Sunday, April 28, 2013

Time for MBIA To Get Resourceful (Again)

On Friday, April 26, The Wall Street Journal reported that MBIA hired Weil, Gothsal & Manges in order to seek to prevent the New York Department of Financial Services (NYDFS) from placing the securitization guaranty subsidiary, MBIA Insurance, into a rehabilitation proceeding.  See MBIA Hires Law Firm.

Of course, no law firm can prevent the NYDFS from exercising its discretion to commence a rehabilitation proceeding, notwithstanding Hollywood portrayals of "fix-it lawyers" such as Michael Clayton.  So what might explain this hire of a firm that has experience in transactional matters and reorganizations, including according to Weil's website, representing Syncora in its restructuring.

Typically, if one is not considering litigation, one hires a law firm to plan and execute a transaction.  In this case, one wonders whether MBIA might be planning for a rehabilitation of MBIA Insurance, but on its terms.

Suppose MBIA convinced NYDFS to approve the repayment (or set up a NYDFS-approved mechanism that devotes all future cash flow of MBIA Insurance, first, to the repayment) of National's $1.7 billion secured loan by MBIA Insurance, as a condition to commencing a voluntary proceeding of MBIA Insurance's rehabilitation.  After all, this was National's money, used to commute cds wraps in favor of Morgan Stanley, National's secured loan transaction was specifically approved by NYDFS, NYDFS has an interest in seeing National get repaid (especially after defending the transformation litigation for four years), and the loan's ranking among MBIA Insurance's claims would rank highest, given its secured status.

Why would NYDFS agree to this?  Perhaps, MBIA offered to throw something into the pot, such as transferring any residual interest it may have in MBIA Insurance to the NYDFS, for eventual payment into the New York Insurance Fund. Or something similar that works for both MBIA and NYDFS.

The bankruptcy jocks among you might respond that this is a preferential transfer to an affiliate, subject to recoupment under federal bankruptcy laws.  You would be right, except New York State insurance law applies to the rehabilitation, not federal bankruptcy law.

So, one could see a 3am phone call to Bank of America (BAC) where MBIA says that BAC has until 9am to commence settlement negotiations based upon a supplied term sheet, or else MBIA will commence a rehabilitation of MBIA Insurance after National has been repaid its secured loan, and under the circumstance where MBIA's fraud and representation and warranty breach lawsuit against BAC will be continued to the bitter end, because the NYDFS is the real party in interest now, and it is in it to win it.

Given that BAC has already been caught sleeping at the due diligence switch, see Thoughts About MBIA/BAC Post-Consent Solicitation, perhaps MBIA's law firm hire indicates that MBIA is about to get resourceful, again.

NB:  this blog is not intended to be investment advice, and should not be relied upon by anyone to constitute investment advice.  Investing is a tough game, and everyone must do and own their own work, because you will certainly own your investments.

Disclosure: long MBI.  Follow me on twitter.

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