Banksvmbia 5.18 Transcript

156
In The Matter Of: v. May 18, 2012 Supreme Court - New York County Original File ABN AMRO 051812.txt Min-U-Script®

Transcript of Banksvmbia 5.18 Transcript

Page 1: Banksvmbia 5.18 Transcript

In The Matter Of:v.

May 18, 2012

Supreme Court - New York County

Original File ABN AMRO 051812.txt

Min-U-Script®

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2 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - CIVIL TERM - PART: 39

3 ------------------------------------------------X ABN AMRO BANK N.V.; BARCLAYS BANK PLC; BNP

4 PARIBAS; CALYON; CANADIAN IMPERIAL BANK OF COMMERCE; CITIBANK, N.A.; HSBC BANK USA N.A.; JP MORGAN CHASE

5 BANK, N.A.; KBC INVESTMENTS CAYMAN ISLANDS V LTD.; MERRILL LYNCH INTERNATIONAL; BANK OF AMERICA, N.A.;

6 MORGAN STANLEY CAPITAL SERVICES INC.; NATIXIS; NATIXIS FINANCIAL PRODUCTS INC.; COOPERATIEVE

7 CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., NEW YORK BRANCH; ROYAL BANK OF CANADA; THE ROYAL

8 BANK OF SCOTLAND PLC; SMBC CAPITAL MARKETS LIMITED; SOCIETE GENERALE; UBS AG, LONDON BRANCH; and

9 WACHOVIA BANK, N.A.,

10 Petitioners,

11 -against-

12 ERIC DINALLO, in his capacity as Superintendent of the New York State Insurance Department,

13 the NEW YORK STATE INSURANCE DEPARTMENT; MBIA INC.; MBIA INSURANCE CORPORATION; and NATIONAL PUBLIC

14 FINANCE GUARANTEE CORPORATION (f/k/a MBIA INSURANCE CORP. OF ILLINOIS),

15

16 Respondents. ------------------------------------------------X

17 Index No. 601846/09 60 Centre Street New York, New York

18 May 18, 2012

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20 B E F O R E:

21 HONORABLE BARBARA R. KAPNICK,

22 Justice of the Supreme Court

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2 A P P E A R A N C E S:

3 SULLIVAN & CROMWELL, L.L.P.

4 Attorneys for the Petitioners 125 Broad Street

5 New York, New York 10004 BY: ROBERT J. GIUFFRA, ESQ.

6 MICHAEL H. STEINBERG, ESQ.

7 KASOWITZ BENSON TORRES & FRIEDMAN, L.L.P. Attorneys for the MBIA Respondents

8 1633 Broadway New York, New York 10019-6799

9 BY: MARC E. KASOWITZ, ESQ. KENNETH R. DAVID, ESQ.

10 JOSHUA GREENBLATT, ESQ.

11 OFFICE OF THE ATTORNEY GENERAL Attorneys for the State Respondents

12 120 Broadway New York, New York 10271

13 BY: DAVID HOLGADO, ESQ., MARK E. KLEIN, ESQ.

14 Assistant Attorney General

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16 VICKI K. GLOVER, CSR, RMR, CRR CLAUDETTE GUMBS,

17 Official Court Reporters

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2 M O R N I N G S E S S I O N

3 MR. GIUFFRA: Good morning, your Honor.

4 THE COURT: Good morning, everybody.

5 Okay. So are you ready to continue?

6 MR. GIUFFRA: Yes, I am, your Honor.

7 Good morning.

8 What I'm going to do this morning is cover the

9 errors and the adjustments. I did the adjustments

10 yesterday, places where we think the data was stale,

11 information was not complete; and then Mr. Steinberg will

12 talk about BlackRock and the legal structure of the

13 transaction. I'll come back to fair and equitable and sort

14 of the regulatory process issues, and then, hopefully,

15 we'll be done. And we'd like to get done in the early part

16 of the afternoon, particularly since it's a Friday and

17 people would like to go home and it's a beautiful day

18 outside.

19 If I could turn up slide 42.

20 Your Honor, this is a slide from Mr. Greenspan's

21 report, slide 42, and it talks about projected

22 policyholders surplus at December 31. And then it's

23 corrected to reflect MBIA's admitted errors and then

24 adjustments. And I sort of explained some of this

25 yesterday, and I'm going to sort of take you through the

26 process that explains all of these numbers in the early

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2 part of the morning.

3 But the first sort of module there on the left is

4 MBIA Extreme Stress Scenario. And so when Mr. Buchmiller

5 was looking at MBIA's numbers, and on January 27th he had

6 received -- he had made a request for the extreme stress or

7 break-the-bank scenario because he was concerned about the

8 state of the economy at that point in time, which was a

9 logical thing to do. And so he received from MBIA -- this

10 was done over, basically, a two-day period, and I'll be

11 talking about it today -- an extreme stress result.

12 Now, that extreme stress result was based on a

13 5.23 discount rate. And the discount rate is relevant

14 because MBIA, obviously, has assets and they have to sort

15 of assume in what amount those assets will grow and that

16 impacts the size of their loss reserve. The higher the

17 discount rate, obviously the less assets you need and your

18 loss reserves are low because it will grow up over time.

19 And these products are products that go out to 2054, some

20 of them.

21 So, when he originally got this information on the

22 29th, he was told by MBIA -- MBIA ran all the numbers. He

23 didn't run any of the numbers. It was not done by the

24 Department. They decided the inputs. And it was positive

25 $362 million.

26 Now, last November MBIA submitted materials to

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2 your Honor indicating and admitting that this extreme

3 stress scenario that was given to Mr. Buchmiller was

4 erroneous by $291 million. So it was negative 291 on

5 MBIA's own numbers.

6 Now, I will talk a little bit about how the

7 discount rate that MBIA used in their corrections, this

8 5.23, was even wrong in and it itself. MBIA, in fact, has

9 used a lower discount rate in its filings, and I think they

10 say the correct discount rate was 5.03. So, in the

11 corrections they didn't even correct the discount rate.

12 The next number, which is MBIA extreme stress,

13 reflects what we think the discount rate should be, which

14 is 4.18. And the next number, which is FTI updated extreme

15 stress scenario, reflects both the correct discount rate we

16 believe, the correction of the errors, and then in

17 addition, as you may recall with those RMBS transactions

18 where Mr. Buchmiller was basing it off the August numbers,

19 that was the discussion he was having with Mr. Uppuluri.

20 If you go to December, and remember, the transaction wasn't

21 approved until February, you end up with numbers that are

22 $2.7 billion negative. And then BlackRock was the firm

23 that was talked about by Deputy Superintendent Finer as

24 possibly bringing a third party in, and he said others have

25 used BlackRock to good effect. And the guidance and the

26 guidelines from the National Association of Insurance

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2 Commissioners talk about bringing in a third party. And

3 the third party that was actually discussed by the

4 Department was BlackRock. So we went out and hired

5 BlackRock and they actually ran the -- they actually did an

6 analysis based on what they would have done back in

7 February 2009. We paid, you know, $7 million for it. They

8 had 20 people literally working six weeks. And the numbers

9 that BlackRock comes up with under a base case are, you

10 know, close to $10 billion and then $17 billion, all

11 negative policyholder surplus.

12 Now, let me go back to the law, which I think is

13 important to focus on. The law in New York in an Article

14 78 case -- and we have a binder that I'd like to hand up.

15 I'll hand them to the other side -- of what we think are

16 some of the key cases.

17 It's clear that Article 78 petitions --

18 (Handing to the Court.)

19 (Handing to respondents.)

20 MR. GIUFFRA: -- that Article 78 petitions should

21 be granted when an agency acts on false information,

22 erroneous information, inaccurate information, and there's

23 case after case after case talking about that. And so, in

24 this case it doesn't matter whether people -- the

25 information was inaccurate or incomplete because someone

26 had bad intent. All that matters is that the agency acted

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2 on inaccurate or incomplete information. And our position

3 is that here the Department, because of the nature of the

4 review that was done by Mr. Buchmiller, you know,

5 essentially doing the work between January 9 and then

6 ending on February 11th, one person, and the information

7 that was given to him by MBIA was inaccurate and

8 incomplete, and on that basis alone your Honor can annul

9 the decision. They agree that the information that they

10 gave to Mr. Buchmiller was inaccurate. And that's sort of

11 the stop-go on policyholders surplus, which I'll talk about

12 this morning.

13 Now, if we can just turn up slide 16.

14 And this is the slide we saw yesterday of the

15 three basic categories of what was looked at by

16 Mr. Buchmiller: the CMBS, the RMBS and the CDOs.

17 And now let's turn to slide 14.

18 And this shows how MBIA had zero losses for what

19 became its worst structured products by the end of 2008,

20 and that's important because it goes to MBIA's ability to

21 accurately project future losses.

22 Let's turn to slide 22. I think it's actually

23 Exhibit 22. Excuse me, PX 70. And this, your Honor, is

24 that discussion that we talked about yesterday with

25 Mr. Buchmiller about the 8 and the 12. Again, they had the

26 accurate information available and they didn't use it.

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2 Stale information. The use of stale information in and of

3 itself is something that requires annulment of its

4 decision.

5 And then exhibit -- slide 23.

6 And this is the Lehman information which we talked

7 about. Again, other information available to

8 Mr. Buchmiller. He actually knew about they were doing

9 third party reviews and they didn't make this available to

10 him notwithstanding the fact that he knew about CMBS.

11 MR. HOLGADO: Your Honor, just want to interject.

12 Is it available or is it not available? Is it before him

13 or is it not before him?

14 MR. GIUFFRA: Well, in fact --

15 MR. HOLGADO: You said it was available to

16 Mr. Buchmiller but they didn't make it available to him.

17 MR. GIUFFRA: The reason why it was available to

18 Mr. Buchmiller because he was told by MBIA, and in fact in

19 submissions that have been made by MBIA, they said they

20 made available to him any and all information that they

21 had, and everything was available to Mr. Buchmiller.

22 Mr. Buchmiller knew that there were third party reviews.

23 MR. KASOWITZ: Objection.

24 MR. GIUFFRA: So it's a question --

25 MR. KASOWITZ: Objection, your Honor. If he wants

26 to use the quotes, let him use the quotes. What

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2 Mr. Buchmiller testified about, both in deposition and in

3 his affidavit, and we're going to show it to you, he said

4 everything he asked for he got. There's nothing that he

5 asked for that he didn't get. And he asked for everything

6 that he thought he needed. So let's just -- this idea that

7 any data point in the world MBIA was obligated to make

8 available to him, that's not part of the record. That's

9 not what Mr. Buchmiller testified to. We're going to

10 handle this in our presentation, but we'd at least like it

11 to be accurate for the record.

12 MR. GIUFFRA: I think I am being accurate. In

13 fact, when Mr. Buchmiller was told, and what's in the

14 record is, he supposedly received unfettered access. And

15 our point with respect to the Lehman study is Mr. McKiernan

16 knew that Mr. Buchmiller was looking at Broderick III and

17 he had information about Broderick III which he did not

18 share with Mr. Buchmiller, so -- and your Honor is --

19 THE COURT: We talked about that yesterday.

20 MR. GIUFFRA: Exactly.

21 THE COURT: You talked about it.

22 MR. GIUFFRA: I did talk about it.

23 And then the last one, 65, and then I'll be done

24 sort of reorienting us back to where we were. So that's

25 the CDO issue.

26 And then with respect to CMBS, there's the

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2 question about the internal analyses and what he saw.

3 Why don't we just keep going to PX 51.

4 Now, this is the memo that we obtained in

5 discovery from Justice Yates. It's the backdated memo.

6 And we don't think that the Department can rely upon this

7 document because it was written, by Mr. Buchmiller's own

8 admission, some time many weeks after the transaction. He

9 doesn't say that Mr. Dinallo has no recollection of knowing

10 about the document. But the issue that I want to just

11 focus on for a second is down at the bottom of the first

12 page.

13 It says: "I did not find evidence that MBIA

14 Insurance Corporation is inadequately reserved based on

15 what we know as of today" -- then there's a comma where it

16 says "redacted."

17 And then to the next page.

18 There's more redactions.

19 And our point, your Honor, is, clearly there must

20 be some limitations on the conclusion in the sentence; and

21 so they can't, for example, rely on that statement of

22 Mr. Buchmiller and then not provide us with whatever

23 limitations are expressed by Mr. Buchmiller in his memo.

24 And we have the same issue, your Honor, on page 32.

25 MR. HOLGADO: Before we move on, your Honor, if I

26 could just interject again. We've been over this and

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2 Justice Yates approved these redactions. If Justice Yates

3 were still here, he would know the context in which to put

4 a statement like this from Mr. Giuffra that suggests

5 there's something particularly important that needs to be

6 disclosed to the banks in that redaction. Justice Yates

7 found that there was not. And --

8 THE COURT: If you have something to show me that

9 he made a determination on it, then I'm obviously not here

10 to overrule --

11 MR. HOLGADO: Understood.

12 THE COURT: -- my former colleague.

13 MR. HOLGADO: Right.

14 THE COURT: That was a while ago and I honestly

15 don't know where it is that he made that determination. If

16 he did it during an argument or something if you could show

17 me that, then I think then -- I mean, you got a lot of

18 stuff, you told me, because of him, but if he ruled that

19 you shouldn't get things then, you know, what's good for

20 one side is good for the other. If that's what he ruled,

21 that's what he ruled. I just don't know that for sure and

22 I'd ask you to find it.

23 MR. HOLGADO: I can tell you for sure that he did

24 approve these redactions. It would have been done in

25 camera and whether there is a sealed transcript of that

26 discussion, I'm not certain, your Honor. But, you know, we

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2 can make whatever additional inquiry into that, or if your

3 Honor needs to see what the redacted portion was yourself,

4 that's another option. But I would just ask that we, at

5 least, put in context Mr. Giuffra's characterization that

6 there's of course something important in there that nobody

7 here has passed on and decided didn't need to be seen.

8 THE COURT: I'm going to leave it to you guys in

9 the first instance if you can go back and find anything

10 that reflects what went on here because I don't know.

11 Again, I don't want to -- if it's been ruled on, then it's

12 out of my hands.

13 MR. HOLGADO: Okay.

14 THE COURT: If it hasn't been, then I can always

15 take a look at those portions and make my own rulings. I

16 need you to do the preliminary work.

17 MR. GIUFFRA: Very well, your Honor. Let me give

18 you some context because I think this is very important.

19 When Justice Yates looked at this document, he did

20 so in the context of us getting the document for purposes

21 of discovery. Now the Department would like to use the

22 document affirmatively as a sword.

23 In addition, the record and the facts are

24 different than they were when Justice Yates looked at this

25 document, and this is before Mr. Holgado was involved in

26 the case. It was in 2010, in the early fall. Since that

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2 time, the Department itself has put at issue solvency and

3 internal discussions within the Department about solvency

4 issues. So they put forward Mr. Dinallo's affidavit,

5 Mr. Dinallo's testimony, Mr. Buchmiller's second affidavit,

6 Mr. Buchmiller's second deposition. And in those

7 affirmative uses of testimony, in our view, they have

8 waived the privilege. So, at the time when Justice Yates

9 looked at this issue, they had not waived the privilege.

10 We were trying to get discovery. Now they've had

11 Mr. Dinallo submit an affidavit, they've had Mr. Buchmiller

12 submit a second affidavit, and they have talked about the

13 fact that Mr. Dinallo said, well, I talked to people within

14 the Department about Mr. Buchmiller's review. I talked to

15 people in the Department about solvency issues. And he

16 said what they told him. Therefore, he has waived the

17 privilege. And now what they would like to do is use this

18 as a sword. You can't do that.

19 And then under the basic rule of completeness, one

20 can't use this document affirmatively and be able to say --

21 use the first sentence, and then there's a comma and have

22 it be redacted and so oh, this shows that Mr. Buchmiller

23 said that I haven't found, you know, any issues with

24 respect to solvency, and then have a redaction right after

25 a comma. It makes no sense.

26 MR. HOLGADO: Your Honor, if I may. To suggest

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2 that the state respondents have somehow put into issue the

3 question of MBIA's solvency or the analysis that was done

4 via our sur-reply papers, your Honor, the fourth round of

5 briefing in this matter, where the petition itself made

6 those very arguments where that became the central issue in

7 petitioners' case was whether or not the review was

8 adequate by the Department and what was done by

9 Mr. Buchmiller and what was said by Mr. Buchmiller to

10 senior Department officials prior to transformation. And

11 on that last point, your Honor, it's a very important

12 point. And we touched on this when Mr. Giuffra made these

13 waiver arguments on Monday. And in the better to your

14 Honor on the Friday before this hearing began, your Honor.

15 He's suggesting that the waiver that -- no waiver has been

16 found, but there was a voluntary production by the state

17 respondents, as you know, on March 9th in this proceeding,

18 and there was also provided in both plenary actions that

19 were pending at the time in advance of that hearing before

20 your Honor in Judge Sullivan. The waiver that we didn't

21 concede but we said was at least arguable was with respect

22 to two categories that had been put into issue by the very

23 affidavits that Mr. Giuffra references for you; the

24 affirmation, your Honor, of Superintendent Dinallo, and the

25 supplemental affirmation of Mr. Buchmiller. And in those

26 affirmations these are the communications, these are the

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2 communications that were arguably put into issue, if at

3 issue type waiver was even something that could be -- is

4 cognizable under a public interest privilege, which your

5 Honor expressed some skepticism about, we agree, your

6 Honor. We have not conceded such a waiver. But here are

7 the two categories of communications, and we were very

8 clear, and it was just as clear in the production letter

9 itself. Anything from Mr. Dinallo to senior Department

10 staff or Department staff of any kind, including

11 Mr. Buchmiller, regarding the instructions for how the

12 financial review should be conducted. That's Category 1.

13 And Category 2, and this is the one that's important here.

14 Anything from Mr. Buchmiller relaying the progress or

15 results of his review to Department staff, including

16 Mr. Dinallo, prior to their transformation approval. This

17 document, your Honor, does not fit in that Category 2

18 anyway. Yes, it's drafted by Mr. Buchmiller. Who is it

19 directed to? It's not directed to senior Department staff.

20 It's directed to file. When was it completed, your Honor?

21 Several weeks after transformation. That's why we -- now,

22 one thing we did do, to be completely transparent, your

23 Honor, is there were previous e-mails from Mr. Buchmiller

24 that had been ordered to be produced that were produced in

25 redacted form with redactions approved by Justice Yates

26 that we decided even though those redactions were approved,

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2 some of those redactions did have -- they were in e-mails

3 from early February and late January where the progress and

4 results of Mr. Buchmiller's review were discussed. And so

5 we decided yes, if they put it at issue, we're going to

6 produce those e-mails, they were before transformation and

7 they are e-mails to Department staff. That's within that

8 possible waiver that we're not even conceding. So we

9 produced those unredacted. And we produced additional

10 e-mails. But this, your Honor, was not provided, as it's

11 their very argument, in fact. He just said it a few

12 minutes ago. This was not provided to Department staff

13 prior to transformation. It's not the purpose of this

14 memorandum.

15 THE COURT: Are you relying on this? I mean, you

16 requested it in discovery.

17 MR. HOLGADO: Exactly.

18 THE COURT: Are you relying on this report?

19 MR. HOLGADO: Well, what we're doing, your Honor,

20 is meeting the proof. When he offers it as -- how can he

21 say we're offering it as a sword when he is offering it?

22 THE COURT: The thing is, I am not clear yet.

23 Mr. Giuffra, you asked for it in discovery. You

24 got it in discovery. But I don't think that means that

25 Mr. Holgado is relying on it. He just gave it to you in

26 discovery because Judge Yates said give it to him in

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2 discovery, so he gave it to you with some redactions.

3 MR. HOLGADO: And your Honor, though, we are

4 relying on it because it is in the administrative record.

5 It is proper to be in the record. Not only because it was

6 argued to be in the record. Now, they're saying they don't

7 want to rely on it now because it's not even a document for

8 them. But when they were seeking the document, your Honor,

9 they said it needed to be in the record. Now that they see

10 the document they don't want it in the record. And more

11 importantly, this document is a contemporaneous

12 recordation, memorialization by Mr. Buchmiller of the work

13 that he performed and the conclusions that he reached.

14 It's completely competent and relevant proof with respect

15 to the conclusions that he reached.

16 Now, that is a distinct point from whether or not

17 it evidences that he told his superiors these things.

18 We're not offering this -- to be clear your Honor, when I

19 say we're not relying on it, we're not relying on it to

20 show that he told superiors these things. We're only

21 showing that these are the conclusions he reached in the

22 work being performed. It's relevant to that. It shows

23 that. Now, it doesn't show that he told Mr. Dinallo that.

24 He'll tell you that. He'll tell you that he did. And

25 there's other e-mails, your Honor, that show that he told

26 Department staff these very same things. But this

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2 particular document, we're not offering it for that

3 purpose. And I think that's an important distinction with

4 respect to the waiver-type arguments he's making, is that

5 since we're not offering it in the same context -- it's a

6 memo to file. He should show you the first page. It says

7 "to file." That's not a person. It's just to record what

8 he did.

9 MR. GIUFFRA: Your Honor --

10 THE COURT: Do you want to add on to this and then

11 I'll listen to --

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2 MR. KASOWITZ: MBIA certainly relied on the

3 document. It is a document that was -- nothing

4 unusual about it, your Honor, it worked -- worked at a

5 -- that a department employee did that was very

6 sensitive over an extensive period of time and then,

7 he decided to write a memo to the file after he

8 completed the work to reflect what he had done and that

9 is what it was, so it is now four years later, it is --

10 three years later, it is more than three years later,

11 almost four, it is contemporaneous evidence of the very

12 extensive work that he had done.

13 It is clearly relevant, they have been

14 arguing from it for the last two days. They don't like

15 it, they don't like his conclusions and they don't like

16 how extensive the work was and how conscientious it was

17 and the like, that is their problem. It clearly is

18 relevant to this, the work that one of the primary --

19 the primary person did and so, we are relying on it,

20 the Department is relying on it for those purposes.

21 There ought not to be any dispute about -- that it is

22 relevant.

23 THE COURT: Since you, Mr. Giuffra, were

24 involved in the case before Mr. Holgado and myself, you

25 -- can you go back and find or do you have any

26 recollection of what Judge Yates -- I mean, his ruling

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2 -- Mr. Giuffra says the facts are different now than

3 when he made rulings.

4 MR. KASOWITZ: The facts are not different

5 at all.

6 What Mr. Holgado was referring to, he was not

7 around at the time, I was around at the time, the facts

8 are not different at all. There was an issue as to

9 whether or not there were certain internal discussions

10 and the like that might be privileged as deliberative

11 privilege within the Department. Justice Yates

12 decided there was a dispute about it and Justice Yates

13 decided that he would look at certain documents that

14 might include some of those references.

15 I think that is the part of this memo, I

16 think that he looked at for that purpose, because it

17 might have reflected that discussion, That in and of

18 itself -- we weren't part of that, we didn't see those

19 redactions because it was not our document, but those

20 -- but Justice Yates did make some, I think

21 determinations about a list of documents. I am not

22 sure what they were.

23 We will go back and look in the transcripts

24 to see if we can shed some light on this, but the

25 argument that that invalidates the entire -- the other

26 entire document is -- just doesn't hold water here.

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2 MR. GIUFFRA: Your Honor, if I could be

3 heard.

4 What we are saying is the following: I think

5 Mr. Holgado made the concession, this document was not

6 shown to any decision makers at the Department prior to

7 the decision. And --

8 THE COURT: I think everybody agrees with

9 that.

10 MR. GIUFFRA: So the relevance of the

11 document is -- can I just be heard for a second, Mr.

12 Kasowitz?

13 The relevance of the document is, was this

14 something that was a basis for the Department's

15 decision. My view is, since the who people made the

16 decisions didn't see it, it would not be, but I am not

17 arguing at this moment about whether or not your Honor

18 should consider this document. My point is a much more

19 narrow point; which is that if they want to put this

20 document before your Honor and I quote the sentence "I

21 did not find evidence that MBIA Insurance Corp is

22 inadequately reserved based on what we know as of today

23 mid February?" They certainly can't rely on the first

24 part and then not --

25 MR. HOLGADO: There is a period.

26 THE COURT: A period and a comma.

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2 MR. GIUFFRA: Period and a comma, but my

3 point is --

4 MR. HOLGADO: A typo, your Honor.

5 MR. GIUFFRA: But my point is there is

6 obviously something that is redacted there and so, if

7 they want to use the document affirmatively, they have

8 to make the entire document available. Otherwise,

9 what you would have is a situation where the Department

10 can essentially use their redaction pencil to decide

11 what we can see and what we can't see based on some

12 completely subjective analysis by the Department.

13 The second point and again, I was involved in

14 the case then, Mr. Holgado has conceded that after the

15 review by Justice Yates, there was at issue a waiver --

16 MR. HOLGADO: I did not concede that.

17 MR. GIUFFRA: You put things at issue

18 because of the affidavits submitted by Dinallo and by

19 Buchmiller, which happened well, well after this.

20 MR. HOLGADO: Again, that is not correct.

21 MR. GIUFFRA: Can I please be finished?

22 THE COURT: Yes.

23 MR. GIUFFRA: So my point your Honor is,

24 when Justice Yates was making this decision as to what

25 -- basically what the redactions would be, that was at

26 a time earlier in the case, we were seeking -- this

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2 document does not have a record cite on it, it was not

3 in the original certified administrative record. In

4 fact, when the original certified administrative record

5 was put forward, the Department under certification

6 said this is what we relied upon as the basis of our

7 decision and we have all of that, we put it before the

8 Court.

9 The narrow issue that I am focusing on right

10 now is, before we even get to all of those issues, if

11 they want to affirmatively rely on the document, we

12 need to see it.

13 THE COURT: I got it. I got your point.

14 But I did ask you to go back and see exactly how this

15 developed.

16 MR. GIUFFRA: We will.

17 THE COURT: And then, I will see how he is

18 going to offer it, but we are, you know, what you have,

19 you have and you can talk about it.

20 MR. HOLGADO: Understood, your Honor, but

21 even though I am newer to the case than Mr. Giuffra, I

22 am somewhat aware of what happened. I did try to

23 inform myself of the proceedings before this Court

24 prior to my entry. I am not so self-centered as to

25 think that those proceedings were irrelevant.

26 I do happen to know there was an in camera

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2 review with Justice Yates.

3 THE COURT: I happen to know that too, but I

4 am not sure whether it was recorded.

5 MR. HOLGADO: I know that you know, your

6 Honor, I am trying to remind Mr. Giuffra because he

7 said it was a completely subjective redaction. That

8 is inconsistent with the notion that it is court

9 approved, reviewed by the judge.

10 We don't have anything to hide here from your

11 Honor, and with respect to these redacted portions, if

12 after you hear how we used this evidence, your Honor,

13 your Honor wishes to obtain further context, that is

14 not something that we will stand this the way of. And

15 that is really where we should leave it at.

16 THE COURT: Anything further?

17 MR. KASOWITZ: Yes one thing quick thing.

18 This argument that a document that reflects

19 the reasons that Buchmiller approved were -- or

20 believed that transformation should proceed, that

21 because the document itself was not given to someone

22 senior to him doesn't mean that it doesn't reflect what

23 his real thinking was or what he told people is

24 nonsense. They made the same argument in trying to

25 keep out Buchmiller's affidavit. They said how can an

26 affidavit in 2011 reflect what was his reasoning back

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2 in 2009? Because now is when the litigation is

3 proceeding, he is saying what he was thinking.

4 Thank you, your Honor.

5 THE COURT: So why don't we go on? I think

6 you have made your point and they will look and see,

7 you will look and see what you can find and --

8 MR. GIUFFRA: My point is much more narrow

9 and we will deal with it later.

10 The next issue, your Honor, is if we could

11 turn to Page 29 of this memo. I will be talking this

12 morning about the extreme stress scenario and that is

13 where MBIA has admitted there was a 1.4 billion dollar

14 error that took that extreme stress scenario from

15 positive policyholder surplus to negative policyholder

16 surplus from green to red and in Mr. Buchmiller's memo

17 he says "because I am stressing the extreme loss

18 scenario, these figures do not tie to their statutory

19 balance sheet, which is and is supposed to be the

20 expected case." Now, he then says "and this is very

21 important for focusing on the importance of the extreme

22 stress scenario that you received late in the review."

23 He says "Worst case scenario is more appropriately our

24 concern regarding transformation", meaning Mr.

25 Buchmiller in his own words, says that the extreme

26 stress scenario is something he was focused on, it was

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2 a concern of his in part and the testimony supports

3 this because of the nature of the economy at that point

4 in time. We were in the middle of the financial

5 crisis, so the extreme stress scenario was very

6 important.

7 MR. KASOWITZ: Objection. Show the

8 testimony. Show the statement where he said that.

9 MR. GIUFFRA: We will, Marc. We will, Marc.

10 THE COURT: Well, why don't you just -- I

11 mean we know somewhat about the economy at that time,

12 but why don't you try to stick to what he said or --

13 MR. KASOWITZ: Thank you, your Honor.

14 MR. GIUFFRA: So what I am sticking to is

15 what he said in the memo is more appropriately our

16 concern regarding transformation. This is a base case

17 scenario and a worst case extreme stress scenario and

18 he says that the extreme stress scenario is more

19 appropriately our concern regarding transformation.

20 Now, just the next page I wanted to focus on

21 to get it for your Honor, is there is a question of

22 like when was the work that was done with respect to

23 this memo and if we could turn to Page 2.

24 He says "Post decision, I have continued to

25 backfill test and will validate the work done prior to

26 the decision, connecting the dots or filling in the

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2 gaps."

3 MR. HOLGADO: Read the first sentence,

4 please.

5 MR. GIUFFRA: "This memo covers only items

6 or matters that I reviewed up to the date of the

7 Department's February 17,2009 decision on

8 transformation and nothing after."

9 I am glad you pointed that out to me, David.

10 Turn to page 27. So Mr. Buchmiller is

11 focused on RFC, that was the second-lien RMBS

12 transaction that he looked at in detail, the only one

13 and in the footnotes to his memo, it says forwarded to

14 me on March 27, 2009. So that raises the question of

15 how much that is in this memo reflected things that

16 happened after February 17, after the decision.

17 THE COURT: Did you ask him that in one of

18 his depositions?

19 MR. GIUFFRA: I don't remember, your Honor,

20 but I will look and get back to you. But the only

21 point I am raising again, it is unclear from the memo

22 what was or was not available at the time.

23 Now, what -- Mr. Buchmiller, let's turn to

24 the next slide, and the question was, when was the memo

25 finalized, and he said it probably would have been

26 March or April of 2009.

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2 And could we turn to the last page of the

3 memo under the section dealing with --

4 THE COURT: Did you ask him why he dated it

5 February 16 if he testified that it wasn't finalized

6 until March or April?

7 MR. GIUFFRA: Your Honor, my -- the

8 testimony --

9 THE COURT: Did you --

10 MR. GIUFFRA: The best of my recollection is

11 Scott Fischer, the lawyer working on this transaction,

12 asked Mr. Buchmiller to do this memo. I do not

13 remember precisely what he said, but it is quite clear

14 that the memo was written later and it takes some doing

15 to figure out exactly what is -- do you have the

16 testimony?

17 MR. HOLGADO: I do. If you would like to

18 read it, well you know, it is my --

19 THE COURT: What --

20 MR. HOLGADO: He said in his deposition.

21 THE COURT: This is Mr. Buchmiller's

22 deposition?

23 MR. HOLGADO: The first deposition on page

24 249. If you could do it.

25 MR. GIUFFRA: Your Honor, he asked -- let's

26 turn it up to to the top so we get the whole thing up

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2 there.

3 QUESTION: Do you have any idea as to

4 whether the superintendent ever reviewed your final

5 memo to file?

6 ANSWER: I don't know that he did.

7 QUESTION: Do you have any knowledge as to

8 whether any of the senior people in the Department ever

9 reviewed your final memo?

10 ANSWER: I don't know for sure that they

11 did.

12 QUESTION: And you started writing your

13 final memo after the transformation transaction was

14 approved by the superintendent, right?

15 ANSWER: Yes. It was to document what had

16 been done up to the point of the Superintendent's

17 decision.

18 QUESTION: And you finished that memo

19 probably about April, I think you testified this

20 morning?

21 ANSWER: March or April.

22 QUESTION: But you certainly didn't write

23 any final memos before February 17, 2009, correct?"

24 We will have to go back and look at the

25 transcript, but there was an earlier discussion in the

26 transcript.

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2 MR. HOLGADO: 248, your Honor. 14 to 23,

3 your Honor.

4 THE COURT: Doesn't seem like there is an

5 issue that even though the date on that memo was

6 February 16,2009, it wasn't completed until March or

7 April. That is what he has testified.

8 MR. GIUFFRA: There is no question about

9 that. The question that I think there is an issue

10 about is how much in that memo is things that he did

11 after, and at least that one footnote and also all of

12 the communications which we showed you yesterday.

13 This is a little bit of a tempest in a teapot and so, I

14 would like to keep moving.

15 The point about the memo is two things, one

16 the level of redactions of key things --

17 THE COURT: You made that point.

18 MR. GIUFFRA: -- and second, the fact that

19 he is focused on the extreme stress test and that

20 becomes very important because of the errors.

21 MR. KASOWITZ: If your Honor wants the

22 answers to the questions that your Honor asked, they

23 are in the testimony. He gave testimony that --

24 specific testimony that he was reflecting the work that

25 he had done, but there is also in the document the

26 statement that there was an examination --

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2 MR. GIUFFRA: Put it up again.

3 THE COURT: Let him talk.

4 MR. KASOWITZ: There is also evidence that

5 there was an Insurance Department examination that was

6 going on of MBIA, of issues relating to MBIA at the

7 same time and Buchmiller was also part of that

8 examination, so some of his memo related to that work

9 that he was continuing to do. It was -- he was very

10 clear about it.

11 MR. GIUFFRA: The examination was not done

12 until probably May of 2010.

13 MR. KASOWITZ: And the examination confirmed

14 exactly what was in the memo, your Honor.

15 THE COURT: All right.

16 MR. GIUFFRA: It postdates the approval.

17 THE COURT: We agree with that, but I have

18 not said that nothing afterwards could possibly reflect

19 it, so --

20 MR. GIUFFRA: Let me focus, your Honor, on

21 stress testing. Stress testing was clearly an

22 important focus of Mr. Buchmiller and that was

23 addressed in the Greenspan Goldin reports.

24 Now, some definitions for your Honor.

25 A base scenario reflects losses that an

26 insurer expects to suffer.

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2 A stress scenario reflects losses that would

3 arise if economic conditions are worse than expected in

4 that base scenario. So you have base and then you have

5 stress.

6 Now, a monoline insurer like any insurer,

7 whether it is for your home or your health, sells

8 protect against unlikely events occurring. And that

9 is why you have a homeowner's policy, that is why you

10 get health insurance for catastrophic injury, that is

11 why people buy monoline insurance, they want to protect

12 themselves against unlikely events occurring and as one

13 of our experts, former Comptroller Goldin, who was a

14 big buyer of municipal bond insurance when he was in

15 office explains, the point of bond insurance like MBIA

16 was selling was to buy protection from what was

17 believed to be a well-capitalized insurer that could

18 absorb what he calls longtailed risks, events that are

19 unlikely, but foreseeable and so, insurers set loss

20 reserves based on their expected case losses but when

21 people buy that insurance, they are focused on unlikely

22 but unforeseeable events.

23 Greenspan 14.

24 Again, the losses by a monoline insurer can

25 be much worse than they expect, so here these are the

26 worst cases that MBIA had.

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2 In 2007 they were having zero reserves on 8

3 of these, and some of them went as high the next year

4 as 270 million, 230 million, 210 million, 150 million

5 and so on.

6 Now, Mr. Buchmiller stated, as our experts

7 state, it is important to evaluate volatility,

8 particularly when you're dealing with a stress

9 environment, particularly like what was happening in

10 2008, 2009. And so, when the riskiness of a financial

11 product increases, the volatility increases and our

12 point, your Honor, is that post transformation, all of

13 the volatility, all of the risk was left with the

14 structured policyholders, whereas before the structured

15 and municipal policyholders were in the same boat, they

16 split it in half and put all of the risk in one boat

17 and obviously, volatility would increase. That

18 increases the likelihood that the losses could be far

19 greater than expected, which is essentially what

20 happened here and there can be no doubt that MBIA

21 structured finance liabilities were highly, highly

22 volatile as shown by their own data, their own

23 information.

24 And every one agrees that -- Dinallo,

25 Moriarty, Buchmiller that there was a substantial

26 degree of uncertainty when this transaction was being

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2 approved and Mr. Dinallo says substantial degree of

3 uncertainty. Mr. Buchmiller talks about known

4 unknowns.

5 MR. HOLGADO: The word was significant.

6 MR. GIUFFRA: I apologize. Significant. I

7 apologize.

8 MR. KASOWITZ: I will object one last time

9 and I will sit down, your Honor. We will show the

10 whole quote. I am not going to make Mr. Giuffra do it

11 now. We will show you Mr. Dinallo's whole quote, so

12 you can see the full paragraph of what he really says.

13 MR. GIUFFRA: We will put it up right now.

14 MR. KASOWITZ: Let's see the whole paragraph

15 from the affidavit.

16 MR. GIUFFRA: I think paragraph 61 from the

17 affidavit.

18 MR. KASOWITZ: I am pretty sure.

19 MR. GIUFFRA: "I understood that Mr.

20 Buchmiller was analyzing loss modeling, that he was

21 essence, trying to predict the assertion and resolution

22 of future policy claims tied to, among other things,

23 macroeconomic conditions such as unapplied rate, GDP

24 and housing prices."

25 The next sentence is critical, because --

26 MR. HOLGADO: Just read.

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2 MR. GIUFFRA: It is my presentation. You

3 will get a chance.

4 "This task was made more difficult because

5 the -- was made more difficult because the

6 unprecedented economic changes occurring at the time

7 undercut the predictive power of historical losses and

8 assumptions which are typically used by life and

9 property insurers to predict future claims."

10 And then he says "I recognized that a

11 significant degree of uncertainty would be inherent in

12 MBIA's projections and concomitantly in Mr.

13 Buchmiller's own review of MBIA Corp's loss modeling,

14 or for that matter, in any one's predictions of future

15 events or analysis of those predictions.

16 (Continued on next page.)

17

18

19

20

21

22

23

24

25

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2 I thus viewed Mr. Buchmiller's task as not

3 deciding whether MBIA Corp's predictions of future

4 losses were accurate, since such an assessment could

5 only be made in hindsight. Rather, I viewed his task

6 as examining the analytical soundness of MBIA Corp's

7 loss modeling and informing me and my senior staff if

8 he had observed anything in his examination that called

9 into question the financial statements presented in, or

10 otherwise would be relevant to our consideration of the

11 transformation application."

12 (Whereupon the following was transcribed by

13 Senior Court Reporter Vicki Glover.)

14

15

16

17

18

19

20

21

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23

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25

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2 MR. GIUFFRA: (Continuing) Our point, your Honor,

3 to go back to the second page, on this testimony from

4 Mr. Dinallo is, he did not have to approve transformation.

5 It was a discretionary decision. He admits by his own

6 affidavit that he understood that there were unprecedented

7 economic changes occurring at the time. He could have,

8 your Honor, said no, we're not going forward; there's too

9 much uncertainty. And so what he says is, he knew that

10 there was a significant degree of uncertainty inherent in

11 MBIA Corporation's projections because of the unprecedented

12 economic changes occurring at the time and concomitantly in

13 Mr. Buchmiller's own review.

14 So our point is, in a time of unprecedented

15 economic changes he decided to make a decision when his

16 obligation, his core mission was to protect policyholders.

17 As Mr. Steinberg made the point yesterday, they did not do

18 any kind of solvency review. Mr. Buchmiller doesn't say he

19 did a solvency review, notwithstanding the fact that the

20 Department, in an answer in this case, claimed to have done

21 a solvency review pursuant to 1309, and we think that in

22 and of itself warrants annulment of this decision.

23 Our point is, they were not forced to make this

24 decision. MBIA could have just been told no, not at this

25 time of unprecedented economic changes, and they didn't

26 make that decision.

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2 Now, let me turn, your Honor, to PX 94.

3 Okay. Now, this is an important document. It's a

4 circular that was issued by the Department on November 18,

5 2008. Let's go back in time. That's when the financial

6 crisis was at its most red hot and the Department put out a

7 circular saying that they expected every insurer to have a

8 scenario stress testing process in place. Again, the

9 Department itself is talking about the importance of doing

10 stress testing. And they say that, "Insurers should

11 systematically review their stress testing and scenario

12 analyses, especially in light of recent market events."

13 And then, your Honor, they say, "In a robust

14 process, inputs" -- and that's the information that you're

15 putting in, the staleness, how current the information

16 is -- "inputs, assumptions and stress scenarios and the

17 resulting impact must be continuously monitored, assessed

18 and" -- critically -- "updated."

19 THE COURT: This memo goes to whom? I can't read

20 this.

21 MR. GIUFFRA: This is a --

22 THE COURT: This is a memo from the Insurance

23 Department that goes to all insurance companies?

24 MR. GIUFFRA: Exactly, your Honor. It's a

25 circular that they put out basically telling all their

26 insurers because of the financial crisis that we want you

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2 to implement stress testing procedures. And then at the

3 bottom it says, "In addition, the Department will evaluate

4 how such models are independently reviewed within the

5 company by risk management professionals, internal

6 auditors, external auditors and/or consulting firms."

7 That's why, your Honor, we think these third party

8 analyses are important, because the Department itself was

9 telling insurers that they would be evaluating how the

10 models would be, what would be looked at by internal

11 auditors, external auditors and consulting firms. And that

12 FSI I mentioned yesterday was a firm that MBIA had

13 retained.

14 So, our position would be that this circular was a

15 good regulatory practice in light of the financial crisis.

16 But this circular was not followed by MBIA, and it was not

17 followed, in our view, by the Department in evaluating

18 MBIA.

19 Now, as we explained yesterday, MBIA's extreme

20 stress test for the second lien RMBS was based on August

21 2008 data. And I didn't have anybody jumping up when I

22 said that. They were relying on August 2008 data that

23 predates Lehman, that predates AIG, it predates the heat of

24 the financial crisis. And they could have used the more

25 current information. It was available. And if you just

26 use the current information as of year end, and again, the

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2 decision doesn't come until February, that would have

3 boosted the losses that they suffered in that one category,

4 second lien RMBS, just one category, by $1.9 billion in

5 extreme stress.

6 They also used, as we talked about yesterday,

7 outdated research reports to analyze CMBS, a June/July

8 research report instead of the September Lehman report,

9 that public research report. We know that if they had used

10 current assumptions from Moody's, that that would have

11 boosted on their own model, the Moody's assumptions for

12 CMBS, that would have boosted their CMBS loss projections

13 from zero to $7.5 billion. And there's a question as to

14 whether Mr. Buchmiller ever saw the updated Moody's

15 analysis. It's not in his final memo. It's not in his

16 February 11th memo. And, again, the Lehman/Barclays

17 analyses were used by MBIA in making business decisions but

18 not shared with the Department.

19 And so, we believe that their failure to use

20 current data and assumptions and failure to share the third

21 party analyses with the Department was contrary to the very

22 circular that the Department had issued to address the

23 financial crisis.

24 If I could turn to PX 85.

25 The issue of third party analyses -- it's Exhibit

26 58.

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2 The Department itself raised with MBIA, and this

3 is one of the more important documents in the case, in our

4 view. They raised with MBIA on November 11th, 2008, and

5 that's Mr. Hampton Finer, who is the deputy superintendent,

6 and an economist at the Department, and he's writing to a

7 whole series of people at MBIA: Bill Fallon, who is a

8 senior person, I think he might have been the president;

9 the CFO, Mr. Chaplin; some folks at the Department; the

10 general counsel of MBIA. And in fact, it's sort of

11 interesting. This Titus Leung, who is at the end of the cc

12 on the second line, he works at Perella Weinberg. So, they

13 sort of, at least at some point, had thought about getting

14 Perella Weinberg involved in this. But Mr. Buchmiller was

15 never -- they were never -- Mr. Buchmiller never consulted

16 with Perella Weinberg.

17 And the question Mr. Finer is raising, "I think we

18 may want a third party analysis of the expected loss in the

19 ABS" -- that's ABS CDO -- "and RMBS portfolios."

20 He says, "This does not have to be an element of

21 the filing necessarily, but would assist us in making our

22 fair and equitable determination."

23 And that's the statutory language that we talked

24 about on Tuesday.

25 Then he goes on to say, "We are not recommending a

26 particular valuation provider, but others have used

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2 BlackRock with some success."

3 And that, your Honor, is why we went out and

4 retained BlackRock, because the Department in discussing

5 BlackRock, discussed BlackRock with MBIA.

6 Now, it's pretty clear that as a matter of common

7 sense having multiple people look at the same portfolios,

8 particularly in a time of substantial economic uncertainty,

9 as Mr. Dinallo himself understood as reflected in his

10 affidavit, would give a regulator a better understanding of

11 the volatility that would be faced, the volatility of

12 potential losses. And clearly, third party analyses were

13 on the mind of the Department when they were looking at

14 MBIA's application.

15 Let me show you another document. PX 123.

16 This is an e-mail from a lawyer at Fried Frank.

17 And it's sent to someone, Miss Tam, who worked at Dewey

18 Leboeuf, and Dewey Leboeuf is the outside counsel to MBIA

19 on the transaction. The Department actually went out,

20 instead of, basically, going out and hiring a third party

21 valuation firm, they did hire a law firm to work on this

22 transaction and to assist the Department. So, they

23 actually -- well, they knew about the -- you know, they

24 went out and hired Fried Frank, and Bonnie Steingart, who

25 was the general counsel of the Department earlier on, to

26 actually go and assist the Department on the legal issues

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2 that they were dealing with. And there are a series of

3 questions that are put by Fried Frank to Dewey Leboeuf.

4 And this is on December 18th. This is after the

5 application has been pending and the issue of stress

6 testing comes up.

7 "MBIA conducted a stress test scenario for the

8 remaining book of business?"

9 Let me restate that.

10 "Specifically" -- the question is asked by the

11 Department's outside counsel.

12 "Specifically, has MBIA conducted a stress test

13 scenario for the remaining book of business?"

14 Again, demonstrating the importance of stress

15 testing.

16 But then the next question is, "Did they have an

17 independent third party do a reserve analysis?"

18 Again, the importance of having a third party look

19 at the book comes up.

20 Now, Fried Frank asked the right questions and it

21 was consistent with regulatory practice in other liability

22 based restructurings. They asked directly. They asked

23 MBIA directly whether MBIA had third party analyses and

24 wanted to discuss stress testing.

25 So, this whole notion that third party analyses

26 are somehow irrelevant is inconsistent by what the

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2 Department was actually asking for. On two separate

3 occasions the Department is raising third party analyses

4 with MBIA.

5 MR. KASOWITZ: I'm going to object to that, your

6 Honor. He just implied in the last statement that the

7 Department required MBIA to hire a third party consultant

8 and was requiring, and the e-mails he shows never do that.

9 MR. GIUFFRA: So let's go to the next slide.

10 And again, part of the importance of this is just

11 to focus on the importance of the extreme stress test.

12 Here's an e-mail in January 24th, 2009, and it's

13 worth noting that this document was produced, and it has

14 that NYS Bates number? So MBIA itself thought that this

15 had relevance to the Article 78 because it said, "Produced

16 to NYS."

17 MR. KASOWITZ: Objection, your Honor. I'm going

18 to object to that. MBIA thought what?

19 MR. GIUFFRA: You produced it in the Article 78

20 Marc, correct?

21 MR. DAVID: It's a mischaracterization, Bob.

22 MR. GIUFFRA: Did you produce the document in the

23 Article 78?

24 MR. HOLGADO: Let's not have there be any mistake.

25 This was not before the Department, at least, okay?

26 Whether it was produced in this case or not because of a

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2 request from me is not really the issue.

3 THE COURT: Well, I don't really agree with you.

4 MR. HOLGADO: Would you at least point that out?

5 MR. KASOWITZ: It's a fallacious argument, your

6 Honor. The only reason that this was produced in the 78,

7 and I hate to niggle about this, but the only reason it was

8 produced in the 78 was that before Mr. McKiernan's

9 deposition at some point, and this was not originally

10 produced by us, Justice Yates said, so anything that

11 Mr. McKiernan may have been a party to, even though it

12 doesn't relate necessarily to the 78 and it's going to be

13 otherwise produced in the plenary, give it to them, which

14 we did.

15 Thank you, your Honor.

16 MR. GIUFFRA: Your Honor --

17 THE COURT: Thank you.

18 MR. GIUFFRA: -- let's turn to the actual slide.

19 The point is, we know there was an error in the

20 extreme stress scenario that the Department relied upon.

21 There's no dispute about that. And our point is, in

22 assessing materiality of the error, in assessing how

23 important was this error to the decision-making process,

24 it's certainly relevant what people at MBIA thought of the

25 importance of the stress test. And so, our point, your

26 Honor, is Mr. McKiernan in an e-mail --

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2 MR. KASOWITZ: Object, your Honor. The e-mail

3 doesn't talk about extreme stress. There were a number of

4 different stress scenarios that MBIA tested for and this

5 e-mail does not talk about extreme stress. It says losses

6 and stress. So, if there's going to be a discussion about

7 a specific category of testing, then it ought to be

8 accurate. It doesn't say extreme stress.

9 MR. GIUFFRA: You know, you'll have your chance.

10 THE COURT: The thing is, I don't think you should

11 mischaracterize documents.

12 MR. GIUFFRA: I'm not.

13 THE COURT: We understand he's going to have his

14 chance. Everybody is going to have their chance. But I

15 think they have the right to do objections.

16 MR. GIUFFRA: That's fine.

17 THE COURT: You know, the problem here is that the

18 way this proceeding is, you've been talking for three days,

19 so now everybody needs to talk a little bit. It's hard, I

20 understand, for lawyers. But I need you to be accurate in

21 making your representations.

22 MR. GIUFFRA: Absolutely.

23 MR. KASOWITZ: And further, your Honor, the

24 extreme stress testing wasn't requested until January 27 by

25 the Department, okay. That's a January 24th e-mail. So

26 it's a mischaracterization. And again, your Honor, we're

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2 going to deal with all of this, but just when you flat out

3 mischaracterize an e-mail, that's why we're making the

4 objection.

5 Thank you, your Honor.

6 MR. GIUFFRA: Your Honor, it's an internal MBIA

7 document. It says, "Subject: Transformation urgent."

8 THE COURT: I understand.

9 MR. GIUFFRA: And it says, "Transformation hinges

10 on Buchmiller's analysis of our losses and stress."

11 And then it says, "I would not ask if this was not

12 absolutely critical to the company."

13 And I'm happy to put up the whole document.

14 THE COURT: Okay.

15 MR. GIUFFRA: We can put the whole -- here.

16 Question. The document.

17 "Guys - I need to update you where we are on

18 transformation and what we may need to do this weekend."

19 And again, these guys are working -- and again,

20 I'm not saying that, you know, people were doing things

21 nefariously. The point is, they were doing things on a

22 very short timeline and people make mistakes when they act

23 on a very short timeline, and there are people helping, and

24 we now know there were mistakes. It's undisputed. There's

25 a $1.4 billion dispute that in and of itself, your Honor,

26 is a basis for annulling this decision. You can write a

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2 ten-page opinion and annul just on the basis of the $1.4

3 billion error.

4 So it says, "Transformation hinges on Buchmiller's

5 analysis of our losses and stress."

6 Then he says, "So I believe we have RMBS totally

7 covered so no more work needed. However, on the CDO side

8 we need to run a stress."

9 Then he says, "If I am not mistaken we have not

10 done so. Perhaps we can visit it and stand down."

11 And then he talks about, "If we haven't, we need

12 to run one. Sai, we need to think about how we would

13 stress the current bucket in the roll-to-loss I think as

14 maybe the only driver."

15 And then he talks about, "My question is, how long

16 would it take to run the nonCDO2 deals if we created a

17 stress run changing that variable?"

18 They never ran the CDO2'd numbers at all.

19 Mr. Buchmiller never looked at CDO2s and Mr. Kasowitz

20 hasn't jumped up and questioned that.

21 MR. KASOWITZ: I will. I will, your Honor.

22 THE COURT: That's a great invitation.

23 MR. KASOWITZ: He if he opens the door then I

24 will.

25 There was an e-mail the day before from

26 Mr. Buchmiller to Mr. McKiernan, and that e-mail -- we'll

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2 show it to you when we put our case on -- that e-mail asked

3 for stress testing. And so what Mr. McKiernan was doing

4 was getting his folks in a conscientious way prepared to

5 quickly give him the information he was asking for. Three

6 days later, on the 27th, they gave him that information.

7 Mr. Buchmiller looked at the stress testing and said, this

8 is good, okay. Now we want to see extreme stress testing,

9 and then they gave that to him. And when they gave him the

10 extreme stress testing, we'll explain exactly what he's

11 asking for. It was something different than what

12 Mr. Giuffra is talking about. But that's the point. That

13 was the regular and proper sequence of events here, your

14 Honor.

15 MR. GIUFFRA: So, your Honor, if we would turn to

16 PX 502.

17 Again, our point is that stress test is something

18 that is focused on in Mr. Buchmiller's final, the extreme

19 stress test, something the Department is talking about the

20 importance of stress testing. This is a document that was

21 given by MBIA to Mr. Buchmiller.

22 Now, as Mr. Kasowitz said, they make the request

23 on the 27th. He makes the request for this extreme stress

24 test. And they get the numbers back two days later. They

25 give it to him on January 29th. A lot of work for a very

26 short period of time. And we subsequently have learned

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2 that that work was riddled with errors. Riddled with

3 errors. And it took MBIA and a team of people working six

4 weeks to fix it. Six weeks to fix it with a team of

5 people, something they elected to give Mr. Buchmiller on a

6 two-day timeframe.

7 So, the applicant for the regulatory approval

8 essentially decided they could do this, instead of saying,

9 hey, Mr. Buchmiller, we can't get it done; it's going to

10 take us three, four, five weeks to get this bottom down,

11 check it, make sure everything is right, they basically --

12 he made the request on the 27th. They gave it to him on

13 the 29th.

14 And, your Honor has seen documents in the course

15 of our presentation where there was discussion of how MBIA

16 wanted this thing approved by January 31st. So, when an

17 applicant wants something done quickly from a government

18 agency and the government agency is asking them to do

19 something, and if they can't do it accurately, and there's

20 no question this was not done accurately, our view is that

21 this decision should be annulled. That's a risk that the

22 applicant bore.

23 Now, in the stress test scenario information that

24 was given to Mr. Buchmiller, relied upon by Mr. Buchmiller,

25 you'll see where that arrow is. It shows positive

26 policyholders surplus for the extreme stress test, which is

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2 the line-dot-line-dot version of this analysis. And this

3 was eyeballed by Mr. Buchmiller on the 29th. He got it on

4 the 29th. And then on the 30th --

5 Let's turn to the next document. This is PX 146.

6 This is a January 30 e-mail from Mr. Buchmiller to sort of

7 the team he was reporting to at the Department,

8 Mr. Moriarty, Mr. Peltonen, Mr. Fischer, the lawyer that's

9 involved in this, Mr. Finer, they're all people he's

10 sending this memo to. And your Honor, he talks about what

11 they've been doing.

12 Now, he got this document from MBIA on the 29th,

13 these analyses, these extreme stress test runs, and he's

14 writing the e-mail at 10:37 in the morning, which certainly

15 raises a question about how much time Mr. Buchmiller had to

16 eyeball, analyze, whether other people at the Department

17 had any opportunity to look at these extreme stress

18 scenarios that were provided by MBIA. And our position is,

19 again, Mr. Buchmiller was one person. He was asked to do a

20 mission impossible job. They had a lot of other resources

21 at the Department who could have looked at this stress test

22 results, accountants and the like, and seen if there were

23 mistakes. But instead, they give it to him on the 29th and

24 he's writing back the next morning at 10:37. How much time

25 did Mr. Buchmiller have to analyze these documents if he's

26 writing back at 10:37 p.m. -- in the morning -- I'm

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2 sorry -- in the morning.

3 And in the e-mail he says, "In addition to the two

4 stress tests IPM runs" -- that's the one they were running

5 at the time -- "Finance (Chaplin and Pastore) add

6 additional stress by accelerating loss timing by 20% -

7 e.g., move 20% of 2010's losses into 2009 to stress the

8 cashflow. We then asked them for a third scenario, a

9 'break-the-bank' scenario."

10 And that's this extreme stress scenario, the one

11 that in our view based on their own corrected information

12 goes from green to red. And he says that, "keep increasing

13 the stress factors until MBIA becomes insolvent at any one

14 point in time. This was done by extending the peak loss

15 period by 36 months; their other stress cases extended by 6

16 & 12 months."

17 Then he makes the point to his supervisors, "They

18 actually survive in one of the four resulting 'extreme

19 scenario' outcomes, with surplus falling to 300 to 350

20 million, but goes negative if they call or pay off the

21 surplus note and continue paying dividends."

22 Then he says, "Obviously the superintendent won't

23 allow dividends or surplus note payment if it means

24 insolvency."

25 But the point is, he's reporting up to his

26 supervisors that they pass this test for surplus falls,

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2 positive surplus is 300 to 350 million.

3 Then he goes and says, "The 'break the bank' or

4 extreme stress test requires solving backwards, re-running

5 all the 2nd lien and ABS CDO models with new parameters."

6 And then he says, and this is the point I made

7 when I first spoke to your Honor on Tuesday, "So 300

8 million is close enough to the stat minimum of $65

9 million," and that's the statutory provision for Financial

10 Guarantee insurers. They have to have $65 million in

11 policyholder surplus to write policies. And that, you

12 know, ability to write policies is something that gets

13 referenced in the approval letter in the discussion of

14 4105, which is that earned surplus test. And that's really

15 the closest they even come to any kind of a finding.

16 So, in the memo that Mr. Buchmiller writes at

17 10:37 in the morning to his supervisors, he's making the

18 point that it was positive under one of the four scenarios

19 and that $300 million was close enough to the stat minimum

20 of $65 million. We now know that if he had gotten the

21 corrected numbers from MBIA, they would have been negative

22 policyholder surplus because of the $1.4 billion deferred

23 tax error that MBIA has admitted to.

24 So our view, your Honor, a very simple way to

25 decide this case, is that the information they gave to the

26 Department was wrong, it was something that was important

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2 to the Department's decision making, it's written about in

3 memos by Mr. Buchmiller to his supervisors, and if you had

4 the correct information this would have gone to negative

5 policyholder surplus. And this is not like some minor

6 error that one can just, you know, discount. The point is

7 that this is something that Mr. Buchmiller is focused on.

8 And his memos are not very long. They're e-mails of a page

9 or two or, you know, they're pretty short e-mails. So this

10 was something he was very focused on and that he was

11 concerned about.

12 Now, the next page says, "Given that they have

13 reasonably demonstrated that Corp./OldCo New York can

14 survive, with a reasonable expectation of viability."

15 Then he talks a little bit about Bridge.

16 MR. HOLGADO: Could you just read the sentence,

17 Bob, because you spent three hours on Bridge yesterday.

18 MR. GIUFFRA: "We believe (and have been told) we

19 have gone deeper than Bridge Associates in our assessment.

20 (Still working on going wider, if we haven't already.)"

21 Mr. Buchmiller, as we showed you yesterday, your

22 Honor, didn't think much of Bridge. And in fact, as you'll

23 recall in the audio transcript with -- the audio that we

24 played yesterday with Mr. Chaplin, he was sort of talking

25 about when lawyers use this kind of Bridge analysis to pay

26 for the files. The point being, if you actually look at

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2 what Mr. Dinallo said at his deposition, he thought Bridge

3 was important and he thought they were a firm that was

4 relied upon, and Bridge was important to Mr. Dinallo's

5 decision.

6 So, Mr. Buchmiller, the person who's doing the

7 work, was discounting the value of Bridge. The person who

8 was making the decision, Mr. Dinallo, thought Bridge was

9 something that was important to his decision, and he said

10 that repeatedly in his deposition. And those are the facts

11 and that's where we sort of are. The other point is --

12 and there's no question, your Honor, as Mr. Steinberg

13 established yesterday, that Bridge made errors in the

14 information that they had provided to the Department.

15 And then he talks about the fact that, and this

16 is, you know, January 30th, it's a preliminary opinion.

17 There is never a final opinion by Mr. Buchmiller as of the

18 decision. That February 11th memo on its face makes it

19 clear that there's more work to be done.

20 Then he says it's "based on only the 'known

21 knowns.'"

22 And then he talks about "significant 'known

23 unknowns' are what isn't in their 2008 loss reserves that

24 should be, or possibly/probably will be in 2009, 2010, or

25 beyond."

26 And the point of that, your Honor, is, when he

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2 talks about what isn't in their loss reserves, he then

3 talks about likely suspects, and he cites the likely

4 suspects as including CMBS, CLO high-yield CDO, and other

5 structured finance underlying sectors that we have not yet

6 reviewed (we'll probably start on those next week)."

7 What's important is, there were zero loss reserves

8 on CMBS. And so he was only focused -- he was focused on

9 the fact that that was a risky sector, and by his own

10 words, there's no question that he didn't start doing the

11 work on that until some time in early February. And again,

12 so at most, he looks at the CMBS for seven days, at most.

13 One person. And so when he says "likely suspects," he's

14 referring to the fact that CMBS has zero loss reserves.

15 Now, your Honor, let me turn to PX 962.

16 This is one of the spreadsheets that MBIA provided

17 to Mr. Buchmiller on January 29th, and this is the spread-

18 sheet that he relies upon, an e-mail that he sends to his

19 superiors at the Department about 10:30 in the morning the

20 next day. You can just look at the spreadsheet. It's got

21 a lot of information on it. And we've sort of looked down

22 at the bottom, and it says, "Extreme Loss Scenario,"

23 "Statutory Balance Sheets," and then it says, "Total

24 Capital and Surplus." And then if you look across, your

25 Honor, all of these numbers are positive. And the one that

26 I think, your Honor, is important to focus on is the 362.

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2 What this document that was given to Mr. Buchmiller right

3 near the end of his work shows that for the fourth quarter

4 of 2009, within less than a year of approval, there would

5 be positive policyholder surplus under the extreme stress

6 scenario of $362 million. That's what MBIA told

7 Mr. Buchmiller.

8 And your Honor, I think it's important also to

9 note that if you just look at what they were telling

10 Mr. Buchmiller, those numbers, they're going from $2.4

11 billion in the first quarter, to $1.7 billion in the second

12 quarter, $1 billion, down to 362. So the numbers are

13 heading south. And, of course, this extreme loss scenario

14 is assuming zero CMBS losses. Zero CMBS losses.

15 (Continued on next page.)

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2 MR. GIUFFRA: Now, your Honor, if I could --

3 is this a good point for the morning break? That

4 would be great, your Honor.

5 THE COURT: Let's take ten minutes.

6 (Recess taken.)

7 THE COURT: Okay, Mr. Giuffra.

8 MR. GIUFFRA: I will shift to the subject

9 of discount rates, which I will talk about quickly.

10 If you could put up slide 20.

11 This is the New York Insurance Law Section

12 6903 and the issue I am talking about we believe is an

13 issue of law for the Court and it says that a deduction

14 from loss reserves shall be allowed for the time value

15 of money by application of a discount rate equal to the

16 average rate of return on the admitted assets of the

17 insurer as of the date of the computation of any such

18 reserves."

19 A key phrase to look at. What we are

20 focussed on is admitted assets and if you could turn to

21 1301, 1301 which defines admitted assets, defines them

22 to include cash and then investments acquired or held

23 in accordance with the applicable provisions of this

24 chapter. That is 1301.

25 The higher the discount rate that an insurer

26 has, the lower the loss reserves it must have, because

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2 that means it is earning a higher return on its

3 investments. So if an insurer is all in cash,

4 obviously it needs higher loss reserves.

5 If it has a ten percent return on

6 investments, it needs lower loss reserves.

7 Let me put before the Court PX 169.

8 Now, as Mr. Greenspan explained in his

9 report, MBIA used a 5.3 discount rate -- excuse me, a

10 5.23 discount rate in the extreme stress projections

11 that were given to Mr. Buchmiller. They used 5.23.

12 On February -- -- on February 3rd, about a

13 week before Mr. Buchmiller sent that last January --

14 February 11 e-mail, there is a meeting of the loss

15 reserve committee of MBIA and that is PX 169 and among

16 the people at the meeting are Mr. Brown the CEO, Mr.

17 Chaplin the CFO, Mr. Fallon, who is the president and a

18 lot of senior people, Mr. McKiernan, whose name you

19 have heard a lot, and they are all at this meeting and

20 in the minutes of the loss reserve committee, and that

21 is the committee that is deciding what the loss

22 reserves have to be, they are talking about the fact --

23 and the meeting was held on the 28th or the 29th, but

24 in the --

25 THE COURT: I think it is the 28th.

26 MR. GIUFFRA: This is an update after the

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2 meeting. So the meeting is held on the 28th -- 29th,

3 excuse me and then there is an update which they sent

4 around to the people who are on the committee. And it

5 says on February 3, an error was discovered regarding

6 the interest rate used to discount case reserves. The

7 rate originally used was 5.23. The corrected rate is

8 5.03. Now, in the numbers that were given to Mr.

9 Buchmiller, even in the corrections by Mr. Chaplin that

10 were presented to the Court in November of 2012, based

11 on our information and analysis, that MBIA did not

12 correct this discount rate and had they done so, their

13 reserves would have been 75 million dollars -- would

14 have had to be higher, because the lower discount rate

15 means higher reserves.

16 So what that means, your Honor, is that given

17 the extreme stress error would have been even more just

18 by correcting that discount rate.

19 Now, let's turn to Greenspan 39. My team is

20 advising me that the 75 million is just in the base

21 case, and in the extreme stress case it would be even

22 higher than 75 million. So it is a bigger error than

23 that and we will get you, your Honor, the precise

24 number.

25 Now, this is a document, that is a January

26 15, 2009 presentation to MBIA's Board Finance Committee

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2 and they basically are talking about what the liquidity

3 management is and they are talking about what the book

4 yield was and they say 4.18 percent and then they say

5 -- below that that MBIA Corp is MBIA Insurance, which

6 is the company that ultimately gets split in half,

7 current book yield excluding cash and cash equivalents

8 is 5.23.

9 Now, that number should have been 5.03, but

10 the other point to note your Honor is what MBIA does in

11 submitting the information to the Department, is they

12 use this -- they basically don't use the 4.18, the

13 lower discount rate. They use the higher discount

14 rate, which means their reserves can be lower and as we

15 say in our papers, by excluding cash from the discount

16 rate, they are violating the plain definition of 6903

17 which says cash is an admitted asset and cash

18 equivalents are an admitted asset and our expert Mr.

19 Hershman explains this is incorrect under statutory

20 accounting principles, and that the use of the higher

21 discount rate improperly inflated their policy holder

22 surplus.

23 MBIA will say that because the statute does

24 not say all admitted assets -- and can we go back to

25 that? -- because the statute does not say all

26 admitted assets, they essentially can pick and choose

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2 which admitted assets they want it to include and your

3 Honor, these e-mails that we talked about and we have

4 the record where MBIA was actually discussing whether

5 they should go to the Department and get the

6 Department's view on this issue, and they never sent

7 them to the Department. And we can bring those to

8 your Honor's attention if necessary, but there is a

9 series of e-mails discussing what is permissible under

10 the New York State Insurance Law and rather than being

11 open and sharing the issue with the Department, they

12 don't do that.

13 Now, Greenspan 37 is a reflection of what the

14 projected surplus scenarios would be, and this is pre

15 the errors, so MBIA, using this 5.23 discount rate is

16 telling the Department under the extreme stress

17 scenario that they are $362 million positive.

18 In our view, if they are used the correct

19 4.18 discount rate, it would have been lower and the

20 FTI updated extreme stress scenario reflects merely FTI

21 taking information that was available to the Department

22 on second-lien RMBS, 17 transactions, where if MBIA had

23 used the 12 year end numbers instead of the August

24 numbers, which were pre financial crisis, just using

25 those numbers drives the surplus, policy holder surplus

26 under the extreme stress down and then the numbers to

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2 the right are the BlackRock base and stress case, which

3 Mr. Steinberg will talk about when BlackRock looked at

4 the information.

5 Next, I will show you Mr. Chaplin's

6 affidavit. There is no dispute that MBIA admits that

7 they erroneously provided information to the Court and

8 to the Department.

9 Turn to the next slide.

10 In paragraph 4, Mr. Chaplin describes the big

11 error and that related to deferred tax assets and that

12 -- this error with respect to deferred tax assets and

13 in virtually every submission to the Department; the

14 application letter of December 5,, the January 27 and

15 29 presentations, and other financial presentations

16 given to the Department.

17 So there is no dispute, and your Honor could

18 decide in a short opinion that these errors were in

19 multiple submissions to the Department.

20 Now, as Mr. Hershman explains, and I may have

21 misstated this the other day, and I am not a statutory

22 accountant, a deferred tax asset reflects taxable

23 losses in a current year that can be used to offset

24 taxable income in future years. And essentially, what

25 that means is, you have to earn income going forward

26 and there were certain legitimate questions as to

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2 whether MBIA Insurance was going to be earning any

3 income going forward post transformation, but under

4 statutory accounting rules, which MBIA and the

5 Department don't dispute, you can only use this

6 deferred tax asset if you're going to use it within 12

7 months and here it was there was little doubt that MBIA

8 was not going to be able to do that, and so, there is

9 no question that MBIA treated something as an admitted

10 asset, this deferred tax asset, when they were not

11 entitled to do so.

12 It had the effect of -- it is a 1.4 billion

13 dollar error and it had the effect of impacting a lot

14 of different numbers that MBIA had.

15 And we are not -- - this is not a question of

16 whether it should have been found, wasn't found, good

17 motives, bad motives. It is an error. They admitted

18 to it. It was significant.

19 Let me show you another document, PX 165.

20 This is an e-mail on December 5. That is the same day

21 that MBIA's application is going forward to the

22 Department. The re is NYID Christina Hwang is someone

23 who works within MBIA in the Tax Department. She is

24 the head of Tax and she says "Based on what I heard, it

25 sounds like that none of the deferred tax assets will

26 be admissible since we will not be able to monetize the

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2 asset in the first 12 months." PX 165.

3 So Ms. Hwang realized there is an issue with

4 respect to whether they can address this deferred tax

5 asset if is not going to be dealt with in the next 12

6 months.

7 MR. KASOWITZ: Your Honor, just to -- I am

8 going to quickly object. That had nothing to do with

9 what was disclosed. Nothing to do with the stress

10 test.

11 MR. GIUFFRA: No question, Marc. I am not

12 disputing that.

13 Our point, Marc is a more simple one; that

14 the head of Tax in an e-mail dated -- was -- refers to

15 NYID, December 5 was when the application was filed,

16 knew and understood that a deferred tax asset would not

17 be admissible if you would not be able to monetize it

18 within 12 months. That is what she is saying in that

19 e-mail and the point is that the error that occurred

20 was MBIA's in the submission that was made on December

21 5, and all the other submissions it made to the

22 Department, miscalculated and treated this deferred tax

23 asset as something that was admissible and they now

24 admit it was not admissible because they would not be

25 able to use the deferred tax asset in 12 months.

26 That is our point.

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2 THE COURT: What is your objection?

3 MR. KASOWITZ: My objection is, I don't know

4 what he is talking about with how he refers to --

5 referring to admissibility.

6 Your Honor, we will deal with it on our case

7 and I am objecting to his treatment of it. It has

8 nothing to do with the mistake that he is talking

9 about.

10 THE COURT: Okay.

11 MR. KASOWITZ: Thanks.

12 MR. GIUFFRA: Mr. Chaplin's second

13 deposition, pages 43 and 44.

14 QUESTION: Am I correct that the impact of

15 the mathematical impact of the tax treatment of losses

16 error in the extreme stress scenario in 2009

17 shareholder surplus is 1.4 billion dollars?"

18 This is his second deposition, page 43 to 44.

19 And the answer is "The tax impact of losses in the

20 extreme stress scenario, all other things being equal,

21 would be approximately 1.4 billion dollars in 2009."

22 So essentially, what MBIA is saying is that a

23 1.4 billion dollar error that they admit to is not a

24 reason to annul this decision.

25 THE COURT: Could you just wait a moment?

26 MR. GIUFFRA: No problem.

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2 (Pause in proceedings.)

3 MR. GIUFFRA: So what MBIA realized and

4 again, LAIX Partners, when they were a consultant for

5 MBIA, found the errors initially I think in July 2011

6 and then, MBIA, I believe told the Department in

7 October or November, told the Department about the

8 errors in October or November of 2011 and -- but they

9 started working to correct them from October of 2011

10 into mid November. And in correcting them, they spent

11 more time correcting the errors, your Honor, than Mr.

12 Buchmiller spent on his entire review.

13 MR. KASOWITZ: I will object to what --

14 the statement counsel just made that -- I also note

15 your Honor, that -- I will just object. It is not in

16 the record, the statement that he just made.

17 MR. GIUFFRA: Your Honor, we actually -- we

18 deposed Mr. Chaplin. I will do it when we get to talk

19 again.

20 He went there when they found out about the

21 error, he went there when they started working to fix

22 the error, and he went there when it was submitted to

23 the Court.

24 To my recollection, I took Mr. Chaplin's

25 deposition, they found out about it in July, started

26 working to fix it in October, and made a submission to

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2 the Court in the middle of November. They had a lot of

3 people working on that, to fix the error and what they

4 did was, they looked through all of the materials that

5 they had submitted to the Department and they found a

6 series of other errors. And what they did then was,

7 these were errors where what they viewed as positive in

8 their view and they essentially used the positive

9 errors to try to minimize the extent of the 1.4 billion

10 dollar error. All of this of course occurs years after

11 the application has been approved and it is not

12 something that the Department had in front of it and

13 our view is pretty straightforward that once this error

14 occurs, under basic Article 78 law, the Court should

15 just annul the decision.

16 It is not something that people can explain

17 away years after the fact, much less people who don't

18 even work with the Insurance Department any more. And

19 that is essentially what they are doing. The error is

20 undisputed and clear.

21 Now, let's put up 15. Essentially, what

22 happens your Honor, is, if you look at the -- the

23 1.4 billion dollar error is the error with respect to

24 the deferred asset issue. The 362 million dollars

25 positive extreme stress, even under MBIA's own analysis

26 goes negative to 291, that is all the way to the right,

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2 and so, what MBIA does, your Honor is they engage in

3 corrections to the tune of 767 million dollars.

4 We object to a number of the corrections that

5 they have made. Among other things, they assume that

6 the Department would have allowed them to release

7 certain contingency reserves and in fact, around the

8 time the application was pending, the Department had

9 disallowed the use of contingency reserves.

10 MR. HOLGADO: Just to be clear -- and

11 allowed the release of some other contingency reserves.

12 MR. GIUFFRA: They are sitting there in 2011

13 speculating about what would have happened and they are

14 saying oh, the Department would have let us release

15 contingency reserves when in fact, in reality, the

16 Department did not let them release contingency

17 reserves in some of the subsequent years.

18 MR. HOLGADO: And again, what I just said --

19 THE COURT: Okay.

20 MR. HOLGADO: Certainly --

21 MR. GIUFFRA: So what happened, your Honor,

22 in January --

23 THE COURT: You were talking?

24 MR. HOLGADO: Yes, your Honor.

25 Again, I am correcting what Mr. Giuffra said.

26 He is suggesting that in the very letter that he is

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2 referring to that the Department only disallowed

3 contingency reserve releases. In the same letter, they

4 allowed the release of hundreds of millions of

5 contingency reserves and they did in previous years.

6 Your Honor, sorry, in subsequent years, which is even

7 more important, I guess.

8 MR. GIUFFRA: Your Honor, our point is a more

9 simple one than than that.

10 THE COURT: Thank you.

11 MR. GIUFFRA: The letter that we will put

12 before the Court if necessary, they deny -- in January

13 of 2009 when the application was pending, the

14 Department denied MBIA's request for a 500 million

15 dollar release of discretionary contingency reserves.

16 So in correcting these errors, no one is

17 jumping up, in correcting these errors, they assumed

18 another two hundred million dollars in discretionary

19 contingency reserves that could have been released.

20 MR. KASOWITZ: It is not our assumption.

21 It is Mr. Buchmiller's testimony. So just -- he gave

22 testimony clearly on this point as to what he would

23 have done, had he known about these errors and in the

24 extreme -- in this extreme statistical case and he said

25 that it would not have made any difference to him for a

26 number of reasons, including among others, the fact

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2 that there was 1.3 billion dollars of cash in

3 contingency reserves available to MBIA at that time for

4 use in this kind of situation.

5 So if you are going to -- if you're going to

6 say that we said it, it is actually testimony that is

7 in the record right now.

8 MR. GIUFFRA: That is actually great --

9 MR. HOLGADO: Actually, your Honor, I just

10 want to add that we will cover this more later when I

11 speak, but Mr. Giuffra is suggesting that this is

12 improper for Mr. Buchmiller to give this sort of

13 hypothetical testimony about what he would have done

14 with respect to contingency reserves.

15 It is worth noting that we are talking about

16 a hypothetical scenario in the first place, this

17 extreme stress scenario that he is discussing.

18 There is also a hypothetical scenario and we

19 will make that point, your Honor, in our argument.

20 MR. GIUFFRA: Our point is much more simple

21 than that.

22 It is undisputed, just looking at the

23 documents and I think one of the important things your

24 Honor, when -- I am talking from the documents. I am

25 pointing to some of the documents and what people said.

26 And in my experience, your Honor, in some ways one of

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2 the great things about e-mail is that people write

3 things in e-mail and that is what they mean in real

4 time, as opposed to what people say years after the

5 fact in a lawsuit.

6 And a lot of what I am focused on is what is

7 in the documents that were written in contemporaneous

8 time.

9 So what they have he now done is, they have

10 got Mr. Buchmiller, who works for National Association

11 of Insurance Commissioners, no longer works for the

12 State of New York and they show him Mr. Chaplin's

13 affidavit, that is what they show him, and Mr. Chaplin

14 in his testimony, when I took his deposition, made it

15 quite clear that on the face of the affidavit you could

16 not figure out all of the different changes and he

17 actually took out a piece of paper and described how he

18 was doing the whole process, information not available

19 to Mr. Buchmiller and by the way, Mr. Buchmiller has --

20 once you start doing hypotheticals, let's put all of

21 the information in front of Mr. Buchmiller, Lehman, the

22 updated first-lien -- everything that had been

23 discovered and say would none of this have changed your

24 opinion?

25 So what they have done is on a very selective

26 slice basis, just showing Mr. Chaplin's affidavit,

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2 someone who no longer works with Mr. Buchmiller, and

3 all he does is say maybe I can come up with some way it

4 would not have changed my decision.

5 The standard for materiality, your Honor, is

6 is not whether something would have changed someone's

7 decision. It is whether the information is something

8 you would have wanted to know, whether it would have

9 been important to the decision, not whether it would

10 have changed the decision. And there is a lot of law

11 on that and I am unaware of any decision in the history

12 of New York State -- I would love to see if the other

13 side did present it -- where a former government

14 official can explain away errors that wore provided to

15 the official when he worked for the State of New York

16 that caused the official to make decisions and the law

17 under Article 78 is quite clear, that when there is

18 erroneous information provided, and clearly this was

19 important information, the Court should annul the

20 decision and in fact, that is the simple way to resolve

21 this case, a simple annulment based on the fact that

22 there were errors in the materials.

23 THE COURT: Okay.

24 I know that is your position. You have told

25 me several times. I heard it.

26 MR. GIUFFRA: Mr. Buchmiller, when I took

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2 his deposition -- "it would not have changed my

3 decision, just this one correction --" under there, and

4 he doesn't know all of the facts.

5 QUESTION: Have you are ever spoken to any

6 one at MBIA about the errors that were identified in

7 Mr. Chaplin's sir reply affidavit?

8 ANSWER: No."

9 So how could he possibly even make a

10 statement about what would or what would not have done

11 if he had not talked to them about the errors, the

12 correction? Plus, he presumably would have had to know

13 about everything else.

14 That is why the law requires annulment and in

15 this case, where annulment would be is they could reply

16 with with updated information and the new Department of

17 Financial Services, which actually has jurisdiction,

18 can deal with this, not hypothetical things.

19 Let me take your Honor to Greenspan 42 and

20 this is the last document I will be talking about on

21 this segment.

22 This is projected policy holder surplus

23 reflected as of year end 2009, corrected to reflect

24 MBIA's admitted errors and adjustments and the numbers

25 are essentially the 362 negative. Goes to 291. We

26 actually think it goes lower than that, because if you

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2 use the correct discount rate, which they still have

3 not corrected, the number would be lower and that also

4 reflects their selective corrections, because otherwise

5 the number would be far lower than 291.

6 The second number is, using the 4.18 discount

7 rate which we think should be used, that number becomes

8 a billion and the next number is what happens if you

9 use the -- just the 17 RMBS that you use the numbers

10 available at year end as opposed to numbers available

11 in August, and then the other two numbers are the

12 BlackRock numbers and with that, Mr. Steinberg will

13 takeover.

14 Thank you, your Honor.

15 MR. STEINBERG: Good morning your Honor.

16 Thank you, your Honor.

17 Let's put up slide Number three. What I

18 will discuss now, your Honor, is -- and I will try to

19 be brief, sort of pose the what if that was raised by

20 Hampton Finer's e-mail PX 58.

21 What if MBIA had hired BlackRock? And it is

22 sort of simple. MBIA did retain experts in this

23 matter to assist the Department and to assist itself

24 and in fact, MBIA was even paying for the New York

25 Insurance Department's outside counsel. And we have

26 seen the costs that MBIA has incurred for a variety of

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2 different analyses. We have heard about the

3 3.75 million dollars for the Lehman analysis, we have

4 heard, you know, talked about Bridge, you know, another

5 greater than one million dollar price.

6 You know, there have been a series of experts

7 in this case and you know, expertise in this area is

8 out there in the market, there are lots of people who,

9 especially during the depths of the financial crisis

10 were very interested in modeling these types of

11 securities and so, what we did was we said okay, when

12 we saw the Hampton Finer e-mail, we said let's engage

13 BlackRock and what we asked to see was we wanted to

14 make sure that a -- a couple of things:

15 Could BlackRock have met MBIA's rush

16 timetable? Because if they could not, they would

17 argue hey, you know, it would take too long, we would

18 not want to do it and argue against it. So we wanted

19 to make sure BlackRock could do it and we wanted to

20 make sure we were hiring the best. We were making

21 sure that we were hiring a firm with a world class

22 reputation, which is undoubtedly why Mr. Finer noted

23 that they had some success with BlackRock in the past.

24 And so, what we did, if you could put up

25 slide 4, BlackRock "was asked by petitioners to

26 estimate the present value" and we did it as of

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2 December 31, 2008. We didn't do what Bridge did, we

3 didn't look at the more stale quarter. We looked at an

4 updated quarter, the December 31 time period.

5 And what we did was, we wanted to find out

6 what payments, the present value of the payments that

7 would have to be made by MBIA to petitioners, other

8 policy holders, in respect of their claims on their

9 contracts, on their insurance policies, for certain CDS

10 and RMBS securities, where MBIA was acting as a CDS

11 credit fault swap, counterparties or financial

12 guarantor. And what we asked BlackRock to do was

13 pretty basic because we didn't want do -- we were

14 trying to make sure it was what happened if they were

15 hired; so we asked BlackRock to prepare its analysis

16 using the similar -- using similar or analogous

17 techniques, data and assumptions that it would have

18 used had it been hired at the early part of January of

19 2009. The six weeks between January 1st, 2009 and

20 February 17.

21 (Continued on next page.)

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2 and we wanted to make sure that it would be done in

3 time and so, basically, the report that BlackRock gave

4 was what MBIA -- was what MBIA would have received or

5 the New York Insurance Department would have received

6 if either had hired BlackRock.

7 (Whereupon the following was transcribed by

8 Senior Court Reporter Vicki Glover.)

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2 MR. STEINBERG: (Continuing) Now, let's talk a

3 moment about BlackRock.

4 Let's go to the next slide.

5 Now, BlackRock has these models, and what we, as

6 the petitioners, did, we helped them identify which

7 elements, what instruments to actually use. And so we

8 asked them to say, all right, here's financial instruments

9 that a number of the petitioners held, without telling them

10 that it had been held by the petitioners, and we asked them

11 to look at that and certain of the analyses that

12 Mr. Buchmiller had done. We asked them to look at those

13 portfolios and to provide data. Now, BlackRock looked at a

14 much more rich area than Mr. Buchmiller, and I'll talk

15 about that in a moment; but we wanted to make sure that

16 BlackRock used its same analysis that it would provide to

17 any other customer, any other client that would come in the

18 door, and said, "I want you to model my RMBS portfolio,

19 please help me do it." BlackRock could do it.

20 MR. KASOWITZ: Can I just note one thing, your

21 Honor?

22 THE COURT: Sure.

23 MR. KASOWITZ: We have a Frye motion on this.

24 Especially when counsel refers to analysis, in fact the

25 analysis that BlackRock used is a black box model that's

26 not disclosed because it claims it's proprietary and the

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2 like, and they also have -- they're riddled with conflicts

3 of interest in this situation. But I just want to note

4 that for the record. We'll argue it when we present next

5 week, but I want it noted for the record.

6 THE COURT: I'm aware of it.

7 MR. KASOWITZ: Thank you, your Honor.

8 MR. STEINBERG: Your Honor, we'll discuss the Frye

9 standard if you want argument on it, but this is not some

10 chronologist checking the back of your head to see, you

11 know, precisely whether or not you have some personality

12 disorder. This is the most respected modeling firm in the

13 world hired by multiple governments, and we'll talk about

14 who's hired them.

15 So what we did was, we wanted to make sure their

16 analysis would be independent. So BlackRock provided its

17 valuation report just as if we were any other client coming

18 in the door. And the only input from the petitioners was,

19 A, please don't look at data after February 16; and B, we

20 helped identify the securities for them, but we didn't tell

21 them why we identified the securities for them. We didn't

22 want to say, well, these are what some of the petitioners

23 held, this is what was being analyzed by Mr. Buchmiller.

24 We said, just do it and give us your results.

25 So, what I want to show you in slide 6, what we

26 did -- you've seen this chart before. This is the chart

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2 that shows sort of the depth of what Mr. Buchmiller did.

3 And we've updated it --

4 Let's show the next slide. This is slide 7.

5 -- as against what Mr. Buchmiller reviewed.

6 So if we look at RMBS, Mr. Buchmiller reviewed

7 instruments at approximately $757 million. BlackRock

8 reviewed 21.6 of net par securities.

9 What "net par" means, your Honor, is that these

10 securities, because they are paid down over time, they

11 might have started at a $24 billion number, but because

12 payments have been made, they're now at a different number.

13 So we had BlackRock look at the net par number in,

14 for example, RMBS. In multi-sector CDOs, an area where

15 Mr. Buchmiller looked at $1.187 billion in net par,

16 BlackRock looked at approximately ten times that amount,

17 $11.3 billion. And same in CMBS and commercial real estate

18 CDOs, Mr. Buchmiller looked at approximately a half a

19 billion dollars, BlackRock looked at $17.1 billion.

20 So if you look at the sum total of the portfolio

21 that was examined, the net par insured that Mr. Buchmiller

22 looked at was approximately one percent, and BlackRock

23 looked at 21 percent of that portfolio.

24 Now, only looking at that portfolio, they arrived

25 at some analysis. They didn't look at the entire

26 portfolio. And they --

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2 Let me go to the next slide. And this is out

3 of -- the individual who is testifying is a man named

4 Mr. Paltrowitz. And he is the principal of what's called

5 BRS Solutions, BlackRock Solutions. And they ran these

6 models, and we were able to obtain the outcome of their

7 modeling.

8 And let me do one thing. Let me do one thing

9 first, your Honor.

10 What I want to talk about, before I do this, let

11 me pull up this Exhibit A to the Paltrowitz.

12 Now, it is true that BlackRock has what the

13 respondents have characterized as a black box. It's their

14 proprietary modeling system. Now, we gave them access to

15 it. They were free to look at it.

16 MR. KASOWITZ: Objection, your Honor.

17 MR. STEINBERG: They were --

18 THE COURT: Wait. Let me hear his objection.

19 MR. KASOWITZ: Objection, your Honor.

20 We were given access to, in return for signing a

21 license agreement, a small amount of information, not the

22 information within the black box that demonstrates

23 precisely how the assumptions that are input by BlackRock

24 are actually manipulated and used to come out with their

25 projections. So that in striking contrast to what

26 Mr. Buchmiller did when he was working through the various

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2 transactions relating to these transactions that are in

3 MBIA's files where he disclosed at every step along the way

4 how the assumptions were then being used to calculate what

5 the loss projections would be, BlackRock's black box model

6 doesn't do any of that, none of it, and it was not

7 disclosed to us. There's no dispute about that.

8 THE COURT: Just to be accurate about it, we know

9 about this motion and we'll have to deal with it.

10 MR. KASOWITZ: Right. We will. But it's

11 misleading. I'm sorry, your Honor, I didn't mean to cut

12 you off. It is a distortion and completely misleading for

13 counsel to represent that they disclosed to us what was in

14 the black box model. That wasn't done.

15 MR. STEINBERG: That is not what I said, your

16 Honor. We gave them -- BlackRock allows clients, people

17 who pay them, to have access to their model. They don't

18 allow them to see the proprietary side, but Mr. Kasowitz

19 decided to jump up before I could explain it to your Honor.

20 But what I wanted to say is that, so I can have access and

21 I want to say, you know what? I got this CUSIP, I got this

22 particular security, and I put it in the system and I get

23 what are their output, and you can -- they were permitted

24 to, you know, access that software. They weren't permitted

25 to go behind it. BlackRock would never allow that. But

26 they're allowed to look at how it would behave and how it

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2 behaved for various instruments.

3 Now, BlackRock has a number of different variables

4 because as you can imagine, the world is complicated. One

5 of the principal variables that gets used in connection

6 with these mortgage-based securities, it's going to come as

7 no surprise to you that it is the home price appreciation

8 projections. And these come from -- they're sort of one of

9 the most basic indexes to evaluate home prices and their

10 decline during this period has been the Case-Shiller index.

11 And Case-Shiller, every once in a while on CNBC, it's like

12 the 10th of the month, they announces what the new

13 Case-Shiller index is. And they says, Case-Shiller says

14 housing went down three percent or one percent or up two

15 percent. Whatever it is, there's an analysis that is

16 performed, and it is a very widely used index. And what

17 BlackRock has, and they, obviously, monitor that quite

18 carefully, and BlackRock, if you look at the Case-Shiller

19 index, the housing bubble basically reached its peak in

20 June of 2006. And since that time there's been quite a

21 slide. And what BlackRock does is model its base case and

22 then a stress case. And the base case, you know, uses that

23 index, uses the Case-Shiller, and it shows what happened

24 over time.

25 THE COURT: Just wait one more second.

26 (Pause in proceedings.)

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2 THE COURT: Yes.

3 MR. STEINBERG: BlackRock, in their model, has two

4 things. And what we've shown is, what was happening to

5 Case-Shiller during the period, it was obviously declining,

6 and that was causing mortgage dislocations. The economy in

7 general was hitting other issues, right? People became

8 unemployed. That causes further deceleration because

9 people can't pay their mortgages. Further diminution in

10 home prices make people question whether or not they have

11 any equity in their homes. And BlackRock had a model, and

12 what they use in their base case is they use a 35 percent

13 diminution over time, and then they identify how this goes

14 out. And this would be in page 16 of the appendix to the

15 BlackRock report that's before your Honor.

16 They also show in their base case they sort of

17 separately, because California was so tremendously hit by

18 this bubble, they show the California base case separately

19 and they break that out. And then in both sets of

20 circumstances, your Honor, they use a stress case.

21 Now, let me go to the analysis, to the output of

22 what BlackRock did.

23 Now, this is from the report that's in front of

24 your Honor. And what I have here is, there are -- along

25 the bottom there's an analysis. I'm going to open it up a

26 little bit because it's sort of hard to see here. But

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2 there were four asset categories that BlackRock reviewed.

3 They looked at ABS CDOs and they looked at 19 separate

4 securities. They looked at CMBSs and commercial real

5 estate CDOs, they looked at six separate ones. They looked

6 at CMBS tranche portfolios, they looked at 17 of those

7 instruments. And of RMBS they looked at 422 of them.

8 Let's go to the next slide.

9 The values we discussed of the securities they

10 looked at was $50.1 billion. And in the BlackRock base

11 case looking at those securities, BlackRock reached the

12 conclusion that there would be a $13.7 billion loss based

13 upon the models that BlackRock was using. And that is in

14 their base case, your Honor.

15 That also, one thing we asked them to do, we said,

16 you know, they used this 5.03 discount number. Please use

17 the same number. Obviously, we're not endorsing it, but we

18 just want to say -- again, this is the what if MBIA had

19 retained BlackRock. Assume that they would have said, hey,

20 our discount rate is 5.03. That's fine. $13.7 billion of

21 losses. If you look at the stress case, stress case for

22 BlackRock would arrive at $20.7 billion.

23 Now, again, this is what would have happened had

24 they do it. Now, it doesn't really -- this, obviously, far

25 exceeds the $5 million that was taken out of MBIA Insurance

26 and given to National. There was not enough, obviously, if

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2 you understand BlackRock's model, that would have wiped us

3 out one way or the other. This has accelerated that

4 wipeout.

5 Now, BlackRock has actually been retained by a

6 number of firms in this area. One of the organizations

7 that has retained BlackRock is the National Association of

8 Insurance Commissioners. And so, in September 2010 they

9 were retained by -- BlackRock was retained by the National

10 Association of Insurance Commissioners. The Insurance

11 Commissioners also -- and they hired them for the RMBS

12 portfolio. NAIC also hired -- let me go -- I'm sorry --

13 the CMBS securities. I misspoke, your Honor.

14 Now, if we go to the next slide.

15 Even Mr. Buchmiller understood that in 2010, NAIC

16 retained BlackRock to analyze CMBS.

17 MR. HOLGADO: Your Honor, if I could just point

18 out, maybe the reason Mr. Buchmiller knows that is the NAIC

19 hired Mr. Buchmiller.

20 THE COURT: Okay. Thank you.

21 MR. STEINBERG: Right. And they still needed

22 BlackRock. So...

23 "You know, the NAIC, as far as you know, relies on

24 the work of BlackRock, correct?

25 "Yes."

26 Let's go to the next slide.

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2 Now, they also, you know, to be fair, they

3 hired -- NAIC hired PIMPCO, which is Pacific Investment

4 Management Company, Bill Gross, who is one of the most

5 famous bond buyers in history. They have as well models

6 for this. And PIMCO was retained by the NAIC and PIMPCO

7 also uses the so-called black box because that's their

8 proprietary models.

9 And Mr. Buchmiller was asked:

10 "Do you have understanding that PIMPCO's models

11 are proprietary?"

12 And Mr. Buchmiller indicated quite plainly that,

13 "Most firms doing this kind of work maintain, or

14 try to maintain, proprietary models."

15 No great surprise there.

16 Now, a little bit more about who BlackRock is and

17 then I'll conclude it.

18 BlackRock is the largest money manager in the

19 world. It has $3.5 trillion under management. Trillion.

20 That's a big number. Their investment management platform

21 is a ladder, which we talked about. It's the most widely

22 used structured finance valuation platform in the world.

23 And by 2010, $9 trillion of securities had been modeled on

24 BlackRock's platform. Eight thousand plus portfolios are

25 managed by BlackRock's platform with 6,000 plus unique

26 users.

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2 And more than that -- let's put up slide 13.

3 They have expertise in this industry. They have

4 been hired by Ambac, CIFG, Syncora, all other monolines

5 that were experiencing difficulties during this time

6 period. They are hired by central banks, finance

7 ministries, the United States Federal Reserve, the United

8 States Treasury.

9 I want to just move along, but they are certainly

10 one of the best known experts in the world about this.

11 Let's put up slide 15.

12 What did Mr. Buchmiller say about BlackRock? This

13 was at his February 2nd, 2012 deposition.

14 "Question: In 2008, 2009 did you believe that

15 BlackRock was among the firms in the financial industry

16 that followed best practices in modeling structured finance

17 transactions?"

18 Mr. Buchmiller agreed.

19 "Yes, I believed that to be the case in what I

20 knew about their models."

21 The question was asked:

22 "What about their models that gave you the view

23 that BlackRock was among the firms in the financial

24 industry that followed best practices in modeling

25 structured finance transactions?

26 "Answer: It was based on things they presented

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2 at the Risk USA Conference and I'm pretty sure we had some

3 followup meetings or maybe a presentation where they

4 discussed that. And I may have had conversations with

5 others in the market about that, although I don't have any

6 specific recollection of those as well; and just through

7 the professional literature."

8 Now, let me go to the -- wait. I won't go through

9 all of the slides on that he was very well known, that

10 PIMCO and the two of them are sort of the top, but I would

11 like to show you slide 19.

12 Now, when Treasury Secretary Geithner was being

13 confirmed, at those confirmation hearings, obviously, there

14 was a lot of concern in the nation about the AIG rescue,

15 Bear Stearns, Lehman, a number of different items. And the

16 Federal Reserve had taken on a number of these securities

17 on their balance sheet and they needed to value them. They

18 needed to understand how much they were worth so that we

19 could make, as a nation, informed decisions about this

20 crisis.

21 And Chuck Grassley, the U.S. senator from Iowa,

22 was asking Mr. Geithner about this, and it's his opening

23 statement, and he wanted to understand what the Fed's

24 investment in these SPVs, these special purpose vehicles,

25 which is sort of the way in which they discussed a number

26 of these assembly of financial instruments. And it would

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2 seem that the Fed's investment in these special purpose

3 vehicles is based on a valuation of assets which was

4 conducted in all three cases by BlackRock Financial.

5 And so then New York Federal Reserve President

6 Geithner responded to why he had selected BlackRock. And

7 Mr. Geithner said, "As I have testified before, we had to

8 move very, very quickly in that timeframe, and we believed

9 at that moment we had no alternative."

10 There was some criticism that BlackRock had been

11 expensive. Of course they were, having modeled many more

12 times than what Lehman modeled for $3.75 million. We think

13 they were highly worth it.

14 But what Mr. Geithner said is, "They come with a

15 world class reputation and set of expertise in doing that,

16 and we thought the interests of the American taxpayer would

17 be best served by having them there on our side as we made

18 those consequential judgments."

19 I think that that is probably the best endorsement

20 that one can have, and I would note, of course, that that

21 hearing was on January 21st, 2009.

22 Your Honor, I'd like to move from the discussion

23 of BlackRock to the discussion of the illegal structure of

24 this transaction because in fact, and we have been focusing

25 on some of the elements of this transaction and I want to

26 focus on the dividend and related materials to that which

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2 occurred as part of the transformation transaction.

3 Your Honor will recall the evidence that there was

4 a dividend of $1.147 billion that was allowed in connection

5 with this transaction. And what I'm going to discuss

6 during my presentation are that -- I'm going to discuss the

7 legal standard under which dividends are to be provided,

8 and that's section 4105. And there are two independent --

9 4105(a). There are two independent provisions of that.

10 I'm going to discuss how the approval letter references

11 only one provision of 4105(a). And then I'm going to

12 discuss the excuses for why the respondents think that 4105

13 just does not matter. And what we'll show is that there

14 was no earned surplus to allow this dividend, and that the

15 process by which the dividend was created establishes how

16 it couldn't have existed and didn't exist. And it shows

17 another flaw in the application on a pure legal question

18 upon which your Honor can determine in favor of

19 petitioners.

20 Now, I'd like to start my discussion by talking

21 about what the legal standard is. 4105(a). Now, your

22 Honor -- your Honor --

23 THE COURT: We're working hard.

24 MR. STEINBERG: You are working hard, and we all

25 are, and I will tell you, I will try to make the dividend

26 test of 4105(a) as compelling as I can.

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2 THE COURT: Good luck.

3 MR. STEINBERG: That will be my job today.

4 4105(a) starts in a densely worded provision. I

5 just take it as I see it. And it talks about there being

6 two portions. And what we've done on this slide is I've

7 added the "1" and the "2." It doesn't appear in the

8 statute. So, I just want to let you know that I'm breaking

9 it into two tests. There is the first test.

10 "Except as provided in subsection (c), no domestic

11 stock property/casualty insurance company" -- i.e., an

12 insurer, domiciled in New York -- "shall declare or

13 distribute any dividend to shareholders except out of

14 earned surplus."

15 That is Rule No. 1. You can't do it. Full stop.

16 Earned surplus, which we've highlighted below,

17 means the portion of the surplus that represents the net

18 earnings, gains or profits after deduction of losses that

19 have not been previously distributed to shareholders or

20 transferred to stated capital or capital surplus or applied

21 to other purposes permitted by law, but you can't allow any

22 unrealized appreciation of assets. It's all in the

23 exclusion. Earned surplus is net earnings, gains or

24 profits, okay? After deduction of losses, obviously. You

25 can't, you know, only look at one side of the balance sheet

26 and not the other of a financial statement.

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2 But then there's a second test. And the second

3 test is potentially permissive because as we'll go through

4 it, that one can be waived. And I'll talk about that.

5 Now that, the second test in 4105(a), is, "No

6 domestic stock property/casualty insurance company shall

7 declare or distribute any dividend to shareholders which

8 together with all dividends declared or distributed by it

9 during the next preceding 12 months."

10 Let me help you out because it took me a long

11 time.

12 What they're doing is a forward looking rolling

13 test. It's saying, I'm going to look at what you can do

14 possibly over the next 12 months. We're going to say,

15 we're going to look at what you could do, as long as you

16 don't exceed these items over that next time period.

17 MR. HOLGADO: Is that the word "preceding" you're

18 referring to?

19 MR. STEINBERG: Yeah. You know what? Preceding

20 in the -- so you look -- I'm sorry.

21 You look to the rolling 12 months that we've just

22 gone through, preceding 12 months, during the next

23 preceding 12 months, exceeds the lesser of ten percent of

24 its surplus to policyholders as shown by its last statement

25 on file with the superintendent.

26 So let me back up.

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2 Every quarter the insurance company files with the

3 Department a statement of what its earned surplus is as

4 part of its financial statements. It provides that number

5 regularly. And so you look at these numbers and you can

6 find them in a form that is provided. And so you look at

7 what is the time period, what is the time period and what

8 is the value of what is your earned surplus. And that's

9 what you look at for what you can distribute in accordance

10 with these tests.

11 And it goes on to say that it can be ten percent,

12 and ten percent is the number that I'm going to show your

13 Honor because that's what makes its way into the

14 application and that's what makes its way into the approval

15 letter.

16 So it says, you're under this limit, in subsection

17 2, "unless the superintendent approves a greater dividend

18 distribution based upon his finding that the insurer will

19 retain sufficient surplus to support its obligations and

20 writings."

21 Okay?

22 So that Test No. 2 can't be waived by the

23 superintendent if they find the insurer will retain

24 sufficient surplus.

25 I've tried to make a slide that will hopefully

26 make it a little bit easier for your Honor.

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2 Let's go to the next one.

3 THE COURT: Who do you think they get to write

4 these insurance laws?

5 (Continued on next page.)

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2 MR. STEINBERG: If I could write the

3 insurance laws, here is what I am doing. I will have a

4 stop sign and a speed limit. It is dense stuff, your

5 Honor, like I said.

6 So there is the 4501 test. The first test as

7 we have been discussing it, is an absolute rule.

8 The first test is the stop sign. You can't

9 do it. You stop. Full stop.

10 The second part is sort of what we would be

11 saying is the speed limit. It tells you okay, you have

12 this -- you have this surplus, how much you can allow

13 out over time. And that speed limit can be waived by

14 the Insurance Commissioner. They can say okay, I can

15 let you out of that, I can let you go faster if you

16 prove that the insurer will retain sufficient surplus

17 to support its obligations and writings and so, what we

18 will discuss here, your Honor, is that the only

19 findings made in this case relate to the speed limit

20 and not the stop sign and so -- and the measurement

21 test, it is a specific measurement test and the -- if

22 you notice in the speed limit sign, it says that you're

23 to measure the surpass shown by its last statement on

24 file.

25 And you see that? It is about four lines --

26 five lines down in the slide, last statements on file?

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2 If you notice, the first, the stop sign portion does

3 not have that.

4 And so, we look to see what the Department

5 itself interprets for that, and whether you have to

6 look at the last statement on file, and we found the

7 opinion of the general counsel of the New York

8 Insurance Department, let's put that up, Opinion Number

9 8513, this was issued in February of 1985 and it says

10 "The prescribed last statement on file determines the

11 amount of the earned surplus available for

12 distribution.

13 And then, it describes, that is sort of the

14 conclusion and it says "The evident purpose of the

15 underscored language is to set the parameters and to

16 simplify the computations used in declaring a

17 shareholder dividend based upon a statutory statement

18 required to be filed under the Insurance Law and

19 recognized by the Legislature."

20 And bearing in mind that is a component of

21 unassigned funds surplus, which is in turn a component

22 of surplus to policy holders, one cannot attempt to

23 extrapolate language referring to surplus to policy

24 holders without considering the component parts of the

25 surplus to policy holders.

26 Thus, pursuant to Section 4105, the source of

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2 dividends is limited to that earned surplus which is a

3 component of surplus to policy holders.

4 Two points; you can't take it out, you can't

5 -- if you don't have earned surplus, you can't take it

6 out.

7 And how do you measure it? You look at the

8 last statement on file.

9 Now, what happened -- when this application

10 was originally filed, there were changes that occurred

11 over time. There were changes to the size that was

12 allowed for the dividend and the size of the share

13 repurchase, and your Honor may recall that in the

14 application itself there was this 1.147 dividend and

15 then there was a share repurchase of approximately two

16 billion dollars.

17 And there was some back and forth about what

18 to do about how to split those two up and the point I

19 want to show here is in February 11, Dewey and Leboeuf,

20 counsel to MBIA was going through and they were

21 modifying some of the analysis given where they were

22 and as Dewey and Leboeuf writes, and this is to show

23 that everybody knew, everybody knew -- I am sorry. I

24 misspoke. The redemption is 1.12 billion dollars not

25 2.

26 And as they were writing in February, they

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2 knew, MBIA through its counsel knew that you could only

3 take the dividend out of the earned surplus.

4 So this is the letter from MBIA's counsel as

5 described in the filing submitted by MBIA to the New

6 York Insurance Department by letter dated December 5.

7 "The original application, MBIA planned to transfer its

8 shares to Munico to MBIA Inc by dividend. However,

9 given that MBIA's earned surplus as reflected in the

10 attached pro forma balance sheet as of December 312008

11 is less than the statutory carrying value of Munico,

12 MBIA has instead decided to effectuate the transfer

13 pursuant to a share redemption under Section 1411."

14 In other words, they didn't have the earned

15 surplus, so if they didn't have it, they wanted to go

16 around that provision.

17 What is interesting is when the approval

18 letter was ultimately signed up on February 17, 2009,

19 let's go to -- let me go to the next slide.

20 What is interesting about this, your Honor,

21 is that Insurance Law 4105, when they describe it, they

22 only describe the speed limit provision, not the stop

23 sign. So in the -- in connection with the description

24 of the MBIA dividend, it says "Insurance Law 4105

25 prevents an insurer within a 12-month period from

26 paying dividends to shareholders in excess of ten

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2 percent of surplus to the policy holders."

3 Your Honor will remember that from the

4 waivable speed limit portion of the statute. There is

5 no mention of the stop sign provision. There is no

6 mention of that.

7 Let's pull up Petitioners' Exhibit 6. So

8 let's go to the description of the dividend in the

9 filings. Page 6.

10 THE COURT: I think that will have to be

11 your last slide. I am so upset to have to disturb

12 you.

13 MR. STEINBERG: It is scintillating, I know.

14 I want to give you something good after lunch. That

15 is the short punch line, your Honor.

16 In 4105, they mention "prevents the insurer"

17 and this is in the finding, there's -- I won't read it

18 all again into the record, but we can all agree that it

19 does not refer to the earned surplus limitation, what I

20 call the stop sign provision and if this is a

21 convenient place for your Honor, we can break.

22 THE COURT: Yes. It is almost one o'clock,

23 so I think we can break.

24 So have a nice break. Walk around a little

25 bit. We will open the doors around two o'clock and we

26 will start a few minutes after that.

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2 Okay.

3 MR. GIUFFRA: Thank you, your Honor.

4 (Lunch recess taken.)

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2 A-F-T-E-R-N-O-O-N S-E-S-S-I-O-N.

3 THE COURT: I took a nice walk.

4 MR. STEINBERG: Me too, your Honor.

5 THE COURT: Nice day for it.

6 Back into Insurance Law.

7 MR. STEINBERG: Thank you, your Honor.

8 When we were breaking, we were discussing the

9 approval letter, and if I could have Petitioners'

10 Exhibit 6 up on the board again. We can use this

11 slide. This is the same thing. This is the finding,

12 your Honor, of the Insurance Department in connection

13 with the approval letter of February 17. And what I

14 wanted to draw the Court's attention to is, the

15 references, all of the references in the approval

16 letter are to 4105(a); the speed limit test. So

17 4105(a) prevents an insurer, within a 12-month period,

18 that is in the second provision we pointed out and it

19 also says the finding at the end is that "The

20 Department finds that MBIA Corp will retain sufficient

21 surplus to support its obligations and writings

22 following the payment of the MBIA Corp dividend."

23 Thus, they approve.

24 There is no mention of the first test and

25 your Honor, let me put up Mr. Moriarty's testimony on

26 this point. He makes -- he submitted, and this is

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2 slide 7, he has two pieces of information and I think

3 they sort of highlight where the Department's position

4 is and where the respondents' position is.

5 The affidavit of Mr. Moriarty, we will start

6 with the bottom one submitted on November 24,2009 when

7 they filed their answer. It indicates that the

8 dividend was paid out of earned surplus in compliance

9 with 4105(a) because, as noted before, or noted below,

10 the Department determined that the payment of the

11 dividend of MBIA Corp would retain sufficient surplus

12 to supports its obligations and writings.

13 At his deposition, we acquired about whether

14 -- what about the first test, the earned surplus test

15 which is not mentioned. He agrees about whether or not

16 the earned surplus test, the stop sign is waived --

17 MR. HOLGADO: It is not mentioned in

18 Paragraph 48 is what Mr. Steinberg is saying. Isn't

19 that the first thing he said?

20 MR. STEINBERG: Out of earned surplus,

21 you're right, we think that is a mistake by him, but

22 you're absolutely correct. It does say earned surplus

23 and we think it is a mistake, because at the

24 deposition --

25 QUESTION: Under the earned surplus test of

26 the Insurance Law, the Insurance Department has no

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2 discretion with respect to approving a dividend, right?

3 ANSWER: That's correct.

4 QUESTION: The Department doesn't have the

5 discretion to permit an insurance company to pay a

6 dividend to its holding company if the insurance

7 company doesn't have earned surplus in excess of the

8 dividend, correct?

9 ANSWER: That's correct."

10 Let's go back to the statute, the statute

11 where -- and your Honor will recall that this is the

12 stop sign section, there is no reference to "support

13 its writings and obligations". That only appears in

14 this Part 2. Only in Part 2 is that finding

15 applicable.

16 The first one is a more objective test which

17 is, it has got to be out of earned surplus, full stop.

18 Mr. Moriarty, a 31-year professional with the

19 Department, understands that distinction quite clearly.

20 Now, let's go back to Petitioners' Exhibit 6,

21 the approval letter.

22 Now, we have cited lots of cases to you to

23 say you have got to provide the basis for your

24 determination in the approval letter. There is no

25 reference to what we have called the stop sign, which

26 Mr. Moriarty admits is a stop sign in this provision.

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2 It is not there at all, and under that basis alone,

3 that is another ground that your Honor can, as a matter

4 of law, rule in our favor.

5 I will show you. There are no facts on this.

6 Let's put up slide 8.

7 There is no dispute that MBIA Insurance never

8 had sufficient earned surplus to support that

9 1.47 billion dollar dividend.

10 Notice to Admit 19 admits that as of

11 September 30, 2008, MBIA's insurance earned surplus was

12 approximately 189 million.

13 MR. KASOWITZ: Sorry, your Honor. I will

14 object.

15 The word that counsel used was never. So --

16 and the Notice to Admit relates to a specific date, so

17 --

18 MR. HOLGADO: Prior to transformation, I

19 will add.

20 MR. STEINBERG: That is fine. During the

21 relevant period they did not have 1.147 of earned

22 surplus.

23 MR. HOLGADO: Again, wrong.

24 MR. KASOWITZ: I will object, your Honor.

25 This is the whole issue, that in this concept is

26 simultaneity and as of the date of the transformation,

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2 which was in February, they didn't. So I mean, it is

3 argument.

4 I think I understand the point that he is

5 making but he is using the wrong time period to define

6 it.

7 MR. STEINBERG: Mr. Kasowitz has not read

8 further down my slide.

9 September 30, 2008. MBIA's earned surplus

10 was approximately 189 million.

11 Response? "Subject to and without waiving

12 these objections", MBIA admits. They admit that.

13 Number 2, as of December 31, 2008 MBIA's

14 earned surplus was approximately one million.

15 During that period, it went down to one

16 million. We cited where that was from.

17 Response, "Subject to and without waiving

18 these objections or the general responses", they admit.

19 Now, your Honor will recall they want to say

20 well, that is fine, but that is not as of February 17,

21 2009.

22 Your Honor may recall that the opinion from

23 the attorney general that we had up, which is -- sorry,

24 it is from the counsel of the -- let's put it up and I

25 will get it exactly right.

26 MR. HOLGADO: What affirmation exhibit is

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2 this in the record, just to clarify?

3 MR. STEINBERG: I think we are entitled to

4 take judicial notice of the opinions of the attorney

5 general. PX 239.

6 MR. HOLGADO: That is not the attorney

7 general.

8 THE COURT: Wait. Wait. Wait. What is it?

9 MR. STEINBERG: PX 239, New York Insurance

10 opinion of the general counsel.

11 Again, we had talked about this before the

12 break, your Honor. This is, what period do you look

13 at? What is the statement that you look at? You look

14 at it in hindsight to make sense. Don't you want to

15 sort of give people the discretion to say oh, I am

16 going to have a really good quarter, it will be a

17 really good earned surplus.

18 These statutes, of course are meant to

19 protect policyholders. They are meant to protect

20 policyholders against the parent from taking dividends

21 out of the subsidiary that should never come up.

22 So when Mr. Kasowitz gets up and objects and

23 says we are not making -- offering proof as of February

24 16 or February 17, the answer is, that is correct, we

25 don't have to. It is just not there. You have to

26 look at the last statement. That is what the law says

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2 and the opinion of the general counsel of the New York

3 Insurance Department is precisely the same.

4 Let's go to slide 9, please. We discussed,

5 nevertheless despite having one million dollars of

6 earned surplus, they declare a 1.147 billion dividend.

7 If you look at -- and we have in the record your

8 Honor -- PX 825, which is a sizable document that I

9 will -- but it is the annual statement of MBIA

10 Insurance Corporation and this is Petitioners' Exhibit

11 825, they filed this report. That is what they filed

12 and in it, include the 1.1 million dollar dividend

13 capacity that they had during that period.

14 THE COURT: Wait.

15 MR. HOLGADO: When?

16 MR. STEINBERG: Year end December 31 --

17 THE COURT: Okay.

18 MR. STEINBERG: Your Honor, now Mr. Holgado

19 correctly says this gets filed later, but I am trying

20 to give him the benefit. Let's give him the forward

21 time. If this gets filed later, they are back at the

22 187. It doesn't matter under 1.1 or under the 185, we

23 can all don't do the math that 1.137 is bigger than 1.1

24 or 185.

25 Now, the reinsurance transaction, there is a

26 discussion about whether or not the reinsurance

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2 transaction alone would be legal.

3 Let's go to slide 10. Now, the reinsurance

4 transaction your Honor, you recall is where MBIA -- the

5 insurance company, it still holds the policies. After

6 the transformation, they didn't physically move the

7 policies to National. They kept them back at MBIA

8 Insurance Corp, but to shift the economic risk, they

9 enter into this reinsurance contract and that involves

10 the cut-through insurance. There is that element so

11 that policyholders can look to National, or policy

12 holders can look to MBIA Insurance. They get that

13 option. That is that reinsurance transaction.

14 The problem is, of course, National at that

15 time does not have sufficient funds to reinsure MBIA

16 Insurance Corp. Until the dividend gets it over

17 there, it doesn't have the funds.

18 So we ask the CFO of MBIA, Chuck Chaplin

19 about whether or not National would qualify to do the

20 reinsurance without the dividend and basically, he says

21 "I don't believe that National would qualify to enter

22 into the reinsurance transaction -- until it is

23 capitalized."

24 We ask him again, why is that?

25 ANSWER: Because it would be inadequately

26 capitalized to engage in reinsurance of that scale."

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2 We ask the same of Mr. Moriarty. We ask

3 him, and he said, his answer was "If the reinsurance

4 transaction was entered into standalone", that is

5 anticipating the respondents' argument, "the Department

6 would not allow it to be done with a company with a 185

7 million dollar surplus because immediately post

8 transaction, the company, the assuming company on the

9 reinsurance would be insolvent."

10 In other words, National had to have a lot of

11 money before it could reinsure MBIA Insurance Corp and

12 what they are both saying is on a standalone basis, if

13 that was a transaction, it could not happen. It just

14 couldn't happen.

15 Now, of course, there are -- and sequence

16 matters, your Honor. Sequence matters.

17 When this -- especially the earned surplus,

18 your Honor, and if I can have up slide 11, this is an

19 e-mail and it is Petitioners' Exhibit 242. It is at

20 R000647 in the record, the administrative record here

21 and initially, when the application was made, there was

22 financial information that was provided and then, there

23 was additional information that was provided.

24 And on December 15, Kenneth Gingrass from the

25 Department writes to Allison Tam and Jane *Boisseau and

26 says "the proposal does not seem to work legally."

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2 MBIA Insurance does not have -- they were

3 under the view that MBIA does not have sufficient

4 earned surplus to dividend the stock of MBIA of

5 Illinois as MBIA Insurance is left with an earned

6 surplus of negative 12 after the dividend.

7 What you will see is, they actually come back

8 and we will get to that in a moment, MBIA comes back

9 and says oh, no, no, no, there is a mathematical error.

10 We didn't give you the right data.

11 They gave them the right data, but the

12 important thing, and then we will show why they still

13 -- it still doesn't matter, but the important thing is

14 that the New York Insurance Department was very

15 cognizant of the earned surplus issue, even though it

16 is left off of the approval letter.

17 Now, the transaction again, what are these

18 statutes designed to do? They are designed to protect

19 the policy holders, to allow -- to avoid the holding

20 company taking money out of it, to the holding company,

21 to then take that away from what would be available to

22 policy holders.

23 And I want to -- I thought it was actually a

24 very telling moment at how surprised analysts and

25 investors were by this transaction and if I can show up

26 Petitioners' Exhibit 231, this is an e-mail chain that

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2 has an analyst and we talked about that a little bit, I

3 believe, on Tuesday, but I think it is important to see

4 its context and let's start at the top of it, so that

5 maybe it will remind you, this is on February 24, 2009

6 and again, this is Petitioners' Exhibit 231. And this

7 is Jay Brown, the CEO of MBIA Insurance, writing David

8 Coulter and David Coulter is a member of the board of

9 MBIA Insurance and from Robert Pincus, who had invested

10 approximately at least in excess of a billion dollars

11 in MBIA Insurance -- MBIA Inc, the parent, and this is

12 where Mr. Brown says "glad someone on the outside could

13 figure it out."

14 And I will go down to what someone on the

15 outside did to figure it out. Let's go down. Let's

16 start at the top. Let's turn to the next page of the

17 exhibit. This is Mr. Mehta, who is an analyst -- runs

18 a fund called Coliseum Capital, which we will go up and

19 show you your Honor, just keep it on the second page

20 and he is describing the transformation transaction and

21 his perceptions of it in the period after it was

22 announced.

23 And at the second full paragraph, let's pull

24 that out, it says "Now look at what is being put into

25 National. 2.09 billion, so that is the dividend and

26 the share repurchase, look at what is being put into

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2 National, 2.09 billion is being taken out of insurance

3 co as a dividend to Holdco. A dividend!"

4 They understand that this was an

5 extraordinary transaction. That was not going to be

6 permitted out of the earned surplus.

7 He says "Regulator has given the okay to take

8 this capital out and put it out of the reach of

9 policyholders of insurance company. This is huge for

10 shareholders. Huge. Nine dollars per share is now

11 protected from claims that National does not choose to

12 insure or reinsure."

13 Let's go down further to the net result.

14 "The net result is that Holdco now owns two

15 subs, one where the structured finance exposure is

16 contained and you where the muni* superb is held. SF

17 (structured finance) has no way to get at the muni sub;

18 whatever the muni subs value is belongs entirely to

19 Holdco, which means it belongs entirely to

20 shareholders."

21 And finally, he says "National now has 2.89

22 billion plus 2.09 billion of assets. Round that to

23 five billion. That is 21.50 per share in value, all

24 of which belongs to shareholders and it is untouchable

25 by SF counterparties, structured finance.

26 This document evidences precisely why the

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2 Legislature has a very clear and objective test, so

3 that the shareholders who are subordinate in interest

4 to these people who hold these insurance contracts

5 can't get to the head of the line, your Honor, and that

6 is what happened in this transaction and what does Mr.

7 Brown say about this?

8 Let's go all the way back to the top, when he

9 is forwarded this e-mail. "Glad someone on the outside

10 could figure it out."

11 And then to understand this is not some --

12 you know, random person, "I think I have had a few

13 e-mails with Mehta."

14 Your Honor, these provisions of the earned

15 surplus, while admittedly not the most enticing and not

16 the most comprehensible, are, however highly, highly

17 important.

18 Now, in this case, we could stop right there

19 and say, that is it, this is -- this dividend was

20 illegal, it is not in the approval letter, but the

21 respondents, of course, have an argument and what their

22 argument is, is that they come up with this post hoc

23 simultaneity theory. Let's put that up.

24 This came up for the first time at the

25 deposition of Mr. Chaplin on July 29, 2010 at 453 and

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2 (Whereupon the following was transcribed by

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2 MR. STEINBERG: (Continuing) The question is

3 asked:

4 "Question: How did MBIA have sufficient earned

5 surplus to complete the transaction?"

6 And this is Mr. Chaplin's response.

7 "Answer: The earned surplus as you can see is

8 positive. After each step in the transaction, we did not

9 view -- this spreadsheet comes from my Department."

10 He sort of pauses.

11 "We are not making any opinion or expressing a

12 view on the ordering of the transactions. There is no

13 sequence that is implied or intended by what's shown here

14 at the beginning of the transformation. On the day of its

15 implementation, the company had a positive earned surplus.

16 At the end of the day, on which the transformation took

17 place, the company had positive earned surplus."

18 And they do that through a lot of releasing of

19 earned surplus and releasing of contingency reserves. That

20 all had to have happened, now they claim, all at the same

21 moment in time precisely, despite the fact that as, your

22 Honor, we've gone through before, and I don't want to sort

23 of bore you with it, but the approval letter itself uses

24 terms of sequence and series. It says, you know, after

25 this. It's a series of transactions. Those are temporal

26 notations and temporal views. And not only that, MBIA's

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2 applications to, and presentations to the New York

3 Insurance Department always have used language of sequence.

4 So let me see slide 14.

5 Slide 14 is an excerpt from a PowerPoint that was

6 provided to the New York Insurance Department. Two days

7 before the application was filed there was a meeting. They

8 were discussing this is going to be our application and

9 they explained to the Department about the steps.

10 Let's go to the next slide.

11 And this is again, this is at R 29 of the

12 administrative record here. It talks about steps.

13 Step 1: "MBIA Insurance Corp." -- and this is a

14 presentation made by MBIA -- will dividend up the capital

15 stock of MuniCo to MBIA Inc., and MBIA will contribute such

16 stock to a newly established Delaware intermediate holding

17 company, MuniCo Holding Company."

18 Now, again, what's interesting, look under the

19 approvals, your Honor.

20 It says, "No approval needed under 4105 for this

21 step since we understand the dividend would not be

22 considered extraordinary and the dividend would be paid out

23 of earned surplus."

24 Right there they're acknowledging the earned

25 surplus test.

26 Let's go to the next slide.

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2 This is the next page where it is referring again

3 the MBIA to Step 2.

4 And then they say, "After dividend of the MuniCo

5 stock" -- again, words denoting different sequences --

6 "MuniCo is capitalized by approximately 2.83 billion

7 contribution of capital from MBIA Inc."

8 And there's more. Let's go to the next slide.

9 Step 3. "MBIA Insurance Corp. will transfer its

10 U.S. public finance business to MuniCo by entering into a

11 reinsurance agreement."

12 Again, there are further indications that these

13 are not simultaneous but they are part of a temporal

14 series.

15 Now let's go to the next slide.

16 This is part of a presentation that was made.

17 This is consistent, by the way, with the various

18 presentations that MBIA made to the Department earlier in

19 2008. So, at February 22nd, 2008, effort by the MBIA to

20 engage in transformation. Again, they're talking about

21 steps.

22 And again, importantly, they're acknowledging,

23 even back in February 2008, if you look at -- this is from

24 PX 1042, so Petitioner's Exhibit 1042.

25 Even back in early 2008, they're discussing -- you

26 see under two options?

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2 "MBIA New York dividends capital stock of MBIA

3 Illinois and CapMAC" -- CapMAC was going to be a different

4 insurance subsidiary -- "NY" -- New York -- "need approval

5 under section 4105 of the NY Insurance Law if such

6 dividends are considered extraordinary and such dividends

7 must be paid out of earned surplus." Again, we're always

8 back to earned surplus.

9 Similarly, in October, 2008, this is when the

10 testimony is that they believe that the Insurance

11 Department will finally consider it. Again, language of

12 sequence. Step 1. And again, these have to be paid out of

13 earned surplus.

14 The next slide.

15 The application itself uses this same language.

16 This is from the December 5th application.

17 "MBIA will distribute as a dividend to MBIA Inc.

18 all of the stock of its current subsidiary MBIA Insurance

19 Corp. of Illinois, an Illinois-domiciled financial

20 guarantee insurer. Following this stock distribution they

21 will contribute" -- again, over and over again. And it

22 gets even more so.

23 Let me go to the next slide.

24 "MBIA will contribute these funds to MuniCo which

25 in turn will contribute such funds to MuniCo Holding Co.,

26 which goes to then MuniCo."

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2 Again, this is not consistent with the deposition

3 testimony of Mr. Chaplin a year and a half later saying

4 something entirely different.

5 Let's go to the next slide.

6 Now, actually, there are financial statements that

7 are provided by MBIA, and these are from the administrative

8 record 242 at R 648, 653, 850 and 532. All in the

9 administrative record. And MBIA would send in these

10 financial statements. And they would send them in and

11 identify what was going to happen with the earned surplus

12 because everyone was following the earned surplus question.

13 And so we took out four different plots of time.

14 On December 15th, 2008, in the morning, the financial

15 statements that show this balance sheet and the existence

16 of earned surplus refers to earned surplus after each

17 transaction. Language of sequence even in the financial

18 statements. Same in the afternoon. On 12/15/08, earned

19 surplus after each transaction. Same on December 18th, and

20 the same on February 10th.

21 Let's go to the next slide.

22 Now, your Honor, we had talked about Mr. Gingrass

23 writing a letter to MBIA's counsel saying, hey, you know,

24 we think this, as we read this statement, and this is an

25 excerpt from that statement, your transaction isn't legal

26 because we don't show any earned surplus. And so in the

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2 dividend stock of MBIA Illinois you'll see "Earned Surplus

3 After Each Transaction," they start with a negative. And

4 that's where Mr. Gingrass writes, hey, your transaction is

5 illegal. You start from the premise that you have no

6 unearned surplus. We can't allow a transaction like that.

7 MBIA comes back later that day and says, "You know

8 what? We made a mistake." But the point is, they are

9 alert to the issue. You can't create negative unearned --

10 you can't create negative earned surplus.

11 Let's go to the next.

12 Now, simply, and this is not; it's anything but,

13 the dividend could not have occurred independently of the

14 reinsurance transaction. MBIA Corp. had approximately one

15 million of earned surplus at December 31, 2008, and they

16 had 185 at September 30, 2008, yet they paid a 1.147

17 billion dividend. Without the reinsurance transaction

18 occurring first, the dividend could not have been declared

19 or distributed because its size exceeded the earned surplus

20 by over a billion dollars.

21 Let's go to the next slide.

22 Not only that, National had a value of about $185

23 million, according to the materials submitted to the NYID.

24 But before receiving the proceeds of that dividend, they

25 wouldn't have had enough capital to write the $2.89 billion

26 of reinsurance transaction.

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2 If you only have $185 million of capital, you

3 can't insure $2.89 billion. You can't. The entire $232

4 billion that was -- I'm sorry. I misspoke. Let me take it

5 back.

6 THE COURT: Start again.

7 MR. STEINBERG: Yes.

8 National has, before it gets funded from these

9 dividends, has $185 million of earned surplus. That would

10 not be adequate. And that's what Mr. Moriarty testified.

11 That would not be adequate to reinsure all of the Muni

12 portfolio that was still held at MBIA Insurance Corp., but

13 was now being completely reinsured by National. You

14 couldn't have that.

15 One, you need to have it funded in order to allow

16 that. There was not the earned surplus. The stop sign

17 said stop and that's -- they couldn't do it. There is no

18 evidence in the administrative record that all of these

19 things were to occur simultaneously, and in order to do

20 that there's a lot of mental gymnastics that have to take

21 place that are inconsistent with the administrative record

22 and inconsistent with the approval letter.

23 Thank you, your Honor.

24 MR. GIUFFRA: Your Honor, I think we're in the

25 home stretch. I'm going to turn just for a few moments to

26 a discussion of past practices of the Insurance Department.

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2 Very quick.

3 Let's just put up slide 1, please. It's DPP.1.

4 Your Honor, the law under Article 78 is that an

5 administrative agency needs to act consistent with its

6 prior precedent, which is the reason why, for example, the

7 document that Mr. Steinberg showed you about the general

8 counsel's opinion letter was so important with respect to

9 earned surplus. So, to adopt different standards and not

10 follow the same precedence is something that on its own is

11 arbitrary and capricious.

12 Let's put up DPP.2.

13 This is the NAIC guidance for a liability-based

14 restructuring, and there's no question that the

15 transformation transactions was a liability-based

16 restructuring. That's PX 648. And Mr. Buchmiller talked

17 about the fact that the NAIC guidelines were best practices

18 and that's something that insurers around the country

19 follow in order to ensure that the decisions they reach are

20 sort of consistent and can be applied when you have

21 insurance companies in multiple states. And the key things

22 to do when you have a liability-based restructuring are,

23 number one, to analyze the financial solvency issues.

24 Here, that was not done through some independent third

25 party. The only thing that's in the record is the Bridge

26 opinion, which even Mr. Buchmiller thought was just a

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2 lawyer's, you know, papering the files. They talk about

3 the regulatory authority engaging experts. That wasn't

4 done here, other than hiring the Fried Frank law firm to

5 handle the legal side of it, but no one handled the

6 financial side of it. And the one expert they had that

7 could have helped them maybe, Perella Weinberg, was never

8 consulted by Mr. Buchmiller.

9 MR. KASOWITZ: I'm just going to object, your

10 Honor, only because it says it right in this guidance it

11 says "should consider."

12 MR. GIUFFRA: Absolutely, Marc.

13 MR. KASOWITZ: It doesn't say "should retain." So

14 I just want that clear for the record.

15 Thank you, your Honor.

16 MR. GIUFFRA: My only point, your Honor, is that

17 there are these guidelines, they're out there. When we

18 showed them to Mr. Dinallo, he had no recollection of them,

19 no knowledge of them, doesn't remember consulting them,

20 and --

21 MR. KASOWITZ: It will be my last objection, your

22 Honor.

23 THE COURT: Wait, wait, wait.

24 MR. KASOWITZ: Counsel's disregarding all of the

25 testimony which is completely consistent that whatever

26 guidelines these are, they're not binding in New York

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2 State, so...

3 MR. GIUFFRA: Your Honor, definitely not binding,

4 but the point is, the guidelines exist, they are

5 guidelines, they're best practices and they weren't

6 followed here.

7 This whole situation needs to be looked at in

8 terms of the entirety of it. And this is just another

9 place where the Insurance Department did not follow the

10 best practices, and in other places, obviously, violated

11 the law.

12 The next point, which is down at the bottom and

13 then I'll flip forward.

14 It says, "The plan should provide for the

15 provision of financial support by the parent company."

16 And in this case, there's nothing in the approval

17 letter that provides for financial support.

18 Let's put up slide 101.

19 And as your Honor will recall, Superintendent

20 Dinallo believed he had some sort of an agreement with

21 Mr. Brown that would have provided for putting money into

22 MBIA Insurance if it turned out that they didn't have

23 enough money.

24 And let's put on 102.

25 Mr. Brown -- Mr. Brown --

26 MR. KASOWITZ: Excuse me. I'm only going to

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2 object because -- if we can go back to that prior one?

3 Okay. "I think Brown acknowledged my position

4 around having those powers."

5 MR. HOLGADO: Right.

6 MR. GIUFFRA: Let's look down at the bottom.

7 "There was the potential for course corrections

8 and there was -- and when I use that term and he used that

9 term, when we both use that term, that to me was absolutely

10 clear in my mind."

11 And then Superintendent Dinallo said, "I do think

12 that I had that understanding with him."

13 That's what he testified to. There's nothing in

14 the approval letter. And best practices would require you

15 to have some sort of an agreement in writing that could

16 actually obligate MBIA Inc., because the Insurance

17 Department has no jurisdiction over the holding company,

18 only over the insurance subsidiaries.

19 Let's look to what Mr. Brown said.

20 "Question: Did you ever reach an agreement with

21 Mr. Dinallo about the obligation of either MBIA, Inc. or

22 National to contribute capital to MBIA Insurance in the

23 event it was unable to pay the claims of structured

24 policyholders?

25 "Answer: No."

26 And then let's turn to 103.

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2 "Question: Did you have an understanding with

3 Mr. Dinallo that in the event Corp. became insolvent the

4 Department could require National or Inc. to put capital

5 into Corp.?

6 "Answer: No."

7 And, in fact, your Honor will recall there was a

8 letter sent to the Department -- there was a letter that

9 was sent to the Department in December 2008, where MBIA

10 made it quite clear they weren't putting any money in.

11 Now let's turn back to DPP.2.

12 It talks about policyholders should have an

13 opportunity for direct participation in the LBR process.

14 In this case the application was filed in secret.

15 Mr. Dinallo's testimony is, he sort of knew what the

16 structured policyholders would say and it just didn't

17 interest him as to their objection to transformation. But

18 in fact, but in fact, your Honor, he was working on a whole

19 series of monoline restructurings in the same entire period

20 because the industry was undergoing massive, massive

21 upheaval.

22 And if we can turn to DPP.4.

23 This is Mr. Dinallo's deposition. And he's

24 talking about CIFG. That was a New York monoline that he

25 was involved in the restructuring of.

26 And we asked Mr. Dinallo:

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2 "You were involved in the CIFG restructuring from

3 a regulatory point of view?

4 "Yes."

5 And then the question was:

6 "And am I correct that in connection that

7 transaction the Department worked with structured

8 policyholders and discussed with them the proposed

9 restructuring?"

10 Some objections.

11 And he says: "I think that is true" --

12 THE COURT: Do you want to read the rest of the

13 sentence?

14 MR. GIUFFRA: Fine.

15 -- "but it -- the apples and oranges could not

16 be further apart on that. Just so we're clear. If you're

17 try -- I mean yes, but that was around commutations. And

18 the binary choice between rehabilitation or not, your

19 clients would have been in horrendous shape."

20 Let's turn to the next transaction, DPP.5.

21 Syncora was another New York monoline that there

22 was a restructuring on.

23 "Now, in the Syncora restructuring, am I correct

24 that the Department also had discussions with structured

25 policyholders before it approved that restructuring?"

26 Let's turn to the next page. You went too far.

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2 And Mr. Dinallo's answer is:

3 "I don't know -- I believe that is the case, but I

4 don't remember -- I remember having conversations -- I was

5 involved in that, but from a different perspective."

6 The point though, your Honor, is that he did that

7 one and there was policyholder involvement.

8 Now, let's look --

9 MR. KASOWITZ: Read the rest of his answer.

10 MR. GIUFFRA: Fine.

11 "I was involved in -- what is the word I'm looking

12 for. I was involved in trying to elicit as much capital

13 from XL as I could for the policyholders."

14 MR. KASOWITZ: There's more.

15 MR. GIUFFRA: Fine. If we can blow it up.

16 "I had many conversations with Michael McGavitt

17 about what was going to be the amount he was going to have

18 to inject into SCA in order for XL to be released from

19 their obligations.

20 "But again, just to be clear, I don't -- again,

21 SCA XL was in a similarly sickly position compared to MBIA.

22 So it wouldn't surprise me if even after that or during

23 that injection there were conversations about look, you can

24 commute now and get $0.14 on the dollar for claims you

25 don't yet have or we can go into rehabilitation, and at

26 best you wait for many, many -- for decades with the

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2 municipal holders. And there were other issues that could

3 arise for the CDS holders."

4 And then actually we can keep going. I'm glad

5 Mr. David reminded me of this.

6 "Question: Do you know whether you or anyone

7 working for you at any time ever had any conversations with

8 any MBIA structured policyholders other than the

9 conversations you testified about, where those

10 policyholders were encouraged to commute policies with

11 MBIA?

12 "Answer: That the Department had or MBIA had?"

13 And then he said: "If you showed me a list it

14 might refresh my recollection. I don't know -- I don't

15 know what all of them were and it's possible I'm even

16 conflating some of them. I remember the Merrill Lynch one

17 fairly well."

18 Then he goes on to talk -- the point being --

19 I'm reading. That's fine.

20 "It is possible -- it is possible that because of

21 Bear Stearns, I don't want to call it, failure but purchase

22 by JP Morgan I have a recollection that there was a

23 conversation about what Bear Stearns' obligations were, so

24 that might have led to it."

25 MR. HOLGADO: Wait. Can you go back? Say it

26 right about what Bear Stearns' obligations.

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2 MR. GIUFFRA: -- "about what Bear Stearns

3 obligations were, so that might have led to it.

4 "I had so many conversations with people about the

5 monolines and many of them with banks that I can't be

6 certain about which ones, but if you want to show me

7 something I wouldn't dispute it I guess is what I'm

8 saying."

9 The point is, your Honor, that the Superintendent

10 of Insurance, at least vis-a-vis Merrill Lynch, was

11 actually involved trying to bring about commutations, which

12 is a real question. Why is he trying to have policyholders

13 take less money than they were entitled to.

14 Now, let's look at DPP.7.

15 This is Syncora. Look at the timeframe. August

16 27 -- FGIC -- I'm sorry. August 27, 2008. This is a press

17 release by the Insurance Department. Same time period.

18 And he's talking about a ten-business day public comment

19 period during which all interested parties are free to

20 comment on the transaction before the Department makes its

21 final determination.

22 And he says, "We want to ensure that both

23 companies moving forward are stronger for all

24 policyholders."

25 The basic point is, your Honor, during this period

26 they were having discussions in connection with other

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2 monoline restructurings and they were bringing the

3 structured policyholders into the process.

4 Now, Mr. Kasowitz will jump up and say oh, but

5 this was different. Those were restructurings and MBIA was

6 different. Well, the transformation clearly was a

7 restructuring and it certainly left the clients that I

8 represent in a much weaker position than they would have

9 been before.

10 MR. KASOWITZ: Your Honor, if I might, I wasn't

11 going to say that. I'll save it for argument. But the

12 only point I want to make on this news release is this

13 relates to the MBIA FGIC deal, it doesn't relate to Syncora

14 or CFIG.

15 MR. GIUFFRA: That's true, Mr. Kasowitz.

16 MR. KASOWITZ: You had said Syncora. This relates

17 to this MBIA deal, which apparently was okay with you, but

18 the other MBIA deal wasn't, so...

19 MR. GIUFFRA: Okay. Well, this one, Mr. Kasowitz,

20 is FGIC.

21 We can go back to DPP.4.

22 Mr. Dinallo's deposition basically saying that

23 with respect to CIFG, he thinks it's true that they worked

24 with the structured policyholders.

25 And then Syncora, which is DPP.5.

26 The question is: "Am I correct the Department

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2 also had discussions with structured policyholders before

3 it approved that restructuring?

4 "I believe that is the case."

5 And again, go back to DPP.2.

6 The point, your Honor, from our perspective, is,

7 the guidelines talk about giving policyholders an

8 opportunity for direct participation, and as I mentioned on

9 Tuesday, and I won't go over again, while the New York

10 Court of Appeals in its decision said there was nothing in

11 the statute requiring public notice or comment, that was

12 because there was nothing in the statute for the dividend

13 standing alone, nothing in the statute for the stock

14 redemption standing alone and nothing in the statute for

15 the reinsurance transaction standing alone. But, your

16 Honor, federal and state due process considerations are

17 important. And the basic point is, that my clients had a

18 property interest in their insurance policy with MBIA and

19 they had no opportunity to be heard. So we think that

20 doing this transaction as it was done was a violation of

21 procedural due process considerations. That's the point.

22 In addition, they clearly did not follow the best practices

23 of the NAIC.

24 I'm going to turn now to another subject, and that

25 is the fair and equitable issue, and we're very close to

26 the end.

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2 Let's put up slide 1.

3 This is the provision that we've talked about from

4 the beginning, 1505(a).

5 "Transactions within the holding company system to

6 which a controlled insurer is a party shall be subject to

7 the following: 1. The terms shall be fair and equitable."

8 And then down at the bottom, it says:

9 "The superintendent, in reviewing transactions

10 pursuant to subsection (c) and (d) hereof, shall consider

11 whether they comply with the standards set forth in

12 subsections (a) and (b) which includes fair and equitable

13 hereof; and 2, whether they may adversely affect the

14 interests of policyholders." It doesn't say "will

15 adversely." It says "may adversely."

16 Now, the approval letter, your Honor, if we can

17 put that up, says absolutely nothing under 1505 with

18 respect to anything other than the reinsurance transaction.

19 There's nothing about whether this transaction, this

20 transformation, these three transactions together as a

21 whole satisfy the fair and equitable requirements of 1505.

22 Just nothing.

23 Now, let's turn to FE.1.

24 In the New York Insurance Department sur-reply

25 brief you'll be hearing that -- let's just put up -- they

26 say, well, in issuing this approval, Superintendent Dinallo

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2 concluded that the terms of the transformation were fair

3 and equitable within the meaning of 1505. What do they

4 cite for that? Mr. Dinallo's affidavit that was written in

5 the end of 2011. They don't cite the approval letter.

6 They don't cite the administrative record.

7 What they would like your Honor to do, and this is

8 a point I made, I think, on either Monday or Tuesday of

9 this week, that you can't rely on litigating positions,

10 which is what this is, something that's not in the approval

11 letter. They can't cite to a single regulation or

12 longstanding departmental legal analysis. And then

13 similarly, when they talk about the share redemption,

14 they're citing Mr. Dinallo's affidavit written when he's a

15 lawyer in private practice. Nothing in the approval

16 letter. Nothing in the administrative record.

17 And in addition, your Honor, they basically try to

18 equate, they try to equate fair and equitable for purposes

19 of 1505 with the notion that all policyholders would be in

20 a position that their claims would be paid as they came

21 due. Well, your Honor, that's different than fair and

22 equitable. That sounds much more like a solvency standard

23 which is different than fair and equitable. Fair and

24 equitable is not the same as solvency. And in fact, the

25 NYID and MBIA --

26 And let's turn to slide 4.

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2 This is in the actual application. In the actual

3 application put forward by MBIA on December 5, they say,

4 "The superintendent has exclusive authority to determine

5 whether the reinsurance transaction is fair and equitable,

6 leaves MBIA unimpaired, and not otherwise in hazardous

7 financial condition."

8 The point being -- excuse me.

9 -- "unimpaired, solvent and not otherwise in

10 hazardous financial condition."

11 Meaning that in the application itself MBIA

12 treated fair and equitable as not being the same thing as

13 solvency.

14 Let's turn to No. 5.

15 This is a regulation of the Insurance Department,

16 108. And in this regulation it states that, "In connection

17 with affiliated transactions where the transferrer is

18 insolvent or impaired, the transaction shall not be

19 approved unless it both eliminates the impairment or

20 insolvency and if done between affiliates or members of the

21 same holding company system is fair and equitable to both

22 insurers."

23 MR. HOLGADO: We'd just like to make clear again,

24 Bob, that you've added those numbers yourself.

25 MR. GIUFFRA: Absolutely true.

26 And my point being, your Honor, that their own

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2 regulation treats impairment and insolvency, and then it

3 says "and" -- obviously "and" is something beyond the

4 first -- if done between affiliates or members of the same

5 holding company system is fair and equitable.

6 Obviously, in interpreting statutory schemes, the

7 Court will look to whether you've got one provision that

8 deals with insolvency, which is that 1309 provision that

9 we've shown you about three or four times about the

10 reinsurance test; but then there's this entirely separate

11 provision which is 1505, which the legislative history was

12 added in the '70s because of concerns about taking money

13 out of insurance companies.

14 Now, the Department's reading here would

15 essentially leave irrelevant 1505, because all you would

16 have to do is comply with 1309 and that makes no sense. In

17 addition, the plain meaning of equitable means fair to all

18 concerned.

19 Now, let's look at the Department's answer in this

20 case, which is slide 9.

21 This is a document filed early on, and I always

22 find the documents that are filed in a lawsuit early on are

23 in some ways the most interesting. And we basically asked

24 them, our petition said:

25 "The Superintendent has acknowledged that

26 insurance regulators like the NYID are required to protect

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2 the interests of all policyholders and cannot show

3 favoritism."

4 They deny the allegations in paragraph 3 of the

5 petition, except they admit the allegations of the first

6 sentence. "Cannot show favoritism."

7 Now, they say that the Superintendent's approval

8 did not favor one group of policyholders over another, but,

9 your Honor, there can be little doubt here that this

10 transaction was one that showed favoritism -- but your

11 Honor, there can be little doubt that they did show

12 favoritism.

13 Let's turn to slide FE.3. This is Mr. Moriarty.

14 "Question: So you agree that a New York

15 Insurance Company cannot distribute among policyholders

16 outside of article 74?

17 "Answer: I do agree."

18 Let's turn to slide 10.

19 1505 was added, as made clear, and this is from

20 the New York Superintendent of Insurance, 1968. This was

21 added to embody protection for the policyholder against the

22 worst forms of exploitation or milking of the insurer to

23 which he has paid his premium dollar and to which he must

24 look in the future for performance of the promise for which

25 he has already paid."

26 Let's put up slide 11.

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2 And there's Governor Rockefeller's personal

3 papers. "1505 was added to ensure that transactions within

4 the holding company structure would not weaken the

5 financial soundness of the insurer."

6 And then let's turn to slide 12.

7 Mr. Moriarty.

8 "Question: And is the objective of the Insurance

9 Department in approving such transactions to ensure that

10 the insurance company has sufficient funds to pay claims of

11 its policyholders?

12 And he says something that I think is extremely

13 relevant to this case.

14 "Answer: Ultimately the fair and equitable

15 standard to protect the insurance companies is to not

16 jeopardize the ability of the insurer in any way to pay

17 policyholders."

18 -- "to not jeopardize the ability of the insurer

19 in any way to pay policyholders."

20 And in this case, all of the risk was borne by one

21 set of policyholders that was preferred over another.

22 Now let's turn to slide 13.

23 Mr. Moriarty agreed that the transformation

24 transactions needed to be evaluated as a whole, as he said

25 at 148 of his deposition.

26 "Now, in terms of the Department's review of the

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2 legality of the transformation transactions, you mentioned

3 a wholistic approach. Do you recall that testimony?

4 "Answer: The Department's review of the

5 transaction -- the transaction was looked at as a whole,

6 not as a series of separate transactions."

7 Then in the sur-reply the Department says:

8 "Properly determined that the transformation, in

9 its entirety, complied with the relevant provisions and was

10 fair and equitable to all policyholders."

11 That was the first one in MBIA's brief.

12 And then in the Department's brief at page 4, they

13 say, "The superintendent did not err when he determined,

14 inter alia, that the terms of both the reinsurance

15 agreement and the transformation as a whole were fair and

16 equitable pursuant to the Insurance Law."

17 Let's put up the approval letter.

18 The point, your Honor, is to see what they're

19 saying in the briefs and then look at the approval letter.

20 And the approval letter, which we put up before, where

21 there's a discussion of 1505, your Honor, there's

22 absolutely no reference to the transformation transactions

23 as a whole, as a whole being fair and equitable. The

24 conclusion is not there. It's not in the approval letter.

25 They say in their briefs they made a determination about

26 fair and equitable transformation as a whole, but your

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2 Honor, when you look at the approval letter, it's not

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2 MR. GIUFFRA: So the best they can do is

3 perhaps a brief after the fact, which your Honor would

4 tomorrow or actually Monday when you hear the argument

5 being made, you must defer to the Department. In

6 fact, the law is quite clear. You have no obligation

7 to defer to a litigating position that is not in an

8 approval letter. This is another example your Honor

9 like with the earned surplus test where this approval

10 letter does not have basic requirements that even the

11 Department says were necessary in order to make this

12 transaction work.

13 And indeed your Honor, there is a master

14 services agreement that was part of the reinsurance

15 transaction and the Department actually did find that

16 the terms and conditions of that master services

17 agreement were fair and equitable and would not

18 adversely affect the interests of policyholders, but

19 there is nothing in this approval letter about the

20 transformation as a whole being fair and equitable to

21 policyholder.

22 So your Honor, the problem here is that the

23 Department did not make the required legal approvals in

24 this approval letter and your Honor could write

25 literally a five-page opinion annulling --

26 THE COURT: It is getting shorter and

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2 shorter, isn't it?

3 MR. GIUFFRA: This one is actually pretty

4 straightforward. And it is nothing more than the

5 required approvals are not in the approval letter. And

6 yes, this is a huge case that has gone on for a really

7 long time, but it is a pretty elemental point of

8 administrative law that if the required approvals are

9 not in the approval letter, the Court should annul and

10 obviously again if MBIA wants to reapply, they can do

11 so.

12 Let's put up slide 15.

13 Your Honor, fair and equitable is not

14 something that means one group of policyholders bears

15 all of the risk, all of the uncertainty. But in this

16 transaction, there is no question that the approval was

17 in the middle of the worst financial crisis since The,

18 Great Depression, when the Department knew there was a

19 substantial degree of uncertainty, actually a

20 significant degree of uncertainty in MBIA's insurance

21 ability to project future claims. That was something

22 that Mr. -- that we talked about this morning.

23 There were, in Mr. Buchmiller's words, as

24 reflected in his internal memos, written at the time,

25 not something that someone writes in an affidavit or

26 says in a deposition after the fact, many known

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2 unknowns.

3 We know that this transaction took

4 5.1 billion dollars that was available to pay future

5 claims on 233 billion dollars in highly volatile

6 structured products away from MBIA Insurance. We know

7 it reduced the cash and investments available for MBIA

8 Insurance and the part that or is sort of curious is

9 that MBIA Insurance is still on the hook ultimately for

10 554 billion dollars in municipal policies because the

11 way to cut through reinsurance work, if National didn't

12 have enough money, ultimately the municipal

13 policyholders could look to MBIA Insurance.

14 But you know what MBIA Insurance did for that

15 wonderful reinsurance? They paid 2.89 billion

16 dollars, 2.89 billion dollars to reinsure a municipal

17 bond business, even though MBIA Insurance in its entire

18 35-year history had paid just 669 million dollars in

19 public finance claims. MBIA Insurance, in addition,

20 received nothing for capitalizing this new municipal

21 bond company, even though it had done it all.

22 Let's go to the next slide.

23 On the other hand, your Honor, this

24 transaction clearly benefited MBIA's stockholders, its

25 executives and public finance policyholders. Mr.

26 Brown's e-mail, "I am glad someone on the outside can

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2 figure it out" is telling.

3 Transformation for the benefit of

4 stockholders took 5.1 billion dollars from MBIA

5 Insurance, allowed MBIA to start a new public finance

6 business. It ring-fenced from MBIA this new public

7 finance business, all of the risky structured finance

8 liabilities. In fact, your Honor, MBIA Inc had

9 sufficient cash to start its own public finance

10 business, but elected not to and any benefit that comes

11 out of the public finance business goes to the holding

12 company and that is why in that e-mail with Mr. Brown,

13 there is discussions about the dollars per share that

14 this transaction was worth to the shareholders of MBIA.

15 The executives of MBIA Insurance -- of MBIA Inc, they

16 got success bonuses for completing transformation.

17 They continue to get millions of dollars in

18 compensation and they got the upside from the ownership

19 of MBIA stock and the public finance policyholders

20 didn't bear the risk any more of facing liability from

21 this dangerous volatile structured finance business.

22 If we could just put up FE 6.

23 This is an e-mail early on in February of

24 2008, where the CEO of -- CFO, excuse me of MBIA

25 Insurance, this is PX 8, is attempting to talk about

26 the possibility, this is Bill Ackman, to have a stacked

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2 structure which actually provides greater protection to

3 policyholders than what was ultimately done because in

4 a stacked structure, any profits from the municipal

5 business will go to the structured policyholders first

6 and then potentially will go to the holding company and

7 Mr. Chaplin, because at that point in time, MBIA does

8 not want to do this stack structure, says "if the

9 structure --

10 MR. HOLGADO: Says to whom? I am sure this

11 is an internal MBIA e-mail.

12 MR. GIUFFRA: That is absolutely true and it

13 has the number at the bottom.

14 MR. HOLGADO: No, it does not.

15 MR. GIUFFRA: NYS --

16 MR. HOLGADO: It was produced for the same

17 reason before, as Mr. Kasowitz wanted to be clear for

18 the record, this is not before the Department.

19 MR. GIUFFRA: But the point is that the CFO

20 of MBIA is criticizing the stacked structure because it

21 creates two classes of policyholders, for which there

22 is no provision in the Insurance Law.

23 And he then goes on to say seems unlikely

24 that a company would voluntarily under go this plan and

25 forcing it would require the superintendent to step

26 very far outside the existing legal framework.

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2 MR. KASOWITZ: If I could, your Honor, I want

3 to be clear for the record.

4 We are glad there is reference to Ackman

5 here, but this plan was for the transformation. This

6 is not transformation. So I just want it to be clear

7 for the record it is not and we will address -- we will

8 deal with that in our presentation.

9 MR. HOLGADO: I would like you to read the

10 rest of the sentence.

11 MR. GIUFFRA: "To take over a trip A or

12 double A company -- "

13 MR. HOLGADO: It will be important later.

14 Thank you.

15 MR. GIUFFRA: In fact, Mr. Steinberg said I

16 should read the next sentence "So where there is no

17 clear policyholder benefit would be untenable and no

18 one has ever identified any policyholder benefit to the

19 policyholders of MBIA from the transformation."

20 In fact, in the application materials, the

21 benefit that was identified was the fact that they

22 would -- that the holding company would somehow be

23 stronger and might put money into MBIA Insurance and by

24 December of 2008, MBIA went ahead and made it quite

25 clear to the Department that they would put in no money

26 and were taking no obligation to put money into MBIA

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2 Insurance and sitting here today, there is absolutely

3 no obligation for MBIA Inc or National to put any money

4 into MBIA Insurance and your Honor, there can be little

5 doubt that this case would not even be going on right

6 now if National had the obligation to back stop the

7 claims of MBIA Insurance.

8 There is no obligation. Mr. Brown said there

9 was no obligation, no agreement, nothing in the

10 approval letter.

11 So the issue, your Honor, is that they -- in

12 the actual approval letter itself, the Department could

13 not say that the transaction as a whole was fair and

14 equitable to policyholders. The transaction clearly

15 was one that benefited one group of policyholders and

16 not another. It benefited the holding company and it

17 is a transaction that was not fair and equitable to the

18 policyholders of MBIA Insurance.

19 Just a few more documents. I will be --

20 MR. KASOWITZ: Your Honor, if I might --

21 THE COURT: Sure.

22 MR. KASOWITZ: And I will deal with this in

23 my -- next week, but counsel repeatedly says that any

24 discussion of being fair and equitable to all

25 policyholders was not in the approval letter, not done

26 at that time, it was ex post facto, so I just want to

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2 note for the record that there was a -- and it is in

3 the -- we will show your Honor in the approval letter

4 where it is, but also, there was issued on February 18,

5 2009 a press release by Superintendent Dinallo. I will

6 read the first sentence of it, if I could.

7 "This deal is fair to all policyholders, the

8 bank, counterparties and other policyholders of the

9 structured financings and the owners and issuers of

10 municipal bonds" we will deal with this in our

11 presentation, just it makes it sound like something

12 thought up years later.

13 Not true.

14 THE COURT: Okay.

15 MR. HOLGADO: I will address something else

16 in my argument, but as long as this is up here, I want

17 to make clear it is talking about forcing a plan on

18 MBIA and so, the existing legal framework that is being

19 referred to here appears to be an Article 74 or

20 something of that nature, and the reason that it would

21 be outside of that framework is because of the help

22 from the company.

23 So it doesn't even appear to be talking about

24 what transformation is.

25 MR. GIUFFRA: Your Honor, I think what Mr.

26 Kasowitz did was very telling. You would think that

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2 an insurance regulator doing an extremely important

3 transaction, one of the most important in its history,

4 would have put the key legal finding in the approval

5 letter, and the best that Mr. Kasowitz can cite is a

6 mere press release. It certainly doesn't have the

7 force of law of an approval letter. And I think it is

8 very telling and in addition, I believe that that press

9 release is not even in the administrative record.

10 Let's just turn up PX 18. Let's go to 17

11 and 18.

12 Let's go to 18. 18 the question is "Admit

13 that after the NYID approval of the Transformation

14 Transaction, MBIA Inc did not have any legal obligation

15 to make assets available to pay the current and future

16 claims of structured finance policyholders of MBIA

17 Insurance."

18 In fact Mr. Moriarty's deposition said that.

19 If you go down, there is a bunch of legal

20 verbiage, but you get to the key part at the bottom

21 there is an admission "Except admits that MBIA never

22 had, nor does it currently have, any legal obligation

23 to pay any claims of any of its insurance company

24 subsidiaries policyholders", so the point here is, your

25 Honor, that post this transformation, MBIA Inc is scot

26 free, has no obligation to support MBIA Insurance and

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2 they made it clear at the time and they are continuing

3 to make it clear in the documents that they are

4 submitting to the Court and your Honor, it simply was

5 not fair and equitable to do a transaction that had

6 zero benefit to the policyholders of MBIA Insurance and

7 many, many benefits to the shareholders of MBIA Inc,

8 its executives and the public finance policyholder.

9 You simply cannot, under the New York

10 Insurance Law Section 1505, the provision that Mr.

11 Kasowitz said is reflected in a statement in a press

12 release, you cannot -- you cannot divide up an

13 insurance company and say it satisfies 1505, that it is

14 fair and equitable for the policyholder of the left

15 behind insurance company, when there is simply no

16 conceivable benefit in this record for the structured

17 finance policyholder.

18 The best that Mr. Dinallo could say at his

19 deposition was oh, I thought there was all this risk in

20 the muni markets. That is what he literally says.

21 It could be over time the muni markets might become

22 very risky.

23 Well, your Honor, you saw the document that

24 we put up before. The losses in the muni business in

25 2008, two million dollars. The losses in the muni

26 business in the entire history of MBIA, 667 million

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2 dollars. If the muni business was such a source of

3 risk, why did no one, no one, Mr. Buchmiller or any one

4 else, do any review of the muni business in connection

5 with this approval process?

6 Let me, your Honor, talk a few minutes about

7 Mr. Stulz, who is one of our experts. This

8 demonstrates that that transformation transaction

9 benefited municipal bond policyholders in MBIA Inc

10 while harming the structured finance policyholders.

11 Stulz Chart 1, your Honor makes quite clear

12 that the default rates for public finance debt, Triple

13 A financed debt, very low and you can't even see it, it

14 is zero, and that the default rates through 2006 for

15 the structured side a little higher, 0.49.

16 If you go to investment rate, the default

17 rates go to 0.05 and 3.14, but then completely contrary

18 to what Mr. Dinallo says in his deposition, years after

19 the fact, if you look at performance through 2009,

20 triple A rated have no zero default rate, and AAA

21 structured is 3.65 and if you go to investment, great,

22 it is .03 versus 15 percent.

23 Let's look at Stulz Chart 2. By the end of

24 2008, before the transaction was approved, the total

25 claims payments on the public finance side talked about

26 this 667 million. On the structured side,

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2 substantially higher, over two billion and your Honor,

3 the loss reserves that they had on those relative

4 positions were very low for municipal. You can see the

5 blue, probably a little bit over 150 million and then

6 you can see the structured is over a billion dollars.

7 And if we put up what happened post transformation,

8 there can be little doubt your Honor that what this

9 transaction did was, it moved assets from one insurer

10 to another. There was absolutely no benefit to the

11 left behind policyholder.

12 Can we take a break and we will be done after

13 the break, probably 15 or 20 minutes?

14 THE COURT: Sure. A short break and we will

15 finish this up.

16 (Recess taken.)

17 THE COURT: Okay. So --

18 MR. GIUFFRA: Your Honor, I have just two

19 things to say.

20 THE COURT: Okay.

21 MR. GIUFFRA: Thank you so much for your

22 attention this week, and have a great weekend.

23 THE COURT: That is it?

24 MR. GIUFFRA: That is it.

25 THE COURT: Well, that is not two things --

26 MR. GIUFFRA: Thank you very much and we

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2 will see you all next week and we will hear from the

3 respondents.

4 THE COURT: Okay.

5 I will talk to the three of you for a minute

6 or two, but I presume we will start at ten o'clock on

7 Monday, with your opening -- with your presentation,

8 right?

9 MR. HOLGADO: Sounds great, your Honor.

10 THE COURT: So have a nice weekend,

11 everybody and I will speak to the three attorneys O for

12 a couple of minutes and I look forward to seeing you

13 all on Monday.

14 MR. GIUFFRA: Thank you, your Honor.

15 MR. KASOWITZ: Thank you, your Honor.

16 MR. HOLGADO: Thank you, your Honor.

17 (Whereupon, the proceedings were adjourned to

18 May 21, 2012.)

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