banksvmbia 6.7 transcript

7/31/2019 Banksvmbia 6.7 Transcript

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ABN AMRO v.DINALLO, MBIA June 7, 2

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12 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: TRIAL TERM PART 393 - - - - - - - - - - - - - - - - - - - - - X ABN AMRO BANK N.V.; BARCLAYS BANK PLC;4 BNP PARIBAS; CALYON; CANADIAN IMPERIAL BANK OF COMMERCE; CITIBANK, N.A.; HSBC5 BANK USA, N.A.; JPMORGAN CHASE BANK, N.A., KBC INVESTMENTS CAYMAN ISLANDS V LTD.;6 MERRILL LYNCH INTERNATIONAL; BANK OF AMERICA, N.A.; MORGAN STANLEY CAPITAL7 SERVICES INC.; NATIXIS; NATIXIS FINANCIAL PRODUCTS INC.; COOPERATIEVE CENTRALE8 RAIFFEISEN-BOERENLEENBANK B.A., NEW YORK BRANCH; ROYAL BANK OF CANADA; THE ROYAL9 BANK OF SCOTLAND PLC; SMBC CAPITAL MARKETS LIMITED; SOCIETE GENERALE;10 USB AG, LONDON BRANCH; and WACHOVIA BANK, N.A.,11

Petitioners,12

- against -13

ERIC DINALLO, in his capacity as14 Superintendent of the New York State Insurance Department; the NEW YORK15 STATE INSURANCE DEPARTMENT; MBIA INC.; MBIA INSURANCE CORPORATION; and16 NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION (f/k/a MBIA INSURANCE17 CORP. OF ILLINOIS),18

Respondents.19 - - - - - - - - - - - - - - - - - - - - - X Index No.09/60184620 Article 78 60 Centre Street New York, New York21 June 7, 201222

BEFORE:23

HONORABLE BARBARA R. KAPNICK,24 Justice.2526

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12345 Attorneys for the Petitioners

125 Broad Street6 New York, New York 10004 BY: ROBERT GIUFFRA, ESQ.7 MICHAEL H. STEINBERG, JR., ESQ. MICHAEL T. TOMAINO, JR., ESQ.8 BRIAN T. FRAWLEY, ESQ. MARIE-LOUISE HUTH, ESQ.,9 Of Counsel1011 KASOWITZ BENSON TORRES & FRIEDMAN, L.L.P. Attorneys for the Respondents12 1633 Broadway New York, New York 10019-679913 BY: MARC E. KASOWITZ, ESQ. DANIEL R. BENSON, ESQ.14 KENNETH R. DAVID, ESQ. JOSHUA GREENBLATT, ESQ.15 Of Counsel1617 OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF NEW YORK18 120 Broadway New York, New York 1027119 BY: DAVID HOLGADO, MARK E. KLEIN,20 Assistant Attorneys General212223

NINA KOSS,24 BARBARA STROH, CSR, CRR, CMR OFFICIAL COURT REPORTERS2526

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1 Petitioners-Giuffra2 T13 THE COURT: Okay. Good morning.4 (All say "Good morning, your Honor.")5 THE COURT: Mr. Holgado came a little ear6 and, to my surprise, I seem to have ended up with7 matrimonial. Amazing what you get around her8 Okay, so I thought we're having Mr. Steinber9 Not that I care but...10 MR. GIUFFRA: He'll be back.11 THE COURT: He'll be back?12 MR. STEINBERG: I promise, your Hono13 MR. GIUFFRA: His melodious voice will b14 back.15 THE COURT: So you're going to start off th16 morning?17 MR. GIUFFRA: This morning.18 THE COURT: Very good.19 MR. GIUFFRA: Good morning, your Hono20

THE CURT: Good morning.21 MR. GIUFFRA: I think, your Honor, as we ha22 discussed, petitioners believe that the department23 approval of transformation violated four statute24 within the Insurance Law.25 That would be 4105, which Mr. Steinberg talke

26 about on Tuesday, the earned surplus test, 1504, whic

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1 Petitioners-Giuffra2 is the fair and equitable standard, and 1411, which i3 fair and reasonable for stock redemptions, and the

4 1309, which the insolvency statute.5 I'll be talking this morning about 1505 an6 1411. I think, as every Insurance Department offici

7 who has testified in these proceedings by deposition o

8 affidavit has said, including former Superintenden9 Dinallo, the fundamental purpose of the Insurance La

10 is the protection of policyholders.11 Each one of the statutes that we've been12 talking about are focused on the protection of13 policyholders, and I don't think there really can b14 much of a dispute that the fundamental purpose o15 insurance regulation, among other things, is to prote

16 insurance companies from holding companies.17 Now, respondents have claimed during th18 course of this case that the only real evidence o19 standard that the court need apply is whether MBIA

20 Insurance could pay claims as they came due, you know

21 literally, for almost 45 years.22 On May 21 counsel for the state respondent23 first say, quote: "Enough solvency" -- quote, "Enoug

24 solvency is really the only test that matters," at pag

25 755.26 Now, on surrebuttal, if we could put up slid

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1 Petitioners-Giuffra2 1, counsel for the state respondents came up with a3 nuanced argument which wasn't pure insolvency.4 The argument was that, on the facts and5 circumstances of this case, the department reasonably

6 concluded that the same facts were dispositive on each

7 of the four statutes.8 We, obviously, take issue with that. In fact,9 an example that was given by the Attorney General's

10 office at page 1689 to 90 proves that, I think, where11 he said that while the superintendent could declare a

12 transaction as being unfair and inequitable when an13 insurance company is overcapitalized.14 I think that sort of admits that fair and15 equitable means something more than just pure solvency

16 or bare solvency, in fact, your Honor.17 Put up slide 2. We have discussed the four18 statutes that are at issue in the case, and under19 settled law, the court must give effect to each one of

20

those statutes.21 They can't all be treated to mean exactly the22 same thing. And there's settled law which says that23 interpretation of a statute that renders the others in24 the statutory scheme to be meaningless is not one that

25 the court should adopt.26 Clearly, you know, we talked about earned

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1 Petitioners-Giuffra2 surplus. That's been in the statutes for over a3 hundred years. 1411, which deals with stock

4 redemptions, was added in 1965.5 Previously there were no stock redemptions6 permitted at all. And the legislature said okay, we'll7 allow stock redemptions, but they must be reasonable8 and equitable, and "equitable" being a word that we9 don't hear much about in the courtroom from the other

10 side.11 We talked about 1505 and about how that was

12 added to the law in 1969, and then 1309, which is the13 insolvency statute has been also for many, many years.

14 Now, as I mentioned, respondents just focus on15 whether their determination -- we question whether16 there ever was a determination that MBIA could pay

17 claims as they came due, whether there was a valid18 determination is enough.19 But, your Honor, they ignore the legislative20 history and ignore the plain language of these21 statutes. Reasonable and equitable, fair and equitable

22 means something other than pure solvency.23 For example, your Honor, we showed before and

24 there was no response to all the detailed legislative25 history I went through.26 Slide 3. The actual report that resulted in

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1 Petitioners-Giuffra2 the adoption by the legislature of 1505 focused on th3 notion of surplus to surplus.4 What is sought is more than solvency in th5 traditional sense. "What is sought is more than 6 stringent test of soundness. You want something that

7 going to be lasting long enough in the future for an

8 dangerous development to be detected and any surplu9 drain resulting from it stopped."10 Here, of course, these transactions were11 approved in the middle of a financial crisis. I thin12 the other side is almost advocating a casino view 13 insurance whereby all of the risk is placed on th14 policyholder, in the economic uncertainty that we we

15 living through in 2009.16 In fact, your Honor, there's a regulation17 which has also been ignored by the other side. Slid18 4. This is a New York Insurance Department regulatio

19 no. 108, which makes it quite clear that the ability

20

pay claims is not the touchstone under all these21 statutes. It's just not.22 That regulation says that, quote: "In23 connection with affiliated transactions or transaction

24 where the transferor is insolvent or impaired, th25 transaction shall not be approved unless it both26 eliminates the impairment or insolvency and if don

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1 Petitioners-Giuffra2 between affiliates or members of the same holdin3 company system is fair and equitable to both insurers

4 Fair and equitable, language that courts appl5 all the time.6 Then, your Honor, MBIA's application -- w7 went through this already -- described two separa8 tests.9 They talk about -- this is PX 242. They tal10 about whether the reinsurance transaction was fair an

11 equitable.12 Then they also talked about whether it le13 the company solvent or otherwise in a hazardou14 financial condition.15 So, essentially, what the other side has don16 is they've tried to defend Superintendent Dinallo

17 decision by whether this transaction satisfied one-ha18 of 1309, the nonreinsurance section part of it.19 But that supposedly is enough to satisfy a20 the other provisions that we have talked about, a21 four provisions that are at issue in this case.22 We think that position is legally indefensib23 and, as a matter of law, the court should null.24 THE COURT: Can I ask you a question. Yo25 don't have to answer it now if you don't want to26 MR. GIUFFRA: No, I'm happy to answer it, yo



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1 Petitioners-Giuffra2 Honor.3 THE COURT: We're trying to figure out, why is4 1309 implicated at all? I mean, they mention it5 somewhere in their answer and at one point.6 You never put it in your petition, I think you7 said, didn't you? In your petition did you talk about

8 1309?9 MR. GIUFFRA: We talked about insolvency.10 THE COURT: But you didn't talk about 1309.11 MR. GIUFFRA: Not in the petition itself, I12 don't believe. We talk about insolvency, but, your13 Honor, when they answered the petition, they said that

14 they applied 1309, and they are bound by that15 determination.16 We filed that petition, your Honor, we had no17 discovery. They had refused to allow us any18 information about what had happened. All we had --19 THE COURT: No, I understand. I just don't20

really see how 1309 is implicated in this21 transformation.22 So perhaps at some point later you can try to23 explain that, because it seems that really there's24 going to be some kind of insolvency, and that's not25 what this was about.26 This was a transformation of a company. They

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1 Petitioners-Giuffra2 weren't trying to see whether it was insolvent, or they3 were going to put it into liquidation. It seems like

4 that's where that would come into play.5 If you're saying it just didn't play because6 it was talked about in that one portion of the7 answer --8 MR. GIUFFRA: No, Mr. Steinberg is going to9 talk for quite some time about 1309, but, briefly, your

10 Honor, that is a standard that they have to apply, and

11 to approve a transaction that would leave the insurer

12 insolvent is not something that can be done under the13 Insurance Law.14 Our point is that the reinsurance prong must15 be applied and particularly was a prong that should be

16 applied in the circumstances such as this, where there

17 was a lot of uncertainty as to the markets and, again,18 it's an investor -- it's a policyholder protection19 provision.20 In addition, your Honor, 1309 was mentioned21 and referenced in MBIA's application itself, which we

22 had no access to at the time that we filed the23 application.24 So 1309 is front and center in the case. It25 was in their answer, and obviously, you know, a26 pleading doesn't bind us forever. You know, we should

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1 Petitioners-Giuffra2 get discovery during the course of a case. It would b3 the same in any kind of a civil case.4 So, your Honor, under 1505, they have to fin

5 that the transaction was fair and equitable.6 We can put up slide 5. The department's7 counsel said that -- this was complied with.8 MR. HOLGADO: What page?9 MR. GIUFFRA: This is at page 1695.10 That the department somehow found, quote, tha

11 "the Insurance Law was complied with and found th

12 policyholders would benefit overall from the13 transformation."14 That's the statement. Let's put up slide 615 This is MBIA's counsel. He said, well, there w16 specific findings by the superintendent with respect

17 these banks, and essentially what Mr. Kasowitz did wa

18 he quoted the press release.19 Again, your Honor, I think that's a telling20

fact, that, rather than citing the approval letter,21 we're now relying upon a press release for the centr22 finding as to whether this transaction satisfied a23 critical provision of the Insurance Law.24 That, your Honor, is very revealing as to wh

25 this transaction violated the Insurance Law.26 But, your Honor, even the press release

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1 Petitioners-Giuffra2 doesn't say equitable. Let's put up the press release3 What it says -- this is the language that Mr. Kasowi

4 quoted. It says, quote: "This deal is fair to all5 policyholders- the bank counterparties and othe6 policyholders of the structured financial and th7 owners and issuers of municipal bonds," Mr. Dinall8 said.9 What's interesting, your Honor, is that M10 Dinallo had the time to put in a press release the da

11 after the approval letter was signed why it wasn't 12 the approval letter itself, but the word equitable13 your Honor, does not appear in this press releas14 We, again, don't think the press release is15 legally operative document. It wasn't in the approv

16 -- it wasn't in the administrative record in this cas

17 and it's something that they've now, you know, sort 18 pointed to at the back end of the case.19 But, more importantly, your Honor, if yo20 actually look at the press release -- and we have21 looked at it every which way -- there is not a single

22 single benefit to left-behind policyholders, whic23 includes more than banks, and includes people that ow

24 international public financings, it includes people w

25 own student loan bonds that were securitized. 26 includes a lot more than just banks.



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1 Petitioners-Giuffra2 But, your Honor, there's not one word of3 benefit, not one word in the press release, not one4 word in the -- clearly not in the approval letter as to5 how this transaction benefitted the left-behind6 policyholders, not one word.7 Now, what does the letter talk about? It8 talks about the benefits to the municipal markets. But9 not one word about the benefits to the left-behind10 policyholders.11 Again, they use the word fair. They didn't12 use the word equitable. Obviously, the legislature13 included equitable for a reason.14 Now, on last Monday, when the other side15 spoke, we had raised the question and, it's sort of --16 I think it's a very revealing document, and I think it17 sort of explains what this was all about:18 Stockholders versus policyholders, who ultimately19 loses.20

Let's put up PX 8, no. 8 -- no. 8, slide 8.21 This is -- this is the e-mail -- and we have seen it22 before -- from the analyst. It ultimately goes all the23 way up to Mr. Jay Brown, I think, in probably the most

24 revealing nine words of the case.25 After the analyst goes through all the26 benefits to MBIA Inc. from this transformation, it

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1 Petitioners-Giuffra2 talks about -- can you believe it -- a dividend was3 approved by -- we can put up the full document, can we,

4 Roger?5 This is the e-mail at the back, where Mr.6 Brown says "glad someone on the outside could figure it

7 out," after he gets the e-mail.8 Let's go to the bottom of the e-mail for Mr.9 Mehta. He talks about, he describes the transaction.10 In fact, he goes through, literally, by numbers what11 the benefit was to MBIA Inc.12 Now, he talks about, for example, that -- you13 know, let's look to the second paragraph. Look at what

14 is being put into National. $2 billion is being taken15 out of the insurance company as a dividend.16 He said, quote: "Yes, the regulator has given

17 the okay to take this capital and put it out of the18 reach of the policyholders of insurance companies.19 This is huge for shareholders."20 Then he says "huge. $9 a share is now21 protected from claims that National does not choose to

22 insure or reinsure."23 Literally, it goes through it to the dollar,24 and the CEO says, "glad someone on the outside could

25 figure it out."26 That wasn't in the application to the

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1 Petitioners-Giuffra2 Insurance Department. But then he talks further dow

3 about the fact, what else is in National?4 He talks about the 2.89 billion paid by5 National to get the reinsurance done from the6 municipal book.7 Then he actually specifies to the dollar ho8 much he thinks that's worth, and he denominates that a9 12 or $13.10 I went through this document in some detai11 I won't do it again, your Honor, but these are no12 facts that were in the application, and these facts ar13 incredibly revealing as to what this transaction wa14 about.15 It was a transaction that clearly favored th16 stockholders of the holding company, to the detrime

17 of the policyholders.18 Yes, this case is about banks, but the nex19 one might not be.20 So, whatever ruling your Honor issues in th21 case will apply to banks and everyone else who buy22 insurance from a New York insurance company23 Here, the CEO of MBIA is saying "glad someon

24 could figure it out" as an analyst is telling him25 within days of the approval of this transaction how26 yes, the benefit is $21.50 a share.

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1 Petitioners-Giuffra2 Let's put up -- Mr. Kasowitz sort of, you3 know, was complaining about this, but let's put u

4 slide 10.5 I mean there's the math, your Honor. There

6 the math. The math comes from an analyst who gets

7 be the CEO. He says "glad someone could figure8 out."9 The CEO didn't say no, I disagree with tha10 He said, I'm glad that someone could figure it ou11 So, your Honor, ultimately that demonstrat12 that this transaction was about the stockholders an13 the fact that in the approval letter, in the press14 release nowhere has anyone identified a benefit to th

15 left-behind policyholders, absolutely nothing.16 Let's put up slide 11. Your Honor, after th

17 transformation was approved -- this is from MBIA's ow18 public disclosures -- part of the bonus compensatio

19 that was paid to MBIA executives related to their wor

20 on transformation. That's PX 109.21 It's expressly stated in the public disclosu22 of MBIA. I showed you last week the stock pricin23 packet, and counsel for MBIA said, oh, you know, yo

24 didn't provide enough information.25 I think the stock right now is almost, you26 know, maybe close to $9 a share, but let's put up, yo



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1 Petitioners-Giuffra2 know, what it was right after. This is 12. Yes, it3 went down with the rest of the stock market. It went

4 up, had the big burst, and then it went down.5 But then it outperformed through the end of6 March 2009. MBIA stock outperformed the S & P, and it

7 also outperformed the S & P financial index. And that

8 is Mr. Stulz's affidavit, Exhibit 6B.9 Now, there is also no question that MBIA10 Insurance was left with the more volatile book of11 business. That's what Mr. Moriarty testified to at 232

12 of his deposition.13 There is no question, your Honor, that the14 purpose of this transaction was plain and simple: To

15 separate, to ring fence the volatile structured finance

16 liabilities from the muni book, to favor one set of17 policies over another, but, more importantly,18 ultimately for the benefit of the stockholders of the19 insurance company, in complete, in complete20

contravention of basic principles of insurance21 regulation.22 Now, let's put up slide 13. Your Honor, we23 went through this. Mr. Wertheim, general counsel, made

24 it quite clear to the department in December 2003 that

25 National would not subsidize or have any obligation to

26 support MBIA Insurance's operations following

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1 Petitioners-Giuffra2 transformation."3 They made it quite clear. Did the department,

4 when it got this letter, object? Did it say no? Did5 it say we want to have a backstop? No.6 Then let's turn to the next one. The MBIA7 press release issued, literally, the day that this was8 publicly announced, made it quite clear that the9 municipal business -- made it quite clear that, quote:

10 "We intend to operate our municipal business11 as a separate operating and legal entity that will have

12 no exposure to structured finance business. This split13 formalizes that commitment," close quote.14 (Continued on next page)15 (End of take 1)1617181920212223242526

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1 PROCEEDINGS - GIUFFRA2 T2 MR. GIUFFRA: That's Exhibit 608. Turn to t3 next one.4 Then, literally both Mr. Dinallo and the CEO, J

5 Brown of MBIA, are on television talking about thi6 Mr. Dinallo says quote, I am a big fan of th7 immediate ring fencing. Mr. Brown says, quote, i8 totally legally separate. There is no cross liabilit9 going from the new Co. back to the old Co., close quot

10 Did anyone in the Insurance Department object whe

11 they heard that, literally the day after this was approve

12 and the day it became public? No, no, not one wor13 We spoke to Mr. Moriarity. That's the next one

14 his deposition, September 2, 2010.15 "Question: Okay. So, as we sit here today, MBI

16 Inc., the holding company, has no obligation legal or mor

17 or otherwise, to provide further assets to MBIA Insuranc

18 Corporation for the payment of claims of structure19 policyholders?20

"Answer: MBIA Inc. does not have a lega21 obligation to fund MBIA Corp. It may have a busine22 incentive to do so, but there is no legal obligatio23 There is no question that The Department could hav

24 required a back stop, as was done in other transaction25 similar to this one.26 Let's turn to the next one. This is the noti

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1 PROCEEDINGS - GIUFFRA2 to admit in this case by MBIA, PX 18, making it quite clea

3 that quote, MBIA Inc. never had, nor does it currently hav

4 any legal obligation to pay any claims of any of i5 Insurance Co. subsidiaries policyholders, close quot

6 That's what MBIA -- that's the position they hav

7 taken in this Court. No obligation. Then, put up M8 Brown's deposition. He made it quite clear at h9 deposition that --10 "Question: Did you ever have an understandin

11 from Mr. Dinallo that, in the event Corp. Became insolven

12 The Department could require National or Inc. to put capit

13 into Corporation?14 "Answer: No."15 Now, despite all of the uncertainty, your Hono

16 surrounding the financial crisis, all of the uncertaint

17 the known unknowns, The Department allowed an unprecedente

18 transaction to be approved without any protection for thos

19 left behind at MBIA Insurance. They bore all the risk, bu

20 an insurance company is not a casino.21 Now, Mr. Dinallo, let's put up 19. He thought h

22 had some sort of an understanding with Mr. Brown. Bu

23 your Honor, that makes no sense, because The Departme

24 repeatedly said, both -- let me restate.25 MBIA repeatedly stated to the Department o26 December 23rd, made it clear on February 18th, there was n



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1 PROCEEDINGS - GIUFFRA2 such obligation and Mr. Moriarity testified that he3 understood that there was no obligation by either Inc. or

4 insurance to back stop MBIA.5 This is the problem, your Honor, with people coming

6 in years after a transaction is approved and saying well, I

7 had some sort of an understanding.8 First of all, if he had an understanding you, put9 it down on paper and make an enforceable agreement and

10 that's something that former Superintendent Corcoran

11 testified should have been done here. It was not done.

12 MR. HOLGADO: Your Honor, if I may, the first time13 he used this slide, your Honor made a point to let Mr.

14 Giuffra know that you would like to see the questions along

15 with the answers.16 If he is not going to read out the answers into the

17 record, then I will just suggest your Honor read the full18 question and answers of the portions of the transcript that

19 he is citing only portions of the answers to.20

THE COURT: Okay.21 MR. HOLGADO: Thank you, your Honor.22 MR. GIUFFRA: Your Honor, we have heard from the23 State's counsel that it was important to Mr. Dinallo that

24 the funds transferred out of MBIA Insurance be kept within

25 the MBIA family.26 But, your Honor , let's put up slide 20. Then we,

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1 PROCEEDINGS - GIUFFRA2 according to counsel for the State Respondents, quote, we

3 have also heard unrebutted testimony from Superintendent

4 Dinallo as to why it was actually a better solution for MBIA5 Inc. to do this reinsurance transaction with an affiliate,6 since that would mean the assets associated with the7 policies would not go out of the door of the holding company

8 for good, close quote.9 That makes no sense, because Mr. Dinallo did not

10 put in any sort of express requirement of capital support

11 from National or MBIA Inc. into the approval letter, into

12 the press release, into any documents whatsoever.13 The best he could do was cite an e-mail that was

14 sent between he and Mr. Brown talking about course15 directions. His answers at deposition were fairly all over

16 the place as to whether there was any sort of agreement, and

17 Mr. Brown denied any sort of an agreement.18 MR. HOLGADO: Your Honor, I will take exception to19 that. I think the, as Mr. Giuffra well knows, the word

20 "understanding", can have the meaning "agreement". It can

21 also have the meaning "awareness".22 It's, I think, it's clear which meaning Mr. Dinallo23 was using, which is the latter. And, that what he24 testified at his deposition was that Mr., in his view, Mr.

25 Brown had an awareness that Mr. Dinallo was taking that

26 position in regard to the Department's powers. That's the

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1 PROCEEDINGS - GIUFFRA2 testimony.3 They have seized on the word "understanding", th

4 way they have seized on other words in this hearin5 MR. GIUFFRA: Your Honor, we put up six documen6 where MBIA told the Insurance Department on December 23r

7 they told them literally in a press release on8 February 18th, the CEO was on television saying there was n

9 objection to support, the Deputy Superintendent testifie

10 that there was no obligation of either the holding compan

11 or National to support MBIA Insurance.12 Again, all the risk was placed on the left behin13 policyholders and there was nothing -- let's assum14 everything the other side has said is correct. MBI15 Insurance is wildly solvent -- an issue we strongly disagre

16 with.17 Wildly solvent -- then, put the back stop in plac18 Put the back stop protection in place. It won't be use

19 It won't be used, but instead, in the middle of the wor

20 financial crisis since the Great Depression, all the ris

21 was placed on the left behind policyholders and all of th

22 upside benefit went to the holding company. I am gla

23 someone on the outside could figure it out.24 Now --25 THE COURT: All of your points have been ma26 several times, so, I understand that's your position.

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1 PROCEEDINGS - GIUFFRA2 understand that's his position.3 MR. GIUFFRA: Your Honor, they ignore the Nation

4 Association of Commissioner guidelines, they ignore what th5 other Superintendents have testified to.6 In fact, your Honor, this whole question of7 providing equity actually came up after the transformation

8 Let's put up slide 21. The other side never responded

9 this your Honor. PX 572.10 I will not go through it again because we have

11 speed through this. Hampton Finer literally, in Marc

12 within a month of the approval, was talking about quot

13 MBIA will have to offer value to satisfy them that they a

14 being treated fairly.15 And then he talked about, quote, the better16 solution could be to allow the banks a share in the equity

17 And, your Honor, when that Dow Jones story gets communicate

18 up to Mr. Brown, his response is "F...K." That's what h

19 thought about that idea, sharing that, because he knew wha

20 this case was about.21 It was the about the stockholders of MBIA Insuranc

22 benefitting from a transaction where all of the risk wa23 placed on the policyholders and all of the benefits and a

24 the upside went to the stockholders.25 Then, Mr. Kewsong Lee, director of the bigge

26 shareholder of MBIA, he has a lot of skin in the gam



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1 PROCEEDINGS - GIUFFRA2 quote, I am not sharing. Those documents were all ignored

3 by the other side and the contemporaneous documents, your

4 Honor, make it quite clear that the purpose of5 transformation was to benefit the holding company and to

6 force left behind policyholders to commute their policies

7 and allow MBIA Insurance to get out of its obligation at a

8 substantial discount.9 Put up slide 22. Here, your Honor, is Mr.10 Kewsong Lee again. He is talking in February of 2008.

11 This is when they are first talking about transformation.

12 I won't go through the whole document -- we talked about it

13 before.14 But, he talks about, you know, as we work through

15 the restructuring plan one key component is that the16 negotiations with the bank counterparties with large CDs

17 exposures, later on, quote we will not tip our hand with18 specifics. We want to try to maximize our leverage and

19 limit their time to respond, close quote. That's PX 306.

20 Your Honor, this is not a case where Petitioners21 are making wild allegations that are unsupported by22 contemporaneous documents. I can't imagine a case where I

23 would have a situation where directors of MBIA Insurance is

24 talking about using this transaction for leverage in25 commutation transactions.26 I can't imagine a case where literally, the CEO is

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1 PROCEEDINGS - GIUFFRA2 talking and saying, "glad someone could figure it out", when

3 literally, they are trying monetize the benefit from MBIA

4 Inc. to this transaction and when the whole question of5 sharing equity with the policyholders who are left behind

6 comes up, this CEO, in his own words contemporaneously says

7 "all F...K", and then the Director, who represents the8 biggest shareholder says, "I am not sharing".9 These are contemporaneous documents that no10 argument by lawyers can cast aside. They are11 contemporaneous documents, and I dare say, your Honor, if

12 this was a case involving something other than banks, this

13 would be a slam dunk.14 The only reason we are even litigating this case at

15 that point, because it involves banks, but justice16 obviously, must be blind.17 Let's look at 23. This is Mr. Sonkin, senior18 person at MBIA. October 2008. That's PX 245.19 He talks about quote, goal: Separation of muni,

20 and then he talks about leverage for commutations. This is

21 not something that we are just talking about, your Honor,

22 without basis in evidence.23 They were trying to get The Department to do this

24 transaction to cause policyholders to take less money than

25 they were entitled to. They were trying to do so to26 benefit the holding company. That's not fair and equitable

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1 PROCEEDINGS - GIUFFRA2 on anybody's terms. That's why The Department said nothin

3 about fair and equitable in the approval letter. That's wh

4 they said nothing about fair and equitable in the, even i

5 their press release.6 "Equitable" is not there. They use the wo7 "fair" and provide no specifics. When you write an opinio

8 your Honor, you have to sort of provide the arguments tha9 support your position.10 In this particular case, they could not suppo11 their position, so they didn't write it in the approv12 letter. They didn't write it in the press release, becau13 it would have been laughable.14 Now, after the transformation was approved, again

15 right around the day it gets publicly announced, you woul

16 think the Insurance Department would have called Mr. Brow

17 up and said, what are you saying to the press?18 Here is Mr. Brown, Dow Jones, quote, I would expec

19 some of them, some would be far more interested i20 commuting. Brown said, quote, they will say oh, my Go

21 there is only 10 billion instead of 14 or 15 billion. Mayb

22 I better cut a settlement today, close quote.23 That's the CEO, the day this transaction ge24 publicly announced. This is the same CEO, you will recal

25 on the issue of when the Ackman plan came back in Februar

26 2008, when they were talking about doing a stacke

Page 19

1 PROCEEDINGS - GIUFFRA2 structure. He said he was a fiduciary for all the3 policyholders. That's not the way the fiduciary treats, th

4 way the fiduciary treats people that are policyholder5 They don't say there is only 10 billion instead o6 14 or 15 billion, maybe I better cut a settlement toda

7 close quote. To try to get around what I think is8 devastating contemporaneous evidence, Respondent

9 essentially say, well, it was a lot of risk in the mu10 book. Put up slide 27.11 This was Mr. Kasowitz earlier this week. He said

12 you know, quote, as we have seen, and Jack Buchmiller sai

13 the volatility in the financial markets and the need 14 achieve an AAA rating in order to write the business mea

15 the Superintendent's approval of the transformation16 including the transfer of funds to cover this potential 53

17 billion in public finance liabilities was more than18 rational.19 Now, what got ignored by Respondent's, your Hono

20 is that the Insurance Department never looked at the mu

21 book. If this was supposedly some big risk area for MBIA

22 you would think they would have looked at the muni book

23 Let's put up 28. There is Mr. Buchmiller's famou

24 backdated February 16th memo. What does he sa25 Quote, there was insufficient time to look int26 other sectors, which may be of concern, such as CLO and hig



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1 PROCEEDINGS - GIUFFRA2 yield CDO, future flow or public finance where past, past is

3 unlikely to be prologue, close quote.4 So, your Honor, if they were so concerned about the

5 muni book, you would have thought they would have got Mr.

6 Buchmiller or one of the other people at the Department to

7 look at that book.8 And, there is absolutely nothing in the record9 indicating that the muni book was a source of great risk at

10 all. Nothing other than lawyers' argument.11 Now, let's look at the January 30th e-mail, which

12 was seen before. Quote, Mr. Buchmiller, status of my MBIA

13 review, close quote. Quote, another K/UNK -- " in Mr.

14 Buchmiller-speak, that's known unknowns -- in their muni

15 book, close quote.16 Now, he didn't look into it. He wasn't concerned

17 about looking into it. The Department, if they were so18 concerned about it, you would think he would have looked at

19 it. But, they never looked at the muni book at all.20

That's Exhibits 51, PX 51 and PX 146.21 Now, here is a document that the other side didn't22 show you, your Honor. This is MBIA's own document. This

23 is slide 29.24 This is MBIA's own public disclosure. What were

25 the losses in 2008? $2 million on the muni side. Far,

26 far less than the massive losses on the structured side.

Page 1966

1 PROCEEDINGS - GIUFFRA2 In the entire history of MBIA, your Honor, the losses, as of

3 the date of this approval on the public finance side were

4 $669 million. Those are facts not argument.5 MR. KASOWITZ: One moment. We did show this6 Exhibit, your Honor. Counsel just said we didn't, but we

7 did.8 MR. GIUFFRA: Apologies if I made a mistake.9 The losses on the structured side were far, far10 higher in 2008. They were, you know, approaching one and a

11 half billion dollars and the losses on the muni side were

12 $2 million.13 And, we heard a lot about oh, this big risk on the

14 muni side. There was no review done on the muni side and

15 the facts were that, on the muni side, there hadn't been

16 serious losses.17 Now, let's look at slide 31. More facts.18 This is a document that shows the MBIA Insurance

19 and National pro forma met par insured rated below20 investment grade. These are the below investment grade held

21 at National and MBIA Insurance as of December 31, 2008.

22 What these documents show are several things.23 One, the green is the cash that's left in both24 businesses. And then you look, your Honor, at the below

25 investment grade exposure. The risky, the risky securities,

26 and post transformation MBIA Insurance was left with four

Page 19

1 PROCEEDINGS - GIUFFRA2 times more below investment grade insured exposure tha

3 assets. That's a fact. That's from Mr. Greenspan4 affidavit figure 14.5 Now, your Honor, let's turn to slide 32. Th6 State Respondents said that AAA is really everything in th

7 industry. That, the whole meaning of AAA you need,

8 order to sell insurance.9 In fact, my clients and others left behind, thoug

10 they had a AAA company and it was junk by the time th

11 transaction was announced.12 But, your Honor, what's interesting is that MBI13 promised the world capital strength, AAA performance. Bu

14 when they did the transformation they, in fact, told Th

15 Department -- let's put the next slide up 34 -- they to16 The Department, it goes to Hampton Finer in December

17 2008. PX 242.18 MR. KASOWITZ: Just objection, your Honor. 19 thought I just heard the argument that MBIA promised

20

rating.21 There is absolutely no doubt that there is n22 contractual obligation in these insurance policies fo23 ratings.24 THE COURT: I am not sure if he said they promis25 or they thought they had the AAA.26 MR. GIUFFRA: Mr. Kasowitz is missing the point

Page 19

1 PROCEEDINGS - GIUFFRA2 my argument. The point is --3 MR. KASOWITZ: Excuse me, your Honor. All I w

4 to do is make the point, if there was a, if there is a5 argument that there is a contractual obligation, there is n

6 basis for that. There is no contractual obligation7 MR. GIUFFRA: The point, I am making is a differe8 one.9 (Continued on next page.)1011121314151617181920212223242526



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1 Petitioners-Giuffra2 MR. GIUFFRA: Your Honor, the other side put3 up some documents about Mr. Dinallo saying things after

4 the approval had happened. We saw like the webinar

5 argument we saw.6 Here's what Mr. Dinallo said about this7 transaction on August 31, 2010 during the debate when

8 he was running for public office. This is PX 122.9 (The video was played as follows:)10 "In my professional capacity as the11 superintendent of insurance, I was sued by the Wall12 Street banks because I was the insurance superintendent

13 that stood up to them and made sure they didn't strip

14 assets out of the bond insurance industry, an important

15 part of the insurance system that lets municipalities16 go to market issue bonds."17 MR. HOLGADO: Your Honor, I just want the18 briefly point out this is a quote that was carted out19 by the banks in trying to argue this bias argument back

20

in the fall of 2010.21 We have responded to this evidence that22 they're trying to proffer now in the course of the23 papers in connection with that discovery dispute, and I

24 think your Honor also is aware of how that discovery25 dispute turned out with Justice Bradley.26 There were no bias documents evidenced that

Page 1974

1 Petitioners-Giuffra2 were produced to the petitioners based on Justice3 Bradley's review. We refer your Honor to that prior

4 briefing for our response to that.5 MR. GIUFFRA: Your Honor, in fact, I think6 first of all, I would take issue with what Mr. Holgado

7 said. The documents are the documents. We argue one

8 thing from documents. They argue another thing from

9 the documents.10 That's Mr. Dinallo's own words bragging about

11 how he prevented banks from stripping money out of12 MBIA.13 That's not his job as the insurance14 superintendent.15 MR. KASOWITZ: Objection, your Honor.16 MR. GIUFFRA: It's not his job, your Honor.17 MR. KASOWITZ: Objection. He didn't say MBIA.18 He talked about monolines. He didn't say --19 THE COURT: He didn't specifically -- I mean,20 he said what said.21 MR. GIUFFRA: In fact, the question that was22 asked of him, have you ever been sued. He defended23 this case, and I believe this is the only one. We can24 play it again, to be sure.25 THE COURT: All I heard was the one response.26 Again, I didn't hear what -- it was taken out of

Page 19

1 Petitioners-Giuffra2 context, so I don't know what it was.3 MR. HOLGADO: The question actually was, yo4 Honor, have you ever been arrested or sued.5 MR. GIUFFRA: Okay.6 THE COURT: Perhaps you could show tha7 rather than just taking it -- that's really kind of ou8 of context when you just put in an answer.9 MR. GIUFFRA: He's got it right here.10 THE COURT: Okay.11 (The tape was played as follows:)12 "I've never been arrested" --13 MR. GIUFFRA: No, go back.14 -- "and I guess in my professional capacity 15 superintendent of insurance I concede I've been sued b

16 a Wall Street bank."17 THE COURT: I understand. That's the top18 "have you ever been arrested or sued."19 MR. GIUFFRA: That's on the screen.20

MR. HOLGADO: It's not what he said.21 THE COURT: Is there a question that someon22 asked?23 MR. HOLGADO: Go up to the question.24 MR. GIUFFRA: We'll get it after lunch. H25 doesn't have it.26 MBIA's counsel made a big point about

Page 19

1 Petitioners-Giuffra2 municipal losses, and how there were huge municip3 losses potentially faced by National.

4 Let's put on 41. Your Honor, since the5 transformation the losses on the MBIA Insurance side o

6 the ledger have been $9.4 billion. On the municipa

7 side, $458 million.8 This notion that there was some huge municip

9 exposure that was out there is just belied by the10 facts. But, again, your Honor, we don't even have t

11 go forward. We can just look at what happened at th

12 time.13 The department didn't look at the municipa14 book. The municipal book hadn't suffered large losse

15 and notwithstanding that, there was a massive amount o

16 money taken out of MBIA Insurance. There was a massi

17 amount of money that was paid by MBIA Insurance t18 reinsure municipal book, $2.8 billions, had $2 millio

19 in losses the prior year.20 Your Honor, this gets lost. MBIA Insurance 21 still on the hook for the municipal policies if22 National can't pay on those policies.23 Now, during this argument, MBIA's couns24 talked about something called CIFG, and should hav

25 glossed over some facts, and this was a transactio26 that Superintendent Dinallo was involved in.



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Page 1977

1 Petitioners-Giuffra2 In that case stockholders gave equity to3 policyholders. In addition, counsel for MBIA did not4 mention, while he was excoriating the banks, that MBIA

5 was a policyholder of CIFG.6 MBIA is itself was a policyholder alongside7 the banks, that MBIA was a participant in, and8 beneficiary of, the settlement process, that we heard9 was a poor regulatory practice.10 MR. KASOWITZ: Objection, your Honor. I11 didn't say it was poor regulatory practice.12 MR. GIUFFRA: Well, MBIA --13 THE COURT: Wait just a minute.14 MR. KASOWITZ: I didn't say that that was poor15 regulatory process. What I said was it was ill behoove

16 the banks to complain about the same superintendent who

17 on the one hand approved the transaction that they18 liked and, on the other hand, had virtually, at that19 same time, approved the transaction that they didn't20 like, and for that, they accused him of complicity and

21 theft. That was my point. I didn't say it was poor22 regulatory process.23 Thank you, your Honor.24 MR. GIUFFRA: Again, your Honor, CIFG, equity25 was given to policyholders. So equity -- the26 stockholders didn't win as they did in this case.

Page 1978

1 Petitioners-Giuffra2 Second, MBIA was a policyholder. MBIA was a

3 beneficiary of that settlement. The holding company in

4 CIFG, your Honor, provided capital.5 It didn't happen here. The holding company6 took capital out.7 And in that case, your Honor -- and this is PX8 37 and 331 -- CIFG hired BlackRock and FSI to model its

9 book of business.10 So this is a transaction where Mr. Dinallo was

11 involved, where MBIA was a policyholder, and it was

12 handled in a completely different way than the MBIA13 transformation in exactly the same time period.14 Equity infusion -- excuse me -- equity given15 to policyholders, the holding company doing capital16 infusion and BlackRock and FSI being involved to model

17 book.18 Now, the only benefit that I've heard in any19 way articulated here is some hypothetical possibility

20 that the federal government might come in after the21 fact and give money to MBIA Insurance; hypothetical

22 possibility.23 First of all, MBIA itself didn't want that24 because they would have had to give up equity.25 Let's put up slide 37. We saw this document.26 It was put up. February 11 bond buy article.

Page 19

1 Petitioners-Giuffra2 President Obama is in office at this point. It's a3 week before the transaction is going to be public4 announced. PX 235, and the article says, quote5 "Treasury rejects direct aid to insurers," close quot

6 It goes on to say, quote: "Geithner said tha7 the market has shown some minor improvement, but th

8 the Treasury and the Federal Reserve Board are sti9 looking for ways to help it further. 'We are open 10 suggestions,' he said. 'To be honest, I have not y11 seen a good idea,'" close quote.12 What we have done on these slides, your13 Honor -- I won't go through them, there's a who14 series of them, but Mr. Dinallo in his affidavit and i

15 his deposition talked about all of the communication

16 that he had had with Treasury in 2008 and into 2009

17 It wasn't as if there hadn't been any18 discussions, your Honor. Dinallo affidavit 33, Dinal

19 affidavit 41.20

Let's go to the next slide: Dinallo21 deposition, 169, Dinallo deposition 178, Dinall22 deposition 181. Let's go to the next slide.23 So, your Honor, the basic point is that he ha24 plenty of communication with the Treasury Departme

25 and, as of a week before this became public, th26 Secretary of the Treasury was publicly quoted a

Page 19

1 Petitioners-Giuffra2 saying, quote: "I have not yet seen a good idea3 Now, counsel for MBIA brought up the AI

4 resolution for no purpose that I can think of oth5 than to tar the banks, say Societe Generale was someho

6 a beneficiary of AIG. It has nothing to do with th7 case at all.8 It's not something that's ever been in any o9 the briefs.10 MR. KASOWITZ: It's in the record, your Hono11 In Miller's, Professor Miller's affidavit.12 MR. GIUFFRA: There is one key distinguishi13 fact that seems to be getting lost here. It's that o14 AIG, the holding company was facing a liquidity crisi

15 and owed money to various counterparties.16 Because of this liquidity crisis, AIG secure

17 a loan from the Treasury Department. That was secur18 by the pledge on all of the assets of AIG and, in fac

19 the Federal Reserve owned warrants that were redeemab

20 for 79.9 percent of the common stock.21 In other words, they gave up equity in orde22 to get the money.23 So, this transaction was in lieu of strippin24 AIG's insurance subsidiaries of cash and securitie25 In fact, on March 9, 2009 Mr. Dinallo talke26 about the AIG settlement. Among other things, he w



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Page 1981

1 Petitioners-Giuffra2 talking about how this was different.3 He made the point, quote: "In most industries

4 the parent company can reach down and use the assets of

5 the subsidiaries with insurance that is greatly6 restricted," close quote.7 That didn't happen here. So to summarize,8 your Honor -- let's put up slide 35 -- MBIA's9 transformation was not fair or equitable to the10 structured finance policyholders who bore all the risk.

11 This approval was in the middle of the12 greatest financial crisis this country has seen since13 the Great Depression.14 They lost $5.1 billion needed to pay claims on

15 a highly volatile book, $233 billion. The cash in16 investments was reduced of MBIA Insurance from 9.6

17 billion to 4.4, and post transformation MBIA Insurance

18 is still liable for 554 billion in municipal policies.19 Your Honor they paid, MBIA Insurance, $2.89

20

billion to reinsure this municipal business, even21 though in the entire history of MBIA they'd only paid22 669 million in public finance claims.23 MBIA Insurance got nothing, nothing. They24 didn't get equity like they got in CIFG. They got25 nothing, even though they capitalized the entire26 business.

Page 1982

1 Petitioners-Steinberg2 All the benefits, as the CEO of MBIA himself3 recognized, I'm glad you could figure it out. Excuse

4 me. I'm glad someone on the outside could figure it5 out.6 Let's turn to the next page. All of the7 benefits of this transaction, your Honor, went to8 either the stockholders of MBIA Inc., the executives of

9 MBIA, or the public finance policyholders.10 That, your Honor, is not allowed under the11 Insurance Law, it's not fair, it's not equitable, and12 these facts, in fact, are, you know, clear. They're13 not disputed. The transaction is what the transaction

14 was.15 So, your Honor, the reason why 105 was not in

16 the approval letter -- in terms of looking at it from a

17 transformation as a whole, the reason why 1505 as to18 fair and equitable are not seen in that document is19 because they couldn't write a defensible order on these

20 facts, particularly in light of the way they were21 handling other monoline restructurings.22 Mr. Steinberg is now going to cover 1309.23 Thank you very much.24 THE COURT: Thank you.25 MR. STEINBERG: Good morning, your Honor.26 THE COURT: Good morning.

Page 19

1 Petitioners-Steinberg2 MR. STEINBERG: I'd like to start at the poi3 where you raised the question about the importance

4 section 1309 to this proceeding.5 This isn't something that came out of nothing

6 your Honor. Back when the original application wa7 made -- and you will recall, your Honor, that there wa

8 an initial presentation that was made to the departmen9 on November -- on December 3 and or 4, and it's Exhib

10 242, PX 242 no. 3.11 This was -- you will recall this was first a12 meeting, and there was PowerPoint presentation, yo13 Honor.14 Then there was an application that followed o

15 December 5. In that application, just like in the 16 in that application, as well as in the PowerPoint17 before -- and there was a further PowerPoint on Octob

18 30, 2008 -- each time, under the legal section -- let

19 pull up 242 no. 3.20

This is part of the -- this is the project21 transformation. This is the PowerPoint that go22 provided. Let's go toward the end in the legal23 section.24 Here we go. There was in the section on lega25 analysis, your Honor, and I want to come back to on

26 thing in a moment, but in the section of legal

Page 19

1 Petitioners-Steinberg2 analysis, one of the concerns expressed and was to b3 met was that there was a concern of fraudulent

4 conveyance, that all of this, if there was5 nonsufficient capital, could be deemed fraudule6 conveyance.7 This was a very important question that th8 department had and was going to be analyzed, as state

9 here, was going to be analyzed by obtaining an opinio

10 from Bridge Associates.11 You will recall we have talked a lot abou12 Bridge Associates over the past several days.13 Now, what is it, your Honor, that Bridge14 Associates, which was a part of the application, sai

15 in connection with 1309?16 Let us put up 242-4, which is from the Bridg

17 opinion that was provided. This was provided by MBI18 in its application. Bridge was retained by Dewey &

19 LeBoeuf, representing MBIA. MBIA was also one of t

20 firms retaining Bridge. They were responsible for th

21 payment.22 "Solvency standards under applicable law23 The tests for determination for solvency for a24 financial guarantee insurer are based upon the25 following sections of New York Insurance Law." Th

26 very first one, your Honor, is 1309.



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Page 2005

1 PROCEEDINGS - STEINBERG2 We have referred your Honor to the Executive Life brief. I

3 am not going to go through it. You have it. He uses the

4 identical language we have discussed.5 Now, there is nothing, according to the State,6 however, you should disregard the Superintendent's7 discussion in the Executive Life matter because the8 Superintendent, when he filed this brief, was wearing his9 rehabilitator hat, although the Superintendent is still the

10 Superintendent making the determination, albeit not in his

11 rule making hat.12 There is nothing in 1309 that bears upon that.13 Whatever hat the Superintendent was wearing, he read the

14 statute and the brief, and he submitted and applied the

15 statute exactly as Petitioners have told you it must be16 applied.17 That brief says, the inability, at pages 31 through18 32, the inability to assume and reinsure all of ELNY's point

19 of impact objections under the reinsurance and assumption

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

21 assets are insufficient for the reinsurance of all of its22 policy obligations in a solvent corporation -- the very23 definition of insolvency under Section 1309 of the New York

24 Insurance Law.25 Now, your Honor, I have two cases for you that26 interpret the language in the same way. They are not,

Page 2006

1 PROCEEDINGS - STEINBERG2 however, interpreting it in the context of valuating an3 analysis of whether or not there is sufficient reinsurance,

4 but those cases are, Stewart versus Citizens Casualty of New5 York, 23, NY2d, 407, 1968, a New York Court of Appeals case

6 and People versus Feitner, 65 NYS, 523 and this is a Supreme

7 Court, New York County case from 1900.8 In that case --9 THE COURT: 1900?10 MR. STEINBERG: 1900 -- this statute has been11 around for over 100 years, your Honor. It's a well12 established test.13 What is the response to the plain meaning of the

14 statute that has been on the books for 100 years?15 First, the Respondents have told you it makes no

16 sense to focus on the language of the statute during the

17 financial crisis of 2008 and 2009 because, quote, requiring18 an FGI to be able to reinsure its entire book to prove its

19 solvency, would require that the Department deem every FGI

20 under its regulatory supervision insolvent.21 That was from the 5/21/2012 transcript, page 760.

22 What is the evidence of that? The Department23 introduce evidence that every FGI was going to be insolvent?

24 No, they did not. What they did, they called out, in Mr.

25 Moriarity's affidavit, a number of them were on the brink

26 and required the intervention of the Superintendent in order

Page 20

1 PROCEEDINGS - STEINBERG2 to avoid rehabilitation and insolvency.3 The point is that, when you have a market base4 test, you have these two tests of 1309. One involves los

5 judgements by the insurer. As a check on that, you hav

6 this market based test.7 So, we showed you last week the affidavits8 submitted by Mr. Moriarity at the outset of this proceedin9 demonstrated that FGIs were, in fact, about to be insolve

10 in 2008 and 2009.11 Now, counsel for MBIA presented the Court with

12 series of hypothetical and really, it became one13 hypothetical regarding scenario in which there was, the

14 were two hypotheticals proposed, as I understood i15 One is a super well capitalized insurer that can

16 get reinsurance. That seems, to me, to be not payin17 attention to the two different elements here where you hav

18 a market choice or a where a market is not available f

19 them, reinsurance is not available, that should tell yo

20

something, your Honor.21 Look at an insurance policy for a moment. If 22 am -- let's do it in the easy context of a life insuranc23 policy where someone has paid up all their premiums in fu

24 They have a million dollars life insurance and, let's sa

25 they are 96 years old. Death is not a question. It is

26 question of when.

Page 20

1 PROCEEDINGS - STEINBERG2 So, if I were to reinsure that particular3 $1 million life insurance contract, I am sure I will b

4 paying pretty close to, pretty close to the million dollar5 if not the million dollars itself, because the only questio

6 is when that insured is going to pass away.7 So, that would actually be a really nice indicatio8 of how to value that insurance contract.9 If I turn to Met Life and I say would you reinsur

10 my book on this -- they are going to quote me very much t

11 limit here. That's the purpose of it, to keep me, as th12 insurer, honest about what are my reserves.13 Now, one of, some of the hypotheticals are pret

14 far-fetched. The one that I thought that was mo15 interesting was an extreme and complete monopoly, yo

16 Honor, where there was but one great insurer in the gre

17 State of New York, and that one is well capitalized becau18 undoubtedly it's a monopoly, and charging monopoly rent

19 but how strange a hypothetical do we have to get to in th

20 case -- one insurance company for all the risks of New Yor

21 Just one?22 Do we really think that no other company woul23 enter this field if there was just a monopoly in that way

24 Is it rational to think the legislature ever contemplate

25 one insurer, when that's not been the history of the Stat

26 of New York, which has had an active and vibrant market f



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Page 2009

1 PROCEEDINGS - STEINBERG2 insurance?3 If it did, why is it so crazy to think that the4 Insurance Law would include a provision that would encourage

5 a market where competitors would be obligated to reinsure

6 each other's books and keep them honest?7 The fact is, the reinsurance test of solvency would

8 serve as a natural check on growth. Isn't competition, I9 thought, what Mr. Dinallo wants in the muni market?10 The reinsurance test is important precisely because

11 it provides a metric, an objective market based metric for

12 assessing the probability of loss. That's why it was13 relied on in Executive Life.14 The testimony offered by Professor Stulz is here.

15 It is important here for precisely the same reason.16 As MBIA counsel correctly noted, Mr. Stulz, a17 professor in finance, is not offering the New York,18 interpretation of the New York Insurance Law. But, Mr.

19 Stulz has offered an opinion about the cost of reinsurance.

20

Uncertain of MBIA's outstanding risk, in fact, Mr.,21 Professor Stulz testified he didn't even need to offer the22 opinion, because MBIA has made the determination for us.

23 The supposed absence of a market didn't prevent

24 MBIA from valuating the cost of reinsuring for certain of

25 its risks.26 I direct your Honor to the discussion in the 10K,

Page 2010

1 PROCEEDINGS - STEINBERG2 where MBIA, where they estimated the fair value of certain

3 of its liabilities, an amount that MBIA said was based on

4 the cost of reinsuring its outstanding risk, and that was5 nearly $20 billion.6 That amount was well in excess of anything that

7 MBIA had the capacity to pay. The 2008 10K, which is PX

8 977 at page 276, shows a derivative liability on its balance

9 sheet of 6.219 billion. But, as the notes 10K make clear,

10 MBIA got to the 6.19, a derivative liability, by reducing

11 the pre tax amount by 13.2, and in the words of the 10K, it

12 did it because of the company's own non -- the risk of the

13 company's own non-performance of paying those amounts and

14 the non-performance risk of its reinsurers.15 If that is the case, if this is that risk built16 into those numbers, that seems like a really good reason to

17 require the application of the reinsurance test.18 Now, I want to address one last thing that got19 raised by MBIA's counsel, which is, that there is deference

20 to be paid here in connection with an interpretation of

21 1309.22 Counsel for MBIA referred, I am sort of surprised23 as we get here, that there would be need for an24 interpretation of some of this language because, as counsel

25 for MBIA admitted on June 5th, 2012, page 1814, the language

26 of Section 1609 is quote, clear and unambiguous reading of

Page 20

1 PROCEEDINGS - STEINBERG2 it. This statute is clear. So what are --3 THE COURT: You do mean 1309?4 MR. STEINBERG: 1309.5 THE COURT: It's not a statute.6 MR. KASOWITZ: You said 1609.7 MR. STEINBERG: Sorry. So, why are we talki8 about, did he ever recognize, in the terms of the statu9 are clear and unambiguous?10 The cases we have cited for your Honor, and I wi

11 cite for your Honor two more cases, saying there is n

12 deference where the language of the statute is clea13 I will cite Raritan Development Corporation versu

14 Silva, 91 NY2d, 98, 1997, and that's at page 102; Rosne

15 versus Metro Mark Liability Insurance Company, 96 NY2d, 47

16 2001-case. Both cases were cited in our sur-sur reply

17 pages 67 to 68.18 The fact is, you don't give deference where th19 statutory language is clear and unambiguous. Mo20 importantly, as we have shown, the Superintendent did n

21 articulate any interpretation of Insurance Law 1309, 22 which the Corporation could defer here.23 I would cite for your Honor, Zimmerman versus Boa

24 of Education, City School District of New York, 50 AD3rd

25 952, a First Department case from 2008.26 Let's put that up. This is from the Zimmerma

Page 20

1 PROCEEDINGS - STEINBERG2 case.3 Judicial review, judicial review of the proprieta

4 of any administrative determination is limited to th5 grounds invoked by the agency in making its determinatio

6 In denying Petitioner's request to be reimbursed f7 attorney's fees and expenses, Respondents merely sai8 quote, a criminal proceeding does not fall within the scop

9 of Education Law 3028, end quote.10 At the agency level, as opposed to their respon

11 to the Petitioners, Respondents made no pronouncement abou

12 the meaning of the phrase, quote, arising out of end quot

13 in Education Law 3028.14 Thus, while deference is appropriate to an agency

15 quote, specific application of a broad statutory term citin

16 a case, there was no agency interpretation in the insta

17 case.18 (Continued on next page.)1920212223242526



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1 Petitioners-Steinberg2 better in many instances and, in many instances, far3 inferior to a more technological but less transparent4 method. And I described my bike, a car and an airplane

5 engine.6 MBIA's counsel on Monday said the FAA7 understands how those jet engines work and, quote:8 "The FAA is statutorily assigned to make sure that9 those engines work, and they most certainly do not take

10 it on faith." That's at page 1777.11 This is true, your Honor. The FAA does not12 take it on faith. Instead, they instead act on the13 basis of third-party industry experts who truly do14 understand the technology and understand how these

15 things work.16 MBIA should do its homework before they speak

17 up. Your Honor, I would direct your Honor to title 418 part 183 of the code of Federal regulations, which19 describes exactly the model of using a third party to20

identify and to evaluate these types of issues.21 Moreover, it's paid for by the manufacturer,22 precisely the same type of administrative model present

23 in this case.24 Now, in this case the department has insisted25 that it is the expert on Insurance Law. Yet it brought

26 in an outside law firm for Insurance Law expertise.

Page 2022

1 Petitioners-Steinberg2 The department does not plan to be expert in3 model structuring, finance products, but it sought no

4 assistance or independent views. This allowed the5 party with the greatest conflict to dominate the6 conversation that was being held.7 I want to talk for a moment about stale data8 because there was an insinuation that somehow BlackRock

9 was using stale data and this could be used, in10 essence, to justify the fact that MBIA undoubtedly used

11 stale data.12 What's perhaps most galling about the13 haphazard mention of BlackRock is that MBIA elected to

14 misrepresent the facts and Mr. Paltrowitz's testimony15 to justify MBIA's use of stale data.16 Here's what MBIA's counsel told you yesterday.

17 This is --18 MR. KASOWITZ: Tuesday.19 MR. STEINBERG: Sorry. Tuesday. It was20 yesterday when I wrote this. At page 1851: "So21 here"-- and the "as of is underlined. We did that, and

22 I will come pack to why.23 "So here, while Mr. Greenspan contends that24 MBIA's use of data from prior to the fourth quarter of

25 2008 was a modeling error, the banks' other expert, Mr.

26 Paltrowitz, of BlackRock, has testified that the

Page 20

1 Petitioners-Steinberg2 Federal Reserve Bank of New York's reliance in Februar

3 2009 on BlackRock's loss analysis ran as of Novembe

4 21, 2008, and relying on performance data from5 September 2008 was reasonable."6 I am sure your Honor remembers that7 discussion.8 Again, it would have been nice if MBIA ha9 actually done its homework here. First of all, th10 statement itself, apart from the reasonable part, whic

11 we'll come back to, is unremarkable.12 It says that BlackRock did what its client13 the regulator, asked it to do. It asked them to run14 as of November 21, 2008.15 Now, here is what the BlackRock -- here's wh

16 the BlackRock retainer agreement with the Federa17 Reserve and Mr. Paltrowitz was asked about in th18 testimony to which MBIA's counsel referred.19 This is what Mr. Geithner hired BlackRock t

20

do. Let's have this. This is from MRX 12, the21 Paltrowitz deposition at Exhibit 5. This is in22 schedule A of what BlackRock was to do:23 "Mark to market valuation." This was -- the

24 were two different banks that were going to obtain

25 considering getting funding from the U.S. Treasury

26 BlackRock was being used to identify the

Page 20

1 Petitioners-Steinberg2 collateral and to discuss the valuation of that3 collateral.

4 (Continued on next page)5 (End of take 5)67891011121314151617181920212223242526



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1 PROCEEDINGS - STEINBERG2 T6 MR. STEINBERG: This is from page ten. See3 government's overall objectives to the background -- mark to

4 market valuation.5 Citigroup provided the USG, United States6 Government parties, with its valuations for the mark to7 market assets as of November 21, 2008. The USG parties

8 seek an independent valuation and review of the mark to9 market assets.10 Now, November 21st was the date that they requested

11 because that was the measurement date that the government

12 and these, Citibank in this instance, were looking at to13 value the collateral.14 Now, so Black Rock performed for The Federal

15 Reserve what The Federal Reserve asked of it. A valuation

16 as of a specified date by the client, using the most recent

17 data then available. In other words, Mr. Geithner wanted

18 Black Rock to test the veracity of what Citibank had told

19 it.20 Although Respondents point to the sentences of Mr.

21 Paltrowitz' deposition out of context, we would ask you

22 review pages 232 to 234 of his deposition to understand what

23 was agreed to by The Federal Reserve.24 The Federal Reserve, Black Rock used the most

25 current data that was available as of November 23rd, as of

26 the date. That testimony is at pages 106 through 119 of

Page 2026

1 PROCEEDINGS - STEINBERG2 Mr. Paltrowitz' testimony. This isn't the same as MBIA3 preparing models at year end 2008 that rely upon stale data,

4 including data at least five months old, and in many cases,5 much older, at a critical time of accelerating decline in6 our economy and representing it to the New York Insurance

7 Department as the most current information.8 So, what exactly did Mr. Paltrowitz say what MBIA

9 asked him about MBIA's use of stale data? He compared it

10 to the act of, I compared it to the act of not updating the

11 data to the most current information as, quote, putting your

12 head in the sand. I would direct the Court to Mr.13 Paltrowitz' deposition transcript at pages 232 to 233.14 Of course, given MBIA's counsel's argument, you

15 would have thought Mr. Geithner blindly relied on the

16 valuation report as of November 23, 2008 to loan taxpayer

17 money to Citibank in January of 2009, not February, as MBIA18 said. Again, MBIA did not do their homework.19 Let's take a look at what the GAO report, the same

20 GAO report that MBIA's counsel showed to the Court, and that

21 MBIA misdescribed earlier, to see exactly what Mr. Geithner

22 did with Black Rock's valuation as of November 23rd.23 Put that up. Now, this is the GAO report,24 analyzing various retentions by The Federal Reserve during

25 the period of the financial crisis.26 One of the agreements that got evaluated was

Page 20

1 PROCEEDINGS - STEINBERG2 this -- and for the assistance provided to Citigroup an3 Bank of America, Bank of America later did not take th

4 loan, FRBNY, The Federal Reserve Bank of New York and FR

5 Richmond, that's the FRBR. Coordinated with Treasury an

6 FDIC to negotiate similar types of loss projection7 In contrast to the Maiden Lane transactions, whic

8 we don't have to go into, FRBNY and FRBR agreed to provid

9 loans, under certain circumstances, but did not anticipa

10 having to lend, and ultimately, did not lend to thes11 institutions under these agreements.12 Then, it goes on and talks about the loss sharin13 agreement on a designated portfolio and how the transactio

14 was structured, but I want to focus on the highlighte

15 language after footnote 114.16 Based on the analysis conducted by Black Rock

17 FRBNY concluded that losses on Citigroup assets reached th

18 point at which FRBNY could be required to lend one wer

19 unlikely. FRBR staff said they reached a simila20 conclusion on Bank of America, based on analysis perform

21 by PIMCO. PIMCO is the other world class modeling firm w

22 have been chatting about.23 In both cases, the reserve banks hired extern24 audit firms to conduct due diligence on the asset portfoli

25 FBRNY did not complete due diligence before signing a fin

26 lending agreement with Citibank in January 200

Page 20

1 PROCEEDINGS - STEINBERG2 They didn't finish it, but what they did3 incorporated protections into this agreement that allowe

4 FRBNY to reject specific assets based on additional du5 diligence.6 Following approximately 11 months of due diligen

7 by FRBNY vendor Block Rock, FRBNY, Treasury, FDIC an

8 Citigroup, agreed to a final set of assets to be included i

9 the portfolio.10 Then, as discussed earlier, Bank of Americ11 requested a termination of the term sheet before a fina

12 agreement was executed.13 So, let's sort of think about that for a momen14 Unlike the situation here, The Federal Reserve used Blac

15 Rock to challenge the information provided by its regulate

16 entity.17 It recognized the limitations, stale data and18 shortness of time, and its agreement, this lending19 agreement, expressly took into account those limitations

20 protect the public -- as the New York Insurance Departme

21 was supposed to do, but failed to do here.22 They conducted 11 months of due diligence. Sound

23 like a good, sound way to proceed, to me.24 Thank you, your Honor.25 THE COURT: Thank you, Mr. Steinberg.26



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1 en he2 MR. GIUFFRA: Your Honor, I have some good news.3 I am all that is standing between the conclusion of my

4 presentation and the end of this 409 proceeding. So, I will

5 try to be as expeditious as I possibly can.6 I want to focus first on the issue of errors, which

7 we heard a lot about.8 As your Honor knows, the approval letter notes9 eight times that the Department was acting in reliance on

10 the accuracy of the information that got it got from MBIA.

11 The issue that we are focused on, there is no dispute that

12 MBIA has identified an error that caused its policyholders

13 surplus under extreme stress to shift from positive 362

14 million to negative 291 million.15 As we discussed last time I was speaking about this

16 subject, extreme stress is the focus of Mr. Buchmiller's

17 review.18 I would like to talk about the Byrne case, which

19 got a lot of attention from Mr. Holgado, when he was20

speaking several days ago.21 That is the First Department case from 2004, that22 we think is an important case to focus on here. And, the

23 argument was made by Mr. Holgado at 1664, 1666 of the

24 transcript that inconsequential errors were not enough to

25 require annulment of a decision on your Article 78, and we

26 agree with that.

Page 2030

1 en he2 We maintained from the beginning of this proceeding

3 and went back and looked at the transcript, materiality is

4 obviously what needs to be shown.5 To escape the Byrne case, the State Respondents say

6 that that case involved quote, total outright fabrication of

7 facts. But, the Department cites no authority for the8 proposition that only the outright fabrication of facts9 provided to an agency requires annulment.10 We have maintained all along, your Honor, we stand

11 by the position, we think if you mislead an agency, that

12 clearly is something that would require annulment under

13 Article 78.14 But, if you put up slide two, which is, these are15 all the various cases, First Department cases, and other

16 Departments making quite clear, that agencies cannot act on

17 the basis of factually incorrect information and that no18 judicial deference is required when there is, an agency acts

19 on an erroneous factual conclusion.20 I think the Basile case is an important case.21 That's the Third Department case when an agency acts on

22 quote, false assumptions. That's another case where the23 Court must annul.24 Waterhouse, Fourth Department, 1980, erroneous

25 assumptions.26 Now, to avoid annulment, MBIA claims that the facts

Page 20

1 en he2 at issue need to change the agency's decision. But, yo

3 Honor, in the Byrne case, the Board of Standards and Appea

4 didn't seek to revoke the certificate of occupancy. I

5 fact, opposed the revocation of the certificate of6 occupancy.7 In that case, even though there were errors an8 what happened in Byrne was, a tenant brought a lawsui9 That tenant had complained about the fact that the landlor

10 tried to raise the tenant's rent and the landlord hadn11 done certain things, like complying with a C of O, putting

12 sink in, dealing with a smoke detector, and the agenc13 wanted to basically overlook those issues.14 The First Department and the trial Court said n

15 you can't do that.16 So, your Honor, the notion somehow that, you know

17 the mere fact that an agency is opposed requires the Cou

18 not to act? That's not the standard of materiality19 The standard of materiality is not a but for20 decision. It has to be something with the information bein

21 important, and we think there is no doubt that th22 information was important here.23 The other thing that the State Respondents rely o

24 statements by Mr. Buchmiller and Mr. Dinallo. And, th

25 issue there is whether these errors, which they didn't kno

26 about back when they were at the Department, would hav

Page 20

1 en he2 changed their position on transformation.3 Now, there has been no law cited -- I will answ

4 your Honor's question that you asked the other day -- abou5 the ability of former officials testifying about facts th

6 weren't before those officials when they were working at th

7 agency and, whether those facts would have changed, cause

8 them to change their decision.9 Now, Mr. Kasowitz talked about a case called Pric

10 which was a Third Department case from 1999. We went bac

11 and looked at the Price case.12 That's a situation where a former official13 submitted an affidavit in an agency proceeding before th

14 agency, about historical facts relating to agency practic

15 and there, it was a secretary and she said that the agency

16 at the agency hearing, that the Petitioner had been to

17 about the option to join this retirement plan.18 So, the affidavits were at the agency level, th19 were prior to the agency decision, and they were abou

20 historical facts.21 Here, on the other hand, your Honor, what the oth

22 side would like the Court to do is rely on affidavits th23 are talking about events that happened after the approva

24 facts that were learned after the approval, facts th25 weren't before the agency at the time when it made i

26 decision, and they want the Court essentially to allow



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Page 2037

1 en he2 In addition, your Honor, the point was made that3 this was just, the error just effected extreme stress. Not

4 true.5 Slide five.6 The error was, is a $1.2 billion error on the face7 of the application. If the information was not important,

8 why was it on the face of the application?9 If the extreme stress scenario was not important,

10 why did Mr. Buchmiller have MBIA run the extreme stress

11 scenario?12 If the extreme stress scenario was not important,13 why Mr. Buchmiller report to superiors about the result of

14 the extreme stress scenario? The facts speak volumes.

15 Now, one of the arguments that's been made is16 somehow, the extreme stress scenario was hypothetical.

17 Well, Mr. Buchmiller didn't assign a probability to any of

18 scenarios he looked at.19 Let's put up seven.20 So, I have shown this before. He didn't do that21 with any of them, your Honor. The facts are what the facts

22 are.23 In addition, your Honor, there was an argument made

24 that the extreme stress scenario was solving backward. The

25 question was, how many months could they survive before the

26 surplus would fall below 65 million positive. Made a big

Page 2038

1 en he2 point in that January 30th e-mail that the fact that they3 survived one of the four extreme stress scenarios, we won't

4 know if it changed anyone's decision if they had known at5 that moment time. They failed, by the end of the year.6 That's why the Courts repeatedly said, when there

7 is an error of this magnitude, the Courts annul and the8 applicant can reapply.9 Rather than having this Court rely upon an10 affidavit submitted by people who don't even work in the

11 government any more, and they can't cite a single case in

12 the history of New York State where that's ever been done,

13 they are asking your Honor to do something, to essentially

14 go where no Judge has ever gone before -- to quote Star

15 Trek. But, that's not just something that any Court has

16 every done.17 They have also made the point, your Honor -- we can18 look at slide nine.19 Again, we emphasize the importance of it. Slide

20 ten.21 Mr. Buchmiller is, in his memo, made the point22 again. They actually put the same language, the same23 language that was in that January 30th e-mail gets24 incorporated verbatim almost, in his backdated memo.

25 Again, talking about how MBIA survives, actually

26 survives in one of the four resulting extreme scenario

Page 20

1 en he2 outcomes with surplus falling to 300 to 350 million. That

3 just factually wrong.4 That's an undisputed fact. It's wrong.5 Now, let's talk about policyholder surplus becaus

6 it gets glossed over so much. Let's focus on Buchmiller 1

7 That's his affidavit.8 Asking him, you know --9 "Question: Would it be fair to say again, i10 connection with your financial review of MBIA, you pay clo

11 attention to the policyholders' surplus projections th

12 would be made by MBIA in connection with the various stre

13 scenarios that were provided to you?14 "Answer: Generally, yes, I did.15 "Why was that?16 "Answer: Well again, it is a threshold.17 "Question: When you say a threshold, what do yo

18 mean specifically?19 Mr. Buchmiller, "Answer, quote, well, if it fall

20 below 65 million, the best I recall, the statute allows th

21 Department or the Superintendent to instruct the insurer t

22 stop writing business and repair its surplus.23 "Similarly, if it's below zero, surplus is24 negative. They would also want a plan or action to restor

25 surplus to its proper level -- minimal level, I should say

26 Now, your Honor, that's Mr. Buchmiller's word

Page 20

1 en he2 It's not a lawyer's words. This was important to him, an

3 the notion that it wasn't, is just again belied by th

4 facts.5 In essence, your Honor, what Respondents are askin

6 the Court to do is to hold, that error, into the man7 hundreds of millions of dollars, in a scenario that wa8 indisputably important to Mr. Buchmiller -- those just don

9 matter, and your Honor, we don't see how that can happe

10 Let me turn to the third-party analysis.11 As I mentioned, put up 14 again.12 Again, Mr. Buchmiller was focused on when he had

13 choice, his words, "when a choice was available, I opted fo

14 the most pessimistic scenario."15 This is a key statement by Mr. Buchmiller16 unredacted as a result of your Honor's Order.17 When he had a choice, he picked the most18 pessimistic scenario. That was because this review wa

19 being done in the middle of the financial crisis, a logic

20 action by Mr. Buchmiller.21 Now, on the question of the Lehman report, th

22 Lehman CDO report, the analysis that was done by MBIA

23 September 2009, the other side ignores what Mr. Buchmill

24 said at his deposition.25 Put up 15.26 Mr. Buchmiller tried to make it quite clear, mad



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Page 2045

1 en he2 I will object to this. It's all been explained --3 McKiernan deposition which is contrary to what counsel is

4 arguing.5 MR. GIUFFRA: Mr. McKiernan said --6 THE COURT: We will take a look.7 MR. KASOWITZ: I know you will, your Honor.8 MR. GIUFFRA: We would urge your Honor to look at9 Mr. Buchmiller's testimony about what he would have wanted

10 to see, how he would have wanted to be the one to make the

11 decision.12 He was interested in the most pessimistic cases and

13 then, you have a self interested MBIA executive, who is

14 trying to basically downplay, downplay the importance of

15 this analysis.16 And, you know, the basic answer is, if he had17 unfettered access and they were completely transparent with

18 him, why did they not share this information with him?

19 Similarly, your Honor, there is AFSI Capital. They

20 did an analysis for MBIA on RMBS. They had losses of

21 $3.4 billion. MBIA, on the same RMBS, had losses of 1.1.

22 Again, like the Lehman study, it should have been23 shared with Mr. Buchmiller.24 So, you have a situation here where no third-party

25 review was done. To the extent there were third-party

26 reviews, they did have them in their files, they didn't

Page 2046

1 en he2 share it with the Department. I don't care whether you3 call it a black box, a green box or a red box. You should

4 have explai

banksvmbia 6.7 transcript

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