honor, we

23 talked a bit about why they couldn't be material

24 either. I'm sorry -- materially inaccurate, I guess.

25 The reasons I pointed out, your Honor,

26 included the fact that accuracy in the context of

BARBARA STROH, CSR, CRR, CMR

Page 48: Banksvmbia 6.4 Transcript

1662

1 State Respondent-Holgado

2 hypothetical stress scenarios predicting the future is

3 somewhat of a misnomer.

4 The fact that the extreme stress or the

5 break-the-bank case in particular was solving backwards

6 and, thus, not evening predicting anything.

7 And also, your Honor, the fact that the

8 contingency reserves, the rainy day fund was more than

9 three times the amount of what any hypothetical short

10 fall in surplus would have been if that near

11 apocalyptic break-the-bank scenario that they were

12 solving backwards from, if that actually did come to

13 pass.

14 But we haven't yet had a chance, your Honor,

15 to address the banks' new assertions that there is some

16 sort of materiality standard in the Article 78 and

17 taking what we have said and what we mean by material

18 and turning it into this other thing.

19 And now, your Honor, one of the many

20 appendices of cases handed up to your Honor by the

21 banks during their argument was one that had these

22 supposed materiality cases for your Honor to consider.

23 That appendix was actually relatively small

24 compared to some of the other ones they gave your

25 Honor. It had just six cases in it , your Honor.

26 I asked the banks to clarify for the court, at

BARBARA STROH, CSR, CRR, CMR

Page 49: Banksvmbia 6.4 Transcript

1663

1 State Respondent-Holgado

2 the time they handed it up, whether any of those cases

3 were Article 78 cases.

4 In fact, your Honor, only two of them are.

5 The others are cases in contexts like the Martin Act,

6 with securities-type threshold for materiality. That's

7 a well-known standard in Federal securities cases as

8 well.

9 I used to be a securities litigator in my

10 former life, your Honor, and materiality standards -- I

11 argued materiality cases myself. It's a very different

12 standard than what we are saying by material.

13 But let's actually talk about the two Article

14 78 cases that appear in that appendix. The first of

15 those, they didn't mention to your Honor.

16 It's in the appendix. They didn't talk about

17 it. It's a case called Bell v. Waterfront Commission.

18 It's from 1967 Court of Appeals.

19 They didn't talk to your Honor about that case

20 for good reason: Because in that case the issue was

21 whether the petitioner himself, a long shoreman, lied

22 under oath to the administrative agency in connection

23 with an interview it had conducted when he applied for

24 registration with the Waterfront Commission.

25 It was actually the challenge was about the

26 commission's revoking of that registration seven years

BARBARA STROH, CSR, CRR, CMR

Page 50: Banksvmbia 6.4 Transcript

1664

1 State Respondent-Holgado

2 later for having discovered that lie.

3 So, it's not really our kinds of facts at all,

4 but it's even better: The lie he told your Honor was

5 that he denied ever having belonged to or participated

6 in the Communist-party-related organization.

7 So they revoked his license seven years later

8 after it came out that he lied about that. Even the

9 Court of Appeals in its decision in 1967 found that

10 that revocation was too extreme a result and changed it

11 to a suspension.

12 It's a McCarthyism case, your Honor. That's

13 why you didn't hear about that. That's let's talk

14 about the one they mentioned specifically.

15 It's a case called Byrne, B-Y-R-N-E, Byrne.

16 This is the one that the banks specifically mention and

17 hold forth, even though it doesn't use the word

18 material, materiality /TEFPLT. It's the materiality

19 standard is what they said for Article 78, is this the

20 materiality case.

21 This involved a certificate of occupancy that

22 the New York City Board of Standards & Appeals had

23 issued, based on a false certification under the lift

24 law that all the required work had been done to obtain

25 that CO, all of it.

26 In fact, none of it had been. Let's actually

BARBARA STROH, CSR, CRR, CMR

Page 51: Banksvmbia 6.4 Transcript

1665

1 State Respondent-Holgado

2 just look at the language that shows that. I'm not

3 going to read this whole thing, but: "It's also

4 significant that the applicant certified that all the

5 work that was necessary to bring the building into

6 compliance with the laws had been completed.

7 "In light of the undisputed fact that none of

8 the required work was actually completed, serious

9 questions are raised as to the veracity of these

10 certifications."

11 That's what it says, your Honor. Let's

12 actually go to the next slide. What it says in

13 footnote 3 is: "After saying that that's what it took

14 to make it so that this certificate of occupancy was

15 not properly done, they actually note that this was a

16 pretty extreme case."

17 And that's why they found what they found,

18 because, look what they concede in footnote-- actually,

19 the footnote, your Honor, is where it says: "To this

20 extent." No ellipses, no ellipsed-out language.

21 That's the text, and that's the footnote that

22 accompanies the text.

23 It says: "We do not dispute that the agency,

24 in the exercise of its discretion, might properly

25 decline to seek revocation of an improperly issued CO

26 in circumstances where the violations were relatively

BARBARA STROH, CSR, CRR, CMR

Page 52: Banksvmbia 6.4 Transcript

1666

1 State Respondent-Holgado

2 minor and the owner has shown a willingness to correct

3 the problem."

4 Then in the footnote, your Honor, it says:

5 "To this extent, we disagree with the motion court's

6 suggestion that the agency must revoke a CO for any

7 violation of the approved plans or applicable laws, no

8 matter how inconsequential."

9 It doesn't use the term material, your Honor.

10 That's about as close as it gets, but if the banks,

11 your Honor, want to cite this case, Byrne, as providing

12 the standard for consequentiality or materiality in the

13 Article 78 context, we'll take it.

14 It says: "Inconsequential errors are not

15 enough."

16 Indeed, what actually was enough, your Honor,

17 was total outright fabrication saying all the work was

18 done when, in fact, none was. Not our facts, your

19 Honor.

20 Now, the banks also made the argument during

21 their rebuttal that the language we showed you in the

22 very press release announcing the department's approval

23 to the world, the press release which made clear that

24 the department considered statutory capital an

25 important touchstone in terms of making sure that the

26 transformation complied with all the Insurance Law

BARBARA STROH, CSR, CRR, CMR

Page 53: Banksvmbia 6.4 Transcript

1667

1 State Respondent-Holgado

2 provisions, that that was inconsistent with the

3 approval letter, which mentions, not surprisingly, this

4 language of section 4105A about how MBIA Corp. will

5 retain sufficient surplus to support its obligations --

6 "surplus" is the language they key your Honor in on.

7 That's language doesn't mention statutory capital.

8 Well, this, your Honor, is another red

9 herring, and here is why: The approval letter, again,

10 it's simply tracking the statutory language.

11 When we have been talking with your Honor

12 about statutory capital, we've been doing so

13 specifically to contextualize the break-the-bank

14 scenario, the extreme stress scenario that Mr.

15 Buchmiller had run.

16 There could be no argument that the department

17 based its finding that section 4105A was complied with,

18 that that's the finding that specifically is set forth

19 in approval letter.

20 There would be no argument that that was based

21 on anything other than the base or expected case

22 submitted by MBIA, not the extreme stress case.

23 Now, Mr. Buchmiller's analysis, of course,

24 included this additional stress testing, including

25 break-the-bank, but as we discussed at great length,

26 break-the-bank was about solving backwards from a

BARBARA STROH, CSR, CRR, CMR

Page 54: Banksvmbia 6.4 Transcript

1668

1 State Respondent-Holgado

2 result, the bank breaking.

3 As Mr. Buchmiller explained in his

4 supplemental affidavit, the correction of those errors

5 would not have changed his conclusion about

6 transformation because MBIA still had that cushion,

7 that rainy day fund of contingency reserves to look to

8 for that brief two-year period of a shortfall in

9 surplus to policyholders.

10 That, your Honor, is why we talked about

11 statutory capital. That's where that came into play.

12 But the department made its findings that the

13 transformation complied with the Insurance Law

14 provisions at issue, including section 4105A, regarding

15 the dividend.

16 It made those findings based on those pro

17 forma post transformation financial statements that

18 MBIA provided the department with its application.

19 Of course, it relied on Buchmiller's work as

20 well, but the findings were based on the base case, the

21 expected case that's reflected in those pro forma

22 financials, not some hypothetical near-apocalyptic

23 extreme stress scenario, to which Mr. Buchmiller

24 himself did not even assign any probability.

25 Indeed, your Honor, the play that out a little

26 bit further, to illustrate this, let's just say

BARBARA STROH, CSR, CRR, CMR

Page 55: Banksvmbia 6.4 Transcript

1669

1 State Respondent-Holgado

2 hypothetically, since we're talking about hypotheticals

3 here, that that hypothetical break-the-bank result

4 actually did come to pass and that hailstorm, that

5 hurricane of unexpected losses actually did come to

6 pass.

7 Let's say that MBIA was applying to the

8 department at that time, as Mr. Buchmiller sort of

9 presumed they would when he talks about this in his

10 recent affidavit, applying to the department for a

11 release of contingency reserves in order to replenish

12 its surplus during that temporary period of shortfall

13 because of this hurricane.

14 Would the department have also been approving

15 another dividend at that point? This is hypothetical

16 again. Would they have been approving a dividend, too?

17 Of course not.

18 In fact, that's consistent with some of those

19 newly unredacted portions of the memo that we just

20 showed. Obviously, the superintendent would not allow

21 dividends in a scenario like that.

22 So, again, by mixing and matching statutes and

23 analyses that look to MBIA's actual financials, ones

24 which use the base case or the expected case with

25 statements and numbers from this hypothetical extreme

26 stress case, which isn't about making reasonable

BARBARA STROH, CSR, CRR, CMR

Page 56: Banksvmbia 6.4 Transcript

1670

1 State Respondent-Holgado

2 assumptions but, instead, about solving backwards. By

3 doing that the banks are offering just another red

4 herring.

5 Now, your Honor, we just touched upon that

6 there is that finding in the approval letter that they

7 carted out about section 4105A and how it was complied

8 with.

9 Now, during the rebuttal the banks reiterated

10 some of their other arguments about the approval letter

11 or tangentially related to the approval letter, and

12 it's worth just briefly hitting on a few of the points

13 we have made about those arguments again.

14 Now, first, your Honor, the banks point to

15 Insurance Law -- former Insurance Law section 302 and

16 how it says that an approval like that of the

17 transformation has to be in writing.

18 It was in writing. So that takes care of

19 that, your Honor.

20 But the banks want section 302 to mean even

21 more than that. They want it to mean that all of the

22 reasons also need to be stated in that writing, except

23 nowhere in section 302 does it say that at all.

24 It doesn't say that all the reasons need to be

25 stated in the writing. It doesn't say that any need to

26 be stated in the writing.

BARBARA STROH, CSR, CRR, CMR

Page 57: Banksvmbia 6.4 Transcript

1671

1 State Respondent-Holgado

2 As we know, your Honor, a lot of the reasons

3 the department had for transformation actually are

4 stated in the approval letter.

5 We have noted that before, so we won't put the

6 court through that again, going through all those

7 findings in the letter, all those bases.

8 One that's worth mentioning, though, is that

9 Mr. Buchmiller's financial review is actually cited as

10 one of the bases for each of the approvals, and you

11 could argue, then, that the approval letter is

12 incorporating by reference everything Mr. Buchmiller

13 did.

14 Now, even though it did that, even though the

15 letter cited reasons, and even though it might have

16 specifically -- even though it could be argued that

17 specifically it incorporated all of Mr. Buchmiller's

18 work by reference, it didn't have to do either of those

19 things.

20 We explained last week, your Honor, about how

21 and when findings actually need to be set forth in a

22 determination, both under the Insurance Law and in New

23 York administrative practice generally, and the general

24 rule, your Honor, is this: They are required only when

25 a hearing is held, only when the agency is acting in a

26 quasi-judicial capacity.

BARBARA STROH, CSR, CRR, CMR

Page 58: Banksvmbia 6.4 Transcript

1672

1 State Respondent-Holgado

2 Now, there's a very recent opinion from the

3 Third Department that the banks mentioned themselves

4 called Office Building Associates, and they initially

5 say your Honor, that Office Building Associates

6 contradicted this argument. This is from the Third

7 Department, May 3 of this year.

8 It does nothing of the sort, your Honor.

9 Indeed, we affirmatively cited this case not only in

10 our May 11 brief in opposition to the banks' prehearing

11 motion, but in the May 4 prehearing motion that we

12 filed, just a day later, a day after the decision came

13 down, your Honor.

14 Now, this case does, indeed, say that the

15 reasons for an agency's determination need to be given

16 even if there is not a hearing.

17 But the court, your Honor, also made clear

18 that this can be done by affidavits submitted in the

19 Article 78 proceeding itself by witnesses with personal

20 knowledge of, and who can, therefore, speak directly

21 to, those reasons.

22 Here's the part of that opinion I want to key

23 in on. This will give you the citation as well, and

24 you can go to the cite, and we'll talk more about this

25 case, but this is how we have cited it in our briefs,

26 your Honor; that: "In a CPLR 78033 review, the court

BARBARA STROH, CSR, CRR, CMR

Page 59: Banksvmbia 6.4 Transcript

1673

1 State Respondent-Holgado

2 may properly consider an agency employee's affidavit,

3 despite the fact that it was not submitted during the

4 administrative process."

5 But the touchstone is that the affiant, your

6 Honor, has to have firsthand knowledge of the

7 decision-making process undertaken by the agency in

8 making the determination that's actually at issue.

9 That actually is important, your Honor,

10 because at issue in Office Building Associates was not

11 the underlying determination of an administrative

12 agency, that sort of determination in the first

13 instance.

14 And the determination there was that -- that

15 underlying determination in Office Building, your

16 Honor, was, one, to revoke a certification of the

17 petitioner to participate in what was called the Empire

18 Zone program, one that --a program that provides tax

19 benefits to businesses that create jobs economically

20 impoverished areas.

21 Now, that underlying determination was not at

22 issue in Office Building but, rather, what was at issue

23 was the upholding of that determination on

24 administrative appeal by a review board.

25 Here's what the court -- the court made clear

26 that the affidavit of the employee of the agency who

BARBARA STROH, CSR, CRR, CMR

Page 60: Banksvmbia 6.4 Transcript

1674

1 State Respondent-Holgado

2 was involved in the underlying determination that while

3 that affidavit could not supply the rationale of the

4 review board when it determined the appeal because he

5 wasn't involved in that, and that was what was actually

6 being challenged in that case, his affidavit could, of

7 course, in the court's words -- and this is a quote --

8 "address the commissioner's reasons for revoking

9 petitioner's certification in the first instance,"

10 unquote.

11 That's something he was involved in doing,

12 your Honor. That's important. That's a very important

13 distinction because here in this case we are only

14 talking about the first instance, the department's

15 underlying determination to approve transformation.

16 We're not talking about some decision on

17 administrative appeal of that determination. And here,

18 your Honor, just like the affiant in Office Building

19 Associates, we're talking about affidavits from the

20 employees and officials of the department who can, of

21 course, address the department's reasons for approving

22 the transformation.

23 THE COURT: Yes.

24 MR. GIUFFRA: Your Honor, I think it might be

25 helpful if Mr. Holgado put up the entire paragraph he

26 is quoting from because that entire paragraph says,

BARBARA STROH, CSR, CRR, CMR

Page 61: Banksvmbia 6.4 Transcript

1675

1 State Respondent-Holgado

2 quote -- do you have it?

3 MR. HOLGADO: I don't have it. I have the

4 cite. Do you want to read it?

5 MR. GIUFFRA: You can give the court a copy.

6 Let me just read it. The paragraph stated -- you can

7 read it into the record.

8 MR. HOLGADO: What's the page?

9 MR. GIUFFRA: I will read it, your Honor --

10 MR. HOLGADO: It's okay. I've got it.

11 MR. GIUFFRA: -- quote: "Stated another way,

12 although Coburn is an employee of the very agency that

13 administers the Empire Zone programs, indeed, may be

14 able to address the commissioner's reasons for revoking

15 petitioner's certification in the first instance, he

16 certainly cannot supply the board's rationale for

17 upholding the commissioner's decision upon petitioner's

18 administrative appeal," citing the Court of Appeals

19 decision in Matter of Weill versus New York City

20 Department of Education.

21 That's actually -- W-E-I-L-L -- New York City

22 Department of education 61. A.D. 3d 407/409 2009.

23 (Continued on next page)

24 (End of take 3)

25

26

BARBARA STROH, CSR, CRR, CMR

Page 62: Banksvmbia 6.4 Transcript

1676

1 PROCEEDINGS - HOLGADO

2 T4 THE COURT: Thanks. If you want to say anything

3 about that further later, I will let you.

4 MR.HOLGADO: Your Honor, the only other thing I

5 want to add to what he just said, that's exactly what I just

6 said.

7 The Court said that the affiant who was involved in

8 the underlying determination could address the rationality

9 of that determination, but not of the Appeal Board's

10 decision, because he wasn't on that panel. It's not for

11 him to say why the Appeal Board upheld the underlying

12 determination. So, that's exactly the quote he just gave

13 your Honor.

14 The banks almost invoked Office Building Associates

15 to the Court the other day in support of their arguments

16 about limiting us to the record and to the four corners of

17 the approval letter, as they call it.

18 Those four corners, by the way, that may

19 incorporate all of Mr. Buchmiller's analysis anyway. But

20 then, when your Honor asked them to provide a case cite,

21 they changed their mind, your Honor.

22 They mention Third Department cases, a Third

23 Department case. What case are you talking about? Then,

24 here is what they said. No, there is this Court of Appeals

25 case your Honor from 1951 called Berry V. O'Connell.

26 They moved out from Office Building. Now, we are

NK

Page 63: Banksvmbia 6.4 Transcript

1677

1 PROCEEDINGS - HOLGADO

2 talking about, more about Office Building, but let's talk

3 about Berry V. O'Connell as well.

4 We noted, your Honor, I pointed this out at the

5 time we noted in our May 11th brief in opposition to the

6 banks pre hearing motion, that Berry V. O'Connell is

7 directly, readily distinguishable from this case.

8 The reason why there is a later case, your Honor,

9 called Claire V. New York State Liquor Authority -- Berry is

10 about the Liquor Authority as well.

11 This Claire case, the Supreme Court case from

12 12 years later, makes clear that the provision of the -- it

13 cites Berry, this case, your Honor.

14 The Claire opinion makes clear that the provision

15 of the Alcoholic Beverage Control Law, the ABC Law that was

16 at issue in Berry, Section 54 of that law, the Claire Court

17 made clear that section mandates the expression and the

18 filing of reasons for non-issuance of a liquor license.

19 That's Section 543 that says that.

20 Says, if the Authority shall disapprove an

21 application for a license or permit, it shall state and file

22 in its offices the reasons therefore. They have to set

23 forth their reasons. It's in the very law.

24 As a result, the Court in Claire noted, that's why

25 the Court in Claire noted the filing, which does set forth

26 those reasons is an indispensable one for judicial scrutiny

NK

Page 64: Banksvmbia 6.4 Transcript

1678

1 PROCEEDINGS - HOLGADO

2 to be applied in Article 78 in that context. That's all the

3 Berry case stands for.

4 As we already made clear, the Insurance Law, the

5 New York Insurance Law contains no similar findings

6 requirements, reasons requirements for the Department's

7 determinations at issue in this proceeding. So, the Berry

8 case, your Honor, provides no support for the banks'

9 argument.

10 Frankly, we understood, your Honor, to have

11 dispensed with Petitioner's arguments about how the State

12 Respondents should be limited to the four corners of the

13 approval letter or the just the 980 pages of the

14 administrative record we initially submitted in connection

15 with our answer.

16 We thought these were dispensed with on the first

17 day of this hearing -- indeed, if your Honor had not already

18 dispensed with them at the conferences we held on April 20th

19 and May 8th in this proceeding.

20 But, the banks have continued to make the

21 argument. So, in addition to pointing out why their cases

22 don't say what they say they say, I feel compelled to

23 briefly show the Court what our cases say, so that it can be

24 assured, the Court can be assured your rulings, that you

25 have already made, are directly in accord with controlling

26 precedent.

NK

Page 65: Banksvmbia 6.4 Transcript

1679

1 PROCEEDINGS - HOLGADO

2 I am talking too fast.

3 Plain and simple, here is the first point.

4 Affidavits of agency employees, with personal knowledge

5 relating to the basis for the agency's determination are

6 properly considered, whereas here that determination was

7 made without a hearing.

8 Here is a case. Martinek, Martinek V. Sawyer. We

9 have cited it a couple of times.

10 Contrary to Petitioner's contention, we may

11 properly consider that affidavit, despite the fact that it

12 was not submitted during the administrative process, because

13 there was no administrative hearing.

14 Go to the next slide. Couple of more cases.

15 Third Department, Humane Society: Contrary to

16 Petitioner's argument, Supreme Court did not err in relying

17 upon affidavits of agency employees in determining whether

18 the State Respondents' determination had a rational basis."

19 Again, that's a situation where there was no hearing, your

20 Honor.

21 Then, another Third Department case saying the same

22 thing, Third Department --

23 THE COURT: Can I ask you a question?

24 Something I seem to have heard Mr. Giuffra say a

25 lot of times is that one of the reasons I should not

26 consider Mr. Buchmiller's affidavits or someone's affidavits

NK

Page 66: Banksvmbia 6.4 Transcript

1680

1 PROCEEDINGS - HOLGADO

2 because they no longer work for the agency and he emphasized

3 that numerous times.

4 I wonder if you could, no one likes when I ask too

5 many questions here, but since I have to make the decision

6 one day, we are getting near the end, can you answer if

7 there are any cases that you are aware of, where there is a

8 difference, it's several years ago -- Mr. Dinallo doesn't

9 work there, we know that, Mr. Buchmiller doesn't work there

10 any more, we know that, we have their affidavits.

11 Is there anything that says just because they are

12 no longer there, I should look at them any differently than

13 if they were still at the agency?

14 MR. HOLGADO: Your Honor, the banks have handed up

15 a lot of appendices to your Honor. I think if the answer to

16 that question was yes, and there was a case that actually

17 held that a former agency employee could not speak to the

18 rational of a decision that he made or participated in when

19 he was an employee, that that was impermissible, you would

20 think they would be leading front and center with that case,

21 your Honor, and handing up those appendices.

22 I can tell you, we know of no such case that

23 addresses it one way or the other. What we can say is that

24 in the particular circumstances of this case, what an absurd

25 result that would be, that this special proceeding -- maybe

26 that's why it doesn't come up a lot, because these

NK

Page 67: Banksvmbia 6.4 Transcript

1681

1 PROCEEDINGS - HOLGADO

2 proceedings are not to supposed to take three years. They

3 are not supposed to have this extensive discovery, that's

4 plenary-like in nature. They are not supposed to take this

5 long.

6 Mr. Dinallo was, you asked at one point, when did

7 he become Superintendent and it was early in 2007 we said.

8 His tenure, as Superintendent, was actually longer than

9 average, among New York Superintendents overall. So, that's

10 just a couple of years.

11 This case has already gone on longer than that

12 entire tenure, despite that fact, so it would be

13 particularly absurd, especially since it has gone on in that

14 regard because of the repeated discovery requests, many of

15 them improper, in our view, that the banks made over and

16 over again in this case, and so I think that is the only

17 argument I can give, given there is no case law addressing

18 it directly, your Honor.

19 THE COURT: Thank you.

20 MR. HOLGADO: Now, your Honor, in addition to these

21 cases that we just cited, there is another concept that we

22 want to address, not just about the affidavits.

23 And, it's an argument we have put forward in our

24 briefs as well. It's any documents that were actually

25 before the Department in connection with its transformation

26 review, are competent and relevant proof of what was before

NK

Page 68: Banksvmbia 6.4 Transcript

1682

1 PROCEEDINGS - HOLGADO

2 the Department in connection with its review, that those

3 documents may be part of the record of this case as well.

4 With respect to the latter concept, your Honor,

5 maybe it wasn't actually before the Department, but at least

6 it's proof of what was. That undoubtedly includes Mr.

7 Buchmiller's file memo, that memo memorializing his

8 transformation review.

9 Although it was completed a few weeks later, it's

10 undeniable it was written specifically in order to

11 memorialize the work that he performed and the conclusions

12 he reached as of the date.

13 THE COURT: I hope that people are not saying I

14 shouldn't be considering that after you spent half the

15 hearing on that memo and worked so hard. I can't imagine

16 that's --

17 MR. HOLGADO: I can't imagine it either, but it is

18 the position the Petitioners take. It's hard to imagine, I

19 agree.

20 But, your Honor, that competent and relevant proof

21 standard that I am referencing, that's from this Court of

22 Appeals case that we talked about at the very start of this

23 hearing, as well as the first day, it's called Mandel V.

24 Brown. Matter of Mandel, 1958, Court of Appeals.

25 In fact, I think, that case was the Court of

26 Appeals case that they had said in their May 11th brief,

NK

Page 69: Banksvmbia 6.4 Transcript

1683

1 PROCEEDINGS - HOLGADO

2 they said, we misrepresented the holding of that case. We

3 submitted in a letter to your Honor on the first day of this

4 hearing, the first day we submitted a letter, where we

5 informed the Court to the contrary. It's the banks who are

6 misreading the holding of that opinion.

7 The banks, if you recall, your Honor --

8 MR. GIUFFRA: On this one we were relying on the

9 First Department's interpretation of Mandel. He now says

10 the First Department, I guess, is wrong and he is right.

11 So, we will discuss it on our rebuttal.

12 THE COURT: I don't want to get into that.

13 MR. GIUFFRA: I don't think we are misrepresenting

14 a case if we are relying on the First Department's

15 interpretation of a Court of Appeals decision.

16 MR.HOLGADO: I think what Mr. Giuffra is actually

17 addressing, they didn't intentionally misrepresent the

18 holding in the case, but they, along with the First

19 Department, misread it.

20 MR. GIUFFRA: Got it.

21 MR. STEINBERG: We are in good company.

22 THE COURT: Better you say it than me.

23 MR. GIUFFRA: I like being in that company though.

24 MR.HOLGADO: The banks actually said something else

25 at the time. They said they would respond to that letter

26 with a letter of their own, presumably explicating why they

NK

Page 70: Banksvmbia 6.4 Transcript

1684

1 PROCEEDINGS - HOLGADO

2 and the First Department were right, and how they did not,

3 in fact, wrongly accuse us of misrepresenting Mandel. We

4 are still waiting for that letter, your Honor. We don't

5 believe it's on its way.

6 They did misread the case, your Honor. This is

7 important, not only because of Mandel V. Brown. Supports

8 why this Court should be able to consider documents like Mr.

9 Buchmiller's file memorandum, but also because the case

10 supports why this Court should not consider documents that

11 were neither before the Department, nor possibly evidence of

12 what was.

13 Now, some of the banks' documents that they have

14 relied on in this case fit this description. I won't delve

15 any further into that argument. We have made it over and

16 over again.

17 Our May 11th opposition to the banks pre hearing

18 motion makes it as well, so does our May 4th pre hearing

19 motion. We have also submitted a letter to your Honor this

20 morning, that I identified as, or at least attempt to

21 identify, all of the documents we know of that, either in

22 the reply and sur-sur reply papers of the Petitioners, or at

23 this argument, that fit that description, that were, that

24 were not before us, the Department, and aren't evidence of

25 what was before the Department.

26 But, I will just say this. This may be

NK

Page 71: Banksvmbia 6.4 Transcript

1685

1 PROCEEDINGS - HOLGADO

2 self-evident itself, your Honor.

3 Clearly, the banks are frustrated with how the law

4 actually shakes out on this issue. Because, as it turns

5 out, and this should not be surprising, what really

6 constitutes, quote unquote, competent and relevant proof as

7 the Mandel V. Brown Court said, what really constitutes that

8 proof for purposes of this Article 78 proceeding, are the

9 documents that were before the Department and statements

10 from the people at the Department who actually worked on the

11 transformation review -- people with firsthand knowledge of

12 these matters, like Mr. Buchmiller, Mr. Dinallo, Mr.

13 Moriarity.

14 The banks are frustrated because none of these

15 folks are their witnesses. They are all ours. It's not

16 fair, they protest. Those affidavits are all lawyer

17 prepared they say.

18 Well, each of these affidavits was signed by a

19 former State official and/or a civil servant for the State

20 of New York under the perjury. And, Mr. Buchmiller, Mr.

21 Dinallo and Mr. Moriarity, they each made clear at their

22 depositions, that they stand behind every word of those

23 affidavits.

24 Indeed, the documents that were actually before the

25 Department, they speak for themselves and tell the same

26 story, your Honor.

NK

Page 72: Banksvmbia 6.4 Transcript

1686

1 PROCEEDINGS - HOLGADO

2 So clearly, the banks are frustrated, but the law

3 is what it is for good reason.

4 This is what is actually probative of the basis and

5 the grounds for the Department's determination, the only

6 issue in this Article 78 proceeding. The rest of this is

7 just side show.

8 Now, the banks also made a novel argument, your

9 Honor, on their rebuttal which is, it cannot possibly be the

10 case that three separate provisions of the Insurance Law

11 Section 1505(a), Section 1411(d) and Section 4105(a) can't

12 be, that they can all be complied with, based on the same

13 underlying factual underpinnings, factual circumstances.

14 Namely, that all of MBIA Corp's policyholders would

15 be left in a position, such their claims would be paid as

16 they came due. That can't mean they are all satisfied.

17 Let's start with the first two of those. This is a

18 slide I used, your Honor. It's got 1505(e) on there as

19 well, but we will talk about the other three.

20 Let's first talk about the first one and the last

21 one. 1505(a): The terms of the transaction shall be fair

22 and equitable. We have heard that phrase a lot.

23 1411(d): The stock redemption must be approved by

24 the Superintendent as reasonable and equitable -- fair and

25 equitable, reasonable and equitable.

26 I think, your Honor, we can all agree that the fact

NK

Page 73: Banksvmbia 6.4 Transcript

1687

1 PROCEEDINGS - HOLGADO

2 that those two terms are interpreted to mean essentially the

3 same thing may be -- that is not too shocking a result.

4 So, let's talk about Section 4105(a) for a second.

5 When the banks made their argument, they used the slide -- I

6 don't have it handy -- but they used the slide, your Honor,

7 which quoted only the "out of earned surplus" language of

8 4105(a).

9 They did not, in that slide, mention the other

10 language, the "will retain sufficient surplus to support its

11 obligations and writings" language. That's the language.

12 THE COURT: Is that the "stop sign"?

13 MR. STEINBERG: Correct.

14 THE COURT: I have to put it together since

15 everybody calls these things different things.

16 MR. HOLGADO: No slogans from the banks, but yes,

17 that's the "stop sign" versus the "speed limit".

18 THE COURT: Okay.

19 MR. HOLGADO: Your Honor, your Honor this is the

20 language that we are actually talking about when we talk

21 about how Corp., paying its claims as they come due after

22 transformation, satisfies 4105(a). We are talking about

23 this language.

24 It's easy to see how this language can be

25 interpreted as being satisfied, as long as policyholders are

26 being paid as they come due. It's almost exactly what that

NK

Page 74: Banksvmbia 6.4 Transcript

1688

1 PROCEEDINGS - HOLGADO

2 language is saying. The company has to have sufficient

3 funds to support its obligations and writings.

4 What are its obligations and writings? What are

5 its obligations? Indeed, it's paying claims.

6 So, that interpretation should not be at all

7 surprising. Yet, the fact that insuring this same very

8 thing that Corp.'s post transformation solvency would happen

9 under the Insurance Law, the fact that insuring that was

10 deemed, in these specific circumstances, to be the

11 touchstone for what was fair and equitable and reasonable

12 and equitable under the other two statutes, that's not

13 surprising either, your Honor.

14 In other words, the State Respondents are not

15 contending that these three statutes mean the same thing in

16 all circumstances.

17 Instead, we are contending they, in applying these

18 particular statutes to the facts and circumstances of this

19 case, the Department reasonably concluded that the same

20 factual underpinnings, the same circumstances, were in this

21 case, dispositive of each of these statutes.

22 This is no different than what your Honor must be

23 familiar with, yourself, in lawsuits that are brought with

24 multiple alternative claims or counts.

25 For instance, several counts might be brought under

26 various sections of the Martin Act and then they tack on a

NK

Page 75: Banksvmbia 6.4 Transcript

1689

1 PROCEEDINGS - HOLGADO

2 claim for common-law fraud and negligent misrepresentation,

3 et cetera. Very often the same underlying factual issues

4 determined by your Honor are dispositive of all of the

5 claims at once.

6 But, does that make all of the claims the same?

7 Does that make all of the statutes the same in every

8 circumstances? No.

9 The same is true here. The fact of whether Corp.

10 could pay its claims as they came due following

11 transformation, happened to be the touchstone for all of

12 these three statutes under these circumstances.

13 Now, one can imagine scenarios where that might not

14 be the touchstone. For instance, take 1505(a). That

15 requires holding company transactions between affiliates to

16 be fair and equitable.

17 Let's talk about something other than a

18 transformation. Let's talk about something like a services

19 agreement that actually happened as part of transformation.

20 Let's say, you do a servicing agreement with an

21 affiliate. This is hypothetical. Say you have a well

22 capitalized insurer, so well capitalized, say hundreds of

23 billions of dollars of surplus, but it is, enters into a,

24 your servicing agreement with its affiliate, where it asks

25 the affiliate to service say ten policies for $10 billion --

26 an exorbitant sum, not a fair sum at all.

NK

Page 76: Banksvmbia 6.4 Transcript

1690

1 PROCEEDINGS - HOLGADO

2 But, the company is so over-capitalized, that

3 paying that sum doesn't hardly put a dent in its surplus.

4 Still has hundreds of billions of dollars in surplus so,

5 it's not even close. They can pay their claims as they come

6 due still.

7 Does that mean the Department can't declare that

8 servicing agreement to be unfair, inequitable? No. It

9 doesn't mean that at all.

10 The touchstone in that circumstances would be

11 something different or might be something different because

12 the facts and circumstances are something different.

13 Here however, the concern, as the banks have

14 repeatedly stressed, what they assert is the core mission of

15 the Department, making sure that policyholders' claims get

16 paid. That also, was the paramount concern that Mr. Dinallo

17 had with respect to transformation.

18 It's not at all surprising then that, the

19 Department determined that all policyholders would be

20 protected and that all of the Insurance Law provisions at

21 issue would be complied with, if they were left in a

22 position where their claims were paid as they come due.

23 Now, the banks also cited an Op Ed piece from Mr.

24 Dinallo in February 2010 in the Wall Street Journal about

25 the AIG crisis, in support of their argument against how the

26 Department interpreted these provisions.

NK

Page 77: Banksvmbia 6.4 Transcript

1691

1 PROCEEDINGS - HOLGADO

2 I am not sure, your Honor, why they did this

3 because the very quote they showed the Court was this one

4 here. Let's go to page two of PX 924. Actually, the

5 paragraph below as well. You have it. That's it.

6 So, what they cited for your Honor was the first

7 paragraph, and then the first sentence of the second

8 paragraph. That's what is in their slide.

9 "My job at the time was to protect policyholders of

10 AIG."

11 Then he continues to say, "my role was to make it

12 clear that whatever happened with the AIG parent,

13 policyholders and the funds set aside to pay their claims,

14 would be protected."

15 Pay their claims -- it's the touchstone.

16 Now, this is exactly the protection of

17 policyholders that the Department made sure of when they

18 approved transformation, and it's exactly how the Department

19 witnesses have testified regarding their understanding of

20 what the Department's duty to policyholders was.

21 Treating them equally, as Mr. Moriarity said, in

22 terms of making sure their claims get paid. Making sure

23 the transaction is fair and equitable, as Mr. Dinallo said,

24 because everyone will have their claims paid.

25 Okay. So, the banks also took issue with the

26 State's citation, my citation, your Honor, to the Court of

NK

Page 78: Banksvmbia 6.4 Transcript

1692

1 PROCEEDINGS - HOLGADO

2 Appeals decision and I will butcher this pronunciation,

3 Kurscics, Kurscics, the Court of Appeals decision.

4 The banks are quite right that in Kurscics, the

5 Court rejected the agency's regulation. That was the word

6 at issue as being directly counter to the clear wording of a

7 particular Insurance Law provision.

8 But, the devil is in the details, your Honor.

9 Let's put up the portion of the Kurscics opinion that talks

10 about that provision that was at issue. It's Insurance Law

11 671.

12 Here we go. Now, it says, Plaintiff contends that

13 the legislature has authorized expressly the recovery up to

14 $1,000 per month for lost earnings and that it should not be

15 interpreted as limiting, should not be interpreted as up to

16 $800, which is the argument being advanced by the Insurance

17 Department.

18 They issued a regulation that makes it, in some

19 circumstances, $800 would be the maximum for lost earnings.

20 The Court said we agree with the Plaintiff's

21 contention that -- the very, the very end of that. And

22 now, the Court said essentially not -- what the Court's real

23 decision was here, your Honor, was that a thousand dollars

24 means a thousand dollars. That's what it said.

25 The legislature knows how to count. They would

26 have written $800 if that's what they meant. This is not

NK

Page 79: Banksvmbia 6.4 Transcript

1693

1 PROCEEDINGS - HOLGADO

2 your Honor, a broad statutory term.

3 Now, go to the section of Kurscics we cited from

4 and they cited the other language here where the Court was

5 contrasting the term that was at issue here -- sorry, not

6 here -- in Kurscics there, with the kinds of terms that

7 might be at issue in other cases.

8 Here is what they said. We recognize that the

9 Superintendent of Insurance has interpreted the applicable

10 provisions of Section 671 of the Insurance Law as limiting

11 recovery for lost earnings to $800 per month. Again, they

12 said no. It says a thousand right in the statute.

13 So, where the interpretation of a statute and this

14 is the part we quoted, your Honor, where the interpretation

15 of a statute or its application involves knowledge and

16 understanding of underlying operational practices, or

17 entails an evaluation of factual data and inferences to be

18 drawn therefore, the Courts regularly defer to the

19 governmental agency charged with the responsibility for

20 administration of the statute. If its interpretation is not

21 irrational or unreasonable, it will be upheld.

22 Then, the rest is the part they want to focus your

23 Honor on. This is what they are saying about the provision

24 at issue here.

25 A thousand dollars? Does that involve these types

26 of considerations? Interpreting what the word a thousand

NK

Page 80: Banksvmbia 6.4 Transcript

1694

1 PROCEEDINGS - HOLGADO

2 dollars means? They say where, however, the question is

3 one of pure statutory reading, a thousand dollars, and

4 analysis dependent only on accurate apprehension of

5 legislative intent, there is little basis to rely on any

6 special competence or expertise of the administrative

7 agency. That's all it's saying, your Honor.

8 In fact, they say if the regulation runs counter to

9 the clear wording "a thousand dollars", it should not be

10 accorded any weight. Indeed, this is the opposite of what

11 we have here, with statutory terms like "fair and equitable"

12 and "reasonable and equitable".

13 Indeed, your Honor, former Superintendent Stewart,

14 one of the banks' experts, he did not wax philosophical at

15 his deposition and would not have waxed philosophical at his

16 deposition about how the term $1000 was a vague concept.

17 That was intended to give the Superintendent wiggle room.

18 That's exactly what he said about our provisions. He would

19 never have said that about this one.

20 So, that can be no more different than it already

21 is from this case because these are the type of broad

22 statutory terms, your Honor, with respect to which the Court

23 of Appeals here made it clear, Courts ought to defer to the

24 reasonable interpretations of the agency.

25 Now, the banks also made the argument on rebuttal,

26 they also made the argument on rebuttal, there is nothing in

NK

Page 81: Banksvmbia 6.4 Transcript

1695

1 PROCEEDINGS - HOLGADO

2 the Insurance Law suggesting that the Superintendent can

3 take actions adverse to policyholders or in violation of the

4 insurer in order to promote the public interest -- something

5 like unfreezing the municipal market, your Honor.

6 Well, your Honor, that's -- I did it again. That's

7 not what happened here. As I noted when going through what

8 we called our pre hoc -- I have been told that the Latin is

9 a little wrong, I know that -- our pre hoc reasons for the

10 approval the Department found that the Insurance Law was

11 complied with and found that policyholders would benefit

12 overall from the transformation.

13 In addition to these two things, they also found

14 the public interest would also be served -- not instead of,

15 but in addition to.

16 So, the banks, they must agree that there is

17 nothing in the Insurance Law that actually prohibits the

18 Department from taking into account the public interest

19 while simultaneously insuring that the Insurance Law is

20 complied with.

21 Indeed, Petitioner's former, Petitioner's own

22 expert, former Superintendent Stewart, testified that the

23 Department's goal of restoring liquidity to the municipal

24 bound market was within the mission of the Department.

25 That's at page 111 and 113, as well as page 115, and page

26 121 at his deposition, your Honor.

NK

Page 82: Banksvmbia 6.4 Transcript

1696

1 PROCEEDINGS - HOLGADO

2 Mr. Stewart also agreed that insurance has too

3 important a public role not to be effected by changes in the

4 surrounding society. That's at page 128 of his deposition.

5 Mr. Stewart also agreed that the Superintendent can

6 take account of external circumstances, like a financial

7 crisis, in determining whether to approve a transaction.

8 That's at page 132.

9 Those depositions quotes, they are included as

10 Exhibit I to Mr. Klein's affirmation, submitted in

11 connection with the State Respondents' surreply papers. For

12 sake of time, I will not throw them on the screen.

13 Yet, the banks, your Honor, still maintain, as they

14 argued in their reply papers, that the Department was

15 somehow acting in excess of is jurisdiction or statutory

16 authority under 78032. They cite cases like Boreali and

17 Health Insurance Association of America for this

18 proposition.

19 This argument is meritless for several reasons,

20 your Honor. We address them in greater detail at pages 51

21 through 54 of our surreply memorandum of law.

22 So, I will just briefly mention a couple of those

23 reasons again here.

24 First, all of the cases the banks rely on, involve

25 the promulgation of regulations by the administrative agency

26 that were inconsistent with a particular legislative

NK

Page 83: Banksvmbia 6.4 Transcript

1697

1 PROCEEDINGS - HOLGADO

2 mandate. Boreali Insurance involved regulations by agency

3 that created the exemption for a smoking ban that was, that

4 was past by the legislature.

5 Here, the Department did not promulgate a

6 regulation. It interpreted and applied the Insurance Law

7 that it has been charged with, the duty of interpreting and

8 applying in the first instance. It did so to a specific

9 application that was made by one of is regulated entities.

10 That's all it did.

11 (Continued on next page.)

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

NK

Page 84: Banksvmbia 6.4 Transcript

1698

1 State Respondent-Holgado

2 T5

3 Now, moreover, the Boreale Court's conclusion

4 that the agency had exceeded its authority rested on

5 what it called the coalescence of four circumstances,

6 the most compelling of which was that those

7 regulations, as I just mentioned, ran directly counter

8 to the legislation itself.

9 The legislature passed a ban on smoking. The

10 agency passed a bunch of exemptions to that ban. The

11 court found that since exemptions *reportedly run

12 counter to such legislative goals, they cannot be

13 justified as simple implementations of them.

14 The same happened in health insurance

15 associations, your Honor. The court found the agency

16 passed regulations that make unlawful what the

17 legislature chose to make lawful. There is no showing

18 of any of that here.

19 Finally, your Honor, the Boreale court found

20 that there was no special expertise required, no

21 technical competence *in field required in order to

22 pass those smoking ban exemptions.

23 Here it could be anything further -- it

24 couldn't be anything further from the case, your Honor.

25 The department's approval was manifestly based on its

26 special expertise on its technical competence in the

BARBARA STROH, CSR, CRR, CMR

Page 85: Banksvmbia 6.4 Transcript

1699

1 State Respondent-Holgado

2 field of insurance regulation.

3 So Boreale is inapposite, and the banks'

4 arguments under 78032 are also meritless for the same

5 reason.

6 Now, your Honor, we mentioned briefly earlier

7 today Insurance Law 1309. I said I would get back to

8 it. I want to talk now about some of the banks'

9 arguments regarding that section. That's Insurance Law

10 section 1309.

11 For starters, your Honor, they've attached

12 particular significance to paragraph 87 of the state

13 respondents *answer in this proceeding.

14 It's worth noting, however, what they didn't

15 show you, which is what that answer is actually an

16 answer to.

17 So let's look at the petition, paragraph 87.

18 It's the second sentence, your Honor. That's the key

19 sentence for us to look at. The banks have essentially

20 defined insolvency in their petition with the words:

21 "The present fair salable value of its assets" --

22 that's MBIA Corp.'s assets -- "are less than the amount

23 that will be required to pay its probable liabilities

24 on its existing debts as those debts become absolute

25 and mature."

26 Essentially, your Honor, the banks put forth

BARBARA STROH, CSR, CRR, CMR

Page 86: Banksvmbia 6.4 Transcript

1700

1 State Respondent-Holgado

2 an allegation about MBIA's solvency that literally

3 tracked the language word for word of a provision of

4 the Debtor and Creditor Law, section 271 of the DCL.

5 That's one of the provisions at issue

6 potentially, your Honor, in the plenary action. So, we

7 responded somewhat--

8 THE COURT: Aren't you going to miss not being

9 here for that?

10 MR. HOLGADO: Yes, your Honor. Yes, your

11 Honor.

12 So we responded somewhat unremarkably to this

13 allegation in the answer -- I'm sorry -- in the

14 petition, and we simply said that the test for solvency

15 that the Insurance Department uses is not this DCL test

16 at all but, instead, the one under the Insurance Law,

17 section 1309 of the Insurance Law.

18 (Mr. Giuffre addressing Mr. Holgado)

19 MR. GIUFFRA: Now, your Honor, I don't have it

20 handy. I think we said we're required to utilize it.

21 That's what he wants me to say. And I'll get to that,

22 too.

23 Your Honor, the banks have coupled this

24 paragraph of our answer with Mr. Buchmiller's testimony

25 that he did not do a, quote, unquote, solvency exam in

26 connection with the transformation. They've coupled

BARBARA STROH, CSR, CRR, CMR

Page 87: Banksvmbia 6.4 Transcript

1701

1 State Respondent-Holgado

2 the two things.

3 *again, Mr. Buchmiller's testimony is they're

4 not remarkable at all either because that's Mr.

5 Buchmiller's term of art, as the testimony makes clear.

6 That's his term of art for the full-scope

7 statutory examination that take place pursuant to

8 Insurance Law section 309, the ones that take 12 to 18

9 months to complete, the ones that happen every three to

10 five years.

11 Again, that is 309, not 1309. Insurance Law

12 1309 does not provide for exams. It does not require

13 that a full-scope exam be conducted every time it is

14 resorted to or looked at or utilizeed.

15 The banks repeatedly have conflated 1309 with

16 309. Those are separate statutes. Let's actually call

17 up 1309.

18 To be clear, Insurance Law 1309, your Honor,

19 is something to which a department examiner who is

20 actually conducting a 309 exam will refer to in

21 connection with that exam.

22 The statute even makes clear at the very start

23 that it should be referred to in such a circumstance,

24 it says, "whenever the superintendent finds from a

25 financial statement or report on examination."

26 So that second thing -- that's a 309

BARBARA STROH, CSR, CRR, CMR

Page 88: Banksvmbia 6.4 Transcript

1702

1 State Respondent-Holgado

2 examination, your Honor -- as it makes clear, section

3 1309 can also be referred to whenever the department

4 looks at and evaluates a financial statement of one of

5 its regulated insurers.

6 Now, here the department, in reviewing the

7 Bridge opinion regarding MBIA Corp.'s audited third

8 quarter 2008 financial statement, as well as analyzing

9 MBIA Corp.'s pro forma post transformation financial

10 statement, of course, it utilized section 1309 as a

11 guidepost. And that's all the answer was saying that

12 we would do. We're required to utilize that, not the

13 DCL.

14 In other words, the department did exactly

15 what we said in our answer. Consider Corp.'s post

16 transformation solvency by reference to the Insurance

17 Law definition, not the DCL one.

18 Now, there are a couple of arguments, your

19 Honor, that the banks have made about what exactly this

20 provision means, how it works and what, if anything, it

21 requires the department to do.

22 I want to address a couple of those arguments.

23 The first one is this: The banks make a point

24 regarding section 1309, that is similar to the points

25 they made about 4505A I mentioned earlier.

26 Both of those statutes contain essentially

BARBARA STROH, CSR, CRR, CMR

Page 89: Banksvmbia 6.4 Transcript

1703

1 State Respondent-Holgado

2 references to the insurer's surplus. In section 4105A

3 your Honor, it's explicit. The word "surplus" is

4 actually used.

5 Here in 1309 in one of these two prongs that

6 they've made so much of, your Honor, that's in the

7 middle of this 1309A, there is a definition, your

8 Honor, that is essentially another way of saying

9 "Surplus" -- or another way of saying that the company

10 has negative surplus, and that specifically is the

11 language "in excess of required reserves and other

12 liabilities over admitted assets."

13 Now they keyed in on that language, your

14 Honor. They want to say that that means that statutory

15 capital is irrelevant here, and that the existence of

16 contingency reserves is irrelevant here.

17 Well, in a way they're kind of right. When we

18 have talked to your Honor -- I addressed this earlier.

19 When we talked to your Honor about statutory capital

20 and contingency reserves, we did so specifically to

21 place into context, as I mentioned, Mr. Buchmiller's

22 opinions about how the errors in the hypothetical

23 extreme stress scenario, the break-the-bank scenario

24 would not have led him to change his conclusions about

25 MBIA Corp.'s post transformation solvency.

26 We haven't been talking about those things in

BARBARA STROH, CSR, CRR, CMR

Page 90: Banksvmbia 6.4 Transcript

1704

1 State Respondent-Holgado

2 connection with MBIA Corp.'s financial statements,

3 their third quarter audited ones or their pro forma

4 post transformation ones.

5 There is a reason why, your Honor. It's

6 because the banks, again, are mixing apples and oranges

7 here to suit their arguments.

8 When the department evaluates a financial

9 statement with reference to the section 1309, it's

10 looking at something that's based not on a hypothetical

11 stress scenario but on the base case, on the expected

12 case.

13 Certainly it's not relying, your Honor, on a

14 stress case that assumes the result of a broken bank

15 because it's an empty exercise where you would already

16 know the answer. You don't need to resort to anything.

17 So, anything -- to be clear, Corp.'s third

18 quarter 2008 audited financials and their pro forma

19 post transformation financials, those are based on that

20 expected case, not on these hypothetical ones.

21 In the base case, your Honor, there is no

22 dispute that the company had a positive surplus

23 following transformation. So there can't be any

24 argument that that prong isn't somehow met.

25 But the banks, your Honor, make another

26 argument about 1309. This one is worth spending

BARBARA STROH, CSR, CRR, CMR

Page 91: Banksvmbia 6.4 Transcript

1705

1 State Respondent-Holgado

2 actually a little bit of time on, if we can.

3 The banks were, obviously, concerned with some

4 testimony that Mr. Moriarty has given in this case and

5 that we showed your Honor during our initial

6 presentation. I want to show the slide again of that

7 testimony from Mr. Moriarty.

8 He makes two points here, your Honor. The

9 first is that the "department" -- this is Mr.

10 Moriarty's words: "The department, in my 31 years in

11 the department, and based on conversations with

12 colleagues, we have never used the second part of this

13 provision to determine an insolvency."

14 The second part he's referring to is the

15 reinsurance prong, your Honor. He says: "We have

16 always used that first prong, the standard of whether

17 your liabilities are more than your assets."

18 He goes on to say, your Honor, that: "With

19 respect to the FGI marketplace, where, arguably, there

20 are no reinsurers for the structured securities, I'm

21 not sure that it" -- he's referring to the reinsurance

22 test -- "I'm not sure that it would provide, at least

23 from an intellectual basis, or even a systemic basis, a

24 good test to determine whether a financial guarantee

25 company is insolvent."

26 Why? Because there is no capacity out there,

BARBARA STROH, CSR, CRR, CMR

Page 92: Banksvmbia 6.4 Transcript

1706

1 State Respondent-Holgado

2 he says. Because of the uncertainty associated with

3 structured securities, the concerns with ratings, the

4 complex structured securities market is essentially

5 shut down. Sufficient market? No. Almost no market.

6 Now, as we mentioned before, the banks cannot

7 refute this testimony. They did not refute it. They

8 hired four former superintendents of the New York

9 Insurance Department, your Honor.

10 None of them refuted it. None of them said

11 Mr. Moriarty was wrong, that the department actually

12 used this test during his 31 years.

13 Instead, the banks are now arguing that it's

14 somehow legal error not to conduct both of these

15 prongs, both of these what they call tests under

16 section 1309 whenever the department may happen to

17 either conduct a statutory exam under section 309 or

18 even simply evaluate an insurer's financial statement,

19 that every time the department does either of those

20 things, they must conduct both of those tests to make

21 sure that the company passes bowl, or else they're

22 required to find the insurer insolvent under section

23 1309.

24 That's their argument. And if the banks are

25 correct, your Honor, if the banks are right, then the

26 legislature -- if the legislature really did write a

BARBARA STROH, CSR, CRR, CMR

Page 93: Banksvmbia 6.4 Transcript

1707

1 State Respondent-Holgado

2 statute that requires the department to find an insurer

3 insolvent whenever these two prongs or so-called tests

4 are satisfied, then every report on examination, not

5 just of FGIs but of all of the 1500 insurers under the

6 department's regulatory purview, all of those 31 years

7 of reports on examination of all of those 1500

8 insurers, they should all be invalidated because of the

9 examiner's supposed failure to conduct the reinsurance

10 test.

11 MR. GIUFFRA: Your Honor --

12 MR. HOLGADO: And that, your Honor, would be

13 quite a revelation because this is already the biggest

14 Article 78 case in history. That would make it quite a

15 bit bigger.

16 MR. GIUFFRA: Your Honor, as you will recall,

17 last week Mr. Steinberg showed the court a brief where

18 the reinsurance test was, in fact, applied by the

19 department.

20 MR. HOLGADO: We'll get to it.

21 MR. GIUFFRA: Your Honor, my only point is

22 he's making statements that are not supported by the

23 record before the court.

24 THE COURT: Okay, I am certainly aware of

25 that. I did not forget. As a matter of fact, I was

26 going to ask him a question about that, but he says

BARBARA STROH, CSR, CRR, CMR

Page 94: Banksvmbia 6.4 Transcript

1708

1 State Respondent-Holgado

2 he's going to get to it, so I will hold him to that.

3 MR. HOLGADO: I am going to get to it, your

4 Honor. In fact, I'm going to point out it was not made

5 by the department, as he said. We'll get to it. We'll

6 get there.

7 So, your Honor, thankfully, thankfully, the

8 legislature did not do what I just said, did not do

9 what the banks argued, did not make it so that all of

10 those statutory examinations needed to be invalidated

11 over the 31 years of Mr. Moriarty's tenure, which, by

12 the way, that tenure ended a year or two ago, before

13 this case that he's referring to. That's another

14 point, but we'll get to it.

15 So let's actually show the statute again.

16 Let's look at 1309. Again, the important clause here

17 is the first one. We're talking about 1309A. The

18 important clause is the first one, everything up until

19 "regular course of business."

20 Let's highlight that actually. The first two

21 lines, "up until the course of business": "Whenever

22 the superintendent finds" -- whenever the

23 superintendent finds from a financial statement or a

24 report on examination that an authorized insurer is

25 unable to pay its outstanding lawful obligations as

26 they mature in the regular course of business."

BARBARA STROH, CSR, CRR, CMR

Page 95: Banksvmbia 6.4 Transcript

1709

1 State Respondent-Holgado

2 Now that's the language, your Honor, when

3 department witnesses talk about 1309, meaning pay your

4 claims as they come due, and we have used that phrase

5 over and over again, "pay your claims as they come

6 due." That's this language.

7 "Unable to pay its outstanding lawful

8 obligations as they mature," as they come due.

9 Now, if you read the whole provision, it makes

10 clear that only when the superintendent makes this

11 finding, only then shall the insurer be deemed

12 insolvent.

13 That's actually highlighted, the last two

14 lines of A, everything but this thing in the middle

15 that we'll talk about at length in a second: "Such

16 insurer shall be deemed."

17 So then the natural reading of this, your

18 Honor, is that whenever the superintendent finds the

19 company can't pay its claims as they come due, it shall

20 be deemed insolvent.

21 What is noteworthy, your Honor, is what

22 Insurance Law 1309A does not say. It does not say that

23 whenever either of these two prongs, as we're calling

24 them, in the middle starting with the words "as shown

25 by," it does not say that whenever either of these

26 prongs are met, the department must make a finding or

BARBARA STROH, CSR, CRR, CMR

Page 96: Banksvmbia 6.4 Transcript

1710

1 State Respondent-Holgado

2 shall make a finding that the insurer can't pay its

3 claims as they come due. It could have said that. It

4 doesn't say that.

5 What it actually says is that: "Whenever the

6 department makes a finding that an insurer can't pay

7 its claims as they come due, that finding needing to be

8 justified by a showing that at least one of these two

9 prongs are present."

10 Those prongs, again, the liabilities and

11 required reserves, exceed assets or that the insurer

12 can reinsure its book.

13 You have to justify why you're finding the

14 real finding, the thing that we've been talking about

15 all along, your Honor, paying your claims as they come

16 due, not being able to, you have to justify it with one

17 or the other.

18 The most important -- there are different

19 reasons why the department would need to justify such a

20 finding, your Honor, and the most *wore one is kind of

21 referenced in this statute.

22 The department may decide in its discretion to

23 bring an Article 74 petition against such an insurer to

24 take it into either rehabilitation or liquidation.

25 In doing so, it may need to demonstrate the

26 insurer -- its insolvency under the statute. They have

BARBARA STROH, CSR, CRR, CMR

Page 97: Banksvmbia 6.4 Transcript

1711

1 State Respondent-Holgado

2 to do that sometimes as a ground for that petition.

3 That's one of the various grounds that you can assert

4 for such a petition.

5 So the legislature simply wanted to give the

6 department the power to be able to do that, to be able

7 to take an insurer in order to make a finding that it

8 couldn't pay its claims as they come due by showing

9 either of these two things.

10 That's what the statute actually says, that if

11 the department can show one of these two prongs, it may

12 make a finding that company can't pay its claims as

13 they come due.

14 But it does not have to make such an

15 independent finding. That's why the word "whenever" is

16 there instead of "shall."

17 Now, once it does make a finding, the word

18 "shall" is right in the statute actually, your Honor:

19 "Once it does make a finding, that necessarily means

20 the insurer shall be deemed insolvent."

21 So the legislature knows how the use the word

22 "shall," and it's right there in the statute. It's

23 just not where the banks would like it to be.

24 That's a good point because it's actually

25 worth just showing a quick example of how the

26 legislature knows how to require the department to do

BARBARA STROH, CSR, CRR, CMR

Page 98: Banksvmbia 6.4 Transcript

1712

1 State Respondent-Holgado

2 something when it wants to.

3 It knows how the use the word "shall," and

4 here's just one quick example. *as a warning is this a

5 statute that has nothing to do with this case either.

6 We have shown you a couple of statutes like

7 that. This is another one of those. This is section

8 1212 of the Insurance Law.

9 THE COURT: I won't even write it down.

10 MR. HOLGADO: But, your Honor, it employs the

11 *long of "shall," and it does so in part E: "When

12 service of process is made on the superintendent, he

13 shall forward a copy of that to the insurers designee."

14 It also says, 1212, subsection G, says: "The

15 superintendent shall keep records." Again, not an

16 issue here, your Honor. They know how to use the word.

17 Let's go to Insurance Law 1309. Let's go to

18 1309. Your Honor, it doesn't say that here. It

19 doesn't say that the superintendent shall make a

20 finding.

21 It says that: "Whenever he does, the

22 following shall happen, and the following may happen."

23 The "may" part is he may take them in under Article 74.

24 So once you read the Insurance Law and the

25 Insurance Law 1309 the way it is actually written, you

26 see it is more about the power of the department to

BARBARA STROH, CSR, CRR, CMR

Page 99: Banksvmbia 6.4 Transcript

1713

1 State Respondent-Holgado

2 find an insurer insolvent, rather than the department's

3 supposed duty to do so, a mandate on the department to

4 make such a finding.

5 Then, your Honor, it's easy to understand why

6 the legislature would have been somewhat lenient in a

7 way or overinclusive, you could even say, in what the

8 superintendent would need to show in order to make a

9 finding that that insurer can't pay its claims as they

10 come due or its obligations as they mature, is what the

11 language actually says.

12 For example, just to take an example, this

13 might be a little bit in the weeds, but I'm going to

14 try to illustrate this.

15 Suppose an insurer has more liabilities and

16 required reserved than assets. So we're going to talk

17 just about that first prong, one we have already shown

18 is met here anyway.

19 Let's say we have a hypothetical insurer that

20 has more liabilities and required reserves than assets.

21 That's not based on some hypothetical stress scenario,

22 but actually financial statements say that.

23 Suppose that same insurer has no prospects for

24 remedying that deficit. For instance, they have no

25 other sources of investment income, let's say, no

26 premiums still due to be collected on existing

BARBARA STROH, CSR, CRR, CMR

Page 100: Banksvmbia 6.4 Transcript

1714

1 State Respondent-Holgado

2 policies, no way to dig themselves out of that surplus

3 hole.

4 Yet, this insurer, your Honor -- let's say

5 assuming that this insurer is not currently failing to

6 pay its claims, for whatever reason.

7 It may be because it has the assets available

8 from its required reserve to pay whatever claims are

9 due, or it just didn't even have claims to pay at the

10 moment; they're long-tailed claims that won't come due

11 for many years. For whatever reason, it can't be

12 demonstrated that they actually aren't paying a claim.

13 But the legislature made it, your Honor, so

14 that the insurer would not be able to tell the

15 department in those circumstances no, you can't

16 declare -- you can't make a finding that I am

17 insolvent, you can't make a finding because I haven't

18 actually failed to pay a claim yet.

19 Well, these prongs are worded in such a way,

20 your Honor, that this is about power, not duty. These

21 prongs are worded in such a way that the department, as

22 long as it can show that the insurer's current assets,

23 let's say are exceeded by its liabilities. That's

24 enough.

25 Being enough doesn't mean that the department

26 is compelled to make that finding. But it can.

BARBARA STROH, CSR, CRR, CMR

Page 101: Banksvmbia 6.4 Transcript

1715

1 State Respondent-Holgado

2 Because that's more, your Honor, because consider a

3 very similar but different example.

4 Assume that same insurer, same facts, except

5 in this example the insurer actually does have

6 prospects for being able to dig its way out of that

7 surplus hole, to remedy that assets-liabilities

8 deficit.

9 Whether maybe because it has sources of

10 investment income, it can collect additional premiums,

11 some other reason. In such a scenario the legislature

12 has, quite rightly, given the department discretion not

13 to find the insurer unable to pay its claims and deemed

14 insolvent.

15 The department has the discretion again to do

16 either/or, but what the legislature has essentially

17 done with these prongs, your Honor, is word them in

18 such a way to entrust the department and word the

19 entire statute in such a way to entrust the department

20 with the discretion to determine when it needs to make

21 such a finding and when it doesn't.

22 Your Honor, let's bring us back to Mr.

23 Moriarty's testimony because that is entirely

24 consistent with his testimony.

25 Not only does it explain why the department

26 never once utilized that reinsurance prong in Mr.

BARBARA STROH, CSR, CRR, CMR

Page 102: Banksvmbia 6.4 Transcript

1716

1 State Respondent-Holgado

2 Moriarty's 31 years, because it did not have to do so.

3 Not only does it explain that, but it also

4 puts into better context Mr. Moriarty's second

5 statement on that slide, your Honor, his testimony

6 about why it would not make sense for the department to

7 invoke the reinsurance prong of section 1309, which

8 again, that's a market-based prong which assumes an

9 efficient market for reinsurance.

10 Mr. Moriarty was testifying about why it would

11 not make sense to invoke that prong where there is not

12 only not an efficient market, but essentially no market

13 at all for the reinsurance issue.

14 So what it shows is that the department could

15 consider, should consider, indeed, circumstances like

16 that in exercising the discretion it has been afforded

17 by the legislature to determine whether to make a

18 finding of insolvency under section 1309.

19 The clear wording of the statute, your Honor,

20 shows the legislature entrusted the department with

21 this discretion.

22 Okay, thanks, Bunky.

23 Having said that, your Honor, keep in mind how

24 the statute is actually worded. The banks' argument --

25 now we're getting to it -- the argument based on the

26 recent filing by the New York Liquidation Bureau and by

BARBARA STROH, CSR, CRR, CMR

Page 103: Banksvmbia 6.4 Transcript

1717

1 State Respondent-Holgado

2 Mr. Bing of that bureau in the Executive Life New York

3 case -- we call it the ELNY case -- their argument that

4 somehow that proves that the reinsurance test of

5 Insurance Law 1309 is somehow alive and well in Nassau

6 County, it proves too much, your Honor.

7 First of all, the record must be corrected. I

8 alluded to this earlier. Not me but them, your Honor.

9 Mr. Steinberg asserted that this was a filing.

10 In fact, Mr. Giuffra just repeated the

11 assertion, asserted that this was a filing by the

12 Department of Financial Services, the successor to the

13 New York Insurance Department.

14 As Mr. Giuffra knows, as Mr. Steinberg should

15 know, this is not the case. It is, in fact, a filing

16 by the New York Liquidation Bureau. Mr. Bing's

17 affidavit, which since 1992, nearly 20 years ago, has

18 been acting as the court-appointed rehabilitator of

19 ELNY.

20 This is an important distinction, your Honor,

21 because in that role, and, indeed, in anything that the

22 New York Liquidation Bureau does, it is acting in a

23 private, nongovernmental capacity and not as a state

24 officer, not as an administrative agency of the state.

25 The Court of Appeals, your Honor, made this

26 clear in the case Dinallo v. DiNapoli. This case has

BARBARA STROH, CSR, CRR, CMR

Page 104: Banksvmbia 6.4 Transcript

1718

1 State Respondent-Holgado

2 quotes throughout it, your Honor, but I'm just going to

3 give you one of them:

4 "The superintendent as liquidator occupies a

5 legal status that is separate and distinct from the

6 superintendent of insurance as the public official

7 charged with regulating the industry generally.

8 "Thus, while the superintendent role as

9 liquidator is judicial and private, his role as

10 regulator and superintendent is administrative and

11 public.

12 "Consequently, the superintendent as

13 liquidator is not a state officer but, rather, one who

14 acts on behalf of a private entity."

15 Your Honor, that statement refers to the two

16 hats of the superintendent of insurance and how the New

17 York Liquidation Bureau is the private hat.

18 So this is not a filing by the department.

19 They know this.

20 Leaving that aside, your Honor, even assuming

21 that this was a filing by the department, which it was

22 not, it does not support the banks' arguments for

23 several reasons.

24 Not only is this filing from 2012 and, thus,

25 in no way contrary to Mr. Moriarty's testimony, the

26 test had not been used in his 31 years at the

BARBARA STROH, CSR, CRR, CMR

Page 105: Banksvmbia 6.4 Transcript

1719

1 State Respondent-Holgado

2 department, which ran past the time of transformation,

3 by the way, and again, this is -- even if we assume for

4 the sake of argument that this is a filing from the

5 department, not only is this not probative for that

6 reason, not only does the affidavit rely not only on

7 the reinsurance prong but, in fact, it relies on --

8 primarily it relies on the assets-liabilities prong,

9 the one that Mr. Moriarty says the department always

10 uses.

11 Not only that, but because of what we just

12 discussed about how Insurance Law 1309 is actually

13 worded, this filing, even if it were from the

14 department, which it isn't, this filing shows nothing

15 more than an attempt being made to justify a finding of

16 insolvency under the Insurance Law to the judge in this

17 rehabilitation proceeding.

18 Exactly one of those reasons why the

19 legislature put these prongs in there, knowing that the

20 department has to make that showing.

21 In ELNY what they're doing is trying to

22 convert the rehab into a liquidation with this filing,

23 so they're making that justification there. We talked

24 about that before.

25 So, your Honor, that's why the filing has

26 no -- does no violence to the testimony from Mr.

BARBARA STROH, CSR, CRR, CMR

Page 106: Banksvmbia 6.4 Transcript

1720

1 State Respondent-Holgado

2 Moriarty in this case.

3 Now, there is one more issue I want to discuss

4 with your Honor. I think we're going to be able to do

5 it before lunch, is the good news.

6 The last issue I want to talk to your Honor

7 about today is this new argument that the banks are

8 advancing about the stop sign: No slogans, your Honor,

9 but the stop sign, the out-of-earned-surplus test of

10 4105A relating to the dividend.

11 So for starters, your Honor, early on Friday

12 morning of last week the banks used a demonstrative.

13 They quoted two portions of the transcript of my oral

14 argument, my initial presentation, and in both cases

15 they did so inaccurately.

16 They did so with respect to this argument:

17 With the first quote: "They had been simply referring

18 to the notion that this dividend was paid out of

19 anything other than earned surplus," and that was where

20 they stopped it.

21 They lopped off the end of my sentence because

22 it was separated actually by a brief word from your

23 Honor. Here's what I actually said, if we can show

24 that transcript:

25 "But the notion that this dividend was paid

26 out of anything other than earned surplus, which is --

BARBARA STROH, CSR, CRR, CMR

Page 107: Banksvmbia 6.4 Transcript

1721

1 State Respondent-Holgado

2 that's the first part.

3 "The Court: Yes.

4 Mr. Holgado: "There is no basis for it."

5 They left that part out, your Honor.

6 Here is the second quote they use. This one

7 actually works, your Honor. I didn't get a chance to

8 mention this when I stood up when they showed the

9 slide, but this next quote, I think we'll all agree,

10 was clearly a transcription error that happened, of

11 course, as Nina well knows, because of how quickly I

12 speak.

13 But specifically the banks cited page 898 of

14 the transcript on the second day of my argument, and it

15 says that I said this -- actually, yeah, this is what

16 the transcript says I said:

17 "We're not saying that a company can pay --

18 and MBIA did pay a dividend -- out of something other

19 than earned surplus."

20 That's what they quoted me as saying. Your

21 Honor, that would be quite an admission if it's what I

22 said.

23 But as I noted to Mr. Steinberg at the time he

24 used the slide, the transcript is missing the word

25 "not," "did not pay a dividend out of earned surplus.

26 MBIA did not pay a dividend out of "earned surplus --

BARBARA STROH, CSR, CRR, CMR

Page 108: Banksvmbia 6.4 Transcript

1722

1 State Respondent-Holgado

2 I'm sorry. I did it again -- "out of something other

3 than earned surplus."

4 Indeed, I have submitted to your Honor this

5 morning a letter clarifying and correcting the

6 transcript of my initial oral presentation.

7 Again, I fully admit that I spoke too quickly

8 at times and that led to these issues, but I've made

9 those corrections. This is, of course, among them.

10 Here actually is how the transcript should

11 read as a result of those corrections. Andy, 207.

12 "We are not saying that a company can pay --

13 and MBIA did not pay -- a dividend out of something

14 other than earned surplus."

15 So, actually, in addition to the word "not"

16 being there, I actually moved the M dash to where I

17 believe it belongs as well because I believe that

18 perhaps created some confusion.

19 So I think the banks are well aware --

20 MR. STEINBERG: Could we have a clarification

21 here. If he wants to change it, that's fine. If he

22 wants to change the transcript, that's fine.

23 But is he saying -- because now I'm utterly

24 confused and I suspect your Honor is, too -- is he

25 saying is that a company can pay a dividend out of

26 something other than earned surplus?

BARBARA STROH, CSR, CRR, CMR

Page 109: Banksvmbia 6.4 Transcript

1723

1 State Respondent-Holgado

2 MR. HOLGADO: No.

3 THE COURT: He's saying we're not saying that.

4 MR. STEINBERG: That's what I want to make

5 clear. The double negatives always throw me off.

6 Maybe I'm slow in the morning.

7 Well, we're not saying other than. I just

8 want to make clear because we didn't say that MBIA was

9 paying it.

10 That's the dispute. We just want to make

11 clear -- and we'll address this -- that he's saying

12 that a company may not pay these amounts out of

13 anything other than earned surplus.

14 MR. HOLGADO: Your Honor, I'm saying that

15 that's what I said, and I will let the transcript speak

16 for itself. I will let Mr. Steinberg make whatever

17 arguments he wants to make when they get the last word.

18 THE COURT: Okay.

19 MR. HOLGADO: So, your Honor, I think the

20 plaintiffs are well aware that we're not taking that

21 position he's referencing.

22 Now that I have corrected it, maybe they'll

23 correct their slide. But their rebuttal, your Honor,

24 the banks also once again relied on that 1985 opinion

25 from the Office of the General Counsel at the Insurance

26 Department, and Mr. Steinberg took your Honor through

BARBARA STROH, CSR, CRR, CMR

Page 110: Banksvmbia 6.4 Transcript

1724

1 State Respondent-Holgado

2 literally every part of that opinion except for the one

3 long paragraph where the holding is. So let's take

4 another look at that opinion.

5 Your Honor, looking at the paragraph, that's

6 actually the holding again the first big paragraph on

7 page 2, Bunky.

8 Why don't the banks want your Honor to read

9 this paragraph? They showed every other part of the

10 document to you other than this paragraph. "I find no

11 rational basis for," etc. equating net income -- I

12 shouldn't say "etc." "I find no rational basis for the

13 conclusion in the company's letter equating net income

14 and earned surplus."

15 That's the dispute, your Honor.

16 (Continued on next page)

17 (End of take 5)

18

19

20

21

22

23

24

25

26

BARBARA STROH, CSR, CRR, CMR

Page 111: Banksvmbia 6.4 Transcript

1725

1 PROCEEDINGS - HOLGADO

2 T6

3 MR. HOLGADO: Now, the reference that is made in

4 passing to the last statutory accounting statement on

5 file, that's on page one. That occurs in this

6 background section on page one if you actually go to

7 that one.

8 He tries to characterize this as a holding, your

9 Honor. It's an in a background section at the start where

10 the opinion is describing essentially, the procedural

11 history, the back and forth between the insurer and the

12 Department -- we said this to them, they said this to us.

13 The Department was pointing to some evidence that

14 the company, the insurer, did not have sufficient earned

15 surplus. They are pointing to the evidence that will be

16 readily available to the company. Look at your last

17 statement.

18 So, the dispute undeniably however, between the

19 insurer and the Department was not about that. It was

20 about whether the company had to support its dividends with

21 earned surplus at all or, whether it could instead, rely on

22 some sort of GAAP measure, Generally Accepted Accounting

23 Principles measure, like net income, and those, your Honor,

24 are not our facts.

25 So, the suggestion that the holding of this opinion

26 is that dividends cannot be approved by the Department,

NK

Page 112: Banksvmbia 6.4 Transcript

1726

1 PROCEEDINGS - HOLGADO

2 above the amount of earned surplus reflected on the last

3 statement on file with the Department, is untenable.

4 Not just because the reading that the banks have

5 offered of this opinion, your Honor, is a tortured one, but

6 also because we have shown you an example, this NCIC

7 approval, which shows that this is not at all the

8 Department's established practice.

9 So, let's actually talk about that NCIC approval.

10 The banks made this a feature of their rebuttal presentation

11 actually. They seem particularly, your Honor, particularly

12 concerned about this precedent -- with good reason.

13 So, they threw everything but the kitchen sink at

14 it. They raised authenticity questions, confidentiality

15 questions, they called the approval a mystery document.

16 But, let's clear all of those mysteries up right now.

17 First, your Honor, this question of confidentiality

18 that they raised. There is no such question here. The

19 insurer, NCIC, was contacted by the Department prior to Mr.

20 Serio's deposition, when this -- the application letter and

21 materials were used as an exhibit, and NCIC specifically

22 consented to use of the document at issue, the November 2001

23 application letter. Period.

24 MR. GIUFFRA: Is there a written communication?

25 We certainly haven't received it. This is the first we

26 heard of it.

NK

Page 113: Banksvmbia 6.4 Transcript

1727

1 PROCEEDINGS - HOLGADO

2 MR.HOLGADO: This actually, your Honor, raises my

3 other point.

4 What entitlement do they have to such a letter?

5 What standing do the banks have to complain about some

6 supposed confidentiality breach of the use of a document

7 that is ten years old, and for which the company itself has

8 provided its consent?

9 What standing whatsoever do they have to complain

10 about the confidentiality of it? Are they suggesting, your

11 Honor, this document is somehow less devastating to their

12 tortured reading of the OGC opinion? Simply if it was

13 somehow brought up at Mr. Serio's deposition and before your

14 Honor, in violation of some sort of a confidentiality

15 provision that inures to the benefit of the insurer who

16 consented to its use?

17 Your Honor, I would just --

18 MR.HOLGADO: It's ridiculous.

19 MR. GIUFFRA: I would note for the record, when we

20 were exchanging exhibits, we objected to this particular

21 document on authenticity grounds and we still do.

22 MR.HOLGADO: Okay, your Honor.

23 THE COURT: I will let you address that briefly

24 when you get up.

25 MR.HOLGADO: Your Honor, the banks also point to

26 the December 2001 approval letter from the Department to

NK

Page 114: Banksvmbia 6.4 Transcript

1728

1 PROCEEDINGS - HOLGADO

2 NCIC regarding this request by Mr. Wade, who is the

3 associate insurance examiner at the Department who signed

4 this approval letter under Mr. Serio's authority. They

5 tried to question its authenticity because the copy that we

6 used in Mr. Serio's deposition was unsigned.

7 Well, guess what, your Honor? We have a signed

8 copy to show the Court and I will pass it out to the parties

9 as well.

10 Again, your Honor, NCIC itself provided this to us.

11 This is from their files. If the banks still want to make a

12 authenticity objection, your Honor, and your Honor wants an

13 affidavit from someone at NCIC, we are happy to get one if

14 your Honor really thinks that's necessary.

15 We respectfully submit, however, that would be

16 entirely excessive and unnecessary, particularly because I

17 am about to show your Honor how everything that is in this

18 letter and everything it says that it is approving, is also

19 reflected in the company's statutory accounting statements

20 for the end of the year 2001. That's a public document,

21 your Honor.

22 Now, one thing with this letter though before we

23 move on, because I know the banks will make an issue of it

24 themselves. You can actually scroll up.

25 It says December "2000" at the top instead of

26 "2001". And, I am sure the banks would like to make some

NK

Page 115: Banksvmbia 6.4 Transcript

1729

1 PROCEEDINGS - HOLGADO

2 hay out of that. Before they do, I will save them the

3 trouble.

4 It's clearly another typo, and I am sure Mr. Wade

5 did not think this letter was going to be receiving as much

6 attention as it is receiving this week because of their

7 tortured statutory interpretation arguments, your Honor, but

8 as you can see from the letter itself, it clearly is

9 referring to that same application from November 2001. So,

10 there is no question this letter is actually from --

11 THE COURT: It would be pretty good if he could

12 write a letter in December of 2000.

13 MR.HOLGADO: Impressive. I think that takes us to

14 the next argument the banks try to make to try to get away

15 from this precedent.

16 They assert, your Honor, there was some sort of a

17 discrepancy with the way this transaction was described in

18 this approval letter and the way it was described in passing

19 in the company's report on examination, and that's something

20 that was filed over a year and a half later, I believe, by a

21 different examiner. I am not certain.

22 Now, your Honor, this is more than a typo. It's a

23 mistake. But, it's an easy to explain mistake. Just as

24 easy to explain as this typo.

25 The banks actually wanted to avoid directing the

26 Court's attention to how the numbers in this letter actually

NK

Page 116: Banksvmbia 6.4 Transcript

1730

1 PROCEEDINGS - HOLGADO

2 match up exactly with the numbers in the examination report.

3 That the exam report, actually, just the only mistake is

4 that the exam report happens to call the things by the wrong

5 names.

6 Let's take a look. So, in the letter it refers to

7 the two elements of this $14 million capital contribution

8 that goes up to the parent and then back to the affiliate as

9 an "$8 million extraordinary dividend, and a $6 million

10 share redemption."

11 That's how the approval letter refers to it and

12 here is what the exam report that they carted out saying

13 that it somehow made this a big mystery, here is what the

14 exam report actually said -- page four of the exam report.

15 Under the heading 2001 it references an "ordinary

16 dividend of $8 million, and an extraordinary dividend of

17 $6 million." So, what the exam report did, was it called

18 the extraordinary dividend an ordinary one, and it called

19 the share redemption as an extraordinary dividend.

20 It had the numbers correct, your Honor. It's a

21 passing reference. It was inaccurately describing the exam

22 report, that's true, but the numbers they match up. They

23 just called them by the wrong names during the their

24 argument.

25 The banks did not focus on this very obvious

26 explanation. They didn't even mention the 6 million for

NK

Page 117: Banksvmbia 6.4 Transcript

1731

1 PROCEEDINGS - HOLGADO

2 you. They tried to show 6 million here, eight million

3 there. There is some gray area. It's a mystery. There is

4 no mystery however, your Honor. Not just because of the

5 Attorney argument, it's because the banks could have showed

6 you and didn't show you that NCIC annual statement for the

7 year 2001 that was filed with the Department. That's the

8 statutory accounting statement, that's that statement which

9 makes clear the description in the approval letter is

10 actually correct. The exam report is simply mislabeling

11 them.

12 Here is that annual statement. Page 14.2 of the

13 statement which, your Honor, I am going to distribute as

14 well, as another State Respondents' exhibit, SRX 117.

15 MR. GIUFFRA: This isn't in the record either, what

16 you are giving to us now in rebuttal?

17 THE COURT: Right.

18 (Handed).

19 MR. HOLGADO: I think, note ten, this is now the

20 bubble at the bottom of the screen, note ten, on page 14.2

21 of the annual statement of NCIC, a publicly filed document,

22 makes clear that the company paid extraordinary dividend of

23 $8 million in 2001, a ten million dollar one in 2000.

24 It also referenced in the first sentence, in the

25 next sentence, the company also returned $6 million --

26 sorry, to make clear, don't show it against the exam report.

NK

Page 118: Banksvmbia 6.4 Transcript

1732

1 PROCEEDINGS - HOLGADO

2 I want to show the approval letter is right.

3 My apology. There it is.

4 An extraordinary dividend of $8 million in 2001 and

5 then, the second sentence, this is from the annual

6 statement, note ten, the company also returns 6 million in

7 capital by a stock redemption in 2001 -- 8 million and 6

8 million -- and this time, they are actually given the right

9 names, your Honor.

10 So, in fact, now that we are talking about these

11 statutory accounting statements, let's actually look at the

12 one for NCIC, from the third quarter of 2001. This is the

13 last of these documents that I am going to hand out. Also

14 a publicly filed statement.

15 (Handed).

16 MR. HOLGADO: So, your Honor, this actually is

17 noteworthy for this reason. This is the third quarter, 2001

18 statement of NCIC. This is the last statement on file by

19 NCIC at the time they made this dividend request. So, it's

20 sort of pertinent to their last statement on file argument.

21 This is the statement then, according to that

22 tortured argument has to somehow reflect earned surplus in

23 an amount equal to or greater than the dividend that NCIC

24 paid, which we just looked at that $8 million extraordinary

25 dividend. They better have earned surplus on their last

26 statement on file of at least 8 million, is what the banks

NK

Page 119: Banksvmbia 6.4 Transcript

1733

1 PROCEEDINGS - HOLGADO

2 say.

3 Well, let's go to page three of this statement.

4 The entry actually, your Honor, is for "unassigned funds

5 surplus". They don't actually -- these statements don't

6 actually say "earned surplus". They say this instead. The

7 banks are quite aware of that.

8 The important thing to note here, your Honor, is

9 that the number here for unassigned funds, which is

10 inclusive of the earned surplus number, it's less than 8

11 million. It's just a little bit over $7 million.

12 So, here it is definitively, your Honor, the

13 dividend that was approved in the NCIC precedent was without

14 question, for an amount greater than the amount of earned

15 surplus reflected in the NCIC last statement on file.

16 Thanks.

17 Now, with that, I would like to turn to another

18 argument the banks made during their rebuttal about Section

19 4105(a) of the Insurance Law, and this out of earned surplus

20 test. It's literally the last thing I will do.

21 THE COURT: How long will it be?

22 MR. HOLGADO: 5 or 10 minutes, your Honor.

23 THE COURT: Can we do it?

24 MR. HOLGADO: Your Honor, this is still about out

25 of earned surplus. That's why I want to cover it now

26 related to these other arguments.

NK

Page 120: Banksvmbia 6.4 Transcript

1734

1 PROCEEDINGS - HOLGADO

2 They keep calling this first part of Section

3 4105(a), the "out of earned surplus" language, they keep

4 calling it a "stop sign".

5 Now, as I have noted already, the State Respondents

6 are not suggesting that the dividend in the transformation

7 was paid out of anything under the earned surplus -- what's

8 reflected on unsigned funds on these statutory accounting

9 statements.

10 Now, we have corrected that typo from the

11 transcript, because that happened because I was talking too

12 fast. I think the banks will concede that point.

13 Nonetheless, during their rebuttal, the banks

14 brought out some deposition testimony from Mr. Buttner, one

15 of MBIA's experts, in support of an assertion that the

16 reinsurance agreement does not create earned surplus,

17 period.

18 That therefore, the dividend was illegal, is their

19 argument, regardless of the timing of the transactions of

20 transformation, regardless of whether they were simultaneous

21 or not.

22 Your Honor, this is an entirely new argument from

23 the banks. It does not appear in any of their briefs.

24 And, it is understandable why they are grasping at this

25 straw now.

26 One thing your Honor did not hear a lot about from

NK

Page 121: Banksvmbia 6.4 Transcript

1735

1 PROCEEDINGS - HOLGADO

2 Mr. Steinberg and their rebuttal, was a response to our

3 arguments about simultaneity. He actually said quote, I am

4 not going to spend any time here with your Honor focusing

5 unquote, on those simultaneity arguments, including about

6 how the language of the application itself speaks in terms

7 of simultaneity. He is not going to focus on that.

8 Well then, what is the banks' response to our

9 argument that the language of simultaneity appears in that

10 application itself? Nothing.

11 What is their response to our argument that

12 simultaneity occurs with every real estate closing involving

13 a mortgage and every leverage buy out transaction?

14 Nothing.

15 Well, that's not quite right. Mr. Steinberg

16 actually suggested in the mortgage example, none of the

17 transactions, standing alone, would be illegal. What he

18 said, each component of a mortgage transaction is lawful on

19 its own, and just briefly, your Honor, I have to take issue

20 with that.

21 Are the banks seriously contending that there is

22 nothing illegal about a borrower pledging to a lender as

23 collateral for a mortgage loan a house that he does not own

24 and will not own?

25 Because, simultaneous purchase of that house for

26 purposes of his, you know, hypothetical, isn't actually

NK

Page 122: Banksvmbia 6.4 Transcript

1736

1 PROCEEDINGS - HOLGADO

2 going to happen. All that happens is that loan? That's

3 not illegal? That's mortgage fraud, your Honor. That's

4 illegal.

5 But, other than that specious argument, your Honor,

6 what is their response to our mortgage and our LBO analogy?

7 Nothing. They don't respond because there is no response.

8 They cannot argue these transactions could not have

9 happened simultaneous. They cannot argue they did not

10 happen simultaneous.

11 So, what they are left with, your Honor, is an

12 argument of last resort. That, the transactions were

13 illegal, even if they were simultaneous. And, that is an

14 entirely new argument that they have made for the first

15 time, your Honor, on June 1st, 2012, nearly three years

16 after submitting their petition, and in the context of what

17 is supposed to be an oral argument on the thousands of pages

18 of briefs filed in this proceeding over the last three

19 years, none of which in those papers do they ever make this

20 argument.

21 We can simply point that out, your Honor, and

22 direct your Honor to case law that makes clear that this

23 argument should not even be considered at this point.

24 Cases like State Farm V. Limauro. It's 103, NY2d,

25 514, your Honor, from the Second Department. It's a case

26 that says, it is beyond cavil that a new substantive issue

NK

Page 123: Banksvmbia 6.4 Transcript

1737

1 PROCEEDINGS - HOLGADO

2 of law for the first time in a reply brief is improper.

3 And, in such circumstances, an order to strike is the proper

4 remedy.

5 Here, your Honor, it wasn't in their reply even.

6 If wasn't even in their sur-sur reply. It wasn't even in

7 their initial three-day presentation to the Court on those

8 papers. We can simply cite that principle, your Honor,

9 move to strike and call it a day -- but it's better than

10 that.

11 Not only is this an entirely new argument that's

12 not in their briefs, in fact, their briefs say the opposite.

13 They acknowledge what is, in fact true, your Honor, that the

14 reinsurance agreement created earned surplus at MBIA Corp.

15 Their only argument in their briefs your Honor is

16 it did not do so in time. It didn't do so in time for the

17 dividend because, as they argue, it didn't happen at the

18 same time. It happened afterwards. We will get some of

19 those things from their briefs.

20 In their most recent brief, this is not very long

21 ago, March of this year, but the other leg of the

22 transaction, the earned surplus created at MBIA Insurance

23 used to justify the transformation, was also an accounting

24 anomaly. It's in the context of a different point, but

25 they acknowledge the earned surplus is created.

26 Back to March 2011, in their reply papers where

NK

Page 124: Banksvmbia 6.4 Transcript

1738

1 PROCEEDINGS - HOLGADO

2 they say at the same time, Respondent's theory goes, and the

3 theory they are referencing is the simultaneity theory.

4 MBIA Insurance used, via earned surplus, created by the

5 reinsurance transaction, to pay the dividend.

6 Now, they are disputing that happened at the same

7 time. That's the context of this statement, but they are

8 not disputing that it was created by the reinsurance

9 agreement, your Honor.

10 In fact, the page before this, March 2011 brief,

11 yet for, this is an affirmative statement by them. This

12 isn't about our arguments. Yet, for MBIA Insurance, that's

13 MBIA Corp, to lawfully pay the dividend, the reinsurance

14 transaction had to receive the dividend to supply the

15 necessary earned surplus.

16 So, I think, it's understandable why the banks

17 have conceded repeatedly in the proceeding, the reinsurance

18 agreement created earned surplus for MBIA Corp. You know

19 why? It's because their own financial experts, your Honor,

20 are telling them the same thing, telling us the same thing.

21 Indeed, the financial experts just recently offered

22 by the banks, an accounting expert no less, you may recall

23 they made mention of the fact Mr. Greenspan himself is a not

24 an accountant, Mr. Hirschman is. That's why he was brought

25 in to talk about some other things.

26 Here is what he said. Mr. Hirschman, whose report

NK

Page 125: Banksvmbia 6.4 Transcript

1739

1 PROCEEDINGS - HOLGADO

2 was offered for the first time a couple of months ago, your

3 Honor, here is what he said about this issue.

4 Let's go to the deposition transcript at 320, line

5 22.

6 "Okay", is the question.

7 "Well, what if, what if you assumed that the

8 reinsurance transaction had occurred first? Would there

9 have been sufficient earned surplus to effect the dividend?"

10 Then, there is an "objection to form".

11 "Let's call it off. Assuming what you are

12 saying -- " this is the answer -- "assuming what you are

13 saying, assuming facts that are not in this case, the

14 reinsurance occurred first hypothetically?

15 "Question: A-ha.

16 "Answer: I guess, if the requirements to effect a

17 reinsurance transaction would have been met then, and then

18 you would look at it at that stage and see if there was

19 enough, you know, enough surplus to effect a dividend.

20 "Question: Well, do you dispute that the

21 reinsurance transaction released sufficient earned surplus

22 to issue the dividend?

23 "Objection to form.

24 "Answer: Again, in the hypothetical, under the

25 terms that I have seen in the reinsurance transaction, I

26 don't disagree that it released enough earned surplus."

NK

Page 126: Banksvmbia 6.4 Transcript

1740

1 PROCEEDINGS - HOLGADO

2 Again, your Honor, here is Mr. Hirschman at page

3 327 of the same deposition, line five.

4 "Question: Is there anything, well, what's the

5 impact for reinsurance agreement on earned surplus?

6 "Objection to form.

7 "Answer: In general?

8 "Question: Yeah.

9 "Answer: -- " this is Mr. Hirschman -- "well, a

10 reinsurance transaction could move liabilities, does move

11 assets and liabilities from one company to another for

12 consideration and that could, it could increase the surplus

13 of one company and decrease the surplus of another company."

14 Thanks. So, the banks' own experts, your Honor,

15 are saying that the reinsurance agreement creates earned

16 surplus. Maybe we don't have to do that motion to strike

17 after all. This argument, your Honor, strikes itself.

18 In short, your Honor, the banks' rebuttal was

19 riddled with flawed factual and legal arguments, arguments

20 which, at the end of the day, amount to nothing more than

21 additional red herrings with which to distract your Honor

22 from the fact that the State Respondents, in approving the

23 transformation, did not act in an arbitrary and capricious

24 manner, but instead, in a measured and reasonable one.

25 The fact is, that the State Respondents in

26 approving the transformation did not act contrary to the

NK

Page 127: Banksvmbia 6.4 Transcript

1741

1 PROCEEDINGS - HOLGADO

2 Insurance Law, but instead, properly interpreted and applied

3 it.

4 Thank you again for your time.

5 THE COURT: We are going to take a break now. I

6 have to give everybody a full hour.

7 So, why don't you come back at 2:15 and we will get

8 as far as we can get this afternoon, and there is also

9 tomorrow.

10 MR.HOLGADO: Thank you, your Honor.

11 MR. GIUFFRA: Thank you.

12 (Lunch recess taken).

13

14

15

16

17

18

19

20

21

22

23

24

25

26

NK

Page 128: Banksvmbia 6.4 Transcript

1742

1 MBIA Respondents-Kasowitz

2 T7

3 AFTERNOON SESSION

4 THE COURT: I guess you're getting a little

5 bit later start than you thought, but we'll do what we

6 can, okay?

7 MR. KASOWITZ: Okay, your Honor. Thank you.

8 Your Honor, before today we sat through two

9 days of supposed rebuttal argument from the banks.

10 Basely what we heard during those couple of

11 days was a rehash of what we heard during the first

12 three days of the banks' argument on May 15, May 17 and

13 May 18.

14 There is nothing that the banks have said in

15 their rebuttal, their reply that changes the fact that

16 the voluminous record in this proceeding shows

17 overwhelmingly that the department's review and

18 approval of the transformation was done in an entirely

19 rational way, was fully compliant with the New York

20 Insurance Law and was not had in any way arbitrary and

21 capricious.

22 Nevertheless, your Honor, we continue to see

23 distortions and misrepresentations in the record made

24 by the banks and a couple of new twists on some old

25 distortions in its representation.

26 So I'm going to go through their arguments. I

BARBARA STROH, CSR, CRR, CMR

Page 129: Banksvmbia 6.4 Transcript

1743

1 MBIA Respondents-Kasowitz

2 am going to try to avoid the places that Mr. Holgado

3 covered, and I am going to try to do it as quickly as I

4 can.

5 Your Honor asked a question during the morning

6 about whether -- about a position that the banks have

7 taken here with respect to evidence.

8 The question you asked related to the argument

9 that the banks have made that the court may not

10 properly consider affidavits from former Superintendent

11 Dinallo, who, of course, made this decision, or

12 affidavits from Mr. Buchmiller, who, by all accounts,

13 was the principal person involved in doing the review

14 that led to the superintendent's approval.

15 The question I think you asked was, is there

16 any support for the proposition that in an Article 78

17 case, or maybe any kind of case, the court can't

18 consider affidavits or other evidence from former

19 government employees. I think that's what you asked,

20 something like that.

21 THE COURT: Yes, because I thought he had said

22 that, since they were no longer employed, that was the

23 issue, so.

24 MR. KASOWITZ: You know, your Honor, I thought

25 it was -- you know, I never thought about having this

26 researched because I thought that the proposition in

BARBARA STROH, CSR, CRR, CMR

Page 130: Banksvmbia 6.4 Transcript

1744

1 MBIA Respondents-Kasowitz

2 the argument was so out of bounds, that it kind of flew

3 in the face of any kind of court proceeding that I've

4 been familiar with for the past 35 years.

5 If you have people who are involved in a

6 particular transaction, especially the ones who were

7 the key decisionmakers, then that's what litigation is

8 about. That's what we do. We take evidence. We get

9 evidence. We get evidence from the people who are most

10 involved.

11 So, I confess that, you know, I never said to

12 anybody on our team, you know, make sure we research

13 this because we could really be in trouble if a former

14 government employee, you know, can't tell about what he

15 or she knows.

16 But I've got really, really -- I've got a

17 really, really smart partner at my firm, and he said to

18 me, you know, this morning, well, have we researched

19 that?

20 And I said, I don't know. I never thought to.

21 So he said, well, why do we?

22 So we did. And, lo and behold, we found

23 authority for the proposition that in an Article 78

24 proceeding, former government employees who have

25 knowledge about a particular transaction can say what

26 they know.

BARBARA STROH, CSR, CRR, CMR

Page 131: Banksvmbia 6.4 Transcript

1745

1 MBIA Respondents-Kasowitz

2 The case that -- a case that we found -- and I

3 guess there are more -- is called Price versus Board of

4 Education. It is a 1999 case in the Third Department.

5 THE COURT: They have a lot of Article 78

6 cases in the Third Department, don't they?

7 MR. KASOWITZ: They're laden with Article 78

8 cases, your Honor.

9 But I think what the case has to do with is a

10 teacher in the, I guess she was a part-time substitute

11 teacher in the Dunkirk City School District.

12 You know, what I really should do, your Honor,

13 is get the person who found this up here to describe

14 it, but, you know, I'll do it myself, and I know that

15 he will correct me when I go off the tracks.

16 But this is a part-time substitute teacher who

17 was seeking to become eligible for membership in the

18 New York State Teachers Retirement System.

19 She apparently did not apply for membership

20 when she was employed but did so some years later.

21 Apparently one of the requirements in order to

22 become -- in order to -- one of the requirements here

23 was that notice had to be given to -- notice was

24 obligated to be given to all eligible teachers during

25 their employment that they, in fact, were eligible for

26 this particular retirement system.

BARBARA STROH, CSR, CRR, CMR

Page 132: Banksvmbia 6.4 Transcript

1746

1 MBIA Respondents-Kasowitz

2 I think that what happened was that this

3 teacher claimed that she had not received such notice.

4 So what the school system -- what the state did -- and

5 she ended up bringing an Article 78 proceeding when she

6 was denied eligibility.

7 I think that what the state did was to get

8 from -- and she had some evidence to that effect, that

9 she had not received notice.

10 But I think what the state did was to collect

11 affidavits from former teachers or employees of the

12 school system -- someone is whispering -- to the effect

13 that it had been the practice of the school system to

14 provide this notice on a customary basis.

15 At first I think that her -- I think she

16 succeeded at the trial court level, but I think that at

17 the Appellate Division level the court overturned her

18 successful petition.

19 The Appellate Division found that there was --

20 even though she had adduced some evidence, the evidence

21 that had been supplied by these former employees was

22 sufficient, in the view of the court, to make it not

23 irrational for her having been denied these eligibility

24 benefits by the school system.

25 So, this was a decision -- the decision was

26 not appealed. But it certainly wasn't reversed.

BARBARA STROH, CSR, CRR, CMR

Page 133: Banksvmbia 6.4 Transcript

1747

1 MBIA Respondents-Kasowitz

2 THE COURT: Do you have the case, do you have

3 a copy of the case, Mr. Kasowitz?

4 MR. KASOWITZ: Yes. I'll hand it up

5 (handing).

6 THE COURT: Thank you.

7 MR. KASOWITZ: So, now, this wasn't the -- in

8 the Price case that didn't involve the main actors in

9 the particular transaction that was at issue.

10 It did involve former employees who the state

11 had found, and the court, the Appellate Division had no

12 difficulty whatsoever with what I think is the

13 noncontroversial proposition of accepting evidence from

14 those former employees.

15 There are some other things in the case as

16 well that are not relevant to the question that you

17 asked, but I think that the answer to the question that

18 you asked is a simple no, there is no valid authority

19 for the proposition that you cannot accept evidence

20 from former government employees, especially when

21 they're the ones who are directly involved in the

22 decision of the agency that we have been litigating

23 about for the past three years and that we've been here

24 taking up time in your courtroom for what is getting to

25 be, I guess, running on a month.

26 We will supplement that with whatever other

BARBARA STROH, CSR, CRR, CMR

Page 134: Banksvmbia 6.4 Transcript

1748

1 MBIA Respondents-Kasowitz

2 cases that we find.

3 So I think, your Honor, the first thing that

4 I'd like to talk about, in addition to that case, is a

5 proposition that we have heard over and over again from

6 the banks, especially during their time last week.

7 That proposition is that through

8 transformation, MBIA, with the complicity of the

9 Insurance Department, has cheated its structured

10 finance policyholders.

11 That's what they say, your Honor. The

12 language that the banks have used here in this

13 courtroom is that MBIA, with the department, has

14 cheated, has ripped off the structured finance

15 policyholders, these banks.

16 Bucky, do you want to put that up.

17 This is part of the quote from argument that

18 the banks' counsel made last week, that they planned to

19 do this transformation transaction by ripping off the

20 policyholders of MBIA Insurance.

21 Thanks, Bucky.

22 The argument, your Honor, is that MBIA did

23 this by starting this public finance, this new company,

24 that would take on MBIA Insurance's $537 million worth

25 of finance liabilities and would receive approximately

26 $2 billion in additional funding -- that National would

BARBARA STROH, CSR, CRR, CMR

Page 135: Banksvmbia 6.4 Transcript

1749

1 MBIA Respondents-Kasowitz

2 receive approximately $2 billion in additional funding,

3 and that this transaction, this theft was accomplished

4 by a dividend and a share redemption, both of which

5 were approved by the superintendent, pursuant to

6 sections 4105A and 1411D respectively of the Insurance

7 Law.

8 Now, when you look at the argument that the

9 banks are making, it pretty much boils down to the

10 proposition that pretty much any transfer of assets

11 from the insurance company, of which they are

12 policyholders, is a theft of policyholder funds.

13 Ripped off, your Honor. The banks say they

14 are ripped off if any money goes from MBIA Insurance to

15 fund this new public finance company, insurance entity.

16 Your Honor, they're flat wrong. As we have

17 shown, a policyholder of an insurance company does not

18 have a lien, does not have an ownership interest in the

19 assets of that insurance company, as the banks would

20 have this court believe.

21 Rather, what the policyholder is entitled to

22 is an insurance company which is sufficiently well

23 capitalized to pay claims as they come due.

24 Your Honor, that is exactly what the banks

25 received here, as Superintendent Dinallo found: "Both

26 MBIA Corp. and National will continue to pay all valid

BARBARA STROH, CSR, CRR, CMR

Page 136: Banksvmbia 6.4 Transcript

1750

1 MBIA Respondents-Kasowitz

2 claims in a timely fashion, and both entities will have

3 sufficient resources to meet policyholder claims as

4 they come due.

5 "Consistent with New York State Insurance Law,

6 the New York State Insurance Department only approved

7 the transaction after deciding that both companies

8 would have sufficient statutory capital to meet the

9 letter and spirit of the Insurance Law.

10 "The review and study process lasted

11 approximately one year."

12 Thanks, Bucky.

13 So Superintendent Dinallo made a rational

14 determination that was well within the scope of his

15 authority to make that would help to seek unfreeze the

16 public finance markets, which desperately at that time

17 needed unfreezing, and would help to revitalize a

18 moribund segment of the insurance industry, the

19 monolines, which desperately needed to be revitalized,

20 and the decision that he made would do these critically

21 important things while, at the same time, protecting

22 the interests of the policyholders of both the

23 insurance company, the old insurance company, and the

24 new insurance company, by being sufficiently well

25 capitalized to pay claims as they come due.

26 Now, the banks disagree with the

BARBARA STROH, CSR, CRR, CMR

Page 137: Banksvmbia 6.4 Transcript

1751

1 MBIA Respondents-Kasowitz

2 superintendent. They disagree with the determination

3 he made.

4 But their disagreement, your Honor, doesn't

5 show that the decision was irrational and provides no

6 basis for this court granting their petition.

7 Indeed, your Honor, notwithstanding the

8 constant kvetching by the banks -- and that's

9 kvetching, k-v-e-t-c-h-i-n-g -- which means complaining

10 or whining.

11 It's usually said by your parents with a stop

12 before "it" and an "already" behind it, as in "stop

13 kvetching already."

14 You know, notwithstanding this constant

15 kvetching, your Honor, Superintendent Dinallo, when he

16 approved the transformation, he didn't do it ignoring

17 these banks. He did it with the banks in mind.

18 He made specific findings with respect to the

19 interests of these banks. Here's what he said: "This

20 deal is fair to all policyholders -- the bank

21 counterparties and other policyholders of the

22 structured financings and the owners and issuers of

23 municipal bonds."

24 But, your Honor, the banks don't really stop

25 at kvetching here. They go further. As I indicated

26 right at the beginning, they actually accuse the

BARBARA STROH, CSR, CRR, CMR

Page 138: Banksvmbia 6.4 Transcript

1752

1 MBIA Respondents-Kasowitz

2 superintendent and MBIA of being engaged in theft.

3 They use words like "ripped off," which is at the

4 transcript at page 1282.

5 Then they say at page 1293 of the transcript

6 that $21.50 per share of MBIA stock was stolen from

7 MBIA Insurance and given over to MBIA's shareholders.

8 $21.50 per share of value was stolen from the

9 insurance company and given over to MBIA shareholders.

10 Now, your Honor, we know that's not true. The

11 funds that were transferred were not transferred to

12 MBIA's shareholders. They were transferred to National

13 to start a new municipal bond guaranteed business.

14 The banks claim, though, that the

15 shareholders, in effect, did get the value of this

16 money because, according to the banks, everyone knew

17 that National would never have to use the money that it

18 received to take care of the liabilities that were

19 transferred to it because municipal bonds were so safe.

20 That is the argument.

21 As the banks argued at the hearing last week,

22 they said: "They took $5 billion, your Honor. They

23 took a lot more money than they needed to pay municipal

24 claims."

25 That's the theft theory, your Honor. There it

26 is. The banks argued that because the $5 billion was

BARBARA STROH, CSR, CRR, CMR

Page 139: Banksvmbia 6.4 Transcript

1753

1 MBIA Respondents-Kasowitz

2 not needed to take care of the $537 billion of

3 liabilities that were transferred to National, then

4 that was a theft of $5 billion for MBIA shareholders.

5 This theory, your Honor, is directly negated

6 by the record in this case. The record shows that the

7 funding was necessary to adequately fund this new

8 public finance insurer, so that it would be

9 sufficiently well capitalized to meet its obligations

10 and sufficiently well capitalized to achieve a high

11 enough rating, triple A, so that it could write new

12 business, and sufficiently well capitalized so that it

13 could accomplish one of the goals of transformation,

14 which was to help unfreeze these frozen public finance

15 markets during this very, very serious recession.

16 That goal is fully apparent from the

17 application that was filed in this matter: "The

18 purpose of the project is simple: To promptly

19 establish a U.S. public finance financial guarantee

20 insurance company at a capital adequacy level

21 sufficient to provide lower-cost funds to public

22 issuers and to assist in unfreezing the public finance

23 and infrastructure markets, while preserving MBIA as a

24 well-capitalized, highly solvent insurer."

25 Mr. Chaplin, MBIA's CFO, explained in his

26 November 24, 2009 affidavit that: "The transfer of $5

BARBARA STROH, CSR, CRR, CMR

Page 140: Banksvmbia 6.4 Transcript

1754

1 MBIA Respondents-Kasowitz

2 billion was necessary to help insure that National

3 received credit ratings unaffected by the rating of the

4 structured finance business and to facilitate market

5 acceptance."

6 Mr. Moriarty, of the department, who was

7 involved in this transaction, also explained this

8 concept during his deposition.

9 When he was asked by the banks' counsel as to

10 why transformation was necessary -- this is slide 7 --

11 for National to write new business, Mr. Moriarty said:

12 "Answer: In order to, number 1, achieve a

13 rating from the rating agencies; and number 2, to

14 attract new capital. A new sister entity -- insurance

15 company that did not have the legacy liabilities of

16 MBIA Corp. would have to be formed."

17 So the concept here is straightforward, your

18 Honor. The reason why substantial funds were

19 transferred to National was that MBIA needed to insure

20 that it would have sufficient funds to pay claims as

21 they became due, enough capital to be able to help

22 unfreeze these frozen municipal bond markets.

23 To do that -- and the only way that that could

24 be done -- would be if new municipal bond business

25 could be written.

26 And the only way that that could happen, your

BARBARA STROH, CSR, CRR, CMR

Page 141: Banksvmbia 6.4 Transcript

1755

1 MBIA Respondents-Kasowitz

2 Honor, was that the new company, National, needed to

3 receive a sufficiently high rating by the credit

4 agencies so that it could write new business.

5 Your Honor, as Mr. Buchmiller has made clear

6 in February 2009 in this now unredacted 59-page memo,

7 neither he, nor anyone else, knew in February 2009

8 where the municipal bond market was headed.

9 What everyone did know in February 2009 -- and

10 the banks don't dispute this, your Honor, because they

11 can't dispute it -- is that the municipal bond markets

12 were frozen, and that fact, your Honor, in and of

13 itself, disproves the banks' contention that in

14 February 2009 the municipal bond markets were

15 relatively safe and that National would never need to

16 use the $5 billion in assets that it was receiving to

17 support the $537 billion in liabilities that National

18 was taking on.

19 In fact, your Honor, if it was so important to

20 the municipalities to arrange for their bonds to be

21 insureds -- and it was -- then it had to be the case

22 that investors in that market saw municipal bonds as

23 not a sure thing, that the banks now say every one of

24 them supposedly knew that they were.

25 But the banks don't care about reality, your

26 Honor. They don't care about the facts. They don't

BARBARA STROH, CSR, CRR, CMR

Page 142: Banksvmbia 6.4 Transcript

1756

1 MBIA Respondents-Kasowitz

2 care about the emis, the truth. They claim that their

3 ox was gored in this transaction and, therefore, it was

4 theft.

5 Your Honor, the banks were deprived of nothing

6 that they were entitled to. The transactions that

7 comprised the transformation were authorized by, and

8 approved under specific provisions of the Insurance

9 Law.

10 They were approved by a superintendent who

11 admittedly had the authority to approve it. The banks'

12 own experts, their own former superintendents admit

13 that, and the banks, when they purchased these

14 policies, they purchased these policies subject to

15 precisely the provisions of the Insurance Law that gave

16 rise to this transaction.

17 (Continued on next page)

18 (End of take 7)

19

20

21

22

23

24

25

26

BARBARA STROH, CSR, CRR, CMR

Page 143: Banksvmbia 6.4 Transcript

1757

1 PROCEEDINGS - KASOWITZ

2 T8 MR. KASOWITZ: The dividend, the return of capital

3 and the like.

4 When the banks returned, purchased their policies,

5 they did not negotiate for specific provisions whereby MBIA

6 would agree to limitations on its rights under the Insurance

7 Law to either issue dividends or buy back stock.

8 Nor, did the banks negotiate for policies that

9 would otherwise provide them with rights beyond which all

10 policyholders are entitled under the Insurance Law.

11 Nonetheless, it doesn't stop these banks from

12 irresponsibly charging that transformation was highway

13 robbery, facilitated by the Department and committed for the

14 benefit of MBIA shareholders.

15 One of the things that the banks point to, and they

16 said this last week, was the performance of MBIA stock

17 immediately following the approval of the transformation as

18 evidence of this theft. Here is a slide that they showed

19 to the Court last week, your Honor.

20 MBIA's stock rose 29.6 percent after the

21 transformation announcement. On February 17th, 2009, the

22 date of the approval, it was $3.48 a share and on the public

23 announcement of the transformation, it increases by

24 29.6 percent to $4.51 per share.

25 The message, according to the banks, is clear.

26 The transformation was done at the banks' expense for the

NK

Page 144: Banksvmbia 6.4 Transcript

1758

1 PROCEEDINGS - KASOWITZ

2 benefit of MBIA's shareholders, whose shares rose

3 dramatically as soon as this theft transaction was

4 announced.

5 The basis for that was because everyone knew that

6 there was this enormous premium of unneeded funds going to

7 National, which would never be needed for, to fund public

8 finance obligations and would inure to the benefit of MBIA's

9 shareholders.

10 But, your Honor, the banks are not quite being

11 candid with the Court when they put up this slide, which

12 highlighted that price increase. Because, while they

13 highlight this bump, and I forget the exact words that

14 counsel used last week to describe it, what they didn't

15 highlight was that virtually immediately after that, MBIA,

16 the price of MBIA stock began sliding and it slid

17 dramatically down.

18 Let's look at the next slide.

19 So that on the 18th, it goes up to $4.51. On the

20 19th, it goes down to $3.84. It ticks up a little bit on

21 the 20th to $4, but then on the 21st, 22nd, 23rd, by the

22 23rd, it's down to $3.43; on the 24th it's $3.44; on the

23 25th it's $3.24; 26th it's $3 and on the 27th, one week

24 following or about ten days following the approval of

25 transformation, it is $2.74.

26 The stock price fell 39 percent from the day that

NK

Page 145: Banksvmbia 6.4 Transcript

1759

1 PROCEEDINGS - KASOWITZ

2 the approval was announced, and 14 percent from the day

3 before the approval was announced.

4 Now, I am not making these numbers up. That's one

5 of the things we heard a lot last week. Just facts.

6 Facts. Not razzle dazzle, not Yiddish words from somebody.

7 Facts.

8 I am not making these facts up, your Honor. They

9 are right on their chart. They just chose, the banks just

10 chose not to show them to you.

11 But, this chart is important, your Honor, because

12 what it does, it puts the lie to this issue that the

13 immediate bump in the stock price and what happened with

14 respect to the stock market was confirmation of the theft by

15 shareholders.

16 If you look at the affidavit of our macro economic

17 expert, your Honor, Professor Edelstein at paragraphs 28

18 through 36, he gives a number of additional reasons that the

19 banks' arguments, based on stock price, put the lie to the

20 banks' argument that this was a theft by MBIA's

21 shareholders.

22 Now, in addition to this fact that the stock price

23 actually fell, didn't go up, there is a broader fact here

24 which the banks have not chosen to share with this Court.

25 It's directly, it directly contradicts the main premise that

26 the banks have here with respect to this theory of theft

NK

Page 146: Banksvmbia 6.4 Transcript

1760

1 PROCEEDINGS - KASOWITZ

2 that they have.

3 Their premise is, as I said before, your Honor,

4 this concept that the transfer of $5 billion to capitalize

5 National to take care of these $537 billion of public

6 finance obligations, really wasn't needed because you know

7 what? The municipal bond market was safe. It was safe.

8 And so, at this time, you know, the real action was

9 in the structured finance area, according to the banks. So

10 you really didn't, you know, this municipal finance stuff,

11 you know, this is, this is part of the, this is part of

12 MBIA's scheme, aiding and facilitated by the Superintendent

13 to benefit MBIA's shareholders.

14 Well, let's see what the real facts are with

15 respect to what was happening in the public finance market

16 both before, at and after the announcement of this approval.

17 On January 9th, 2009 the New York Times reported

18 that the executive director of the Board that regulates

19 municipal bond markets sought greater rule making authority

20 comparing what could happen in the municipal bond market to

21 what had happened, and what was happening with what the New

22 York Times called the, quote, serial breakdown on Wall

23 Street, close quote.

24 In particular, the article calls attention to what

25 the reality was of this public finance market. It was

26 really a market that was populated largely by mom and pop

NK

Page 147: Banksvmbia 6.4 Transcript

1761

1 PROCEEDINGS - KASOWITZ

2 investors. Let's see what they said.

3 Quote, the $2.6 trillion muni market is the last

4 bastion of mom and pop investors who arguably, require

5 tougher regulatory protections than the institutional

6 investors that dominate the stock and corporate bond

7 markets."

8 So, it's no stretch, your Honor, to say that these

9 mom and pop investors required at least as much insurance

10 protection in the face of an uncertain future as the banks.

11 Nonetheless, these banks, who I have heard it, your Honor,

12 they profess to be ardent, ardent protectors of the little

13 guy, they would have had Mr. Buchmiller essentially do

14 nothing for these mom and pop investors.

15 And so, let's see what others had to say about what

16 was happening to these mom and pop investors that these

17 banks were so ardent to protect.

18 The individual investor, for as long as one can

19 look back, dominated the municipal bond market. Munis were

20 tax free and most important, safe. With everything

21 unravelling in front of our eyes, from mortgages, to credit,

22 to banks, it is no surprise that a new shoe is now

23 dropping -- the municipal market, and it is not a pretty

24 picture.

25 MR. GIUFFRA: Your Honor, can I ask where is this

26 from? Mr. Kasowitz, I haven't seen it before.

NK

Page 148: Banksvmbia 6.4 Transcript

1762

1 PROCEEDINGS - KASOWITZ

2 MR. KASOWITZ: If you sit down --

3 MR. GIUFFRA: Looks like cash cow --

4 MR. KASOWITZ: If counsel would sit down, if

5 counsel would sit down, I am delighted to tell him where

6 this is from.

7 THE COURT: I will let him ask the question and he

8 will give you the answer so you will all be happy.

9 MR. KASOWITZ: The date of this blog, which is Best

10 Cash -- BestCashCow.com is January 11th, 2009.

11 Now, I think that this is an important observation.

12 This market is a mess, and will get a lot messier -- a month

13 before transformation, your Honor.

14 So, you know, further, contrary to this, it really

15 is kvetching, there is no problem in the municipal bond

16 market and never would be, and Mr. Buchmiller's concerns

17 about this market were irrational.

18 The New York Times and I wonder if counsel for the

19 banks or anybody else in the room has heard of the New York

20 Times -- well, the New York Times pointed out on

21 February 26th, about a week after transformation was

22 approved, that the municipal bond market was already in

23 turmoil and had been so for about a year.

24 Quote, municipal bond portfolios can be as exciting

25 as the kiddie rides at a local carnival, but last year,

26 bondholders may have felt as if they were riding over

NK

Page 149: Banksvmbia 6.4 Transcript

1763

1 PROCEEDINGS - KASOWITZ

2 Niagara Falls in a barrel.

3 Quote, there was an almost total, total melt down

4 of the municipal bond fund market in 2008, said Rob

5 Williams, Director of Fixed Income at the Cash Cow -- not,

6 no, at the Schwab Center for Financial Research. This may

7 have startled municipal bond holders more than other

8 investors, he said, because muni bond investors are

9 generally looking for safety."

10 And, at the end of it, it says, "although high

11 grade munis safer than many other investments, they are not

12 immune from serious problems."

13 Of course, your Honor, this is not a unique

14 idiosyncratic view. It's a view that continues to be

15 expressed to this very day. Which, of course, includes the

16 time that transformation and the work that Mr. Buchmiller

17 had done and the work that Mr., that's former Superintendent

18 Dinallo had done, was planning for today and in the future.

19 Let's see what Meredith Whitney, who is a prominent

20 analyst, has to say about all of this. This is March 15th,

21 2012, from Money News.

22 Quote, a tidal wave of defaults in the municipal

23 bond market is still building and will eventually hit the

24 United States, says Wall Street analyst, Meredith Whitney.

25 Many U.S. cities, towns and municipalities are insolvent,

26 but are treading along similar to how Greece did for years

NK

Page 150: Banksvmbia 6.4 Transcript

1764

1 PROCEEDINGS - KASOWITZ

2 before officially defaulting. In late 2010, Whitney told

3 60 Minutes, that the municipal defaults could run up into

4 the hundreds of billions of dollars, although that hasn't

5 happened. Maybe not officially, but insolvency is a

6 deepening problem and defaults are still on the way.

7 Then, there is some editor's note.

8 Wall Street whistle blower warns of a melt down.

9 See in uncensored interview.

10 Quote, you have Stockton, California that is on the

11 bring of bankruptcy. You have five cities, including

12 Detroit, which is on the brink of insolvency. It's

13 fascinating, because there has been so much back room

14 political maneuvering to keep these cities from goes bust,

15 Whitney tells CNBC, pointing out how California is trying to

16 pass legislation to prevent municipalities from declaring

17 bankruptcy.

18 Quote, so there has been every effort on the part

19 of the states to prevent this tidal wave of defaults, which

20 is going to happen sooner or later. It's happening at an

21 accelerating space -- strike that -- pace.

22 Now, one last thing on this topic, your Honor. We

23 have heard the banks' counsel go on and on about how prior

24 to transformation MBIA had paid a very small amount on

25 municipal bond claims.

26 One reference for that is March 31st, at the

NK

Page 151: Banksvmbia 6.4 Transcript

1765

1 PROCEEDINGS - KASOWITZ

2 transcript at page 1280, lines 14 through 18.

3 The banks' counsel said that MBIA had paid only

4 $2 million on such claims in 2008 and therefore, the

5 transfer of $5 billion to National to support $537 billion

6 in public finance liabilities was excessive unjustified.

7 But, your Honor, as we have seen, what has happened

8 previously in the municipal bond market was not necessarily

9 relevant at all. Indeed, if you look at the difference

10 between 2007 and 2008, in MBIA's payments on RMBS, what you

11 see is that those payments jumped one year, your Honor, one

12 year, from 44 million to one billion three hundred seventy

13 eight million. One year. That is more than 3000 percent.

14 As the banks have argued continually through this

15 case, this is a, was and is a financial crisis of

16 unprecedented proportions -- the biggest one since the Great

17 Depression.

18 So, what happens one year could change

19 dramatically the next. As we have seen, and as Jack

20 Buchmiller said, the volatility in the public finance

21 markets and the need to achieve an AAA rating in order to

22 write new business meant that the Superintendent's approval

23 of the transformation, including the transfer of funds to

24 cover this potential $537 billion in public finance

25 liabilities, was more than rational, your Honor, and

26 certainly not arbitrary and capricious.

NK

Page 152: Banksvmbia 6.4 Transcript

1766

1 PROCEEDINGS - KASOWITZ

2 So, your Honor this is exactly what Mr. Buchmiller

3 meant when he observed at page five of his memo, "further,

4 given the increasing depth and breadth of this global

5 economic downturn, this is February 16th, 2009, we expect

6 every sector of the monolines insured portfolio, including

7 U.S. Public Finance, to experience higher, if not record

8 setting levels of distress, which may or may not flow -- " I

9 think you meant "through to MBIA as claims are reserves

10 depending on subordination, remediation -- " et cetera.

11 And, it's for that reason, your Honor, it's for

12 that reason, and because of the fact that you can't predict

13 the future, that Mr. Buchmiller came to the following

14 conclusion in his memorandum, which, on its face, is

15 perfectly, perfectly rational, notwithstanding any of the

16 kvetching by the banks.

17 In his summary, from all of the above analysis and

18 discussion, "I cannot say who might, in the future, be more

19 disadvantaged by transformation. It quite possibly may

20 turn out to be the new Co. policyholders as state and local

21 governments have significant financial issues to confront or

22 perhaps, the conventional wisdom that all structured finance

23 is somehow toxic and incurable will be borne out.

24 "There are too many unknown unknowns to draw a

25 precise line between them. It is a large, gray no man's

26 land, which reasonable men may contest. I can say that

NK

Page 153: Banksvmbia 6.4 Transcript

1767

1 PROCEEDINGS - KASOWITZ

2 MBIA's line, MBIA's line has been reasonably and

3 systematically drawn, that transformation is fair to both

4 old Co. and new Co. based on what we know as of or have

5 learned up to February 16th, 2009."

6 So, your Honor, this was not some scheme to steal

7 assets from structured finance policyholders and turn them

8 over to MBIA's shareholders. Far from it.

9 As we have seen, and as Superintendent Dinallo made

10 abundantly clear, the purpose of the transformation was to

11 revitalize those all important public finance markets while

12 protecting the legitimate interests of MBIA's existing

13 policyholders.

14 Now, your Honor, Jay Brown and MBIA's investors and

15 others who were quoted in e-mails shown by the banks, did

16 they believe that MBIA, the company, would benefit from

17 being able to write new business again in the public finance

18 sector? Did they believe that? They did -- and properly

19 so.

20 Everyone who reviewed this transaction, from the

21 begin right through approval, properly understood that,

22 including the Bank of America and including Soc Gen and

23 including their own analysts.

24 Your Honor, notwithstanding that, notwithstanding

25 what they knew, notwithstanding all of the positive things

26 that they were saying about transformation, and about Jay

NK

Page 154: Banksvmbia 6.4 Transcript

1768

1 PROCEEDINGS - KASOWITZ

2 Brown, and about his leadership and the like, we nonetheless

3 heard the banks' counsel last week say, that Bank of America

4 and Soc Gen and their top executives were shocked when they

5 heard that the transformation had been approved.

6 Now, your Honor, perhaps they were shocked, just as

7 Captain Renault was shocked in Casablanca, that there was

8 gambling at Rick's, but if they truly were shocked, your

9 Honor, it would only be because they weren't reading their

10 own analyst's reports.

11 Certainly, certainly, those are the facts, your

12 Honor. That's what happened. But, those facts don't stop

13 these banks from saying things like this, your Honor.

14 Because $21.50 per share was stolen from this

15 insurance company, and the Insurance Department failed in

16 its responsibilities, and that's why no one wants to talk

17 about the law, because the law doesn't allow this.

18 Now, your Honor, I sat here last week and I

19 listened to the banks' counsel say that it was a "shonda"

20 that I characterized the banks' position as "chutzpah".

21 So, I guess, falsely accusing MBIA of theft and falsely

22 accusing a dedicated public servant of complicity in that

23 theft, what's that, your Honor? Something worse than a

24 shonda, I think.

25 Now, your Honor, let me turn to something

26 different.

NK

Page 155: Banksvmbia 6.4 Transcript

1769

1 PROCEEDINGS - KASOWITZ

2 In rebuttal last week, the banks focused again on

3 the Lehman black box commutation analysis, and they said it

4 was clear that Lehman was doing a loss projection analysis.

5 As I have noted, all of the work that Lehman was

6 doing for MBIA, was done in its capacity as a restructuring

7 agent and the documentary evidence on that is undisputed.

8 Moreover, while the banks took substantial

9 discovery from Mr. McKiernan, Anthony McKiernan, who was the

10 head of the IPM Group, and asked him lots of questions about

11 all of this, they really didn't see fit to show to the Court

12 his answers about why Lehman was hired. So, I think I will

13 do that. 18.

14 "Did MBIA ever disclose to anyone from the

15 Insurance Department that Lehman Brothers, later Barclays,

16 had done loss projections for multi sector CDOs?

17 There is an objection.

18 "No, because we don't believe they did loss

19 projections for MBIA."

20 Now, there is nothing ambiguous about that, your

21 Honor. The head of the IPM Group testifies that the work

22 that Lehman was hired to do was as a restructuring agent and

23 specifically for the purpose of negotiating commutations

24 with a set number of banks.

25 The documents that the bank showed you confirm

26 this, the retention agreement confirms this. They were not

NK

Page 156: Banksvmbia 6.4 Transcript

1770

1 PROCEEDINGS - KASOWITZ

2 doing loss projections for any other purpose, and that's

3 exactly what Mr. McKiernan understood, and that's what he

4 testified to.

5 Now, one of the red herrings that's floated by the

6 banks here is that since MBIA used Barclays' analyses in

7 connection with approvals internally by management at MBIA,

8 of these commutation deals that Barclays had negotiated and

9 structured on MBIA's behalf, that MBIA somehow is not

10 telling the truth when it explains that Barclays' cash flow

11 projections were not relevant to the work that the

12 Department was doing in 2008 and 2009.

13 But, MBIA isn't lying, your Honor, and the banks

14 are, once again, attempting to mislead this Court and

15 distract from the real issue in this proceeding.

16 Lehman and, then Barclays, was retained by MBIA to

17 negotiate commutation deals with certain MBIA

18 counterparties. Given the size and the complexity of these

19 commutation settlements, Barclays often arranged creative

20 and sophisticated structures in the course of negotiating

21 these deals.

22 Those structures had nothing to do with any

23 modeling of cash flow projections for RMBS or other

24 transactions. For example, in one of these structures,

25 MBIA's counterparty would, in exchange for receiving a

26 commutation payment from MBIA, provide MBIA with notes that

NK

Page 157: Banksvmbia 6.4 Transcript

1771

1 PROCEEDINGS - KASOWITZ

2 entitled MBIA to receive cash payments under certain

3 circumstances in the future.

4 As Mr. McKiernan testified at his deposition,

5 because Barclays created these complex structures, it had

6 already modeled the way that the commutation arrangement

7 would operate under a range of different scenarios in the

8 future.

9 Barclays, Lehman and then Barclays, had done that

10 modeling as to how these commutations might result in cash

11 coming back to MBIA. MBIA didn't have the capacity to do

12 that.

13 So, it was those analyses that MBIA referred to

14 when it was reviewing these proposed commutations for

15 approval, and Mr. McKiernan explained this. That testimony

16 can be found at pages 90 to 91, and 310 to 311 of

17 McKiernan's April 4th, 2012 deposition.

18 That deposition was taken, your Honor, as we

19 explained earlier, after the, after our surreply papers were

20 submitted. We will provide, to the Court, a copy of the

21 transcript.

22 So, the facts relating to this commutation are

23 irrelevant to this proceeding and certainly had nothing to

24 do with the Lehman black box cash flow modeling of these

25 pre-existing transactions.

26 As we have pointed out, your Honor, with respect to

NK

Page 158: Banksvmbia 6.4 Transcript

1772

1 PROCEEDINGS - KASOWITZ

2 Lehman, and with respect to Black Rock, which I am going to

3 get to in a second, the work, any work that Lehman had done,

4 was non transparent and would not have been available for

5 someone like Buchmiller to review soup to nuts.

6 (Continued on next page.)

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

NK

Page 159: Banksvmbia 6.4 Transcript

1773

1 MBIA Respondents-Kasowitz

2 T9

3 MR. KASOWITZ: Now, as to BlackRock, I think

4 that the bottom line with respect to BlackRock is that

5 the banks -- I think as things kind of -- I'm trying to

6 look at the back-and-forth.

7 I think that -- at the end of the day I think

8 the banks agree that it is within the -- that under New

9 York law, it is within the discretion of the

10 superintendent to make a decision as to whether or not

11 to hire a third-party consultant to assist in any

12 particular transaction.

13 There is nothing in the Insurance Law that

14 requires a superintendent to hire a consultant, be it a

15 third-party consultant, be it BlackRock or anybody

16 else, to assist in any particular transaction.

17 I don't think that the banks contest that. I

18 don't think they can. What the banks do is they point

19 to a proposition which I think is completely

20 uncontroversial that the Insurance Law, just as it

21 gives the superintendent of insurance broad authority

22 in lots of areas with respect to the work he does,

23 gives him broad authority to hire a third-party

24 consultant if he thinks it's a necessary thing to do.

25 There is nothing controversial about that.

26 But here the superintendent determined that it was not

BARBARA STROH, CSR, CRR, CMR

Page 160: Banksvmbia 6.4 Transcript

1774

1 MBIA Respondents-Kasowitz

2 necessary to do, and while the banks have presented a

3 squib from, an e-mail from Hampton Finer suggesting

4 that MBIA might want to consider hiring it, there was

5 never any directive from the superintendent or anybody

6 else that said go hired BlackRock or hire somebody

7 else.

8 Your Honor, that's a good thing because in

9 this circumstance, even though there is nothing --

10 well, let me back up a second. One last thing before I

11 talk about the merits of it.

12 What's interesting to me is that,

13 notwithstanding the fact that the superintendent is not

14 obligated to retain a third-party consultant in this

15 area at this time, the banks take the position here,

16 and continue to take the position, that approval of

17 transformation should be reversed because, I suppose

18 -- this is their argument -- it was arbitrary and

19 capricious for Superintendent Dinallo not to have

20 either hired BlackRock himself or forced MBIA to hire

21 BlackRock;

22 That it is irrational for the superintendent

23 not to have required BlackRock to be hired, and that's

24 one of the main bases that we continue to hear from the

25 banks as to why the approval of transformation should

26 be reversed.

BARBARA STROH, CSR, CRR, CMR

Page 161: Banksvmbia 6.4 Transcript

1775

1 MBIA Respondents-Kasowitz

2 Now, the banks don't seem to care that in its

3 review of MBIA's loss modeling, the department itself

4 had full and unfettered access and clarity as to every

5 input, every assumption that went into its models, and

6 that they ultimately carried through on their analyses

7 of the models to ultimate calculations of projected

8 losses. That's one of the things that Mr. Buchmiller

9 did.

10 The banks say that the department should have

11 required BlackRock to have been retained because

12 they're BlackRock. They're big, they're expensive,

13 they're goldplated, and they acknowledge that there is

14 a black box element to the work that BlackRock does

15 but, they say, that's okay, you should have hired them.

16 We could have trusted them, even though you couldn't

17 tell how BlackRock reached its conclusions.

18 Now, we have explained, and so has Mr.

19 Holgado, that those third-party analyses, these black

20 box and these that BlackRock does are not appropriate

21 for regulatory oversight because neither the regulator,

22 nor the regulated party can see how the inputs to the

23 model are being manipulated to arrive at the

24 projections.

25 Our structured finance expert, Jim Finkel,

26 describes this in great detail at paragraphs 294

BARBARA STROH, CSR, CRR, CMR

Page 162: Banksvmbia 6.4 Transcript

1776

1 MBIA Respondents-Kasowitz

2 through 297 of his affidavit, and also at paragraph

3 551, and our financial regulatory expert, Professor

4 Jeffrey Miller, describes this at paragraph 36.

5 How do you get around it? Well, how do the

6 banks try to get around this?

7 Well, they came up with a metaphor or

8 something, an analogy or something on Friday. They

9 said that. They tried to explain away this problem

10 with black boxes by arguing that, just because you

11 can't see it or understand it doesn't mean it doesn't

12 work.

13 And the example that counsel used was an

14 airplane. Let's see it. Let's see what he said:

15 "But, man, when I get on an airplane, I am

16 putting my life in just God's hands because I cannot

17 see how a jet engine works.

18 "I see a big turbine. I don't know how the

19 fuel injections work, I don't know how they ignite it,

20 how they run it. I know nothing.

21 "But that doesn't mean that the jet-propelled

22 engine is any less safe because I can't see it and poke

23 around with it before takeoff."

24 That's a good one, your Honor. A jet engine.

25 BlackRock's black box is just like a jet engine.

26 Thanks, Bunky.

BARBARA STROH, CSR, CRR, CMR

Page 163: Banksvmbia 6.4 Transcript

1777

1 MBIA Respondents-Kasowitz

2 And I guess their point is that maybe you

3 don't know how it works, but since you end up in the

4 air and, God willing, you usually land, it must be

5 fine.

6 You're going on faith when you board an

7 airplane, so it's fine to go on faith when you sign up

8 with BlackRock.

9 Your Honor, I don't think this analogy works.

10 It ignores the fact that while the workings of a jet

11 engine may be opaque to the likes of the banks' counsel

12 and opaque to me, they are not opaque to the people who

13 are charged with insuring the safety of those engines.

14 It's not just the airline's engineering staff

15 who know what's going on with those jet engines.

16 It's also the regulators. The FAA is

17 statutorily assigned to make sure that those engines

18 work, and they most certainly do not take it on faith.

19 I'll bet that people at the FAA know exactly

20 how those engines work, that those engines aren't

21 opaque, some black box, some nontransparent thing that

22 makes these big engines fly in the air.

23 THE COURT: I sure hope so.

24 MR. KASOWITZ: All of us do, your Honor.

25 So I'd just like to know how much faith the

26 banks' counsel really has in this analogy. I wonder

BARBARA STROH, CSR, CRR, CMR

Page 164: Banksvmbia 6.4 Transcript

1778

1 MBIA Respondents-Kasowitz

2 whether the banks' counsel would still get on an

3 airplane if the regulators had outsourced their

4 oversight to a third-party firm who absolutely refused

5 to share what they were doing to insure the safety of

6 the plane and the safety of that engine with even the

7 regulators themselves.

8 My bet is that if the third-party consultants

9 who were entrusted with the responsibility of making

10 sure that that engine was safe kept that information

11 from the regulators whose real responsibility it is to

12 make sure that those engines are safe, defense counsel

13 probably wouldn't feel so happy about getting on that

14 plane.

15 That's really the point, your Honor, your

16 Honor. We are not arguing that nobody use BlackRock or

17 that nobody should use BlackRock.

18 What we're saying is that -- and I think it's

19 obvious -- exchanging genuine and transparent

20 regulatory oversight -- regulatory oversight for an

21 opaque black box model is not only inappropriate. It's

22 dangerous.

23 The regulator's job is not to take someone

24 else's judgment on faith. The regulator's job is to

25 verify and validate, and that's not a job that can in

26 all circumstances be, nor should it be, outsourced.

BARBARA STROH, CSR, CRR, CMR

Page 165: Banksvmbia 6.4 Transcript

1779

1 MBIA Respondents-Kasowitz

2 Your Honor, the idea that this court should

3 null the transformation because Superintendent Dinallo

4 did not outsource his regulatory obligations to a

5 third-party firm that wouldn't let him see what their

6 proprietary models are, frankly, absurd.

7 Now, as I said before, the banks basically

8 admit that the model -- that BlackRock's model is

9 really an opaque black box, but they've been nibbling

10 around about that.

11 They've been listening to us about it. You

12 know, maybe they're getting irritated. Maybe they

13 think I'm kvetching, I don't know. They probably are.

14 So lately we've heard some things like, well,

15 you know, BlackRock, quote, "provides as much

16 information as clients want about the millions of

17 computations that underlie its conclusions," close

18 quote. That's on June 3 at page 1514 of the

19 transcript.

20 That's interesting, your Honor, that they make

21 this kind of stab at transparency because a couple of

22 weeks ago here's what the banks told the court. It's

23 pretty clear: "Now it is true that BlackRock has what

24 the respondents have characterized as a black box.

25 It's their proprietary modeling system.

26 "BlackRock allows clients, people who pay

BARBARA STROH, CSR, CRR, CMR

Page 166: Banksvmbia 6.4 Transcript

1780

1 MBIA Respondents-Kasowitz

2 them, to have access to their model. They don't allow

3 them to see the proprietary side."

4 Then there is some business about me jumping

5 up. Nothing surprising about that, but -- nothing

6 surprising about any of it, your Honor.

7 They say down below: "They weren't permitted

8 to go behind it, BlackRock would never allow that."

9 So I think the point is fair that this model

10 -- thanks, Bunky -- is a black box, and while the banks

11 suggested that our expert, Mr. Finkel, wasn't

12 sufficiently educated in the model to be able to speak

13 to its intricacies, that argument is a red herring.

14 We don't need to hire, MBIA doesn't need to

15 hire an expert to tell us that this is a black box

16 because, in addition to the banks' counsel confirming

17 that, Mr. Paltrowitz, the bank's expert, who I think

18 works for BlackRock, he's confirmed that BlackRock will

19 not provide proprietary information to their clients

20 either.

21 21 -- 22; sorry.

22 "Question: Okay. And how can, how can

23 clients get insight into what historical time periods

24 the regression analysis is based?

25 "Answer: When we release a new model, we tell

26 them. So that the new estimation set goes up to this

BARBARA STROH, CSR, CRR, CMR

Page 167: Banksvmbia 6.4 Transcript

1781

1 MBIA Respondents-Kasowitz

2 cutoff date, whichever the case may be. But I mean, I

3 think we're missing the forest for the trees a little

4 bit.

5 "Question: Go ahead.

6 "Answer: Right. Many market participants use

7 similar approaches. They all get slightly different

8 results.

9 "It depends how you weight them, what you

10 throw in, what you throw out. That's proprietary

11 nature, and the R and D effort of what we do.

12 "But checking the model is easier. You look

13 at inputs, look at outputs, look at sensitivities, and

14 you get sense of understanding it without being able to

15 replicating it.

16 "We view the replications as trade secrets, if

17 you will."

18 That's just the point, your Honor. That's

19 exactly the problem because what Mr. Buchmiller was

20 doing at MBIA, was replicating their models.

21 He could replicate their models because they

22 were fully and wholly transparent to him.

23 And as we explained in our Frye motion, the

24 black box nature of this modeling renders BlackRock an

25 inappropriate expert, consultant for the purposes of

26 transformation where the department, a public entity,

BARBARA STROH, CSR, CRR, CMR

Page 168: Banksvmbia 6.4 Transcript

1782

1 MBIA Respondents-Kasowitz

2 has a statutorily assigned obligation to oversee

3 insurance in this state.

4 So I think that this issue with BlackRock

5 should be pretty much put to bed. They're

6 nontransparent. They are opaque, and for these

7 purposes the idea that Superintendent Dinallo's

8 decision should be overturned because he didn't hire

9 them just holds no water.

10 One last point about BlackRock, and then if

11 it's time to take a break, that's cool. Whatever you

12 want.

13 THE COURT: I don't necessarily thing we're

14 going to take a break because we're going to lose a lot

15 of time.

16 MR. KASOWITZ: I'm cool.

17 So, now, this issue of BlackRock's conflicts

18 came up at -- we raised it and the like, and it came

19 up -- well, we raised it.

20 We pointed out that BlackRock during the

21 relevant time period here was owned almost 50 percent

22 by B of A, who is a policyholder and a petitioner in

23 this case and a plaintiff in the DCL matter and the

24 like.

25 We pointed out that, you know, that's a pretty

26 egregious conflict to hire as a consultant the people

BARBARA STROH, CSR, CRR, CMR

Page 169: Banksvmbia 6.4 Transcript

1783

1 MBIA Respondents-Kasowitz

2 who are, in effect, your counterparty and potentially

3 your adversary. It sounds like a conflict to me, your

4 Honor.

5 We point out something else. That wasn't just

6 our view about things. We cited during our last

7 presentation the report that was issued by the General

8 Accountability Office of the federal government, which

9 said in situations involving Bank of America or Merrill

10 Lynch, BlackRock is off the list. They have an

11 inherent conflict. They're off the list.

12 So, there wasn't really -- there was no real

13 response to that, your Honor, by the banks other than

14 some statement to the effect that, what's wrong? You

15 know, you don't want your policyholders seeing what

16 you're doing? Something like that.

17 I didn't think that was much of a response,

18 your Honor. It's not a question of transparency to

19 what you're doing.

20 It's a question of whether or not someone who

21 you're paying apparently a lot of money to as a

22 consultant is going to have undivided loyalties to do

23 just that job or whether their conflict of interest may

24 cloud their objectivity.

25 That was not addressed at all by banks'

26 counsel, and I didn't hear any response at all to the

BARBARA STROH, CSR, CRR, CMR

Page 170: Banksvmbia 6.4 Transcript

1784

1 MBIA Respondents-Kasowitz

2 finding by the General Accounting Office that there was

3 an inherent conflict that would preclude BlackRock from

4 being considered as a consultant in cases involving

5 Bank of America or Merrill.

6 So, your Honor, I'd like to turn to the

7 dividend aspect of the transformation, and we heard

8 about section 4105 from Mr. Holgado today, and I am

9 going to talk a little bit about it now.

10 Now, 4105 provides that a dividend can only be

11 paid out of hat is known as earned surplus, and on

12 that, I think everyone in this room agrees.

13 Last week the banks argued that MBIA did not

14 have sufficient earned surplus to pay the dividend

15 here.

16 Now, the banks have made this argument before,

17 and we and Mr. Holgado have addressed it in our

18 presentation.

19 But this time, for the very first time, the

20 banks pointed to the testimony of MBIA's statutory

21 accounting expert, Mr. Buttner, claiming that Mr.

22 Buttner's testimony supports the banks' contention that

23 MBIA did not have enough earned surplus to pay the

24 dividend.

25 That argument, your Honor, was on Friday, and

26 it was at pages 1497 through 1500 of the transcript.

BARBARA STROH, CSR, CRR, CMR

Page 171: Banksvmbia 6.4 Transcript

1785

1 MBIA Respondents-Kasowitz

2 That's where the banks' counsel advanced that argument.

3 The only problem with the argument, your

4 Honor, is that it's wrong. As I'm going to show the

5 court, what the banks have done is to take a little

6 snippet of Mr. Buttner's testimony and twist it out of

7 context and, at the same time as they have done that,

8 they have ignored the -- I mean, literally, pages of

9 Mr. Buttner's testimony where he said that there was,

10 quote, "no question," close quote -- his own words --

11 "no question that MBIA had sufficient earned surplus to

12 pay the dividend."

13 But, your Honor, Mr. Buttner's testimony is

14 not the only thing that the banks chose to ignore in

15 their presentation last week about the dividend. They

16 also ignored the testimony of their own statutory

17 accounting expert Richard Hershman.

18 What Mr. Hershman testified about was that if

19 the components of the transformation occurred, quote,

20 "simultaneously," close quote, and as we have

21 explained, there is no question that they did, but

22 that's something the banks challenge.

23 But Mr. Hershman testified that assuming that

24 those components took place at the same time, Mr.

25 Hershman said, quote: "I don't disagree that the

26 reinsurance transaction released enough earned surplus

BARBARA STROH, CSR, CRR, CMR

Page 172: Banksvmbia 6.4 Transcript

1786

1 MBIA Respondents-Kasowitz

2 to pay the dividend."

3 I'm going to go through this. I'm going to

4 put up all the quotes so we can see exactly where they

5 are.

6 The fact is that Mr. Hershman is right about

7 this. MBIA did have more than enough earned surplus to

8 pay the dividend.

9 Let's put this issue in context. The

10 transformation included a reinsurance agreement, and

11 Jane Boisseau, our expert, and Professor Baker, our

12 expert explained these reinsurance agreements in their

13 affidavits.

14 If you look at Ms. Boisseau's affidavit at

15 paragraph 58 and Professor's Baker's affidavit at

16 paragraph 62 through paragraph 63, you can see where

17 the reinsurance agreements are explained, and this is a

18 point that we address on pages 17 through 18 of our

19 surreply brief.

20 Briefly, your Honor, the reinsurance agreement

21 effectively transferred MBIA Corp.'s approximately $537

22 billion of domestic public finance policies to MBIA

23 Illinois, which is now National.

24 As part of that reinsurance agreement, MBIA

25 Corp. paid National over $3 billion to take on that

26 risk and transferred all of the loss reserves and

BARBARA STROH, CSR, CRR, CMR

Page 173: Banksvmbia 6.4 Transcript

1787

1 MBIA Respondents-Kasowitz

2 contingency reserves related to the domestic public

3 finance business to National.

4 Your Honor, National also paid to MBIA Corp.

5 what's known as a seeding commission of approximately

6 $765 million.

7 So in the jargon of the insurance industry,

8 the effect of the reinsurance agreement at MBIA Corp.

9 was, among other things, to, quote, "release," close

10 quote, the contingency reserves that were associated

11 with the public finance business that was being

12 reinsured.

13 The net result of this release of contingency

14 reserves and the payment of the seeding commission on

15 MBIA Corp.'s earned surplus was an increase in $1.85

16 billion, which was more than enough to pay the $1.147

17 billion dividend.

18 Now, Mr. Buttner, MBIA's statutory accountant,

19 opines that this was clearly consistent with statutory

20 accounting principles.

21 At page 135 of his affidavit, he says: "The

22 reinsurance transaction resulted in MBIA Insurance's

23 earned surplus being increased by $1.85 billion and, in

24 my opinion, that result was proper under the Insurance

25 Laws, rules, and regulations."

26 Further, at paragraph 116 of his affidavit he

BARBARA STROH, CSR, CRR, CMR

Page 174: Banksvmbia 6.4 Transcript

1788

1 MBIA Respondents-Kasowitz

2 says: "Based on my review of the transformation

3 transactions, as well as my thirty-plus years of

4 experience, it is my opinion that the transformation

5 transactions occurred simultaneously.

6 "Because they occurred simultaneously, the

7 reinsurance transaction increased earned surplus so

8 that MBIA Insurance's earned surplus was sufficient to

9 complete the dividend transaction."

10 (Continued on next page)

11 (End of take 9)

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

BARBARA STROH, CSR, CRR, CMR

Page 175: Banksvmbia 6.4 Transcript

1789

1 PROCEEDINGS - KASOWITZ

2 T10 MR. KASOWITZ: And at his deposition, Mr. Buttner

3 testified, there was no question that after the reinsurance

4 agreement, MBIA had more than sufficient earned surplus to

5 issue his, to issue the dividend. Let's see -- okay.

6 "Question: And, is it also your understanding

7 while, well, let me back up what you are saying here, that

8 the reinsurance transaction increased earned surplus so that

9 MBIA Insurance's earned surplus was sufficient to complete

10 the dividend transaction.

11 "So, I take it what you mean, there is that,

12 without the reinsurance transaction, MBIA Insurance would

13 not have had sufficient earned surplus to pay the dividend

14 transaction; is that right?

15 There is an "objection as to form".

16 "Generally, yes, that transaction was a transaction

17 that, as it was recorded, as it was recorded, had the

18 component to increase the earned surplus of the company that

19 was in an amount greater than that dividend that was being

20 requested.

21 "You say "the company" in that answer, you mean

22 MBIA Insurance?

23 "Answer: I am sorry, that's correct, MBIA

24 Insurance.

25 "Question: Right. Without that increase of

26 earned surplus that resulted from the reinsurance

NK

Page 176: Banksvmbia 6.4 Transcript

1790

1 PROCEEDINGS - KASOWITZ

2 transaction, MBIA Insurance would not have been properly

3 able to pay the dividend, correct?

4 "Objection, object to form.

5 "Answer: Right, and again, I really have to look

6 at that second part. Don't know whether their earned

7 surplus was sufficient before the transaction to pay it or,

8 whether it wasn't sufficient. I do know that after the

9 reinsurance transaction there was no, no question whether it

10 was or wasn't sufficient."

11 Now, your Honor, the good news here is that, and I

12 am going to get to what the banks argue about this in a

13 minute, but the good news is that we don't have to take Mr.

14 Buttner's word for that because, as I mentioned, Mr.

15 Hirschman, the banks' statutory accountant, confirms this.

16 He confirms this, even though he is the statutory

17 accountant that the banks retained specifically for the

18 express purpose of rebutting Mr. Buttner's opinions.

19 In fact, I think, that he was retained only at the

20 time of, pretty late in the game, at the time that the

21 sur-sur reply papers were submitted.

22 So, at his deposition, Mr. Hirschman admits that if

23 you accept the proposition that the components of the

24 transformation occurred simultaneously, then the reinsurance

25 agreement released sufficient earned surplus to issue the

26 dividend. Here is what he had to say.

NK

Page 177: Banksvmbia 6.4 Transcript

1791

1 PROCEEDINGS - KASOWITZ

2 "Well, do you dispute that the reinsurance

3 transaction released sufficient earned surplus to issue the

4 dividend?

5 "Objection to form.

6 "Answer: Again, in the hypothetical, under the

7 terms that I have seen in the reinsurance transaction, I

8 don't disagree that it released enough earned surplus."

9 Thanks. Eliminating any doubt about that a few

10 minutes later, Mr. Hirschman is asked:

11 "Question: All right. So, so, assuming that all

12 the transactions occurred simultaneously, did National have

13 adequate surplus to assume a public finance business under

14 the reinsurance?

15 There is an "objection".

16 "There is -- " my guy says something -- and then

17 there is an answer.

18 "Again, I think I have, I, I testified to this

19 already. But assuming, you are saying assuming that there

20 was, if it was in the approval letter that these

21 transactions should be accounted for at simultaneous, which

22 if it's not in the approval letter, then under those

23 circumstances, would somebody be able to effect these

24 transactions in a way that it could get this desired result?

25 The answer could be yes."

26 MR. GIUFFRA: Your Honor, your Honor, this refers

NK

Page 178: Banksvmbia 6.4 Transcript

1792

1 PROCEEDINGS - KASOWITZ

2 to "adequate surplus". Doesn't refer to "earned surplus".

3 So, I think there may be a discrepancy in what Mr. --

4 counsel is saying.

5 MR. KASOWITZ: Argue it next week.

6 MR. GIUFFRA: Hopefully not next week.

7 THE COURT: When you get up.

8 MR. KASOWITZ: Argue it next week or tomorrow.

9 So, last week, when the banks' counsel asserted

10 that MBIA did not have enough earned surplus to pay the

11 dividend, they didn't mention that their own statutory

12 accounting expert testified that he doesn't disagree that

13 the reinsurance transaction released enough earned surplus

14 to pay the dividend, if the transformation components

15 occurred simultaneously. They didn't mention that.

16 When the banks' counsel argued that Mr. Buttner's

17 testimony supports their position, they didn't mention that

18 Mr. Buttner testified that there was no question but that

19 MBIA had enough from surplus to pay the dividend. They

20 didn't mention that either.

21 The banks' counsel certainly didn't mention

22 paragraph 135 of Mr. Buttner's affidavit, where he says as

23 plain as day, that increasing MBIA's earned surplus by

24 $1.85 billion to account for the reinsurance agreement was,

25 quote, proper under the insurance laws, rules and

26 regulations, close quote.

NK

Page 179: Banksvmbia 6.4 Transcript

1793

1 PROCEEDINGS - KASOWITZ

2 Banks didn't say anything about that.

3 What they do, they latch on to a single sentence of

4 Mr. Buttner's 55 page affidavit and they misconstrue it.

5 That sentence comes from paragraph 90 of Mr. Buttner's

6 affidavit.

7 I am not going to read the whole thing. I will

8 read the last sentence.

9 "Unlike other reserves prescribed by SSAPP number

10 60, changes in the contingency reserve liability are

11 reported directly as increases or decreases to under

12 assigned surplus and therefore, are not included in the

13 determination of earned surplus."

14 So, the banks say, the banks say hey, Mr. Buttner

15 says that changes in contingency reserves are not included

16 in the determination of earned surplus, therefore -- and

17 this is the conclusion that they draw, not the conclusion

18 that he draws -- therefore, MBIA did not have sufficient

19 earned surplus to pay the dividend after the reinsurance

20 agreement. That's just not correct. The banks aren't

21 following the logic of Mr. Buttner's statement all the way

22 through to its conclusion.

23 Now, let me explain. MBIA excludes contingency

24 reserves from earned surplus. If you take that view, then

25 as a matter of basic arithmetic, if you release or reduce

26 contingency reserves, you increase earned surplus. The

NK

Page 180: Banksvmbia 6.4 Transcript

1794

1 PROCEEDINGS - KASOWITZ

2 assets that were formerly set aside for contingency reserves

3 were not included in the earned surplus calculation. MBIA,

4 the Department, and Mr. Hirschman all agree, that this was

5 the result of the reinsurance agreement.

6 Mr. Buttner takes a different approach in

7 accounting than MBIA, but he gets to the same place.

8 Mr. Buttner's conclusion is that MBIA had

9 sufficient earned surplus to pay for the dividend, even

10 notwithstanding the reinsurance agreement. Mr. Buttner's

11 interpretation of the definition of earned surplus, under

12 Section 4105 of the Insurance Law, and the relevant

13 accounting standards, is that contingency reserves are

14 already included within the company's earned surplus.

15 The simplest terms, in Mr. Buttner's opinion, you

16 don't get a bump to earned surplus when contingency reserves

17 are released, because contingency reserves are already

18 included in earned surplus.

19 For the same reason, you do not increase earned

20 surplus when contingency reserves are increased, even from

21 zero.

22 Thus, using Mr. Buttner's method, MBIA would have

23 had more than enough earned surplus to execute the dividend,

24 even before the reinsurance transaction, and Mr. Buttner

25 explained this in his deposition at pages 297 through 298.

26 Okay.

NK

Page 181: Banksvmbia 6.4 Transcript

1795

1 PROCEEDINGS - KASOWITZ

2 "Question: So, and with the ceding commission and

3 the release of reserves that you have just described as your

4 understanding in connection with the reinsurance

5 transaction, is it your understanding that as a result of

6 those, MBIA Insurance's earned surplus increased by about

7 $2 billion?

8 "Answer: I don't know what the number would be.

9 I would have to look to see what the components were of

10 those elements.

11 "Question: Okay, but is that roughly in the

12 ballpark, as far as you recall the transaction?

13 "Answer: I don't know that again, that their

14 earned surplus would have increased by, by the $2 billion,

15 by the 2 billion, because the release of the contingency

16 reserve isn't an earned surplus number. Just, just like

17 the contingency reserve that is held is not a component of

18 the earned surplus number."

19 But, your Honor, because the components of the

20 transformation took place simultaneously, there is no need

21 for MBIA to rely on this aspect of Mr. Buttner's testimony

22 to argue that it had enough earned surplus to execute the

23 dividend, even absent the reinsurance agreement.

24 MBIA takes a more conservative approach. MBIA

25 does not include contingency reserves in its calculation of

26 earned surplus which, by definition means, that there would

NK

Page 182: Banksvmbia 6.4 Transcript

1796

1 PROCEEDINGS - KASOWITZ

2 be less earned surplus and MBIA's position in connection

3 with its application to the Department, and in this

4 proceeding has always been, that as a result of the

5 reinsurance transaction, which occurred simultaneously with

6 the dividend and the share redemption, is that earned

7 surplus increases by an amount more than enough to execute

8 the dividend.

9 So, does this difference between Mr. Buttner's view

10 of permissible statutory accounting practice and MBIA's more

11 conservative practice, mean that Mr. Buttner's view somehow

12 proves the banks' contention that MBIA did not have enough

13 earned surplus to pay the dividend? Not at all. In fact,

14 it proves exactly the opposite.

15 Under Mr. Buttner's interpretation of Section 4105,

16 MBIA had more than sufficient earned surplus, even before

17 the transformation was executed, and even if the components

18 had not occurred simultaneously which, of course, they did.

19 This is what Mr. Buchmiller meant when he testified

20 that whether you calculate earned surplus in the manner that

21 he thinks is permissible, or in the more conservative manner

22 as MBIA does, after taking the effect of the reinsurance

23 agreement on contingency reserves, there is no question that

24 MBIA had sufficient earned surplus to pay the dividend.

25 Now, I want to point out, your Honor, that this

26 argument is not an argument that the banks have ever made

NK

Page 183: Banksvmbia 6.4 Transcript

1797

1 PROCEEDINGS - KASOWITZ

2 before. I think Mr. Holgado made that point when he was up

3 earlier. They didn't make this argument in their 90 page

4 surreply, sur-sur reply memorandum, which they submitted

5 long after they took Mr. Buttner's deposition.

6 In fact, at page 95 of their reply brief, the

7 banks' argue that, quote, for MBIA Insurance lawfully to pay

8 the dividend, the reinsurance transaction had to precede the

9 dividend to supply the necessary earned surplus, close

10 quote.

11 In other words, if you assume simultaneity, MBIA

12 had quote, necessary earned surplus, close quote.

13 Just like their reply and surreply reply briefs,

14 the exclusive basis for Mr. Hirschman's challenge to

15 statutory accounting for transformation, is the contention

16 that there was no simultaneity here.

17 Mr. Hirschman admitted straight up at his

18 deposition, that if you assume the transactions occurred

19 simultaneously, he has no basis to criticize the statutory

20 accounting for the transformation. Let's take a look.

21 "Question: Is there any, assuming that they did

22 occur simultaneously, is there any accounting issue that you

23 have identified with any of the independent transactions?

24 Then there is an objection, there is an answer.

25 "Again, I think you have asked me the question

26 earlier, assuming that, assume hypothetically that this

NK

Page 184: Banksvmbia 6.4 Transcript

1798

1 PROCEEDINGS - KASOWITZ

2 occurred simultaneously, you know, would I, would I be able

3 to find problems with the transactions as they were if it

4 was set forth that way unknown, again, simultaneously all

5 transactions closing at the exact same time by that

6 definition? I can't think, I don't have a basis to

7 criticize that."

8 So, I think, at the end of the day, we end up in a

9 situation where there cannot be any doubt that there was

10 sufficient earned surplus here.

11 I am not going to go back through all of the

12 arguments about simultaneity. We have set it forth in

13 spades.

14 But, at the end of the day, we have the banks'

15 expert agreeing that if it was simultaneous, then there was

16 sufficient earned surplus. We have the Superintendent

17 agreeing, we have MBIA agreeing and MBIA's own statutory

18 accounting expert says whether or not it was simultaneous,

19 there was sufficient earned surplus.

20 So, that point, your Honor, I think is well

21 disposed of.

22 THE COURT: Is this a good time?

23 MR. KASOWITZ: I think it is because the next

24 subject I have will go for much longer than 15 minutes.

25 THE COURT: So, approximately how much time do you

26 need for tomorrow? Actually, counsel come up.

NK

Page 185: Banksvmbia 6.4 Transcript

1799

1 PROCEEDINGS - KASOWITZ

2 (Whereupon, there was a discussion had off the

3 record, at the bench, among all counsel, at this time.)

4 THE COURT: We will be finished for today. We will

5 not start with anything else. Obviously, we will continue

6 tomorrow at 10 o'clock.

7 I will just talk to them about exactly what we will

8 do.

9 (Whereupon, the case stood in recess to Tuesday,

10 June 5, 2012, at 10:00 A.M.)

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

NK