Tuesday, April 7, 2009 0 comments ++[ CLICK TO COMMENT ]++

Not a pretty sight: Third Avenue sues MBIA

In a move that definitely doesn't help confidence in MBIA, Martin Whitman's Third Avenue is suing MBIA for its split:

MBIA Inc. was sued by Third Avenue Management LLC, the New York company founded by mutual fund manager Martin Whitman, over claims the insurer’s split of its bond-insurance businesses hurts debt holders.

Three mutual funds managed by Third Avenue bought notes issued by MBIA Insurance Corp. in February 2008 based on assurances that the company was recapitalizing following losses in its structured finance insurance business, according to a statement distributed yesterday by PR Newswire.

MBIA, the largest bond insurer by outstanding guarantees, said in February it was transferring $5 billion in cash and its public finance business to another entity that has no obligation to the notes, Third Avenue said in its statement. The lawsuit, filed in Delaware state court, alleges the transfers were illegal and unfair and seeks to unwind them, according to the statement.

“MBIA sold us these surplus notes, and then to our surprise and distress, stripped away the principal assets as well as the only going concern operations within MBIA Insurance Corporation,” Whitman, chairman of the Third Avenue funds, said in the statement. “That’s wrong, and a big disappointment to us, especially after we went to bat for them with our pocketbooks and more.”

Third Avenue has supported MBIA in the past but the dispute here, although not helpful to MBIA, isn't that surprising. As is to be expected in these cases, MBIA is acting on its shareholders' interests while ignoring the creditors. If the insurance regulator has accepted the split, it is reasonable to expect MBIA to try to save the shareholders.

MBIA, as well as Ambac, and possibly AIG if it also pursues a split*, are going to face a barrage of lawsuits. Creditors suing the companies is a bit surprising but plausible. What is more likely are insurance buyers, especially those who bought CDS-type insurance, suing the bond insurers.

Personally, I'm somewhat skeptical of the split but we'll see what happens. These lawsuits certainly don't help matters and will be an additional cost.

(* For AIG to consider a so-called split, it needs to get out of the collateral posting requirements. It's not clear if they will ever reach a stage where a split is possible. AIG's muni bond insurance business is also much smaller and they don't need to rely on bond insurance for survival whereas the monlines' livelihood depends on insuring bonds. Also the fact that AIG's main shareholder, the government, is willing to protect creditors with unlimited capital support makes them quite different. MBIA, Ambac, and other monolines, not only don't have much capital but it will probably be borderline illegal for them to protect creditors at the expense of shareholders--however they will protect policyholders above shareholders (policyholders rank above shareholders for insurance companies.))


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