banksvmbia 5.24 transcript
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12 SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: TRIAL TERM PART 393 - - - - - - - - - - - - - - - - - - - - - X
ABN AMRO BANK N.V.; BARCLAYS BANK PLC;4 BNP PARIBAS; CALYON; CANADIAN IMPERIAL
BANK OF COMMERCE; CITIBANK, N.A.; HSBC5 BANK USA, N.A.; JPMORGAN CHASE BANK, N.A.,
KBC INVESTMENTS CAYMAN ISLANDS V LTD.;6 MERRILL LYNCH INTERNATIONAL; BANK OF
AMERICA, N.A.; MORGAN STANLEY CAPITAL7 SERVICES INC.; NATIXIS; NATIXIS FINANCIAL
PRODUCTS INC.; COOPERATIEVE CENTRALE8 RAIFFEISEN-BOERENLEENBANK B.A., NEW YORK
BRANCH; ROYAL BANK OF CANADA; THE ROYAL9 BANK OF SCOTLAND PLC; SMBC CAPITAL
MARKETS LIMITED; SOCIETE GENERALE;10 USB AG, LONDON BRANCH; and WACHOVIA
BANK, N.A.,11
Petitioners,12
- against -13
ERIC DINALLO, in his capacity as14 Superintendent of the New York State
Insurance Department; the NEW YORK15 STATE INSURANCE DEPARTMENT; MBIA INC.;
MBIA INSURANCE CORPORATION; and16 NATIONAL PUBLIC FINANCE GUARANTEE
CORPORATION (f/k/a MBIA INSURANCE17 CORP. OF ILLINOIS),
18Respondents.
19 - - - - - - - - - - - - - - - - - - - - - XIndex No.09/601846
20 Article 78 60 Centre StreetNew York, New York
21 May 24, 2012
22BEFORE:
23HONORABLE BARBARA R. KAPNICK,
24 Justice.
25
26
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APPEARANCES:4
SULLIVAN & CROMWELL, L.L.P5 Attorneys for the Petitioners
125 Broad Street6 New York, New York 10004
BY: ROBERT GIUFFRA, ESQ.7 MICHAEL H. STEINBERG, JR., ESQ.
MICHAEL T. TOMAINO, JR., ESQ.8 BRIAN T. FRAWLEY, ESQ.,
Of Counsel9
10
KASOWITZ BENSON TORRES & FRIEDMAN, L.L.P.11 Attorneys for the Respondents
1633 Broadway12 New York, New York 10019-6799
BY: MARC E. KASOWITZ, ESQ.13 KENNETH R. DAVID, ESQ.
JOSHUA GREENBLATT, ESQ.14 Of Counsel
15
16 OFFICE OF THE ATTORNEY GENERAL FOR
THE STATE OF NEW YORK17 120 Broadway
New York, New York 1027118 BY: DAVID HOLGADO,
MARK E. KLEIN,19 Assistant Attorneys General
20
21
22NINA KOSS,
23 BARBARA STROH, CSR, CRR, CMROFFICIAL COURT REPORTERS
24
25
26
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1 Proceedings2 T13 THE COURT: Okay, before we start, a few4 things that we've been spending some time on that I5 said I would talk to you about before Mr. Kasowitz6 started his presentation.7 So we're back to dealing with the public8 interest privilege which I allowed you to argue, I9 thought, pretty extensively on Tuesday afternoon.
10 First of all, to the extent Mr. Giuffra, that
11 you have argued at this stage of the game that the
12 public interest privilege really shouldn't apply to
13 this case, in looking back at, as much as I could look
14 back at all the papers you have given me, and referred
15 to, it seems very clear to me that Judge Yates, who we
16 all refer to all the time because he had so much
17 involvement at the beginning of this case for a long
18 time in this case, and JHO Bradley, to some privilege
19 reviews, and myself, who did some privilege review of
20 documents, have all already found that the public
21 interest privilege does apply to this case.
22 I don't think you can now argue -- I think
23 it's law of the case, and I don't think you can now
24 argue that it doesn't apply to this Article 78 because
25 it's termination of the agency is what is at issue.
26 I mean I know that's your argument. I
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1 Proceedings2 appreciate, it but I think we're past that, and it's3 already been established as law of the case. I think4 we can get on from there.5 Also, to the extent that you have argued --6 and I believe argued on Friday -- that some of the7 subsequent things that happened in this case, like the8 affidavits of Mr. Buchmiller and Mr. Dinallo, that were9 submitted as part of the surreply papers waived the
10 public privilege interest as to certain subject matters
11 and trying to learn as much as I could about the public
12 interest privilege in the past couple of days, it's
13 become pretty clear to me that this is not a privilege
14 that attaches to subject matters but is a privilege
15 that attaches to a communication or perhaps to a
16 document but not to a subject matter.
17 So while I will accept your argument that they
18 may have waived -- and I know Mr. Holgado doesn't agree
19 that they waived it at all, but where they may have had
20 waived the privilege as to some particular document and
21 communication, it's not because he said one thing.
22 He waived it as to everything that involves
23 solvency of MBIA or the financial condition of MBIA or
24 Mr. Buchmiller's review because that would be
25 everything involved in this case, so I disagree with
26 that concept.
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1 Proceedings2 I think that the cases are clear that the3 privilege attaches to the communication, and there is a4 few cases, not a lot because it's not a privilege that5 is dealt with a lot, but there is a case from the First6 Department in 1993, the Martin versus Gross case.7 That cites a Court of Appeals case called8 Cirale, C-I-R-A-L-E, versus 80 Pine Street Corp., 359 New York 2d 113, and the cases seem consistent that say
10 that the privilege attaches to confidential
11 communications and not to subject matters.
12 It says: "The public interest is a flexible
13 term and what constitutes sufficient harm to the public
14 interest, though, as to render the privilege operable,
15 must, of necessity, be determined on the fact of each
16 case."
17 So it's very clear that this is a very
18 fact-specific case, specific kind of a review, and even
19 the case that, Mr. Giuffra, you cited to, matter of
20 Jasmine G, 35 A.D. 3d 604, which was an A.D. 2d
21 department case from 2006, that was a juvenile
22 delinquency proceeding in Family Court in Kings County,
23 and New York City Department of Probation was involved.
24 Apparently a witness testified that a
25 supervisor in the department had overrode his
26 dispositional recommendations after reviewing some
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1 Proceedings2 documents and, therefore, the Appellate Division found3 that, because the department actively participated in4 the dispositional hearings and its testifying witness5 affirmatively placed the particular they are called PAT6 material -- I think that's not really relevant -- at7 issue by stating that the supervisor overrode his8 dispositional recommendation after reviewing the9 juvenile scores as a result of that, they found that
10 the department had waived any public interest privilege
11 or any privilege under any other particular law barring
12 disclosure of that particular communication, those
13 particular scores, but I think it just does not attach
14 to the subject matter. It just attaches to the
15 document.
16 As we know, as we were reminded the other day,
17 and Mr. Kasowitz asked me for discovery in an Article
18 78, you don't just get discovery. You have to request
19 of the court leave of discovery, as opposed to a
20 plenary action, where anything relevant, possibly
21 relevant potentially be discoverable. 3101 is one
22 thing, but Article 78 is something very different.
23 At the beginning of this case counsel and
24 Judge Yates drafted some parameters for how the
25 discovery was going to proceed in this case and,
26 obviously, as time went on, it was somewhat expanded,
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1 Proceedings2 but most of that was done with Judge Yates.3 I hope he won't get mad at me for blaming him4 for all this stuff. I'm not blaming him, but that's5 what happened.6 So I tried to look over the materials that you7 gave to me about what happened with this February 168 memo, which has become a big issue here, that memo to9 file that was dated February 16 that we all agreed was
10 not completed until something after February 16, and
11 there is no dispute that Judge Yates did review the
12 redactions that were taken by the Insurance Department
13 in that document.
14 But, there doesn't seem to be any evidence
15 that Judge Yates actually conducted that as a public
16 interest privilege review.
17 Rather, he was reviewing it just in the
18 context of what he was going to allow, what he wasn't
19 going to allow, and I really think that for me to
20 appropriately make any comment about that particular
21 document, with all the things that I've read, that I
22 need to look in camera at the unredacted document, the
23 unredacted February 16 memo.
24 So to the extent you can call your big staff
25 back at the Attorney General's Office and get somebody
26 to walk over here and get that to us as soon as
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1 Proceedings2 possible, that would be helpful because it's very hard3 for me because I'm supposed to be looking on a document4 basis, to not have the things that are redacted to try5 and figure out what's going on.6 I think that would be the best way for me to7 deal with it as to that document.8 As to the other documents, Mr. Giuffra, that9 you mentioned in your letter of May 21, Mr. Holgado did
10 provide redacted and unredacted copies of those e-mails
11 to us yesterday.
12 We reviewed them last evening for public
13 privilege. I did not speak to Mr. Holgado, and I
14 didn't take any further argument. I was just looking
15 at them based on everything we know, the affidavits and
16 all the testimony we've had.
17 Hopefully, I will get something to you later
18 in the day. I think I would like to look at the other
19 document also because I don't want to be inconsistent
20 in any of my rulings.
21 I already said the other day that I wasn't
22 going to start opening up other discovery because that
23 was inappropriate, and I made that ruling, so there was
24 a cutoff line. I was going to deal with things that
25 Mr. Giuffra put in his letter but not in anything past
26 that.
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1 Kasowitz-MBIA Respondents2 So, yes.3 MR. HOLGADO: I just want to let you know,4 your Honor, we'll, at the very latest, hopefully, get5 that unredacted version of that memo to you during the6 lunch hour. Hopefully, sooner, and I'm not certain I7 can get it before then, but I would hope by lunch.8 THE COURT: Okay, I appreciate that. So I9 think that deals with all the issues that you raised on
10 public interest privilege for now. So that we can now
11 proceed with MBIA's presentation here, right? Mr.
12 Kasowitz, you're up.
13 MR. KASOWITZ: Thank you, your Honor.
14 Your Honor, Mark Kasowitz for the MBIA
15 Respondents.
16 Your Honor, we now have a new definition of
17 chutzpah. We have Bank of America which in 2008 was
18 bailed out to the tune of tens of billions of dollars
19 in taxpayer money, based on a single weekend of
20 meetings among Federal regulators, asking this court to
21 overturn Superintendent Dinallo's approval of MBIA's
22 transformation and approval that was based on a
23 year-long investigation, including weeks of intensive
24 department review on site at MBIA's headquarters.
25 Superintendent Dinallo approved the
26 transformation because he found that it fully protected
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1 Kasowitz-MBIA Respondents2 the interests of MBIA's policyholders, including these3 banks, and because he found that the transformation4 would serve the public interest by helping to unfreeze5 the public finance markets.6 That is, the markets for the bonds that7 finance schools, roads, infrastructure projects.8 Those markets had been disrupted by the9 financial crisis which had been precipitated in no
10 small part by these banks themselves, and after helping
11 themselves to those tens of billions of taxpayer
12 dollars, doled out after a single weekend of meetings,
13 the banks now have the chutzpah to base their challenge
14 to the approval of transformation, which, your Honor,
15 didn't involve a dime of taxpayer money, on what
16 amounts to nothing more than nitpicking the extensive,
17 conscientious and year-long effort of the department.
18 Your Honor, we've heard Mr. Holgado describe
19 very effectively the extensive and conscientious job
20 that the department did in reviewing and approving the
21 transformation.
22 I think it's difficult to come away from Mr.
23 Holgado's presentation with any conclusion other than
24 that the banks cannot come close to meeting their heavy
25 burden of demonstrating that the department's approval
26 of the transformation was arbitrary and capricious.
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1 Kasowitz-MBIA Respondents2 Your Honor, Mr. Holgado's presentation was so3 persuasive and he made so many of the points that we4 were prepared to make because it was based on the5 undisputed facts in this case, that we fought long and6 hard about whether we even needed to stand up and make7 a presentation at this point.8 Well, your Honor, as the court probably knows9 by now, it's really hard for us to sit quietly in our
10 seats, so, with the court's indulgence.
11 THE COURT: I didn't think you were just going
12 to do that.
13 MR. KASOWITZ: I thought long and hard about
14 it, your Honor, but, with the court's indulgence, there
15 are some additional things that we would like to bring
16 to the court's attention which we believe will confirm
17 with even greater force the conclusion that there is no
18 conceivable basis for disturbing the superintendent's
19 decision in this matter.
20 Your Honor, as we've heard, the banks say that
21 pretty much everything the department, everything
22 Superintendent Dinallo and everything Mr. Buchmiller
23 did was wrong from start to finish, the banks say the
24 way the department thought about the transformation,
25 the way they reviewed it, the way they discussed it,
26 the way they handled it, the way they approved it, how
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1 Kasowitz-MBIA Respondents2 many people worked on it, how much time was spent on3 it, all of that was wrong.4 And not just wrong, according to the banks,5 but irrational and arbitrary and capricious. The banks6 even go so far as to cast aspersions on Superintendent7 Dinallo's motives for approving the transformation.8 They say he was politically ambitious and that9 he was catering to political interests. And they even
10 go so far as to imply that he really just wanted to get
11 a job at one of MBIA's law firms.
12 Your Honor, there is not a scintilla of
13 evidence to support any of these charges. To the
14 contrary, the evidence is absolutely clear that
15 Superintendent Dinallo fulfilled his duties in an
16 entirely exemplary, conscientious and rational manner.
17 Your Honor, I have to admit that I found it
18 especially interesting when the banks' counsel said
19 last week that the banks aren't in this case just for
20 themselves. They're also in it for all policyholders
21 of insurance companies.
22 They said that at page 120 of the hearing
23 transcript. Bank of America and Societe Generale, two
24 of the largest and most rapatious banks in the world,
25 are really in this case for the little guy.
26 That's pretty rich, your Honor. And, by the
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1 Kasowitz-MBIA Respondents2 way, your Honor, if Bank of America, for example, is3 really in this case for other policyholders, then4 perhaps the first thing that it should do is to return5 to MBIA insurance for the benefit of all its6 policyholders the $5 million it owes MBIA insurance for7 MBIA's broad and put-back claims against the Bank of8 America that are pending in another courtroom in this9 building.
10 Your Honor, the banks are throwing as much mud
11 against the wall as they possibly can in the hope that
12 something will stick. But it doesn't.
13 We have already seen that during the Attorney
14 General's presentation. After we have completed
15 reviewing the evidence, the evidence of the undisputed
16 facts, we believe it will be even clearer, if that were
17 possible, that none of what the banks say comes close
18 to establishing any basis under Article 78 for
19 disturbing the superintendent's approval in any way.
20 Your Honor, the banks' overarching theme in
21 this proceeding is that Mr. Dinallo didn't have the
22 authority as superintendent of insurance to do anything
23 other than to protect what the banks say were the
24 interests of existing policyholders.
25 The banks say that the superintendent didn't
26 have the authority to approve the transformation
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1 Kasowitz-MBIA Respondents2 because one of its purposes was to help unfreeze the3 public finance markets.4 If you listen to the banks, your Honor, you5 would think that it is impermissible for the Department6 of Insurance to concern itself with any broad policies7 or goals.8 The banks actually take the position here that9 approval of the transformation should be reversed
10 because the superintendent did not have the authority
11 to take any action to serve the public interest or to
12 insure the stability of financial or insurance markets.
13 The banks really say that the only thing that
14 the superintendent cares about is whether they, as
15 existing policyholders, get paid.
16 Your Honor, I would have thought that it would
17 have been an uncontroversial and, indeed, a bedrock
18 principle of government service, that the
19 superintendent of insurance, one of the state's
20 highest-ranking officials, has the authority and,
21 indeed, the obligation to take into account, in
22 addition to the interests of existing policyholders,
23 interests such as the health and viability of insurance
24 companies operating in New York State, the availability
25 of insurance coverage in critical markets and the
26 overall health and welfare of the financial markets,
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1 Kasowitz-MBIA Respondents2 the insurance markets and the public interest as a3 whole.4 Your Honor, the banks claim otherwise, but5 they're wrong. In fact, the legislature of this state,6 in Insurance Law section 201 has made it very clear7 that the superintendent has been given extremely broad8 power and discretion, namely, the rights, powers and9 duties in connection with the business of insurance in
10 this state, express or reasonably implied by the
11 Insurance Law, or any other applicable law of this
12 state.
13 There is nothing in the Insurance Law that
14 supports the bank's position that the superintendent is
15 limited solely to protecting the interests of existing
16 policyholders.
17 The principal support the banks originally
18 propounded for this position are the affidavits of four
19 former superintendents whom the banks designated as
20 experts in this case.
21 For example, one of the former
22 superintendents, James Corcoran, submitted an affidavit
23 in which he said: "The stated public policy reason for
24 then-Superintendent Dinallo's approval of the
25 transformation, the reinvigoration of the municipal
26 bond market in New York and nationwide, was not within
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1 Kasowitz-MBIA Respondents2 the department's statutory mission and did not justify3 Mr. Dinallo's violation of his paramount duty to4 protect and to treat fairly and equitably the interests5 of all existing policyholders of MBIA Insurance,6 including its structured-finance policyholders."7 Your Honor, these are the same four former8 superintendents that the banks bally-hooed to the media9 when they submitted their reply papers in this
10 proceeding.
11 The banks informed The Wall Street Journal at
12 that time, in March 2011, that: "Four former New York
13 State insurance superintendents said they wouldn't have
14 approved the 2009 restructuring of MBIA bank that split
15 the bond insurer into two companies, according to court
16 papers filed on Sunday.
17 "Lawyers representing a group of 11 banks,
18 which earlier sued to challenge the legality of MBIA's
19 business split, submitted statements from the former
20 insurance regulators to bolster their arguments that
21 the New York State Insurance Department improperly
22 allowed the restructuring to proceed.
23 "The former superintendents, James Corcoran,
24 Edward Muhl, Gregory Serio and Richard Stewart, whose
25 collective tenures leading the Insurance Department
26 span two decades, said they wouldn't have approved the
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1 Kasowitz-MBIA Respondents2 acknowledged that a superintendent could act to protect3 the public interest and promote the competitive4 markets.5 Let's turn to his testimony:6 "Question: Good. And to promote the public7 interests."8 And, in fact, you have acted to promote the9 public -- to protect the public interest and promote
10 the competitive markets when you were the
11 superintendent of New York Department of Insurance,
12 correct? There's an objection.
13 "Answer: Yes."
14 Indeed, Mr. Serio testified that it was well
15 within the superintendent's authority to seek to
16 achieve goals for the greater public good, such as
17 reestablishing lower Manhattan after the 9/11 attacks.
18 Let's see the next slide.
19 "Question: I understand that. I'm asking --
20 I'm asking what you said your job was. That was to
21 protect the public interest, correct?
22 There's an objection.
23 "Question: Correct?
24 "Answer: Yes. In that case I guess you could
25 consider the public interest to try to reestablish
26 lower Manhattan."
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1 PROCEEDINGS - KASOWITZ2 T23 MR. KASOWITZ: And, your Honor, earlier we saw the4 former Superintendent Corcoran stated in his affidavit that5 the reinvigoration of the municipal bond market was not6 within the Department's mission because he claimed it did7 not protect the interests of existing policyholders, but8 when he was in office, Mr. Corcoran actively pursued9 policies that he believed were in the public interest, which
10 he admitted had quote, nothing to do with existing
11 policyholders, close quote. That's at the Corcoran
12 transcript at 284.
13 Your Honor, these former Superintendents had to
14 admit that the Superintendents' authority extended beyond
15 the mere strict interest of existing policyholders because
16 that's exactly what the Department's mission statement says.
17 Take a look at the website.
18 The Department's mission is to protect
19 policyholders and to promote the continued development of a
20 sound, fair and robust insurance industry. Moreover, the
21 NAIC mission statement, which the banks try to make so much
22 of, squarely confirms the first regulatory goal of an
23 insurance department is to protect the public interest.
24 Let's read it.
25 Our mission, the mission of the NAIC is to assist
26 state insurance regulators individually and collectively in
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1 PROCEEDINGS - KASOWITZ2 serving the public interest and achieving the following3 fundamental insurance regulatory goals in a responsive,4 efficient and cost effective manner, consistent with the5 wishes of its members.6 The first, the first fundamental insurance7 regulatory goal that the NAIC lists, protect the public8 interest; second, promote a competitive market; third9 facilitate the fair and equitable treatment of insurance
10 consumers; fourth, promote the reliability, solvency,
11 financial solidity of insurance institutions, and fifth,
12 support and approve state regulation insurance.
13 As Mr. Holgado correctly pointed out, the
14 affidavits of the four Superintendents, former
15 Superintendents amount, at most, to legal opinions on the
16 ultimate issue before this Court, all of which as a matter
17 of law is inadmissible.
18 But, their deposition testimony concerning what
19 they did as Superintendents, gives the lie to the banks'
20 complaint that Superintendent Dinallo has exceeded his
21 authority. That testimony also exposes the affidavits of
22 the former Superintendents for what they really are.
23 What they really are, your Honor, is impermissible
24 second guessing, Monday morning quarterbacking. For those
25 of us who are football fans, these former Superintendents,
26 to the extent that they questioned what Superintendent
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1 PROCEEDINGS - KASOWITZ2 "Answer: That is the case. But, the only thing3 that I could suggest to you that Dick's a very bright guy,4 very knowledgeable, did a lot of background review on this5 when he was writing, and probably making these kinds of6 quotations, but he was not there in my office working on7 these matters as I was. These are things that he had no8 idea --9 MR. GIUFFRA: Could you continue reading, Mr.
10 Kasowitz?
11 MR. KASOWITZ: "Question: Just as -- "
12 MR. GIUFFRA: No, no.
13 MR. KASOWITZ: Excuse me. I will read what I would
14 like to read.
15 MR. GIUFFRA: That wasn't the rule when I was in
16 this --
17 THE COURT: I will let him do some reading. Why
18 don't you read that page if you want to read it. I did
19 allow --
20 MR. KASOWITZ: I am delighted to read the rest of
21 it. I want to get this answer out, but I am fine with the
22 rest of it.
23 "Just as Mr. Stewart was not in your shoes when you
24 approved Lloyd's Equitas, you were not in the shoes of Mr.
25 Dinallo when he approved MBIA's transformation, right?
26 "That is correct."
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1 PROCEEDINGS - KASOWITZ2 What would you like me to read?3 MR. GIUFFRA: The part in the yellow.4 MR. KASOWITZ: "The main one I would suggest,5 though I agree with a great majority of what Dick Stewart6 would say, he was unaware that I held Lloyd's, the new7 Lloyd's, to stand behind the old Lloyd's in the event there8 was any liability (sic) of Equitas to pay --9 THE COURT: "Any inability".
10 MR. KASOWITZ: "Any inability to pay policyholders'
11 claims."
12 Major difference and, as far as I am concerned, he
13 probably was unaware of it at that time.
14 MR. GIUFFRA: Thank you Marc. Appreciate it.
15 MR. KASOWITZ: Now, we are going to deal with the
16 Lloyd's Equitas precedent later on.
17 We are going to bring to the Court's attention the
18 further testimony that Mr. Muhl gave where he said that even
19 though Lloyd's was standing behind Equitas, it was the
20 members of Lloyd's, the names who were standing behind
21 Equitas, and as a practical matter, it would have been
22 impossible for policyholders to have gotten recourse against
23 those names who were living all over the world, but we will
24 deal with that later on and we will read all of it.
25 So, your Honor, I think the point here is very
26 clear. It's hard to put it any better, I think, than
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1 PROCEEDINGS - KASOWITZ2 former Superintendent Muhl put it. When you are the Acting3 Superintendent, you are invested with the responsibility and4 the obligation to make the ultimate calls about insurance5 matters in this State and the State Legislature defers to6 the acts and responsibilities of the Superintendents and to7 their judgement in making decisions.8 The last thing that the law permits is a second9 guessing of those decisions by former Superintendents,
10 experts, lawyers, and indeed, your Honor, we are going to
11 present this respectfully, even the Courts here in approving
12 MBIA's transformation.
13 Superintendent Dinallo was seeking to further
14 public interest goals. The transformation was intended to
15 strengthen the overall MBIA company which would, in fact,
16 provide additional protection for MBIA's existing
17 policyholders, including the banks, as Mr. Dinallo has
18 testified, and as we heard Mr. Holgado describe earlier this
19 week.
20 The transformation also was intended to
21 reinvigorate the moribund segments of the State's insurance
22 industry, the monolines. It was also intended to address
23 one of the adverse impacts of the financial crisis by
24 helping to unfreeze the public finance markets.
25 What has prevented all of that from happening, your
26 Honor, has been the litigation commenced by the banks.
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1 PROCEEDINGS - KASOWITZ2 Now, at this point, sixteen of the original banks have now3 dismissed themselves from this litigation. It's time for4 this litigation to be dismissed, so that the5 Superintendent's goals can be achieved, so that MBIA can6 start writing new municipal finance business, and the7 economy can be assisted as it needs to be, as Superintendent8 Dinallo intended it to be, through the unfreezing of the9 public finance business.
10 Your Honor, we have listened to the banks argue
11 that the Department approved transformation, which the banks
12 claim was unprecedented based on --
13 THE COURT: One second.
14 You are blocking that door. Don't stand in front
15 of the door. Sorry, Mr. Kasowitz, I had to take care of the
16 public interest in the courtroom.
17 MR. KASOWITZ: To which we pay great deference,
18 your Honor.
19 The banks here argue that the transformation was an
20 unprecedented transaction and one of the things that they
21 have argued time and time again, was that the transformation
22 was done in secret, that the review and approval of it was
23 done in secret, and that that secret review was so rushed,
24 that it was inadequate and fatally flawed.
25 Your Honor, those contentions are belied by the
26 undisputed facts of the record here. They are belied by
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1 PROCEEDINGS - KASOWITZ2 arbitrary and capricious, and where the undisputed facts3 demonstrate just the opposite.4 What I will do next, your Honor, is to take the5 Court through the story of transformation from the time the6 idea of transformation was first conceived in early 2008,7 through the approval of the transformation, a year later in8 February 2009.9 What we will see, your Honor, will confirm what Mr.
10 Holgado showed us earlier in the week and what the banks try
11 to obscure, namely, that the transformation was thoughtfully
12 conceived as a necessary and important response to the
13 financial crisis, that it was conscientiously reviewed and
14 commented upon for almost a year, not only by the
15 Department, your Honor, but as you will see and contrary to
16 what the banks have told you, by the banks themselves, and
17 that it was properly approved by Superintendent Dinallo
18 because it would protect the interests of MBIA's
19 policyholders, including these banks, while at the same time
20 helping to unfreeze the public finance markets.
21 Your Honor, following up on Mr. Holgado's
22 presentation, I will also address the arguments made by the
23 banks and show none of those arguments, either alone or
24 together, come close to satisfying the burden that the banks
25 have here.
26 Let's turn to the transformation story.
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1 PROCEEDINGS - KASOWITZ2 Just a couple of seconds about MBIA's business that3 your Honor knows MBIA issues essentially two forms of4 financial guarantee insurance -- the bond insurance business5 guarantees a payment of principal and interest on public6 finance bonds, such as municipal bonds that finance public7 works operations and the like, and the structured finance8 products, such as collateralized debt obligation, also9 mortgage backed securities.
10 The structured finances products that the MBIA
11 insures include a number of different sectors; RMBS that are
12 made of mostly second-lien credits, and it also provides
13 insurance on securities, on SMBS in the commercial
14 collateralized RDO.
15 The of affidavit Chuck Chaplin, MBIA's CFO, goes
16 through this in detail in mostly paragraphs 9 through 12, if
17 your Honor wants to take a look at it.
18 "The crisis in the financial markets, including the
19 deterioration of the U.S. residential market began in 2007
20 and had adversely effected MBIA and numerous other financial
21 institutions, some of which are, unlike MBIA, but including
22 the Bank of America, received enormous bailouts.
23 The crisis, of course, was not anticipated by
24 pretty much anyone, least of all by these banks, and not
25 only was it not anticipated, after it began there was
26 widespread disagreement and debate among the financial
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1 PROCEEDINGS - KASOWITZ2 institutions and the economists and analysts about how long3 the crisis would last and how deep it would go.4 Nonetheless, your Honor, the banks, as you have5 heard, have accused MBIA and the Department of grossly and I6 suppose, irrationally, underestimating the crisis and its7 potential effect on MBIA. That's not so, your Honor.8 MBIA economic assumptions in December of 2008, when9 it files its application for approval of the transformation,
10 through February 2009 when the Department approved that
11 application, were eminently reasonable and indeed,
12 conservative.
13 As I will explain in detail, MBIA and the
14 Department fully considered the issues the banks have raised
15 and the Department concluded entirely reasonably, that the
16 assumptions being used by MBIA at that time were appropriate
17 and sound.
18 While the banks stand here with 20/20 hindsight and
19 argue MBIA and the Department were underestimating the
20 severity of the financial crisis and should be have been far
21 more pessimistic in the fourth quarter of 2008, one
22 prominent analyst was saying at that time, among others,
23 that he had never been more bullish, and that the bonds
24 represented and that bonds represented the investment
25 opportunity of a lifetime.
26 That analyst was James Montier. He said those
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1 PROCEEDINGS - KASOWITZ2 things on November 25th, 2008, about ten days before MBIA3 filed its application with the Department, and he worked for4 none other than Societe Generale. His statements are5 reported and quoted in Exhibit 39 to the deposition of the6 banks' expert James Corcoran.7 What's interesting about this report, your Honor,8 is that Mr. Montier had formerly been referred to as a bear,9 and he had been bearish on the economy and smart. So, I
10 guess he was a smart bear.
11 At or about this time, he is quoted as saying that
12 he had quote, never been more bullish, that he, and that he
13 viewed bonds as the investment opportunity of a lifetime.
14 So, your Honor, the very same banks that are
15 accusing MBIA of not being sufficiently pessimistic in its
16 loss projections for bond guarantees in the fourth quarter
17 of 2008, those banks had never been more bullish about the
18 economy at that time.
19 And, exactly at that time, while it may be easy for
20 the banks today with four years of hindsight to say now MBIA
21 should have been projecting far greater losses in late 2008,
22 those banks were whistling a far different tune back then.
23 Now, this issue of predicting the future is an
24 issue which comes up time and again in the banks papers, and
25 we have seen some of it during the course of this hearing.
26 There have been suggestions and arguments that
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1 PROCEEDINGS - KASOWITZ2 Superintendent Dinallo believed, when he gave the approval3 that MBIA's projections were inherently uncertain or that4 they were inherently incapable of being precise. We will5 look exactly at the right language.6 The point here, your Honor, is this: First, of all7 and we will show this, Superintendent Dinallo believed that8 MBIA's projections and the analysis that Buchmiller had done9 and others had done with respect to those loss projections,
10 were eminently reasonable, and he made, at paragraph 61, of
11 his affidavit, and entirely reasonable and realistic
12 statement that at that time, as at other times, it was
13 difficult, in fact, it was impossible for MBIA, for the
14 Department, or for anyone else, to predict the future, which
15 created some uncertainty in projections.
16 That's why they are called "projections", your
17 Honor. Projections are just that -- an attempt by someone,
18 in the case of MBIA, by people in its, in its business and
19 in the case of the Superintendent of insurance in this case,
20 Mr. Buchmiller, and others, to try to ascertain whether the
21 projections of losses that are being made are reasonable,
22 whether the methodologies that are used in determining what
23 those losses are are reasonable.
24 What Superintendent Dinallo said and said very
25 clearly was, you can't predict the future. The only way
26 that you can tell what's happened in the future is after the
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1 PROCEEDINGS - KASOWITZ2 future is done in hindsight.3 So, the banks, having nothing more than hindsight4 to work on, and being unable to criticize the5 extraordinarily conscientious and exhaustive work that the6 Department did in analyzing this transaction and Mr. Holgado7 did an excellent job in describing that, we will go into8 some highlights of it in a little while, having nothing9 more, what the banks fasten on is well, these were difficult
10 times.
11 This was an enormous crisis and because these
12 projections are -- there is always uncertainty with them,
13 then the only answer that follows from that is do nothing.
14 Superintendent Dinallo should have done nothing. He should
15 have waited for months and months and months and months of a
16 tri annual exam, more than additional year of a tri annual
17 exam to be done, in order to make any kind of decision or,
18 he should have gone out and hired Black Rock -- but he
19 should have done nothing.
20 The whole point of Superintendent Dinallo's action
21 here, your Honor, this goes to heart of it, he saw the worst
22 crisis since the Great Depression. He saw that the bond
23 guarantee business was literally deteriorating. He saw that
24 there was one bond insurer that was much healthier than the
25 others, and there was a legitimate and real possibility to
26 enable that bond insurer to begin to write new public
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1 PROCEEDINGS - KASOWITZ2 finance business, and he studied and had his department3 study in detail what the, what the data points were for that4 bond insurer and then he approved the plan that they had5 come to.6 He approved it because it was the right plan and7 because it was the right policy and because it would have8 protected all of the policyholders, both on the structured9 finance side and on the government finance side.
10 Now, your Honor, one of the bases that before
11 the -- before MBIA conceived of this proposal to do the
12 transformation, it sought to meet the challenges posed by
13 the financial crisis in another way. It began raising new
14 capital between December 2007 and February 2008.
15 In fact, MBIA Inc., the parent, raise up to 2.85
16 billion dollars in additional capital, pursuant to a series
17 of stock offerings and surplus note issuances.
18 As Superintendent Moriarty has explained, over the
19 past two years the MBIA entities have entered into
20 transactions to solidify their capital position and mitigate
21 against further deterioration.
22 Specifically, those transactions included, on
23 January 16th, 2008, MBIA Corp issued one billion dollars in
24 surplus notes due January 15th, 2033. On February 6, 2008,
25 Warburg Pincus agreed to purchase up $750 million of
26 convertible participating stock, and on February 13th, 2008,
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1 PROCEEDINGS - KASOWITZ2 MBIA Inc. completed a public offering for the sale of 94.63 million dollars, million shares of MBIA Inc. common stock at4 $12.15 a share, for the total net proceeds of approximately5 1.1 billion dollars.6 Also, in late 2008, MBIA issued preferred stock to7 a trust to secure additional $400 million in capital.8 Approximately 2.5 billion of the capital raised by9 MBIA Inc. between December 2007 and late 2008, was invested
10 in MBIA insurance or was used to support liabilities of MBIA
11 Inc., that were insured by MBIA insurance.
12 So, to further address the effects of the financial
13 crisis, MBIA also began discussing with the Department, a
14 possible restructuring of MBIA's insurance business, a year
15 before the transformation transaction was approved in
16 February 2008, when MBIA former CEO Jay Brown returned to
17 the company as its Chairman and CEO.
18 In February 2008, MBIA retained Jane Boisseau, an
19 insurance loss specialist, with 25 years of experience, in
20 connection with this potential restructuring, and on
21 February 19th, 2008, Mr. Brown, a lawyer to MBIA
22 shareholders, noted that MBIA had successfully raised
23 capital in response to the financial crisis, but made clear
24 that the structure of the financial guarantee industry needs
25 redesign.
26 The next day, February 20th, 2008, Mr. Brown met
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1 PROCEEDINGS - KASOWITZ2 with Superintendent Dinallo, and discussed with him a3 proposed concept for restructuring MBIA, which included the4 basic elements of what would become the transformation.5 Two days later, on February 22, 2008, MBIA and its6 counsel, including Ms. Boisseau, met with the7 representatives of the Department, including the8 Department's financial and advisors, Perella Weinberg and9 Fried Frank, to describe to the Department how a possible
10 restructuring of MBIA could work in order to address the
11 freezing of the public finance markets.
12 MBIA explained to the Department at that meeting,
13 that the public finance market was frozen, and that to help
14 unfreeze it, MBIA would separate its public finance business
15 from its structured finance business, and as Ms. Boisseau
16 states her affidavit, this February 22nd meeting was, quote,
17 only the beginning of months of discussions involving the
18 Department and MBIA regarding MBIA's business plans,
19 including its restructuring proposal and its financial
20 condition.
21 As she states, during subsequent months of planning
22 and discussion, MBIA and her law firm worked closely with
23 NYID to develop a proposal that would he create a new public
24 financial insurance entity, while simultaneously insuring
25 that all MBIA policyholders would be treated fairly and
26 equitably, and that both insurers would be sound, solvent
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1 PROCEEDINGS - KASOWITZ2 and well capitalized.3 The restructuring proposal that was discussed at4 the February 22nd meeting involved interdependent5 transactions, the result of which would create a separate6 and new viable public finance insurance company, that would7 be able to write new business, while preserving MBIA8 insurance as a well capitalized, highly solvent insurer.9 MBIA provided a Power Point presentation to the
10 Department at the meeting, which set forth the key
11 components that ultimately comprised the transformation as
12 approved by the NYID.
13 While some of the components and the overall
14 structure of the transformation would change over time, the
15 presentation provided an initial overview of the statutory
16 standards and regulatory requirements governing the proposed
17 transaction.
18 The Department discussed extensively with the MBIA
19 representatives the statutory standards and the regulatory
20 requirements that MBIA would have to satisfy in order to
21 perform the affiliated transactions that would ultimately
22 comprise the transformation.
23 And, as Ms. Boisseau states, the proposal primarily
24 involved affiliated transactions of a type for which she had
25 sought and obtained approval many times in her 25-year
26 practice before the Department.
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1 PROCEEDINGS - KASOWITZ2 Now, your Honor, one of the advantages of telling3 the story of transformation as it unfolds, is that we get to4 see what actually happened, rather than what the banks say5 happened years later.6 So, for example, we have learned the banks'7 counsel's argument that the transformation transactions did8 not occur simultaneously and that MBIA's argument that they9 did, and that the Department's argument that they did, is
10 nothing more than a post hoc rationalization raised for the
11 first time in litigation, and never discussed
12 contemporaneously at the time of the transformation.
13 Your Honor, Mr. Holgado did a very good job of
14 going through some of the evidence that showed that the
15 banks' post hoc claim with respect to how the transaction
16 worked was wrong, and that evidence included MBIA's
17 application for approval of the transformation which
18 specifically provided that the transformation would be
19 simultaneously done.
20 But, your Honor, there is also evidence that even
21 predated the application, that related to the simultaneous
22 nature of this transaction.
23 Now, at the -- already at the February 2008 meeting
24 that we have been discussing, MBIA counsel Boisseau,
25 discussed with the Department the components of the deal and
26 the dividend and share redemption and reinsurance agreement
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1 MBIA Respondent-Kasowitz2 T33 We were not viewing this as a transaction that4 would be sequenced in a specified chronological5 sequence.6 Ms. Boisseau continued at paragraph 69 through7 70 of her affidavit: "I explained that MBIA believed8 that the various components of the restructuring were9 interdependent and should be viewed as occurring
10 simultaneously.
11 "I explained that if the NYID believed that
12 it was important to describe or perform the transaction
13 sequentially, then we would be happy to prepare
14 presentation materials to reflect whatever sequence the
15 NYID believed was appropriate.
16 "In the absence of a preference or
17 requirement by the NYID that MBIA Insurance should
18 sequence the steps in a prescribed order, I explained
19 that we felt that these affiliated transactions, like
20 others involving multiple components, should be viewed
21 as occurring simultaneously."
22 Following this explanation, NYID
23 representatives present at the meeting indicated that
24 the transaction worked as a simultaneous transaction.
25 From that point on, our understanding with the
26 NYID was that the transformation was being viewed by
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1 MBIA Respondent-Kasowitz2 the NYID and MBIA as a simultaneous, rather than a3 sequenced, transaction, and that the various ways of4 describing the components of the transaction in one5 order versus another order was intended solely as6 discussed above, for purposes of identifying specific7 components of a multi-part transaction.8 And deputy Superintendent of Insurance9 Moriarty has testified in this case clearly that he,
10 quote, "looked at the transactions as taking place
11 simultaneously as part of the overall goal of, again,
12 affecting the establishment of National as an
13 affiliate."
14 Moriarty also testified that department
15 understood that the transformation transactions
16 occurred simultaneously when the department approved
17 them on February 17.
18 So, your Honor, the testimony of Ms. Boisseau
19 and Mr. Moriarty shows the fact that the transformation
20 components would occur simultaneously was not any post
21 hoc explanation as the banks would try to have the
22 court believe.
23 Rather, it was explicitly and fully vetted and
24 addressed by MBIA and the department at least a year
25 prior to the transformation approval.
26 Now, your Honor, from the beginning of this
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1 MBIA Respondent-Kasowitz2 case and during their argument in this hearing, the3 banks never miss an opportunity to accuse MBIA and, for4 that matter, the department, of being engaged in some5 secret scheme to foist the transformation upon the6 unsuspecting banks, who the banks claim they therefor7 had no opportunity to voice their views about.8 The banks' counsel said just the other day to9 your Honor that the banks had no notice of this.
10 Indeed, the purported secrecy of this
11 transformation scheme and the banks' inability to
12 express their view on transformation to the department
13 have been mantras of the banks since this case started.
14 The banks have told this court repeatedly, and
15 to cite just a couple of examples, in December 2001 --
16 slide 24 -- the banks told the court: "As your Honor
17 well knows, the transformation transaction was done in
18 secret."
19 In their recent sursurreply brief the banks
20 again say that: Quote, "Mr. Dinallo cited to approve
21 in secret and without any input from affected
22 policyholders, one of the largest liability-based
23 restructurings of an insurer in U.S. history."
24 In fact, your Honor, the purported secrecy of
25 the transformation was one of the main arguments in the
26 bank's appeal to the Court of Appeals from the
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1 MBIA Respondent-Kasowitz2 dismissal of the plenary proceeding by the First3 Department.4 There the banks argued: "To avoid billions in5 additional losses, MBIA, Inc. senior executives devised6 a secret plan to divide its principal subsidiary, MBIA7 Insurance, into a healthy insurer of low-risk public8 finance products and a dying insurer of toxic9 structured finance products.
10 Secret plan? What the banks were telling the
11 Court of Appeals and this Court is that MBIA hid the
12 transformation plan from them, that they were
13 blindsided by it when it was approved by the department
14 in February 2009, and the reason that the supposed
15 secret plan was important to the banks' argument, your
16 Honor, is that the banks say that if they had had
17 notice of the transformation, they would have commented
18 on it, they would have made their opposition known, and
19 they say now that they would have prevented it from
20 happening.
21 According to the banks, it was, therefore,
22 arbitrary and capricious of Superintendent Dinallo not
23 to have given them notice and an opportunity to voice
24 their objections.
25 But, your Honor, this secrecy argument turns
26 out to be absolutely false. The banks knew all along
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1 MBIA Respondent-Kasowitz2 about the proposed transformation.3 The undisputed facts -- and the banks haven't4 shared these facts with the court. Even though they5 are based on the bank's own documents, the undisputed6 facts are that the banks knew about the proposed7 transformation all along.8 They knew about it when it was first discussed9 in February 2008, they soon learned about its structure
10 and timing.
11 They had more than an ample opportunity to
12 comment and raise any issues about it with the
13 department, MBIA or anyone else.
14 In fact, your Honor, the banks did comment on
15 it. They did comment on the transformation proposal.
16 They commented on it a lot.
17 You will see, your Honor, that these banks in
18 particular, the banks that are left in this case, Bank
19 of America and Societe Generale, these two banks
20 commented on it, and they supported the idea of
21 transformation.
22 They thought it was a good idea. They
23 applauded Brown, MBIA's CEO and chairman, for coming up
24 with the idea.
25 That's right, your Honor. The very same banks
26 that are in this courtroom trying to demonize MBIA and
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1 MBIA Respondent-Kasowitz2 its executives for a plan the restructure their3 business in extraordinarily difficult economic times,4 these very same banks, at the time the transformation5 proposal was made, liked the idea and supported it.6 We'll show you the quotes. The banks didn't7 show you the quotes because it totally undermines their8 position here, but we'll show you these statements.9 So, your Honor, on February 25, 2008, a full
10 year before the transformation was approved, Mr. Brown
11 publicly announced in a letter to MBIA shareholders and
12 in a press release that MBIA intended to restructure
13 the company in such a way as to insure public and
14 structured finance -- as to insure public and
15 structured finance business from separate operating
16 entities."
17 On that very same day, on the very same day
18 that MBIA sent that letter, February 25, 2008, a year
19 before the transformation, one of the two banks left in
20 this case, SocGen issued a credit research report
21 discussing that very same public announcement by MBIA
22 of the proposed transformation.
23 Here is what SocGen said on February 25, 2008:
24 "We expect splitting the insurers is likely to succeed,
25 given that a split is now actively under discussion, as
26 it is likely to please regulators, could achieve rating
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1 MBIA Respondent-Kasowitz2 stability and would facilitate capital raising."3 Further: "This is one of the few ways to4 equitably raise new capital, given the problems in5 assessing structured credit risk at present.6 "We had suggested a split, raising new7 capital for the municipal business after allocating8 sufficient to maintain the structured credit business9 following the announcement of the insurance regulator's
10 involvement."
11 While we're on it, how is it that these banks
12 get up in court and claim repeatedly that
13 transformation was a secret and claim that
14 Superintendent Dinallo abused his discretion by keeping
15 this information from them, which they claim left them
16 with no opportunity to voice their views about it.
17 It's ridiculous, your Honor. As this document
18 shows, the banks knew about MBIA's plans to apply to
19 the regulators for approval of the transformation a
20 full year before approval was granted.
21 And not only did they know about it. On the
22 date that MBIA announced their intention to do it, they
23 went out and they issued their own opinion about what
24 MBIA was planning to do.
25 From the looks of it, your Honor, the way I
26 see it, they thought it was a pretty good i dea.
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1 MBIA Respondent-Kasowitz2 Let me see. They said that -- well, they3 thought it would work. That's one thing. And they4 said that this idea, this split could achieve ratings5 stability and would facilitate capital raising.6 Of course, your Honor, capital raising was7 critically important to financial institutions like the8 banks and like MBIA and, like the other Monolines at or9 about this time, given the financial crisis that the
10 country and, in fact, the whole world was in.
11 But then they go on, your Honor. I think
12 their use of language here is very, very important:
13 "This is one of the few ways to equitably raise new
14 capital, given the problems in assessing structured
15 credit risk at present."
16 "Equitably," your Honor. Equitable. That's
17 one of the key concepts in this Article 78 proceeding,
18 one of the key determinations that the court will make
19 is whether or not the banks will be able to sustain
20 their heavy burden of demonstrating that somehow all of
21 this was equitable and not rational.
22 But I'll tell you, the part that gets me the
23 most, you know, because I've been in this litigation
24 for three years, your Honor, and I've been sitting and
25 listening to these banks tell me, and their lawyers
26 tell me, and tell my client, and tell the world and put
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1 MBIA Respondent-Kasowitz2 it out in press releases and publish it in Greece that3 this was a secret kabbala, some sinister kabbala by4 MBIA and the superintendent that was foisted on them.5 Well, here you have SocGen, an employee of6 SocGen on February 25, 2008 saying that not only is it7 a good idea. He's trying to take credit for it: "We8 had suggested a split." Credible, your Honor.9 Credible.
10 So, was that it? This little idea kind of
11 pops up in February 2008, the folks that are in this
12 courtroom, I think one of the SocGen executives was
13 introduced to you by the banks' counsel earlier on, was
14 this just like a passing glimmer, and they just never
15 heard about it again? Both these banks?
16 Well, not quite, your Honor, because the next
17 day Bank of America weighs in. They waited until a day
18 after the announcement, the day after SocGen issued
19 their public report.
20 Their report came out on February 26. What
21 did Bank of America have to say about this? Here's
22 what they said in a letter -- this is February 26,
23 2008:
24 "In a letter to owners issued late yesterday,
25 MBIA's CEO Brown stated that the company will
26 restructure to separate its public and structured
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1 MBIA Respondent-Kasowitz2 finance businesses into two separate entities."3 Sounds like transformation, your Honor.4 "The company plans to do this as soon as5 possible" -- as soon as possible, they plan it -- "but6 within five years and only under the condition that it7 can protect the interests of all of its stakeholders.8 "We believe such a separation is feasible,9 although likely complex. The most reasonable split
10 would be intermunicipal and nonmunicipal businesses,
11 but we believe it would be best to even further divide
12 the structured finance business into different products
13 with different risk characteristics and tails."
14 Well, they liked it, too, your Honor. They
15 liked it too, B of A. They said that they believe that
16 such a separation is feasible, and they even go so far
17 as to say that the most reasonable split, the most
18 reasonable split would be into, you know what, your
19 Honor?
20 It would be into the very two components that
21 Brown and MBIA had planned to split it into: The
22 municipal and nonmunicipal businesses.
23 Credible. Bank of America liked it, too.
24 They use words like "reasonable" and "feasible" to
25 describe how they felt about it.
26 It doesn't sound like a surprise to me, your
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1 MBIA Respondent-Kasowitz2 Honor, but let's look at what B of A said because they3 put a little cherry on top. Not only did they like it:4 "We" applaud MBIA for its decisiveness under CEO5 Brown's leadership."6 MR. GIUFFRA: Do you want to read the next7 line, Mark?8 MR. KASOWITZ: "We applaud MBIA for its9 decisiveness under Brown's leadership."
10 Well, that's a lot different, your Honor, than
11 what I've been hearing from B of A about Mr. Brown and
12 about Mr. Brown's company, MBIA, in this litigation.
13 I will read next the line: Moreover, CEO Jay
14 Brown's interests are closely aligned with
15 shareholders."
16 Well, they are supposed to be, your Honor.
17 That's what CEOs do. And at this point in time, a year
18 before -- just as soon as this proposal was announced
19 and a year before -- about a year before it was
20 approved, these good folks at B of A knew about it.
21 And they even knew the basic terms of it.
22 Your Honor, they even knew that MBIA was going to try
23 and do it as soon as possible, and to the extent that
24 they had any problems with the absolutely
25 uncontroversial doctrine that the CEO of MBIA was
26 acting in interests aligned with his shareholders, they
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1 MBIA Respondent-Kasowitz2 didn't say a damn word about it, not here, and as you3 will see, for this entire period of time up until the4 time that the application was made, and even after.5 They didn't say boo about it.6 You know, it might be a good time for a break,7 your Honor.8 THE COURT: That's what I was going to say.9 Thank you. Let's take a ten-minute break, and then
10 we'll continue.
11 MR. HOLGADO: Thank you, your Honor.
12 (Short recess taken)
13 (Continued on next page)
14 (End of Take 3)
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1 PROCEEDINGS - KASOWITZ2 T43 THE COURT: Just so it's official on the record,4 counsel and I had discussed this before, and we are not5 going to have a session here tomorrow, for a lot of reasons.6 So, we are not going to, so everybody can enjoy a7 four-day holiday weekend, and we will continue on Tuesday8 morning. People can stop asking Ray that question. Okay.9 I just want to make that official.
10 Mr. Kasowitz, you may continue.
11 MR. KASOWITZ: Thanks, your Honor.
12 When last we left off, we were looking at some of
13 these reports issued by B of A and Soc Gen concerning the
14 knowledge they had of MBIA's transformation, dating back to
15 really the time that the transformation proposal was first
16 conceived, really back to February 2008, and saw the
17 e-mails, the reports, and we will look at the e-mails in
18 awhile, concern the fact that Soc Gen and B of A knew about
19 the transformation proposal, had knowledge of the basic
20 structure of the proposal, commented on the proposal,
21 commented favorably on the proposal, and as we said in one
22 instance that we have seen so far, tried to take credit for
23 it.
24 So, you know, one of the things that the banks
25 argued during the course of their presentation was that all
26 of this was in secret -- of course it wasn't -- but, in
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1 PROCEEDINGS - KASOWITZ2 addition, what I think is significant about these documents,3 your Honor, is that during their presentation the banks make4 this, I think there was some comment made to the effect of,5 you know, the good thing about contemporaneous statements6 and documents and e-mails is that they are made at the time,7 not made years later, and they reflect what people really8 knew or were saying, as opposed to what positions they are9 taking in litigation.
10 I think that is precisely the significance here in
11 contrast to these arguments advanced to this Court and in
12 contrast to arguments advanced to the Appellate Division and
13 the Court of Appeals, that all of this was a secret.
14 In fact, these documents show that that was --
15 nothing could be further from the truth. So, you know, in
16 a way this goes back to where I started, your Honor --
17 chutzpah.
18 This is really sort of more than chutzpah -- people
19 taking a position not only that they didn't know, but that
20 the idea was so nefarious and so outrageous and so
21 prejudicial, in fact, the facts are exactly the opposite.
22 Sort of, you know, chutzpah is a nice word to describe it.
23 So now, let's turn to -- why don't we turn to the
24 continuation of sort of this story.
25 The next thing you see, in the early spring of 2008
26 is that the banks are continuing to look at all of this and
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1 PROCEEDINGS - KASOWITZ2 analyze it. So, I think that's slide 31.3 On March 9th, the B of A folks are issuing another4 heads up, another -- they are issuing another heads up.5 This is March 9th, 2008. I think I will read it.6 But, what is interesting is this isn't just a7 question of the two banks who are left in this case, you8 know, analyzing something afar, your Honor.9 This is, this heads up, heads up reflects the fact
10 that they were sitting right with MBIA, right with the CEO
11 and Chairman of MBIA and talking to him. Unbelievable.
12 What a secret. What a clandestine, what a clandestine
13 scheme.
14 So, let's read it.
15 "We met with MBIA's Chairman and CEO Jay Brown on
16 Friday, at a meeting held for Self Side (ph) analysts. We
17 came away from the meeting more confident that the company
18 is focused on the right things -- on the right things --
19 namely, returning to new business generation, albeit slowly,
20 and determining and implementing the right operating
21 structure over the next several years.
22 "We look at MBIA as a company in -- see if I have
23 that -- we look at MBIA as a company in transformation and
24 one that should stabilize over the next several quarters,
25 particularly if it retains its AAA ratings and visibility
26 into loss trends and the macro picture for the U.S.
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1 PROCEEDINGS - KASOWITZ2 increases."3 I like this one. "We applaud MBIA for its4 decisiveness under CEO Jay Brown's leadership, and for the5 banks' counsel. Moreover, CEO Jay Brown's interests are6 closely aligned with shareholders."7 Moving on, "MBIA continues to have, after8 discussions with the rating agencies surrounding its plan of9 action, including the structure of the company -- " I will
10 comment on these things, but let me get through it first.
11 "Mr. Brown reiterated his plan to split MBIA into
12 at least two operating units within the next five years. A
13 restructuring, in our view, will take time, given the
14 regulatory issues and the need to appease both shareholders
15 and policyholders."
16 So, let me go back to the beginning of this because
17 I think this is a document which ends up being critically
18 important in the analysis of whether or not there was
19 something egregious, something so irrational, so arbitrary
20 and capricious, perpetrated by the Superintendent of
21 insurance, in cahoots with MBIA, with respect to this
22 transformation transaction.
23 Those are all the things that we have been hearing
24 in this courtroom, first in Justice Yates' courtroom, for a
25 little bit of time in Justice Sherwood's courtroom, and now
26 in this courtroom during the past three years.
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1 PROCEEDINGS - KASOWITZ2 I must tell you, your Honor, that I have shown up3 and from the very first day of argument in this case, there4 have been all manner of accusations hurled at MBIA by the5 banks.6 Originally, it was 18 banks, now it's just two, but7 the accusations were ones that I had a difficult time8 listening to, that my clients had engaged in some kind of9 fraudulent scheme, that my clients had engaged in some kind
10 of secret conspiracy with a regulator, that my client was
11 trying -- and this is an argument that I haven't mentioned
12 yet today, but that has absolutely been advanced in all the
13 papers and in Court hearings -- that my client is trying to
14 line its own pockets at the expense of policyholders and the
15 like.
16 That, it's all being done, this whole argument that
17 it was being done in secret, as part of some kind of
18 clandestine scheme, was sort of the patina of accusation and
19 of egregious misbehavior that the banks advanced, to try to
20 give some oomph to the arguments they were making.
21 In fact, there is no oomph to the arguments. As
22 Mr. Holgado pointed out earlier in the week, we will go into
23 a little bit more of that.
24 There is no oomph to the arguments, and there is
25 not a shred of truth that there was some egregious scheme by
26 MBIA and its executives in conspiracy with the Department to
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1 PROCEEDINGS - KASOWITZ2 foist this on this these poor, unexpecting victim banks.3 Let's look at what they were saying back in the4 spring of 2008.5 First, they meet with Mr. Brown. I think that's6 significant. It's not just a question of them reading a7 press release that MBIA has issued, not a question just of8 that.9 They met with him and apparently, he is, you know,
10 they went up to Armonk or maybe -- MBIA also has an office
11 in the City -- and they went over to see him and, you know
12 what? He let them in. He didn't stand behind the door,
13 you know, cowering in a little corner saying I will not talk
14 to you, I have a conspiracy.
15 Conspirators don't meet with the people they are
16 seeking to defraud. They don't meet with the people they
17 are seeking to victimize, but he met with them. I bet
18 others met with him too. That's the first thing -- they
19 met.
20 Second thing, this is when I first saw this
21 document. I said wow this is surprising. "We came away
22 from the meeting more confident that the company is focused
23 on the right things."
24 Does that sound bad? Doesn't sound bad to me.
25 Sounds good. Sounds like they are focused on the right
26 things. B of A is saying the company, as a result of their
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1 PROCEEDINGS - KASOWITZ2 meeting with Mr. Brown, where he was talking about the split3 up of the company, was focused on the right things. Sounds4 good.5 Namely, returning to the new business generation,6 albeit slowly -- remember, we are going through a really,7 really difficult time here in the spring of 2008. It is8 the -- we are, the country and the whole world is heading9 into this really difficult time -- is in a difficult time,
10 not heading into it.
11 It is a difficult time, and moving on, and "we came
12 away from the meeting more confident that the company
13 essential focused on the right things, namely returning to
14 new business generation, albeit slowly."
15 Here is the part I really like -- "and determining
16 and implementing the right operating structure over the next
17 several years."
18 I don't even need to comment on that. That's,
19 that sounds like they really like this concept, the
20 splitting up of the company. But then, this is good.
21 Because, you know, I have sat here, again for three years in
22 this courtroom or other courtrooms and I have listened to
23 the banks make the argument, and I have sat in depositions
24 with their expert witnesses, former Superintendents, and
25 heard them make the argument as follows:
26 What's transformation? There is nothing in the
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1 PROCEEDINGS - KASOWITZ2 toward the beginning, at the beginning of the presentation3 today, that was this idea of making predictions about the4 future.5 And, the banks have leveled, as one of their6 criticisms against the review and analysis of7 transformation, the claim that MBIA had made somehow flawed8 projections of losses, flawed and not just flawed, but9 really flawed. That's what they say.
10 You all were, you know, hopelessly optimistic and
11 you were too optimistic in your projections and for that we
12 need to, we need to reverse transformation. That's I am
13 paraphrasing, but that's certainly one of the arguments they
14 made.
15 I pointed out earlier in the argument that, in
16 fact, these Petitioners were optimistic. In fact, I think
17 I pointed to a report from a Soc Gen executive who had
18 formerly been a bear, very bearish on the economy and in
19 November of 2008 he became bullish on the economy. Never
20 about a better time to invest in bonds, is what he said.
21 And, the report about that indicated that he had
22 been actually notoriously bearish, but smart. We will call
23 him the "smart bear".
24 But, at or about this time, just several weeks
25 before MBIA had submitted their application for approval of
26 transformation, he was saying that things were looking up.
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1 PROCEEDINGS - KASOWITZ2 to do that because we have seen the testimony from the3 banks' own experts, former Superintendents, all of whom said4 he did, and also, a transaction that would benefit MBIA's5 policyholders, both, both the structured finance and the6 public finance policyholders and something that was going to7 be good for the public, because in order to do business you8 need to build things and in order to build things, you need9 to have bonds, and in order to have bonds, your Honor, you
10 need to have guarantees, and I will get to that in an a
11 couple of minutes.
12 (Continued on next page.)
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1 MBIA Respondents-Kasowitz2 T53 The point here, your Honor, is just this:4 That on March 9, 2008, you have B of A saying that:5 "We look at MBIA as a company in transformation and one6 that should stabilize over the next several7 quarters" -- optimistic.8 It looks like they're pretty optimistic about9 it, your Honor. Your Honor, not that it should
10 stabilize over the next several quarters --
11 "particularly if it retains its triple A status and
12 visibility loss trends and the macropicture for the
13 United States."
14 So you don't have B of A at this point in time
15 saying it's all over. It's terrible. It's going --
16 we're heading to a depression.
17 In fact, they didn't know, just like we didn't
18 know. But they're pretty optimistic here. So that's
19 the other thing that I think is significant about this
20 heads-up from B of A.
21 That's in addition to, of course, this issue
22 of applauding Mr. Brown for his decisiveness and his
23 leadership.
24 That's an important point here, your Honor.
25 It goes to another point that the banks have talked
26 about here. That's simply this: The banks have taken
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1 MBIA Respondents-Kasowitz2 e-mail from a Justin Klein at B of A to some other3 people at B of A, and the subject is MBIA.4 In this e-mail it reflects discussion between5 Mr. Klein and the CFO of MBIA, who was Chuck Chaplin,6 and the treasurer of MBIA, who was Fred Pastore.7 So, there doesn't seem to be a lot of doubt or8 questioning being expressed in this e-mail about what9 was happening.
10 "MBIA eventually intends to split the company
11 with municipal and structured business being written
12 from separate operating entities, with both having
13 adequate capital, both entities will ideally be AAA
14 rated."
15 "The first priority of this initiative is to
16 build a capital cushion sufficient to support both
17 business units.
18 The new structure is expected to increase the
19 agility of the business units and transparency to
20 constituents and the market. I like that:
21 "Transparency to constituents and the market.
22 "The company has announced a five-year
23 timeframe to complete this separation, although the CFO
24 indicated in our conversation that the restructuring is
25 a high priority and would likely occur sooner than five
26 years."
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1 MBIA Respondents-Kasowitz2 So, to the extent that the banks say that this3 is all somewhere off in the future, we don't know if4 and when it's going to happen, when you look at the5 language of what they're saying, based on the meetings6 that they were having, they knew that this was a7 priority for MBIA, and the MBIA folks are saying, look.8 We're going to do this for the next five years, but9 we'd like to do it sooner.
10 And we're going to see some other documents
11 here, your Honor, that talk about the banks' knowledge
12 of almost exactly when it's going to happen.
13 Now, we all know that in June, as MBIA's work
14 on the transformation plan was proceeding, Standard and
15 Poors and Moody's downgraded their financial strength
16 ratings for MBIA, as they did for a number of other
17 monolines, and they downgraded beneath AAA.
18 As a result of those downgrades, MBIA
19 Insurance was not able to write financial guarantee
20 insurance in either the public finance markets or the
21 structured finance markets.
22 Both of those at that time, your Honor,
23 really, as a practical matter, required AAA ratings in
24 order to proceed.
25 So, that really sort of -- that resulted in
26 the freeze in the public finance markets that we have
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1 MBIA Respondents-Kasowitz2 new business.3 Now, whether or not at some point, depending4 on what happened in the overall economy and the global5 economy, MBIA insurance would be able in the future to6 write new business, who knows at that point?7 The idea was that it would have more than8 enough capital to take care of the obligations of its9 policyholders, and that's the determination that the
10 superintendent made, and it was an important and a
11 correct determination.
12 Now, one of the -- well, I'm going to turn --
13 I'll do this in a little bit more detail later, but --
14 in fact, I will turn to it later.
15 Let me get back to B of A. Immediately after
16 this downgrade, B of A, which had been following this
17 very closely, issued another report.
18 I think that was on June 6: "We believe the
19 business model as it exists today will likely have to
20 change in order for bond insurance to remain a viable
21 business."
22 I'm going to jump down to a second, and then
23 I'm going to go back: "MBIA's CEO Jay Brown stated
24 that perhaps the bond insurer will have to split its
25 company into separate entities sooner than expected."
26 So there can't be any claim here by these
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1 MBIA Respondents-Kasowitz2 banks that, okay, well, we understand that there's3 going to be -- that there's a plan to have a4 transformation. We know that the MBIA is going to be5 making an application for that with the superintendent6 of insurance, but this could be five years off, you7 know, given the recent events, the fact that there was8 a downgrade that made the need for, and the impetus of,9 doing this transaction even more pressing.
10 Just five days after that report, MBIA issued
11 a letter to its shareholders which said, among other
12 things: "We will assess one key action item at this
13 point, which is to continue to pursue opportunities to
14 support the bond insurance market as a whole in
15 conjunction with the New York State Insurance
16 Department and other stakeholders.
17 "In addition, we will assess what would be
18 required by us by the rating agencies and regulators to
19 use one of our two fully licensed subsidiaries as an
20 AAA subsidiary for new public finance business."
21 So, there is no doubt that this is moving
22 ahead.
23 On June 19 MBIA issues a press release. The
24 press release a very clear: "We are moving forward
25 with" -- it says "out," but it's our -- our
26 "transformation plan which we will pursue in
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1 MBIA Respondents-Kasowitz2 little bit because I'm doing this chronologically. I3 think it's sort of the most -- at least to me it's the4 way that makes the most sense.5 About the time that all of this was happening6 and it was out in the public realm, especially with7 these banks, that this transformation plan was being8 worked on and worked on hard, the department was at9 work.
10 One of the things that the department was
11 doing was continuing its risk surveillance with respect
12 to MBIA in accordance with the obligations that the New
13 York State Insurance Department had to continue to
14 maintain vigilance with respect to the insurance
15 companies that are subject to its jurisdiction.
16 We've heard argument in this case that the
17 analysis -- that the review and analysis and work that
18 was done with respect to transformation was very, very
19 flawed.
20 The arguments that the banks have made is that
21 it was rushed, it was in secret, it was flawed, and
22 ultimately -- and there have been suggestions that
23 there were ulterior motives on both sides and the like.
24 One thing that -- well, all of that is wrong,
25 your Honor, and one of the glaring facts -- just to
26 kind of pick apart the puzzle here, one of the glaring
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1 MBIA Respondents-Kasowitz2 They were working in connection with the3 surveillance, the financial surveillance of Monoline4 insurers.5 You've heard Hampton Finer's name raised both6 by the banks and discussed by Mr. Holgado. We're going7 to talk about him a little bit later, too.8 So let's see. "This is the e-mail: "Sorry I9 couldn't get back to you sooner."
10 This is to Mr. McKiernan at MBIA:
11 "To put it too briefly, we need to see
12 everyth