banksvmbia 5.17 transcript

7/31/2019 Banksvmbia 5.17 Transcript

1/153

Claudette Gumbs

Page 280

SUPREME COURT OF THE STATE OF NEW YORKNEW YORK COUNTY: CIVIL TERM: PART 39- - - - - - - - - - - - - - - - - - - - - - - -XABN AMRO BANK NV, BARCLAYS BANK PLC,BNP PARIBAS, CALON, CANADIAN IMPERIAL BANK

OF COMMERCE, CITIBANK NA, HSBC BANK USA NA,JP MORGAN CHASE BANK NA, KBC INVESTMENTSCAYMAN ISLANDS V LTD, MERRILL LYNCHINTERNATIONAL, BANK OF AMERICA NA,MORGAN STANLEY CAPITAL SERVICES INC,NATIXIS, NATIXIS FINANCIAL PRODUCTS INC,COOPERATIEVE CENTRALE RAIFFEISEN BOERENLEENBANKBA NEW YORK BRANCH,

Petitioners,

Index Number:- against - 601846-09

ERIC DINALLO, in this capacity as Superintendentof the New York State Insurance Department, theNEW YORK STATE INSURANCE DEPARTMENT, MBIA INC,MBIA INSURANCE CORPORATION, and NATIONAL PUBLICFINANCE GUARANTEE CORPORATION (fka MBIAINSURANCE CORP OF ILLINOIS),

Respondents.

- - - - - - - - - - - - - - - - - - - - - - - -X

Supreme Court60 Centre StreetNew York, New York 10007

May 17, 2012

BEFORE:

HONORABLE BARBARA R. KAPNICK,Justice of the Supreme Court


2/153

Claudette Gumbs

Page 281

1

2

APPEARANCES:3

SULLIVAN & CROMWELL LLP4 Attorneys for the Petitioners125 Broad Street

5 New York, New YorkBY: ROBERT J. GIUFFRA, ESQ.

6

7 KASOWITZ BENSON TORRES & FRIEDMAN LLPAttorneys for Respondents

8 1633 BroadwayNew York, New York 10019-6799

9 BY: MARC E. KASOWITZ, ESQ.10

OFFICE OF THE ATTORNEY GENERAL11 Attorneys for the State Respondents

120 Broadway12 New York, New York

BY: DAVID HOLGADO, ESQ.13

------------------------------------------------------14

Vicki Glover, Official Court ReporterClaudette Gumbs, Official Court Reporter15 60 Centre Street

New York, New York 100716 646.386.369317

18

19

20

21

22

23

24

25

26


3/153

Claudette Gumbs

Page 282

1 Proceedings

2 THE COURT: Good morning, everybody.

3 PMR. GIUFFRA: Good morning, your Honor.

4 MR. KASOWITZ: Good morning, your Honor.

5 THE COURT: So I give you one day off and you get

6 in all kinds of trouble. I don't know what I will do with

7 you all. I am going to have to keep you here every day

8 now. I don't want to spend too much time with the

9 correspondence letters that I got, e-filed last night,

10 yesterday afternoon and last night. Let's just spend a few

11 minutes, otherwise it is like a pink elephant sitting in the

12 courtroom, so Mr. Kasowitz, since you wrote the first

13 letter, I will let you briefly address this issue and I will

14 let Mr. Giuffra respond.

15 Mr. Holgado, you have not chimed in on this yet but

16

I will certainly let you if you want to and we will try to17 move along.

18 MR. KASOWITZ: Thank you, your Honor. I will be

19 brief. It is in our letter but I just to have it amplified

20 a little bit.

21 We have all spent during the last three years an

22 unprecedented amount of time and effort and money on all

23 manner of discovery, all manner of hearings, all manner of

24 litigation in this case and it has been an enormous amount

25 of litigation in any case, let alone what is supposed to be

26 a summary proceeding and the banks have taken enormous


4/153

Claudette Gumbs

Page 283

1 Proceedings

2 amounts of discovery, expanded this into way beyond what it

3 really probably should have been from the outset and it has

4 been an enormous burden for our client and expense -- and

5 for the State and for the Court.

6 So we are entitled, I think, and the State is and

7 the people are and the Court is entitled to know whether at

8 this point, as this hearing commences, whether or not there

9 is some effort by Bank of America and their lawyers and

10 consultants and lobbyists and the like to undermine this

11 process and you know, the Legislature certainly has the

12 right to hold hearings and do whatever they do, but the

13 question is, whether or not the banks and their counsel and

14 their lobbyists and their agents have participated in that

15 process in a way that could be improper under the Code of

16

Professional Responsibility and other things.17 And so, I think that from the facts here it seems

18 inescapable that they have, your Honor.

19 First, this is three years after transformation.

20 There has been an enormous amount of publicity in the media

21 about this case and yet, it seems just coincidentally at the

22 time that this hearing, which is going to resolve the issue

23 of whether or not the Superintendent's approval was

24 arbitrary and capricious or whether it was appropriate,

25 right then, all of a sudden, there is this public statement

26 from the Legislature about this.


5/153

Claudette Gumbs

Page 284

1 Proceedings

2 Secondly, that public statement was followed

3 directly by the banks' counsel publicity people sending out

4 a public release.

5 And thirdly, when you look at the substance of the

6 public statement, it is right on the banks' playbook, your

7 Honor. The language looks like it is taken right out of

8 their briefs.

9 And so, I think we are entitled to know whether the

10 banks or their counsel or their lobbyists or other agents

11 had some role in preparing that release that made reference

12 to the possibility of concealment of material information

13 from the Department.

14 And I am particularly -- I think we are also

15 particularly entitled to know whether or not they had some

16

role in preparing this or participating in any way or knew17 about this proposition that there is going to be -- that the

18 -- these committees are going to consider whether or not to

19 do anything and they are going to monitor events in this

20 case and then see how those events go and then, if

21 appropriate, take necessary action.

22 What does that mean, your Honor? What does that

23 mean? Does that mean that if the banks don't prevail here,

24 then there are going to be hearings up in Albany about this?

25 I have never heard of such a thing. We are here today for

26 the purpose -- and during this hearing -- of deciding


6/153

Claudette Gumbs

Page 285

1 Proceedings

2 whether or not this transformation is going to be approved.

3 All of a sudden, the Legislature is weighing in and saying

4 they will hold hearings on the very same subject matter?

5 If the banks or their counsel or their consultants and

6 lobbyists have something to do with this, we are entitled to

7 know that, your Honor.

8 Look, I don't know why they would do it. I don't

9 know whether it is because 16 of the 18 banks have already

10 settled or have otherwise dismissed this case. I don't know

11 whether it is because there is a $5 billion claim by MBIA

12 proceeding against Bank of America for insurance fraud in a

13 courtroom down the hall. I don't know.

14 What I do know is that our client and the State and

15 the Court and the people are entitled to know whether there

16

was some involvement there and I think that as a very simple17 and straightforward matter. Counsel should just directly

18 answer the questions that we have presented in our letter

19 and we can move on.

20 Thank you, your Honor.

21 MR. GIUFFRA: I agree, your Honor, that we should

22 not spend a lot of time on this. I agree with Mr. Kasowitz

23 that we should decide these issues in this courtroom,

24 present the evidence in this courtroom and that is what we

25 are prepared to do.

26 I responded to Mr. Kasowitz' letter last night. I


7/153

Claudette Gumbs

Page 286

1 Proceedings

2 learned that the issuance of this press release when a

3 reporter called me about it. So we would like to just try

4 the case, get moving today and just go forward.

5 MR. KASOWITZ: Your Honor, that does not answer

6 the question.

7 I am sorry. That was a non answer answer. They

8 learned about -- the letter says it learned about the

9 issuance of the press release, does not go to whether they

10 had knowledge of it, or whether any of the agents lobbyists

11 knew about the preparation of it, whether they instigated

12 it, and it was a complete non answer answer. We know they

13 had some role in the dissemination of it because we, we got

14 copies of the issuance by the banks own publicity people, so

15 we would like those questions answered, your Honor.

16

Thank you.17 THE COURT: Mr. Holgado.

18 MR. HOLGADO: Yes, your Honor.

19 Very briefly, I think there are two points I would

20 like to make. I don't know if I can be as brief as Mr.

21 Giuffra was. However, he said we would like these issues

22 to be decided in this courtroom. I would like to point out

23 to your Honor what these issues are that he is referring to

24 and he did in fact mention these issues that were referenced

25 in this press release which we are not going to comment on

26 on what questions need to be answered and anything about


8/153

Claudette Gumbs

Page 287

1 Proceedings

2 that, as Mr. Kasowitz is suggesting, I think he is entitled

3 to the position he is taking. But you know we are not

4 taking a position on that.

5 However, your Honor, you know, decided with respect

6 to our motions in limine that we would go ahead and despite

7 having told Mr. Giuffra at the April 20th conference and on

8 other occasions including the morning of the first day that

9 that was not what this case is about, these issues of

10 concealment and what MBIA might have hid or not hid or said

11 or not said, but rather, the rational basis for the

12 Department's determination that that is what is at issue in

13 this proceeding.

14 He is saying let's have these issues decided in the

15 courtroom. That is a little bothersome to me and I don't,

16

I think that this is part of why we tried to keep these17 things out in the first place, and keep us focused on what

18 the actual issues to be decided are here is the side show

19 that Mr. Giuffra creates in his oral argument, your Honor.

20 It runs the risk of extending beyond this courtroom and we

21 think that that is not helpful to your Honor to decide this

22 case.

23 The only other thing I want to reference, your

24 Honor, in terms of just these issues having been public

25 since long before the first couple of days of this hearing,

26 is that I would just remind your Honor that there was a


9/153

Claudette Gumbs

Page 288

1 Proceedings

2 letter sent by Mr. Giuffra to the current Superintendent of

3 the Department of Financial Services that I was not copied

4 on and we talked about this with your Honor briefly at a

5 conference in the fall of last year, and in that letter, I

6 was not copied on the letter even though he knew I was

7 counsel and I found out about it in the Wall Street Journal

8 and it was about these same types of issues and so I think,

9 you know, I would just -- I think that is at least relevant

10 to point out this had been in the Wall Street Journal and in

11 the papers for sometime. It is a little bit interesting

12 this is suddenly happening now and I think Mr. Kasowitz is

13 certainly entitled to the position he is taking in his

14 search for an answer to those questions, your Honor.

15 THE COURT: Well, I guess the timing of all this

16

is what to some extent concerns people and there is the17 other issue that you both touched on in your letters about

18 anybody trying to do something that is going to influence my

19 determination, my ultimate determination in this case.

20 We are trying in this courtroom the Article 78.

21 That is it. I have a lot of decisions to make on that. I

22 have made some. I will have a lot more to make as it goes

23 on, and I am not here to do an investigation for State

24 Insurance Fund or the State Senate or any of their

25 committees or anything else. They look at what they look

26 at. We look at the legal issues dealt with in this case.


10/153

Claudette Gumbs

Page 289

1 Proceedings

2 So I don't think it helps anybody and I don't think

3 it helps the process here to be trying everything outside --

4 in an attempt to try something outside of this courtroom.

5 The fact that things get outside of the courtroom is

6 obvious. The Court is an open place. I don't know who is

7 sitting in the room. I do know there is a lot of press

8 people. We see things that are coming out and that is fine,

9 that is what we do, but I think the concern is to

10 affirmatively go and get -- be involved with lobbyists to

11 try to do things outside to this extent would be of some

12 concern.

13 So I don't know if you have any answer further than

14 what you have said Mr. Giuffra. I mean, I saw some of the

15 e-mails that you attached to your letter last night; I

16

recognized some of the names and I don't know if that17 answers the question completely or not, but can you address

18 anything else as to any involvement that you or any people

19 that you are working with on this case have had in getting

20 this all going?

21 MR. GIUFFRA: Your Honor, I agree with you. We

22 just should get going. I never saw the press release until

23 the reporter sent it to me, so I think we just should get

24 going and I agree that the case should be tried in this

25 courtroom. And this is just, as Mr. Holgado said, a side

26 show.


11/153

Claudette Gumbs

Page 290

1 Proceedings

2 THE COURT: Yes.

3 MR. KASOWITZ: Your Honor, if it is a side show,

4 it is a side show they started and again, I note for the

5 record that is no answer to these questions. I think that

6 we are entitled to these answers and I don't want to hold up

7 these proceedings, but if we are put in a position where we

8 can't -- we don't have these answers and need to take

9 discovery on them and the like and need to make a formal

10 application for them. We will preserve our rights with

11 respect to this.

12 We think this is improper and as potentially has

13 consequences so what would be easiest would be a straight

14 out answer, would be a straight out answer now. The -- his

15 letter does not deny it, he is not denying it, he just says

16

he didn't know about the issuance of the press release. We17 had questions that related to the time before the press

18 release. I don't want to get bogged down here, but we are

19 entitled to an answer.

20 If he has nothing to hide, let him say it. If he

21 has something he doesn't want to say and we need to serve

22 discovery requests and the like so we don't hold this up, we

23 are prepared to do that too, but I think his non answers

24 here are speaking volumes about the questions that we

25 present in our letter.

26 Thank you, your Honor.


12/153

Claudette Gumbs

Page 291

1 Proceedings

2 THE COURT: I think we should proceed. You

3 certainly have the right to reserve any rights that you

4 have. If there is any other kind of request or whatever,

5 we will go on. I don't want to get bogged down all morning

6 in this. I want to move this ahead as much as we can.

7 So let's go now. I have your letters and we will

8 see where it goes.

9 MR. KASOWITZ: Thank you, your Honor.

10 MR. GIUFFRA: Mr. Steinberg will lead off this

11 morning for us.

12 THE COURT: Good morning, Mr. Steinberg.

13 MR. STEINBERG: Good morning, your Honor.

14 Your Honor, this morning I will talk to you about

15 the solvency analysis that was done by the -- in connection

16

with the review of the transformation transaction and we17 will talk about its importance to the transformation

18 transaction and the analysis that the New York Insurance

19 Department undertook.

20 I am also going to talk about the two tests of

21 Insurance Law Section 1309. 1309 has two different prongs

22 which I will go through and show your Honor.

23 One prong of 1309 and I will go through the slides

24 which will give you a heads up of where we will go today

25 relates to what is called the objective reinsurance test,

26 that is how the Department Mr. Moriarty characterized it and


13/153

Claudette Gumbs

Page 292

1 Proceedings

2 then, there is a second test which is more subjective, based

3 on the ability to pay claims as they come due.

4 Now, what we will show is there is no evidence in

5 the record that the objective reinsurance test, that there

6 was any analysis of it or that it even could be met and this

7 is one of two prongs in the Insurance Law that must be met

8 in order to determine solvency.

9 Second, there is a subjective ability to pay claims

10 test. The support in the record for that finding, for that

11 determination is based exclusively on an opinion that was

12 delivered to the New York Insurance Department by Bridge

13 Associates. The Department, as we talked about on Tuesday

14 and I will briefly remind your Honor, said that the

15 Insurance Department did not do its own solvency exam. In

16

fact, it relied upon Bridge.17 The Bridge opinion was done in two and a half

18 weeks. Now, that comes in with the evidence that it took

19 over a year, at least a year is the evidence in the record

20 about what the Department thought it would take.

21 In connection with the Bridge analysis we will talk

22 to your Honor about what Bridge did do and didn't do. And

23 even though Bridge was supposed to be independent and

24 looking at all of these questions that were being performed,

25 Bridge missed a rather sizable error and we will talk about

26 that.


14/153

Claudette Gumbs

Page 293

1 Proceedings

2 Finally, Bridge submitted its original report which

3 used numbers that MBIA supplied that were for the third

4 quarter of 2008; the 9-30-08 quarter and as the transaction

5 progressed was -- and was not being immediately acted upon

6 those data contained in the 9-30 financial statements before

7 the world had really started to change, became stale and we

8 will talk about that and finally, we will show you what the

9 Department, what Mr. Dinallo thought about the Bridge

10 opinion, and what his experts in the Department thought

11 about the Bridge opinion and its usefulness and we will show

12 you there was quite a divergence.

13 Now, I said I would start with solvency and its

14 importance to the transaction and I would like to remind

15 your Honor of Plaintiff's Exhibit 600, which is the 150

16

annual report of the superintendent and it is the "the core17 mission of the New York State Insurance Department to

18 protect policyholders and make certain that insurers

19 maintain their solvency. Seldom has achieving that mission

20 been more critical than in 2008."

21 Obviously, 2008 was quite a year, your Honor and

22 so, it raises solvency to the forefront.

23 In fact, if I can go to the next slide, MBIA's own

24 sir reply discussed that the sine qua non, the entire

25 underpinning of the approval letter was the New York

26 Insurance Department finding that MBIA Insurance would be


15/153

Claudette Gumbs

Page 294

1 Proceedings

2 solvent post transaction.

3 Now, what is interesting is that in fact, there is

4 no finding.

5 So let's go to the answer that was filed in this

6 proceeding, which is we have it also as Plaintiff's

7 Exhibit 1083 and in their answer, they affirmatively aver we

8 indicated that we didn't think they were solvent and they

9 responded by affirmatively averring that the definition of

10 insolvency stated by petitioners in our paragraphs is

11 irrelevant in this proceeding, because critically, the

12 Department's determination of MBIA Corp's post

13 transformation solvency was based on the definition of

14 insolvency provided for in Insurance Law 1309 which the

15 Department was required, required your Honor to utilize in

16

making its determination.17 Now, in fact, we touched upon and I will move on,

18 but we touched upon how in the very approval letter itself,

19 your Honor, which is Petitioners' Exhibit -- I am sorry, it

20 is not here, 6, this is the February 17th approval and when

21 you look at it, it has again the application which describes

22 on the first page what they are asking to do, and go to the

23 next page, it describes the reinsurance transaction, it

24 describes certain credit they wanted to have, it describes

25 plaintiffs' reduced exposure and then it goes to the

26 findings. Next page, Department Approvals.


16/153

Claudette Gumbs

Page 295

1 Proceedings

2 So the Department on February 16th indicates that

3 they have reviewed what they considered the requests, they

4 note that they have seen the agreements and "In

5 consideration of the foregoing the Department issues the

6 following approval --" and the very first one, your Honor,

7 is the MBIA Corp dividend which refers to Section 4105.

8 And in the entirety of this letter, 4105 is as

9 close as the Department gets to making a solvency finding.

10 What they say is Insurance Law 4105 prevents an insurer

11 within a 23-month period from paying dividends to

12 shareholders in excess of ten percent of surplus.

13 We had a discussion about that on Tuesday and then,

14 it says that statute grants the Superintendent the

15 discretion to permit an insurer to exceed such limitation

16

upon the finding that the insurer will retain sufficient17 surplus to support its obligations and writings.

18 Now, that is in 4105. To support its obligations

19 and writings. In other words, so they can continue to pay

20 their policies. That determination, as we have discussed

21 before, was based upon representations made, the

22 Department's examination of the MBIA entities' financial

23 condition and their analysis giving effect to the

24 transformation.

25 So in light of those three areas, the Department

26 finds that MBIA Corp will retain sufficient surplus. In the


17/153

Claudette Gumbs

Page 296

1 Proceedings

2 entire letter, that is as close as they get. There is no

3 mention of 1309 at all in this letter.

4 Now, why is it that there was not a finding under

5 1309 in this letter? And the answer is sort of simple.

6 One, the Department did not do a solvency review. They

7 didn't have time. You recall that.

8 (Whereupon the following was transcribed by Senior

9 Court Reporter Vicki Glover.)

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26


18/153

vg

Page 297

1 Proceedings

2 MR. STEINBERG: (Continuing) You'll recall that

3 involved in the transaction was Mr. Moriarty, who was the

4 31-year professional from the Department and who was

5 dealing with this matter and was the sort of the person on

6 the street, the Deputy Superintendent. In fact, he is the

7 person signing this letter.

8 And what does Mr. Moriarty say about whether or

9 not there was going to be a full verification?

10 "Was there any discussion" -- this is his

11 testimony.

12 "Was there any discussion of Mr. Buchmiller doing

13 a verification of the financial statements; i.e., a full

14 scope examination, prior to the approval of the

15 transformation transaction?

16

"Answer: There was a discussion; however, that17 would have taken a year or more."

18 Mr. Buchmiller also testified -- Mr. Buchmiller

19 was asked these questions.

20 "Did you perform a solvency analysis" -- I'm

21 sorry, this is Buchmiller at 100, line 25 to 101, line 12.

22 Starting at the top, I'm sorry.

23 "Did you perform a solvency analysis of MBIA

24 Insurance in connection with your work on the

25 transformation transaction?"

26 Objections.


19/153

vg

Page 298

1 Proceedings

2 "Answer: No, I wouldn't characterize it that

3 way."

4 He didn't do it. It would have taken a year or

5 more.

6 Now, in fact, let's go to 391 for Mr. Buchmiller.

7 Mr. Buchmiller was asked questions about the 1309

8 exam, whether or not he did this. And what did

9 Mr. Buchmiller say about that? And that is

10 Mr. Buchmiller's deposition at 391, 14 through 24. And so

11 here's what he testified in September 2010.

12 "Question: So did you do a solvency analysis for

13 purposes of 1309 in connection with the review that you did

14 for the transformation transaction?"

15 Now, you'll recall, of course, this is the

16

question of -- that was crucial in their answer.17 "Answer: No, I did it with respect to the

18 examination report."

19 Now, the examination report, the examination, the

20 evidence is, the examination started in September 2008.

21 When did that examination conclude? That examination

22 report was not completed until May 2010. It took 19 months

23 for them to do that analysis, the 1309 analysis.

24 Now, in view of all of this, what is the analysis

25 that was going to be required? Now, we know the Department

26 didn't do it. They say they didn't do it. So let's look


20/153

vg

Page 299

1 Proceedings

2 at what it is in section 1309 that they were supposed to

3 do.

4 So let's put up the language of the statute.

5 1309 says that: Whenever the superintendent finds

6 from a financial statement or report on examination that an

7 authorized insurer is unable to pay its outstanding lawful

8 obligations -- its policies, among other things -- as they

9 mature in the ordinary course of business -- and then it

10 sets two tests with an "or" -- it has to be both, as showed

11 by number one, we've added these ones -- "by an excess of

12 required reserves and other liabilities over admitted

13 assets," whether there's a surplus, or "by its not having

14 sufficient assets to reinsure all outstanding risks with

15 other solvent authorized assuming insurers after paying all

16

accrued claims owed."17 Then it says -- this is sort of written in an odd

18 way, but the superintendent is commanded to look at it.

19 And if they find that there's either, number one, this

20 excess of required reserves, or number two, by its not

21 having sufficient assets to reinsure all its outstanding

22 risks, such insurer shall be deemed insolvent. That's it.

23 Right there. You fail either of those tests, you're deemed

24 insolvent. And then the superintendent does have some

25 discretion. And then the superintendent may proceed

26 pursuant to the provisions of article 74 of the chapter.


21/153

vg

Page 300

1 Proceedings

2 Now, article 74, your Honor, relates to the

3 rehabilitation, the liquidation, conservation and

4 dissolution. Once you fall out of 1309, the Legislature is

5 telling the superintendent you should do something. We'll

6 give you the discretion about what to do, but no matter

7 what, here's what the key prerequisites are. Here's what

8 you have to look at.

9 Now, we asked Mr. Moriarty about these two tests

10 and to understand them. And with respect to the (2), the

11 reinsurance test, we asked him whether or not this was an

12 objective test. It's a market based test, right? You go

13 out and you look to others to say, hey, can you reinsure my

14 book? How much would it cost? And then I get a number.

15 And if that number is what I have above what I'm able to

16

pay other folks, right, what's my obligations, I meet that17 test.

18 And so we asked him:

19 "Wouldn't you agree that the second prong of 1309

20 is an objective test as to the solvency of an insurer?"

21 They object to the form.

22 THE COURT: Why are you standing up?

23 MR. HOLGADO: We exchanged, you know, deposition

24 designations back when we thought this was going to be a

25 little bit more of a formal process, and there were counter

26 designations. I would just like to see the next two


22/153

vg

Page 301

1 Proceedings

2 questions and answers after the one he's quoting.

3 MR. STEINBERG: Your Honor, I'll talk about these,

4 but this is in the record. This is Petitioner's Exhibit 15

5 that's been in front of your Honor. I'm sorry.

6 Mr. Moriarty's has been lodged with your Honor for quite a

7 while. So he'll have his opportunity. I'm going to talk

8 about -- I know what he wants to talk about and we're going

9 to get to that. So if I can make my presentation, I'd

10 appreciate it.

11 MR. HOLGADO: Sure. I just want to make sure

12 we're going to eventually see those next two questions and

13 answers, your Honor.

14 THE COURT: In a trial if they don't show, or in a

15 proceeding, if they don't show everything that you want,

16

you have an opportunity to do that when you're up there.17 MR. HOLGADO: Of course, okay. I'll make a note

18 of it. Thanks, your Honor.

19 MR. STEINBERG: Now, let me go back from the

20 interruption. I want to make sure because this is an

21 important point and they have to acknowledge it.

22 "Would you agree that the second prong is an

23 objective test as to the solvency of the insurer?

24 "Answer: It is a market test, an objective

25 test."

26 What a perfect thing to have in the statute as an


23/153

vg

Page 302

1 Proceedings

2 objective test.

3 Now, we asked about the other prong, the setting

4 the reserves prong. Mr. Moriarty a 31-year professional,

5 was asked:

6 "Question: Whereas the first prong of 1309 is a

7 test that's based on the loss reserving judgments of the

8 insurer, right?"

9 Mr. Moriarty's answer: "In addition to the

10 valuation of the assets, yes."

11 So what is Mr. Moriarty saying?

12 He's saying the reinsurance prong objective, the

13 setting reserves subjective, and not only are -- and he

14 correctly adds in the point that, not only is the insurer

15 required to make subjective determinations about its

16

assets -- its liabilities, what it's going to pay the17 policyholders, but they also have to make subjective

18 valuations about their assets. There may be illiquid

19 investments that they're going to have to make subjective

20 judgments about as well. And that's part of the disclosure

21 process. That's what they tell the commissioner. That's

22 what they tell the Insurance Department. They give them

23 what their reserves are. But importantly, one is within

24 the mind and the ability of the insurer, the other one

25 looks to the market.

26 Now, in this period, and I want to step back for a


24/153

vg

Page 303

1 Proceedings

2 minute. The information that was provided to the New York

3 Insurance Department has been focused on the subjective

4 test; whether the loss reserves were correct, whether or

5 not sufficient information was, what was their valuation of

6 these highly sophisticated financial instruments that they

7 had agreed to insure. That is a highly -- you know,

8 involves a more great amount of subjectivity than could you

9 turn your book to the reinsurance market.

10 Now, there's nothing in -- the facts are clear in

11 the record that MBIA could not meet the reinsurance test.

12 And in fact, they never looked at it. Never looked at that

13 prong.

14 Mr. Moriarty again at 343.

15 And Mr. Moriarty submitted an affidavit. He

16

submitted it to your Honor in connection with the answer to17 the petition. That is dated November 24th, 2009. And in

18 paragraph 39, Mr. Moriarty describes --

19 Yeah, let's pull up 39.

20 And this was submitted simultaneously with the

21 submission of the record that was certified and he submits

22 this. And what does Mr. Moriarty, whose testimony I've

23 just shown you, say? He says that -- he describes what I

24 told you. 1309 states an insurer is insolvent if the

25 insurer has an excess of reserves and liabilities over

26 admitted assets, the subjective test, and is unable to


25/153

vg

Page 304

1 Proceedings

2 reinsure all outstanding risks with other solvent

3 authorized assuming insurers after paying its claims owed,

4 the objective test.

5 Now, in fact, you go to Mr. Moriarty. We asked

6 him at his deposition at 343, line 7 through 344 line 17.

7 "Let's turn to your affidavit.

8 "Do you know" -- this is the person who signed the

9 letter -- "whether MBIA Insurance could have reinsured all

10 of its risk prior to the transformation transaction?

11 "Answer: I do not.

12 "Do you know whether MBIA Insurance could have

13 reinsured all of its risk after the transformation

14 transaction?

15 "Answer: I do not."

16

I'm not sure why I have the other "I do not,"17 but --

18 "Did the Department ever consider evaluating

19 whether MBIA Insurance could have reinsured all of its risk

20 prior to approving the transaction?

21 "I do not."

22 He didn't do it. There is nothing in the record

23 right there on that provision. And in fact, they just

24 never -- there is nothing in the administrative record at

25 all where they analyzed the cost to MBIA of reinsuring this

26 book.


26/153

vg

Page 305

1 Proceedings

2 Now, underneath the tests that the Department

3 acknowledges in its binding answer, when it says "the

4 required test of 1309," we win right there. The decision

5 must be annulled under their own standard. There is no

6 evidence in that administrative record.

7 Now, of course, Mr. Holgado got up, you know, as

8 he should, and said, but your Honor, I have another story.

9 I can tell you something about this. I can tell you what

10 Mr. Moriarty said.

11 And what did Mr. Moriarty say about this? Well,

12 before I go there, I want to say, what is it that MBIA knew

13 about this? What did MBIA know about the second prong?

14 Let's put up Mr. Chaplin's e-mail to Mr. Brown.

15 Now, this is Exhibit 126, your Honor. This is

16

before your Honor. I want to talk with the bottom e-mail17 that's July 27, 2008. This is within the quarter leading

18 to the 9/30. We're going to talk a lot about September 30,

19 2008. In that quarter, Chuck Chaplin, the CFO, the chief

20 financial officer of the parent, is writing Jay Brown, the

21 CEO of the parent. And they're going to discuss an audit

22 committee presentation on solvency. Undoubtedly, it was on

23 their minds. And Fred is referred to Fred Pastore. In

24 fact, if you go up to the top e-mail, Chuck Chaplin sends

25 to Fred Pastore this e-mail.

26 "Fred passed along to me your concerns about the


27/153

vg

Page 306

1 Proceedings

2 slide in this deck" -- and this is the deck being prepared

3 for the audit committee -- "that asserts that the insurer

4 is not insolvent under the reinsurance test of 1309. This

5 was a slide suggested by the attorneys for our meeting with

6 The New York State Insurance Department" -- "NYSID" --

7 that's what I'm guessing it means. "The points I would

8 have made" -- never actually got to the presentation --

9 "would have been" -- and this is where Mr. Holgado might

10 stand up a lot.

11 He said, the esoteric -- this is their view --

12 "This is an esoteric and never used test hardly seems

13 relevant when we have all these other really good things."

14 All their subjective judgments. They have lots of

15 subjective judgments. They think that's really good.

16

That's not what the Legislature thinks, but that's okay.17 "In today's reinsurance market, we don't believe

18 that there's capacity to reinsure our entire book at

19 virtually any price, so any analysis of a required price is

20 highly speculative."

21 What are they saying? That their book has become

22 so volatile that there are no other reinsurers out there

23 for them. That is the nature of insolvency. When your

24 book can change so fast, so rapidly and the reserves

25 changing so quickly, that's what the insurance laws are

26 meant to protect against.


28/153

vg

Page 307

1 Proceedings

2 Then it goes on to discuss Mr. Ackman who is

3 making a run at them at the time, and they're criticizing

4 his analysis because everybody was on to this. Everyone

5 knew as we slipped into the depths of the financial crisis

6 that reinsurance, because these esoteric instruments were

7 becoming so volatile and creating such losses, they were,

8 and I'm sure your Honor remembers the phrase at the time,

9 called toxic. No one wanted to touch them. So, Ackman's

10 analysis isn't based on transaction data so they're

11 criticizing him. And so what they really had, they had a

12 line in their audit committee papers which was, "We believe

13 we can do it." So he goes on to say, "The belief that we

14 have asset adequacy to reinsure in a theoretically open

15 market" -- and this is what they were going to tell the

16

audit committee in the last bullet -- "is really based on17 my conviction that we're highly capital and liquid."

18 No, no, no. My subjective views? We think we're

19 great. Since we have a financial position that justifies

20 our high investment grade, I believe that, you know, if and

21 when there is a market for this type of reinsurance, it

22 will be available to us.

23 How does he, Mr. Chaplin, conclude to the CEO?

24 "I wouldn't plan on telling the audit committee

25 that we 'meet the second test of section 1309 in any direct

26 way.'"


29/153

vg

Page 308

1 Proceedings

2 So the header on the page may be misleading.

3 They, MBIA, knew, knew, they could not meet this test.

4 Now, their experts in this case play that theme

5 out. They play it out. Not surprisingly. That's their

6 story. They say, hey, you couldn't reinsure it. It was

7 highly speculative. I know the Legislature said it but,

8 you know, and Mr. Moriarty said, in 31 years he doesn't

9 recall ever having to use it, undoubtedly because we never

10 had a market situation like in the -- over those 31 years.

11 But they did consider using it once. They thought about

12 it, and then when we asked about it we were shut down. We

13 were shut down. We said, we'd like to know about that, and

14 they said no. And I'm looking forward when he comes up

15 here, your Honor, to show you about that because it goes to

16

a broader issue of their ability and desire to use things17 as a sword and as a shield. They'll let us know a little

18 bit, but they won't let us know the whole story.

19 So, the record in this case under this one prong,

20 and then I'm going to move on to the subjective prong,

21 there is nothing in the record to support that

22 determination. Nothing.

23 So when the reinsurance prong goes away, the focus

24 has to be, therefore, on the subjective prong. And that's

25 where Bridge comes in. Because the Department didn't do an

26 analysis. They said it would take a year or more. It in


30/153

vg

Page 309

1 Proceedings

2 fact took 18, 19 months. It took a long time. Now, they

3 didn't have that type of time. MBIA wanted to get it done

4 fast. MBIA started this process and there was a discussion

5 we had -- there was the discussion -- we had this

6 discussion the other day.

7 (Continued on next page.)

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26


31/153

Claudette Gumbs

Page 310

1 Proceedings

2 MR. STEINBERG: We had this discussion the other

3 day where -- I am sorry, let me step back for a moment.

4 The Department in the end of October changed its

5 view around whether or not this was going to go forward and

6 in the end of October, there was a discussion with the

7 Department by members of MBIA and the Department and

8 finally, they said we think we will get somewhere, and they

9 decide that there is going to be an -- they will permit an

10 application to be filed.

11 And in connection with the original application,

12 and this is October 30th of 2008, there is a discussion of

13 what they will make in their ultimate application and let's

14 go to the first page of this, Exhibit 242 and this is the

15 application that gets made in October and they say they are

16

going to establish a highly rated finance platform to17 stabilize and assist in unfreezing the domestic market,

18 increasing the value of the obligations and they say what

19 they will provide and at the end of the presentation they

20 preview to the Department how they will prove up that they

21 should be permitted to do this, so let's go to -- at the

22 Department in the presentation given, your Honor, one of the

23 end point slides is sort of the next steps. You finish the

24 meeting, the last slide is, what are my next steps? The

25 next steps here are the legal analysis.

26 Now, one of the issues, as I am sure you can


32/153

Claudette Gumbs

Page 311

1 Proceedings

2 appreciate that was being discussed is legal analysis. No

3 one has any recollection of what was discussed, but what

4 MBIA tells the Department about what they are going to do

5 when they come back next is, they are going to find an

6 opinion of a reputable outside insurance consulting firm to

7 opine on the reasonableness and fairness of the transaction,

8 including the Ceding Commission and that will be talking

9 about the reinsurance transaction and they will have an

10 insurance consulting firm do that, but then they will get

11 two other opinions and this is where ultimately it evolves

12 into Bridge.

13 They will get an opinion from a reputable

14 investment bank as to the solvency of Corp, the insurance

15 company and its ability to pay claims following the

16

transaction and they are going to get an opinion from a17 reputable investment bank that Corp, again the insurance

18 company has reasonably sufficient capital subsequent to the

19 transaction. They don't say anything there about that they

20 can -- will show them that the reinsurance part of it works.

21 But they do say we will get you an opinion from an

22 investment bank on those two subjects.

23 Now, in fact -- let me just find this, your Honor.

24 In fact, they don't get an investment bank, and the

25 Department announces to -- I am sorry, MBIA announces to the

26 Department, to Hampton Finer and I will put the e-mail up,


33/153

Claudette Gumbs

Page 312

1 Proceedings

2 Petitioners' Exhibit 58, your Honor and Hampton Finer is

3 told by Bill Fallon, so this is Exhibit 58, bottom e-mail,

4 this is and I want to walk through this, this is

5 November 13, 2008, so approximately two weeks after their

6 meeting with the Department, which happened in October, two

7 weeks later they want to update regarding project

8 transformation. "Our meeting two weeks ago which we just

9 saw we indicated that we would obtain a solvency opinion and

10 a fairness opinion. Now -- and this is Bill Fallon, who is

11 from MBIA, he is writing to, you can see Hampton Finer and

12 he is copying Ram Wertheim the general counsel, Chuck

13 Chaplin, Mitch Sonkin and Mitch Sonkin and Laurence Larose.

14 The lawyer from Dewey Leboeuf and they say we will

15 consult -- and if you're following along, you will realize

16

that he switched. Bridge Associates is not an investment17 company, Raymond James is and Raymond James as the

18 investment bank is providing the fairness opinion, not the

19 solvency opinion. It is sort of switched.

20 So nevertheless, they select Bridge, this is

21 November 13, 2008, and you're going to see this e-mail from

22 others, so I will just tell you about it, because you will

23 see it in two different contexts in this case, your Honor.

24 If you go up, Mr. Finer writes back to Mr. Fallon

25 on the same day and since you know, they had, MBIA had

26 raised the topic of third party analysis, third parties,


34/153

Claudette Gumbs

Page 313

1 Proceedings

2 independent, he goes I think we might have a third party

3 analysis of expected loss in the ABS and RMBS portfolios,

4 the asset backed securities and the residential backed

5 securities, and if you guys are getting experts, this will

6 be really good, and he says this doesn't have to be an

7 element -- have to be an element of the filing necessarily,

8 but it would really help us in making that fair and

9 equitable decision, and because you will hear a lot about

10 Blackrock, I thought I would highlight it.

11 We are not recommending a particular valuation

12 provider, but others have used Blackrock with some success.

13 So on November 13th, they have told the Department

14 okay, we got Bridge lined up. Well, they sort of have

15 Bridge lined up, but first things first, you have to get a

16

retention letter with Bridge and in fact, Bridge gets17 retained and this is in PX 1011, and the cover page is just

18 on the final return copy which does not come back to them

19 until December 11th.

20 But let's go to the second page of it and this is a

21 November 17th -- that is four days after the other e-mail,

22 when they say they selected them and this is going to

23 confirm the understanding between Dewey and Bridge, that

24 Dewey has retained Bridge as an expert consultant to review

25 the financial status. Now, Bridge, let me -- I will go to

26 the next -- so they are going to, let's go down to the


35/153

Claudette Gumbs

Page 314

1 Proceedings

2 services, they are going to identify classes of documents,

3 to be provided to us and let's go back up to the top. This

4 is us being Bridge, you're going to provide us the classes

5 of documents to be provided to us by the client and assist

6 us to inform ourselves. The lawyers will help them learn

7 and they are going to appear if and when requested at

8 administrative proceedings before the New York State

9 Insurance Department.

10 And then, in terms of work product, what do they

11 say? We will provide a written opinion on corporation

12 solvency as of the measurement date, the solvency opinion

13 and then, what they say is, oh, by the way, we understand

14 that any of the documents prepared by us or obtained by us

15 are only for Dewey and Leboeuf, are the property of Dewey

16

and Leboeuf and are subject to Dewey's and -- prepared17 solely for Dewey and Leboeuf and are the property of Dewey

18 and Leboeuf and are subject to Dewey and Leboeuf's right to

19 require that they be delivered into their possession at any

20 time, but you can keep one copy.

21 And at Bridge, who will do this work and that is

22 identified in the staffing provision in the next paragraph,

23 which is Anthony Schnelling will be the managing director,

24 he will be assisted by Fred Kraegel, a senior consultant,

25 and to a director of Bridge. Mr. Schnelling passed away

26 just a few days after this petition was filed, so you won't


36/153

Claudette Gumbs

Page 315

1 Proceedings

2 be hearing from him in this case.

3 But we are going to go in here a little bit, and it

4 is in the record from Mr. Kraegel, the senior consultant.

5 Now, for this engagement, for this engagement, they

6 were going to be paid $1.15 million and they were going to

7 be paid in installments, basically one week, one week, one

8 week they will get different parts of this, and what are

9 they going to -- when are they going to start?

10 They have an agreement about that, when they will

11 start and that is in Paragraph 5. Paragraph 5. Bridge is

12 prepared to commence working on the engagement immediately

13 following receipt of an executed copy of this agreement and

14 receipt of the first installment payment.

15 Now, in fact, in fact, they started to work when

16

they got the payment but they didn't necessarily get the17 document back but they did start to work. Now, how much

18 time before when they started work on this project until

19 they got it done?

20 So let's go back to the front page. They started

21 -- let's assume they got it back that very first day,

22 November 17th. They submitted their solvency opinion on

23 December 5th. So two and a half weeks where the Department

24 said if they did the analysis it would take a year and in

25 fact it took 18 months, so they will have to go really fast.

26 And what does Bridge do? Well, they definitely start,


37/153

Claudette Gumbs

Page 316

1 Proceedings

2 there is no doubt about it and to expedite things, let's

3 have Exhibit 1190, to expedite things and this is Mr.

4 Kraegel and let me go back one moment, your Honor.

5 , on that engagement letter, we asked Mr. Kraegel

6 about it and we said is this typical engagement letter?

7 And he said it is not a typical engagement letter. That is

8 not how these engagement letters are typically written.

9 They are usually -- I am sure your Honor has seen them in

10 many other cases in this part. It was a -- in Mr. Kraegel's

11 words, not typical.

12 Now, Appendix -- so they are starting on this

13 project and they want to go fast. One of the ways in which

14 they go fast is Mr. Kraegel to Mr. Schnelling, he is

15 attaching a first draft, this is by November 26th, he is

16

attaching the first draft of the opinion and appendices A17 and B related to MBIA.

18 And they are asking about comments, and he says

19 please keep in mind as you review or have a desire to edit,

20 that much of the text has come from other documents and not

21 originally developed by Bridge and then, they are just --

22 they want to go fast and I appreciate that, and first of all

23 it is similar to another one being done, but they say

24 Appendix A and other places which have a description of

25 transformation are verbatim from what Dewey and Leboeuf sent

26 us and again, your Honor this is Plaintiff's Exhibit 1190


38/153

Claudette Gumbs

Page 317

1 Proceedings

2 and then he says Number Two, in their desire to go fast,

3 95 percent of the text is verbatim from the 12- 31-200710-K

4 for MBIA Inc, the parent and that is the first draft, fair

5 enough and they want to go fast.

6 We were sort of interested in the speed of this and

7 so, because it is pretty remarkable, so we asked Mr. Kraegel

8 at his deposition, Mr. Kraegel again, I don't think that I

9 have mentioned this yet, but Mr. Kraegel is not in this

10 jurisdiction any longer but his -- so his transcript, which

11 is Plaintiff's Exhibit -- PX 15, we submitted this along

12 with the Giuffra affidavit in March of 2011. So when your

13 Honor wants to find that and read it, that is where it is.

14 We asked Mr. Kraegel, as you sit here today, can

15 you think of any other solvency work that Bridge did that

16

was done in a shorter time than the time spent on the MBIA17 engagement?

18 What did Mr. Kraegel respond?

19 I can't speak to all the various solvency opinions

20 that Bridge has done over the life of its firm, so I can't

21 answer the question.

22 The question "But just in terms of your own

23 recollection, do you recall providing any solvency opinion

24 after doing less than four weeks of work on it?"

25 ANSWER: I don't recall at this time."

26 Two and a half weeks is pretty fast, your Honor.


39/153

Claudette Gumbs

Page 318

1 Proceedings

2 When you finally got to the work that they in fact did, they

3 are able to issue this opinion in early December and let's

4 pull up -- and the Bridge opinion is part of the

5 administrative record, your Honor, which was certified and

6 is our 001 to 980 I believe in the record and so we have

7 cited to the administrative part of the record for your

8 Honor, and this came into the Department on December 5,

9 2008, along with the application.

10 So, it is not -- let's go to this page first, next

11 page, so this is the opinion of Bridge Associates LLC

12 concerning the solvency of MBIA, MBIA Insurance Corporation

13 in connection with the structural transformation of MBIA

14 Insurance Corporation.

15 What I will start with, your Honor, is what were

16

the opinions that were given and then we will work backwards17 from there about how they got to those opinions.

18 So the opinions that were given appear on Page 21

19 of the document, R85 and we will see an old friend here your

20 Honor, R85.

21 You see this is the solvency opinion and the

22 solvency opinion has several different parts. Let's just

23 start with the -- let's go to the opinion first.

24 "Bridge is of the opinion that as of September 30,

25 2008 MBIA was solvent and not impaired as those terms are

26 used in the New York State Insurance Law pursuant to Article


40/153

Claudette Gumbs

Page 319

1 Proceedings

2 13 and Section 1309, 1310 and 4902(b)1.

3 Again, what is the required test according to the

4 New York State Insurance Department? 1309. And they say

5 aye not only would it be solvent, but it would not be

6 impaired on September 30th as those terms are used in these

7 sections and then, they identify how they reach that

8 opinion, and I will come back to that, your Honor, but I

9 want you to see the first opinion.

10 Bridge actually does not only deal with that

11 opinion but on the next page, they deliver two other

12 opinions as well. They say that based on their analysis

13 which I will come back to, I promise, we believe that MBIA's

14 -- and their knowledge about the underwriting practices we

15 believe that MBIA's underwriting and surveillance policies

16

and practices appear reasonable and are similar to those17 followed by others in the financial guarantee insurance

18 industry.

19 They don't tell us who in the financial guarantee

20 insurance industry, but certainly to others.

21 And further, they indicate that based upon their

22 Bridge's review, Bridge's review, the loss reserving

23 methodologies used by MBIA both in the aggregate and the

24 individual, appear reasonable for the stimulation of losses

25 to be incurred by MBIA related to its exposure in structured

26 and international finance portfolios.


41/153

Claudette Gumbs

Page 320

1 Proceedings

2 So that is what Bridge said they did. Those are

3 the opinions they reached in two and a half weeks. And now,

4 let's ask ourselves how do you get to those opinions so

5 quickly? And there is an answer. So if we look at the

6 very beginning of the Bridge opinion and that is R00 --

7 00067, again, all from the administrative record, Bridge

8 starts by discussing what is the summary and scope of the

9 assignment. Always a good place to start.

10 So in this, we were a little curious about a couple

11 of things. We were very curious, it talks about -- this is

12 the opinion of Bridge Associates concerning the solvency of

13 MBIA and I want to highlight for your Honor because we will

14 come back to this for a minute, MBIA Insurance Company (MBIA

15 or the company) in connection with a structural

16

transformation of MBIA, that has been prepared pursuant to17 the engagement of Bridge by Dewey and Leboeuf.

18 Now, the engagement letter that we talked about,

19 your Honor, that was never provided to the Department but

20 they tell them that Dewey and Leboeuf had engaged them.

21 Bridge was engaged to review MBIA's statutory financial

22 results and operations and provide an opinion based on those

23 statutory results as of September 30 of 2008 and so, looking

24 at what in fact happened in September 30th of 2008 and pro

25 forma September 30, 2008, having given effect to the

26 proposed transaction.


42/153

Claudette Gumbs

Page 321

1 Proceedings

2 So they are saying we will tell you at

3 September 30th, were you solvent then and if we did the

4 transaction as of that same date, even if they are not doing

5 it that day, would you have been solvent there and we

6 already saw the opinion they said you bet. Great job.

7 In arriving at its conclusion and this is where we

8 got a little flummoxed, your Honor, we didn't understand

9 this, in arriving at its conclusions as to solvency Bridge

10 reviewed, analyzed and considered publicly available

11 documents and information provided by MBIA. Okay. So

12 they looked at what was in the public domain, and MBIA gave

13 them stuff.

14 Now, here is what is curious. This opinion speaks

15 to September 30th, but it is delivered on December 5th.

16

And so, Bridge tells the Department no worries, the solvency17 opinion is based on facts, conditions and circumstances

18 known to Bridge as of September 5, 2008. I am sorry,

19 December 5, 2008.

20 So we wanted to find out. A lot had happened

21 between September 30th and December 5th. So we asked Mr.

22 Kraegel, the second in command, the second person on that

23 staffing list what it was that he meant by that.

24 So can I pull up -- this is from his video, his

25 deposition which is in the record and this is Mr. Kraegel.

26 This is from -- for the record, this is the deposition of


43/153

Claudette Gumbs

Page 322

1 Proceedings

2 Mr. Kraegel from Page 50 Line 8 to Page 54 Line 20 and so

3 this is his deposition on March 5, 2010, and we start by

4 asking him about that, what do you mean by as of December 5.

5 If we could see that.

6 (Videotape played.)

7 Your Honor, that opinion speaks to additional

8 events up until December 5, 2008. That is what they told

9 the Department. They don't know what they based it on.

10 Now, that is not the only quandary we had in

11 reviewing the solvency opinion. We go back to our R 67 and

12 we saw the conclusion and we saw we don't know what they

13 were taking into account after the financial statements were

14 prepared, but what we do know is that they say what they did

15 rely upon.

16

Now, what is it that Bridge did in these two and a17 half weeks to gauge? And so, it says in performing its

18 work, Bridge is relying upon the integrity, accuracy and

19 completeness of the statutory financial and other

20 information made available by MBIA, its counsel and its

21 advisors and MBIA's representations that the provided

22 information -- provided to Bridge was one prepared in good

23 faith, and second reflects MBIA's best available estimates

24 and third, reflect the good faith judgments.

25 (Whereupon the following was transcribed by Senior

26 Court Reporter Vicki Glover.)


44/153

vg

Page 323

1 Proceedings

2 MR. STEINBERG: (Continuing) And if you turn to

3 the next page, did they ask anybody else -- did they ask

4 anyone other than MBIA, MBIA's advisers and MBIA's lawyers.

5 For example, did they ask the auditors? Their opinion

6 addresses that.

7 Bridge has relied, again, on the information and

8 employees and representatives of MBIA, but they go and they

9 say, "Bridge has not conducted an independent validation of

10 the information and data obtained as part of its work in

11 conjunction with this solvency opinion, nor did it even

12 request or obtain access to any audit, compilation or

13 review work papers of PriceWaterhouseCoopers" -- their

14 auditor -- "the independent registered public accounting

15 firm for MBIA."

16

So, they didn't -- they rely on MBIA. They don't17 look at the auditors. These are not audited financials

18 that they're getting. So we wanted to find out what Bridge

19 did to test the subjective judgments instead of just

20 relying upon them. And again, we asked Mr. Kraegel about

21 this.

22 Could we have Mr. Kraegel at 55:2 through 55:20?

23 Let me -- one more point.

24 They also disclaim -- let's go back to R 67.

25 Bridge makes clear that their opinion is fairly

26 limited, that they didn't ask the critical question. And


45/153

vg

Page 324

1 Proceedings

2 how do they tell the Department that? They say here:

3 "The solvency opinion and the work completed to

4 express such opinion does not constitute an audit, a

5 review, a compilation, or any other type of financial

6 reporting engagement that would be subject to the rules of

7 the SEC, the Financial Accounting Standards Board, or any

8 National regulatory or professional body which from time to

9 time may promulgate or regulate those policies."

10 They're not auditing, reviewing, checking the

11 information.

12 So we asked, what were you trying -- Mr. Kraegel,

13 what were you trying to convey through that?

14 Now let's play it from page 55 of his deposition,

15 Mr. Kraegel.

16

(Whereupon, the above selected portion of17 Mr. Kraegel's videotaped deposition was played.)

18 MR. STEINBERG: Your Honor, Mr. Kraegel took, and

19 Bridge did not do any checking whatsoever of the financial

20 statements of MBIA. They didn't question them. They

21 didn't do anything to evaluate them. They accepted them

22 100 percent.

23 Now, your Honor, I'm about to go back through the

24 opinion. I know we've been going for about an hour and a

25 half. If it pleases the Court, maybe this is a convenient

26 time for a break.


46/153

vg

Page 325

1 Proceedings

2 THE COURT: Perfect.

3 MR. STEINBERG: Thank you, your Honor.

4 THE COURT: Let's take a ten-minute break.

5 (Recess taken.)

6 THE COURT: Okay.

7 MR. STEINBERG: Thank you, your Honor.

8 Right before we broke, and we were talking about

9 the Bridge opinion and we talked about the constraints and

10 limitations of that, and I told you after talking about the

11 opinion and constraints, I would go back and show you what

12 was the data that was used to support Bridge's solvency

13 analysis. And in connection with that analysis, I'll show

14 you where it is in the record, in the administrative

15 record. And so if we go to page R 85, there are -- and

16

again, sort of bringing us back, we're talking about the17 1309 determination. And so when Bridge gave its solvency

18 opinion, it gave a lot of other -- it gave other statutory

19 provisions, but we've been focusing on 1309 because that's

20 what the Department's answer in this case says.

21 So, Bridge gives three sort of supporting points

22 for its solvency opinions. The first one, which is based

23 upon a net admitted assets and other funds, that doesn't

24 relate to 1309, and 1309 isn't mentioned in that first one,

25 and so I'm not going to talk about it here today, your

26 Honor.


47/153

vg

Page 326

1 Proceedings

2 The second analysis they give, they're going to

3 focus on policyholder surplus. And that's on a pro forma

4 basis. And that's under, again, not under 1309.

5 But if we go to the next page, they actually --

6 here's where they identify actually, and they don't

7 identify 1309, but as your Honor will recall from our

8 earlier discussion, "having sufficient funds to pay its

9 current and outstanding obligations and claims when such

10 amounts became due and payable pre-transformation."

11 Now, that is based upon, as they say, two separate

12 tables. Now, the tables, which we'll go to in a moment,

13 are information that Bridge received from MBIA and that

14 they incorporated into their opinion. And as we saw from

15 Mr. Kraegel, they accepted it hook, line and sinker. They

16

accepted the accuracy of all of the information in the two-17 and-a-half weeks that they had to operate here. And so

18 let's take a look at table 6.

19 And table 6 is -- which is at R 82, four pages

20 back. And if we look at the caption at the head, this is

21 projected --

22 Go to table 6. Prior page. Thank you. This is

23 on page R 81.

24 "Projected statutory loss coverage ratios as of

25 September 30, 2008, pre-transformation." So this is not

26 given effect yet. This is if it just stayed, what would be


48/153

vg

Page 327

1 Proceedings

2 the future. And the analysis that they've done, the

3 analysis that Bridge did with the numbers that came from

4 MBIA, is they've given sort of two ratios. And the ratios

5 are located on the bottom of -- and let me explain what

6 this chart does.

7 What this chart does is start -- it's actually,

8 although it has three lines, really if they had a long

9 piece of paper it would be linear. It is taking their

10 investment portfolio; how they were doing with their

11 assets, and then their loss reserves; how they were doing

12 with their losses, and how they were going to pay out those

13 losses, the timing of those losses up until 12/31/2039. So

14 actually, if you think about these, these are actually one

15 long linear timeline. And so that's why at the very top it

16

says "Projected Q4."17 We can blow it up a little. I'm sorry, but this

18 is the quality of the copy we received, so this is what we

19 have.

20 And so you see 12/31/08. And if we go all the way

21 back down -- and 12/31/09. And if we go all the way down

22 to the bottom, here we are, at 2039 and they have these

23 ratios. Now, that's if you didn't give effect taking

24 MBIA's numbers how it would be. Now that's fine. That's

25 if you didn't do the transaction.

26 Now, they also did an analysis, and now I'm going


49/153

vg

Page 328

1 Proceedings

2 to start to focus on the numbers in table 7, which is at

3 page R 82, about what is the statutory loss coverage ratios

4 post-transformation, giving effect to it. And this is

5 table 7. And your Honor will recall in that bullet point

6 where we mentioned table 6 and table 7, that's why we're

7 here.

8 So, for the projected statutory loss coverage

9 ratio -- and now I'm going to need my glasses -- if you

10 look at the investment portfolio, they say they've got 7.4

11 billion in the investment portfolio, and then they -- this

12 is Projected Q4. So this is the very first quarter after

13 the 9/30/08s, right? This is the very first quarter. And

14 the ratios that they're going to do, we have the investment

15 portfolio which lines up with the 7 billion -- 7.4, a loss

16

reserve of 1.67 billion, and then we have qualified17 statutory capital. They have 5 billion. This is Projected

18 Q4.

19 Now, remember, Mr. Kraegel couldn't tell us what

20 he did, what new information they took into account after

21 September 30, '08. So, I don't know how they get there but

22 we'll talk about that.

23 And then they have a loss reserve analysis, $5

24 billion. Statutory capital. And then they start doing

25 ratios. And what the ratios do is they say there's this

26 reserve coverage ratio, which takes the investment, the top


50/153

vg

Page 329

1 Proceedings

2 line, and it divides by the loss reserve balance. And that

3 loss reserve is the third item. So, in this --

4 No, you have the wrong one. Sorry. We have

5 the -- right. The investment over loss. So you'll see the

6 two top numbers. 7.4 billion, then you divide it by 1.671,

7 and it's very simple, 4.4. So that's the ratio that Bridge

8 looked at. And they also looked at, right, they divide the

9 income with 4.4, and I think my math is roughly right. You

10 get 4.4 times. That's the coverage ratio.

11 Now, they have a different analysis that's the

12 claims coverage ratio. And the claims coverage ratio,

13 though, takes the beginning investments, again, looking to

14 the investment portfolio, right, because that's the

15 investment, and then the projected loss payout. And you

16

divide the two. And you actually do them in different17 quarters. So you take the beginning for the period so that

18 you have it at the beginning, and then you have the losses

19 that would be paid in that next year. So you're taking --

20 for example, you would take the Q 3/1/08 for the assets,

21 and the projected loss payout you wouldn't look in '08

22 because that's the end of the year, you have to look to the

23 beginning of the next year. And that's that ratio.

24 Now, for most of those, the claims coverage ratio,

25 if we go -- let's take the cutouts out of this exhibit. If

26 we just look at it, for many of them they don't come up


51/153

vg

Page 330

1 Proceedings

2 with a number at all. There's an NMF. And either it's --

3 we're not sure if it's either no meaningful finding, not

4 meaningful, I don't know. We just don't know. But we know

5 what they did have across the page is for each of these

6 they had the reserve coverage ratio.

7 Now, the reserve coverage ratio is meant to show,

8 hey, look, this is going to be great after the

9 transformation. And what they do is they take the numbers

10 of that and in the first year there's going to be 4.4 times

11 the coverage ratio. In the second year there's going to be

12 10. In the third year there's going to be 17. In the

13 fourth-year there's going to be 13.9. And they go out

14 until 2039. And, you know, it either goes up or it goes

15 down, but by the end of the period, which is important

16

because a lot of these obligations come due toward the17 end --

18 Let's put that back up.

19 In the later years they're saying that oh, you

20 guys, you should relax, because in the later years it's

21 like 43 times the coverage, and 41, 39, 36. That's going

22 to be gravy in 2039. It's going to be wonderful when all

23 of these obligations come due.

24 So that's how Bridge comes to their conclusion.

25 They say, okay, look, there's this cushion, it goes up and

26 down over time but it stays pretty big.


52/153

vg

Page 331

1 Proceedings

2 So now you got to ask yourself, okay, I see that,

3 that's how you did the math, but how did you get the

4 numbers? And so, again, we sort of wanted to find that out

5 too, because what really drew our attention very early was,

6 if you look in the -- and let's blow up the very first two

7 time periods, Q 12/31/08 and 12/31/09 -- in the midst of

8 the financial crisis -- and if we can put up the header

9 next to it so we can see which one's which. We're pretty

10 close -- we wanted to find out, you know, loss reserves.

11 They have 1.67 billion of loss reserves for that first

12 year. What was the analysis that they had to get there?

13 We asked Mr. Kraegel this.

14 (Whereupon, a selected portion of Mr. Kraegel's

15 videotaped deposition started to be played.)

16

MR. STEINBERG: Let's stop. I want to go back17 because there's two numbers he's going to talk about.

18 Let's go back and show R 22.

19 So there's two numbers that are sort of

20 interesting in the first two years. This 1.6 as of

21 12/31/08, and then the 12/31/09, and you'll notice that

22 life's really good. It's going down. It's going down. In

23 the middle of the financial crisis they're saying the

24 numbers are going down. So the 611 you should -- you know,

25 that's pretty honkey dory.

26 So, now, we asked Mr. Kraegel how he got to those


53/153

vg

Page 332

1 Proceedings

2 numbers.

3 (Whereupon, a selected portion of Mr. Kraegel's

4 videotaped deposition was played.)

5 (Continued on next page.)

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26


54/153

Claudette Gumbs

Page 333

1 Proceedings

2 MR. STEINBERG: What Mr. Kraegel is saying is that

3 even though Bridge looked at their loss models --

4 A, he can't tell you what those loss models

5 produced.

6 B, he can't tell you how they even got the first

7 number, that first quarter out, where that number came from,

8 and how it makes sense that in the end of 2008, when the

9 financial crisis was upon them, that he thought things were

10 going to be 300 times better in that second year and he

11 can't tell us -- and we don't know, but that was his

12 analysis.

13 Now, it is actually even a little bit worse than

14 that, because he can't even tell us and this is -- I will

15 not show the clip again, you have seen him, he can't even

16

tell us the answer to the following question "Among the MBIA17 financials that you considered in your solvency opinions

18 were loss projections, is that right?"

19 His answer in the deposition, Page 54, "I don't

20 recall specifically today."

21 He could not even say that they reviewed the loss

22 reserves, your Honor, so this opinion manufactured in two

23 and a half weeks would not be really a deep dive into these

24 figures. He accepted MBIA's numbers. They don't even

25 understand what their opinion is based upon. They say it is

26 based on events that are after 2000 -- after September 30,


55/153

Claudette Gumbs

Page 334

1 Proceedings

2 2008 up to the date of the opinion, which by the way, is two

3 full months of losses leading up to December 31st. They

4 didn't adjust for it, don't know the basis for the numbers

5 and these are the numbers that drive the model.

6 So now, not only does this -- you have to question

7 whether or not this meets the good faith subjective test

8 either, and what is the value of this opinion.

9 Now, I was reminded when I went back through my

10 notes, I failed to tell you one other thing about the

11 objective test and I would like to tell you about it, which

12 is that while the respondents have an expert, Mr. Dudney,

13 who will say oh, it could not be done but you're really

14 looking at the wrong question, you know, the reinsurance, we

15 are looking at the wrong question, that is what the statute

16

says, but we are looking at the wrong question and they say17 oh, it has never been applied, blah, blah, blah.

18 We have Professor Stulz, and Professor Stulz is a

19 finance professor and what he testifies is here is, look,

20 what are these things, these financial instruments that are

21 being insured? They are loans.

22 How do people hedge loans? They have these things

23 called credit default contracts, CDSs, credit default swaps,

24 say Fred submits a mortgage and I say I think Fred is good,

25 I will bet on Fred and someone says I don't think Fred is so

26 good, I will bet against him and that is the nature of it


56/153

Claudette Gumbs

Page 335

1 Proceedings

2 and the credit default swap market is an operating market

3 that has trillions of dollars in it, and when they want to

4 suggest there was no capacity for that, Professor Stulz will

5 show there is no capacity for reinsurance?

6 No, no, no, these are simple loans, they are

7 aggregated, but Professor Stulz will show that in fact, they

8 meet that obligation.

9 I won't say that MBIA Corp, because their financial

10 portfolio was not in good shape, so they could not sell all

11 of their assets and thereby buy reinsurance that would allow

12 them to buy it, so that is Professor Stulz who we have

13 engaged and their professor says well, look the other way,

14 that is not the test.

15 So I want to talk a little bit now about after the

16

opinion was delivered in December, there was a fair amount17 of analysis that -- well, there was, I will say, analysis

18 and there was analysis internally by MBIA and there was some

19 review externally by Mr. Buchmiller and Mr. Buchmiller at

20 the end of January of 2009, Mr. Buchmiller was talking to

21 the people at MBIA and they all -- and MBIA came forward and

22 said, we have to tell you something. We have to tell that

23 you Bridge has -- there is a mistake in Bridge.

24 Now, Mr. Buchmiller says okay, well, you know, tell

25 me about it. And at the end of January, 2009 and this

26 petitioners Exhibit 146, Mr. Buchmiller in writing to his


57/153

Claudette Gumbs

Page 336

1 Proceedings

2 supervisor, Mr. Moriarty and colleague, he writes to Matti

3 Peltonen and others, Scott Fischer, Hampton Finer and other

4 people whose names we have talked about, Glenda Gallardo who

5 was with him in some of the interviews, he writes the status

6 of my MBIA review again, January 30, 2009.

7 And he is describing what he is doing and we will

8 go over the memos for other purposes, but he says "During

9 our review, they identified an error in the data set given

10 to Bridge --" and then, he is reporting that he conferred

11 with them about that yesterday and they briefed me on the

12 changes. And there was this error, there is, it is

13 undisputed there was this error and he describes what the

14 error was, and this related to a portion of the portfolio

15 the multiple sector CDOs, the credit default obligations

16

that were in the multiple sectors, meaning different types17 of CDO combined and -- default obligations combined, and he

18 said while present value, the losses -- but they plugged the

19 present value amounts back in the out year cash flows

20 instead of the undiscounted amounts.

21 Your Honor does not have to understand that, I

22 don't have to understand that, but all we have to do is say

23 there was a mistake. I have seen the spread sheets, we are

24 not going there, but if you look at the cash flows here is

25 the conclusion that he goes through and he says if you look

26 at the cash flows on Pages 19 and 20 of Bridge, the


58/153

Claudette Gumbs

Page 337

1 Proceedings

2 penultimate line "reserve coverage ratio" that your Honor

3 and I were talking about, the line that had the 4.4, 4.6 in

4 the out years, the further out years and in the box where we

5 are looking at before, it was at 33.7, right, things will be

6 good in 2039, don't worry about it, he says they drop to

7 about 5x, so they drop way down. One error.

8 And still, in the ample solvency market, in

9 conferring with MBIA on this, I realized that as many ABS

10 and CDOs have legal finals, when are they all coming due,

11 45 years out so they need to extend the cash flows to us at

12 least to 2053, not the 2039 that is in the Bridge opinion.

13 And so, what I thought -- they learn about it and

14 what is interesting is that this was supposed to be Bridge's

15 job. Bridge was supposed to review the modeling. Bridge

16

gave a modeling opinion. They said that again and when we17 go back to the solvency opinion, I will not put it up, but

18 the solvency opinion said that we looked at their modeling

19 and it appeared reasonable.

20 So Bridge misses the error, two and a half weeks,

21 okay, but MBIA does do this. They tell them.

22 Now, because Bridge didn't have -- didn't discover

23 the error, MBIA has to tell them about it and MBIA has to

24 describe it. And so, let's put up the Fred Pastore -- PX,

25 petitioners Exhibit 948 your Honor, and Mr. Pastore is an

26 MBIA executive, I believe he is the treasurer and he is


59/153

Claudette Gumbs

Page 338

1 Proceedings

2 writing Eric Glassman at Bridge and Fred Kraegel, who he has

3 seen from Bridge and this is January 30, note the date, the

4 date after the error gets discovered and so, Pastore sends

5 them over a -- what -- how they made the mistake and so they

6 write "As requested, attached are the summary of issues

7 discovered with our original model", so making clear that

8 this is, you know, the issue in their model and the steps

9 taken to now properly reflect the timing of the securities

10 and the calculation of the loss reserves and so, if you go

11 to the next page, I will not spend a whole lot of time on

12 it, but they have their analysis of what happened and they

13 again, they say MBIA discovered we made an error in the cash

14 and loss reserve for the long dated ABS CDOs, these were in

15 the pro forma financial models used by Bridge to test

banksvmbia 5.17 transcript

Documents