In The Matter Of: v.

May 18, 2012

Supreme Court - New York County

Original File ABN AMRO 051812.txt

Min-U-Script

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1 2 3 4 5 6 7 8 9 10 Petitioners, 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 vg B E F O R E: HONORABLE BARBARA R. KAPNICK, Justice of the Supreme Court Respondents. ------------------------------------------------X Index No. 601846/09 60 Centre Street New York, New York May 18, 2012 -againstERIC DINALLO, in his capacity as Superintendent of the New York State Insurance Department, the NEW YORK STATE INSURANCE DEPARTMENT; MBIA INC.; MBIA INSURANCE CORPORATION; and NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION (f/k/a MBIA INSURANCE CORP. OF ILLINOIS), SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - CIVIL TERM - PART: 39 ------------------------------------------------X ABN AMRO BANK N.V.; BARCLAYS BANK PLC; BNP PARIBAS; CALYON; CANADIAN IMPERIAL BANK OF COMMERCE; CITIBANK, N.A.; HSBC BANK USA N.A.; JP MORGAN CHASE BANK, N.A.; KBC INVESTMENTS CAYMAN ISLANDS V LTD.; MERRILL LYNCH INTERNATIONAL; BANK OF AMERICA, N.A.; MORGAN STANLEY CAPITAL SERVICES INC.; NATIXIS; NATIXIS FINANCIAL PRODUCTS INC.; COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., NEW YORK BRANCH; ROYAL BANK OF CANADA; THE ROYAL BANK OF SCOTLAND PLC; SMBC CAPITAL MARKETS LIMITED; SOCIETE GENERALE; UBS AG, LONDON BRANCH; and WACHOVIA BANK, N.A.,

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 vg VICKI K. GLOVER, CSR, RMR, CRR CLAUDETTE GUMBS, Official Court Reporters SULLIVAN & CROMWELL, L.L.P. Attorneys for the Petitioners 125 Broad Street New York, New York 10004 BY: ROBERT J. GIUFFRA, ESQ. MICHAEL H. STEINBERG, ESQ. KASOWITZ BENSON TORRES & FRIEDMAN, L.L.P. Attorneys for the MBIA Respondents 1633 Broadway New York, New York 10019-6799 BY: MARC E. KASOWITZ, ESQ. KENNETH R. DAVID, ESQ. JOSHUA GREENBLATT, ESQ. OFFICE OF THE ATTORNEY GENERAL Attorneys for the State Respondents 120 Broadway New York, New York 10271 BY: DAVID HOLGADO, ESQ., MARK E. KLEIN, ESQ. Assistant Attorney General A P P E A R A N C E S:

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Proceedings M O R N I N G MR. GIUFFRA: THE COURT: Okay. S E S S I O N Good morning, your Honor.

Good morning, everybody.

So are you ready to continue? Yes, I am, your Honor.

MR. GIUFFRA: Good morning.

What I'm going to do this morning is cover the errors and the adjustments. I did the adjustments

yesterday, places where we think the data was stale, information was not complete; and then Mr. Steinberg will talk about BlackRock and the legal structure of the transaction. I'll come back to fair and equitable and sort

of the regulatory process issues, and then, hopefully, we'll be done. And we'd like to get done in the early part

of the afternoon, particularly since it's a Friday and people would like to go home and it's a beautiful day outside. If I could turn up slide 42. Your Honor, this is a slide from Mr. Greenspan's report, slide 42, and it talks about projected policyholders surplus at December 31. And then it's

corrected to reflect MBIA's admitted errors and then adjustments. And I sort of explained some of this

yesterday, and I'm going to sort of take you through the process that explains all of these numbers in the early vg

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 part of the morning.

Proceedings

But the first sort of module there on the left is MBIA Extreme Stress Scenario. And so when Mr. Buchmiller

was looking at MBIA's numbers, and on January 27th he had received -- he had made a request for the extreme stress or break-the-bank scenario because he was concerned about the state of the economy at that point in time, which was a logical thing to do. And so he received from MBIA -- this

was done over, basically, a two-day period, and I'll be talking about it today -- an extreme stress result. Now, that extreme stress result was based on a 5.23 discount rate. And the discount rate is relevant

because MBIA, obviously, has assets and they have to sort of assume in what amount those assets will grow and that impacts the size of their loss reserve. The higher the

discount rate, obviously the less assets you need and your loss reserves are low because it will grow up over time. And these products are products that go out to 2054, some of them. So, when he originally got this information on the 29th, he was told by MBIA -- MBIA ran all the numbers. didn't run any of the numbers. Department. $362 million. Now, last November MBIA submitted materials to vg It was not done by the And it was positive He

They decided the inputs.

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Proceedings your Honor indicating and admitting that this extreme stress scenario that was given to Mr. Buchmiller was erroneous by $291 million. MBIA's own numbers. Now, I will talk a little bit about how the discount rate that MBIA used in their corrections, this 5.23, was even wrong in and it itself. MBIA, in fact, has So it was negative 291 on

used a lower discount rate in its filings, and I think they say the correct discount rate was 5.03. So, in the

corrections they didn't even correct the discount rate. The next number, which is MBIA extreme stress, reflects what we think the discount rate should be, which is 4.18. And the next number, which is FTI updated extreme

stress scenario, reflects both the correct discount rate we believe, the correction of the errors, and then in addition, as you may recall with those RMBS transactions where Mr. Buchmiller was basing it off the August numbers, that was the discussion he was having with Mr. Uppuluri. If you go to December, and remember, the transaction wasn't approved until February, you end up with numbers that are $2.7 billion negative. And then BlackRock was the firm

that was talked about by Deputy Superintendent Finer as possibly bringing a third party in, and he said others have used BlackRock to good effect. And the guidance and the

guidelines from the National Association of Insurance vg

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Proceedings Commissioners talk about bringing in a third party. the third party that was actually discussed by the Department was BlackRock. So we went out and hired And

BlackRock and they actually ran the -- they actually did an analysis based on what they would have done back in February 2009. We paid, you know, $7 million for it. They

had 20 people literally working six weeks.

And the numbers

that BlackRock comes up with under a base case are, you know, close to $10 billion and then $17 billion, all negative policyholder surplus. Now, let me go back to the law, which I think is important to focus on. The law in New York in an Article

78 case -- and we have a binder that I'd like to hand up. I'll hand them to the other side -- of what we think are some of the key cases. It's clear that Article 78 petitions -(Handing to the Court.) (Handing to respondents.) MR. GIUFFRA: -- that Article 78 petitions should

be granted when an agency acts on false information, erroneous information, inaccurate information, and there's case after case after case talking about that. And so, in

this case it doesn't matter whether people -- the information was inaccurate or incomplete because someone had bad intent. All that matters is that the agency acted vg

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Proceedings on inaccurate or incomplete information. And our position

is that here the Department, because of the nature of the review that was done by Mr. Buchmiller, you know, essentially doing the work between January 9 and then ending on February 11th, one person, and the information that was given to him by MBIA was inaccurate and incomplete, and on that basis alone your Honor can annul the decision. They agree that the information that they And that's sort of

gave to Mr. Buchmiller was inaccurate.

the stop-go on policyholders surplus, which I'll talk about this morning. Now, if we can just turn up slide 16. And this is the slide we saw yesterday of the three basic categories of what was looked at by Mr. Buchmiller: the CMBS, the RMBS and the CDOs.

And now let's turn to slide 14. And this shows how MBIA had zero losses for what became its worst structured products by the end of 2008, and that's important because it goes to MBIA's ability to accurately project future losses. Let's turn to slide 22. Exhibit 22. Excuse me, PX 70. I think it's actually

And this, your Honor, is

that discussion that we talked about yesterday with Mr. Buchmiller about the 8 and the 12. Again, they had the

accurate information available and they didn't use it. vg

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 about. Stale information.

Proceedings The use of stale information in and of

itself is something that requires annulment of its decision. And then exhibit -- slide 23. And this is the Lehman information which we talked Again, other information available to He actually knew about they were doing

Mr. Buchmiller.

third party reviews and they didn't make this available to him notwithstanding the fact that he knew about CMBS. MR. HOLGADO: Your Honor, just want to interject. Is it before him

Is it available or is it not available? or is it not before him? MR. GIUFFRA: MR. HOLGADO: Well, in fact --

You said it was available to

Mr. Buchmiller but they didn't make it available to him. MR. GIUFFRA: The reason why it was available to

Mr. Buchmiller because he was told by MBIA, and in fact in submissions that have been made by MBIA, they said they made available to him any and all information that they had, and everything was available to Mr. Buchmiller. Mr. Buchmiller knew that there were third party reviews. MR. KASOWITZ: MR. GIUFFRA: MR. KASOWITZ: Objection. So it's a question -Objection, your Honor. What If he wants

to use the quotes, let him use the quotes. vg

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Proceedings Mr. Buchmiller testified about, both in deposition and in his affidavit, and we're going to show it to you, he said everything he asked for he got. asked for that he didn't get. that he thought he needed. There's nothing that he And he asked for everything

So let's just -- this idea that

any data point in the world MBIA was obligated to make available to him, that's not part of the record. not what Mr. Buchmiller testified to. That's

We're going to

handle this in our presentation, but we'd at least like it to be accurate for the record. MR. GIUFFRA: I think I am being accurate. In

fact, when Mr. Buchmiller was told, and what's in the record is, he supposedly received unfettered access. And

our point with respect to the Lehman study is Mr. McKiernan knew that Mr. Buchmiller was looking at Broderick III and he had information about Broderick III which he did not share with Mr. Buchmiller, so -- and your Honor is -THE COURT: We talked about that yesterday. Exactly.

MR. GIUFFRA: THE COURT:

You talked about it. I did talk about it.

MR. GIUFFRA:

And then the last one, 65, and then I'll be done sort of reorienting us back to where we were. the CDO issue. And then with respect to CMBS, there's the vg So that's

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Proceedings question about the internal analyses and what he saw. Why don't we just keep going to PX 51. Now, this is the memo that we obtained in discovery from Justice Yates. It's the backdated memo.

And we don't think that the Department can rely upon this document because it was written, by Mr. Buchmiller's own admission, some time many weeks after the transaction. He

doesn't say that Mr. Dinallo has no recollection of knowing about the document. But the issue that I want to just

focus on for a second is down at the bottom of the first page. It says: "I did not find evidence that MBIA

Insurance Corporation is inadequately reserved based on what we know as of today" -- then there's a comma where it says "redacted." And then to the next page. There's more redactions. And our point, your Honor, is, clearly there must be some limitations on the conclusion in the sentence; and so they can't, for example, rely on that statement of Mr. Buchmiller and then not provide us with whatever limitations are expressed by Mr. Buchmiller in his memo. And we have the same issue, your Honor, on page 32. MR. HOLGADO: Before we move on, your Honor, if I We've been over this and

could just interject again.

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Proceedings Justice Yates approved these redactions. If Justice Yates

were still here, he would know the context in which to put a statement like this from Mr. Giuffra that suggests there's something particularly important that needs to be disclosed to the banks in that redaction. found that there was not. THE COURT: And -Justice Yates

If you have something to show me that

he made a determination on it, then I'm obviously not here to overrule -MR. HOLGADO: THE COURT: Understood.

-- my former colleague. Right.

MR. HOLGADO: THE COURT:

That was a while ago and I honestly If

don't know where it is that he made that determination.

he did it during an argument or something if you could show me that, then I think then -- I mean, you got a lot of stuff, you told me, because of him, but if he ruled that you shouldn't get things then, you know, what's good for one side is good for the other. that's what he ruled. If that's what he ruled,

I just don't know that for sure and

I'd ask you to find it. MR. HOLGADO: I can tell you for sure that he did It would have been done in

approve these redactions.

camera and whether there is a sealed transcript of that discussion, I'm not certain, your Honor. vg But, you know, we

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Proceedings can make whatever additional inquiry into that, or if your Honor needs to see what the redacted portion was yourself, that's another option. But I would just ask that we, at

least, put in context Mr. Giuffra's characterization that there's of course something important in there that nobody here has passed on and decided didn't need to be seen. THE COURT: I'm going to leave it to you guys in

the first instance if you can go back and find anything that reflects what went on here because I don't know. Again, I don't want to -- if it's been ruled on, then it's out of my hands. MR. HOLGADO: THE COURT: Okay.

If it hasn't been, then I can always I

take a look at those portions and make my own rulings. need you to do the preliminary work. MR. GIUFFRA: Very well, your Honor.

Let me give

you some context because I think this is very important. When Justice Yates looked at this document, he did so in the context of us getting the document for purposes of discovery. Now the Department would like to use the

document affirmatively as a sword. In addition, the record and the facts are different than they were when Justice Yates looked at this document, and this is before Mr. Holgado was involved in the case. It was in 2010, in the early fall. vg Since that

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Proceedings time, the Department itself has put at issue solvency and internal discussions within the Department about solvency issues. So they put forward Mr. Dinallo's affidavit,

Mr. Dinallo's testimony, Mr. Buchmiller's second affidavit, Mr. Buchmiller's second deposition. And in those

affirmative uses of testimony, in our view, they have waived the privilege. So, at the time when Justice Yates

looked at this issue, they had not waived the privilege. We were trying to get discovery. Now they've had

Mr. Dinallo submit an affidavit, they've had Mr. Buchmiller submit a second affidavit, and they have talked about the fact that Mr. Dinallo said, well, I talked to people within the Department about Mr. Buchmiller's review. people in the Department about solvency issues. said what they told him. privilege. as a sword. I talked to And he

Therefore, he has waived the

And now what they would like to do is use this You can't do that.

And then under the basic rule of completeness, one can't use this document affirmatively and be able to say -use the first sentence, and then there's a comma and have it be redacted and so oh, this shows that Mr. Buchmiller said that I haven't found, you know, any issues with respect to solvency, and then have a redaction right after a comma. It makes no sense. MR. HOLGADO: Your Honor, if I may. vg To suggest

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Proceedings that the state respondents have somehow put into issue the question of MBIA's solvency or the analysis that was done via our sur-reply papers, your Honor, the fourth round of briefing in this matter, where the petition itself made those very arguments where that became the central issue in petitioners' case was whether or not the review was adequate by the Department and what was done by Mr. Buchmiller and what was said by Mr. Buchmiller to senior Department officials prior to transformation. on that last point, your Honor, it's a very important point. And we touched on this when Mr. Giuffra made these And in the better to your And

waiver arguments on Monday.

Honor on the Friday before this hearing began, your Honor. He's suggesting that the waiver that -- no waiver has been found, but there was a voluntary production by the state respondents, as you know, on March 9th in this proceeding, and there was also provided in both plenary actions that were pending at the time in advance of that hearing before your Honor in Judge Sullivan. The waiver that we didn't

concede but we said was at least arguable was with respect to two categories that had been put into issue by the very affidavits that Mr. Giuffra references for you; the affirmation, your Honor, of Superintendent Dinallo, and the supplemental affirmation of Mr. Buchmiller. And in those

affirmations these are the communications, these are the vg

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Proceedings communications that were arguably put into issue, if at issue type waiver was even something that could be -- is cognizable under a public interest privilege, which your Honor expressed some skepticism about, we agree, your Honor. We have not conceded such a waiver. But here are

the two categories of communications, and we were very clear, and it was just as clear in the production letter itself. Anything from Mr. Dinallo to senior Department

staff or Department staff of any kind, including Mr. Buchmiller, regarding the instructions for how the financial review should be conducted. That's Category 1.

And Category 2, and this is the one that's important here. Anything from Mr. Buchmiller relaying the progress or results of his review to Department staff, including Mr. Dinallo, prior to their transformation approval. document, your Honor, does not fit in that Category 2 anyway. Yes, it's drafted by Mr. Buchmiller. Who is it This

directed to?

It's not directed to senior Department staff. When was it completed, your Honor? That's why we -- now,

It's directed to file.

Several weeks after transformation.

one thing we did do, to be completely transparent, your Honor, is there were previous e-mails from Mr. Buchmiller that had been ordered to be produced that were produced in redacted form with redactions approved by Justice Yates that we decided even though those redactions were approved, vg

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Proceedings some of those redactions did have -- they were in e-mails from early February and late January where the progress and results of Mr. Buchmiller's review were discussed. And so

we decided yes, if they put it at issue, we're going to produce those e-mails, they were before transformation and they are e-mails to Department staff. That's within that So we

possible waiver that we're not even conceding. produced those unredacted. e-mails.

And we produced additional

But this, your Honor, was not provided, as it's He just said it a few

their very argument, in fact. minutes ago.

This was not provided to Department staff It's not the purpose of this

prior to transformation. memorandum. THE COURT:

Are you relying on this?

I mean, you

requested it in discovery. MR. HOLGADO: THE COURT: Exactly.

Are you relying on this report? Well, what we're doing, your Honor, When he offers it as -- how can he

MR. HOLGADO: is meeting the proof.

say we're offering it as a sword when he is offering it? THE COURT: The thing is, I am not clear yet. You

Mr. Giuffra, you asked for it in discovery. got it in discovery. But I don't think that means that

Mr. Holgado is relying on it.

He just gave it to you in

discovery because Judge Yates said give it to him in vg

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Proceedings discovery, so he gave it to you with some redactions. MR. HOLGADO: And your Honor, though, we are

relying on it because it is in the administrative record. It is proper to be in the record. argued to be in the record. Not only because it was

Now, they're saying they don't

want to rely on it now because it's not even a document for them. But when they were seeking the document, your Honor, Now that they see And more

they said it needed to be in the record.

the document they don't want it in the record. importantly, this document is a contemporaneous

recordation, memorialization by Mr. Buchmiller of the work that he performed and the conclusions that he reached. It's completely competent and relevant proof with respect to the conclusions that he reached. Now, that is a distinct point from whether or not it evidences that he told his superiors these things. We're not offering this -- to be clear your Honor, when I say we're not relying on it, we're not relying on it to show that he told superiors these things. We're only

showing that these are the conclusions he reached in the work being performed. that. It's relevant to that. It shows

Now, it doesn't show that he told Mr. Dinallo that. He'll tell you that he did. And

He'll tell you that.

there's other e-mails, your Honor, that show that he told Department staff these very same things. vg But this

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Proceedings particular document, we're not offering it for that purpose. And I think that's an important distinction with

respect to the waiver-type arguments he's making, is that since we're not offering it in the same context -- it's a memo to file. "to file." he did. MR. GIUFFRA: THE COURT: I'll listen to -(Continued on next page.) Your Honor -He should show you the first page. It says

That's not a person.

It's just to record what

Do you want to add on to this and then

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 document.

Proceedings MR. KASOWITZ: MBIA certainly relied on the

It is a document that was -- nothing

unusual about it, your Honor, it worked -- worked at a -- that a department employee did that was very sensitive over an extensive period of time and then,

he decided to write a memo to the file after he completed the work to reflect what he had done and that is what it was, so it is now four years later, it is -three years later, it is more than three years later, almost four, it is contemporaneous evidence of the very extensive work that he had done. It is clearly relevant, they have been arguing from it for the last two days. They don't like

it, they don't like his conclusions and they don't like how extensive the work was and how conscientious it was and the like, that is their problem. It clearly is

relevant to this, the work that one of the primary -the primary person did and so, we are relying on it, the Department is relying on it for those purposes. There ought not to be any dispute about -- that it is relevant. THE COURT: Since you, Mr. Giuffra, were

involved in the case before Mr. Holgado and myself, you -- can you go back and find or do you have any recollection of what Judge Yates -- I mean, his ruling

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Proceedings -- Mr. Giuffra says the facts are different now than when he made rulings. MR. KASOWITZ: The facts are not different

What Mr. Holgado was referring to, he was not around at the time, I was around at the time, the facts are not different at all. There was an issue as to

whether or not there were certain internal discussions and the like that might be privileged as deliberative privilege within the Department. Justice Yates

decided there was a dispute about it and Justice Yates decided that he would look at certain documents that might include some of those references. I think that is the part of this memo, I think that he looked at for that purpose, because it might have reflected that discussion, That in and of itself -- we weren't part of that, we didn't see those redactions because it was not our document, but those -- but Justice Yates did make some, I think determinations about a list of documents. sure what they were. We will go back and look in the transcripts to see if we can shed some light on this, but the argument that that invalidates the entire -- the other entire document is -- just doesn't hold water here. I am not

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 that. heard.

Proceedings MR. GIUFFRA: Your Honor, if I could be

What we are saying is the following:

I think

Mr. Holgado made the concession, this document was not shown to any decision makers at the Department prior to the decision. And -I think everybody agrees with

THE COURT:

MR. GIUFFRA:

So the relevance of the

document is -- can I just be heard for a second, Mr. Kasowitz? The relevance of the document is, was this something that was a basis for the Department's decision. My view is, since the who people made the

decisions didn't see it, it would not be, but I am not arguing at this moment about whether or not your Honor should consider this document. My point is a much more

narrow point; which is that if they want to put this document before your Honor and I quote the sentence "I did not find evidence that MBIA Insurance Corp is inadequately reserved based on what we know as of today mid February?" They certainly can't rely on the first

part and then not -MR. HOLGADO: THE COURT: There is a period. A period and a comma.

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Proceedings MR. GIUFFRA: point is -MR. HOLGADO: MR. GIUFFRA: A typo, your Honor. But my point is there is Period and a comma, but my

obviously something that is redacted there and so, if they want to use the document affirmatively, they have to make the entire document available. Otherwise,

what you would have is a situation where the Department can essentially use their redaction pencil to decide what we can see and what we can't see based on some completely subjective analysis by the Department. The second point and again, I was involved in the case then, Mr. Holgado has conceded that after the review by Justice Yates, there was at issue a waiver -MR. HOLGADO: MR. GIUFFRA: I did not concede that. You put things at issue

because of the affidavits submitted by Dinallo and by Buchmiller, which happened well, well after this. MR. HOLGADO: MR. GIUFFRA: THE COURT: MR. GIUFFRA: Again, that is not correct. Can I please be finished? Yes. So my point your Honor is,

when Justice Yates was making this decision as to what -- basically what the redactions would be, that was at a time earlier in the case, we were seeking -- this

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Proceedings document does not have a record cite on it, it was not in the original certified administrative record. In

fact, when the original certified administrative record was put forward, the Department under certification said this is what we relied upon as the basis of our decision and we have all of that, we put it before the Court. The narrow issue that I am focusing on right now is, before we even get to all of those issues, if they want to affirmatively rely on the document, we need to see it. THE COURT: I got it. I got your point.

But I did ask you to go back and see exactly how this developed. MR. GIUFFRA: THE COURT: We will. And then, I will see how he is

going to offer it, but we are, you know, what you have, you have and you can talk about it. MR. HOLGADO: Understood, your Honor, but

even though I am newer to the case than Mr. Giuffra, I am somewhat aware of what happened. I did try to

inform myself of the proceedings before this Court prior to my entry. I am not so self-centered as to

think that those proceedings were irrelevant. I do happen to know there was an in camera

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Proceedings review with Justice Yates. THE COURT: I happen to know that too, but I

am not sure whether it was recorded. MR. HOLGADO: I know that you know, your

Honor, I am trying to remind Mr. Giuffra because he said it was a completely subjective redaction. is inconsistent with the notion that it is court approved, reviewed by the judge. We don't have anything to hide here from your Honor, and with respect to these redacted portions, if after you hear how we used this evidence, your Honor, your Honor wishes to obtain further context, that is not something that we will stand this the way of. that is really where we should leave it at. THE COURT: Anything further? Yes one thing quick thing. And That

MR. KASOWITZ:

This argument that a document that reflects the reasons that Buchmiller approved were -- or believed that transformation should proceed, that because the document itself was not given to someone senior to him doesn't mean that it doesn't reflect what his real thinking was or what he told people is nonsense. They made the same argument in trying to They said how can an

keep out Buchmiller's affidavit.

affidavit in 2011 reflect what was his reasoning back

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Proceedings Because now is when the litigation is

proceeding, he is saying what he was thinking. Thank you, your Honor. THE COURT: So why don't we go on? I think

you have made your point and they will look and see, you will look and see what you can find and -MR. GIUFFRA: My point is much more narrow

and we will deal with it later. The next issue, your Honor, is if we could turn to Page 29 of this memo. I will be talking this

morning about the extreme stress scenario and that is where MBIA has admitted there was a 1.4 billion dollar error that took that extreme stress scenario from positive policyholder surplus to negative policyholder surplus from green to red and in Mr. Buchmiller's memo he says "because I am stressing the extreme loss scenario, these figures do not tie to their statutory balance sheet, which is and is supposed to be the expected case." Now, he then says "and this is very

important for focusing on the importance of the extreme stress scenario that you received late in the review." He says "Worst case scenario is more appropriately our concern regarding transformation", meaning Mr. Buchmiller in his own words, says that the extreme stress scenario is something he was focused on, it was

458

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings a concern of his in part and the testimony supports this because of the nature of the economy at that point in time. We were in the middle of the financial

crisis, so the extreme stress scenario was very important. MR. KASOWITZ: testimony. Objection. Show the

Show the statement where he said that. We will, Marc. We will, Marc.

MR. GIUFFRA: THE COURT:

Well, why don't you just -- I

mean we know somewhat about the economy at that time, but why don't you try to stick to what he said or -MR. KASOWITZ: MR. GIUFFRA: Thank you, your Honor. So what I am sticking to is

what he said in the memo is more appropriately our concern regarding transformation. This is a base case

scenario and a worst case extreme stress scenario and he says that the extreme stress scenario is more appropriately our concern regarding transformation. Now, just the next page I wanted to focus on to get it for your Honor, is there is a question of like when was the work that was done with respect to this memo and if we could turn to Page 2. He says "Post decision, I have continued to backfill test and will validate the work done prior to the decision, connecting the dots or filling in the

459

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 please. gaps."

Proceedings

MR. HOLGADO:

Read the first sentence,

MR. GIUFFRA:

"This memo covers only items

or matters that I reviewed up to the date of the Department's February 17,2009 decision on transformation and nothing after." I am glad you pointed that out to me, David. Turn to page 27. So Mr. Buchmiller is

focused on RFC, that was the second-lien RMBS transaction that he looked at in detail, the only one and in the footnotes to his memo, it says forwarded to me on March 27, 2009. So that raises the question of

how much that is in this memo reflected things that happened after February 17, after the decision. THE COURT: his depositions? MR. GIUFFRA: I don't remember, your Honor, But the only Did you ask him that in one of

but I will look and get back to you.

point I am raising again, it is unclear from the memo what was or was not available at the time. Now, what -- Mr. Buchmiller, let's turn to the next slide, and the question was, when was the memo finalized, and he said it probably would have been March or April of 2009.

460

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 249.

Proceedings And could we turn to the last page of the memo under the section dealing with -THE COURT: Did you ask him why he dated it

February 16 if he testified that it wasn't finalized until March or April? MR. GIUFFRA: testimony -THE COURT: MR. GIUFFRA: Did you -The best of my recollection is Your Honor, my -- the

Scott Fischer, the lawyer working on this transaction, asked Mr. Buchmiller to do this memo. I do not

remember precisely what he said, but it is quite clear that the memo was written later and it takes some doing to figure out exactly what is -- do you have the testimony? MR. HOLGADO: I do. If you would like to

read it, well you know, it is my -THE COURT: MR. HOLGADO: THE COURT: deposition? MR. HOLGADO: The first deposition on page What -He said in his deposition. This is Mr. Buchmiller's

If you could do it. MR. GIUFFRA: Your Honor, he asked -- let's

turn it up to to the top so we get the whole thing up

461

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 did. QUESTION: there. QUESTION:

Proceedings

Do you have any idea as to

whether the superintendent ever reviewed your final memo to file? ANSWER: QUESTION: I don't know that he did. Do you have any knowledge as to

whether any of the senior people in the Department ever reviewed your final memo? ANSWER: I don't know for sure that they

And you started writing your

final memo after the transformation transaction was approved by the superintendent, right? ANSWER: Yes. It was to document what had

been done up to the point of the Superintendent's decision. QUESTION: And you finished that memo

probably about April, I think you testified this morning? ANSWER: QUESTION: March or April. But you certainly didn't write

any final memos before February 17, 2009, correct?" We will have to go back and look at the transcript, but there was an earlier discussion in the transcript.

462

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 that.

Proceedings MR. HOLGADO: your Honor. THE COURT: Doesn't seem like there is an 248, your Honor. 14 to 23,

issue that even though the date on that memo was February 16,2009, it wasn't completed until March or April. That is what he has testified. MR. GIUFFRA: There is no question about

The question that I think there is an issue

about is how much in that memo is things that he did after, and at least that one footnote and also all of the communications which we showed you yesterday. This is a little bit of a tempest in a teapot and so, I would like to keep moving. The point about the memo is two things, one the level of redactions of key things -THE COURT: MR. GIUFFRA: You made that point. -- and second, the fact that

he is focused on the extreme stress test and that becomes very important because of the errors. MR. KASOWITZ: If your Honor wants the

answers to the questions that your Honor asked, they are in the testimony. He gave testimony that --

specific testimony that he was reflecting the work that he had done, but there is also in the document the statement that there was an examination --

463

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings MR. GIUFFRA: THE COURT: Put it up again. Let him talk. There is also evidence that

MR. KASOWITZ:

there was an Insurance Department examination that was going on of MBIA, of issues relating to MBIA at the same time and Buchmiller was also part of that examination, so some of his memo related to that work that he was continuing to do. clear about it. MR. GIUFFRA: The examination was not done It was -- he was very

until probably May of 2010. MR. KASOWITZ: And the examination confirmed

exactly what was in the memo, your Honor. THE COURT: MR. GIUFFRA: THE COURT: All right. It postdates the approval. We agree with that, but I have

not said that nothing afterwards could possibly reflect it, so -MR. GIUFFRA: stress testing. Let me focus, your Honor, on

Stress testing was clearly an

important focus of Mr. Buchmiller and that was addressed in the Greenspan Goldin reports. Now, some definitions for your Honor. A base scenario reflects losses that an insurer expects to suffer.

464

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings A stress scenario reflects losses that would arise if economic conditions are worse than expected in that base scenario. stress. Now, a monoline insurer like any insurer, whether it is for your home or your health, sells protect against unlikely events occurring. And that So you have base and then you have

is why you have a homeowner's policy, that is why you get health insurance for catastrophic injury, that is why people buy monoline insurance, they want to protect themselves against unlikely events occurring and as one of our experts, former Comptroller Goldin, who was a big buyer of municipal bond insurance when he was in office explains, the point of bond insurance like MBIA was selling was to buy protection from what was believed to be a well-capitalized insurer that could absorb what he calls longtailed risks, events that are unlikely, but foreseeable and so, insurers set loss reserves based on their expected case losses but when people buy that insurance, they are focused on unlikely but unforeseeable events. Greenspan 14. Again, the losses by a monoline insurer can be much worse than they expect, so here these are the worst cases that MBIA had.

465

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings In 2007 they were having zero reserves on 8 of these, and some of them went as high the next year as 270 million, 230 million, 210 million, 150 million and so on. Now, Mr. Buchmiller stated, as our experts state, it is important to evaluate volatility, particularly when you're dealing with a stress environment, particularly like what was happening in 2008, 2009. And so, when the riskiness of a financial

product increases, the volatility increases and our point, your Honor, is that post transformation, all of the volatility, all of the risk was left with the structured policyholders, whereas before the structured and municipal policyholders were in the same boat, they split it in half and put all of the risk in one boat and obviously, volatility would increase. That

increases the likelihood that the losses could be far greater than expected, which is essentially what happened here and there can be no doubt that MBIA structured finance liabilities were highly, highly volatile as shown by their own data, their own information. And every one agrees that -- Dinallo, Moriarty, Buchmiller that there was a substantial degree of uncertainty when this transaction was being

466

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings approved and Mr. Dinallo says substantial degree of uncertainty. unknowns. MR. HOLGADO: MR. GIUFFRA: apologize. MR. KASOWITZ: I will object one last time We will show the The word was significant. I apologize. Significant. I Mr. Buchmiller talks about known

and I will sit down, your Honor. whole quote. now.

I am not going to make Mr. Giuffra do it

We will show you Mr. Dinallo's whole quote, so

you can see the full paragraph of what he really says. MR. GIUFFRA: MR. KASOWITZ: from the affidavit. MR. GIUFFRA: affidavit. MR. KASOWITZ: MR. GIUFFRA: I am pretty sure. "I understood that Mr. I think paragraph 61 from the We will put it up right now. Let's see the whole paragraph

Buchmiller was analyzing loss modeling, that he was essence, trying to predict the assertion and resolution of future policy claims tied to, among other things, macroeconomic conditions such as unapplied rate, GDP and housing prices." The next sentence is critical, because -MR. HOLGADO: Just read.

467

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings MR. GIUFFRA: will get a chance. "This task was made more difficult because the -- was made more difficult because the unprecedented economic changes occurring at the time undercut the predictive power of historical losses and assumptions which are typically used by life and property insurers to predict future claims." And then he says "I recognized that a significant degree of uncertainty would be inherent in MBIA's projections and concomitantly in Mr. Buchmiller's own review of MBIA Corp's loss modeling, or for that matter, in any one's predictions of future events or analysis of those predictions. (Continued on next page.) It is my presentation. You

468

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings I thus viewed Mr. Buchmiller's task as not deciding whether MBIA Corp's predictions of future losses were accurate, since such an assessment could only be made in hindsight. Rather, I viewed his task

as examining the analytical soundness of MBIA Corp's loss modeling and informing me and my senior staff if he had observed anything in his examination that called into question the financial statements presented in, or otherwise would be relevant to our consideration of the transformation application." (Whereupon the following was transcribed by Senior Court Reporter Vicki Glover.)

469

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 decision.

Proceedings MR. GIUFFRA: (Continuing) Our point, your Honor,

to go back to the second page, on this testimony from Mr. Dinallo is, he did not have to approve transformation. It was a discretionary decision. He admits by his own

affidavit that he understood that there were unprecedented economic changes occurring at the time. He could have,

your Honor, said no, we're not going forward; there's too much uncertainty. And so what he says is, he knew that

there was a significant degree of uncertainty inherent in MBIA Corporation's projections because of the unprecedented economic changes occurring at the time and concomitantly in Mr. Buchmiller's own review. So our point is, in a time of unprecedented economic changes he decided to make a decision when his obligation, his core mission was to protect policyholders. As Mr. Steinberg made the point yesterday, they did not do any kind of solvency review. Mr. Buchmiller doesn't say he

did a solvency review, notwithstanding the fact that the Department, in an answer in this case, claimed to have done a solvency review pursuant to 1309, and we think that in and of itself warrants annulment of this decision. Our point is, they were not forced to make this MBIA could have just been told no, not at this

time of unprecedented economic changes, and they didn't make that decision. vg

470

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 this.

Proceedings Now, let me turn, your Honor, to PX 94. Okay. Now, this is an important document. It's a

circular that was issued by the Department on November 18, 2008. Let's go back in time. That's when the financial

crisis was at its most red hot and the Department put out a circular saying that they expected every insurer to have a scenario stress testing process in place. Again, the

Department itself is talking about the importance of doing stress testing. And they say that, "Insurers should

systematically review their stress testing and scenario analyses, especially in light of recent market events." And then, your Honor, they say, "In a robust process, inputs" -- and that's the information that you're putting in, the staleness, how current the information is -- "inputs, assumptions and stress scenarios and the resulting impact must be continuously monitored, assessed and" -- critically -- "updated." THE COURT: This memo goes to whom? I can't read

MR. GIUFFRA: THE COURT:

This is a --

This is a memo from the Insurance

Department that goes to all insurance companies? MR. GIUFFRA: Exactly, your Honor. It's a

circular that they put out basically telling all their insurers because of the financial crisis that we want you vg

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings to implement stress testing procedures. And then at the

bottom it says, "In addition, the Department will evaluate how such models are independently reviewed within the company by risk management professionals, internal auditors, external auditors and/or consulting firms." That's why, your Honor, we think these third party analyses are important, because the Department itself was telling insurers that they would be evaluating how the models would be, what would be looked at by internal auditors, external auditors and consulting firms. FSI I mentioned yesterday was a firm that MBIA had retained. So, our position would be that this circular was a good regulatory practice in light of the financial crisis. But this circular was not followed by MBIA, and it was not followed, in our view, by the Department in evaluating MBIA. Now, as we explained yesterday, MBIA's extreme stress test for the second lien RMBS was based on August 2008 data. said that. And I didn't have anybody jumping up when I They were relying on August 2008 data that And that

predates Lehman, that predates AIG, it predates the heat of the financial crisis. current information. And they could have used the more It was available. And if you just

use the current information as of year end, and again, the vg

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 58.

Proceedings decision doesn't come until February, that would have boosted the losses that they suffered in that one category, second lien RMBS, just one category, by $1.9 billion in extreme stress. They also used, as we talked about yesterday, outdated research reports to analyze CMBS, a June/July research report instead of the September Lehman report, that public research report. We know that if they had used

current assumptions from Moody's, that that would have boosted on their own model, the Moody's assumptions for CMBS, that would have boosted their CMBS loss projections from zero to $7.5 billion. And there's a question as to

whether Mr. Buchmiller ever saw the updated Moody's analysis. It's not in his final memo. It's not in his

February 11th memo.

And, again, the Lehman/Barclays

analyses were used by MBIA in making business decisions but not shared with the Department. And so, we believe that their failure to use current data and assumptions and failure to share the third party analyses with the Department was contrary to the very circular that the Department had issued to address the financial crisis. If I could turn to PX 85. The issue of third party analyses -- it's Exhibit

vg

473

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings The Department itself raised with MBIA, and this is one of the more important documents in the case, in our view. They raised with MBIA on November 11th, 2008, and

that's Mr. Hampton Finer, who is the deputy superintendent, and an economist at the Department, and he's writing to a whole series of people at MBIA: Bill Fallon, who is a

senior person, I think he might have been the president; the CFO, Mr. Chaplin; some folks at the Department; the general counsel of MBIA. interesting. And in fact, it's sort of

This Titus Leung, who is at the end of the cc So, they

on the second line, he works at Perella Weinberg.

sort of, at least at some point, had thought about getting Perella Weinberg involved in this. But Mr. Buchmiller was

never -- they were never -- Mr. Buchmiller never consulted with Perella Weinberg. And the question Mr. Finer is raising, "I think we may want a third party analysis of the expected loss in the ABS" -- that's ABS CDO -- "and RMBS portfolios." He says, "This does not have to be an element of the filing necessarily, but would assist us in making our fair and equitable determination." And that's the statutory language that we talked about on Tuesday. Then he goes on to say, "We are not recommending a particular valuation provider, but others have used vg

474

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Proceedings BlackRock with some success." And that, your Honor, is why we went out and retained BlackRock, because the Department in discussing BlackRock, discussed BlackRock with MBIA. Now, it's pretty clear that as a matter of common sense having multiple people look at the same portfolios, particularly in a time of substantial economic uncertainty, as Mr. Dinallo himself understood as reflected in his affidavit, would give a regulator a better understanding of the volatility that would be faced, the volatility of potential losses. And clearly, third party analyses were

on the mind of the Department when they were looking at MBIA's application. Let me show you another document. PX 123.

This is an e-mail from a lawyer at Fried Frank. And it's sent to someone, Miss Tam, who worked at Dewey Leboeuf, and Dewey Leboeuf is the outside counsel to MBIA on the transaction. The Department actually went out,

instead of, basically, going out and hiring a third party valuation firm, they did hire a law firm to work on this transaction and to assist the Department. So, they

actually -- well, they knew about the -- you know, they went out and hired Fried Frank, and Bonnie Steingart, who was the general counsel of the Department earlier on, to actually go and assist the Department on the legal issues vg

475

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 testing.

Proceedings that they were dealing with. And there are a series of

questions that are put by Fried Frank to Dewey Leboeuf. And this is on December 18th. This is after the

application has been pending and the issue of stress testing comes up. "MBIA conducted a stress test scenario for the remaining book of business?" Let me restate that. "Specifically" -- the question is asked by the Department's outside counsel. "Specifically, has MBIA conducted a stress test scenario for the remaining book of business?" Again, demonstrating the importance of stress

But then the next question is, "Did they have an independent third party do a reserve analysis?" Again, the importance of having a third party look at the book comes up. Now, Fried Frank asked the right questions and it was consistent with regulatory practice in other liability based restructurings. They asked directly. They asked

MBIA directly whether MBIA had third party analyses and wanted to discuss stress testing. So, this whole notion that third party analyses are somehow irrelevant is inconsistent by what the vg

476

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Honor.

Proceedings Department was actually asking for. On two separate

occasions the Department is raising third party analyses with MBIA. MR. KASOWITZ: I'm going to object to that, your

He just implied in the last statement that the

Department required MBIA to hire a third party consultant and was requiring, and the e-mails he shows never do that. MR. GIUFFRA: So let's go to the next slide.

And again, part of the importance of this is just to focus on the importance of the extreme stress test. Here's an e-mail in January 24th, 2009, and it's worth noting that this document was produced, and it has that NYS Bates number? So MBIA itself thought that this

had relevance to the Article 78 because it said, "Produced to NYS." MR. KASOWITZ: to object to that. Objection, your Honor. I'm going

MBIA thought what? You produced it in the Article 78

MR. GIUFFRA: Marc, correct? MR. DAVID:

It's a mischaracterization, Bob. Did you produce the document in the

MR. GIUFFRA: Article 78? MR. HOLGADO:

Let's not have there be any mistake.

This was not before the Department, at least, okay? Whether it was produced in this case or not because of a vg

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Honor.

Proceedings request from me is not really the issue. THE COURT: Well, I don't really agree with you. Would you at least point that out? It's a fallacious argument, your

MR. HOLGADO: MR. KASOWITZ:

The only reason that this was produced in the 78,

and I hate to niggle about this, but the only reason it was produced in the 78 was that before Mr. McKiernan's deposition at some point, and this was not originally produced by us, Justice Yates said, so anything that Mr. McKiernan may have been a party to, even though it doesn't relate necessarily to the 78 and it's going to be otherwise produced in the plenary, give it to them, which we did. Thank you, your Honor. MR. GIUFFRA: THE COURT: Your Honor --

Thank you. -- let's turn to the actual slide.

MR. GIUFFRA:

The point is, we know there was an error in the extreme stress scenario that the Department relied upon. There's no dispute about that. And our point is, in

assessing materiality of the error, in assessing how important was this error to the decision-making process, it's certainly relevant what people at MBIA thought of the importance of the stress test. And so, our point, your

Honor, is Mr. McKiernan in an e-mail -vg

478

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 chance.

Proceedings MR. KASOWITZ: Object, your Honor. The e-mail

doesn't talk about extreme stress.

There were a number of

different stress scenarios that MBIA tested for and this e-mail does not talk about extreme stress. and stress. It says losses

So, if there's going to be a discussion about

a specific category of testing, then it ought to be accurate. It doesn't say extreme stress. MR. GIUFFRA: THE COURT: You know, you'll have your chance.

The thing is, I don't think you should

mischaracterize documents. MR. GIUFFRA: THE COURT: I'm not.

We understand he's going to have his But I

Everybody is going to have their chance.

think they have the right to do objections. MR. GIUFFRA: THE COURT: That's fine.

You know, the problem here is that the

way this proceeding is, you've been talking for three days, so now everybody needs to talk a little bit. understand, for lawyers. It's hard, I

But I need you to be accurate in

making your representations. MR. GIUFFRA: MR. KASOWITZ: Absolutely. And further, your Honor, the

extreme stress testing wasn't requested until January 27 by the Department, okay. That's a January 24th e-mail. So

it's a mischaracterization.

And again, your Honor, we're

vg

479

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 document.

Proceedings going to deal with all of this, but just when you flat out mischaracterize an e-mail, that's why we're making the objection. Thank you, your Honor. MR. GIUFFRA: Your Honor, it's an internal MBIA Transformation urgent."

It says, "Subject: THE COURT:

I understand. And it says, "Transformation hinges

MR. GIUFFRA:

on Buchmiller's analysis of our losses and stress." And then it says, "I would not ask if this was not absolutely critical to the company." And I'm happy to put up the whole document. THE COURT: Okay. We can put the whole -- here.

MR. GIUFFRA: Question.

The document.

"Guys - I need to update you where we are on transformation and what we may need to do this weekend." And again, these guys are working -- and again, I'm not saying that, you know, people were doing things nefariously. The point is, they were doing things on a

very short timeline and people make mistakes when they act on a very short timeline, and there are people helping, and we now know there were mistakes. It's undisputed. There's

a $1.4 billion dispute that in and of itself, your Honor, is a basis for annulling this decision. vg You can write a

480

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 will. done so.

Proceedings ten-page opinion and annul just on the basis of the $1.4 billion error. So it says, "Transformation hinges on Buchmiller's analysis of our losses and stress." Then he says, "So I believe we have RMBS totally covered so no more work needed. we need to run a stress." Then he says, "If I am not mistaken we have not Perhaps we can visit it and stand down." And then he talks about, "If we haven't, we need to run one. Sai, we need to think about how we would However, on the CDO side

stress the current bucket in the roll-to-loss I think as maybe the only driver." And then he talks about, "My question is, how long would it take to run the nonCDO2 deals if we created a stress run changing that variable?" They never ran the CDO2'd numbers at all. Mr. Buchmiller never looked at CDO2s and Mr. Kasowitz hasn't jumped up and questioned that. MR. KASOWITZ: THE COURT: I will. I will, your Honor.

That's a great invitation. He if he opens the door then I

MR. KASOWITZ:

There was an e-mail the day before from Mr. Buchmiller to Mr. McKiernan, and that e-mail -- we'll vg

481

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PX 502.

Proceedings show it to you when we put our case on -- that e-mail asked for stress testing. And so what Mr. McKiernan was doing

was getting his folks in a conscientious way prepared to quickly give him the information he was asking for. Three

days later, on the 27th, they gave him that information. Mr. Buchmiller looked at the stress testing and said, this is good, okay. Now we want to see extreme stress testing, And when they gave him the

and then they gave that to him.

extreme stress testing, we'll explain exactly what he's asking for. It was something different than what But that's the point. That

Mr. Giuffra is talking about.

was the regular and proper sequence of events here, your Honor. MR. GIUFFRA: So, your Honor, if we would turn to

Again, our point is that stress test is something that is focused on in Mr. Buchmiller's final, the extreme stress test, something the Department is talking about the importance of stress testing. This is a document that was

given by MBIA to Mr. Buchmiller. Now, as Mr. Kasowitz said, they make the request on the 27th. test. He makes the request for this extreme stress They

And they get the numbers back two days later.

give it to him on January 29th. short period of time.

A lot of work for a very

And we subsequently have learned vg

482

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Proceedings that that work was riddled with errors. errors. Riddled with

And it took MBIA and a team of people working six Six weeks to fix it with a team of

weeks to fix it.

people, something they elected to give Mr. Buchmiller on a two-day timeframe. So, the applicant for the regulatory approval essentially decided they could do this, instead of saying, hey, Mr. Buchmiller, we can't get it done; it's going to take us three, four, five weeks to get this bottom down, check it, make sure everything is right, they basically -he made the request on the 27th. the 29th. And, your Honor has seen documents in the course of our presentation where there was discussion of how MBIA wanted this thing approved by January 31st. So, when an They gave it to him on

applicant wants something done quickly from a government agency and the government agency is asking them to do something, and if they can't do it accurately, and there's no question this was not done accurately, our view is that this decision should be annulled. applicant bore. Now, in the stress test scenario information that was given to Mr. Buchmiller, relied upon by Mr. Buchmiller, you'll see where that arrow is. It shows positive That's a risk that the

policyholders surplus for the extreme stress test, which is vg

483

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Proceedings the line-dot-line-dot version of this analysis. was eyeballed by Mr. Buchmiller on the 29th. the 29th. And then on the 30th -Let's turn to the next document. This is PX 146. And this

He got it on

This is a January 30 e-mail from Mr. Buchmiller to sort of the team he was reporting to at the Department, Mr. Moriarty, Mr. Peltonen, Mr. Fischer, the lawyer that's involved in this, Mr. Finer, they're all people he's sending this memo to. they've been doing. Now, he got this document from MBIA on the 29th, these analyses, these extreme stress test runs, and he's writing the e-mail at 10:37 in the morning, which certainly raises a question about how much time Mr. Buchmiller had to eyeball, analyze, whether other people at the Department had any opportunity to look at these extreme stress scenarios that were provided by MBIA. again, Mr. Buchmiller was one person. mission impossible job. And our position is, He was asked to do a And your Honor, he talks about what

They had a lot of other resources

at the Department who could have looked at this stress test results, accountants and the like, and seen if there were mistakes. But instead, they give it to him on the 29th and How much time

he's writing back the next morning at 10:37.

did Mr. Buchmiller have to analyze these documents if he's writing back at 10:37 p.m. -- in the morning -- I'm vg

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Proceedings sorry -- in the morning. And in the e-mail he says, "In addition to the two stress tests IPM runs" -- that's the one they were running at the time -- "Finance (Chaplin and Pastore) add additional stress by accelerating loss timing by 20% e.g., move 20% of 2010's losses into 2009 to stress the cashflow. We then asked them for a third scenario, a

'break-the-bank' scenario." And that's this extreme stress scenario, the one that in our view based on their own corrected information goes from green to red. And he says that, "keep increasing

the stress factors until MBIA becomes insolvent at any one point in time. This was done by extending the peak loss

period by 36 months; their other stress cases extended by 6 & 12 months." Then he makes the point to his supervisors, "They actually survive in one of the four resulting 'extreme scenario' outcomes, with surplus falling to 300 to 350 million, but goes negative if they call or pay off the surplus note and continue paying dividends." Then he says, "Obviously the superintendent won't allow dividends or surplus note payment if it means insolvency." But the point is, he's reporting up to his supervisors that they pass this test for surplus falls, vg

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Proceedings positive surplus is 300 to 350 million. Then he goes and says, "The 'break the bank' or extreme stress test requires solving backwards, re-running all the 2nd lien and ABS CDO models with new parameters." And then he says, and this is the point I made when I first spoke to your Honor on Tuesday, "So 300 million is close enough to the stat minimum of $65 million," and that's the statutory provision for Financial Guarantee insurers. They have to have $65 million in And that, you

policyholder surplus to write policies.

know, ability to write policies is something that gets referenced in the approval letter in the discussion of 4105, which is that earned surplus test. And that's really

the closest they even come to any kind of a finding. So, in the memo that Mr. Buchmiller writes at 10:37 in the morning to his supervisors, he's making the point that it was positive under one of the four scenarios and that $300 million was close enough to the stat minimum of $65 million. We now know that if he had gotten the

corrected numbers from MBIA, they would have been negative policyholder surplus because of the $1.4 billion deferred tax error that MBIA has admitted to. So our view, your Honor, a very simple way to decide this case, is that the information they gave to the Department was wrong, it was something that was important vg

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Proceedings to the Department's decision making, it's written about in memos by Mr. Buchmiller to his supervisors, and if you had the correct information this would have gone to negative policyholder surplus. And this is not like some minor The point is

error that one can just, you know, discount.

that this is something that Mr. Buchmiller is focused on. And his memos are not very long. They're e-mails of a page So this

or two or, you know, they're pretty short e-mails.

was something he was very focused on and that he was concerned about. Now, the next page says, "Given that they have reasonably demonstrated that Corp./OldCo New York can survive, with a reasonable expectation of viability." Then he talks a little bit about Bridge. MR. HOLGADO: Could you just read the sentence,

Bob, because you spent three hours on Bridge yesterday. MR. GIUFFRA: "We believe (and have been told) we

have gone deeper than Bridge Associates in our assessment. (Still working on going wider, if we haven't already.)" Mr. Buchmiller, as we showed you yesterday, your Honor, didn't think much of Bridge. And in fact, as you'll

recall in the audio transcript with -- the audio that we played yesterday with Mr. Chaplin, he was sort of talking about when lawyers use this kind of Bridge analysis to pay for the files. The point being, if you actually look at vg

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 knowns.'"

Proceedings what Mr. Dinallo said at his deposition, he thought Bridge was important and he thought they were a firm that was relied upon, and Bridge was important to Mr. Dinallo's decision. So, Mr. Buchmiller, the person who's doing the work, was discounting the value of Bridge. The person who

was making the decision, Mr. Dinallo, thought Bridge was something that was important to his decision, and he said that repeatedly in his deposition. and that's where we sort of are. And those are the facts

The other point is --

and there's no question, your Honor, as Mr. Steinberg established yesterday, that Bridge made errors in the information that they had provided to the Department. And then he talks about the fact that, and this is, you know, January 30th, it's a preliminary opinion. There is never a final opinion by Mr. Buchmiller as of the decision. That February 11th memo on its face makes it

clear that there's more work to be done. Then he says it's "based on only the 'known

And then he talks about "significant 'known unknowns' are what isn't in their 2008 loss reserves that should be, or possibly/probably will be in 2009, 2010, or beyond." And the point of that, your Honor, is, when he vg

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Proceedings talks about what isn't in their loss reserves, he then talks about likely suspects, and he cites the likely suspects as including CMBS, CLO high-yield CDO, and other structured finance underlying sectors that we have not yet reviewed (we'll probably start on those next week)." What's important is, there were zero loss reserves And so he was only focused -- he was focused on

the fact that that was a risky sector, and by his own words, there's no question that he didn't start doing the work on that until some time in early February. And again,

so at most, he looks at the CMBS for seven days, at most. One person. And so when he says "likely suspects," he's

referring to the fact that CMBS has zero loss reserves. Now, your Honor, let me turn to PX 962. This is one of the spreadsheets that MBIA provided to Mr. Buchmiller on January 29th, and this is the spreadsheet that he relies upon, an e-mail that he sends to his superiors at the Department about 10:30 in the morning the next day. You can just look at the spreadsheet. It's got

a lot of information on it.

And we've sort of looked down

at the bottom, and it says, "Extreme Loss Scenario," "Statutory Balance Sheets," and then it says, "Total Capital and Surplus." And then if you look across, your And the one that

Honor, all of these numbers are positive.

I think, your Honor, is important to focus on is the 362. vg

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Proceedings What this document that was given to Mr. Buchmiller right near the end of his work shows that for the fourth quarter of 2009, within less than a year of approval, there would be positive policyholder surplus under the extreme stress scenario of $362 million. Mr. Buchmiller. And your Honor, I think it's important also to note that if you just look at what they were telling Mr. Buchmiller, those numbers, they're going from $2.4 billion in the first quarter, to $1.7 billion in the second quarter, $1 billion, down to 362. heading south. So the numbers are That's what MBIA told

And, of course, this extreme loss scenario Zero CMBS losses.

is assuming zero CMBS losses.

(Continued on next page.)

vg

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Proceedings MR. GIUFFRA: Now, your Honor, if I could -That

is this a good point for the morning break? would be great, your Honor. THE COURT:

Let's take ten minutes.

(Recess taken.) THE COURT: MR. GIUFFRA: Okay, Mr. Giuffra. I will shift to the subject

of discount rates, which I will talk about quickly. If you could put up slide 20. This is the New York Insurance Law Section 6903 and the issue I am talking about we believe is an issue of law for the Court and it says that a deduction from loss reserves shall be allowed for the time value of money by application of a discount rate equal to the average rate of return on the admitted assets of the insurer as of the date of the computation of any such reserves." A key phrase to look at. What we are

focussed on is admitted assets and if you could turn to 1301, 1301 which defines admitted assets, defines them to include cash and then investments acquired or held in accordance with the applicable provisions of this chapter. That is 1301. The higher the discount rate that an insurer has, the lower the loss reserves it must have, because

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Proceedings that means it is earning a higher return on its investments. So if an insurer is all in cash,

obviously it needs higher loss reserves. If it has a ten percent return on investments, it needs lower loss reserves. Let me put before the Court PX 169. Now, as Mr. Greenspan explained in his report, MBIA used a 5.3 discount rate -- excuse me, a 5.23 discount rate in the extreme stress projections that were given to Mr. Buchmiller. They used 5.23.

On February -- -- on February 3rd, about a week before Mr. Buchmiller sent that last January -February 11 e-mail, there is a meeting of the loss reserve committee of MBIA and that is PX 169 and among the people at the meeting are Mr. Brown the CEO, Mr. Chaplin the CFO, Mr. Fallon, who is the president and a lot of senior people, Mr. McKiernan, whose name you have heard a lot, and they are all at this meeting and in the minutes of the loss reserve committee, and that is the committee that is deciding what the loss reserves have to be, they are talking about the fact -and the meeting was held on the 28th or the 29th, but in the -THE COURT: MR. GIUFFRA: I think it is the 28th. This is an update after the

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 meeting.

Proceedings So the meeting is held on the 28th -- 29th,

excuse me and then there is an update which they sent around to the people who are on the committee. And it

says on February 3, an error was discovered regarding the interest rate used to discount case reserves. rate originally used was 5.23. 5.03. The

The corrected rate is

Now, in the numbers that were given to Mr.

Buchmiller, even in the corrections by Mr. Chaplin that were presented to the Court in November of 2012, based on our information and analysis, that MBIA did not correct this discount rate and had they done so, their reserves would have been 75 million dollars -- would have had to be higher, because the lower discount rate means higher reserves. So what that means, your Honor, is that given the extreme stress error would have been even more just by correcting that discount rate. Now, let's turn to Greenspan 39. My team is

advising me that the 75 million is just in the base case, and in the extreme stress case it would be even higher than 75 million. So it is a bigger error than

that and we will get you, your Honor, the precise number. Now, this is a document, that is a January 15, 2009 presentation to MBIA's Board Finance Committee

493

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Proceedings and they basically are talking about what the liquidity management is and they are talking about what the book yield was and they say 4.18 percent and then they say -- below that that MBIA Corp is MBIA Insurance, which is the company that ultimately gets split in half, current book yield excluding cash and cash equivalents is 5.23. Now, that number should have been 5.03, but the other point to note your Honor is what MBIA does in submitting the information to the Department, is they use this -- they basically don't use the 4.18, the lower discount rate. They use the higher discount

rate, which means their reserves can be lower and as we say in our papers, by excluding cash from the discount rate, they are violating the plain definition of 6903 which says cash is an admitted asset and cash equivalents are an admitted asset and our expert Mr. Hershman explains this is incorrect under statutory accounting principles, and that the use of the higher discount rate improperly inflated their policy holder surplus. MBIA will say that because the statute does not say all admitted assets -- and can we go back to that? -- because the statute does not say all

admitted assets, they essentially can pick and choose

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Proceedings which admitted assets they want it to include and your Honor, these e-mails that we talked about and we have the record where MBIA was actually discussing whether they should go to the Department and get the Department's view on this issue, and they never sent them to the Department. And we can bring those to

your Honor's attention if necessary, but there is a series of e-mails discussing what is permissible under the New York State Insurance Law and rather than being open and sharing the issue with the Department, they don't do that. Now, Greenspan 37 is a reflection of what the projected surplus scenarios would be, and this is pre the errors, so MBIA, using this 5.23 discount rate is telling the Department under the extreme stress scenario that they are $362 million positive. In our view, if they are used the correct 4.18 discount rate, it would have been lower and the FTI updated extreme stress scenario reflects merely FTI taking information that was available to the Department on second-lien RMBS, 17 transactions, where if MBIA had used the 12 year end numbers instead of the August numbers, which were pre financial crisis, just using those numbers drives the surplus, policy holder surplus under the extreme stress down and then the numbers to

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Proceedings the right are the BlackRock base and stress case, which Mr. Steinberg will talk about when BlackRock looked at the information. Next, I will show you Mr. Chaplin's affidavit. There is no dispute that MBIA admits that

they erroneously provided information to the Court and to the Department. Turn to the next slide. In paragraph 4, Mr. Chaplin describes the big error and that related to deferred tax assets and that -- this error with respect to deferred tax assets and in virtually every submission to the Department; the application letter of December 5,, the January 27 and 29 presentations, and other financial presentations given to the Department. So there is no dispute, and your Honor could decide in a short opinion that these errors were in multiple submissions to the Department. Now, as Mr. Hershman explains, and I may have misstated this the other day, and I am not a statutory accountant, a deferred tax asset reflects taxable losses in a current year that can be used to offset taxable income in future years. And essentially, what

that means is, you have to earn income going forward and there were certain legitimate questions as to

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Proceedings whether MBIA Insurance was going to be earning any income going forward post transformation, but under statutory accounting rules, which MBIA and the Department don't dispute, you can only use this deferred tax asset if you're going to use it within 12 months and here it was there was little doubt that MBIA was not going to be able to do that, and so, there is no question that MBIA treated something as an admitted asset, this deferred tax asset, when they were not entitled to do so. It had the effect of -- it is a 1.4 billion dollar error and it had the effect of impacting a lot of different numbers that MBIA had. And we are not -- - this is not a question of whether it should have been found, wasn't found, good motives, bad motives. to it. It is an error. They admitted

It was significant. Let me show you another document, PX 165.

This is an e-mail on December 5.

That is the same day

that MBIA's application is going forward to the Department. The re is NYID Christina Hwang is someone She is

who works within MBIA in the Tax Department.

the head of Tax and she says "Based on what I heard, it sounds like that none of the deferred tax assets will be admissible since we will not be able to monetize the

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Proceedings asset in the first 12 months." PX 165. So Ms. Hwang realized there is an issue with respect to whether they can address this deferred tax asset if is not going to be dealt with in the next 12 months. MR. KASOWITZ: going to quickly object. what was disclosed. test. MR. GIUFFRA: disputing that. Our point, Marc is a more simple one; that the head of Tax in an e-mail dated -- was -- refers to NYID, December 5 was when the application was filed, knew and understood that a deferred tax asset would not be admissible if you would not be able to monetize it within 12 months. That is what she is saying in that No question, Marc. I am not Your Honor, just to -- I am That had nothing to do with

Nothing to do with the stress

e-mail and the point is that the error that occurred was MBIA's in the submission that was made on December 5, and all the other submissions it made to the Department, miscalculated and treated this deferred tax asset as something that was admissible and they now admit it was not admissible because they would not be able to use the deferred tax asset in 12 months. That is our point.

498

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 THE COURT:

Proceedings What is your objection? My objection is, I don't know

MR. KASOWITZ:

what he is talking about with how he refers to -referring to admissibility. Your Honor, we will deal with it on our case and I am objecting to his treatment of it. It has

nothing to do with the mistake that he is talking about. THE COURT: Okay. Thanks. Mr. Chaplin's second

MR. KASOWITZ: MR. GIUFFRA:

deposition, pages 43 and 44. QUESTION: Am I correct that the impact of

the mathematical impact of the tax treatment of losses error in the extreme stress scenario in 2009 shareholder surplus is 1.4 billion dollars?" This is his second deposition, page 43 to 44. And the answer is "The tax impact of losses in the extreme stress scenario, all other things being equal, would be approximately 1.4 billion dollars in 2009." So essentially, what MBIA is saying is that a 1.4 billion dollar error that they admit to is not a reason to annul this decision. THE COURT: MR. GIUFFRA: Could you just wait a moment? No problem.

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Proceedings (Pause in proceedings.) MR. GIUFFRA: So what MBIA realized and

again, LAIX Partners, when they were a consultant for MBIA, found the errors initially I think in July 2011 and then, MBIA, I believe told the Department in October or November, told the Department about the errors in October or November of 2011 and -- but they started working to correct them from October of 2011 into mid November. And in correcting them, they spent

more time correcting the errors, your Honor, than Mr. Buchmiller spent on his entire review. MR. KASOWITZ: I will object to what --

the statement counsel just made that -- I also note your Honor, that -- I will just object. It is not in

the record, the statement that he just made. MR. GIUFFRA: deposed Mr. Chaplin. again. He went there when they found out about the error, he went there when they started working to fix the error, and he went there when it was submitted to the Court. To my recollection, I took Mr. Chaplin's deposition, they found out about it in July, started working to fix it in October, and made a submission to Your Honor, we actually -- we

I will do it when we get to talk

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Proceedings the Court in the middle of November. They had a lot of

people working on that, to fix the error and what they did was, they looked through all of the materials that they had submitted to the Department and they found a series of other errors. And what they did then was,

these were errors where what they viewed as positive in their view and they essentially used the positive errors to try to minimize the extent of the 1.4 billion dollar error. All of this of course occurs years after

the application has been approved and it is not something that the Department had in front of it and our view is pretty straightforward that once this error occurs, under basic Article 78 law, the Court should just annul the decision. It is not something that people can explain away years after the fact, much less people who don't even work with the Insurance Department any more. that is essentially what they are doing. undisputed and clear. Now, let's put up 15. Essentially, what And

The error is

happens your Honor, is, if you look at the -- the 1.4 billion dollar error is the error with respect to the deferred asset issue. The 362 million dollars

positive extreme stress, even under MBIA's own analysis goes negative to 291, that is all the way to the right,

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Proceedings and so, what MBIA does, your Honor is they engage in corrections to the tune of 767 million dollars. We object to a number of the corrections that they have made. Among other things, they assume that

the Department would have allowed them to release certain contingency reserves and in fact, around the time the application was pending, the Department had disallowed the use of contingency reserves. MR. HOLGADO: Just to be clear -- and

allowed the release of some other contingency reserves. MR. GIUFFRA: They are sitting there in 2011

speculating about what would have happened and they are saying oh, the Department would have let us release contingency reserves when in fact, in reality, the Department did not let them release contingency reserves in some of the subsequent years. MR. HOLGADO: THE COURT: MR. HOLGADO: MR. GIUFFRA: in January -THE COURT: MR. HOLGADO: You were talking? Yes, your Honor. And again, what I just said -Okay. Certainly -So what happened, your Honor,

Again, I am correcting what Mr. Giuffra said. He is suggesting that in the very letter that he is

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Proceedings referring to that the Department only disallowed contingency reserve releases. In the same letter, they

allowed the release of hundreds of millions of contingency reserves and they did in previous years. Your Honor, sorry, in subsequent years, which is even more important, I guess. MR. GIUFFRA: Your Honor, our point is a more

simple one than than that. THE COURT: MR. GIUFFRA: Thank you. The letter that we will put

before the Court if necessary, they deny -- in January of 2009 when the application was pending, the Department denied MBIA's request for a 500 million dollar release of discretionary contingency reserves. So in correcting these errors, no one is jumping up, in correcting these errors, they assumed another two hundred million dollars in discretionary contingency reserves that could have been released. MR. KASOWITZ: It is not our assumption. So just -- he gave

It is Mr. Buchmiller's testimony.

testimony clearly on this point as to what he would have done, had he known about these errors and in the extreme -- in this extreme statistical case and he said that it would not have made any difference to him for a number of reasons, including among others, the fact

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Proceedings that there was 1.3 billion dollars of cash in contingency reserves available to MBIA at that time for use in this kind of situation. So if you are going to -- if you're going to say that we said it, it is actually testimony that is in the record right now. MR. GIUFFRA: MR. HOLGADO: That is actually great -Actually, your Honor, I just

want to add that we will cover this more later when I speak, but Mr. Giuffra is suggesting that this is improper for Mr. Buchmiller to give this sort of hypothetical testimony about what he would have done with respect to contingency reserves. It is worth noting that we are talking about a hypothetical scenario in the first place, this extreme stress scenario that he is discussing. There is also a hypothetical scenario and we will make that point, your Honor, in our argument. MR. GIUFFRA: than that. It is undisputed, just looking at the documents and I think one of the important things your Honor, when -- I am talking from the documents. I am Our point is much more simple

pointing to some of the documents and what people said. And in my experience, your Honor, in some ways one of

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Proceedings the great things about e-mail is that people write things in e-mail and that is what they mean in real time, as opposed to what people say years after the fact in a lawsuit. And a lot of what I am focused on is what is in the documents that were written in contemporaneous time. So what they have he now done is, they have got Mr. Buchmiller, who works for National Association of Insurance Commissioners, no longer works for the State of New York and they show him Mr. Chaplin's affidavit, that is what they show him, and Mr. Chaplin in his testimony, when I took his deposition, made it quite clear that on the face of the affidavit you could not figure out all of the different changes and he actually took out a piece of paper and described how he was doing the whole process, information not available to Mr. Buchmiller and by the way, Mr. Buchmiller has -once you start doing hypotheticals, let's put all of the information in front of Mr. Buchmiller, Lehman, the updated first-lien -- everything that had been discovered and say would none of this have changed your opinion? So what they have done is on a very selective slice basis, just showing Mr. Chaplin's affidavit,

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Proceedings someone who no longer works with Mr. Buchmiller, and all he does is say maybe I can come up with some way it would not have changed my decision. The standard for materiality, your Honor, is is not whether something would have changed someone's decision. It is whether the information is something

you would have wanted to know, whether it would have been important to the decision, not whether it would have changed the decision. And there is a lot of law

on that and I am unaware of any decision in the history of New York State -- I would love to see if the other side did present it -- where a former government official can explain away errors that wore provided to the official when he worked for the State of New York that caused the official to make decisions and the law under Article 78 is quite clear, that when there is erroneous information provided, and clearly this was important information, the Court should annul the decision and in fact, that is the simple way to resolve this case, a simple annulment based on the fact that there were errors in the materials. THE COURT: Okay. You have told

I know that is your position. me several times. I heard it.

MR. GIUFFRA:

Mr. Buchmiller, when I took

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Proceedings his deposition -- "it would not have changed my decision, just this one correction --" under there, and he doesn't know all of the facts. QUESTION: Have you are ever spoken to any

one at MBIA about the errors that were identified in Mr. Chaplin's sir reply affidavit? ANSWER: No."

So how could he possibly even make a statement about what would or what would not have done if he had not talked to them about the errors, the correction? Plus, he presumably would have had to know

about everything else. That is why the law requires annulment and in this case, where annulment would be is they could reply with with updated information and the new Department of Financial Services, which actually has jurisdiction, can deal with this, not hypothetical things. Let me take your Honor to Greenspan 42 and this is the last document I will be talking about on this segment. This is projected policy holder surplus reflected as of year end 2009, corrected to reflect MBIA's admitted errors and adjustments and the numbers are essentially the 362 negative. Goes to 291. We

actually think it goes lower than that, because if you

507

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Proceedings use the correct discount rate, which they still have not corrected, the number would be lower and that also reflects their selective corrections, because otherwise the number would be far lower than 291. The second number is, using the 4.18 discount rate which we think should be used, that number becomes a billion and the next number is what happens if you use the -- just the 17 RMBS that you use the numbers available at year end as opposed to numbers available in August, and then the other two numbers are the BlackRock numbers and with that, Mr. Steinberg will takeover. Thank you, your Honor. MR. STEINBERG: Good morning your Honor.

Thank you, your Honor. Let's put up slide Number three. What I

will discuss now, your Honor, is -- and I will try to be brief, sort of pose the what if that was raised by Hampton Finer's e-mail PX 58. What if MBIA had hired BlackRock? sort of simple. And it is

MBIA did retain experts in this

matter to assist the Department and to assist itself and in fact, MBIA was even paying for the New York Insurance Department's outside counsel. And we have

seen the costs that MBIA has incurred for a variety of

508

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 different analyses.

Proceedings We have heard about the

3.75 million dollars for the Lehman analysis, we have heard, you know, talked about Bridge, you know, another greater than one million dollar price. You know, there have been a series of experts in this case and you know, expertise in this area is out there in the market, there are lots of people who, especially during the depths of the financial crisis were very interested in modeling these types of securities and so, what we did was we said okay, when we saw the Hampton Finer e-mail, we said let's engage BlackRock and what we asked to see was we wanted to make sure that a -- a couple of things: Could BlackRock have met MBIA's rush timetable? Because if they could not, they would

argue hey, you know, it would take too long, we would not want to do it and argue against it. So we wanted

to make sure BlackRock could do it and we wanted to make sure we were hiring the best. We were making

sure that we were hiring a firm with a world class reputation, which is undoubtedly why Mr. Finer noted that they had some success with BlackRock in the past. And so, what we did, if you could put up slide 4, BlackRock "was asked by petitioners to estimate the present value" and we did it as of

509

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Proceedings We didn't do what Bridge did, we We looked at an

didn't look at the more stale quarter.

updated quarter, the December 31 time period. And what we did was, we wanted to find out what payments, the present value of the payments that would have to be made by MBIA to petitioners, other policy holders, in respect of their claims on their contracts, on their insurance policies, for certain CDS and RMBS securities, where MBIA was acting as a CDS credit fault swap, counterparties or financial guarantor. And what we asked BlackRock to do was

pretty basic because we didn't want do -- we were trying to make sure it was what happened if they were hired; so we asked BlackRock to prepare its analysis using the similar -- using similar or analogous techniques, data and assumptions that it would have used had it been hired at the early part of January of 2009. The six weeks between January 1st, 2009 and

February 17. (Continued on next page.)

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings and we wanted to make sure that it would be done in time and so, basically, the report that BlackRock gave was what MBIA -- was what MBIA would have received or the New York Insurance Department would have received if either had hired BlackRock. (Whereupon the following was transcribed by Senior Court Reporter Vicki Glover.)

511

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Honor? THE COURT:

Proceedings MR. STEINBERG: moment about BlackRock. Let's go to the next slide. Now, BlackRock has these models, and what we, as the petitioners, did, we helped them identify which elements, what instruments to actually use. And so we (Continuing) Now, let's talk a

asked them to say, all right, here's financial instruments that a number of the petitioners held, without telling them that it had been held by the petitioners, and we asked them to look at that and certain of the analyses that Mr. Buchmiller had done. We asked them to look at those Now, BlackRock looked at a

portfolios and to provide data.

much more rich area than Mr. Buchmiller, and I'll talk about that in a moment; but we wanted to make sure that BlackRock used its same analysis that it would provide to any other customer, any other client that would come in the door, and said, "I want you to model my RMBS portfolio, please help me do it." MR. KASOWITZ: BlackRock could do it. Can I just note one thing, your

Sure. We have a Frye motion on this.

MR. KASOWITZ:

Especially when counsel refers to analysis, in fact the analysis that BlackRock used is a black box model that's not disclosed because it claims it's proprietary and the vg

512

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Proceedings like, and they also have -- they're riddled with conflicts of interest in this situation. that for the record. But I just want to note

We'll argue it when we present next

week, but I want it noted for the record. THE COURT: I'm aware of it. Thank you, your Honor. Your Honor, we'll discuss the Frye

MR. KASOWITZ: MR. STEINBERG:

standard if you want argument on it, but this is not some chronologist checking the back of your head to see, you know, precisely whether or not you have some personality disorder. This is the most respected modeling firm in the

world hired by multiple governments, and we'll talk about who's hired them. So what we did was, we wanted to make sure their analysis would be independent. So BlackRock provided its

valuation report just as if we were any other client coming in the door. And the only input from the petitioners was,

A, please don't look at data after February 16; and B, we helped identify the securities for them, but we didn't tell them why we identified the securities for them. We didn't

want to say, well, these are what some of the petitioners held, this is what was being analyzed by Mr. Buchmiller. We said, just do it and give us your results. So, what I want to show you in slide 6, what we did -- you've seen this chart before. vg This is the chart

513

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Proceedings that shows sort of the depth of what Mr. Buchmiller did. And we've updated it -Let's show the next slide. This is slide 7.

-- as against what Mr. Buchmiller reviewed. So if we look at RMBS, Mr. Buchmiller reviewed instruments at approximately $757 million. reviewed 21.6 of net par securities. What "net par" means, your Honor, is that these securities, because they are paid down over time, they might have started at a $24 billion number, but because payments have been made, they're now at a different number. So we had BlackRock look at the net par number in, for example, RMBS. In multi-sector CDOs, an area where BlackRock

Mr. Buchmiller looked at $1.187 billion in net par, BlackRock looked at approximately ten times that amount, $11.3 billion. And same in CMBS and commercial real estate

CDOs, Mr. Buchmiller looked at approximately a half a billion dollars, BlackRock looked at $17.1 billion. So if you look at the sum total of the portfolio that was examined, the net par insured that Mr. Buchmiller looked at was approximately one percent, and BlackRock looked at 21 percent of that portfolio. Now, only looking at that portfolio, they arrived at some analysis. portfolio. They didn't look at the entire

And they -vg

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Proceedings Let me go to the next slide. And this is out

of -- the individual who is testifying is a man named Mr. Paltrowitz. And he is the principal of what's called And they ran these

BRS Solutions, BlackRock Solutions.

models, and we were able to obtain the outcome of their modeling. And let me do one thing. first, your Honor. What I want to talk about, before I do this, let me pull up this Exhibit A to the Paltrowitz. Now, it is true that BlackRock has what the respondents have characterized as a black box. proprietary modeling system. it. It's their Let me do one thing

Now, we gave them access to

They were free to look at it. MR. KASOWITZ: MR. STEINBERG: THE COURT: Objection, your Honor. They were -Let me hear his objection.

Wait.

MR. KASOWITZ:

Objection, your Honor.

We were given access to, in return for signing a license agreement, a small amount of information, not the information within the black box that demonstrates precisely how the assumptions that are input by BlackRock are actually manipulated and used to come out with their projections. So that in striking contrast to what

Mr. Buchmiller did when he was working through the various vg

515

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Honor.

Proceedings transactions relating to these transactions that are in MBIA's files where he disclosed at every step along the way how the assumptions were then being used to calculate what the loss projections would be, BlackRock's black box model doesn't do any of that, none of it, and it was not disclosed to us. There's no dispute about that. Just to be accurate about it, we know

THE COURT:

about this motion and we'll have to deal with it. MR. KASOWITZ: misleading. you off. Right. We will. But it's

I'm sorry, your Honor, I didn't mean to cut

It is a distortion and completely misleading for

counsel to represent that they disclosed to us what was in the black box model. That wasn't done. That is not what I said, your

MR. STEINBERG:

We gave them -- BlackRock allows clients, people They don't

who pay them, to have access to their model.

allow them to see the proprietary side, but Mr. Kasowitz decided to jump up before I could explain it to your Honor. But what I wanted to say is that, so I can have access and I want to say, you know what? I got this CUSIP, I got this

particular security, and I put it in the system and I get what are their output, and you can -- they were permitted to, you know, access that software. to go behind it. They weren't permitted But

BlackRock would never allow that.

they're allowed to look at how it would behave and how it vg

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Proceedings behaved for various instruments. Now, BlackRock has a number of different variables because as you can imagine, the world is complicated. of the principal variables that gets used in connection with these mortgage-based securities, it's going to come as no surprise to you that it is the home price appreciation projections. And these come from -- they're sort of one of One

the most basic indexes to evaluate home prices and their decline during this period has been the Case-Shiller index. And Case-Shiller, every once in a while on CNBC, it's like the 10th of the month, they announces what the new Case-Shiller index is. And they says, Case-Shiller says

housing went down three percent or one percent or up two percent. Whatever it is, there's an analysis that is And what

performed, and it is a very widely used index.

BlackRock has, and they, obviously, monitor that quite carefully, and BlackRock, if you look at the Case-Shiller index, the housing bubble basically reached its peak in June of 2006. slide. And since that time there's been quite a

And what BlackRock does is model its base case and And the base case, you know, uses that

then a stress case.

index, uses the Case-Shiller, and it shows what happened over time. THE COURT: Just wait one more second.

(Pause in proceedings.) vg

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 things. THE COURT:

Proceedings Yes. BlackRock, in their model, has two

MR. STEINBERG:

And what we've shown is, what was happening to

Case-Shiller during the period, it was obviously declining, and that was causing mortgage dislocations. general was hitting other issues, right? unemployed. The economy in

People became

That causes further deceleration because Further diminution in

people can't pay their mortgages.

home prices make people question whether or not they have any equity in their homes. And BlackRock had a model, and

what they use in their base case is they use a 35 percent diminution over time, and then they identify how this goes out. And this would be in page 16 of the appendix to the

BlackRock report that's before your Honor. They also show in their base case they sort of separately, because California was so tremendously hit by this bubble, they show the California base case separately and they break that out. And then in both sets of

circumstances, your Honor, they use a stress case. Now, let me go to the analysis, to the output of what BlackRock did. Now, this is from the report that's in front of your Honor. And what I have here is, there are -- along I'm going to open it up a But

the bottom there's an analysis.

little bit because it's sort of hard to see here. vg

518

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Proceedings there were four asset categories that BlackRock reviewed. They looked at ABS CDOs and they looked at 19 separate securities. They looked at CMBSs and commercial real They looked

estate CDOs, they looked at six separate ones.

at CMBS tranche portfolios, they looked at 17 of those instruments. And of RMBS they looked at 422 of them.

Let's go to the next slide. The values we discussed of the securities they looked at was $50.1 billion. And in the BlackRock base

case looking at those securities, BlackRock reached the conclusion that there would be a $13.7 billion loss based upon the models that BlackRock was using. their base case, your Honor. That also, one thing we asked them to do, we said, you know, they used this 5.03 discount number. the same number. Please use And that is in

Obviously, we're not endorsing it, but we

just want to say -- again, this is the what if MBIA had retained BlackRock. Assume that they would have said, hey, That's fine. $13.7 billion of

our discount rate is 5.03. losses.

If you look at the stress case, stress case for

BlackRock would arrive at $20.7 billion. Now, again, this is what would have happened had they do it. Now, it doesn't really -- this, obviously, far

exceeds the $5 million that was taken out of MBIA Insurance and given to National. There was not enough, obviously, if vg

519

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Proceedings you understand BlackRock's model, that would have wiped us out one way or the other. wipeout. Now, BlackRock has actually been retained by a number of firms in this area. One of the organizations This has accelerated that

that has retained BlackRock is the National Association of Insurance Commissioners. And so, in September 2010 they

were retained by -- BlackRock was retained by the National Association of Insurance Commissioners. The Insurance

Commissioners also -- and they hired them for the RMBS portfolio. NAIC also hired -- let me go -- I'm sorry -I misspoke, your Honor.

the CMBS securities.

Now, if we go to the next slide. Even Mr. Buchmiller understood that in 2010, NAIC retained BlackRock to analyze CMBS. MR. HOLGADO: Your Honor, if I could just point

out, maybe the reason Mr. Buchmiller knows that is the NAIC hired Mr. Buchmiller. THE COURT: Okay. Thank you. And they still needed

MR. STEINBERG: BlackRock. So...

Right.

"You know, the NAIC, as far as you know, relies on the work of BlackRock, correct? "Yes." Let's go to the next slide. vg

520

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 world.

Proceedings Now, they also, you know, to be fair, they hired -- NAIC hired PIMPCO, which is Pacific Investment Management Company, Bill Gross, who is one of the most famous bond buyers in history. for this. They have as well models

And PIMCO was retained by the NAIC and PIMPCO

also uses the so-called black box because that's their proprietary models. And Mr. Buchmiller was asked: "Do you have understanding that PIMPCO's models are proprietary?" And Mr. Buchmiller indicated quite plainly that, "Most firms doing this kind of work maintain, or try to maintain, proprietary models." No great surprise there. Now, a little bit more about who BlackRock is and then I'll conclude it. BlackRock is the largest money manager in the It has $3.5 trillion under management. Trillion.

That's a big number.

Their investment management platform It's the most widely

is a ladder, which we talked about.

used structured finance valuation platform in the world. And by 2010, $9 trillion of securities had been modeled on BlackRock's platform. Eight thousand plus portfolios are

managed by BlackRock's platform with 6,000 plus unique users. vg

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings And more than that -- let's put up slide 13. They have expertise in this industry. They have

been hired by Ambac, CIFG, Syncora, all other monolines that were experiencing difficulties during this time period. They are hired by central banks, finance

ministries, the United States Federal Reserve, the United States Treasury. I want to just move along, but they are certainly one of the best known experts in the world about this. Let's put up slide 15. What did Mr. Buchmiller say about BlackRock? was at his February 2nd, 2012 deposition. "Question: In 2008, 2009 did you believe that This

BlackRock was among the firms in the financial industry that followed best practices in modeling structured finance transactions?" Mr. Buchmiller agreed. "Yes, I believed that to be the case in what I knew about their models." The question was asked: "What about their models that gave you the view that BlackRock was among the firms in the financial industry that followed best practices in modeling structured finance transactions? "Answer: It was based on things they presented vg

522

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Proceedings at the Risk USA Conference and I'm pretty sure we had some followup meetings or maybe a presentation where they discussed that. And I may have had conversations with

others in the market about that, although I don't have any specific recollection of those as well; and just through the professional literature." Now, let me go to the -- wait. I won't go through

all of the slides on that he was very well known, that PIMCO and the two of them are sort of the top, but I would like to show you slide 19. Now, when Treasury Secretary Geithner was being confirmed, at those confirmation hearings, obviously, there was a lot of concern in the nation about the AIG rescue, Bear Stearns, Lehman, a number of different items. And the

Federal Reserve had taken on a number of these securities on their balance sheet and they needed to value them. They

needed to understand how much they were worth so that we could make, as a nation, informed decisions about this crisis. And Chuck Grassley, the U.S. senator from Iowa, was asking Mr. Geithner about this, and it's his opening statement, and he wanted to understand what the Fed's investment in these SPVs, these special purpose vehicles, which is sort of the way in which they discussed a number of these assembly of financial instruments. vg And it would

523

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Proceedings seem that the Fed's investment in these special purpose vehicles is based on a valuation of assets which was conducted in all three cases by BlackRock Financial. And so then New York Federal Reserve President Geithner responded to why he had selected BlackRock. And

Mr. Geithner said, "As I have testified before, we had to move very, very quickly in that timeframe, and we believed at that moment we had no alternative." There was some criticism that BlackRock had been expensive. Of course they were, having modeled many more We think

times than what Lehman modeled for $3.75 million. they were highly worth it.

But what Mr. Geithner said is, "They come with a world class reputation and set of expertise in doing that, and we thought the interests of the American taxpayer would be best served by having them there on our side as we made those consequential judgments." I think that that is probably the best endorsement that one can have, and I would note, of course, that that hearing was on January 21st, 2009. Your Honor, I'd like to move from the discussion of BlackRock to the discussion of the illegal structure of this transaction because in fact, and we have been focusing on some of the elements of this transaction and I want to focus on the dividend and related materials to that which vg

524

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings occurred as part of the transformation transaction. Your Honor will recall the evidence that there was a dividend of $1.147 billion that was allowed in connection with this transaction. And what I'm going to discuss

during my presentation are that -- I'm going to discuss the legal standard under which dividends are to be provided, and that's section 4105. 4105(a). And there are two independent --

There are two independent provisions of that.

I'm going to discuss how the approval letter references only one provision of 4105(a). And then I'm going to

discuss the excuses for why the respondents think that 4105 just does not matter. And what we'll show is that there

was no earned surplus to allow this dividend, and that the process by which the dividend was created establishes how it couldn't have existed and didn't exist. And it shows

another flaw in the application on a pure legal question upon which your Honor can determine in favor of petitioners. Now, I'd like to start my discussion by talking about what the legal standard is. Honor -- your Honor -THE COURT: We're working hard. You are working hard, and we all 4105(a). Now, your

MR. STEINBERG:

are, and I will tell you, I will try to make the dividend test of 4105(a) as compelling as I can. vg

525

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 THE COURT:

Proceedings Good luck. That will be my job today. I

MR. STEINBERG:

4105(a) starts in a densely worded provision. just take it as I see it. two portions. And it talks about there being

And what we've done on this slide is I've It doesn't appear in the

added the "1" and the "2." statute.

So, I just want to let you know that I'm breaking There is the first test.

it into two tests.

"Except as provided in subsection (c), no domestic stock property/casualty insurance company" -- i.e., an insurer, domiciled in New York -- "shall declare or distribute any dividend to shareholders except out of earned surplus." That is Rule No. 1. You can't do it. Full stop.

Earned surplus, which we've highlighted below, means the portion of the surplus that represents the net earnings, gains or profits after deduction of losses that have not been previously distributed to shareholders or transferred to stated capital or capital surplus or applied to other purposes permitted by law, but you can't allow any unrealized appreciation of assets. exclusion. It's all in the

Earned surplus is net earnings, gains or After deduction of losses, obviously. You

profits, okay?

can't, you know, only look at one side of the balance sheet and not the other of a financial statement. vg

526

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 test. time.

Proceedings But then there's a second test. And the second

test is potentially permissive because as we'll go through it, that one can be waived. And I'll talk about that.

Now that, the second test in 4105(a), is, "No domestic stock property/casualty insurance company shall declare or distribute any dividend to shareholders which together with all dividends declared or distributed by it during the next preceding 12 months." Let me help you out because it took me a long

What they're doing is a forward looking rolling It's saying, I'm going to look at what you can do We're going to say,

possibly over the next 12 months.

we're going to look at what you could do, as long as you don't exceed these items over that next time period. MR. HOLGADO: referring to? MR. STEINBERG: Yeah. You know what? Preceding Is that the word "preceding" you're

in the -- so you look -- I'm sorry. You look to the rolling 12 months that we've just gone through, preceding 12 months, during the next preceding 12 months, exceeds the lesser of ten percent of its surplus to policyholders as shown by its last statement on file with the superintendent. So let me back up. vg

527

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings Every quarter the insurance company files with the Department a statement of what its earned surplus is as part of its financial statements. regularly. It provides that number

And so you look at these numbers and you can And so you look at

find them in a form that is provided.

what is the time period, what is the time period and what is the value of what is your earned surplus. And that's

what you look at for what you can distribute in accordance with these tests. And it goes on to say that it can be ten percent, and ten percent is the number that I'm going to show your Honor because that's what makes its way into the application and that's what makes its way into the approval letter. So it says, you're under this limit, in subsection 2, "unless the superintendent approves a greater dividend distribution based upon his finding that the insurer will retain sufficient surplus to support its obligations and writings." Okay? So that Test No. 2 can't be waived by the superintendent if they find the insurer will retain sufficient surplus. I've tried to make a slide that will hopefully make it a little bit easier for your Honor. vg

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Proceedings Let's go to the next one. THE COURT: these insurance laws? (Continued on next page.) Who do you think they get to write

vg

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 do it.

Proceedings MR. STEINBERG: If I could write the I will have a

insurance laws, here is what I am doing. stop sign and a speed limit. Honor, like I said. So there is the 4501 test.

It is dense stuff, your

The first test as

we have been discussing it, is an absolute rule. The first test is the stop sign. You stop. Full stop. You can't

The second part is sort of what we would be saying is the speed limit. It tells you okay, you have

this -- you have this surplus, how much you can allow out over time. And that speed limit can be waived by They can say okay, I can

the Insurance Commissioner.

let you out of that, I can let you go faster if you prove that the insurer will retain sufficient surplus to support its obligations and writings and so, what we will discuss here, your Honor, is that the only findings made in this case relate to the speed limit and not the stop sign and so -- and the measurement test, it is a specific measurement test and the -- if you notice in the speed limit sign, it says that you're to measure the surpass shown by its last statement on file. And you see that? It is about four lines --

five lines down in the slide, last statements on file?

530

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings If you notice, the first, the stop sign portion does not have that. And so, we look to see what the Department itself interprets for that, and whether you have to look at the last statement on file, and we found the opinion of the general counsel of the New York Insurance Department, let's put that up, Opinion Number 8513, this was issued in February of 1985 and it says "The prescribed last statement on file determines the amount of the earned surplus available for distribution. And then, it describes, that is sort of the conclusion and it says "The evident purpose of the underscored language is to set the parameters and to simplify the computations used in declaring a shareholder dividend based upon a statutory statement required to be filed under the Insurance Law and recognized by the Legislature." And bearing in mind that is a component of unassigned funds surplus, which is in turn a component of surplus to policy holders, one cannot attempt to extrapolate language referring to surplus to policy holders without considering the component parts of the surplus to policy holders. Thus, pursuant to Section 4105, the source of

531

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Proceedings dividends is limited to that earned surplus which is a component of surplus to policy holders. Two points; you can't take it out, you can't -- if you don't have earned surplus, you can't take it out. And how do you measure it? last statement on file. Now, what happened -- when this application was originally filed, there were changes that occurred over time. There were changes to the size that was You look at the

allowed for the dividend and the size of the share repurchase, and your Honor may recall that in the application itself there was this 1.147 dividend and then there was a share repurchase of approximately two billion dollars. And there was some back and forth about what to do about how to split those two up and the point I want to show here is in February 11, Dewey and Leboeuf, counsel to MBIA was going through and they were modifying some of the analysis given where they were and as Dewey and Leboeuf writes, and this is to show that everybody knew, everybody knew -- I am sorry. misspoke. 2. And as they were writing in February, they I

The redemption is 1.12 billion dollars not

532

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings knew, MBIA through its counsel knew that you could only take the dividend out of the earned surplus. So this is the letter from MBIA's counsel as described in the filing submitted by MBIA to the New York Insurance Department by letter dated December 5. "The original application, MBIA planned to transfer its shares to Munico to MBIA Inc by dividend. However,

given that MBIA's earned surplus as reflected in the attached pro forma balance sheet as of December 312008 is less than the statutory carrying value of Munico, MBIA has instead decided to effectuate the transfer pursuant to a share redemption under Section 1411." In other words, they didn't have the earned surplus, so if they didn't have it, they wanted to go around that provision. What is interesting is when the approval letter was ultimately signed up on February 17, 2009, let's go to -- let me go to the next slide. What is interesting about this, your Honor, is that Insurance Law 4105, when they describe it, they only describe the speed limit provision, not the stop sign. So in the -- in connection with the description

of the MBIA dividend, it says "Insurance Law 4105 prevents an insurer within a 12-month period from paying dividends to shareholders in excess of ten

533

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 bit.

Proceedings percent of surplus to the policy holders." Your Honor will remember that from the waivable speed limit portion of the statute. no mention of the stop sign provision. mention of that. Let's pull up Petitioners' Exhibit 6. So There is

There is no

let's go to the description of the dividend in the filings. Page 6. THE COURT: your last slide. you. MR. STEINBERG: It is scintillating, I know. That I think that will have to be

I am so upset to have to disturb

I want to give you something good after lunch. is the short punch line, your Honor.

In 4105, they mention "prevents the insurer" and this is in the finding, there's -- I won't read it all again into the record, but we can all agree that it does not refer to the earned surplus limitation, what I call the stop sign provision and if this is a convenient place for your Honor, we can break. THE COURT: Yes. It is almost one o'clock,

so I think we can break. So have a nice break. Walk around a little

We will open the doors around two o'clock and we

will start a few minutes after that.

534

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Okay.

Proceedings

MR. GIUFFRA:

Thank you, your Honor.

(Lunch recess taken.)

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings A-F-T-E-R-N-O-O-N THE COURT: S-E-S-S-I-O-N.

I took a nice walk. Me too, your Honor.

MR. STEINBERG: THE COURT:

Nice day for it.

Back into Insurance Law. MR. STEINBERG: Thank you, your Honor.

When we were breaking, we were discussing the approval letter, and if I could have Petitioners' Exhibit 6 up on the board again. slide. This is the same thing. We can use this This is the finding,

your Honor, of the Insurance Department in connection with the approval letter of February 17. And what I

wanted to draw the Court's attention to is, the references, all of the references in the approval letter are to 4105(a); the speed limit test. So

4105(a) prevents an insurer, within a 12-month period, that is in the second provision we pointed out and it also says the finding at the end is that "The Department finds that MBIA Corp will retain sufficient surplus to support its obligations and writings following the payment of the MBIA Corp dividend." Thus, they approve. There is no mention of the first test and your Honor, let me put up Mr. Moriarty's testimony on this point. He makes -- he submitted, and this is

536

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings slide 7, he has two pieces of information and I think they sort of highlight where the Department's position is and where the respondents' position is. The affidavit of Mr. Moriarty, we will start with the bottom one submitted on November 24,2009 when they filed their answer. It indicates that the

dividend was paid out of earned surplus in compliance with 4105(a) because, as noted before, or noted below, the Department determined that the payment of the dividend of MBIA Corp would retain sufficient surplus to supports its obligations and writings. At his deposition, we acquired about whether -- what about the first test, the earned surplus test which is not mentioned. He agrees about whether or not

the earned surplus test, the stop sign is waived -MR. HOLGADO: It is not mentioned in Isn't

Paragraph 48 is what Mr. Steinberg is saying. that the first thing he said? MR. STEINBERG:

Out of earned surplus,

you're right, we think that is a mistake by him, but you're absolutely correct. It does say earned surplus

and we think it is a mistake, because at the deposition -QUESTION: Under the earned surplus test of

the Insurance Law, the Insurance Department has no

537

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings discretion with respect to approving a dividend, right? ANSWER: QUESTION: That's correct. The Department doesn't have the

discretion to permit an insurance company to pay a dividend to its holding company if the insurance company doesn't have earned surplus in excess of the dividend, correct? ANSWER: That's correct."

Let's go back to the statute, the statute where -- and your Honor will recall that this is the stop sign section, there is no reference to "support its writings and obligations". this Part 2. applicable. The first one is a more objective test which is, it has got to be out of earned surplus, full stop. Mr. Moriarty, a 31-year professional with the Department, understands that distinction quite clearly. Now, let's go back to Petitioners' Exhibit 6, the approval letter. Now, we have cited lots of cases to you to say you have got to provide the basis for your determination in the approval letter. There is no That only appears in

Only in Part 2 is that finding

reference to what we have called the stop sign, which Mr. Moriarty admits is a stop sign in this provision.

538

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 will add. object.

Proceedings It is not there at all, and under that basis alone, that is another ground that your Honor can, as a matter of law, rule in our favor. I will show you. Let's put up slide 8. There is no dispute that MBIA Insurance never had sufficient earned surplus to support that 1.47 billion dollar dividend. Notice to Admit 19 admits that as of September 30, 2008, MBIA's insurance earned surplus was approximately 189 million. MR. KASOWITZ: Sorry, your Honor. I will There are no facts on this.

The word that counsel used was never.

So --

and the Notice to Admit relates to a specific date, so -MR. HOLGADO: Prior to transformation, I

MR. STEINBERG:

That is fine.

During the

relevant period they did not have 1.147 of earned surplus. MR. HOLGADO: MR. KASOWITZ: Again, wrong. I will object, your Honor.

This is the whole issue, that in this concept is simultaneity and as of the date of the transformation,

539

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 million.

Proceedings which was in February, they didn't. argument. I think I understand the point that he is making but he is using the wrong time period to define it. MR. STEINBERG: further down my slide. September 30, 2008. was approximately 189 million. Response? "Subject to and without waiving They admit that. MBIA's earned surplus Mr. Kasowitz has not read So I mean, it is

these objections", MBIA admits.

Number 2, as of December 31, 2008 MBIA's earned surplus was approximately one million. During that period, it went down to one We cited where that was from. Response, "Subject to and without waiving these objections or the general responses", they admit. Now, your Honor will recall they want to say well, that is fine, but that is not as of February 17, 2009. Your Honor may recall that the opinion from the attorney general that we had up, which is -- sorry, it is from the counsel of the -- let's put it up and I will get it exactly right. MR. HOLGADO: What affirmation exhibit is

540

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 general. THE COURT:

Proceedings this in the record, just to clarify? MR. STEINBERG: I think we are entitled to

take judicial notice of the opinions of the attorney general. PX 239. MR. HOLGADO: That is not the attorney

Wait.

Wait.

Wait.

What is it?

MR. STEINBERG:

PX 239, New York Insurance

opinion of the general counsel. Again, we had talked about this before the break, your Honor. at? This is, what period do you look You look

What is the statement that you look at?

at it in hindsight to make sense.

Don't you want to

sort of give people the discretion to say oh, I am going to have a really good quarter, it will be a really good earned surplus. These statutes, of course are meant to protect policyholders. They are meant to protect

policyholders against the parent from taking dividends out of the subsidiary that should never come up. So when Mr. Kasowitz gets up and objects and says we are not making -- offering proof as of February 16 or February 17, the answer is, that is correct, we don't have to. It is just not there. You have to

look at the last statement.

That is what the law says

541

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings and the opinion of the general counsel of the New York Insurance Department is precisely the same. Let's go to slide 9, please. We discussed,

nevertheless despite having one million dollars of earned surplus, they declare a 1.147 billion dividend. If you look at -- and we have in the record your Honor -- PX 825, which is a sizable document that I will -- but it is the annual statement of MBIA Insurance Corporation and this is Petitioners' Exhibit 825, they filed this report. That is what they filed

and in it, include the 1.1 million dollar dividend capacity that they had during that period. THE COURT: MR. HOLGADO: MR. STEINBERG: THE COURT: Wait. When? Year end December 31 --

Okay. Your Honor, now Mr. Holgado

MR. STEINBERG:

correctly says this gets filed later, but I am trying to give him the benefit. time. 187. Let's give him the forward

If this gets filed later, they are back at the It doesn't matter under 1.1 or under the 185, we

can all don't do the math that 1.137 is bigger than 1.1 or 185. Now, the reinsurance transaction, there is a discussion about whether or not the reinsurance

542

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings transaction alone would be legal. Let's go to slide 10. Now, the reinsurance

transaction your Honor, you recall is where MBIA -- the insurance company, it still holds the policies. After

the transformation, they didn't physically move the policies to National. They kept them back at MBIA

Insurance Corp, but to shift the economic risk, they enter into this reinsurance contract and that involves the cut-through insurance. There is that element so

that policyholders can look to National, or policy holders can look to MBIA Insurance. option. They get that

That is that reinsurance transaction. The problem is, of course, National at that

time does not have sufficient funds to reinsure MBIA Insurance Corp. Until the dividend gets it over

there, it doesn't have the funds. So we ask the CFO of MBIA, Chuck Chaplin about whether or not National would qualify to do the reinsurance without the dividend and basically, he says "I don't believe that National would qualify to enter into the reinsurance transaction -- until it is capitalized." We ask him again, why is that? ANSWER: Because it would be inadequately

capitalized to engage in reinsurance of that scale."

543

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings We ask the same of Mr. Moriarty. We ask

him, and he said, his answer was "If the reinsurance transaction was entered into standalone", that is anticipating the respondents' argument, "the Department would not allow it to be done with a company with a 185 million dollar surplus because immediately post transaction, the company, the assuming company on the reinsurance would be insolvent." In other words, National had to have a lot of money before it could reinsure MBIA Insurance Corp and

what they are both saying is on a standalone basis, if that was a transaction, it could not happen. couldn't happen. Now, of course, there are -- and sequence matters, your Honor. Sequence matters. It just

When this -- especially the earned surplus, your Honor, and if I can have up slide 11, this is an e-mail and it is Petitioners' Exhibit 242. It is at

R000647 in the record, the administrative record here and initially, when the application was made, there was financial information that was provided and then, there was additional information that was provided. And on December 15, Kenneth Gingrass from the Department writes to Allison Tam and Jane *Boisseau and says "the proposal does not seem to work legally."

544

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings MBIA Insurance does not have -- they were under the view that MBIA does not have sufficient earned surplus to dividend the stock of MBIA of Illinois as MBIA Insurance is left with an earned surplus of negative 12 after the dividend. What you will see is, they actually come back and we will get to that in a moment, MBIA comes back and says oh, no, no, no, there is a mathematical error. We didn't give you the right data. They gave them the right data, but the important thing, and then we will show why they still -- it still doesn't matter, but the important thing is that the New York Insurance Department was very cognizant of the earned surplus issue, even though it is left off of the approval letter. Now, the transaction again, what are these statutes designed to do? They are designed to protect

the policy holders, to allow -- to avoid the holding company taking money out of it, to the holding company, to then take that away from what would be available to policy holders. And I want to -- I thought it was actually a very telling moment at how surprised analysts and investors were by this transaction and if I can show up Petitioners' Exhibit 231, this is an e-mail chain that

545

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings has an analyst and we talked about that a little bit, I believe, on Tuesday, but I think it is important to see its context and let's start at the top of it, so that maybe it will remind you, this is on February 24, 2009 and again, this is Petitioners' Exhibit 231. And this

is Jay Brown, the CEO of MBIA Insurance, writing David Coulter and David Coulter is a member of the board of MBIA Insurance and from Robert Pincus, who had invested approximately at least in excess of a billion dollars in MBIA Insurance -- MBIA Inc, the parent, and this is where Mr. Brown says "glad someone on the outside could figure it out." And I will go down to what someone on the outside did to figure it out. start at the top. exhibit. Let's go down. Let's

Let's turn to the next page of the

This is Mr. Mehta, who is an analyst -- runs

a fund called Coliseum Capital, which we will go up and show you your Honor, just keep it on the second page and he is describing the transformation transaction and his perceptions of it in the period after it was announced. And at the second full paragraph, let's pull that out, it says "Now look at what is being put into National. 2.09 billion, so that is the dividend and

the share repurchase, look at what is being put into

546

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings National, 2.09 billion is being taken out of insurance co as a dividend to Holdco. A dividend!"

They understand that this was an extraordinary transaction. That was not going to be

permitted out of the earned surplus. He says "Regulator has given the okay to take this capital out and put it out of the reach of policyholders of insurance company. shareholders. Huge. This is huge for

Nine dollars per share is now

protected from claims that National does not choose to insure or reinsure." Let's go down further to the net result. "The net result is that Holdco now owns two subs, one where the structured finance exposure is contained and you where the muni* superb is held. SF

(structured finance) has no way to get at the muni sub; whatever the muni subs value is belongs entirely to Holdco, which means it belongs entirely to shareholders." And finally, he says "National now has 2.89 billion plus 2.09 billion of assets. five billion. Round that to

That is 21.50 per share in value, all

of which belongs to shareholders and it is untouchable by SF counterparties, structured finance. This document evidences precisely why the

547

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings Legislature has a very clear and objective test, so that the shareholders who are subordinate in interest to these people who hold these insurance contracts can't get to the head of the line, your Honor, and that is what happened in this transaction and what does Mr. Brown say about this? Let's go all the way back to the top, when he is forwarded this e-mail. could figure it out." And then to understand this is not some -you know, random person, "I think I have had a few e-mails with Mehta." Your Honor, these provisions of the earned surplus, while admittedly not the most enticing and not the most comprehensible, are, however highly, highly important. Now, in this case, we could stop right there and say, that is it, this is -- this dividend was illegal, it is not in the approval letter, but the respondents, of course, have an argument and what their argument is, is that they come up with this post hoc simultaneity theory. Let's put that up. "Glad someone on the outside

This came up for the first time at the deposition of Mr. Chaplin on July 29, 2010 at 453 and 454.

548

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings (Whereupon the following was transcribed by Senior Court Reporter Vicki Glover.)

549

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 positive. asked: "Question:

Proceedings MR. STEINBERG: (Continuing) The question is

How did MBIA have sufficient earned

surplus to complete the transaction?" And this is Mr. Chaplin's response. "Answer: The earned surplus as you can see is

After each step in the transaction, we did not

view -- this spreadsheet comes from my Department." He sort of pauses. "We are not making any opinion or expressing a view on the ordering of the transactions. There is no

sequence that is implied or intended by what's shown here at the beginning of the transformation. On the day of its

implementation, the company had a positive earned surplus. At the end of the day, on which the transformation took place, the company had positive earned surplus." And they do that through a lot of releasing of earned surplus and releasing of contingency reserves. That

all had to have happened, now they claim, all at the same moment in time precisely, despite the fact that as, your Honor, we've gone through before, and I don't want to sort of bore you with it, but the approval letter itself uses terms of sequence and series. this. It says, you know, after Those are temporal

It's a series of transactions.

notations and temporal views. vg

And not only that, MBIA's

550

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings applications to, and presentations to the New York Insurance Department always have used language of sequence. So let me see slide 14. Slide 14 is an excerpt from a PowerPoint that was provided to the New York Insurance Department. Two days They

before the application was filed there was a meeting. were discussing this is going to be our application and they explained to the Department about the steps. Let's go to the next slide. And this is again, this is at R 29 of the administrative record here. Step 1: It talks about steps.

"MBIA Insurance Corp." -- and this is a

presentation made by MBIA -- will dividend up the capital stock of MuniCo to MBIA Inc., and MBIA will contribute such stock to a newly established Delaware intermediate holding company, MuniCo Holding Company." Now, again, what's interesting, look under the approvals, your Honor. It says, "No approval needed under 4105 for this step since we understand the dividend would not be considered extraordinary and the dividend would be paid out of earned surplus." Right there they're acknowledging the earned surplus test. Let's go to the next slide. vg

551

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings This is the next page where it is referring again the MBIA to Step 2. And then they say, "After dividend of the MuniCo stock" -- again, words denoting different sequences -"MuniCo is capitalized by approximately 2.83 billion contribution of capital from MBIA Inc." And there's more. Step 3. Let's go to the next slide.

"MBIA Insurance Corp. will transfer its

U.S. public finance business to MuniCo by entering into a reinsurance agreement." Again, there are further indications that these are not simultaneous but they are part of a temporal series. Now let's go to the next slide. This is part of a presentation that was made. This is consistent, by the way, with the various presentations that MBIA made to the Department earlier in 2008. So, at February 22nd, 2008, effort by the MBIA to Again, they're talking about

engage in transformation. steps.

And again, importantly, they're acknowledging, even back in February 2008, if you look at -- this is from PX 1042, so Petitioner's Exhibit 1042. Even back in early 2008, they're discussing -- you see under two options? vg

552

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings "MBIA New York dividends capital stock of MBIA Illinois and CapMAC" -- CapMAC was going to be a different insurance subsidiary -- "NY" -- New York -- "need approval under section 4105 of the NY Insurance Law if such dividends are considered extraordinary and such dividends must be paid out of earned surplus." Again, we're always back to earned surplus. Similarly, in October, 2008, this is when the testimony is that they believe that the Insurance Department will finally consider it. sequence. Step 1. Again, language of

And again, these have to be paid out of

earned surplus. The next slide. The application itself uses this same language. This is from the December 5th application. "MBIA will distribute as a dividend to MBIA Inc. all of the stock of its current subsidiary MBIA Insurance Corp. of Illinois, an Illinois-domiciled financial guarantee insurer. Following this stock distribution they And it

will contribute" -- again, over and over again. gets even more so. Let me go to the next slide.

"MBIA will contribute these funds to MuniCo which in turn will contribute such funds to MuniCo Holding Co., which goes to then MuniCo." vg

553

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings Again, this is not consistent with the deposition testimony of Mr. Chaplin a year and a half later saying something entirely different. Let's go to the next slide. Now, actually, there are financial statements that are provided by MBIA, and these are from the administrative record 242 at R 648, 653, 850 and 532. administrative record. financial statements. All in the

And MBIA would send in these And they would send them in and

identify what was going to happen with the earned surplus because everyone was following the earned surplus question. And so we took out four different plots of time. On December 15th, 2008, in the morning, the financial statements that show this balance sheet and the existence of earned surplus refers to earned surplus after each transaction. statements. Language of sequence even in the financial Same in the afternoon. On 12/15/08, earned

surplus after each transaction. the same on February 10th.

Same on December 18th, and

Let's go to the next slide. Now, your Honor, we had talked about Mr. Gingrass writing a letter to MBIA's counsel saying, hey, you know, we think this, as we read this statement, and this is an excerpt from that statement, your transaction isn't legal because we don't show any earned surplus. vg And so in the

554

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 what?

Proceedings dividend stock of MBIA Illinois you'll see "Earned Surplus After Each Transaction," they start with a negative. And

that's where Mr. Gingrass writes, hey, your transaction is illegal. You start from the premise that you have no We can't allow a transaction like that.

unearned surplus.

MBIA comes back later that day and says, "You know We made a mistake." But the point is, they are

alert to the issue.

You can't create negative unearned --

you can't create negative earned surplus. Let's go to the next. Now, simply, and this is not; it's anything but, the dividend could not have occurred independently of the reinsurance transaction. MBIA Corp. had approximately one

million of earned surplus at December 31, 2008, and they had 185 at September 30, 2008, yet they paid a 1.147 billion dividend. Without the reinsurance transaction

occurring first, the dividend could not have been declared or distributed because its size exceeded the earned surplus by over a billion dollars. Let's go to the next slide. Not only that, National had a value of about $185 million, according to the materials submitted to the NYID. But before receiving the proceeds of that dividend, they wouldn't have had enough capital to write the $2.89 billion of reinsurance transaction. vg

555

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 that.

Proceedings If you only have $185 million of capital, you can't insure $2.89 billion. You can't. The entire $232 Let me take it

billion that was -- I'm sorry. back. THE COURT:

I misspoke.

Start again. Yes.

MR. STEINBERG:

National has, before it gets funded from these dividends, has $185 million of earned surplus. not be adequate. That would

And that's what Mr. Moriarty testified.

That would not be adequate to reinsure all of the Muni portfolio that was still held at MBIA Insurance Corp., but was now being completely reinsured by National. couldn't have that. One, you need to have it funded in order to allow There was not the earned surplus. The stop sign There is no You

said stop and that's -- they couldn't do it.

evidence in the administrative record that all of these things were to occur simultaneously, and in order to do that there's a lot of mental gymnastics that have to take place that are inconsistent with the administrative record and inconsistent with the approval letter. Thank you, your Honor. MR. GIUFFRA: home stretch. Your Honor, I think we're in the

I'm going to turn just for a few moments to

a discussion of past practices of the Insurance Department. vg

556

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Very quick.

Proceedings

Let's just put up slide 1, please.

It's DPP.1.

Your Honor, the law under Article 78 is that an administrative agency needs to act consistent with its prior precedent, which is the reason why, for example, the document that Mr. Steinberg showed you about the general counsel's opinion letter was so important with respect to earned surplus. So, to adopt different standards and not

follow the same precedence is something that on its own is arbitrary and capricious. Let's put up DPP.2. This is the NAIC guidance for a liability-based restructuring, and there's no question that the transformation transactions was a liability-based restructuring. That's PX 648. And Mr. Buchmiller talked

about the fact that the NAIC guidelines were best practices and that's something that insurers around the country follow in order to ensure that the decisions they reach are sort of consistent and can be applied when you have insurance companies in multiple states. And the key things

to do when you have a liability-based restructuring are, number one, to analyze the financial solvency issues. Here, that was not done through some independent third party. The only thing that's in the record is the Bridge

opinion, which even Mr. Buchmiller thought was just a vg

557

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Honor. THE COURT:

Proceedings lawyer's, you know, papering the files. They talk about That wasn't

the regulatory authority engaging experts.

done here, other than hiring the Fried Frank law firm to handle the legal side of it, but no one handled the financial side of it. And the one expert they had that

could have helped them maybe, Perella Weinberg, was never consulted by Mr. Buchmiller. MR. KASOWITZ: I'm just going to object, your

Honor, only because it says it right in this guidance it says "should consider." MR. GIUFFRA: MR. KASOWITZ: Absolutely, Marc. It doesn't say "should retain." So

I just want that clear for the record. Thank you, your Honor. MR. GIUFFRA: My only point, your Honor, is that When we

there are these guidelines, they're out there.

showed them to Mr. Dinallo, he had no recollection of them, no knowledge of them, doesn't remember consulting them, and -MR. KASOWITZ: It will be my last objection, your

Wait, wait, wait. Counsel's disregarding all of the

MR. KASOWITZ:

testimony which is completely consistent that whatever guidelines these are, they're not binding in New York vg

558

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 State, so...

Proceedings

MR. GIUFFRA:

Your Honor, definitely not binding,

but the point is, the guidelines exist, they are guidelines, they're best practices and they weren't followed here. This whole situation needs to be looked at in terms of the entirety of it. And this is just another

place where the Insurance Department did not follow the best practices, and in other places, obviously, violated the law. The next point, which is down at the bottom and then I'll flip forward. It says, "The plan should provide for the provision of financial support by the parent company." And in this case, there's nothing in the approval letter that provides for financial support. Let's put up slide 101. And as your Honor will recall, Superintendent Dinallo believed he had some sort of an agreement with Mr. Brown that would have provided for putting money into MBIA Insurance if it turned out that they didn't have enough money. And let's put on 102. Mr. Brown -- Mr. Brown -MR. KASOWITZ: Excuse me. vg I'm only going to

559

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings object because -- if we can go back to that prior one? Okay. "I think Brown acknowledged my position

around having those powers." MR. HOLGADO: MR. GIUFFRA: Right. Let's look down at the bottom.

"There was the potential for course corrections and there was -- and when I use that term and he used that term, when we both use that term, that to me was absolutely clear in my mind." And then Superintendent Dinallo said, "I do think that I had that understanding with him." That's what he testified to. the approval letter. There's nothing in

And best practices would require you

to have some sort of an agreement in writing that could actually obligate MBIA Inc., because the Insurance Department has no jurisdiction over the holding company, only over the insurance subsidiaries. Let's look to what Mr. Brown said. "Question: Did you ever reach an agreement with

Mr. Dinallo about the obligation of either MBIA, Inc. or National to contribute capital to MBIA Insurance in the event it was unable to pay the claims of structured policyholders? "Answer: No."

And then let's turn to 103. vg

560

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 "Question:

Proceedings Did you have an understanding with

Mr. Dinallo that in the event Corp. became insolvent the Department could require National or Inc. to put capital into Corp.? "Answer: No."

And, in fact, your Honor will recall there was a letter sent to the Department -- there was a letter that was sent to the Department in December 2008, where MBIA made it quite clear they weren't putting any money in. Now let's turn back to DPP.2. It talks about policyholders should have an opportunity for direct participation in the LBR process. In this case the application was filed in secret. Mr. Dinallo's testimony is, he sort of knew what the structured policyholders would say and it just didn't interest him as to their objection to transformation. But

in fact, but in fact, your Honor, he was working on a whole series of monoline restructurings in the same entire period because the industry was undergoing massive, massive upheaval. And if we can turn to DPP.4. This is Mr. Dinallo's deposition. talking about CIFG. And he's

That was a New York monoline that he

was involved in the restructuring of. And we asked Mr. Dinallo: vg

561

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 sentence?

Proceedings "You were involved in the CIFG restructuring from a regulatory point of view? "Yes." And then the question was: "And am I correct that in connection that transaction the Department worked with structured policyholders and discussed with them the proposed restructuring?" Some objections. And he says: THE COURT: "I think that is true" --

Do you want to read the rest of the

MR. GIUFFRA:

Fine.

-- "but it -- the apples and oranges could not be further apart on that. Just so we're clear. If you're And

try -- I mean yes, but that was around commutations. the binary choice between rehabilitation or not, your clients would have been in horrendous shape." Let's turn to the next transaction, DPP.5.

Syncora was another New York monoline that there was a restructuring on. "Now, in the Syncora restructuring, am I correct that the Department also had discussions with structured policyholders before it approved that restructuring?" Let's turn to the next page. vg You went too far.

562

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 for.

Proceedings And Mr. Dinallo's answer is: "I don't know -- I believe that is the case, but I don't remember -- I remember having conversations -- I was involved in that, but from a different perspective." The point though, your Honor, is that he did that one and there was policyholder involvement. Now, let's look -MR. KASOWITZ: MR. GIUFFRA: Read the rest of his answer. Fine.

"I was involved in -- what is the word I'm looking I was involved in trying to elicit as much capital

from XL as I could for the policyholders." MR. KASOWITZ: MR. GIUFFRA: There's more. Fine. If we can blow it up.

"I had many conversations with Michael McGavitt about what was going to be the amount he was going to have to inject into SCA in order for XL to be released from their obligations. "But again, just to be clear, I don't -- again, SCA XL was in a similarly sickly position compared to MBIA. So it wouldn't surprise me if even after that or during that injection there were conversations about look, you can commute now and get $0.14 on the dollar for claims you don't yet have or we can go into rehabilitation, and at best you wait for many, many -- for decades with the vg

563

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 municipal holders.

Proceedings And there were other issues that could

arise for the CDS holders." And then actually we can keep going. Mr. David reminded me of this. "Question: Do you know whether you or anyone I'm glad

working for you at any time ever had any conversations with any MBIA structured policyholders other than the conversations you testified about, where those policyholders were encouraged to commute policies with MBIA? "Answer: That the Department had or MBIA had?" "If you showed me a list it I don't know -- I don't

And then he said:

might refresh my recollection.

know what all of them were and it's possible I'm even conflating some of them. fairly well." Then he goes on to talk -- the point being -I'm reading. That's fine. I remember the Merrill Lynch one

"It is possible -- it is possible that because of Bear Stearns, I don't want to call it, failure but purchase by JP Morgan I have a recollection that there was a conversation about what Bear Stearns' obligations were, so that might have led to it." MR. HOLGADO: Wait. Can you go back? Say it

right about what Bear Stearns' obligations. vg

564

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Proceedings MR. GIUFFRA: -- "about what Bear Stearns

obligations were, so that might have led to it. "I had so many conversations with people about the monolines and many of them with banks that I can't be certain about which ones, but if you want to show me something I wouldn't dispute it I guess is what I'm saying." The point is, your Honor, that the Superintendent of Insurance, at least vis-a-vis Merrill Lynch, was actually involved trying to bring about commutations, which is a real question. Why is he trying to have policyholders

take less money than they were entitled to. Now, let's look at DPP.7. This is Syncora. 27 -- FGIC -- I'm sorry. Look at the timeframe. August

August 27, 2008.

This is a press

release by the Insurance Department.

Same time period.

And he's talking about a ten-business day public comment period during which all interested parties are free to comment on the transaction before the Department makes its final determination. And he says, "We want to ensure that both companies moving forward are stronger for all policyholders." The basic point is, your Honor, during this period they were having discussions in connection with other vg

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 is FGIC.

Proceedings monoline restructurings and they were bringing the structured policyholders into the process. Now, Mr. Kasowitz will jump up and say oh, but this was different. different. Those were restructurings and MBIA was

Well, the transformation clearly was a

restructuring and it certainly left the clients that I represent in a much weaker position than they would have been before. MR. KASOWITZ: going to say that. Your Honor, if I might, I wasn't But the

I'll save it for argument.

only point I want to make on this news release is this relates to the MBIA FGIC deal, it doesn't relate to Syncora or CFIG. MR. GIUFFRA: MR. KASOWITZ: That's true, Mr. Kasowitz. You had said Syncora. This relates

to this MBIA deal, which apparently was okay with you, but the other MBIA deal wasn't, so... MR. GIUFFRA: Okay. Well, this one, Mr. Kasowitz,

We can go back to DPP.4. Mr. Dinallo's deposition basically saying that with respect to CIFG, he thinks it's true that they worked with the structured policyholders. And then Syncora, which is DPP.5. The question is: "Am I correct the Department vg

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Proceedings also had discussions with structured policyholders before it approved that restructuring? "I believe that is the case." And again, go back to DPP.2. The point, your Honor, from our perspective, is, the guidelines talk about giving policyholders an opportunity for direct participation, and as I mentioned on Tuesday, and I won't go over again, while the New York Court of Appeals in its decision said there was nothing in the statute requiring public notice or comment, that was because there was nothing in the statute for the dividend standing alone, nothing in the statute for the stock redemption standing alone and nothing in the statute for the reinsurance transaction standing alone. But, your

Honor, federal and state due process considerations are important. And the basic point is, that my clients had a

property interest in their insurance policy with MBIA and they had no opportunity to be heard. So we think that

doing this transaction as it was done was a violation of procedural due process considerations. That's the point.

In addition, they clearly did not follow the best practices of the NAIC. I'm going to turn now to another subject, and that is the fair and equitable issue, and we're very close to the end. vg

567

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Proceedings Let's put up slide 1. This is the provision that we've talked about from the beginning, 1505(a). "Transactions within the holding company system to which a controlled insurer is a party shall be subject to the following: 1. The terms shall be fair and equitable." And then down at the bottom, it says: "The superintendent, in reviewing transactions pursuant to subsection (c) and (d) hereof, shall consider whether they comply with the standards set forth in subsections (a) and (b) which includes fair and equitable hereof; and 2, whether they may adversely affect the interests of policyholders." adversely." It doesn't say "will

It says "may adversely."

Now, the approval letter, your Honor, if we can put that up, says absolutely nothing under 1505 with respect to anything other than the reinsurance transaction. There's nothing about whether this transaction, this transformation, these three transactions together as a whole satisfy the fair and equitable requirements of 1505. Just nothing. Now, let's turn to FE.1. In the New York Insurance Department sur-reply brief you'll be hearing that -- let's just put up -- they say, well, in issuing this approval, Superintendent Dinallo vg

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Proceedings concluded that the terms of the transformation were fair and equitable within the meaning of 1505. cite for that? the end of 2011. What do they

Mr. Dinallo's affidavit that was written in They don't cite the approval letter.

They don't cite the administrative record. What they would like your Honor to do, and this is a point I made, I think, on either Monday or Tuesday of this week, that you can't rely on litigating positions, which is what this is, something that's not in the approval letter. They can't cite to a single regulation or And then

longstanding departmental legal analysis.

similarly, when they talk about the share redemption, they're citing Mr. Dinallo's affidavit written when he's a lawyer in private practice. letter. Nothing in the approval

Nothing in the administrative record. And in addition, your Honor, they basically try to

equate, they try to equate fair and equitable for purposes of 1505 with the notion that all policyholders would be in a position that their claims would be paid as they came due. Well, your Honor, that's different than fair and That sounds much more like a solvency standard Fair and

equitable.

which is different than fair and equitable. equitable is not the same as solvency. NYID and MBIA -And let's turn to slide 4. vg

And in fact, the

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 108.

Proceedings This is in the actual application. In the actual

application put forward by MBIA on December 5, they say, "The superintendent has exclusive authority to determine whether the reinsurance transaction is fair and equitable, leaves MBIA unimpaired, and not otherwise in hazardous financial condition." The point being -- excuse me. -- "unimpaired, solvent and not otherwise in hazardous financial condition." Meaning that in the application itself MBIA treated fair and equitable as not being the same thing as solvency. Let's turn to No. 5. This is a regulation of the Insurance Department, And in this regulation it states that, "In connection

with affiliated transactions where the transferrer is insolvent or impaired, the transaction shall not be approved unless it both eliminates the impairment or insolvency and if done between affiliates or members of the same holding company system is fair and equitable to both insurers." MR. HOLGADO: We'd just like to make clear again,

Bob, that you've added those numbers yourself. MR. GIUFFRA: Absolutely true.

And my point being, your Honor, that their own vg

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Proceedings regulation treats impairment and insolvency, and then it says "and" -- obviously "and" is something beyond the first -- if done between affiliates or members of the same holding company system is fair and equitable. Obviously, in interpreting statutory schemes, the Court will look to whether you've got one provision that deals with insolvency, which is that 1309 provision that we've shown you about three or four times about the reinsurance test; but then there's this entirely separate provision which is 1505, which the legislative history was added in the '70s because of concerns about taking money out of insurance companies. Now, the Department's reading here would essentially leave irrelevant 1505, because all you would have to do is comply with 1309 and that makes no sense. In

addition, the plain meaning of equitable means fair to all concerned. Now, let's look at the Department's answer in this case, which is slide 9. This is a document filed early on, and I always find the documents that are filed in a lawsuit early on are in some ways the most interesting. them, our petition said: "The Superintendent has acknowledged that insurance regulators like the NYID are required to protect vg And we basically asked

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Proceedings the interests of all policyholders and cannot show favoritism." They deny the allegations in paragraph 3 of the petition, except they admit the allegations of the first sentence. "Cannot show favoritism." Now, they say that the Superintendent's approval did not favor one group of policyholders over another, but, your Honor, there can be little doubt here that this transaction was one that showed favoritism -- but your Honor, there can be little doubt that they did show favoritism. Let's turn to slide FE.3. "Question: This is Mr. Moriarty.

So you agree that a New York

Insurance Company cannot distribute among policyholders outside of article 74? "Answer: I do agree."

Let's turn to slide 10. 1505 was added, as made clear, and this is from the New York Superintendent of Insurance, 1968. This was

added to embody protection for the policyholder against the worst forms of exploitation or milking of the insurer to which he has paid his premium dollar and to which he must look in the future for performance of the promise for which he has already paid." Let's put up slide 11. vg

572

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 papers.

Proceedings And there's Governor Rockefeller's personal "1505 was added to ensure that transactions within

the holding company structure would not weaken the financial soundness of the insurer." And then let's turn to slide 12. Mr. Moriarty. "Question: And is the objective of the Insurance

Department in approving such transactions to ensure that the insurance company has sufficient funds to pay claims of its policyholders? And he says something that I think is extremely relevant to this case. "Answer: Ultimately the fair and equitable

standard to protect the insurance companies is to not jeopardize the ability of the insurer in any way to pay policyholders." -- "to not jeopardize the ability of the insurer in any way to pay policyholders." And in this case, all of the risk was borne by one set of policyholders that was preferred over another. Now let's turn to slide 13. Mr. Moriarty agreed that the transformation transactions needed to be evaluated as a whole, as he said at 148 of his deposition. "Now, in terms of the Department's review of the vg

573

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Proceedings legality of the transformation transactions, you mentioned a wholistic approach. "Answer: Do you recall that testimony? The Department's review of the

transaction -- the transaction was looked at as a whole, not as a series of separate transactions." Then in the sur-reply the Department says: "Properly determined that the transformation, in its entirety, complied with the relevant provisions and was fair and equitable to all policyholders." That was the first one in MBIA's brief. And then in the Department's brief at page 4, they say, "The superintendent did not err when he determined, inter alia, that the terms of both the reinsurance agreement and the transformation as a whole were fair and equitable pursuant to the Insurance Law." Let's put up the approval letter. The point, your Honor, is to see what they're saying in the briefs and then look at the approval letter. And the approval letter, which we put up before, where there's a discussion of 1505, your Honor, there's absolutely no reference to the transformation transactions as a whole, as a whole being fair and equitable. conclusion is not there. The

It's not in the approval letter.

They say in their briefs they made a determination about fair and equitable transformation as a whole, but your vg

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Proceedings Honor, when you look at the approval letter, it's not there. (Continued on next page.)

vg

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Proceedings MR. GIUFFRA: So the best they can do is

perhaps a brief after the fact, which your Honor would tomorrow or actually Monday when you hear the argument being made, you must defer to the Department. fact, the law is quite clear. In

You have no obligation

to defer to a litigating position that is not in an approval letter. This is another example your Honor

like with the earned surplus test where this approval letter does not have basic requirements that even the Department says were necessary in order to make this transaction work. And indeed your Honor, there is a master services agreement that was part of the reinsurance transaction and the Department actually did find that the terms and conditions of that master services agreement were fair and equitable and would not adversely affect the interests of policyholders, but there is nothing in this approval letter about the transformation as a whole being fair and equitable to policyholder. So your Honor, the problem here is that the Department did not make the required legal approvals in this approval letter and your Honor could write literally a five-page opinion annulling -THE COURT: It is getting shorter and

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 shorter, isn't it?

Proceedings

MR. GIUFFRA: straightforward.

This one is actually pretty

And it is nothing more than the And

required approvals are not in the approval letter.

yes, this is a huge case that has gone on for a really long time, but it is a pretty elemental point of administrative law that if the required approvals are not in the approval letter, the Court should annul and obviously again if MBIA wants to reapply, they can do so. Let's put up slide 15. Your Honor, fair and equitable is not something that means one group of policyholders bears all of the risk, all of the uncertainty. But in this

transaction, there is no question that the approval was in the middle of the worst financial crisis since The, Great Depression, when the Department knew there was a substantial degree of uncertainty, actually a significant degree of uncertainty in MBIA's insurance ability to project future claims. That was something

that Mr. -- that we talked about this morning. There were, in Mr. Buchmiller's words, as reflected in his internal memos, written at the time, not something that someone writes in an affidavit or says in a deposition after the fact, many known

577

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Proceedings

We know that this transaction took 5.1 billion dollars that was available to pay future claims on 233 billion dollars in highly volatile structured products away from MBIA Insurance. We know

it reduced the cash and investments available for MBIA Insurance and the part that or is sort of curious is that MBIA Insurance is still on the hook ultimately for 554 billion dollars in municipal policies because the way to cut through reinsurance work, if National didn't have enough money, ultimately the municipal policyholders could look to MBIA Insurance. But you know what MBIA Insurance did for that wonderful reinsurance? They paid 2.89 billion

dollars, 2.89 billion dollars to reinsure a municipal bond business, even though MBIA Insurance in its entire 35-year history had paid just 669 million dollars in public finance claims. MBIA Insurance, in addition,

received nothing for capitalizing this new municipal bond company, even though it had done it all. Let's go to the next slide. On the other hand, your Honor, this transaction clearly benefited MBIA's stockholders, its executives and public finance policyholders. Mr.

Brown's e-mail, "I am glad someone on the outside can

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Proceedings figure it out" is telling. Transformation for the benefit of stockholders took 5.1 billion dollars from MBIA Insurance, allowed MBIA to start a new public finance business. It ring-fenced from MBIA this new public

finance business, all of the risky structured finance liabilities. In fact, your Honor, MBIA Inc had

sufficient cash to start its own public finance business, but elected not to and any benefit that comes out of the public finance business goes to the holding company and that is why in that e-mail with Mr. Brown, there is discussions about the dollars per share that this transaction was worth to the shareholders of MBIA. The executives of MBIA Insurance -- of MBIA Inc, they got success bonuses for completing transformation. They continue to get millions of dollars in compensation and they got the upside from the ownership of MBIA stock and the public finance policyholders didn't bear the risk any more of facing liability from this dangerous volatile structured finance business. If we could just put up FE 6. This is an e-mail early on in February of 2008, where the CEO of -- CFO, excuse me of MBIA Insurance, this is PX 8, is attempting to talk about the possibility, this is Bill Ackman, to have a stacked

579

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Proceedings structure which actually provides greater protection to policyholders than what was ultimately done because in a stacked structure, any profits from the municipal business will go to the structured policyholders first and then potentially will go to the holding company and Mr. Chaplin, because at that point in time, MBIA does not want to do this stack structure, says "if the structure -MR. HOLGADO: Says to whom? I am sure this

is an internal MBIA e-mail. MR. GIUFFRA: That is absolutely true and it

has the number at the bottom. MR. HOLGADO: MR. GIUFFRA: MR. HOLGADO: No, it does not. NYS -It was produced for the same

reason before, as Mr. Kasowitz wanted to be clear for the record, this is not before the Department. MR. GIUFFRA: But the point is that the CFO

of MBIA is criticizing the stacked structure because it creates two classes of policyholders, for which there is no provision in the Insurance Law. And he then goes on to say seems unlikely that a company would voluntarily under go this plan and forcing it would require the superintendent to step very far outside the existing legal framework.

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Proceedings MR. KASOWITZ: If I could, your Honor, I want

to be clear for the record. We are glad there is reference to Ackman here, but this plan was for the transformation. is not transformation. This

So I just want it to be clear

for the record it is not and we will address -- we will deal with that in our presentation. MR. HOLGADO: rest of the sentence. MR. GIUFFRA: double A company -- " MR. HOLGADO: Thank you. MR. GIUFFRA: In fact, Mr. Steinberg said I It will be important later. "To take over a trip A or I would like you to read the

should read the next sentence "So where there is no clear policyholder benefit would be untenable and no one has ever identified any policyholder benefit to the policyholders of MBIA from the transformation." In fact, in the application materials, the benefit that was identified was the fact that they would -- that the holding company would somehow be stronger and might put money into MBIA Insurance and by December of 2008, MBIA went ahead and made it quite clear to the Department that they would put in no money and were taking no obligation to put money into MBIA

581

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Proceedings Insurance and sitting here today, there is absolutely no obligation for MBIA Inc or National to put any money into MBIA Insurance and your Honor, there can be little doubt that this case would not even be going on right now if National had the obligation to back stop the claims of MBIA Insurance. There is no obligation. Mr. Brown said there

was no obligation, no agreement, nothing in the approval letter. So the issue, your Honor, is that they -- in the actual approval letter itself, the Department could not say that the transaction as a whole was fair and equitable to policyholders. The transaction clearly

was one that benefited one group of policyholders and not another. It benefited the holding company and it

is a transaction that was not fair and equitable to the policyholders of MBIA Insurance. Just a few more documents. MR. KASOWITZ: THE COURT: I will be --

Your Honor, if I might --

Sure. And I will deal with this in

MR. KASOWITZ:

my -- next week, but counsel repeatedly says that any discussion of being fair and equitable to all policyholders was not in the approval letter, not done at that time, it was ex post facto, so I just want to

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Proceedings note for the record that there was a -- and it is in the -- we will show your Honor in the approval letter where it is, but also, there was issued on February 18, 2009 a press release by Superintendent Dinallo. read the first sentence of it, if I could. "This deal is fair to all policyholders, the bank, counterparties and other policyholders of the structured financings and the owners and issuers of municipal bonds" we will deal with this in our presentation, just it makes it sound like something thought up years later. Not true. THE COURT: MR. HOLGADO: Okay. I will address something else I will

in my argument, but as long as this is up here, I want to make clear it is talking about forcing a plan on MBIA and so, the existing legal framework that is being referred to here appears to be an Article 74 or something of that nature, and the reason that it would be outside of that framework is because of the help from the company. So it doesn't even appear to be talking about what transformation is. MR. GIUFFRA: Your Honor, I think what Mr. You would think that

Kasowitz did was very telling.

583

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 and 18.

Proceedings an insurance regulator doing an extremely important transaction, one of the most important in its history, would have put the key legal finding in the approval letter, and the best that Mr. Kasowitz can cite is a mere press release. It certainly doesn't have the And I think it is

force of law of an approval letter.

very telling and in addition, I believe that that press release is not even in the administrative record. Let's just turn up PX 18. Let's go to 17

Let's go to 18.

18 the question is "Admit

that after the NYID approval of the Transformation Transaction, MBIA Inc did not have any legal obligation to make assets available to pay the current and future claims of structured finance policyholders of MBIA Insurance." In fact Mr. Moriarty's deposition said that. If you go down, there is a bunch of legal verbiage, but you get to the key part at the bottom there is an admission "Except admits that MBIA never had, nor does it currently have, any legal obligation to pay any claims of any of its insurance company subsidiaries policyholders", so the point here is, your Honor, that post this transformation, MBIA Inc is scot free, has no obligation to support MBIA Insurance and

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Proceedings they made it clear at the time and they are continuing to make it clear in the documents that they are submitting to the Court and your Honor, it simply was not fair and equitable to do a transaction that had zero benefit to the policyholders of MBIA Insurance and many, many benefits to the shareholders of MBIA Inc, its executives and the public finance policyholder. You simply cannot, under the New York Insurance Law Section 1505, the provision that Mr. Kasowitz said is reflected in a statement in a press release, you cannot -- you cannot divide up an insurance company and say it satisfies 1505, that it is fair and equitable for the policyholder of the left behind insurance company, when there is simply no conceivable benefit in this record for the structured finance policyholder. The best that Mr. Dinallo could say at his deposition was oh, I thought there was all this risk in the muni markets. That is what he literally says.

It could be over time the muni markets might become very risky. Well, your Honor, you saw the document that we put up before. The losses in the muni business in The losses in the muni

2008, two million dollars.

business in the entire history of MBIA, 667 million

585

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Proceedings If the muni business was such a source of

risk, why did no one, no one, Mr. Buchmiller or any one else, do any review of the muni business in connection with this approval process? Let me, your Honor, talk a few minutes about Mr. Stulz, who is one of our experts. This

demonstrates that that transformation transaction benefited municipal bond policyholders in MBIA Inc while harming the structured finance policyholders. Stulz Chart 1, your Honor makes quite clear that the default rates for public finance debt, Triple A financed debt, very low and you can't even see it, it is zero, and that the default rates through 2006 for the structured side a little higher, 0.49. If you go to investment rate, the default rates go to 0.05 and 3.14, but then completely contrary to what Mr. Dinallo says in his deposition, years after the fact, if you look at performance through 2009, triple A rated have no zero default rate, and AAA structured is 3.65 and if you go to investment, great, it is .03 versus 15 percent. Let's look at Stulz Chart 2. By the end of

2008, before the transaction was approved, the total claims payments on the public finance side talked about this 667 million. On the structured side,

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Proceedings substantially higher, over two billion and your Honor, the loss reserves that they had on those relative positions were very low for municipal. You can see the

blue, probably a little bit over 150 million and then you can see the structured is over a billion dollars. And if we put up what happened post transformation, there can be little doubt your Honor that what this transaction did was, it moved assets from one insurer to another. There was absolutely no benefit to the

left behind policyholder. Can we take a break and we will be done after the break, probably 15 or 20 minutes? THE COURT: finish this up. (Recess taken.) THE COURT: MR. GIUFFRA: things to say. THE COURT: MR. GIUFFRA: Okay. Thank you so much for your Okay. So -Sure. A short break and we will

Your Honor, I have just two

attention this week, and have a great weekend. THE COURT: MR. GIUFFRA: THE COURT: MR. GIUFFRA: That is it? That is it. Well, that is not two things -Thank you very much and we

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Proceedings will see you all next week and we will hear from the respondents. THE COURT: Okay.

I will talk to the three of you for a minute or two, but I presume we will start at ten o'clock on Monday, with your opening -- with your presentation, right? MR. HOLGADO: THE COURT: Sounds great, your Honor. So have a nice weekend,

everybody and I will speak to the three attorneys O for a couple of minutes and I look forward to seeing you all on Monday. MR. GIUFFRA: MR. KASOWITZ: MR. HOLGADO: Thank you, your Honor. Thank you, your Honor. Thank you, your Honor.

(Whereupon, the proceedings were adjourned to May 21, 2012.)