MBI - MBIA Inc.

[MYDemaray]

Kraven -- and the time frame is fairly limited, correct? Typically a year before an entity files bankruptcy?

[Cardboard]

There is no fraudulent conveyance of any kind. Everything: the split, interest payments, intercompany loan, commutations have been blessed by NY State insurance regulators. MBIA and the regulators thought that BAC would behave properly and settle on reasonable terms a long time ago. Obviously, some assumptions were made about time, size of potential payment and downside. You can't say that they were so wrong in their judgment since something like 18 banks have settled on Article 78 and most put-back cases have been settled by now. Their record in court is also close to perfect.

 

The fraud is BAC. They are using their size and financial strength to drag this forever until the little guy dies. That is how they do business. Settle for pennies on the dollar with mid size companies, then pay the requested bill from government organizations such as Fannie Mae. While some will argue that if BAC had not bought Countrywide that MBI would be dead by now, it was up to BAC not to buy it. They bought a fraud, they have the means, then they need to pay the cost of the fraud.

 

I truly hope that Lawsky is going to make a case example of BAC and show publicly how this organization is acting like the mob. It is pretty obvious that MBIA and the regulators have made decisions together that BAC is challenging and delaying at every opportunity. They need to pay a price for this behavior.

 

Cardboard

[ERICOPOLY]

While some will argue that if BAC had not bought Countrywide that MBI would be dead by now, it was up to BAC not to buy it. They bought a fraud, they have the means, then they need to pay the cost of the fraud.

 

The "what ifs" are not relevant to whether or not BAC is liable.  You are right -- whether or not MBI's  was headed for the dirt doesn't matter with respect to BAC's liability as the new owner of Countrywide.

 

However, the "what if's" do help in the assessment of management's ability to run a company for the long term -- did they run MBIA straight into the ground at Mach 1 speed?

[17thstcapital]

There is no fraudulent conveyance of any kind. Everything: the split, interest payments, intercompany loan, commutations have been blessed by NY State insurance regulators.

 

While I tend to agree with you on fraudulent conveyance, particularly as it relates to the interco loan, I do think there might be an equitable subordination issue here, which could have a material negative impact on recovery of that loan and therefore to the value of MBIA.  Not expecting a negative outcome but to me that's the bigger risk.

[Kraven]

Kraven -- and the time frame is fairly limited, correct? Typically a year before an entity files bankruptcy?

 

I don't recall the precise rules.  My recollection is that it's a year tops, but like everything there are qualifications, etc.  So around a year.  The interesting thing here is that MBIA isn't even necessarily insolvent now.  If they weren't insolvent at the time, I don't see how there is a fradulent conveyance.  They have made good on their debts and obligations all these years.  To my knowledge no one is claiming that they have failed in that regard.  So I don't see how this goes anywhere, but we'll see.

[Kraven]

There is no fraudulent conveyance of any kind. Everything: the split, interest payments, intercompany loan, commutations have been blessed by NY State insurance regulators.

 

While I tend to agree with you on fraudulent conveyance, particularly as it relates to the interco loan, I do think there might be an equitable subordination issue here, which could have a material negative impact on recovery of that loan and therefore to the value of MBIA.  Not expecting a negative outcome but to me that's the bigger risk.

 

Has that been argued at all?  I am no expert on it all, but agree that would be a bad outcome for MBIA.  I think though it brings up many of the same issues.  They would need to show that MBIA engaged in something akin to fraudulent activity at the time of the transactions in question.  That's a tough thing to prove and given the blessing by the insurance commissioner, etc I don't see how it can realistically be proven that they engaged in this type of behavior.  It would essentially mean they engaged in "bad acts" out in the open and while being scrutinized.  Not impossible certainly, but I am not sure how far that goes. 

[17thstcapital]

There is no fraudulent conveyance of any kind. Everything: the split, interest payments, intercompany loan, commutations have been blessed by NY State insurance regulators.

 

While I tend to agree with you on fraudulent conveyance, particularly as it relates to the interco loan, I do think there might be an equitable subordination issue here, which could have a material negative impact on recovery of that loan and therefore to the value of MBIA.  Not expecting a negative outcome but to me that's the bigger risk.

 

Has that been argued at all?  I am no expert on it all, but agree that would be a bad outcome for MBIA.  I think though it brings up many of the same issues.  They would need to show that MBIA engaged in something akin to fraudulent activity at the time of the transactions in question.  That's a tough thing to prove and given the blessing by the insurance commissioner, etc I don't see how it can realistically be proven that they engaged in this type of behavior.  It would essentially mean they engaged in "bad acts" out in the open and while being scrutinized.  Not impossible certainly, but I am not sure how far that goes.

 

I'm not sure its been argued but there's no downside in arguing it when there's an event (bankruptcy, restructuring, etc) if you're a junior creditor.  Only upside.  It will come up for sure.  And yes, similar issues as FC.  Was it an arms length transaction at market and was proper value accrued to both parties as part of the transaction?  I have seen worse cases where junior creditors were unable to win and so I don't see a negative outcome here for MBIA on this specific issue.  But I'm not a lawyer.

[merkhet]

Let's clear something up quickly.  We should agree on some terms so as not to sow any more confusion than may already be floating around:

 

Holding Co ("MBIA")

Municipal Sub ("National")

Structured Sub ("ShitCo")

 

#1 -- There has, thus far, been no fraudulent conveyance.  Fraudulent conveyance normally happens if a company is going into bankruptcy (or rehabilitation) and you take money out of the company to avoid paying it to the (possibly other) creditors.  There must be a "mens rea" of sorts -- a specific intent to hinder, delay or defraud a creditor.  National LENT money to ShitCo, they did not take money from ShitCo.  Additionally, the NYDFS split up the original company, so that's not a fraudulent conveyance either.

 

#2 -- There is also no equitable subordination.  The point of equitable subordination requires that the claimant do something "inequitable" to the other creditors.  In other words, ShitCo can't pay back National prior to paying back anyone else who should have been higher up the priority chain -- especially if this leaves the rest of the creditors holding the bag.

 

#3 -- The only thing that matters, to preserve the value of National, is whether ShitCo has enough assets to cover the repayment of the loan to National.

 

Furthermore, I don't understand why Jay doesn't just accept the damn settlement and move on with this life.  He's a former lawyer, so he should know better than anyone that law isn't about justice, it's about the redistribution of resources to compensate for economic loss.  The continued reluctance to settle this case is stupid.  They need to move on so that they can re-establish their credit rating and start writing municipal insurance already.

[17thstcapital]

#2 -- There is also no equitable subordination.  The point of equitable subordination requires that the claimant do something "inequitable" to the other creditors.  In other words, ShitCo can't pay back National prior to paying back anyone else who should have been higher up the priority chain -- especially if this leaves the rest of the creditors holding the bag.

 

 

Wrong.  If an insider levers up a related company that is on the verge of insolvency at a senior secured level with the possible intent to profit from it somehow at the detriment of other stakeholders, then its loan is at risk of equitable subordination. There's nothing confusing about that.

[merkhet]

17thstcapital, there is a Fifth Circuit case that disagrees with you. (See Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 174 (Del. Ch. 2006) -- link: http://www.leagle.com/xmlResult.aspx?xmldoc=20061074906A2d168_11061.xml)

 

"Even when a firm is insolvent, its directors may, in the appropriate exercise of their business judgment, take action that might, if it does not pan out, result in the firm being painted in a deeper hue of red. The fact that the residual claimants of the firm at that time are creditors does not mean that the directors cannot choose to continue the firm's operations in the hope that they can expand the inadequate pie such that the firm's creditors get a greater recovery. By doing so, the directors do not become a guarantor of success."

 

You and I may be talking past one another on this issue, btw.  I haven't pinpointed why I feel like we might be doing so, but it's just an inkling that I have right now.

 

I'm running off the thought process that National loaned ShitCo some money so that they could maybe get a better deal from Bank of America through continued litigation, etc. It didn't pan out, and it's tough to say that they engaged in inequitable conduct as a result of the fact that their loan didn't pan out the way they thought it would.

 

You might be running off a different thought process, and I'm curious as to what that might be.  In your estimation, how did National intend to profit off its loan to ShitCo to the detriment of the other creditors of ShitCo?

[17thstcapital]

You might be running off a different thought process, and I'm curious as to what that might be.  In your estimation, how did National intend to profit off its loan to ShitCo to the detriment of the other creditors of ShitCo?

 

As you know, each case is different and the outcomes are different....depends on the judge, the lawyers involved, smoking guns found in discovery process, etc.  If you read what I've written, I DO NOT believe that FC or ES is applicable here and that I do not expect a negative outcome for MBIA.  All I'm trying to say is that there is a strong possibility that the issue will come up should ShitCo as you call it goes bust. That's all.  Not suggesting that MBIA will lose.  I wouldn't be invested in it if I felt that way.

[17thstcapital]

Thanks Merkhet for the case link btw. Can't pull it up for some reason. But I'm wondering - did a related party make the loan to the troubled entity in that situation?  Because if not, then not sure it applies here.

[Cardboard]

I still have not seen any comment from either party on this most important event. Please correct me if I am wrong. Both have lost, but it is clear that MBIA has lost more by not getting the summary judgment with time not being on its side.

 

IMO, that is a good sign or indicative that they may be discussing. It seems different than before when the lawyers or corporate relations would come out with their little interpretation.

 

Latest comment from Herzeca:

 

http://mbibaclitigtion.blogspot.ca/

 

Cardboard

[merkhet]

It's a pretty interesting case...

 

Basically, the claim is that the holding company made a wholly-owned subsidiary take on more debt to support the holding company's operations, and the claimants said that by doing so, the other residual claimants of the holding company's debt suffered an economic injury.  Notably, it is not clear from the facts (court's words, not mine) that either the holding company or the subsidiary company were insolvent at the time of the transaction -- the language, though, that the court uses in my quote above indicates that it doesn't seem to matter whether either party was insolvent at the time.

[merkhet]

I haven't seen a response by either side. I'm also hoping this means that the parties are looking to agree on a settlement. There really is no reason to drag this out any further.

[PlanMaestro]

Good discussion. Thank you all.

[Kraven]

I haven't seen a response by either side. I'm also hoping this means that the parties are looking to agree on a settlement. There really is no reason to drag this out any further.

 

There hasn't been any reason to drag it out for years now!  It does feel a little different now.  No response by either side is kind of strange given how this is a schoolyard brawl at this point with each side claiming ultimate victory each time they shove the other guy.  Without going back and doing an exhaustive search, it does seem as if each time one of the decisions comes out there are press releases or interviews or something by one or both sides.  Nothing yet might mean they are talking.  Or, it just might mean they are crafting the absolute perfect nail the other guy to the wall with clever words press release.........

[valuecfa]

Additional commentary:

 

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=75999&terms=@ReutersTopicCodes+CONTAINS+%27ANV%27

 

 

A little debate going on with Frankel's interpretation of Bransten's previous discussion of not going to trial until after appeal is satisfied.

 

Herzeca: "if i remember colloquy bransten said wouldn't go to trial if she granted SJ until after appeal satisfied. not the case here"

 

 

[valuecfa]

Harry Fong of MKM Partners (the other analyst covering MBIA) research note out today:

 

April 30, 2013

10:44 EDT MBI, BAC MBIA ruling surprising but views mostly supported by judge, says MKM Partners

Though MBIA (MBI) and Bank of America's (BAC) Countrywide were both denied summary judgments in a surprise announcement, MKM Partners said the judge indicated MBIA’s positions were more correct than Countrywide's. MKM thinks that if BofA does not choose to settle, MBIA will win at trial and maintains a Buy rating and $18 target on MBIA.

[ERICOPOLY]

I haven't seen a response by either side. I'm also hoping this means that the parties are looking to agree on a settlement. There really is no reason to drag this out any further.

 

There hasn't been any reason to drag it out for years now!  It does feel a little different now.  No response by either side is kind of strange given how this is a schoolyard brawl at this point with each side claiming ultimate victory each time they shove the other guy.  Without going back and doing an exhaustive search, it does seem as if each time one of the decisions comes out there are press releases or interviews or something by one or both sides.  Nothing yet might mean they are talking.  Or, it just might mean they are crafting the absolute perfect nail the other guy to the wall with clever words press release.........

 

Back in Q4 I think it was, I remember one of the major guys at BAC (Thompson I think) commented on how they are settling a major case every quarter.

 

I've been wondering if the reason BAC is dragging this out is so they can sprinkle the charges across multiple quarters to avoid a huge headline loss quarter.

 

Not sure how bright that strategy is, but they do seem to be settling these things at a somewhat measured pace.

 

[merkhet]

Re-reading what MBIA said last quarter about settlement. Interesting to see what they will say in a week or so.

 

http://seekingalpha.com/article/1233581-mbia-management-discusses-q4-2012-results-earnings-call-transcript?part=single

 

"We continue to expect rulings in our recovery litigations will substantially reimburse our damages, which in the case of Bank of America run to nearly $5 billion. On the other hand, there will be pressure on us too. Bank of America is a policyholder on substantial CMBS exposures. Although these transactions were structured with deductibles, those deductibles continue to be eroded, resulting in increasing probability of potential claims being presented to MBIA Corp. in the near future. We will continue to be motivated to reach a negotiated settlement because of the potential disruption and loss of value that would be triggered by a regulatory proceeding against MBIA Corp. In addition, I believe that Bank of America will also be motivated to achieve a settlement in order to avoid having their CMBS claims substantially diluted and delayed. Settlements occur when the perceived economic values converge. And there are substantial drivers that we think should suggest such a convergence. However, if that is wrong, both companies will be damaged as a consequence. Moreover, as I've said in the past, we will not accept a noneconomic settlement."

 

"As Jay has said, if the regulator intervenes, the result is likely to be adverse to both MBIA and Bank of America. And given the negative consequences for both parties, we believe that the most likely outcome is a settlement ahead of regulatory intervention. Obviously, we have not come to agreement at this time and we do not alone control the timing of any settlement. As a result, there is substantial doubt about MBIA Corp.'s ability to continue as a going concern. While we believe that the risk of a regulatory proceeding is significant, we do not believe that it is probable. It is important to note that we also do not believe that a regulatory proceeding against MBIA Corp. would impair the going concern status of MBIA Inc., National or Cutwater. These views are also reflected in our auditor's opinion."

[merkhet]

I've been pondering this situation all day, and here's what I think:

 

(1) ShitCo is running out of money at some indeterminate rate -- maybe May or August

(2) MBIA hired Weil to prevent a takeover of the subsidiary

(3) MBIA did not receive the summary judgment as they expected

 

I think that the combination of these three things bring MBIA closer to the settlement table.  After all, MBIA understands (as per the conference call transcript I quoted above) that a rehabilitation would cause ShitCo to lose value and that the most likely outcome is that this gets settled ahead of regulatory intervention.

 

(As to the above, let's not forget that rehabilitation will likely drag National down -- not via any value loss at National but rather by preventing National from getting the ratings it needs to begin writing new business for however long rehabilitation lasts...)

Previously, they may have thought that they could keep the case alive until they received a favorable summary judgment so that they had better bargaining leverage.  Now it looks like they won't get that favorable ruling unless they can survive long enough to get through a trial. ShitCo does not have the staying power to get through a trial.  Therefore, they are left with the most immediate threat of value loss via rehabilitation, and that's what's going to drive them towards settlement.  And soon.

 

Thoughts?

[ericd1]

From my 20,000 foot observation tower and absent of legal prowess, I believe MBIA needed the summary judgement in order to keep their ball rolling. Because they didn't get it it's a new day for them and likely they now are willing to accept a settlement. But because time is running out there's little reason for BAC to settle for a large sum, more likely BAC will only offer a pittance and not be in hurry to settle. Isn't BAC now in the drivers seat?

[Cardboard]

My thoughts as a MBI shareholder is that it is a big problem. You need leverage in a negotiation and especially when you are dealing with someone that can bleed you to dry. Accepting any kind of settlement just to avoid rehabilitation, especially after having gone this far is a shame. Going all the way seems to indicate a guaranteed win. It could take 2 or 3 more years.

 

I think at this point that MBI has only two levers left or:

1- Demonstrate to BAC that they will lose on their insurance with MBI if it ends up in rehab.

2- Find some financing offer that will show to BAC that they can go through the court process in its entirety.

 

A discounted cash flow analysis should then be all is required for both to come up with a reasonable settlement.

 

Legally, as soon as Bransten published her judgment it was over in terms of lever for MBI no matter how it played out. Even if she gave summary judgment, BAC would have appealed the decision. This would have kept the rehab issue in play. Regarding the plaintiffs in the $8.5 Billion settlement, I am not sure how they interpret this latest news, but it is out there now. If a settlement had been reached prior to the release, then it would not have been available to them.

 

Cardboard

[merkhet]

The rehabilitation thing is basically playing chicken -- someone will turn, it's just a matter of who turns first.  It's actually very strong leverage under certain circumstances. I remember a professor in law school once commenting that the easiest way to win a (rational) game of chicken is to remove your steering wheel and toss it out the window where your opponent can see.

 

Honestly, the way that I look at it is that MBIA should settle for whatever gets National their $1.7 billion intercompany loan paid back.  ShitCo is trivial compared to National.  They should settle and then spin ShitCo the hell out of the holding company.