banksvmbia 6.5 transcript

7/31/2019 Banksvmbia 6.5 Transcript

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12 SUPREME COURT OF THE STATE OF NEW YORK

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

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

OF COMMERCE; CITIBANK, N.A.; HSBC BANK USA,5 N.A., JP MORGAN CHASE BANK, N.A.; KBC

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

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

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

BRANCH; ROYAL BANK OF CANADA; THE ROYAL BANK9 OF SCOTLAND PLC; SMBC CAPITAL MARKETS LIMITED;

SOCIETE GENERALE; UBS AG, LONDON BRANCH; and10 WACHOVIA BANK, N.A.,

11 PETITIONERS,

12 - against -

13ERIC DINALLO, in his capacity as Superintendent

14 of the New York State Insurance Department; theNEW YORK STATE INSURANCE DEPARTMENT; MBIA INC.;

15 MBIA INSURANCE CORPORATION; and NATIONAL PUBLIC

FINANCE GUARANTEE CORPORATION (f/k/a MBIA16 INSURANCE CORP. OF ILLINOIS),

17RESPONDENTS.

18 - - - - - - - - - - - - - - - - - - - - - XINDEX NO: 601846/09 60 Centre Street

19 New York, New YorkJune 5, 2012

20BEFORE: HONORABLE BARBARA R. KAPNICK, Justice

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22 APPEARANCES:

23 SULLIVAN & CROMWELL, LLPAttorneys for Petitioners

24 125 Broad StreetNew York, New York

25 BY: ROBERT J. GIUFFRA, JR., ESQ.MICHAEL H. STEINBERG, ESQ.

26 WILLIAM WAGENER, ESQ.

NINA KOSS - OFFICIAL COURT REPORTER


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1 PROCEEDINGS2 KASOWITZ, BENSON, TORRES & FRIEDMAN, LLP

Attorneys for Respondents3 1633 Broadway

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

DANIEL BENSON, ESQ.5 KENNETH DAVID, ESQ.67 OFFICE OF THE ATTORNEY GENERAL

Attorneys for State Respondents8 120 Broadway

New York, New York9 BY: DAVID HOLGADO, ESQ.

MARK KLEIN, ESQ.10

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

BARBARA STROH, C.M.R., C.R.R.16 Official Court Reporters

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1 PROCEEDINGS - KASOWITZ2 T1 THE COURT: Good morning.3 So, Mr. Kasowitz, ready to continue?4 MR. KASOWITZ: I am, your Honor, thanks.5 Good morning.6 THE COURT: Good morning.7 MR. KASOWITZ: Your Honor, I want to turn now to an8 argument we heard from the banks last week to the effect9 that Section 1309 of Insurance Law requires that this Court

10 find contrary to the findings of Superintendent Dinallo and

11 to the findings of Mr. Buchmiller and contrary to the

12 findings of The Department of insurance, that MBIA was, in

13 fact, insolvent as a result of the approval of the

14 transformation in February 2009.

15 The banks made that argument last week at 14 --

16 pages 1429 through 1435 of the transcript, among other

17 places.

18 So, the banks argue that under Section 1309, it

19 doesn't matter whether the Superintendent specifically found

20 that MBIA had more than sufficient assets to pay claims from

21 policyholders as they came due and therefore, that MBIA was

22 solvent.

23 The banks' claim that the ability to pay claims as

24 they come due, which is the sine qua non of any solvency

25 analysis, is actually irrelevant under Section 1309 and that

26 all that matters here is MBIA, in February 2009, was able to

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1 PROCEEDINGS - KASOWITZ2 reinsure all of its coverage with a third-party, regardless3 of how ample MBIA's reserves were and were found to be by4 the Superintendent at that time.5 The banks argue, your Honor, that Section 1309(a)6 required that The Department find that MBIA was insolvent7 and indeed, that MBIA, that The Department was required to8 complete a full fledged examination exam, statutory9 examination of MBIA prior to approving transformation.

10 But, your Honor, when you actually read Section

11 1309, rather than listening to this incorrect

12 interpretation, it's clear that the statute doesn't suggest

13 in any way, that the Department was required to make a

14 finding of insolvency when MBIA, in fact, wasn't, nor does

15 it require that the Department was required to complete a

16 full statutory examination prior to approving MBIA's

17 application.

18 To the contrary, the statute confirms that the

19 Superintendent did exactly what he was empowered to do under

20 the Insurance Law.

21 Now, Section 1309 is entitled, "Solvency of an

22 Insurer" and it describes the conditions under which the

23 Superintendent is empowered to make a finding that a New

24 York insurer is insolvent, and when the Superintendent may,

25 in his discretion, place into rehabilitation an insurer that

26 he determines is insolvent.

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1 PROCEEDINGS - KASOWITZ2 Let's take a look at the words of the statute.3 Slide 31.4 (Pause in the proceedings.)5 MR. KASOWITZ: Now, fifteen seconds.6 THE COURT: What's a little 15 seconds.7 MR. KASOWITZ: Between friends.8 All right. Let's read it.9 1309: Insolvency of an Insurer, A, whenever the

10 Superintendent finds, from a financial statement or report

11 on examination, that an authorized insurer is unable to pay

12 its outstanding, lawful obligations as they mature, in the

13 regular course of business, as shown by an excess of

14 required reserves and other liabilities over admitted assets

15 or by its not having sufficient assets to reinsure all

16 outstanding risks with other solvent, authorized assuming

17 insurers after making all the claims owed, such insurer

18 shall be deemed insolvent and the Superintendent may proceed

19 against it, pursuant to the provisions of Article 74 of this

20 chapter.

21 So, let's take a minute to walk through this

22 provision.

23 It applies, quote, whenever the Superintendent

24 finds that an authorized insurer is unable to pay its

25 outstanding, lawful obligations as they mature in the

26 regular course of business."

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1 PROCEEDINGS - KASOWITZ2 As I mentioned, your Honor, that is a classic3 definition of insolvency for an insurer. Can it pay its4 claims as they come due?5 Section 1309 applies when the Superintendent makes6 a finding that an insurer cannot pay its claims as they come7 due, and makes that finding based upon either a financial8 statement or from, or based on an examination, a report on9 examination. That is a report after the triennial

10 examination provided for under Section 309 of the Insurance

11 Law.

12 Now, of course here, your Honor, as we have seen,

13 the Superintendent never made a finding that MBIA was unable

14 to pay its outstanding, lawful obligations as they mature in

15 the regular course of business.

16 Instead, The Department made precisely the opposite

17 finding here, and the evidence in the record, including the

18 deposition testimony, sworn affidavits, contemporaneous

19 documents, demonstrates conclusively that, based on its

20 review, including its review of MBIA's financial statements,

21 The Department found that MBIA Insurance would be solvent

22 after the transformation, including under the definition,

23 this definition of insolvency found in Section 1309.

24 Now, The Department says that --

25 MR. STEINBERG: Your Honor, we would like to have

26 the cite he is now going to give as to where The Department

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1 PROCEEDINGS - KASOWITZ2 made this finding under 1309.3 MR. KASOWITZ: You know what? Counsel will have4 their chance to make their arguments tomorrow or later5 today.6 So, let me just let me just proceed with my7 argument here.8 The Department says it in their approval letter at9 page 6: The Department finds, slide 32, The Department

10 finds that MBIA Corp will retain sufficient surplus to

11 support its obligations and writings following the payment

12 of the MBIA Corp dividend.

13 The Department also says it in the press release

14 announcing its approval of the transformation at page two.

15 Slide 33.

16 "Both MBIA Corp and National will continue to pay

17 all valid claims in a timely fashion, and both entities will

18 have sufficient resources to meet policyholder claims as

19 they come due."

20 Consistent with New York State Insurance Law, the

21 New York State Insurance Department only approved the

22 transaction after deciding that both companies would have

23 sufficient statutory capital to meet the letter and spirit

24 of the Insurance Law.

25 Now, the finding that MBIA would be able to pay all

26 of its claims as they came due, is also confirmed by other

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1 PROCEEDINGS - KASOWITZ2 evidence in the record.3 That includes, among other things, your Honor, Mr.4 Buchmiller's November 24th, 2009 affidavit at paragraph 57,5 Mr. Buchmiller's September 28th, 2010 deposition at page6 423, lines 7 through 24, Mr. Moriarity's November 24th,7 2009, affidavit at paragraph 69, and Mr. Moriarity's8 September 2nd, 2010 deposition at 334, lines 5 through 18,9 among other places.

10 Going back to the text of Section 1309, your Honor,

11 by its own terms, the statute applies when the

12 Superintendent makes a finding that an insolvent insurer

13 cannot pay its claim as they come due based on financial

14 statements or a report on examination.

15 And, there was no such finding here. But then,

16 the statute then goes on to say that, if and when the

17 Superintendent does make such a finding, such a finding may

18 be shown by, shown by either of two methods.

19 First, a Superintendent's finding can be supported

20 by financial statements or an examination before it

21 reflecting, quote, an excess of required reserves and other

22 liabilities over admitted assets, close quote.

23 That's to say, your Honor, a balance sheet that

24 suggests that the company may be under reserved.

25 Second, a Superintendent's finding would be based

26 on a determination that the insurer does, quote, not have

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1 PROCEEDINGS - KASOWITZ2 sufficient assets to reinsure all outstanding risks with3 other solvent, authorized assuming insurers after paying all4 accrued claims owed."5 In other words, your Honor, that its risks are so6 great, that it cannot afford to pay another insurer to take7 them on.8 The statute goes on to say that, if and when the9 Superintendent makes a finding that an insurance company is

10 unable to pay its claims as they come due, based on either

11 the financial reports, financial statements or report on

12 examination, and can support that finding by showing either

13 that the company is under reserved or unable to afford

14 reinsurance for its risks, then that insurer, quote, shall

15 be deemed insolvent, and the Superintendent may proceed

16 against it under the rehabilitation provisions of the

17 Insurance Law.

18 That's what the statute says, your Honor. It

19 defines the Superintendent's power to find that an insurer

20 is insolvent before proceeding with rehabilitation at the

21 Superintendent's discretion.

22 So, what does this have to do with this proceeding?

23 Frankly, very little.

24 Now, the banks' hook for Section 1309 and Mr.

25 Holgado talked about this yesterday, is not anything in the

26 banks' petition in this case.

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1 PROCEEDINGS - KASOWITZ2 Rather, there is no mention of Section 1309 in the3 banks' petition in this case.4 Rather, in paragraph 87 of the banks' verified5 petition, which was filed three years ago, June 2009, that6 alleges, on information and belief, MBIA Insurance's7 liabilities to its policyholders substantially exceed its8 claim paying resources.9 In addition, the fraudulent restructuring has, on

10 information and belief, left MBIA Insurance insolvent in

11 that the present fair salable value of its assets is less

12 than the amount that will be required to pay its probable

13 liabilities on its existing debts as those debts become

14 absolute and mature.

15 "Even if MBIA Insurance is not currently insolvent,

16 the fraudulent restructuring has left it so under

17 capitalized that it faces an unreasonably high risk of

18 insolvency."

19 Then, in responding to these allegations, The

20 Department stated in its answer, which was filed in November

21 of 2009 as follows -- Mr. Holgado referred to this

22 yesterday.

23 "Deny the allegations contained in paragraph 87 of

24 the petition affirmatively there, that the definition of

25 insolvency stated by Petitioners in such paragraph is

26 irrelevant in this proceeding, because the Department's

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1 PROCEEDINGS - KASOWITZ2 determination of MBIA Corp's post transformation solvency3 was based on the definition of insolvency provided for in4 Insurance Law Section 1309, which The Department was5 required to utilize in making its determination.6 So, your Honor, as you can see, what happened here7 was that the banks generated their own definitions of8 insolvency -- all of which were borrowed, by the way, from9 the debtor creditor law, which has nothing strictly to do

10 with this proceeding, but with the plenary case, in drafting

11 the petition.

12 They claim, without any authority to back them up,

13 that MBIA failed their definition of solvency, but even if

14 MBIA didn't fail their definitions of insolvency in the last

15 sentence there, the last allegation, The Department should

16 have disapproved the transformation anyway.

17 The Department denies the accuracy of the banks'

18 definition of insolvency, and then recognizing the

19 inaccuracy in the banks' petition, The Department correctly

20 cites Section 1309 in response to these unsupported and

21 inaccurate statements of the definition of insolvency under

22 the New York Insurance Law.

23 So, having three years later decided that Section

24 1309 is the key to their petition, what is it, how is it

25 that the banks read Section 1309?

26 They say that the statute should not be read as

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1 PROCEEDINGS - KASOWITZ2 it's written, but instead, that it should be read to support3 this new argument that, the only thing that matters in4 Section 1309 is the reinsurance test.5 Here is what they say. They say that 13096 actually means that the Superintendent must, before7 approving a transaction like transformation, conduct and8 complete a statutory examination under Insurance Law Section9 309.

10 1309 doesn't say that. It says, a determination

11 of insolvency can be made based on either an insurer's

12 financial statement or on a report of examination.

13 Second, they say that Section 1309 requires,

14 requires that the Superintendent make two determinations

15 concerning an insurer's finances.

16 They say that the Superintendent is required to

17 determine whether the insurer has, quote, an excess of

18 required reserves and other liabilities over admitted assets

19 and then, the Superintendent is also required to make a

20 separate finding concerning whether the insurer has, quote,

21 sufficient assets to reinsure all outstanding risks with

22 other solvent authorized assuming insurers after paying all

23 accrued claims owed.

24 The banks' reading goes on to require that if

25 either of these prongs is met, then the insurer is

26 automatically deemed insolvent and the Superintendent has no

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1 PROCEEDINGS - KASOWITZ2 discretion in the matter.3 But, your Honor, we can see from the plain text of4 the statute, the portion of Section 1309 that explains how a5 finding of insolvency may be shown by the Superintendent is6 relevant and potentially applicable only when and if the7 Superintendent invokes it as support for a finding, a8 showing, that the insurer is unable to pay its claims as9 they come due.

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1 MBIA Respondents-Kasowitz2 T23 MR. KASOWITZ: There has never been, your4 Honor, never been such a finding here.5 To the contrary, the superintendent has6 concluded here just the opposite. The banks'7 suggestion that the manner in which such a finding may8 be made controls and supersedes the superintendent's9 power to make the predicate finding of an insurer's

10 solvency or insolvency is simply unsupported by

11 anything in the statute.

12 The purpose of the as-shown-by clause, the

13 acid test and the reinsurance test, is to compel the

14 superintendent, to be able to justify a finding of

15 insolvency, when and if he or she makes one, and to

16 provide an insurer with a clear basis to challenge the

17 superintendent's findings if it seeks to do so.

18 There is nothing whatsoever in section 1309

19 that compels the superintendent to make a finding of

20 insolvency or to address the as-shown-by clauses in the

21 absence of a predicate finding of insolvency.

22 And while the banks try to rely on the opinion

23 of their solvency expert, Mr. Stulz, to buttress up

24 this argument, Mr. Stulz, their solvency expert,

25 properly made very, very clear that he's offering no

26 opinion on the manner in which section 1309 is applied:

BARBARA STROH, CSR, CRR, CMR


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1 MBIA Respondents-Kasowitz2 "I have no legal expertise and do not know the3 proper legal interpretation of this paragraph." That's4 at his affidavit at paragraph 180.5 So, your Honor, the clear, unambiguous reading6 of section 1309 as we described makes complete sense,7 and the banks' reading impermissibly would read the8 phrase, quote, "the superintendent finds from a9 financial statement or report on examination," close

10 quote out of the statute.

11 Moreover, if the banks' view were correct,

12 then the solvency of every insurer in New York State

13 would be solely dependent on the ready availability of

14 a robust and fully liquid reinsurance market with the

15 actual ability of the insurer in question to pay the

16 claims being totally irrelevant.

17 So let's take a couple of hypotheticals to see

18 how this works. Let's say that the superintendent were

19 applying the banks' interpretation of section 1309 to

20 the largest insurer in a particular area, and that

21 insurer has tremendous reserves and has an ample

22 cushion of assets well beyond what would be required to

23 meet its obligations as they come due.

24 The insurer is certainly not insolvent by any

25 financial measure, but because of the size of the

26 insurer's book of business and its specialized nature,



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1 MBIA Respondents-Kasowitz2 there is no practical availability of reinsurers.3 No reinsurer is in a position to take on this4 risk because this insurance company is so well off.5 According to the banks, section 1309 says that6 an insurer is insolvent, notwithstanding that it has7 enormous reserves and notwithstanding that it has no8 risk of failing to pay its claims as they come due.9 An even simpler hypothetical, your Honor,

10 let's say there is only one insurer left in New York.

11 It has a monoply, and it has enormous assets. Its

12 risks can't be insured because there are no other

13 insurers out there.

14 Again, the banks say that section 1309 means

15 that that enormously successful monoply operator is

16 insolvent despite the actual facts concerning its

17 financial condition.

18 That is not what the law says, nor would it

19 make any sense to read it that way.

20 Now, what's amazing here, your Honor, is that

21 one of the pieces of evidence that the banks point to

22 in purported support of their contention that MBIA

23 would have failed the so-called reinsurance test makes

24 exactly this point, exactly the point I've made.

25 In July of 2008, as we have seen, the

26 transformation was already under consideration. Mr.



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1 MBIA Respondents-Kasowitz2 Buchmiller and others from the department were on site3 at MBIA doing risk surveillance.4 Chuck Chaplin, MBIA's CFO, sent Jay Brown, the5 company --6 MR. GIUFFRA: Your Honor, may I ask -- the7 problem is could you please, Mark, tell us where that8 is in the record?9 MR. KASOWITZ: Yes, I will.

10 Mr. Chuck Chaplin, MBIA's CFO, sent Jay Brown,

11 the company CFO, an e-mail that says -- can you pick up

12 the slide. This is July 27, 2008.

13 "In today's reinsurance market, we don't

14 believe that there is capacity to reinsure our entire

15 book at virtually any price, so any analysis of a

16 required price is highly speculative."

17 Thanks, Bucky.

18 So what Mr. Chaplin was referring to when he

19 said "in today's reinsurance market," was the enormous

20 dislocation of the market caused by this enormous

21 recession as with other markets, including the public

22 finance markets. As we know, it was difficult, if not

23 impossible, to obtain reinsurance at any price.

24 That's what MBIA's executive team recognized

25 there in July 2008. That's exactly the hypothetical

26 that I raised.



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1 MBIA Respondents-Kasowitz2 The so-called reinsurance test doesn't work in3 this particular situation not because of anything about4 MBIA's actual ability to pay its claims as they come5 due but as a result of broader conditions in the market6 for reinsurance.7 There was no capacity for the book to be8 reinsured, so that piece of the section 1309 test9 couldn't be applied by a superintendent who was

10 determining whether or not a particular insurer was

11 insolvent, which, of course, was not the case here.

12 And, of course, contrary to the banks'

13 positions, the inapplicability of the reinsurance test,

14 due to circumstances other than the insufficiency of

15 the insurer's claims-paying ability, is irrelevant to

16 anything that the superintendent was doing in his

17 review of the proposed transformation.

18 Your Honor, perhaps that's the reason, as Mr.

19 Holgado pointed out yesterday, that Mr. Moriarty, whose

20 testimony the banks are happy to rely on when they

21 think it suits their purposes but unhappy to rely on it

22 when it doesn't, stated that he'd never seen this

23 particular prong used in his 31 years, because it

24 simply hadn't been applied by any superintendent in

25 those circumstances.

26 So, I think, your Honor, that this Executive



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1 MBIA Respondents-Kasowitz2 Life situation then becomes an effort by the banks to3 grasp at straws.4 Mr. Holgado pointed out -- and I thought he5 did it very well; I'll just deal with it a second --6 that Executive Life was a life insurance company, an7 on-line insurer.8 Your Honor, Executive Life had been placed9 into rehabilitation by the Liquidation Bureau, I think,

10 back in 1991, and the Liquidation Bureau recently

11 sought to convert that rehabilitation plan into a

12 liquidation.

13 So, this is exactly the way that the section

14 is supposed to work. In connection with those filings

15 in which a determination had been made that this

16 particular company couldn't pay its claims as they came

17 due, couldn't meet its obligations, certain objecters

18 arose to challenge that.

19 In response to those objections, the

20 Liquidation Bureau, in the filings shown to the court

21 by the banks, said that the objecters were wrong and

22 that the superintendent's finding of insolvency was

23 completely supported by the banks' financial statements

24 which shows that Executive Life had, I think, $2.5

25 billion in liabilities, which far exceeded the $900

26 million in assets.



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1 MBIA Respondents-Kasowitz2 The Liquidation Bureau also noted that, you3 know, after this finding had been made by the4 Liquidation Bureau, they also noted that the so-called5 reinsurance test would be failed.6 No big deal. A finding had already been made,7 according to the first predicate, the first, the main8 predicate of the statute that this insurer could not9 meet its obligations as they came due.

10 Pretty unremarkable, your Honor. And the

11 Liquidation Bureau did exactly what the Insurance Law

12 requires.

13 So, it explained that its finding of

14 insolvency was, quote, "shown by," close quote, exactly

15 the prongs in the statute that it's supposed to use.

16 So, that was both those prongs. So what we

17 see here, your Honor, is that the banks, having failed

18 to show that the department acted in any way

19 irrationally in its review and approval of

20 transformation, they're now arguing that the whole

21 thing was illegal because the department didn't follow

22 the requirements of a statute that the banks never

23 cited in their petition, 1309, never cited in their

24 petition, a statute that is never applied in the way

25 that the banks are seeking to apply it because it

26 simply does not mean what they say it means.



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1 MBIA Respondents-Kasowitz2 Now, others have tried this from time to time.3 Never in the same context but in 2008 Mr. Ackman, who4 was a short seller whose name I think was raised by the5 banks during their argument, and whose play book, in6 attacking MBIA, the banks seem to have adopted, he7 argued in a letter that he sent to the MBIA board that8 the company was insolvent under section 1309 because it9 purportedly couldn't reinsure its book of business.

10 That was months before the application for the

11 transformation was made to the department.

12 A letter was sent -- in fact, we prepared

13 it -- on behalf of MBIA to Superintendent Dinallo on

14 July 9, 2008, pointing out that Mr. Ackman's section

15 1309 claim, which he had been using to try to drive the

16 price of MBIA stock down, that this argument was

17 irrational, it didn't make any sense.

18 You know what, your Honor? The department

19 didn't accept Mr. Ackman's argument about 1309, this

20 contorted definition of it. It didn't accept it then;

21 it's not accepting it now because it's not the way that

22 the statute reads and should read.

23 So, your Honor, the meaning of 1309 is clear.

24 It couldn't mean what the banks say it means, and it

25 doesn't mean what the banks say it means, but, in any

26 event, your Honor, the superintendent has interpreted



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1 MBIA Respondents-Kasowitz2 it correctly.3 Like every agency in the State of New York,4 the Insurance Department's interpretation and5 application of the Insurance Law, including section6 1309, is entitled to substantial deference.7 Let's take a look, Bucky.8 So these are three Court of Appeals decisions9 that talk about the substantial deference to which the

10 superintendent of insurance's decision-making is and

11 interpretations are given, as well as other agencies.

12 In the Medical Society versus Serio case, a

13 2003 case, and that concerned a former superintendent

14 who is one of the experts in this case, the Court of

15 Appeals said that the superintendent, quote, "has broad

16 power to interpret, clarify, and implement the

17 legislative policy.

18 "The superintendent's interpretation, if not

19 irrational or unreasonable, will be upheld in deference

20 to his special competence and expertise with respect to

21 the insurance industry, unless it runs counter to the

22 clear wording of a statutory provision."

23 In the Appelbaum case, a 1985 Court of Appeals

24 case, it says that: "Where an agency is, 'responsible

25 for administering and enforcing a statute,' its

26 interpretation must be given, 'great weight and



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1 MBIA Respondents-Kasowitz2 judicial deference,' so long as the interpretation is3 neither irrational, unreasonable, nor inconsistent with4 the governing statute."5 The Chesterfield Associates case, 2005 Court6 of Appeals case, is to the same effect.7 In fact, here, your Honor -- that's fine,8 Bucky -- Superintendent Dinallo was called on to do9 more than just interpret a complex statute of the

10 Insurance Law, an area of his special competence and

11 expertise, which alone would have required -- requires

12 the courts to give him great deference.

13 He also had to apply that statute to the facts

14 of the case before him as developed by the department's

15 review of the transformation application, which, as we

16 have noted, was being conducted concurrently with an

17 examination.

18 The law is clear in New York that where that's

19 the case, where there is an interpretation being given

20 to a set of facts, that interpretation can't be

21 disturbed unless it's found to be irrational.

22 As the first deposition has held, quote:

23 "Where the judgment of an agency involves factual

24 evaluations in the area of that agency's expertise and

25 is supported by the record, a reviewing court may not

26 re-evaluate the weight accorded the evidence adduced,



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1 MBIA Respondents-Kasowitz2 since the duty of weighing the evidence, interpreting3 relevant statutes and making the determination rests4 solely in the expertise of the agency."5 In fact, your Honor, not only is this the law6 in this state, but it is the great deference that7 should be accorded by the judiciary to the8 superintendent of insurance, as confirmed by the former9 superintendents who have been selected as experts by

10 the banks in this matter.

11 We'll take a quick look at this. 39, Bucky.

12 This is former Superintendent Serio:

13 "Question: And you would also agree with me,

14 Mr. Serio, that the superintendent of insurance in New

15 York is vested with broad powers to interpret, clarify

16 and implement the state's legislative policy as

17 reflected in the Insurance Law?"

18 There's an objection.

19 "Answer: Yes, I would agree with that."

20 Former Superintendent Muhl:

21 "Question: Mr. Muhl, you would agree with me

22 that in New York the Insurance Law -- would you agree

23 with me that the Insurance Law grants the

24 superintendent of insurance broad powers and authority

25 to effectuate and implement its provisions?"

26 There is an objection.



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1 MBIA Respondents-Kasowitz2 "Answer: I believe that there is broad3 authorities that the superintendent has in implementing4 or enforcing the laws, rules and regulations, as long5 as -- it's not unbridled authorities, but he has to do6 it within the bounds and limits of laws, rules and7 regulations."8 41. This is former Superintendent Stewart:9 "Question: Would you agree with me that in

10 New York the Insurance Law grants the superintendent of

11 insurance broad powers to effectuate and enforce

12 provisions of the Insurance Law?"

13 There's an objection.

14 "Answer: Yes, with -- obviously, enforce

15 provisions of the Insurance Law, not to make up as he

16 goes along.

17 "Question: You had these powers at the

18 time -- I'm sorry."

19 "Mr. Greenblatt: We wouldn't want that.

20 "Question: You had those powers at the time

21 you were superintendent of insurance, correct?

22 "Answer: I did.

23 "Question: And Mr. Corcoran did?

24 "Answer: Yeah.

25 "Question: And Mr. Muhl did?

26 "Answer: Yes.



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1 MBIA Respondents-Kasowitz2 "Question: Mr. Serio did.3 "Answer: Okay.4 "Question: And Mr. Dinallo did?5 "Answer: Yes.6 "Question: Superintendent Dinallo had those7 broad powers to effectuate, enforce provisions of the8 Insurance Law at the time he was superintendent?9 "Objection.

10 "Answer: Yes."

11 Finally, your Honor, while it's abundantly

12 clear what this statute says and means, and while it's

13 abundantly clear that the superintendent, within the

14 exercise of his authority and discretion, which the

15 banks concede and their experts concede interpreted it

16 correctly, it's also clear that in the event -- in

17 certain circumstances the Court of Appeals has

18 recognized that where an administrative agency

19 determines that, in light of the circumstances it faces

20 that it's compelled to apply a flexible interpretation

21 of a particular statute, the courts will not disturb

22 the agency's decision.

23 And that, your Honor, is the Tenants Union

24 case, 40 N.Y. 2d 133, 1976.

25 There the court found that: "So long as the

26 agency's application of the statute dictates, even if



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1 MBIA Respondents-Kasowitz2 not fully compliant, was designed to produce an3 accurate result, it would be upheld."4 (Continued on next page)5 (End of take 2)6789

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1 PROCEEDINGS - KASOWITZ2 T3 MR. KASOWITZ: Here of course, your Honor, The3 Department fully and accurately applied Section 1309.4 But, even if the banks were correct that The5 Department did not, and they are not at all correct, your6 Honor, the principles of the tenant's union decision would,7 in any event, dictate that the Department's good faith8 interpretation of Section 1309 was intended to and did9 produce the result that comports with the intended statute

10 and therefore, should not be disturbed by this Court.

11 So, your Honor, I want to turn to, I want to turn

12 to another argument that the banks have made here.

13 You know, your Honor, we made the point at the

14 beginning of our argument that, and I guess the nice way to

15 put it is, that it ill behooves the Bank of America, which

16 was the beneficiary of billions of dollars in TARP money,

17 based on a weekend of meeting with Federal regulators in

18 2008, to ask this Court to overturn a decision of the

19 Superintendent of Insurance in New York in 2009, that was

20 based on a year long review and analysis of the relevant

21 facts, and which included months of on site review by the

22 Department's principal, sort of lead investigator on this.

23 Last week, I heard the banks' lawyer say something

24 that, to the effect of, that they wanted to like sort of

25 look at the quote, true TARP timeline." I think that the

26 banks and they made some arguments about TARP and about the

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1 PROCEEDINGS - KASOWITZ2 banks that, I think, really misses the point here.3 First, no matter what they say, it is absolutely4 uncontradicted that following a series of meetings in5 September, I think it was September 17th and 18th, as the6 banks' counsel correctly pointed out, that Secretary7 Treasurer Paulson concluded that the Federal government8 should spend up to $700 billion to purchase troubled assets9 from a host of banks, and that those banks included the Bank

10 of America and Merrill Lynch, which received, I think, the

11 number that the banks said was $45 billion.

12 Now, the banks counsel said that the money that the

13 banks received was, I think the quote was, the Federal

14 government's money but, I don't think that's really

15 accurate, your Honor. I think that $45 billion really was

16 the taxpayers' money, our money, but no, no need to get into

17 a wrangle with the banks about whether its the Federal

18 government's money or our money. The fact is, that it was a

19 few days of meetings.

20 Second, the banks argue that, and they try to make

21 something out of the fact that after Treasury's decision

22 based on the few days of meetings, Congress wrote some

23 legislation to authorize this action.

24 I think the facts with respect to that were that

25 between September 20th when TARP was announced, and

26 October 3rd, when the Treasury's three page TARP proposal

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1 PROCEEDINGS - KASOWITZ2 was morphed into the Economic Stabilization Act and signed3 into law, during those two weeks, it's absolutely clear that4 no Treasury official was doing anything close to what the5 work that Jack Buchmiller was doing at MBIA, over months and6 months and months, and the work that The Department was7 doing too.8 So, whether or not there was legislation, whether9 or not it was $45 billion, the fact is, it was a lot of

10 money decided upon, in a very short period of time, to make

11 a decision with respect to this enormous financial crisis

12 and the work that was done there pales in comparison to the

13 work that the New York Insurance Department did over months

14 and months to make the rational decision that it made in

15 approving transformation.

16 But, I am glad that the banks' counsel raised this

17 point about Congress' involvement with TARP because, and I

18 think this really sort of underscores the futility of the

19 banks' whole case, your Honor, because the fact is that

20 while Congress needed to step in at this last minute and

21 pass this emergency legislation with respect to TARP, the

22 New York State legislature had already invested the

23 Superintendent of Insurance in New York with the power and

24 the authority to do exactly what he did here.

25 There was no need for some special, last minute

26 legislation. There is no dispute that he acted within the

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1 PROCEEDINGS - KASOWITZ2 scope of the authority and discretion that he had been3 granted. We just saw the testimony that the banks' own4 experts gave with respect to this.5 So, the banks can disagree about whether the6 Superintendent's determination was prudent, whether it was7 fair, whether it was reasonable. They can disagree about8 all of that, but their disagreement does not rise to the9 level of meeting the heavy burden that they have in an

10 Article 78 proceeding, to have that determination

11 overturned.

12 Now, I think the banks also made the point in

13 talking about this legislation and TARP, that it applied to

14 B of A, but not to Soc Gen. So, I am happy to discuss a

15 situation that did apply to Soc Gen, where again, during

16 this financial crisis, the decision, decisions were made in

17 a much compressed period of time to give billions and

18 billions of dollars to these banks in circumstances that

19 were just dramatically less considered, thoughtful,

20 conscientious and expensive than the work that The

21 Department did here, work done by Mr. Buchmiller, work done

22 by others and decision made by Superintendent Dinallo.

23 That, the bailout that I am talking about now, your

24 Honor, is the bailout of AIG in September 2008. There, Soc

25 Gen received more than $11 billion in United States taxpayer

26 funds. Bank of America received more than -- $4.5 billion

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1 PROCEEDINGS - KASOWITZ2 in taxpayer funds and Merrill Lynch got nearly $2 billion,3 and the timeline for the AIG bailout is even, provides an4 even starker contrast with the Department's review of5 transformation than Treasury's decision to deploy TARP funds6 to the banks.7 On September 12th, 2008, AIG informed The8 Department, the Treasury, and the Federal Reserve Bank of9 New York, that it was facing liquidity problem and they

10 would run out of liquidity within 5 to 10 days, largely as a

11 result of credit default swaps that AIG had entered into

12 with people like B of A, Merrill Lynch and Soc Gen.

13 On September 16th, 2008, The Federal Reserve put

14 together a term sheet for an $85 billion credit facility

15 between AIG and The Federal Reserve. Six days later, on

16 September 2nd, the final credit agreement was executed.

17 THE COURT: It has to be October.

18 MR. KASOWITZ: Sorry.

19 Six days later on September 22nd, sorry, the final

20 credit was executed by The Federal Reserve and AIG.

21 As I count it, your Honor, that's ten days and with

22 these other Federal bailouts during this financial crisis,

23 there is, it's absolutely clear that Federal regulators

24 didn't perform anything that could conceivably resemble the

25 work that The Department and Jack Buchmiller did over the

26 course of months and months to evaluate and approve the

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1 PROCEEDINGS - KASOWITZ2 transformation.3 MR. GIUFFRA: Your Honor, your Honor, can I make a4 request?5 Is this in the record of this case? Is this6 something that was before Mr. Dinallo?7 THE COURT: Obviously not, counsel.8 MR. GIUFFRA: Okay.9 THE COURT: I will allow it for argument. Okay.

10 MR. KASOWITZ: I think it's very fair, I think it's

11 pretty fair. I think, your Honor, not only is it fair

12 argument to compare, for the purpose of ascertaining

13 rationality, reasonableness, equitableness, fairness and the

14 like, the decisions, the decisions of, the work that was

15 done by these Federal regulators, compared to the work done

16 by the Superintendent, not only is it fair argument, it

17 certainly is something that can be taken judicial notice of,

18 as your Honor did, and there are references in the record to

19 it.

20 If you look at the affidavit of Jeffrey Miller, who

21 is our, who is MBIA's regulatory expert, he is a Professor

22 at N.Y.U., he goes into a significant amount of detail

23 demonstrating, using the examples of these TARP and other

24 bailouts as additional reasons that the work done by The

25 Department was reasonable. So, I think it's there on every,

26 on every viewpoint.

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1 PROCEEDINGS - KASOWITZ2 Now, I want to be clear about one thing. We are3 not questioning the propriety or prudence of what the4 Federal government did with respect to these bailouts during5 the financial crisis -- not at all.6 We just think that they are interesting7 illustrations and helpful ones, when you look at what The8 Department did, and we think it's rather ironic that the9 banks, who benefitted from that enormously fast action

10 involving billions and billions of dollars, can come into

11 this courtroom and claim that work that was far more

12 extensive, conscientious, detailed, and really much more in

13 the weeds, can, that they can challenge that for any reason.

14 So, your Honor, now I want to turn to an argument

15 that was made by the banks, concerning another argument made

16 by the banks, concerning the statutory accountant that's an

17 expert for MBIA here, Mr. Buttner.

18 The banks try to give the false impression that Mr.

19 Buttner testified at his deposition that the errors in the

20 hypothetical extreme stress scenario were material to the

21 Department's decision to approve the transformation, and

22 that's just wrong, your Honor.

23 Mr. Buttner, of course, never gave that testimony.

24 I will show exactly what he did say. The argument that they

25 made -- that argument is at pages 1307 to 1308 of the

26 transcript.

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1 PROCEEDINGS - KASOWITZ2 It's not what Mr. Buttner was asked, it's not what3 he testified to. In fact, Mr. Buttner was asked, assuming4 that there was an actual $500 million swing in policyholder5 surplus in one year, bringing it from a positive number to a6 negative number, whether that swing was, quote, material,7 close quote.8 And, from his perspective in that, within the9 confines of that question, from his perspective as a

10 statutory accountant he said, yes, if the policyholders'

11 surplus in one year, goes from a negative 291 million

12 instead of positive 362 million, that would be a material

13 difference.

14 I don't think that's controversial, nor do I think

15 it's relevant here. The transcript for that Q and A was at

16 Buttner's deposition at pages 361, 362.

17 What Mr. Buttner was not asked, your Honor, what he

18 did not testify to, was whether such a $500 million swing in

19 policyholder surplus, under the hypothetical extreme stress,

20 break the bank scenario, would have made any difference to

21 the Department's decision to approve the transformation.

22 He wasn't qualified, wouldn't have been qualified

23 to answer that question any way, your Honor. He is not a

24 regulator, he is not an expert in regulatory process and he

25 had no involvement in the Department's review of the

26 transformation, but he did not give that testimony in any

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1 PROCEEDINGS - KASOWITZ2 event.3 So, and I am going to get to this a little bit4 later when we talk about the break the bank hypothetical5 extreme stress situation here. I thought that Mr. Holgado,6 I thought it was covered in detail before, I thought Mr.7 Holgado dealt with it very well yesterday.8 We are not going to go into a lot of detail about9 it, but we will point out that even in that break the bank

10 situation, the results for MBIA over the time, over time,

11 showed a far, far, far more positive outcome, both for MBIA

12 and for its policyholders than the banks have showed you.

13 So, as we have seen, as to the people who were

14 actually involved in the transformation, and who were

15 qualified to answer the question as to whether or not the

16 errors that impacted on that break the bank hypothetical

17 extreme stress situation, as to whether or not those errors

18 would have made any difference to them, the testimony has

19 been absolutely consistent, absolutely clear, by former

20 Superintendent Dinallo and Mr. Buchmiller, that it would not

21 have made a difference to them.

22 And, I think that, you know, Mr. Holgado did a good

23 job of this, but just to recap quickly, Mr. Buchmiller

24 explained that it wouldn't have made a difference to him

25 because, among many other things, MBIA had substantial

26 contingency reserves of over $1.3 billion, a portion of

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1 PROCEEDINGS - KASOWITZ2 which The Department would have allowed MBIA Corp to release3 in order to restore its surplus during the 1 or 2-year4 period in which it would have been negative, and that's from5 paragraph 84 of Mr. Buchmiller's supplemental affidavit and6 also from paragraph 75 of Superintendent Dinallo's7 affidavit.8 So that MBIA, the bottom line is MBIA had more than9 enough contingency reserve to cover that hypothetical break

10 the bank situation, and as we pointed out in our argument,

11 that's exactly what contingency reserves are supposed to be

12 used for.

13 And, in fact, to the extent that Mr. Buttner's

14 testimony relates to this at all, your Honor, it's entirely

15 consistent with what Mr. Buchmiller said, as Mr. Buttner

16 states in paragraph 149 of his affidavit, the changes to the

17 extreme stress scenario were quote, before any adjustment to

18 the projected December 31, 2009 contingency reserve of

19 approximately $1.3 billion, close quote.

20 Mr. Buttner agreed that the release of the

21 contingency reserves would have easily made up for any

22 negative policyholder surplus and, as Mr. Buttner

23 recognized, were precisely there to offset any hypothetical

24 shortfall, and that's also in paragraph 149.

25 Now, but this brings us to a question that has been

26 raised by the banks, an argument made by the banks with

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1 PROCEEDINGS - KASOWITZ2 respect to what is the appropriate legal standard concerning3 the effect of errors and the like, and the banks have4 argued -- I guess their arguments are a bit of a moving5 target.6 We heard them and I cited the places in the7 transcript. We heard them during their initial argument.8 They made the argument that if there is any error in the9 record, then the Court must annul the approval of

10 transformation -- without discretion, not arbitrary and

11 capricious, nothing.

12 Then, they kind of move to some argument where

13 well, if the, if there is, if there is an error and it's

14 material, then, you know, that means that the Court needs to

15 annul the approval of the transformation.

16 They cited a case that they say is, and I don't

17 know whether the banks say that this case was on all fours,

18 but I certainly recall sitting, listening to the argument

19 that they said this is very important, this is really, this

20 solves the problem.

21 The case they cite is this Byrne versus Board of

22 Standards case, the First Department 2004-case Mr. Holgado

23 discussed yesterday.

24 And, the banks argue, the mere presence of any

25 material error in the information considered by The

26 Department, MBIA, that the decision must be thrown out as a

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1 PROCEEDINGS - KASOWITZ2 matter of law, without regard to whether that error would3 have made any difference to the, to the agency's4 determination.5 And, the banks' counsel argues that the definition6 that must be given to materiality is the definition that is7 applied in securities cases. They say that the information8 is, according to that definition in the securities cases,9 they say that the information is material, if a reasonable

10 investor would have wanted to see it.

11 But, your Honor, we don't accept the proposition

12 that a materiality standard in a securities or a fraud case

13 is applicable here anyway, under Article 78, but even if

14 those cases, in order for the misrepresentation, if there is

15 a mistake or a misrepresentation, in order for it to be

16 meaningful, it has to have consequences. It has to have

17 been sufficient so that it would have changed the investor's

18 decision.

19 That's really the key here, your Honor. The issue

20 here is, whether the errors that the banks have talked about

21 in this hypothetical break the bank situation that Mr.

22 Buchmiller said he never foresaw happening anyway, whether

23 they would have been sufficiently important to Mr.

24 Buchmiller or to Superintendent Dinallo to change their

25 minds and, of course, their testimony has been very

26 consistent. The answer is no.

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1 PROCEEDINGS - KASOWITZ2 And so, you know, in our situation, in talking3 about this case, the real key here is, that in talking about4 the standard, the key here is, can the banks meet their5 burden of showing not only were there errors, but were these6 errors sufficiently important to the determination of the7 agency, Superintendent Dinallo, Mr. Buchmiller and others,8 that it would have caused them to change their minds about9 approving the transformation.

10 As we have shown, the banks do not and cannot come

11 close to satisfying that burden. This is confirmed, your

12 Honor, by the Byrne case, as I think Mr. Holgado pointed out

13 yesterday.

14 In Byrne, the Court affirmed annulment of the

15 issuance, by the City's Board of Standards, of a certificate

16 of occupancy covering work done on a building. It was a C

17 of O that necessarily had to be predicated on the completion

18 of work, in compliance with building plans and applicable

19 law, where the Petitioner showed that there had been, quote,

20 a total lack of compliance, close quote, with the plans and

21 with the law, when the C of O was issued, and where it was,

22 quote, the undisputed fact that none of the work that was

23 required to be done had been completed prior to the issuance

24 of the C of O, and that is at 774 NYS2d at 497.

25 So, it couldn't be clearer that the Byrne case

26 factually is about as far from this case as you can possibly

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1 PROCEEDINGS - KASOWITZ2 get.3 It also couldn't be clearer that, that when the4 Byrne Court said in the language the banks like to quote,5 that quote, no judicial deference is owed to an agency's6 statutory interpretation, that is premised on an erroneous7 factual conclusion. That's at 497 as well.8 What the Court meant was, an erroneous factual9 conclusion that, if corrected, would have had

10 consequences -- would have and should have changed the

11 agency's decision.

12 Indeed, the Court made it absolutely clear, that it

13 disagreed with the proposition that, quote, any violation,

14 close quote, of the plans or applicable law, quote, no

15 matter how inconsequential, close quote, meant that the C of

16 O needed to be revoked.

17 (Continued on next page.)

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1 MBIA Respondent-Kasowitz2 T43 MR. KASOWITZ: That's at page 498, at footnote4 3.5 So here, Mr. Buchmiller says that the DTA6 errors would not, and should not have made a7 difference.8 Mr. Dinallo agrees. And the department and9 the Attorney General are here three years later, with

10 full knowledge of these errors, defending this case.

11 And they agree that the errors wouldn't have made a

12 difference.

13 Moreover, there is no legitimate dispute that

14 when all the errors are corrected, the corrected

15 results provide even more support for the approval of

16 transformation.

17 Let's take a look at slide no. 6.

18 So you may recall, your Honor, that when we

19 presented, we showed this graph -- which shows that

20 when all of the errors were corrected, that the

21 policyholder surplus in this hypothetical situation,

22 which Mr. Buchmiller said had no probability of ever

23 occurring, but when all of the errors in that

24 situation, the extreme stress case situation, were

25 corrected, in the corrected version MBIA's policyholder

26 surplus would have been, by 2054, at $6 billion, rather



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1 MBIA Respondent-Kasowitz2 than at $1 billion, which was in the uncorrected3 version.4 Thanks, Bucky.5 So there is no dispute here, your Honor, that6 there was just no -- these errors, in the context of7 the review and analysis of transformation by the8 department, would not have changed the result.9 So, now, I thought that there would be -- I

10 thought that it would be useful, your Honor, to talk

11 for a minute about how the banks' experts view these

12 errors.

13 I made -- when I presented, I guess, last

14 week, I made the point that the banks' expert, Mr.

15 Greenspan, had discovered this error prior to the time

16 that he had submitted -- prepared and submitted his

17 expert report in this case but did not include any

18 mention whatsoever of the error in his report.

19 He held up his report, 148 pages, 434

20 footnotes. Errors? No, none.

21 So, you know, I was going to -- I am not going

22 to go through that presentation again. It's in the

23 record. But I was interested to hear that when the

24 banks got up, they really had nothing to say about

25 that.

26 No explanation whatsoever for why the court



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1 MBIA Respondent-Kasowitz2 should not consider the significance of their main3 financial expert, the person that they retained to do4 this work, at enormous expense, over an extended period5 of time. Didn't even see fit to make any mention6 whatsoever of those errors in his report.7 The only inference that can be drawn from8 that, your Honor, is that those errors, as Mr.9 Buchmiller has testified, as Superintendent Dinallo has

10 testified, in the context in which they were made,

11 weren't consequential, didn't make enough of a

12 difference to have changed the minds of the people who

13 approved transformation.

14 Now would be a good place, because I'm going

15 to go on to something else, to take a break.

16 MR. GIUFFRA: Your Honor, may I ask counsel,

17 how much longer are you going to go today?

18 MR. KASOWITZ: We're going to be going today,

19 Bob.

20 MR. GIUFFRA: I just want to find out.

21 THE COURT: We can discuss that. Okay, let's

22 take a ten-minute break now.

23 MR. KASOWITZ: Thanks, your Honor.

24 (Short recess taken)

25 THE COURT: I need a cup of coffee for this

26 stuff.



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1 MBIA Respondent-Kasowitz2 MR. GIUFFRA: We haven't gotten to modeling3 yet.4 THE COURT: Okay.5 MR. KASOWITZ: Thanks, your Honor.6 Now, your Honor, on Friday the banks attempted7 to rehabilitate their argument regarding the8 department's supposed reliance on allegedly stale data9 in the RMBS sector.

10 Their arguments on this issue can be found at

11 the transcript at pages 1531, 1567 through 74 and 1577

12 through 84.

13 We went through this issue last Tuesday.

14 That's at pages 1258 through 1263 of the transcript,

15 but I think that there are a few additional points that

16 are worth mentioning.

17 On Friday the banks cited to the transcript of

18 one of Mr. Buchmiller's modeling sessions with members

19 of MBIA's IPM Group.

20 During that session Mr. Buchmiller was given

21 the opportunity, but did not, utilize data from

22 December 31, 2008, rather than data from the third

23 quarter of 2008.

24 The banks argue that this is a $1.9 billion

25 decision, and in support of that argument, they rely on

26 the affidavit of their expert, who we have mentioned,



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1 MBIA Respondent-Kasowitz2 Mr. Greenspan, who they claim, quote, "took the3 information that was available as of 12/31/08 and ran4 it through MBIA's model," close quote.5 That's at page 1570 of the transcript, lines 16 through 10.7 They say that this work that he did revealed8 this $1.9 billion in projected losses.9 Now, the banks would have the court believe

10 that Mr. Greenspan's arguments concerning staleness of

11 MBIA's data stand unrebutted. They made this argument

12 that we have had no response to it.

13 That's because in all of the many hours and

14 days of that is the banks have presented, they have not

15 referred to the testimony of MBIA structured finance

16 modeling expert, Mr. Finkel.

17 When the banks did address Mr. Finkel, it was

18 only to discuss this review of BlackRock's modeling.

19 Never did they address Mr. Finkel's review of MBIA's

20 modeling, methodologies, data and assumptions.

21 Through his affidavit, your Honor, which is

22 extensive, Mr. Finkel lays out in meticulous detail why

23 the models, the methodologies and the assumptions

24 utilized by MBIA and relied upon by the department at

25 the time that the transformation was approved and

26 reviewed were reasonable and appropriate.



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1 MBIA Respondent-Kasowitz2 We will also see, your Honor, that not only3 does Mr. Finkel demonstrate the reasonableness and4 appropriateness of the models and methodologies and5 assumptions relied on by MBIA and why this is not stale6 data, but we're going to see in a few minutes why7 another of the banks' experts says the same thing,8 backs him up.9 So Mr. Finkel explicitly rebuts Mr.

10 Greenspan's claim of staleness. In part 5 of his

11 affidavit, Mr. Finkel details the four key reasons why

12 the banks and their experts are wrong to claim why MBIA

13 should have used fourth quarter data in its modeling

14 during the period the transformation was under review.

15 First, he describes how MBIA's loss

16 projections at the time represented cumulative lifetime

17 expected losses, which far exceeded the fourth quarter

18 2008 increase in early-stage delinquencies which the

19 banks claim was ignored by MBIA.

20 That part of his opinion is at paragraphs 214

21 through 219 of his affidavit.

22 Second, Mr. Finkel explains that a short-term

23 spike in data, like the one relied on by the banks and

24 their experts, does not necessarily warrant a

25 fundamental change in MBIA's long-term projections, as

26 early-stage delinquencies, Mr. Finkel points out, can



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1 MBIA Respondent-Kasowitz2 be very volatile and, in fact, those early-stage3 delinquencies declined rapidly in early 2009.4 That part of Mr. Finkel's opinion can be found5 at paragraphs 214 and 220 through 225 of his affidavit.6 Third, and as we have previously discussed,7 and as MBIA had informed Mr. Buchmiller during his8 review, MBIA's existing loss projections included a9 heightened level of losses and default rates in the

10 short term, both of which closely tracked actual

11 performance during the fourth quarter of 2009 and into

12 the first quarter -- I'm sorry, your Honor-- the fourth

13 quarter of 2008 and the first quarter of 2009, and

14 those parts of his opinion are also at paragraph 214

15 and at paragraphs 226 through 233.

16 Now, your Honor, on Friday the banks implied

17 that MBIA 'decision to run second-lien RMBS models in

18 the first quarter of 2009 and to raise its reserves at

19 that time undercuts the fact that MBIA's loss

20 projections were, quote, "tracking," close quote, in

21 the fourth quarter.

22 Instead, according to the banks, that

23 indicates that MBIA had something to hide by not

24 running its models in the fourth quarter.

25 Your Honor, nothing to be further from the

26 truth. As Mr. Finkel testifies in his affidavit, MBIA



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1 MBIA Respondent-Kasowitz2 appropriately wanted to wait to review additional data3 to determine what, if any, trends were developing at or4 around that time before making a decision to rerun5 models, which, again -- and these models are lifetime6 projections of losses.7 That's at paragraphs 214 through 219 of his8 affidavit.9 Your Honor, as Mr. Finkel points out, when

10 MBIA did run its models in the first quarter of 2009,

11 using the most up-to-date data available at that time,

12 its increase in reserves fell well within the

13 reasonable stress test conducted by MBIA in the third

14 quarter of 2008 and during the department's review.

15 Mr. Finkel at paragraphs 239 through 256 of

16 his report goes through a very detailed analysis of

17 that increase in reserves.

18 Finally, Mr. Finkel explains that MBIA

19 believed that these loan defaults at or about this time

20 may have been due to idiosyncratic risk caused by

21 ineligible loans in its portfolio which MBIA believed

22 was captured by the $1 billion increase in its reserves

23 that it had done in the third quarter of 2008.

24 Now, your Honor, as the modeling transcript

25 cited -- I'm sorry, your Honor. For that portion of

26 his opinion, you should look at paragraphs 175 through



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1 MBIA Respondent-Kasowitz2 281 of Mr. Finkel's affidavit -- 181. I'm sorry, your3 Honor.4 Remember, your Honor, as the modeling5 transcript cited by the banks makes clear, this6 modeling transcript with the discussion between Mr.7 Uppuluri and Mr. Buchmiller, it was Mr. Buchmiller's8 choice as to which data to review.9 This is important, your Honor, because

10 although the banks may disagree with Mr. Buchmiller's

11 choice, they have in no way established that his choice

12 was arbitrary or capricious or irrational.

13 That's because the factual record in this case

14 is clear that Mr. Buchmiller's decision to review

15 MBIA's third quarter models was eminently rational and

16 reasonable.

17 As he clearly stated in his file memo, quote:

18 "We reviewed their models to form opinions on their

19 veracity, ability to replicate reality, and internal

20 and external consistency."

21 "Does it work consistently, and is it used

22 consistently?

23 "Whether the assumptions were reasonable at

24 the time made and as fact-based as possible and whether

25 the results were robustly stress tested for worse than

26 expected future results or development."



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1 MBIA Respondent-Kasowitz2 Therefore, Mr. Buchmiller appropriately made3 the reasoned decision to review the models that served4 as the basis for MBIA's then current reserves.5 (Continued on next page)6 (End of take 4)789

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1 PROCEEDINGS - KASOWITZ2 T5 MR. KASOWITZ: So where does this leave us?3 As we previously explained, we are left with4 nothing more than a battle of the experts.5 In the battle of the experts, that does not get it6 done for the banks in upholding the heavy burden they have7 to demonstrate arbitrariness and capriciousness.8 But, in a way, your Honor, as has been the case9 with so many other issues between experts in this case, we

10 have no battle of the experts. We have agreement by the

11 banks' experts with what MBIA's experts have said.

12 So here, while Mr. Greenspan contends that MBIA's

13 use of data from prior to the fourth quarter of 2008 was a

14 modeling error, the banks' other expert, Mr. Paltrowitz, of

15 Black Rock, has testified that The Federal Reserve Bank of

16 New York's reliance in February 2009 on Black Rock's loss

17 analysis, ran as of November 21, 2008, and relying on

18 performance data from September 2008, was reasonable.

19 In that case, your Honor, as Mr. Paltrowitz

20 testified, Black Rock was retained by The Federal Reserve

21 Bank of New York on December 14th, 2008. It was exactly

22 the time period for which the banks say they should have

23 been retained by The Department here and, Black Rock was

24 retained to prepare a valuation analysis for certain assets

25 held by Citibank.

26 What data was Black Rock using in that analysis,

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1 PROCEEDINGS - KASOWITZ2 your Honor? Mr. Paltrowitz has testified about this as3 well.4 Now, October remits in this testimony means5 September dated, your Honor, and second quarter case Kaye6 Scholer data, was using home price data from the second7 quarter of 2008.8 So the valuation covered assets of November 21,9 2008, and here, it's contemplated that the final report

10 would be submitted on January 29th, 2009.

11 "Do you have a recollection as to whether the final

12 report was issued on or about January 29th, 2009?

13 "Yes, I believe it was.

14 "Okay. And then, what can you, again, from your

15 recollection, what period of time then, was Black Rock

16 Solutions drawing data as to the performance of the

17 underlying assets?

18 "Answer: Because of the cut off date of

19 November 21st, we would be using the October remits, which

20 it would have come through as of October 25th, and we would

21 have been using still the second quarter Kaye Scholer data

22 as opposed to the third quarter update.

23 So, let me get this straight, your Honor.

24 The banks here are criticizing the transformation

25 review because MBIA supposedly used stale data, so-called

26 stale data, from the fall of 2008 in some of its RMBS

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1 PROCEEDINGS - KASOWITZ2 modeling, some of it which Mr. Buchmiller reviewed in early3 2009.4 But, their own expert Black Rock, used second5 quarter 2008 and September 2008 data in its analysis for The6 Federal Reserve, submitted on January 29th, 2009, and7 presented to the Federal management on February 12th, 2009,8 right as the NYID here was completing its review of9 transformation.

10 Mr. Paltrowitz said that that was reasonable.

11 It's another situation, your Honor, where there is

12 nothing more than a dispute among experts at most, and here,

13 we see that the expert that the banks have tried repeatedly

14 to argue should have been foisted upon The Department, an

15 expert that used an opaque, black box that the Department

16 could have never discerned, an expert that was heavily

17 conflicted, was nonetheless, an expert that used data that

18 was as dated as the data that the banks are criticizing here

19 was stale.

20 Doesn't work, your Honor. Does not get there.

21 Now, I would like to turn very, very quickly to a

22 couple of other subjects, and then I will be done.

23 We heard some discussion from the banks about other

24 monolines restructurings. We heard these other monoline

25 restructurings should have been a template for the

26 restructuring that was done here.

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1 PROCEEDINGS - KASOWITZ2 One of the things we heard about these other3 monolines restructurings, which were done at or about the4 same time, was that they were, it was this argument that5 this was an inclusive process, an inclusive process that the6 policyholders all had notice and they participated and it7 was wonderful, your Honor, it was really wonderful.8 Well, your Honor the fact is, that the people it9 was wonderful for were the banks. It was not an inclusive

10 process. There were structured finance policyholders who

11 did not have notice of these negotiations that the banks

12 were doing with respect to these other monolines.

13 There were other structured finance policyholders

14 who did not get to sit at the table with these banks and

15 there were other structured policyholders, structured

16 finance policyholders, who did not get to benefit in the way

17 that these banks benefitted.

18 How do we know this? Well, we know it from the

19 banks' expert, Mr. Greenspan. He told us. Let's look.

20 This is talking about the monolines, CIFG

21 restructuring. The question is --

22 "Question: So, there was a concern that there

23 were not sufficient assets in CFIG to pay claims as they may

24 arise.

25 "FTI was advising many of the insurers.

26 "Were there insureds of CFIG who were not

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1 PROCEEDINGS - KASOWITZ2 represented in connection with the negotiations of the CIFG3 restructuring?"4 Mr. Greenspan had testified earlier he was involved5 in that restructuring.6 "Answer: Well, there certainly would have been7 insureds that did not have, for example, their own lawyer."8 Here is the part I like.9 "However, you have CFIG, which has a duty, and I

10 think vigorously carried out its duty to act in the best

11 interests of its policyholders, and of course, you have the

12 insurance regulatory authorities, who also reviewed, as you

13 noted, each one of these commutation and transactions with

14 the Department, again, I believe at least attempting to

15 exercise its appropriate regulatory role."

16 And, exactly the same thing here, your Honor.

17 This was at or about the same time -- 2008.

18 You had exactly the same thing here. You had the

19 Superintendent of the New York Insurance Department

20 exercising its appropriate regulatory role, and as we have

21 seen, it made the reasoned decision, after months and months

22 of work, that the interests of all the policyholders of both

23 National Insurance Co. and the old Insurance Co., that the

24 interests of those policyholders, including specifically

25 these banks, were fully protected.

26 So, let's see, now we have had, we have shown the

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1 PROCEEDINGS - KASOWITZ2 Court the approval letter and we have shown the Court the3 press release that was issued by Superintendent Dinallo, I4 think the day after the approval letter, where he explained5 the basis for his decision.6 The banks hate that letter. They say, they say7 they hate it. They say, you can't look at that letter. I8 mean, you can't look at that press release. It's not the9 letter. You can only look at the letter, not the press

10 release.

11 Well, we want the Court to look at the letter, we

12 want the Court to look at the press release. We want the

13 Court to look at all of the facts and circumstances

14 surrounding transformation. That's what the Court should

15 do, and what it will do.

16 But, let's take a look at the press release that

17 the Superintendent issued when the CFIG restructuring was

18 done.

19 Now, this press release was issued on January 22,

20 2009 which was, I guess, less than a month before

21 transformation was approved and at or about the time that

22 Mr. Buchmiller was continuing to do his work with respect to

23 the review and analysis of transformation.

24 Headline: Dinallo announces approval of agreement

25 to commute troubled credit default swaps and reinsure

26 municipal bonds at CFIG."

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1 PROCEEDINGS - KASOWITZ2 Here is what the press release says -- adding3 stability to the bond insurance industry, in the midst of4 the current credit crisis is good for Wall Street, which is5 so important to New York's economic health, and also for6 cities and towns throughout New York and the nation that7 rely on bond insurance to reduce the cost of borrowing to8 meet their infrastructure needs.9 That's why New York, which is the primary regulator

10 for most of the bond insurers has been working so hard on

11 this project, Dinallo said.

12 Sounds a lot like, your Honor, sounds a lot like

13 the press release that Mr. Dinallo gave after transformation

14 was approved.

15 Thanks, Bunky.

16 Touches on some of the very same issues and the

17 same areas in which Superintendent Dinallo was, had the

18 power and the authority to exercise, to exercise his

19 discretion. Trying for CFIG to do the same thing that he

20 was trying to do for MBIA.

21 Trying to get the bond markets going, trying to

22 help the economy, trying to do all of this in an

23 extraordinarily, extraordinarily difficult time -- worst

24 time since the Great Depression.

25 The banks didn't have any problem with

26 Superintendent Dinallo when he was supervising a

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1 PROCEEDINGS - KASOWITZ2 restructuring which resulted in them getting commutations3 for billions of dollars, and also helping to get the bond4 markets going in New York, but that very same5 Superintendent, less than three weeks later, all of a sudden6 becomes irrational, unreasonable, not able to do his job,7 complicit in a theft, your Honor? It's nonsense.8 Superintendent Dinallo acted just as reasonably,9 just as rationally, just as conscientiously with respect to

10 the MBIA transformation as he did with respect to, as he did

11 with respect to the other monolines restructurings.

12 The only difference here is, your Honor, these

13 banks, who kept other policyholders out of those

14 restructurings came to have, at some point, some objection

15 to what the Superintendent did in the exercise of his

16 reasoned discretion.

17 Doesn't sound like a very principled position for

18 these people to take to accuse the Superintendent, who had,

19 who they are saying had acted so reasonably here, and then

20 three weeks later to be guilty of theft.

21 The reason is, your Honor, there is absolutely no

22 basis to it whatsoever.

23 Now, the banks have argued that The Department

24 should have waited for -- at various times they made this

25 argument -- that The Department should have waited for both

26 the completion of PWC's, 2008-year end audit and the

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1 PROCEEDINGS - KASOWITZ2 Department's triennial examination of MBIA before approving3 the transformation.4 They made that argument in, among many other5 places -- the hearing on May 15th at page 277, lines 176 through 25.7 In their rebuttal argument, the banks have shifted8 a little bit, I think, and they now seem to be saying that9 it's not necessarily their position that The Department

10 should have waited until examination was complete before

11 approving transformation, but rather that The Department

12 should have completed their triennial exam sooner.

13 And, according to the banks, they should have

14 started it earlier than they did and gotten it done sooner

15 than they did. I think that's on the May 31st hearing at

16 1439, lines 20 through 26.

17 So now, I am assuming, your Honor, that the banks

18 are making this argument about wanting to get, that the

19 results of this triennial exam should have been completed

20 whenever it was done, because those results would have

21 supported the position that the banks were taking here and,

22 it would have effected the Superintendent's decision in a

23 way that the banks would have liked. Meaning, that he

24 wouldn't have approved transformation.

25 Well, your Honor, that's not much of an argument

26 based on how this examination and the PWC audit turned out.

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1 PROCEEDINGS - KASOWITZ2 First, your Honor, turn to timing, that kind of3 stuff. You can always argue for a regulator to take more4 time, wait for additional information, delay and the like5 and of course, the banks weren't arguing for that when they6 were seeking the approval by the Superintendent of the other7 monolines restructurings, in which they were getting8 commutations for a billion dollars, but here, after the9 fact, years later, they can argue that he should have taken

10 more time.

11 Now, that's contradicted, as we showed your Honor,

12 by their own expert. Superintendent Muhl testified that

13 quote, at some point a decision, yes, should be made.

14 Mr. Muhl recognized that there is always the

15 possibility that additional information, including new

16 financial statements, can become available. That's at pages

17 144 through 145 of his transcript.

18 He also agreed that it was within the discretion of

19 the Superintendent to determine when he or she had enough

20 information to make a decision, and that's at his transcript

21 at page 145.

22 In this situation, Superintendent Dinallo

23 determined that he had sufficient information to make his

24 determination by mid February 2009.

25 In any event, your Honor, there was nothing in the

26 audit, audited financial statements or final report on

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1 PROCEEDINGS - KASOWITZ2 examination that was likely to have had any different impact3 on what Superintendent Dinallo decided. Despite the banks'4 initial assertion that PWC had issued a going concern5 opinion, that was a statement that the banks had to retract.6 It was a mistake on their part. They retracted it at the,7 on May 15th.8 PWC, in fact, issued an unqualified audit opinion9 for MBIA's 2008 loss reserves and financial condition, which

10 is the highest opinion that an auditor can issue.

11 In doing so, PWC said that MBIA's financial

12 statements, quote, present fairly, in all material respects

13 MBIA's financial condition.

14 In our opinion, the financial statements referred

15 to above, present fairly and in all material respects, the

16 admitted assets, liabilities, and capital and surplus of the

17 company, as of December 31, 2008 and 2007, and the results

18 of its operations and its cash flows for the years then

19 ended on the basis of accounting described in note two.

20 Additionally, as part of the audit for MBIA, for

21 2008-year end, PWC employed an actuary and a team of

22 structured finance specialists to review MBIA's loss

23 reserves.

24 At the conclusion of that review, the actuary

25 issued an unqualified actuarial opinion, and opined that

26 MBIA's loss reserves complied with the Insurance Law and

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1 PROCEEDINGS - KASOWITZ2 applicable statutory accounting principles.3 You can find that, your Honor, in Mr. Buttner's4 affidavit at paragraph 17 and 58 through 61.5 Specifically, PWC opined that MBIA's loss reserves,6 okay, we know it's an opinion because it says "opinion".7 In my opinion, the amounts shown in Exhibit A for8 the sum of items 1 and 2, sum of items 3 and 4, sum of items9 1,2, 5 and 6, meet the requirements of the Insurance Laws of

10 New York, are consistent with reserves computed in

11 accordance with generally accepted actuarial standards and

12 principles, make a reasonable provision for all case bases,

13 unpaid loss and loss adjustment expense obligations of the

14 company, under the terms of its contracts and agreements.

15 Your Honor, I should note that since this time,

16 MBIA has gotten three additional clean audit opinions from

17 PWC.

18 So, it doesn't seem like there would have been

19 anything there that would have changed the Superintendent's

20 mind, and at the same time that this was happening, Mr.

21 Buchmiller was doing the work with respect to approval, but

22 he was also doing the work with respect to the triennial

23 exam. He has testified about that.

24 He testified about that with respect to the work

25 that he was doing in July of 2008 and he testified that he

26 was part of the team that was working on not only

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1 PROCEEDINGS - KASOWITZ2 transformation, but also the triennial exam.3 He testified that had the Department waited for the4 completion of the triennial examination, it would have,5 which would have been May in the following year, it would6 have completely undercut the primary purpose of7 transformation.8 Quote, the need to unfreeze the municipal debt9 insurance market in order to allow municipalities to secure

10 debt financing through insured bond offerings.

11 That's

banksvmbia 6.5 transcript

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