May 1, 2009

MBIA Sues Merrill Lynch Over Subprime-Debt Protection!

MBIA Sues Merrill Lynch Over Subprime-Debt Protection
written by By Jody Shenn
Thursday April 30, 2009

April 30 (Bloomberg) -- MBIA Inc., the largest bond insurer, said two of its units sued two Merrill Lynch & Co. businesses now owned by Bank of America Corp. over protection sold against mortgage-debt defaults.

The suit, filed in New York State Supreme Court, seeks to unwind or recover payouts for $5.7 billion of credit-default swaps and related insurance sold against collateralized debt obligations, Armonk, New York-based MBIA said today in a statement.

Merrill Lynch misrepresented the nature of the debt being protected as part of a “deliberate strategy to offload” billions of dollars of “deteriorating” subprime mortgages between July 2006 and March 2007, as homeowner defaults began to soar, the insurer said in the statement.

“Today’s action is consistent with our intention to pursue all available remedies against those parties whose improper actions have directly resulted in substantial losses for MBIA and its shareholders,” MBIA Chief Executive Officer Jay Brown said in the statement.

William Halldin, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment.

Bond insurers including MBIA and Ambac Financial Group Inc. have sued banks including JPMorgan Chase & Co. and GMAC LLC over the quality of the home-loan securities they agreed to back. Those suits have generally involved mortgage-backed bonds, not the CDOs created from those mortgage-backed securities or other CDOs tied to them.

Canceling Contracts

The CDOs’ values have fallen even more sharply, with some AAA classes returning nothing to investors in liquidations, according to Standard & Poor’s.

The guarantors have also reached agreements to cancel some contracts on mortgage-tied CDOs at discounts to projected losses, with banks including Merrill Lynch and Credit Agricole SA. Merrill Lynch last March sued a bond insurer now known as Syncora Holdings Ltd. as the guarantor threatened to void $3.1 billion of CDO contracts. They later settled the contracts.

Soaring mortgage losses amid the worst U.S. housing slump since the Great Depression last year cost MBIA its top insurance ratings, leading the company this year to split its guarantee business in two in a bid to return to the municipal-bond market. Moody’s Investors Service downgraded the unit that retained structured-finance guarantees to a non-investment grade.

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