MBIA bond insurer sued by top banks for deliberately making itself insolvent

A bond insurer MBIA Inc is being sued by a group of largest banks which includes Citigroup Inc, JPMorgan Chase & Co and Barclays Plc on the grounds of its illegally having illegally restructured its operations by moving $5 billion of assets and leaving a key unit effectively insolvent, reports Reuters.

About 20 financial institutions and affiliates filed a lawsuit against MBIA seeking to ensure that MBIA pays valid claims on insurance it issued on defaulting bonds, but did not put a value on such claims. As a result of the financial crisis MBIA and its rival insurer Ambac Financial Group Inc suffered huge losses as a great number of institutions required claims on insurance policies they issued on repackaged debt, which turned out to be more risky than they assumed.

Thus the lawsuit charges MBIA as acting illegally when it created a new municipal-bond insurance business earlier this year, making it free of its contractual obligations to policyholders. After MBIA moved $5 billion in assets it is no $5 billion in assets

According to the court filing the banks say MBIA could instead have used its own cash to strengthen the balance sheet of MBIA Insurance, but it chose to spend more than $900 million repurchasing its own stock and debt and lending money to its asset management business. As a result, the suit claims MBIA executives will benefit while policyholders are left facing losses.

Other major banks party to the suit include units of: ABN Amro, BNP Paribas; HSBC, Bank of America Corp, Morgan Stanley, Royal Bank of Canada, Societe Generale, UBS AG and Wachovia Bank.