Thursday, March 12, 2009

MBIA's credit default counterparties sue

Representatives of about 15 financial institutions will meet Thursday with New York State Insurance Superintendent Eric Dinallo to complain about MBIA Inc.'s decision to split its bond-insurance unit into two companies, people familiar with the matter said.

The group includes many banks that feel disadvantaged by MBIA's move last month to separate its municipal-bond insurance business from its commitments to insure mortgage-backed bonds and other structured securities. The banks are counterparties to MBIA on derivatives called credit-default swaps that were written on securities they own, many of which have deteriorated since the onset of the credit crisis.

MBIA and New York State's insurance regulator -- which endorsed the restructuring -- are facing a growing backlash from banks, investment funds and other policyholders. These institutions were left holding contracts with a financially weaker insurer when MBIA transferred about $5 billion in capital from its main unit to another company that guarantees only U.S. municipal bonds. A spokesman for Mr. Dinallo declined to comment.

Sophisticated hedge funds were relying on MBIA's insurance as a counterparty?