974 1 2 3 4 5 6 7 8 9 10 11 Petitioners, 12 - against 13 14 15 16 17 18 19 20 21 22 BEFORE: 23 24 25 26 HONORABLE BARBARA R. KAPNICK, Justice. Respondents. - - - - - - - - - - - - - - - - - - - - - X Index No.

09/601846 Article 78 60 Centre Street New York, New York May 24, 2012 ERIC DINALLO, in his capacity as Superintendent of the New York State Insurance Department; the NEW YORK STATE INSURANCE DEPARTMENT; MBIA INC.; MBIA INSURANCE CORPORATION; and NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION (f/k/a MBIA INSURANCE CORP. OF ILLINOIS), SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: TRIAL TERM PART 39 - - - - - - - - - - - - - - - - - - - - - X ABN AMRO BANK N.V.; BARCLAYS BANK PLC; BNP PARIBAS; CALYON; CANADIAN IMPERIAL BANK OF COMMERCE; CITIBANK, N.A.; HSBC BANK USA, N.A.; JPMORGAN CHASE BANK, N.A., KBC INVESTMENTS CAYMAN ISLANDS V LTD.; MERRILL LYNCH INTERNATIONAL; BANK OF AMERICA, N.A.; MORGAN STANLEY CAPITAL SERVICES INC.; NATIXIS; NATIXIS FINANCIAL PRODUCTS INC.; COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., NEW YORK BRANCH; ROYAL BANK OF CANADA; THE ROYAL BANK OF SCOTLAND PLC; SMBC CAPITAL MARKETS LIMITED; SOCIETE GENERALE; USB AG, LONDON BRANCH; and WACHOVIA BANK, N.A.,

975 1 2 3 APPEARANCES: 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NINA KOSS, BARBARA STROH, CSR, CRR, CMR OFFICIAL COURT REPORTERS OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF NEW YORK 120 Broadway New York, New York 10271 BY: DAVID HOLGADO, MARK E. KLEIN, Assistant Attorneys General KASOWITZ BENSON TORRES & FRIEDMAN, L.L.P. Attorneys for the Respondents 1633 Broadway New York, New York 10019-6799 BY: MARC E. KASOWITZ, ESQ. KENNETH R. DAVID, ESQ. JOSHUA GREENBLATT, ESQ. Of Counsel SULLIVAN & CROMWELL, L.L.P Attorneys for the Petitioners 125 Broad Street New York, New York 10004 BY: ROBERT GIUFFRA, ESQ. MICHAEL H. STEINBERG, JR., ESQ. MICHAEL T. TOMAINO, JR., ESQ. BRIAN T. FRAWLEY, ESQ., Of Counsel

976 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 T1 THE COURT: Okay, before we start, a few Proceedings

things that we've been spending some time on that I said I would talk to you about before Mr. Kasowitz started his presentation. So we're back to dealing with the public interest privilege which I allowed you to argue, I thought, pretty extensively on Tuesday afternoon. First of all, to the extent Mr. Giuffra, that you have argued at this stage of the game that the public interest privilege really shouldn't apply to this case, in looking back at, as much as I could look back at all the papers you have given me, and referred to, it seems very clear to me that Judge Yates, who we all refer to all the time because he had so much involvement at the beginning of this case for a long time in this case, and JHO Bradley, to some privilege reviews, and myself, who did some privilege review of documents, have all already found that the public interest privilege does apply to this case. I don't think you can now argue -- I think it's law of the case, and I don't think you can now argue that it doesn't apply to this Article 78 because it's termination of the agency is what is at issue. I mean I know that's your argument. I

977 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Proceedings appreciate, it but I think we're past that, and it's already been established as law of the case. we can get on from there. Also, to the extent that you have argued -and I believe argued on Friday -- that some of the subsequent things that happened in this case, like the affidavits of Mr. Buchmiller and Mr. Dinallo, that were submitted as part of the surreply papers waived the public privilege interest as to certain subject matters and trying to learn as much as I could about the public interest privilege in the past couple of days, it's become pretty clear to me that this is not a privilege that attaches to subject matters but is a privilege that attaches to a communication or perhaps to a document but not to a subject matter. So while I will accept your argument that they may have waived -- and I know Mr. Holgado doesn't agree that they waived it at all, but where they may have had waived the privilege as to some particular document and communication, it's not because he said one thing. He waived it as to everything that involves solvency of MBIA or the financial condition of MBIA or Mr. Buchmiller's review because that would be everything involved in this case, so I disagree with that concept. I think

978 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Proceedings I think that the cases are clear that the privilege attaches to the communication, and there is a few cases, not a lot because it's not a privilege that is dealt with a lot, but there is a case from the First Department in 1993, the Martin versus Gross case. That cites a Court of Appeals case called Cirale, C-I-R-A-L-E, versus 80 Pine Street Corp., 35 New York 2d 113, and the cases seem consistent that say that the privilege attaches to confidential communications and not to subject matters. It says: "The public interest is a flexible

term and what constitutes sufficient harm to the public interest, though, as to render the privilege operable, must, of necessity, be determined on the fact of each case." So it's very clear that this is a very fact-specific case, specific kind of a review, and even the case that, Mr. Giuffra, you cited to, matter of Jasmine G, 35 A.D. 3d 604, which was an A.D. 2d department case from 2006, that was a juvenile delinquency proceeding in Family Court in Kings County, and New York City Department of Probation was involved. Apparently a witness testified that a supervisor in the department had overrode his dispositional recommendations after reviewing some

979 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Proceedings documents and, therefore, the Appellate Division found that, because the department actively participated in the dispositional hearings and its testifying witness affirmatively placed the particular they are called PAT material -- I think that's not really relevant -- at issue by stating that the supervisor overrode his dispositional recommendation after reviewing the juvenile scores as a result of that, they found that the department had waived any public interest privilege or any privilege under any other particular law barring disclosure of that particular communication, those particular scores, but I think it just does not attach to the subject matter. document. As we know, as we were reminded the other day, and Mr. Kasowitz asked me for discovery in an Article 78, you don't just get discovery. You have to request It just attaches to the

of the court leave of discovery, as opposed to a plenary action, where anything relevant, possibly relevant potentially be discoverable. 3101 is one

thing, but Article 78 is something very different. At the beginning of this case counsel and Judge Yates drafted some parameters for how the discovery was going to proceed in this case and, obviously, as time went on, it was somewhat expanded,

980 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Proceedings but most of that was done with Judge Yates. I hope he won't get mad at me for blaming him for all this stuff. what happened. So I tried to look over the materials that you gave to me about what happened with this February 16 memo, which has become a big issue here, that memo to file that was dated February 16 that we all agreed was not completed until something after February 16, and there is no dispute that Judge Yates did review the redactions that were taken by the Insurance Department in that document. But, there doesn't seem to be any evidence that Judge Yates actually conducted that as a public interest privilege review. Rather, he was reviewing it just in the context of what he was going to allow, what he wasn't going to allow, and I really think that for me to appropriately make any comment about that particular document, with all the things that I've read, that I need to look in camera at the unredacted document, the unredacted February 16 memo. So to the extent you can call your big staff back at the Attorney General's Office and get somebody to walk over here and get that to us as soon as I'm not blaming him, but that's

981 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 privilege. Proceedings possible, that would be helpful because it's very hard for me because I'm supposed to be looking on a document basis, to not have the things that are redacted to try and figure out what's going on. I think that would be the best way for me to deal with it as to that document. As to the other documents, Mr. Giuffra, that you mentioned in your letter of May 21, Mr. Holgado did provide redacted and unredacted copies of those e-mails to us yesterday. We reviewed them last evening for public I did not speak to Mr. Holgado, and I I was just looking

didn't take any further argument.

at them based on everything we know, the affidavits and all the testimony we've had. Hopefully, I will get something to you later in the day. I think I would like to look at the other

document also because I don't want to be inconsistent in any of my rulings. I already said the other day that I wasn't going to start opening up other discovery because that was inappropriate, and I made that ruling, so there was a cutoff line. I was going to deal with things that

Mr. Giuffra put in his letter but not in anything past that.

982 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 chutzpah. Kasowitz-MBIA Respondents So, yes. MR. HOLGADO: I just want to let you know,

your Honor, we'll, at the very latest, hopefully, get that unredacted version of that memo to you during the lunch hour. Hopefully, sooner, and I'm not certain I

can get it before then, but I would hope by lunch. THE COURT: Okay, I appreciate that. So I

think that deals with all the issues that you raised on public interest privilege for now. So that we can now Mr.

proceed with MBIA's presentation here, right? Kasowitz, you're up. MR. KASOWITZ: Thank you, your Honor.

Your Honor, Mark Kasowitz for the MBIA Respondents. Your Honor, we now have a new definition of We have Bank of America which in 2008 was

bailed out to the tune of tens of billions of dollars in taxpayer money, based on a single weekend of meetings among Federal regulators, asking this court to overturn Superintendent Dinallo's approval of MBIA's transformation and approval that was based on a year-long investigation, including weeks of intensive department review on site at MBIA's headquarters. Superintendent Dinallo approved the transformation because he found that it fully protected

983 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents the interests of MBIA's policyholders, including these banks, and because he found that the transformation would serve the public interest by helping to unfreeze the public finance markets. That is, the markets for the bonds that finance schools, roads, infrastructure projects. Those markets had been disrupted by the financial crisis which had been precipitated in no small part by these banks themselves, and after helping themselves to those tens of billions of taxpayer dollars, doled out after a single weekend of meetings, the banks now have the chutzpah to base their challenge to the approval of transformation, which, your Honor, didn't involve a dime of taxpayer money, on what amounts to nothing more than nitpicking the extensive, conscientious and year-long effort of the department. Your Honor, we've heard Mr. Holgado describe very effectively the extensive and conscientious job that the department did in reviewing and approving the transformation. I think it's difficult to come away from Mr. Holgado's presentation with any conclusion other than that the banks cannot come close to meeting their heavy burden of demonstrating that the department's approval of the transformation was arbitrary and capricious.

984 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents Your Honor, Mr. Holgado's presentation was so persuasive and he made so many of the points that we were prepared to make because it was based on the undisputed facts in this case, that we fought long and hard about whether we even needed to stand up and make a presentation at this point. Well, your Honor, as the court probably knows by now, it's really hard for us to sit quietly in our seats, so, with the court's indulgence. THE COURT: to do that. MR. KASOWITZ: I thought long and hard about I didn't think you were just going

it, your Honor, but, with the court's indulgence, there are some additional things that we would like to bring to the court's attention which we believe will confirm with even greater force the conclusion that there is no conceivable basis for disturbing the superintendent's decision in this matter. Your Honor, as we've heard, the banks say that pretty much everything the department, everything Superintendent Dinallo and everything Mr. Buchmiller did was wrong from start to finish, the banks say the way the department thought about the transformation, the way they reviewed it, the way they discussed it, the way they handled it, the way they approved it, how

985 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents many people worked on it, how much time was spent on it, all of that was wrong. And not just wrong, according to the banks, but irrational and arbitrary and capricious. The banks

even go so far as to cast aspersions on Superintendent Dinallo's motives for approving the transformation. They say he was politically ambitious and that he was catering to political interests. And they even

go so far as to imply that he really just wanted to get a job at one of MBIA's law firms. Your Honor, there is not a scintilla of evidence to support any of these charges. To the

contrary, the evidence is absolutely clear that Superintendent Dinallo fulfilled his duties in an entirely exemplary, conscientious and rational manner. Your Honor, I have to admit that I found it especially interesting when the banks' counsel said last week that the banks aren't in this case just for themselves. They're also in it for all policyholders

of insurance companies. They said that at page 120 of the hearing transcript. Bank of America and Societe Generale, two

of the largest and most rapatious banks in the world, are really in this case for the little guy. That's pretty rich, your Honor. And, by the

986 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents way, your Honor, if Bank of America, for example, is really in this case for other policyholders, then perhaps the first thing that it should do is to return to MBIA insurance for the benefit of all its policyholders the $5 million it owes MBIA insurance for MBIA's broad and put-back claims against the Bank of America that are pending in another courtroom in this building. Your Honor, the banks are throwing as much mud against the wall as they possibly can in the hope that something will stick. But it doesn't.

We have already seen that during the Attorney General's presentation. After we have completed

reviewing the evidence, the evidence of the undisputed facts, we believe it will be even clearer, if that were possible, that none of what the banks say comes close to establishing any basis under Article 78 for disturbing the superintendent's approval in any way. Your Honor, the banks' overarching theme in this proceeding is that Mr. Dinallo didn't have the authority as superintendent of insurance to do anything other than to protect what the banks say were the interests of existing policyholders. The banks say that the superintendent didn't have the authority to approve the transformation

987 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents because one of its purposes was to help unfreeze the public finance markets. If you listen to the banks, your Honor, you would think that it is impermissible for the Department of Insurance to concern itself with any broad policies or goals. The banks actually take the position here that approval of the transformation should be reversed because the superintendent did not have the authority to take any action to serve the public interest or to insure the stability of financial or insurance markets. The banks really say that the only thing that the superintendent cares about is whether they, as existing policyholders, get paid. Your Honor, I would have thought that it would have been an uncontroversial and, indeed, a bedrock principle of government service, that the superintendent of insurance, one of the state's highest-ranking officials, has the authority and, indeed, the obligation to take into account, in addition to the interests of existing policyholders, interests such as the health and viability of insurance companies operating in New York State, the availability of insurance coverage in critical markets and the overall health and welfare of the financial markets,

988 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents the insurance markets and the public interest as a whole. Your Honor, the banks claim otherwise, but they're wrong. In fact, the legislature of this state,

in Insurance Law section 201 has made it very clear that the superintendent has been given extremely broad power and discretion, namely, the rights, powers and duties in connection with the business of insurance in this state, express or reasonably implied by the Insurance Law, or any other applicable law of this state. There is nothing in the Insurance Law that supports the bank's position that the superintendent is limited solely to protecting the interests of existing policyholders. The principal support the banks originally propounded for this position are the affidavits of four former superintendents whom the banks designated as experts in this case. For example, one of the former superintendents, James Corcoran, submitted an affidavit in which he said: "The stated public policy reason for

then-Superintendent Dinallo's approval of the transformation, the reinvigoration of the municipal bond market in New York and nationwide, was not within

989 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents the department's statutory mission and did not justify Mr. Dinallo's violation of his paramount duty to protect and to treat fairly and equitably the interests of all existing policyholders of MBIA Insurance, including its structured-finance policyholders." Your Honor, these are the same four former superintendents that the banks bally-hooed to the media when they submitted their reply papers in this proceeding. The banks informed The Wall Street Journal at that time, in March 2011, that: "Four former New York

State insurance superintendents said they wouldn't have approved the 2009 restructuring of MBIA bank that split the bond insurer into two companies, according to court papers filed on Sunday. "Lawyers representing a group of 11 banks, which earlier sued to challenge the legality of MBIA's business split, submitted statements from the former insurance regulators to bolster their arguments that the New York State Insurance Department improperly allowed the restructuring to proceed. "The former superintendents, James Corcoran, Edward Muhl, Gregory Serio and Richard Stewart, whose collective tenures leading the Insurance Department span two decades, said they wouldn't have approved the

990 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents restructuring the way Mr. Dinallo did. "There are six former New York superintendents before Mr. Dinallo who are still living. Two of them

declined to participate, according to a spokesman for the banks." Now it's telling, your Honor, that during the banks' presentation at this hearing, we heard virtually nothing from any of these former superintendents, any of the experts that the banks had designated and made such a big deal of to the media in March 2011. I know the reason for that, your Honor. The reason is that each of these former superintendents, all of whom we deposed after they submitted their expert reports, have testified that when they served as superintendents, they made decisions not just solely based on the narrowly-conceived interest of existing policyholders, but they also made decisions based on what they perceived was in the public interest. That, your Honor, completely undercuts the banks' position in this proceeding, which is why these former superintendents have all but disappeared from the scene of this case; for example, former superintendent Serio. Former Superintendent Serio specifically I think

991 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents acknowledged that a superintendent could act to protect the public interest and promote the competitive markets. Let's turn to his testimony: "Question: interests." And, in fact, you have acted to promote the public -- to protect the public interest and promote the competitive markets when you were the superintendent of New York Department of Insurance, correct? There's an objection. "Answer: Yes." Good. And to promote the public

Indeed, Mr. Serio testified that it was well within the superintendent's authority to seek to achieve goals for the greater public good, such as reestablishing lower Manhattan after the 9/11 attacks. Let's see the next slide. "Question: I understand that. I'm asking -That was to

I'm asking what you said your job was. protect the public interest, correct? There's an objection. "Question: "Answer: Correct?

Yes.

In that case I guess you could

consider the public interest to try to reestablish lower Manhattan."

992 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents Your Honor, the principle former Superintendent Serio is advancing here and the actions Seriod took when he was superintendent of insurance directly contradicts the position that the banks have taken throughout this case and the position that they started this hearing with: Mr. Serio is saying clearly that a superintendent has the authority appear, indeed, the obligation, to act for the public good, especially in times of crisis, including when those actions are in no way tied directly to protecting the specific interests of existing policyholders. Thus, Mr. Serio's public service in the aftermath of 9/11, which had nothing to do with protecting the interests of existing policyholders but which helped to reestablish commerce in lower Manhattan, was unquestionably and squarely within the purview of the authority of the superintendent of insurance. That principle was also confirmed by former Superintendent Stewart, who admitted that the Insurance Department's mandate includes matters pertinent to developing a sound, fair and robust insurance industry and also includes the public interest, as well as the protection of policyholders.

993 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents Let's turn to his testimony. There's a

question above that refers to the Insurance Department's mission statement, which I'm going to get into a little bit later, and then the question goes to: "You would agree with me that the NYID's mission as defined by the current NYID, includes promoting the continued development of a sound, fair and robust insurance industry, correct? "Answer: Yes, indeed."

Further in the deposition: "Question: So, as sitting superintendent of

insurance, commissioning this report from Oscar Rueblauesen and his committee, you viewed the scope of your authority to include consideration of the public interest, as well as the protection of policyholders, correct? "Answer: Yes, viewed that way, there could be

no doubt at all that Mr. Dinallo's effort to reinvigorate the municipal bond market in response to the devastating financial crisis was squarely within his authority and responsibility as superintendent of insurance." Indeed, your Honor, that is precisely what the former superintendent testified to. next slide: Let's look at the

994 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents "Question: Okay. So Superintendent Dinallo's

stated goal of reinvigorating the market for municipal bonds by making insurance for those bonds available was within the mission of the NYID, correct? "Answer: Yes, I think so."

This is a very telling admission, your Honor. Here we have one of the bank's own expert witnesses, a former superintendent himself, specifically admitting that Superintendent Dinallo's goal of reinvigorating the market for municipal bonds by making insurance for those bonds available was within the mission of the NYID. That expressly contradicts and undercuts the banks' main theme in this case, the first thing they talked about when this hearing commenced, that because the superintendent's authority was limited only to protecting the interests of existing policyholders, it was not authorized to pursue public policy goals like unfreezing the municipal bond markets. I guess it's no surprise, your Honor, why Superintendent Stewart's name was mentioned only once during the bank's presentation last week, and that mention did not include the opinion from him that I just read. Superintendent Muhl's testimony was the same

995 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Kasowitz-MBIA Respondents as Superintendent Stewart's: "Question: And so Superintendent Dinallo's

goal of reinvigorating the municipal bond market was within the fundamental regulatory goals of NAIC, correct?" There's an objection. "Answer: Yes."

(End of take 1) (Continued on next page)

996 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 T2 MR. KASOWITZ: And, your Honor, earlier we saw the PROCEEDINGS - KASOWITZ

former Superintendent Corcoran stated in his affidavit that the reinvigoration of the municipal bond market was not within the Department's mission because he claimed it did not protect the interests of existing policyholders, but when he was in office, Mr. Corcoran actively pursued policies that he believed were in the public interest, which he admitted had quote, nothing to do with existing policyholders, close quote. transcript at 284. Your Honor, these former Superintendents had to admit that the Superintendents' authority extended beyond the mere strict interest of existing policyholders because that's exactly what the Department's mission statement says. Take a look at the website. The Department's mission is to protect policyholders and to promote the continued development of a sound, fair and robust insurance industry. Moreover, the That's at the Corcoran

NAIC mission statement, which the banks try to make so much of, squarely confirms the first regulatory goal of an insurance department is to protect the public interest. Let's read it. Our mission, the mission of the NAIC is to assist state insurance regulators individually and collectively in NK

997 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ serving the public interest and achieving the following fundamental insurance regulatory goals in a responsive, efficient and cost effective manner, consistent with the wishes of its members. The first, the first fundamental insurance regulatory goal that the NAIC lists, protect the public interest; second, promote a competitive market; third facilitate the fair and equitable treatment of insurance consumers; fourth, promote the reliability, solvency, financial solidity of insurance institutions, and fifth, support and approve state regulation insurance. As Mr. Holgado correctly pointed out, the affidavits of the four Superintendents, former Superintendents amount, at most, to legal opinions on the ultimate issue before this Court, all of which as a matter of law is inadmissible. But, their deposition testimony concerning what they did as Superintendents, gives the lie to the banks' complaint that Superintendent Dinallo has exceeded his authority. That testimony also exposes the affidavits of

the former Superintendents for what they really are. What they really are, your Honor, is impermissible second guessing, Monday morning quarterbacking. For those

of us who are football fans, these former Superintendents, to the extent that they questioned what Superintendent NK

998 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ Dinallo did, are engaged in impermissible second guessing. So, it turns out that back in the 90's, former Superintendent Stewart was highly critical and harshly critical about what Superintendent Muhl decided to do in approving a restructuring of Lloyd's of London that was driven by the need to deal with unexpectedly huge asbestos claims. In that asbestos, in that restructuring these policyholders were transferred to Equitas, a new set up insurance company. We will talk about that set up a little

bit later when we talk about the fact that there were significant precedents, many, many times since the 1930s, for the transformation transactions, which is the subject of this Article 78 proceeding. In any event, these pre 1993 asbestos liability claims were transferred to Equitas, which was set up to handle them. Let's take a look at Mr. Muhl's testimony when he was asked about the criticism that Superintendent Stewart had leveled at him. "Question: So, you thought Equitas was the best

possible chance of U.S. policyholders getting paid 100 cents on the dollar, and had a comfort level, when you looked at the assumptions that were made, but Mr. Stewart agreed with that, right? NK

999 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 it. this -THE COURT: I will let him do some reading. Why "Answer: PROCEEDINGS - KASOWITZ That is the case. But, the only thing

that I could suggest to you that Dick's a very bright guy, very knowledgeable, did a lot of background review on this when he was writing, and probably making these kinds of quotations, but he was not there in my office working on these matters as I was. idea -MR. GIUFFRA: Kasowitz? MR. KASOWITZ: "Question: MR. GIUFFRA: MR. KASOWITZ: like to read. MR. GIUFFRA: That wasn't the rule when I was in No, no. Excuse me. I will read what I would Just as -- " Could you continue reading, Mr. These are things that he had no

don't you read that page if you want to read it. allow -MR. KASOWITZ:

I did

I am delighted to read the rest of

I want to get this answer out, but I am fine with the

rest of it. "Just as Mr. Stewart was not in your shoes when you approved Lloyd's Equitas, you were not in the shoes of Mr. Dinallo when he approved MBIA's transformation, right? "That is correct." NK

1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 clear. claims." Major difference and, as far as I am concerned, he probably was unaware of it at that time. MR. GIUFFRA: MR. KASOWITZ: Thank you Marc. Appreciate it. PROCEEDINGS - KASOWITZ What would you like me to read? MR. GIUFFRA: MR. KASOWITZ: The part in the yellow. "The main one I would suggest,

though I agree with a great majority of what Dick Stewart would say, he was unaware that I held Lloyd's, the new Lloyd's, to stand behind the old Lloyd's in the event there was any liability (sic) of Equitas to pay -THE COURT: "Any inability". "Any inability to pay policyholders'

MR. KASOWITZ:

Now, we are going to deal with the

Lloyd's Equitas precedent later on. We are going to bring to the Court's attention the further testimony that Mr. Muhl gave where he said that even though Lloyd's was standing behind Equitas, it was the members of Lloyd's, the names who were standing behind Equitas, and as a practical matter, it would have been impossible for policyholders to have gotten recourse against those names who were living all over the world, but we will deal with that later on and we will read all of it. So, your Honor, I think the point here is very It's hard to put it any better, I think, than NK

1001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ former Superintendent Muhl put it. When you are the Acting

Superintendent, you are invested with the responsibility and the obligation to make the ultimate calls about insurance matters in this State and the State Legislature defers to the acts and responsibilities of the Superintendents and to their judgement in making decisions. The last thing that the law permits is a second guessing of those decisions by former Superintendents, experts, lawyers, and indeed, your Honor, we are going to present this respectfully, even the Courts here in approving MBIA's transformation. Superintendent Dinallo was seeking to further public interest goals. The transformation was intended to

strengthen the overall MBIA company which would, in fact, provide additional protection for MBIA's existing policyholders, including the banks, as Mr. Dinallo has testified, and as we heard Mr. Holgado describe earlier this week. The transformation also was intended to reinvigorate the moribund segments of the State's insurance industry, the monolines. It was also intended to address

one of the adverse impacts of the financial crisis by helping to unfreeze the public finance markets. What has prevented all of that from happening, your Honor, has been the litigation commenced by the banks. NK

1002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ Now, at this point, sixteen of the original banks have now dismissed themselves from this litigation. this litigation to be dismissed, so that the Superintendent's goals can be achieved, so that MBIA can start writing new municipal finance business, and the economy can be assisted as it needs to be, as Superintendent Dinallo intended it to be, through the unfreezing of the public finance business. Your Honor, we have listened to the banks argue that the Department approved transformation, which the banks claim was unprecedented based on -THE COURT: One second. Don't stand in front It's time for

You are blocking that door.

of the door. Sorry, Mr. Kasowitz, I had to take care of the public interest in the courtroom. MR. KASOWITZ: your Honor. The banks here argue that the transformation was an unprecedented transaction and one of the things that they have argued time and time again, was that the transformation was done in secret, that the review and approval of it was done in secret, and that that secret review was so rushed, that it was inadequate and fatally flawed. Your Honor, those contentions are belied by the undisputed facts of the record here. NK They are belied by To which we pay great deference,

1003 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ what really happened. as to what happened. Department did. There is no real dispute factually There is no dispute about what the

There is no dispute about what the

Department reviewed, and there is no dispute about what the Department decided. The only dispute here, your Honor, involves the conclusions that can be drawn from what undeniably happened. The banks have financial experts, and those financial experts draw one set of conclusions based on what the banks say your Honor should find, that the Superintendent's approval was irrational and arbitrary and capricious and should be set aside. Now, we will show the banks' experts have opinions that are deeply flawed and conflicted and MBIA has prominent experts who draw the opposite conclusions based on their own analysis. Those experts confirm that the Superintendent's

approval was rational and should not be disturbed. Under these circumstances, where the material facts are not in dispute, where the only real dispute is, at most, a battle of experts or a battle of interests, there is no basis whatsoever for the Court to disturb the expert judgment of the Superintendent. This is an especially true, your Honor, where the banks have a heavy burden to overcome that deference by demonstrating that the Superintendent's approval was NK

1004 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ arbitrary and capricious, and where the undisputed facts demonstrate just the opposite. What I will do next, your Honor, is to take the Court through the story of transformation from the time the idea of transformation was first conceived in early 2008, through the approval of the transformation, a year later in February 2009. What we will see, your Honor, will confirm what Mr. Holgado showed us earlier in the week and what the banks try to obscure, namely, that the transformation was thoughtfully conceived as a necessary and important response to the financial crisis, that it was conscientiously reviewed and commented upon for almost a year, not only by the Department, your Honor, but as you will see and contrary to what the banks have told you, by the banks themselves, and that it was properly approved by Superintendent Dinallo because it would protect the interests of MBIA's policyholders, including these banks, while at the same time helping to unfreeze the public finance markets. Your Honor, following up on Mr. Holgado's presentation, I will also address the arguments made by the banks and show none of those arguments, either alone or together, come close to satisfying the burden that the banks have here. Let's turn to the transformation story. NK

1005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ Just a couple of seconds about MBIA's business that your Honor knows MBIA issues essentially two forms of financial guarantee insurance -- the bond insurance business guarantees a payment of principal and interest on public finance bonds, such as municipal bonds that finance public works operations and the like, and the structured finance products, such as collateralized debt obligation, also mortgage backed securities. The structured finances products that the MBIA insures include a number of different sectors; RMBS that are made of mostly second-lien credits, and it also provides insurance on securities, on SMBS in the commercial collateralized RDO. The of affidavit Chuck Chaplin, MBIA's CFO, goes through this in detail in mostly paragraphs 9 through 12, if your Honor wants to take a look at it. "The crisis in the financial markets, including the deterioration of the U.S. residential market began in 2007 and had adversely effected MBIA and numerous other financial institutions, some of which are, unlike MBIA, but including the Bank of America, received enormous bailouts. The crisis, of course, was not anticipated by pretty much anyone, least of all by these banks, and not only was it not anticipated, after it began there was widespread disagreement and debate among the financial NK

1006 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ institutions and the economists and analysts about how long the crisis would last and how deep it would go. Nonetheless, your Honor, the banks, as you have heard, have accused MBIA and the Department of grossly and I suppose, irrationally, underestimating the crisis and its potential effect on MBIA. That's not so, your Honor.

MBIA economic assumptions in December of 2008, when it files its application for approval of the transformation, through February 2009 when the Department approved that application, were eminently reasonable and indeed, conservative. As I will explain in detail, MBIA and the Department fully considered the issues the banks have raised and the Department concluded entirely reasonably, that the assumptions being used by MBIA at that time were appropriate and sound. While the banks stand here with 20/20 hindsight and argue MBIA and the Department were underestimating the severity of the financial crisis and should be have been far more pessimistic in the fourth quarter of 2008, one prominent analyst was saying at that time, among others, that he had never been more bullish, and that the bonds represented and that bonds represented the investment opportunity of a lifetime. That analyst was James Montier. NK He said those

1007 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ things on November 25th, 2008, about ten days before MBIA filed its application with the Department, and he worked for none other than Societe Generale. His statements are

reported and quoted in Exhibit 39 to the deposition of the banks' expert James Corcoran. What's interesting about this report, your Honor, is that Mr. Montier had formerly been referred to as a bear, and he had been bearish on the economy and smart. guess he was a smart bear. At or about this time, he is quoted as saying that he had quote, never been more bullish, that he, and that he viewed bonds as the investment opportunity of a lifetime. So, your Honor, the very same banks that are accusing MBIA of not being sufficiently pessimistic in its loss projections for bond guarantees in the fourth quarter of 2008, those banks had never been more bullish about the economy at that time. And, exactly at that time, while it may be easy for the banks today with four years of hindsight to say now MBIA should have been projecting far greater losses in late 2008, those banks were whistling a far different tune back then. Now, this issue of predicting the future is an issue which comes up time and again in the banks papers, and we have seen some of it during the course of this hearing. There have been suggestions and arguments that NK So, I

1008 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Honor. PROCEEDINGS - KASOWITZ Superintendent Dinallo believed, when he gave the approval that MBIA's projections were inherently uncertain or that they were inherently incapable of being precise. look exactly at the right language. The point here, your Honor, is this: First, of all We will

and we will show this, Superintendent Dinallo believed that MBIA's projections and the analysis that Buchmiller had done and others had done with respect to those loss projections, were eminently reasonable, and he made, at paragraph 61, of his affidavit, and entirely reasonable and realistic statement that at that time, as at other times, it was difficult, in fact, it was impossible for MBIA, for the Department, or for anyone else, to predict the future, which created some uncertainty in projections. That's why they are called "projections", your Projections are just that -- an attempt by someone,

in the case of MBIA, by people in its, in its business and in the case of the Superintendent of insurance in this case, Mr. Buchmiller, and others, to try to ascertain whether the projections of losses that are being made are reasonable, whether the methodologies that are used in determining what those losses are are reasonable. What Superintendent Dinallo said and said very clearly was, you can't predict the future. The only way

that you can tell what's happened in the future is after the NK

1009 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ future is done in hindsight. So, the banks, having nothing more than hindsight to work on, and being unable to criticize the extraordinarily conscientious and exhaustive work that the Department did in analyzing this transaction and Mr. Holgado did an excellent job in describing that, we will go into some highlights of it in a little while, having nothing more, what the banks fasten on is well, these were difficult times. This was an enormous crisis and because these projections are -- there is always uncertainty with them, then the only answer that follows from that is do nothing. Superintendent Dinallo should have done nothing. He should

have waited for months and months and months and months of a tri annual exam, more than additional year of a tri annual exam to be done, in order to make any kind of decision or, he should have gone out and hired Black Rock -- but he should have done nothing. The whole point of Superintendent Dinallo's action here, your Honor, this goes to heart of it, he saw the worst crisis since the Great Depression. He saw that the bond He saw that

guarantee business was literally deteriorating.

there was one bond insurer that was much healthier than the others, and there was a legitimate and real possibility to enable that bond insurer to begin to write new public NK

1010 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ finance business, and he studied and had his department study in detail what the, what the data points were for that bond insurer and then he approved the plan that they had come to. He approved it because it was the right plan and because it was the right policy and because it would have protected all of the policyholders, both on the structured finance side and on the government finance side. Now, your Honor, one of the bases that before the -- before MBIA conceived of this proposal to do the transformation, it sought to meet the challenges posed by the financial crisis in another way. It began raising new

capital between December 2007 and February 2008. In fact, MBIA Inc., the parent, raise up to 2.85 billion dollars in additional capital, pursuant to a series of stock offerings and surplus note issuances. As Superintendent Moriarty has explained, over the past two years the MBIA entities have entered into transactions to solidify their capital position and mitigate against further deterioration. Specifically, those transactions included, on January 16th, 2008, MBIA Corp issued one billion dollars in surplus notes due January 15th, 2033. On February 6, 2008,

Warburg Pincus agreed to purchase up $750 million of convertible participating stock, and on February 13th, 2008, NK

1011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ MBIA Inc. completed a public offering for the sale of 94.6 million dollars, million shares of MBIA Inc. common stock at $12.15 a share, for the total net proceeds of approximately 1.1 billion dollars. Also, in late 2008, MBIA issued preferred stock to a trust to secure additional $400 million in capital. Approximately 2.5 billion of the capital raised by MBIA Inc. between December 2007 and late 2008, was invested in MBIA insurance or was used to support liabilities of MBIA Inc., that were insured by MBIA insurance. So, to further address the effects of the financial crisis, MBIA also began discussing with the Department, a possible restructuring of MBIA's insurance business, a year before the transformation transaction was approved in February 2008, when MBIA former CEO Jay Brown returned to the company as its Chairman and CEO. In February 2008, MBIA retained Jane Boisseau, an insurance loss specialist, with 25 years of experience, in connection with this potential restructuring, and on February 19th, 2008, Mr. Brown, a lawyer to MBIA shareholders, noted that MBIA had successfully raised capital in response to the financial crisis, but made clear that the structure of the financial guarantee industry needs redesign. The next day, February 20th, 2008, Mr. Brown met NK

1012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ with Superintendent Dinallo, and discussed with him a proposed concept for restructuring MBIA, which included the basic elements of what would become the transformation. Two days later, on February 22, 2008, MBIA and its counsel, including Ms. Boisseau, met with the representatives of the Department, including the Department's financial and advisors, Perella Weinberg and Fried Frank, to describe to the Department how a possible restructuring of MBIA could work in order to address the freezing of the public finance markets. MBIA explained to the Department at that meeting, that the public finance market was frozen, and that to help unfreeze it, MBIA would separate its public finance business from its structured finance business, and as Ms. Boisseau states her affidavit, this February 22nd meeting was, quote, only the beginning of months of discussions involving the Department and MBIA regarding MBIA's business plans, including its restructuring proposal and its financial condition. As she states, during subsequent months of planning and discussion, MBIA and her law firm worked closely with NYID to develop a proposal that would he create a new public financial insurance entity, while simultaneously insuring that all MBIA policyholders would be treated fairly and equitably, and that both insurers would be sound, solvent NK

1013 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ and well capitalized. The restructuring proposal that was discussed at the February 22nd meeting involved interdependent transactions, the result of which would create a separate and new viable public finance insurance company, that would be able to write new business, while preserving MBIA insurance as a well capitalized, highly solvent insurer. MBIA provided a Power Point presentation to the Department at the meeting, which set forth the key components that ultimately comprised the transformation as approved by the NYID. While some of the components and the overall structure of the transformation would change over time, the presentation provided an initial overview of the statutory standards and regulatory requirements governing the proposed transaction. The Department discussed extensively with the MBIA representatives the statutory standards and the regulatory requirements that MBIA would have to satisfy in order to perform the affiliated transactions that would ultimately comprise the transformation. And, as Ms. Boisseau states, the proposal primarily involved affiliated transactions of a type for which she had sought and obtained approval many times in her 25-year practice before the Department. NK

1014 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ Now, your Honor, one of the advantages of telling the story of transformation as it unfolds, is that we get to see what actually happened, rather than what the banks say happened years later. So, for example, we have learned the banks' counsel's argument that the transformation transactions did not occur simultaneously and that MBIA's argument that they did, and that the Department's argument that they did, is nothing more than a post hoc rationalization raised for the first time in litigation, and never discussed contemporaneously at the time of the transformation. Your Honor, Mr. Holgado did a very good job of going through some of the evidence that showed that the banks' post hoc claim with respect to how the transaction worked was wrong, and that evidence included MBIA's application for approval of the transformation which specifically provided that the transformation would be simultaneously done. But, your Honor, there is also evidence that even predated the application, that related to the simultaneous nature of this transaction. Now, at the -- already at the February 2008 meeting that we have been discussing, MBIA counsel Boisseau, discussed with the Department the components of the deal and the dividend and share redemption and reinsurance agreement NK

1015 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 they had. THE COURT: Can you spell that name? B. O. I. S. S. E. A. U. PROCEEDINGS - KASOWITZ

MR. KASOWITZ:

Ms. Boisseau's testimony about this, your Honor, is very clear and is uncontroverted. The issue of sequencing, first addressed with the NYID, was first addressed with the NYID at the February 22, 2008 meeting. One of the questions asked at the meeting by, I believe, Bonnie Steingart, a Fried Frank partner and former general counsel of the NYID, was whether the various steps or components of the restructuring, as discussed at the meeting, would be sequenced. I assisted in addressing this question. I stated

that if sequence was used to mean that each step or component part -- and the word "part" might be missing, but it should be there -- that if each step or component part of the overall transaction would be performed and completed at a specific point in time, and that another step or component part of the transaction would then be performed and completed thereafter, and so on until all steps or components of the overall transaction were each performed and completed in a specified chronological sequence and then the answer was no. (Continued on next page.) NK

1016 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 T3 We were not viewing this as a transaction that would be sequenced in a specified chronological sequence. Ms. Boisseau continued at paragraph 69 through 70 of her affidavit: "I explained that MBIA believed MBIA Respondent-Kasowitz

that the various components of the restructuring were interdependent and should be viewed as occurring simultaneously. "I explained that if the NYID believed that it was important to describe or perform the transaction sequentially, then we would be happy to prepare presentation materials to reflect whatever sequence the NYID believed was appropriate. "In the absence of a preference or requirement by the NYID that MBIA Insurance should sequence the steps in a prescribed order, I explained that we felt that these affiliated transactions, like others involving multiple components, should be viewed as occurring simultaneously." Following this explanation, NYID representatives present at the meeting indicated that the transaction worked as a simultaneous transaction. From that point on, our understanding with the NYID was that the transformation was being viewed by BARBARA STROH, CSR, CRR, CMR

1017 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondent-Kasowitz the NYID and MBIA as a simultaneous, rather than a sequenced, transaction, and that the various ways of describing the components of the transaction in one order versus another order was intended solely as discussed above, for purposes of identifying specific components of a multi-part transaction. And deputy Superintendent of Insurance Moriarty has testified in this case clearly that he, quote, "looked at the transactions as taking place simultaneously as part of the overall goal of, again, affecting the establishment of National as an affiliate." Moriarty also testified that department understood that the transformation transactions occurred simultaneously when the department approved them on February 17. So, your Honor, the testimony of Ms. Boisseau and Mr. Moriarty shows the fact that the transformation components would occur simultaneously was not any post hoc explanation as the banks would try to have the court believe. Rather, it was explicitly and fully vetted and addressed by MBIA and the department at least a year prior to the transformation approval. Now, your Honor, from the beginning of this BARBARA STROH, CSR, CRR, CMR

1018 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondent-Kasowitz case and during their argument in this hearing, the banks never miss an opportunity to accuse MBIA and, for that matter, the department, of being engaged in some secret scheme to foist the transformation upon the unsuspecting banks, who the banks claim they therefor had no opportunity to voice their views about. The banks' counsel said just the other day to your Honor that the banks had no notice of this. Indeed, the purported secrecy of this transformation scheme and the banks' inability to express their view on transformation to the department have been mantras of the banks since this case started. The banks have told this court repeatedly, and to cite just a couple of examples, in December 2001 -slide 24 -- the banks told the court: "As your Honor

well knows, the transformation transaction was done in secret." In their recent sursurreply brief the banks again say that: Quote, "Mr. Dinallo cited to approve

in secret and without any input from affected policyholders, one of the largest liability-based restructurings of an insurer in U.S. history." In fact, your Honor, the purported secrecy of the transformation was one of the main arguments in the bank's appeal to the Court of Appeals from the BARBARA STROH, CSR, CRR, CMR

1019 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondent-Kasowitz dismissal of the plenary proceeding by the First Department. There the banks argued: "To avoid billions in

additional losses, MBIA, Inc. senior executives devised a secret plan to divide its principal subsidiary, MBIA Insurance, into a healthy insurer of low-risk public finance products and a dying insurer of toxic structured finance products. Secret plan? What the banks were telling the

Court of Appeals and this Court is that MBIA hid the transformation plan from them, that they were blindsided by it when it was approved by the department in February 2009, and the reason that the supposed secret plan was important to the banks' argument, your Honor, is that the banks say that if they had had notice of the transformation, they would have commented on it, they would have made their opposition known, and they say now that they would have prevented it from happening. According to the banks, it was, therefore, arbitrary and capricious of Superintendent Dinallo not to have given them notice and an opportunity to voice their objections. But, your Honor, this secrecy argument turns out to be absolutely false. The banks knew all along

BARBARA STROH, CSR, CRR, CMR

1020 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 it. MBIA Respondent-Kasowitz about the proposed transformation. The undisputed facts -- and the banks haven't shared these facts with the court. Even though they

are based on the bank's own documents, the undisputed facts are that the banks knew about the proposed transformation all along. They knew about it when it was first discussed in February 2008, they soon learned about its structure and timing. They had more than an ample opportunity to comment and raise any issues about it with the department, MBIA or anyone else. In fact, your Honor, the banks did comment on They did comment on the transformation proposal.

They commented on it a lot. You will see, your Honor, that these banks in particular, the banks that are left in this case, Bank of America and Societe Generale, these two banks commented on it, and they supported the idea of transformation. They thought it was a good idea. They

applauded Brown, MBIA's CEO and chairman, for coming up with the idea. That's right, your Honor. The very same banks

that are in this courtroom trying to demonize MBIA and BARBARA STROH, CSR, CRR, CMR

1021 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondent-Kasowitz its executives for a plan the restructure their business in extraordinarily difficult economic times, these very same banks, at the time the transformation proposal was made, liked the idea and supported it. We'll show you the quotes. The banks didn't

show you the quotes because it totally undermines their position here, but we'll show you these statements. So, your Honor, on February 25, 2008, a full year before the transformation was approved, Mr. Brown publicly announced in a letter to MBIA shareholders and in a press release that MBIA intended to restructure the company in such a way as to insure public and structured finance -- as to insure public and structured finance business from separate operating entities." On that very same day, on the very same day that MBIA sent that letter, February 25, 2008, a year before the transformation, one of the two banks left in this case, SocGen issued a credit research report discussing that very same public announcement by MBIA of the proposed transformation. Here is what SocGen said on February 25, 2008: "We expect splitting the insurers is likely to succeed, given that a split is now actively under discussion, as it is likely to please regulators, could achieve rating BARBARA STROH, CSR, CRR, CMR

1022 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondent-Kasowitz stability and would facilitate capital raising." Further: "This is one of the few ways to

equitably raise new capital, given the problems in assessing structured credit risk at present. "We had suggested a split, raising new capital for the municipal business after allocating sufficient to maintain the structured credit business following the announcement of the insurance regulator's involvement." While we're on it, how is it that these banks get up in court and claim repeatedly that transformation was a secret and claim that Superintendent Dinallo abused his discretion by keeping this information from them, which they claim left them with no opportunity to voice their views about it. It's ridiculous, your Honor. As this document

shows, the banks knew about MBIA's plans to apply to the regulators for approval of the transformation a full year before approval was granted. And not only did they know about it. On the

date that MBIA announced their intention to do it, they went out and they issued their own opinion about what MBIA was planning to do. From the looks of it, your Honor, the way I see it, they thought it was a pretty good i dea. BARBARA STROH, CSR, CRR, CMR

1023 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondent-Kasowitz Let me see. thought it would work. They said that -- well, they That's one thing. And they

said that this idea, this split could achieve ratings stability and would facilitate capital raising. Of course, your Honor, capital raising was critically important to financial institutions like the banks and like MBIA and, like the other Monolines at or about this time, given the financial crisis that the country and, in fact, the whole world was in. But then they go on, your Honor. I think

their use of language here is very, very important: "This is one of the few ways to equitably raise new capital, given the problems in assessing structured credit risk at present." "Equitably," your Honor. Equitable. That's

one of the key concepts in this Article 78 proceeding, one of the key determinations that the court will make is whether or not the banks will be able to sustain their heavy burden of demonstrating that somehow all of this was equitable and not rational. But I'll tell you, the part that gets me the most, you know, because I've been in this litigation for three years, your Honor, and I've been sitting and listening to these banks tell me, and their lawyers tell me, and tell my client, and tell the world and put BARBARA STROH, CSR, CRR, CMR

1024 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondent-Kasowitz it out in press releases and publish it in Greece that this was a secret kabbala, some sinister kabbala by MBIA and the superintendent that was foisted on them. Well, here you have SocGen, an employee of SocGen on February 25, 2008 saying that not only is it a good idea. He's trying to take credit for it: Credible, your Honor. "We

had suggested a split." Credible.

So, was that it?

This little idea kind of

pops up in February 2008, the folks that are in this courtroom, I think one of the SocGen executives was introduced to you by the banks' counsel earlier on, was this just like a passing glimmer, and they just never heard about it again? Both these banks?

Well, not quite, your Honor, because the next day Bank of America weighs in. They waited until a day

after the announcement, the day after SocGen issued their public report. Their report came out on February 26. did Bank of America have to say about this? What

Here's

what they said in a letter -- this is February 26, 2008: "In a letter to owners issued late yesterday, MBIA's CEO Brown stated that the company will restructure to separate its public and structured BARBARA STROH, CSR, CRR, CMR

1025 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondent-Kasowitz finance businesses into two separate entities." Sounds like transformation, your Honor. "The company plans to do this as soon as possible" -- as soon as possible, they plan it -- "but within five years and only under the condition that it can protect the interests of all of its stakeholders. "We believe such a separation is feasible, although likely complex. The most reasonable split

would be intermunicipal and nonmunicipal businesses, but we believe it would be best to even further divide the structured finance business into different products with different risk characteristics and tails." Well, they liked it, too, your Honor. liked it too, B of A. They

They said that they believe that

such a separation is feasible, and they even go so far as to say that the most reasonable split, the most reasonable split would be into, you know what, your Honor? It would be into the very two components that Brown and MBIA had planned to split it into: municipal and nonmunicipal businesses. Credible. Bank of America liked it, too. The

They use words like "reasonable" and "feasible" to describe how they felt about it. It doesn't sound like a surprise to me, your BARBARA STROH, CSR, CRR, CMR

1026 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondent-Kasowitz Honor, but let's look at what B of A said because they put a little cherry on top. Not only did they like it:

"We" applaud MBIA for its decisiveness under CEO Brown's leadership." MR. GIUFFRA: line, Mark? MR. KASOWITZ: "We applaud MBIA for its Do you want to read the next

decisiveness under Brown's leadership." Well, that's a lot different, your Honor, than what I've been hearing from B of A about Mr. Brown and about Mr. Brown's company, MBIA, in this litigation. I will read next the line: Moreover, CEO Jay

Brown's interests are closely aligned with shareholders." Well, they are supposed to be, your Honor. That's what CEOs do. And at this point in time, a year

before -- just as soon as this proposal was announced and a year before -- about a year before it was approved, these good folks at B of A knew about it. And they even knew the basic terms of it. Your Honor, they even knew that MBIA was going to try and do it as soon as possible, and to the extent that they had any problems with the absolutely uncontroversial doctrine that the CEO of MBIA was acting in interests aligned with his shareholders, they BARBARA STROH, CSR, CRR, CMR

1027 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 BARBARA STROH, CSR, CRR, CMR Thank you. MBIA Respondent-Kasowitz didn't say a damn word about it, not here, and as you will see, for this entire period of time up until the time that the application was made, and even after. They didn't say boo about it. You know, it might be a good time for a break, your Honor. THE COURT: That's what I was going to say.

Let's take a ten-minute break, and then

we'll continue. MR. HOLGADO: Thank you, your Honor.

(Short recess taken) (Continued on next page) (End of Take 3)

1028 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 T4 THE COURT: Just so it's official on the record, PROCEEDINGS - KASOWITZ

counsel and I had discussed this before, and we are not going to have a session here tomorrow, for a lot of reasons. So, we are not going to, so everybody can enjoy a four-day holiday weekend, and we will continue on Tuesday morning. People can stop asking Ray that question. I just want to make that official. Mr. Kasowitz, you may continue. MR. KASOWITZ: Thanks, your Honor. Okay.

When last we left off, we were looking at some of these reports issued by B of A and Soc Gen concerning the knowledge they had of MBIA's transformation, dating back to really the time that the transformation proposal was first conceived, really back to February 2008, and saw the e-mails, the reports, and we will look at the e-mails in awhile, concern the fact that Soc Gen and B of A knew about the transformation proposal, had knowledge of the basic structure of the proposal, commented on the proposal, commented favorably on the proposal, and as we said in one instance that we have seen so far, tried to take credit for it. So, you know, one of the things that the banks argued during the course of their presentation was that all of this was in secret -- of course it wasn't -- but, in NK

1029 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ addition, what I think is significant about these documents, your Honor, is that during their presentation the banks make this, I think there was some comment made to the effect of, you know, the good thing about contemporaneous statements and documents and e-mails is that they are made at the time, not made years later, and they reflect what people really knew or were saying, as opposed to what positions they are taking in litigation. I think that is precisely the significance here in contrast to these arguments advanced to this Court and in contrast to arguments advanced to the Appellate Division and the Court of Appeals, that all of this was a secret. In fact, these documents show that that was -nothing could be further from the truth. So, you know, in

a way this goes back to where I started, your Honor -chutzpah. This is really sort of more than chutzpah -- people taking a position not only that they didn't know, but that the idea was so nefarious and so outrageous and so prejudicial, in fact, the facts are exactly the opposite. Sort of, you know, chutzpah is a nice word to describe it. So now, let's turn to -- why don't we turn to the continuation of sort of this story. The next thing you see, in the early spring of 2008 is that the banks are continuing to look at all of this and NK

1030 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 analyze it. PROCEEDINGS - KASOWITZ So, I think that's slide 31.

On March 9th, the B of A folks are issuing another heads up, another -- they are issuing another heads up. This is March 9th, 2008. I think I will read it.

But, what is interesting is this isn't just a question of the two banks who are left in this case, you know, analyzing something afar, your Honor. This is, this heads up, heads up reflects the fact that they were sitting right with MBIA, right with the CEO and Chairman of MBIA and talking to him. What a secret. scheme. So, let's read it. "We met with MBIA's Chairman and CEO Jay Brown on Friday, at a meeting held for Self Side (ph) analysts. We Unbelievable.

What a clandestine, what a clandestine

came away from the meeting more confident that the company is focused on the right things -- on the right things -namely, returning to new business generation, albeit slowly, and determining and implementing the right operating structure over the next several years. "We look at MBIA as a company in -- see if I have that -- we look at MBIA as a company in transformation and one that should stabilize over the next several quarters, particularly if it retains its AAA ratings and visibility into loss trends and the macro picture for the U.S. NK

1031 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 increases." I like this one. "We applaud MBIA for its PROCEEDINGS - KASOWITZ

decisiveness under CEO Jay Brown's leadership, and for the banks' counsel. Moreover, CEO Jay Brown's interests are

closely aligned with shareholders." Moving on, "MBIA continues to have, after discussions with the rating agencies surrounding its plan of action, including the structure of the company -- " I will comment on these things, but let me get through it first. "Mr. Brown reiterated his plan to split MBIA into at least two operating units within the next five years. restructuring, in our view, will take time, given the regulatory issues and the need to appease both shareholders and policyholders." So, let me go back to the beginning of this because I think this is a document which ends up being critically important in the analysis of whether or not there was something egregious, something so irrational, so arbitrary and capricious, perpetrated by the Superintendent of insurance, in cahoots with MBIA, with respect to this transformation transaction. Those are all the things that we have been hearing in this courtroom, first in Justice Yates' courtroom, for a little bit of time in Justice Sherwood's courtroom, and now in this courtroom during the past three years. NK A

1032 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ I must tell you, your Honor, that I have shown up and from the very first day of argument in this case, there have been all manner of accusations hurled at MBIA by the banks. Originally, it was 18 banks, now it's just two, but the accusations were ones that I had a difficult time listening to, that my clients had engaged in some kind of fraudulent scheme, that my clients had engaged in some kind of secret conspiracy with a regulator, that my client was trying -- and this is an argument that I haven't mentioned yet today, but that has absolutely been advanced in all the papers and in Court hearings -- that my client is trying to line its own pockets at the expense of policyholders and the like. That, it's all being done, this whole argument that it was being done in secret, as part of some kind of clandestine scheme, was sort of the patina of accusation and of egregious misbehavior that the banks advanced, to try to give some oomph to the arguments they were making. In fact, there is no oomph to the arguments. As

Mr. Holgado pointed out earlier in the week, we will go into a little bit more of that. There is no oomph to the arguments, and there is not a shred of truth that there was some egregious scheme by MBIA and its executives in conspiracy with the Department to NK

1033 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ foist this on this these poor, unexpecting victim banks. Let's look at what they were saying back in the spring of 2008. First, they meet with Mr. Brown. significant. I think that's

It's not just a question of them reading a

press release that MBIA has issued, not a question just of that. They met with him and apparently, he is, you know, they went up to Armonk or maybe -- MBIA also has an office in the City -- and they went over to see him and, you know what? He let them in. He didn't stand behind the door,

you know, cowering in a little corner saying I will not talk to you, I have a conspiracy. Conspirators don't meet with the people they are seeking to defraud. They don't meet with the people they I bet

are seeking to victimize, but he met with them. others met with him too. met.

That's the first thing -- they

Second thing, this is when I first saw this document. I said wow this is surprising. "We came away

from the meeting more confident that the company is focused on the right things." Does that sound bad? Sounds good. things. Doesn't sound bad to me.

Sounds like they are focused on the right

B of A is saying the company, as a result of their NK

1034 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ meeting with Mr. Brown, where he was talking about the split up of the company, was focused on the right things. good. Namely, returning to the new business generation, albeit slowly -- remember, we are going through a really, really difficult time here in the spring of 2008. It is Sounds

the -- we are, the country and the whole world is heading into this really difficult time -- is in a difficult time, not heading into it. It is a difficult time, and moving on, and "we came away from the meeting more confident that the company essential focused on the right things, namely returning to new business generation, albeit slowly." Here is the part I really like -- "and determining and implementing the right operating structure over the next several years." I don't even need to comment on that. That's,

that sounds like they really like this concept, the splitting up of the company. But then, this is good.

Because, you know, I have sat here, again for three years in this courtroom or other courtrooms and I have listened to the banks make the argument, and I have sat in depositions with their expert witnesses, former Superintendents, and heard them make the argument as follows: What's transformation? NK There is nothing in the

1035 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ transformation, there is nothing in the Insurance Law that's transformation. There is no such creature. Former

Superintendent Serio, whose deposition I took after they came in, after he came into the case is the reason, one of the reasons that this is illegal and improper is because there is no such as thing as a transformation. When I took Mr. Serio's deposition, your Honor, and I asked him to comment on the transformation transaction, he said, "I can't". And I said, "why not?" And he said,

"there is no such thing.

There is no such thing as Never heard of it". Let's make this easy

transformation in the Insurance Law. I said, "well, I will tell you what.

because we have eight time hours, let's assume that whatever it is that MBIA proposed to the Insurance Department and that the Insurance Department approved, let's just assume it's transformation. "No, I won't." Just call it that." He wouldn't do it. Took me

awhile to get him to do it. What is interesting about this, your Honor and what is interesting about the next line is that the Petitioner had no problem using the word "transformation". what it was. it. They knew

Not only did they know what it was, they liked

They liked it -- right operating structure. Now, what is also significant about this, your

Honor, and this goes back to I think something that I said NK

1036 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ toward the beginning, at the beginning of the presentation today, that was this idea of making predictions about the future. And, the banks have leveled, as one of their criticisms against the review and analysis of transformation, the claim that MBIA had made somehow flawed projections of losses, flawed and not just flawed, but really flawed. That's what they say.

You all were, you know, hopelessly optimistic and you were too optimistic in your projections and for that we need to, we need to reverse transformation. That's I am

paraphrasing, but that's certainly one of the arguments they made. I pointed out earlier in the argument that, in fact, these Petitioners were optimistic. In fact, I think

I pointed to a report from a Soc Gen executive who had formerly been a bear, very bearish on the economy and in November of 2008 he became bullish on the economy. Never

about a better time to invest in bonds, is what he said. And, the report about that indicated that he had been actually notoriously bearish, but smart. him the "smart bear". But, at or about this time, just several weeks before MBIA had submitted their application for approval of transformation, he was saying that things were looking up. NK We will call

1037 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ He thought things would turn around. optimistic. That's why he was

He thought the bottom had been hit.

The whole concept of finding the bottom, stock analysts talk about it all the time, debt analysts talk about it all the time, Wall Street talks about it all the time, Main Street talks about it all the time. I think we probably have never, in this country since the Great Depression, heard more talk about finding a bottom and where is the economy going to go than during the past four years, five years, that's probably true. So, people in this, people in this environment try to make the best reasoned predictions they can, but as Superintendent Dinallo has testified, and we are going to look at it in more detail later, you can't predict the future. You can only do that in hindsight. And, one of the stories at the end of the day of this proceeding, your Honor, is that MBIA worked really, really hard to do good loss projections and the like. More importantly, more importantly, the Department worked extraordinarily hard, under extraordinarily difficult economic conditions to make a more reasoned judgment about approving, whether or not to approve a really critical business transaction that was going to benefit the public finances markets. And, we know that the Superintendent had authority NK

1038 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NK PROCEEDINGS - KASOWITZ to do that because we have seen the testimony from the banks' own experts, former Superintendents, all of whom said he did, and also, a transaction that would benefit MBIA's policyholders, both, both the structured finance and the public finance policyholders and something that was going to be good for the public, because in order to do business you need to build things and in order to build things, you need to have bonds, and in order to have bonds, your Honor, you need to have guarantees, and I will get to that in an a couple of minutes. (Continued on next page.)

1039 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 know. T5 The point here, your Honor, is just this: That on March 9, 2008, you have B of A saying that: "We look at MBIA as a company in transformation and one that should stabilize over the next several quarters" -- optimistic. It looks like they're pretty optimistic about it, your Honor. Your Honor, not that it should MBIA Respondents-Kasowitz

stabilize over the next several quarters -"particularly if it retains its triple A status and visibility loss trends and the macropicture for the United States." So you don't have B of A at this point in time saying it's all over. It's terrible. It's going --

we're heading to a depression. In fact, they didn't know, just like we didn't But they're pretty optimistic here. So that's

the other thing that I think is significant about this heads-up from B of A. That's in addition to, of course, this issue of applauding Mr. Brown for his decisiveness and his leadership. That's an important point here, your Honor. It goes to another point that the banks have talked about here. That's simply this: The banks have taken

BARBARA STROH, CSR, CRR, CMR

1040 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz the position trying to fasten onto the statement from Superintendent Dinallo where he said that, you know, predictions about the future are difficult, and inherently difficult. And so one of the arguments that they made at the beginning of this hearing was, well, there's an admission that these predictions about the future are difficult, and we're in these really, really difficult times. So that means predictions are really difficult, Do

so the upshot of their argument is do nothing. nothing.

Well, the whole point of leadership, your Honor, is to do something, to try to solve a problem, which is what Mr. Brown was trying to do at MBIA, and it's what Superintendent Dinallo did ultimately, after this exhaustive examination, in approving the transformation, and it looks like this is something that B of A understood at the time that they prepared this e-mail -- this report. So, now, one of the things that we've heard a bit of from the banks is that maybe these reports are, you know, too vague, that the information is too vague. I don't think so, based on what I've seen, but we've heard some of that, so let's look at some more. A couple of weeks after this there is an BARBARA STROH, CSR, CRR, CMR

1041 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz e-mail from a Justin Klein at B of A to some other people at B of A, and the subject is MBIA. In this e-mail it reflects discussion between Mr. Klein and the CFO of MBIA, who was Chuck Chaplin, and the treasurer of MBIA, who was Fred Pastore. So, there doesn't seem to be a lot of doubt or questioning being expressed in this e-mail about what was happening. "MBIA eventually intends to split the company with municipal and structured business being written from separate operating entities, with both having adequate capital, both entities will ideally be AAA rated." "The first priority of this initiative is to build a capital cushion sufficient to support both business units. The new structure is expected to increase the agility of the business units and transparency to constituents and the market. I like that:

"Transparency to constituents and the market. "The company has announced a five-year timeframe to complete this separation, although the CFO indicated in our conversation that the restructuring is a high priority and would likely occur sooner than five years." BARBARA STROH, CSR, CRR, CMR

1042 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz So, to the extent that the banks say that this is all somewhere off in the future, we don't know if and when it's going to happen, when you look at the language of what they're saying, based on the meetings that they were having, they knew that this was a priority for MBIA, and the MBIA folks are saying, look. We're going to do this for the next five years, but we'd like to do it sooner. And we're going to see some other documents here, your Honor, that talk about the banks' knowledge of almost exactly when it's going to happen. Now, we all know that in June, as MBIA's work on the transformation plan was proceeding, Standard and Poors and Moody's downgraded their financial strength ratings for MBIA, as they did for a number of other monolines, and they downgraded beneath AAA. As a result of those downgrades, MBIA Insurance was not able to write financial guarantee insurance in either the public finance markets or the structured finance markets. Both of those at that time, your Honor, really, as a practical matter, required AAA ratings in order to proceed. So, that really sort of -- that resulted in the freeze in the public finance markets that we have BARBARA STROH, CSR, CRR, CMR

1043 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz been talking about. Clearly, prior to the transformation, MBIA Insurance was the primary -- it was the primary operating entity that was issuing financial guarantee insurance within the MBIA family. The idea of splitting up the companies as, I think, these reports from the petitioners here reflect, was that by dividing the structured finance products business from the public finance business, that would help the public finance business to be able to receive credit ratings post transformation that would be sufficiently high, so that it could begin to write new business. That was the point of splitting up the

companies from each other. Now, the banks argue that this was improper because they claim that the MBIA insurance company that was left behind was insufficiently well capitalized to take care of the obligations of the structured policyholders. But the Superintendent Dinallo, based on all of the work that had been done by the department, said that, in fact, the MBIA insurance would be more than well capitalized to be able to take care of the obligations of the structured policyholders and that, then, the public finance entity would be able to write BARBARA STROH, CSR, CRR, CMR

1044 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz new business. Now, whether or not at some point, depending on what happened in the overall economy and the global economy, MBIA insurance would be able in the future to write new business, who knows at that point? The idea was that it would have more than enough capital to take care of the obligations of its policyholders, and that's the determination that the superintendent made, and it was an important and a correct determination. Now, one of the -- well, I'm going to turn -I'll do this in a little bit more detail later, but -in fact, I will turn to it later. Let me get back to B of A. Immediately after

this downgrade, B of A, which had been following this very closely, issued another report. I think that was on June 6: "We believe the

business model as it exists today will likely have to change in order for bond insurance to remain a viable business." I'm going to jump down to a second, and then I'm going to go back: "MBIA's CEO Jay Brown stated

that perhaps the bond insurer will have to split its company into separate entities sooner than expected." So there can't be any claim here by these BARBARA STROH, CSR, CRR, CMR

1045 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 ahead. On June 19 MBIA issues a press release. press release a very clear: The MBIA Respondents-Kasowitz banks that, okay, well, we understand that there's going to be -- that there's a plan to have a transformation. We know that the MBIA is going to be

making an application for that with the superintendent of insurance, but this could be five years off, you know, given the recent events, the fact that there was a downgrade that made the need for, and the impetus of, doing this transaction even more pressing. Just five days after that report, MBIA issued a letter to its shareholders which said, among other things: "We will assess one key action item at this

point, which is to continue to pursue opportunities to support the bond insurance market as a whole in conjunction with the New York State Insurance Department and other stakeholders. "In addition, we will assess what would be required by us by the rating agencies and regulators to use one of our two fully licensed subsidiaries as an AAA subsidiary for new public finance business." So, there is no doubt that this is moving

"We are moving forward

with" -- it says "out," but it's our -- our "transformation plan which we will pursue in BARBARA STROH, CSR, CRR, CMR

1046 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz conjunction with the New York State Insurance Department and in consideration of our stakeholders." Your Honor, that doesn't sound like a big secret to me. I mean when you have a secret, you don't

go out and issue a press release about it. The impression that I had, when I was first retained in this case and began to review the papers, was that this was a huge secret foisted on these banks. It was nothing of the sort, your Honor, nothing of the sort. So, on -- we have seen a lot of reports from B of A, but Societe Generale was monitoring this situation very, very closely, and on June 20 a summary was circulated internally at SocGen about this: "MBIA commented that it is working on a transformation plan with the NYS Insurance Department." So these banks that claim, and have claimed in papers here, to have been victims of some secret scheme to foist transformation and this plan, splitting up the company, on them, they knew exactly what was going on, they knew it from the time that the plan was -- from the time the transformation idea was conceived. They had lots of opportunities to comment about it, and if anything, they liked it. Now, your Honor, I'm going to shift gears a BARBARA STROH, CSR, CRR, CMR

1047 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz little bit because I'm doing this chronologically. I

think it's sort of the most -- at least to me it's the way that makes the most sense. About the time that all of this was happening and it was out in the public realm, especially with these banks, that this transformation plan was being worked on and worked on hard, the department was at work. One of the things that the department was doing was continuing its risk surveillance with respect to MBIA in accordance with the obligations that the New York State Insurance Department had to continue to maintain vigilance with respect to the insurance companies that are subject to its jurisdiction. We've heard argument in this case that the analysis -- that the review and analysis and work that was done with respect to transformation was very, very flawed. The arguments that the banks have made is that it was rushed, it was in secret, it was flawed, and ultimately -- and there have been suggestions that there were ulterior motives on both sides and the like. One thing that -- well, all of that is wrong, your Honor, and one of the glaring facts -just to

kind of pick apart the puzzle here, one of the glaring BARBARA STROH, CSR, CRR, CMR

1048 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 company. company. MBIA Respondents-Kasowitz facts that the banks never admit and never acknowledge in their papers, ever, is that, as a monoline insurer, MBIA was subject to the jurisdiction and surveillance of the New York State Insurance Department on an ongoing basis. So that the people who ended up being involved in assessing transformation and this particular transaction, they were people who knew the company, your Honor. They had been long involved in MBIA.

So that when the concept of transformation was presented, both originally back in February 2008 and then even after the formal application was filed -- and we're going to talk about all of the exchanges back and forth even before that application was filed, but the folks who were doing the work, they knew this company extremely well. They had a statutory obligation to know the They were engaged in triannual reviews of the There was a triannual review of the company

going on at the time the transformation was being considered, and that wasn't the first time that all of these folks, many of whom are in this e-mail, were at that rodeo with MBIA. They knew MBIA.

So, I picked out an e-mail here from July of 2008, which is, you know, well before the formal BARBARA STROH, CSR, CRR, CMR

1049 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 cold. MBIA Respondents-Kasowitz application was filed, and it's an e-mail that was prepared by Mr. Buchmiller, and we've heard a lot about Mr. Buchmiller during this hearing. Mr. Holgado, I thought, did an exceptional job of describing Mr. Buchmiller's responsibilities in connection with transformation and his qualifications to undertake the work that he did with respect to the transformation and the like. I thought that it would be helpful for the court to understand -- Mr. Holgado focused on the period of time after the formal application was filed. I thought that it would be helpful for the court to have an understanding that Mr. Buchmiller did not come to MBIA cold. He didn't come to their risk methodologies He didn't come to the data that the company

maintained, the financial data that the company maintained cold, and he didn't come to the people at the company cold. He had some extensive experience and involvement in connection with analyzing risk loss methodologies and the like of the company. So that that made him not just the right person to spearhead the review and analysis of transformation, but it also meant that he had a bit BARBARA STROH, CSR, CRR, CMR

1050 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Group. MBIA Respondents-Kasowitz of -- in fact, a very substantial running start to do that. So I thought that what made sense is to take a look at this e-mail because it is to Anthony McKiernan, who was the head of the IPM group at MBIA. It deals with really, your Honor -THE COURT: What is IPM? Insured Portfolio Management

MR. KASOWITZ:

Sometimes I say investor, but it's Insured I shouldn't admit that I

Portfolio Management Group. sometimes I forget that. THE COURT: important thing but... MR. KASOWITZ: important group here.

I'm sure that's not the most

Well, they're a pretty They're very involved in this.

They did a very good job. So let's just take a look at this e-mail and see what role Mr. Buchmiller was performing even before the formal application for transformation was filed on December 5, 2008. So this is an e-mail from Buchmiller to McKiernan and the folks who are copied here, Matty Peltonen and other ones who were working within -Matty Peltonen and others, including Hampton Finer, are ones who were working at the department. BARBARA STROH, CSR, CRR, CMR

1051 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz They were working in connection with the surveillance, the financial surveillance of Monoline insurers. You've heard Hampton Finer's name raised both by the banks and discussed by Mr. Holgado. to talk about him a little bit later, too. So let's see. "This is the e-mail: "Sorry I We're going

couldn't get back to you sooner." This is to Mr. McKiernan at MBIA: "To put it too briefly, we need to see everything that justifies/supports your most recent loss reserves (first and second quarter 2008): Models, assumptions, methods, policies and procedures, etc., starting with the worst/most problematic transactions and working up, and be prepared to leave copies with us (cd roms, memory sticks) of as much supporting material as possible. "(Ram will probably want to draft something). Make your case for your figures and tell us the key assumptions and sensitivities. Your quarterly?

Watch lists for the past year (6/30/07 being the calm before the storm) will give us the list of problematic deals and a sense of the evolution. "Some things you probably can't burn to a disc (e.g., Intex) but you can bring input/output." BARBARA STROH, CSR, CRR, CMR

1052 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 listen. Honor. MBIA Respondents-Kasowitz So what does this mean? It's simple, your

In the middle of the year Mr. Buchmiller, who

ultimately spearhaded formal review of transformation, was working extremely hard and in a very conscientious way in getting up to speed, as he and the department were required to do, on MBIA's financials, on their loss methodologies, on their loss reserves and the like. What he was doing was not just saying to them, Send me a sheet with how you all think things

are going, and tell us where you think things are going, and then we'll make decisions about you based on that. One really important point here, your Honor, to keep in mind: ever: You never see it in the banks' papers

The New York State Department of Insurance has

an ongoing obligation -- an ongoing obligation to monitor insurance companies subject to its jurisdiction for solvency. They need to make sure that insurance companies are solvent. So, totally apart from

transformation, your Honor, both before the time that the application was made and after the time that the application was approved, the NYID has had the statutory obligation to make sure that MBIA is solvent. BARBARA STROH, CSR, CRR, CMR

1053 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz That's pretty important, your Honor, because if you listen to the arguments that the banks have been advancing here for three years, since the time the transformation was approved, they claim that MBIA insurance is insolvent. They claim that MBIA insurance was insolvent as of the date of transformation. They certainly seem

to claim that that's been the case since then. Well, both before transformation transpired and after transformation was approved, the New York State Insurance Department, now the Department of Financial Services, has never made that determination. All of the criticism that has been heaped upon Superintendent Dinallo and Mr. Buchmiller and all the other folks, many of whom are still at the department, in connection with their review and analysis of transformation, all forgets the point that we had two superintendents since then and one acting superintendent, so really three, and none of them have made that determination three years later. So, as part of this ongoing responsibility, Mr. Buchmiller in the summer of 2008 is telling MBIA that he wants to see everything that justifies and supports their recent loss reserves for these first two quarters are. BARBARA STROH, CSR, CRR, CMR

1054 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 two-fold: are. MBIA Respondents-Kasowitz He doesn't want to see it. He tells him what

he wants, and that's going to look very familiar, your Honor. I'm going to bring this e-mail back because

when we match this e-mail about what happens later, they're asking for the same stuff later on during transformation because their obligation to make the analysis of the company's financial condition is the same. Assumptions, methods, policies and procedures. Start with the worst. were most difficult. with us. can. Make your case. Tell us what your assumptions It make sense. Work your way up. The ones that Leave it all

Give us as much supporting material as you

Give us your watch lists and the like, and we'll

compare them with the year before to see if there is movement and the like, and then we'll make our decisions about whether or not you're solvent. So, the point here is, your Honor, that A, the department is watching MBIA carefully

and, B, the person who was tasked ultimately with the responsibility of spearheading the transformation analysis and review -- and there were others who worked on it, notwithstanding what the banks say there were others who worked on it too, but the person who was BARBARA STROH, CSR, CRR, CMR

1055 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz chiefly responsible for it, he'd been working on this stuff with MBIA for some time. That e-mail reflects someone who knows what he's talking about and is acquainted with the business of the insurance company that he is reviewing and analyzing. And that's why I thought that this would be a sort of good introduction to what Mr. Buchmiller did later. So, while the department is engaged in its ongoing review and analysis at MBIA, the marketplace and the rating agencies, and the banks were continuing to look at transformation and what was happening with MBIA. On August 8, 2008 Wachovia, which was another bank that had been included within the 16 banks that had commenced this Article 78 proceeding, but they're not here any longer, issued a report. Not only did that report indicate that transformation was going to be in MBIA's future. said it was imminent: "Management thinks" -- this is August 8. "Management thinks it will be two to four months for a possible launch of a new company." (Continued on next page) BARBARA STROH, CSR, CRR, CMR It

1056 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 BARBARA STROH, CSR, CRR, CMR MBIA Respondents-Kasowitz (End of take 5)

1057 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 T6 MR. KASOWITZ: Two to four months. Definitely PROCEEDINGS - KASOWITZ

before, it looks like definitely before year end, your Honor. So, to the extent that banks try to argue here that these reports are of no moment, because they were talking about something ephemeral, some kind of prospect of doing a transaction some years off in the future, just not the case, your Honor. public report. Not only were the banks continuing to comment, but the rating agencies were as well. So that on August 14th, They knew it was imminent and that was a

we have from Standard & Poors a report that says, "Standard & Poors understands that management has initiated a plan that would restructure its business in such a way that, according to MBIA, the public finance business would be insured by a separate, now dormant insurance subsidiary, and stabilize MBIA's AA rating. Well, I don't think that the banks are going to be able to, by this time, to continue any argument that this was a secret, and I am not sure, at some point today or on Tuesday MBIA will rest, and then the banks will come back and it will be interesting to hear what they have to say about this. One of the things they might say is well, there NK

1058 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ were these reports that were out there so, it wasn't a secret, but you know, that didn't give us, really you know, didn't give us enough of a chance to talk. questions. Well, I don't see how they can make that argument because we know just from the, you know, several documents that I put up on the screen today, and there are more, your Honor, but we know just from these, that they talked to the company a number of times. So, maybe what they will say is well, we didn't have a chance to talk to the Superintendent. decision maker. He is the We had

We could couldn't talk to him.

Now, that argument will not fly, in any event, your Honor, because he is a public official and these banks apparently know how to talk to public officials, but, but we know that, in fact, they didn't have conversations or at least, some evidence that they had conversations because we found an e-mail. This is a GMI. I think was a credit derivative

take of Merrill Lynch that was owned by B of A and I guess Mr. Quentin was an employee there, and he is referring to someone named Nelson Chai, who was the Chief Financial Officer of Merrill Lynch at the time, and it is referring to a call that Nelson has scheduled for tomorrow with Dinallo. He was supposed to speak today, but did not happen. NK

1059 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ So, I don't know. Apparently, this whole

transformation, which I guess they understood what it was, they used the word, they talked about the structure, they knew it was imminent, they talked to us about it, and we actually have other evidence that they did talk to Mr. Dinallo about it, which I will get to in due time, but they had the opportunity to do it. So, that argument when that comes up, well, we are just little banks, we heard about this, we knew about it, we liked it, we thought it was our idea, but you know, now that it's happened and we have sued about it, we didn't know about it, we were scared about it. victims here. We are just -- we are

Won't wash, your Honor.

So now, in fact, you know, the record here, your Honor, is not only going to be that this wasn't a secret, the record here is going to reflect that MBIA actually reached out to these banks at different times to talk to them about this. So that, in early November, at MBIA's request, Soc Gen personnel met with MBIA in order to discuss their business relationship generally, but also to discuss the relationship in light of the fact that -- I think this is Soc Gen's words, that MBIA was quote, in the process of creating a new municipal bond insurer." So, let's look at this e-mail. NK I think, your

1060 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ Honor, it is a November 7th, 2008 e-mail. It is sent from

a Mr. Baldwin at Soc Gen to a whole bunch of people there. Doesn't look like a secret to me. Your Honor, if it was a secret, it was a pretty poorly kept secret at Soc Gen. But, there are a whole mess

of people who have this, and the subject is MBIA Insurance Corporation downgrade and summary of 11/14 meeting. So, this is a memo of a meeting that was held three days before and bunch of different attendees and here is what it says -- no secret -- "MBIA is in the process of creating a new municipal bond insurer. Mr. Barber stated

that MBIA may use one of two existing, but presently inactive companies, for new municipal bond business, CAP MAC or MBIA Insurance Company of Illinois. So, it's just, there is, I don't know how they are going to claim this is a secret. secret to me. And, the next day, it's even, to the extent it was a secret, which it's not, it was even less of a secret the next day, because MBIA did an earnings call. In that earnings call, it says "MBIA announced that we are continuing to assess the opportunity to establish a new MBIA public finance insurance company. We received Doesn't look like a

enough input from the marketplace to be convinced that this is a truly viable option and we are now actively exploring NK

1061 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ with the various insurance regulators and rating agencies how to best accomplish this. "As we enter into, going into the year end, we have a lot of opportunity in terms of adding value to the company. We had mentioned earlier in the presentation that

we are actively in discussions, in terms of getting our new public finance company up and running." I don't know if that's a complete sentence, but also talks about different type of commutation activity they are engaged in, which is also important, your Honor. Did I use the wrong word? So, your Honor, no secret, and imminent and not only imminent, but again, consist with the clear message that the banks have had now since February of 2008, now it's imminent. It's about to happen.

So, I think the one thing that is sort of notable, one of the things that is notable about this, your Honor, is that what Mr. Brown said about receiving input from the marketplace or enough in input from the marketplace to be convinced that this is truly a viable option -- that's true. It's absolutely true. And, as we have seen, no one or nobody was more optimistic about this being a truly viable option than -you guessed it, your Honor -- these folks. They thought it was a right structure. NK They liked it.

They thought it was

1062 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 the right thing. PROCEEDINGS - KASOWITZ They were applauding Mr. Brown for his

decisive leadership. It is impossible for these folks to claim, as they have, that that was a secret, that this was foisted on them, they had no opportunity to be heard. You know, I went back to the transcript before getting up here today to see what these banks have said here. They have said things over the past three years in So, I wanted to see what they said here.

this case.

I have them saying, standing up here in this courtroom, and saying that they quote, had no opportunity to be heard. That is at page 566 of the transcript, line 19.

And that MBIA and the Department quote, were doing this transaction without telling anyone, close quote. That is

on May 15th, that is page 181 and that is lines 3 through 4. Then, your Honor, and I heard this the other day, they said that their due process rights were violated. That's May 15th, 2012, transcript page 188, lines 6 through 20. Your Honor, that's preposterous, just preposterous. If it weren't as bad as it is about this issue about the secrecy, what it reflects is a pattern of virtually everything that the banks have told this Court about transformation. I think this is a good time to break, your Honor. NK

1063 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ THE COURT: I was just going to say the same thing.

Have a nice lunch break and we will open up the courtroom at 2 o'clock and continue then. Thank you. MR. GIUFFRA: MR. HOLGADO: Thank you, your Honor. Thank you, your Honor.

(Lunch recess taken). AFTERNOON SESSION. THE COURT: Are you ready? MR. KASOWITZ: THE COURT: I am ready, your Honor. Thank you. All right. We are ready to continue.

Great. So, when last we left off, your

MR. KASOWITZ:

Honor, we had been dealing with some earnings calls and the like, and we were in the fall of 2008 and in this, you know, moving toward the application for transformation about which the whole world was knowledgeable, including the two Petitioners that remain in this case. Of course, throughout the summer, as I pointed out before, MBIA was working very hard both internally and with the Department on transformation, and that of course, was not secret to anybody. There was a meeting on October 30th, 2008 between MBIA and people at the Department and legal counsel were there too, and there are Power Point presentations and the NK

1064 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ like, discussions about what the shape and, with the general shape and size of the transformation and the proposal as presented really was along the lines of what we have been discussing in terms of the split up of the business and we can turn, you can look at, for this meeting, there is, there is some good references in Jane Boisseau's affidavit, paragraph 19 and 20. Chuck Chaplin's affidavit also covers That's in Mr. Chaplin's

this at paragraphs 30 and 31. original affidavit.

Next, on December 3rd, 2008, members of MBIA senior management, Mr. Brown and Bill Fallon and Ms. Boisseau, their outside counsel met with Superintendent Dinallo and with Hampton Finer and I think that meeting was probably at the Department, and there was again, another presentation concerning transformation and the like. One thing that's important here to know, your Honor, is that contrary to the arguments advanced by the banks to the effect that this was a sort of done deal, proposal by MBIA to be, in effect, rubber stamped by the Department in some secret way, that's not the way this played at all. There were very, very significant exchanges back and forth between the Department and between MBIA about the particular terms of the deal and the like and, in fact, after this December 3rd presentation, and I think that Mr. NK

1065 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ Holgado referred to this during his presentation, when Mr. Finer who was the, I think the chief economist at the Department, was reviewing the financials, he determined that it would be correct for, based on the information available to them, that MBIA actually leave additional $750 million back at MBIA Insurance, money that originally was going to go under the idea that they had then, to National. By no means was this the sort of situation where the Department was a rubber stamp for work that, or proposals that MBIA was working on. Then, on December 5th, your Honor, MBIA did submit its formal application for a transformation and the application was consistent with the general approach that we have been discussing and it's, the language is, you know, the language is strikingly similar to all of the understandings that the public had, that the banks had, that everybody had about what was there. The application described the overall purpose of the transformation as, quote, and I think that this is from Chuck Chaplin's November 24th, '09 affidavit, as quote, promptly establishing a U.S. public Financial Guarantee Insurance Company at a capital adequacy level, sufficient to provide lower cost funds to public insurers and to assist in quote, unfreezing, close quote, the public finance and infrastructure markets, while preserving MBIA Insurance as a NK

1066 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ well capitalized solvent insurer -- pardon -- highly solvent insurer, close quote. Of course, the application sought the approval of all of the different component transactions in a way that they were going to be consummated together. In fact, your Honor, it wouldn't have made any sense to consummate any of these transactions either individually or otherwise, not together. So, the argument, we said this before and I will have one more reference to it a little bit later on, but the argument that this transaction was not intended to be consummated as a whole of a piece, while it may be an argument that the banks seek to avail themselves of now in some kind of effort to overturn the Superintendent's approval, it just, it's not congruent with what actually happened. I think Mr. Holgado showed a reference from the application itself that referred to this. I will show it

very, very quickly, and then we can move on. This is from Exhibit B to the application on the purchase and cancellation date which shall be simultaneous with the closing of the transactions contemplated by transformation and then it goes on. So, your Honor, what we have here are discussions, right from the outset, about the fact that this would be, NK

1067 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ these components would be transacted simultaneously. We

have the reference clearly in the application itself, and we will show you some further evidence of this a little later on, as we get through the transaction. Your Honor, you asked, I think on Tuesday, about Raymond James. It hadn't really been mentioned yet and I,

what Mr. Holgado told you was that they had issued a, subject to my confirming it, they had issued a fairness opinion about whether, under the provisions of the Insurance Law, the consideration to be received by MBIA as part of the reinsurance transaction, including the ceding commission that was going to come to MBIA from National, was fair from a financial perspective, and Raymond James found that it was, and what it did was, to compare the amount of money that MBIA Insurance would receive to a recent arm's length transaction involving FGIC, and they found that there was actually more money that it was going to receive. determined that was fair. Now, in the post application, in the review that was conducted by the Department after the application, it is certainly the case that Mr. Buchmiller had a prominent role in that, and I just wanted to, and there was significant discussion about his qualifications by Mr. Holgado earlier in the week. I am not going to cover the territory that Mr. NK So, it

1068 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ Holgado covered, but I am going to, I am going to point out a couple of things that supplement a couple of things Mr. Holgado said. First, slide 47.

This is an opinion from MBIA's expert Professor Jeffrey Miller. Professor Miller is a professor and an

expert on insurance and financial matters just downtown here at N.Y.U., and he has offered opinions in this case and one of those opinions is that, quote, given Mr. Buchmiller's particular background with MBIA, coupled with his expertise in conducting portfolio insolvency analyses for numerous other monoline insurers, he was the natural choice to lead the Department's review of MBIA Insurance's loss reserve methodology. And, with respect to this, your Honor, there really can't be any -- we have heard a lot of talk here and I used it myself -- discussions about the battle of the experts, but on this point, this is one of those points where they can't be, and there are other opinions, this is one of those points where there can't be a battle of the experts because, slide 48, because with regard to Mr. Buchmiller's qualifications, even the banks' experts agree that he was the right guy for the job. I believe that this is Superintendent Muhl. The

question to him was, do you know of anyone else at the NYID at the time of transformation that was better qualified to NK

1069 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 read. MR. KASOWITZ: THE COURT: Delighted. Let's go read away. PROCEEDINGS - KASOWITZ review MBIA's modeling? "Objection. "Answer: I don't believe there was anybody else,

with the possible exception of Michael Moriarity that had knowledge that was necessary in order to do a review and be able to respond back to the senior staff, Eric Dinallo, executive suite, with the information that was necessary to give Mr. Dinallo an ability to make an informed decision." MR. GIUFFRA: MR. KASOWITZ: THE COURT: Your Honor, can we keep going? Not really.

The only thing, I did allow him to

It's one more question and answer?

What do you want read? MR. STEINBERG: MR. GIUFFRA: Line 22. "Question: -- " I will read it.

"So, do you think Mr. Moriarity was qualified to review MBIA's models? "I didn't say that. THE COURT: Okay." Okay. Go ahead. I would

Is that -- okay.

MR. KASOWITZ: like to see it.

I didn't even hear it.

This is Muhl now.

"You think Mr. Moriarity was qualified to review MBIAs -- " NK

1070 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ MR. GIUFFRA: next paragraph. MR. KASOWITZ: Your Honor, please. I mean, I made Actually, let's keep going into the

an objection when he was talking if there were, if there were times where there was a reference up here and a reference down, something in the middle, that's fine. He will have as much time as the Court gives him next week. I would like to move on. He gave the full answer. Your Honor, actually, if we keep

THE COURT: MR. GIUFFRA:

going and the answer at 281, he is just taking snippets out of the testimony. "I didn't say that. Okay." Let's go to the

And then, he keeps continuing. next one.

Then, I will just keep reading.

"With the exception possibly of Michael Moriarity, there was no one else in the Department that had any kind of knowledge, based on this kind of structure in the monolines. With reference to Mr. Buchmiller, I understand from what I read he had, in fact, some knowledge of modeling. he did some modeling in times past. He said

But, we are talking

about a very volatile book of business and an expertise that is extraordinary, and a expertise that probably went well beyond his capabilities. from Mr. Buchmiller." NK That's not to take anything away

1071 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ MR.HOLGADO: MR. GIUFFRA: Buchmiller. He didn't say anything -"That's not to take way from

That's to suggest he had a limited knowledge,

some knowledge, but as Superintendent, I certainly would have given him some help and get the expertise, the real expertise in there that would give Mr. Buchmiller a fighting chance to figure out what he was really faced with, and what the Department was ultimately faced with, so he needed that kind of assistance and he was never given it. "Question: Does anyone in the Department, to your

knowledge, have that expertise? "Objection to form. "Answer: No." Thank you, your Honor. Actually, I am glad that, I am glad

MR. GIUFFRA: MR. KASOWITZ: to hear that.

Could we pull that last one up -- anybody in The place where the

the Department qualified -- that one.

banks' experts take the position, including a former Superintendent of insurance, takes the position -- I want to see if he says that. "Does anyone at the Department have the next expertise that you were talking about, to review MBIA's structured finance liabilities? "Objection to the form. "No, other than the limited knowledge that Mr. NK

1072 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NK PROCEEDINGS - KASOWITZ Buchmiller never had. (Continued on next page.)

1073 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 T7 "Is anybody at the department other than Mr. Buchmiller qualified to review any of MBIA's loss modeling? "Answer: The only one with the limited That's why I kept MBIA Respondents-Kasowitz

knowledge was Mr. Buchmiller.

suggesting in previous discussions with you, if I were superintendent, I would have really gotten somebody out there as an independent reviewer to help Mr. Buchmiller." That's rich, your Honor, because what that means is that these banks, if this is their position in this case -- and I assume that it is because it's being expressed by one of their experts who counsel has now chosen to quote when we're talking about Mr. Buchmiller's qualifications -- if this is their position, then what the banks are saying is that the New York State Insurance Department is not qualified to look at the solvency of monoline insurers in this state. Now, I wonder about that, your Honor, because -- who is this gentleman? Is this Muhl? It's Muhl.

Because Muhl was superintendent, and he, presumably, presided over a state of affairs in New York concerning the financial markets and the insurance markets where BARBARA STROH, CSR, CRR, CMR

1074 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz there were monoline insurers and other insurance companies. I am quite certain that those companies had various sorts of structured products and the like that were involved in their business and, according to the superintendent of insurance, as an expert -- how many years later? When was he around? 1995.

So we have the former superintendent of insurance, 16 years after, 16 years after he was in place, in charge, the top guy, member of the club, he's saying we ain't got nobody who can do this. don't have nobody who can do this. It's outrageous, your Honor. outrageous. It's absolutely This is And they

You know -- but you know what?

what we have seen throughout this case, and we certainly have seen it from these experts, which is probably why we haven't heard from these experts. You know, I started today talking about the position that the banks had taken that Superintendent Dinallo didn't have the authority to take into consideration the public interest or a public financial interest like reinvigorating the municipal bond market. And then we had all of their expert witnesses get up and say, that's not right. We've got that authority. We have that. In

BARBARA STROH, CSR, CRR, CMR

1075 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz fact, that's a responsibility that we have. admitted that. And now we have the banks, now we have the banks getting up and saying, you know what? Those guys They

in the Insurance Department, they don't know what they're doing. stuff. I guess, you know, if they don't bring in BlackRock or they don't bring in some big -- and I'm going to get to this, your Honor. If they don't bring in some big consulting firm, pay them $7 million, have them not disclose what the basis of their analysis and their methodologies are, unless they do that, it ain't no good. I'm not buying it, your Honor. shouldn't buy it. So, let's turn to, in fact, reality. Let's This court They've got nobody who can do this

put that aside, and let's deal with real life, and let's deal with what Mr. Buchmiller did in real life when he was charged with the responsibility by the superintendent of insurance to go and do this analysis with respect to MBIA. So, what happened? Well, what happened was,

your Honor, he made -- and we saw a little bit of it in that July e-mail that I presented, and I'm going to BARBARA STROH, CSR, CRR, CMR

1076 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 from MBIA. MBIA Respondents-Kasowitz present a couple more. But what happened was he needed information He already had a lot of information, but he

needed more information. So, he made requests for information, and everything that he asked for, he got. Not only did he

get everything that he asked for -- and he asked for a lot, your Honor. What MBIA offered to do was to give him a place up at their headquarters in Armonk, so that he could be in a position where they didn't have to go through some complicated and slow and ineffective process of having the regulator get on the phone in his office downtown and saying, do you have this and that? Can you send it to me? And they'd pack it up, and they

send it to him, bah, bah, bah, and they send it back and forth. We're going to talk about that, too. right there. him an office. office. form. And you're going to see testimony and e-mails which talk about the fact that he was treated like an employee there. BARBARA STROH, CSR, CRR, CMR And not only did he go there. He went

They gave

And not only did they give him an

They didn't restrict him in any way, shape or

1077 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz He could go wherever he wanted, he could see whatever he wanted, he could talk to whomever he wanted whenever he wanted. That's really important, your Honor. open and free access. He had

So let's get that in context.

Let's talk to, or hear from someone who has been in that industry for the past 25 years and who understands how these kinds of transactions go. Let's look at what Ms. Boisseau had to say about the kind of access that Mr. Buchmiller had. is at paragraph 34 of Ms. Boisseau's affidavit: "Furthermore, Mr. Buchmiller provided a level of financial attention to the review of the transaction that I have rarely, if ever, witnessed in my 25 years of experience representing insurance company clients before the NYID. "In my experience, an on-site review of an insurer's financial condition to evaluate proposed affiliated transactions is unusual. "I viewed Mr. Buchmiller's on-site presence as a strong positive, given the financial requirements necessary for the NYID to approve the transformation." Indeed -- and this is a good point: "Indeed This

both Messrs. Serio and Muhl confirmed that it is unusual for examiners to go on site to an insurance BARBARA STROH, CSR, CRR, CMR

1078 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz company when reviewing the company's financial records in connection with an application for approval of affiliated transactions." Thanks. As a result of this unusual access, your Honor, in effect, what happened was that Buchmiller became imbedded with this IPM group, the group we talked about before that Mr. McKiernan headed. This is what Mr. McKiernan had to say about the function and role that Mr. Buchmiller played during the course of this on-site review. It's paragraph 11 of his affidavit: "Beginning in December 2008, at the NYID's request, the IPM group met numerous times with Mr. Buchmiller in connection with the transformation to provide him and his team with an overview of the MBIA group's structured finance portfolio and the loss projection and reserving process, as well as a detailed and hands-on review of the specific loss models and assumptions utilized. "Mr. Buchmiller was given unfettered access to any information he requested and all of the IPM group's employees. "In fact, he was treated almost as though he were a new employee in the IPM group, and was provided BARBARA STROH, CSR, CRR, CMR

1079 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz training and tutorials on the IPM Group's systems and modeling as would a new employee. "Mr. Buchmiller also had several formal meetings with the IPM Group's employees during which we demonstrated the IPM Group's modeling and reserve methodology. "Because he was on site at the MBIA Group's offices, Mr. Buchmiller also had numerous informal meetings and discussions with the IPM Group's employees where, for example, he would stop by someone's office or call or e-mail them directly and discuss follow-up issues." So, I think, your Honor, I think, if there are any questions about not only Mr. Buchmiller's qualifications but about what he was doing up there and the training and skill that he received -- I mean he received training and skill right on their systems. He was plugged into MBIA. He could look at

whatever he wanted, and he could do it by himself. So, if there are any questions about that, if you look at -- well, you can find it in the Buchmiller affidavit of November 24, 2009 at paragraphs 29 through 31, 40 through 43 and Mr. Buchmiller's first deposition, which was held on September 28, 2010, at pages 154 through 155 and at 266. BARBARA STROH, CSR, CRR, CMR

1080 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz Also, Mr. Buchmiller's supplemental affidavit dated December 21, 2011, at paragraphs 27 through 38 and 66 through 69. One other thing, and I'm not going to -- well, Jane Boisseau also talked in more detail about this sort of direct on-site access, and she sort of contrasts this on-site situation with the typical situation. It's a very lengthy quote. paragraph 35 of her affidavit. through it now. So, as I said before, your Honor, Mr. Holgado took all of us through a very impressive review of the work that Mr. Buchmiller did over time. Originally we had intended to review with the court, literally, on a day-by-day, e-mail-by-e-mail, meeting-by-meeting basis, all of the work that Mr. Buchmiller did over this month's period of time, but given the presentation that the Attorney General has done, and as I desire to move through this a little more expeditiously than that, I am not going to do that. What I would like to do, though, your Honor, is walk through a couple of examples of exchanges that the parties had during the interactions that they had BARBARA STROH, CSR, CRR, CMR You can find it at

I'm not going to go

1081 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 e-mail. MBIA Respondents-Kasowitz during that time because I think that really underscores the detailed and conscientious nature of the work that was being done, much like that July 16 e-mail that we were looking at. So that on January 9 Mr. Buchmiller sent an e-mail to Mr. McKiernan and Fred Pastore, who was the treasurer, and he set forth the review that he was intending to do with respect to MBIA's financial condition and loss reserve. I think that this is a really illustrative The first thing that kind of caught my eye

when I looked at this e-mail was the fact that it's from Jack Buchmiller, and he has an MBIA e-mail account. So, this isn't just me saying it, your Honor, coming in and saying that he was actually imbedded in Armonk, you know, when, in fact, he wasn't. He was sufficiently well -- he had such sufficiently close access to and spent sufficient time there, that they gave him his own e-mail address. Now, the second thing when looking at the top of this document that I think is significant is this: If there is another refrain that we have heard ad nauseam during the past three years about the review and analysis by the department of transformation, it is BARBARA STROH, CSR, CRR, CMR

1082 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 is MBIA. So look, your Honor. post facto fiction. This isn't, you know, ex okay? this: That review and analysis, according to the banks, was woefully insufficient, woefully inadequate because it involved this enormous transformation, it involved this big transaction in the middle of the financial crisis. You know what? The department heaped this One guy. How could MBIA Respondents-Kasowitz

entire responsibility on one guy. he do it?

You know, that's their point. They say, well, it's just one guy and perhaps

you heard from them that even this guy wasn't that qualified. Glad to hear that nobody at the department is qualified to do this stuff, but okay. But look, your Honor. Let's look at the cc's, She's not an MBIA

Glenda Gallardo at MBIA.com.

employee, your Honor. Insurance Department.

She was employed by the New York And she also was sufficiently

well connected to this transformation review, and analysis, that they gave her a MBIA e-mail account. Kathleen Reagan. I'll stop. Kathleen Reagan

These people who are reviewing

MBIA's finances and the like had close and unfettered BARBARA STROH, CSR, CRR, CMR

1083 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz access, even MBIA e-mail accounts. So let's go through the e-mail. It's lengthy,

your Honor, but I think that it makes sense for me to read through it for us to have it in the record because, rather than relying on inclusions and conclusory empty arguments, let's look at actually what happened. Okay: "Glenda is preparing a request for For those lists

reserve schedules by fiscal quarters.

I will" -- Mr. Buchmiller -- "select a few (one or two to start) transactions from each collateral or structural type (corporate and ABS CDOs, RMBS, HELOC, etc.) for a detailed review." So that, your Honor, relates to the risk focus approach that Mr. Buchmiller was taking with respect to the analysis of these reserves and that data. You heard on Monday and Tuesday about this risk-focused approach that the department had decided to take, where the analytical soundness of the particular risk loss methodology is tested with respect to certain specimen transactions. Those transactions are then compared to even additional transactions, and then determinations are made about the analytical soundness, rather than going through every single file of every single loan in the BARBARA STROH, CSR, CRR, CMR

1084 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz files which was determined to be not the most efficient, practical or most effective approach. Next: "What I want to do is go through the

entire reserving process for each in a very hands-on manner. "Ideally, as if I were hired into" IBM and assigned the transactions -- pardon. IBM -"IPM and

assign the transactions, getting the deal experience data, developing roll rates, loading Intex, etc. for fourth quarter 2008. I will need the relevant policies

and procedures, etc., to work from and benchmark to. "Obviously, this will probably require some significant hand-holding. Also, do you have a

summarizing or source spread sheet capturing the key assumptions for each detail -- its quarterly roll rates and also common factors such as HPI assumptions?" Now, that part up top, that sort of granular approach is the approach that was referred to as the bottoms-up approach by Mr. Buchmiller, and that's what he says. "This is my bottom-up approach." Let's flip to side 53, Bucky. Professor

Miller, who is very familiar and an expert in this area, says that -- I think that's paragraph 37B that: "A principal purpose of the bottom-up approach was to BARBARA STROH, CSR, CRR, CMR

1085 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz allow Mr. Buchmiller to assess the reasonableness and consistency of the models and methodology. "He did this by examining several models in intensive detail, evaluating whether they were reasonably designed and assessing whether they were employed in a consistent way in other transactions." Let's go back to the e-mail now, Bucky. Next:

"For the top-down portion I'll want to look at the cash flows (claims paid, salvage) projections for all reserved and future or contingent reserves much like the back up to the Bridge report you gave me but listed by transactions, e.g, deals by row, years by columns, and how they are discounted. "I will then want to look at how you sensitivity and/or stress test the overall cash flows (e.g, HPI plus and minus 10 percent, 15 percent, etc. -- deal by deal or macro. "I'll also want to look at the aggregate, not line item, investment cash flows (Bloomberg won't run portfolios beyond five years) especially any reinvestment assumptions and sensitivity tests and also incoming premium cash flow on existing book as of. "In other words, I'm looking for a cash flow model of MBIA going forward (on a close-block basis, no new business or transformation) and how those cash BARBARA STROH, CSR, CRR, CMR

1086 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 second. Now, Professor Miller talks about the top-down approach, and he's an expert in the regulation of financial institutions, and he says: "The top-down MBIA Respondents-Kasowitz flows are presently-valued into financial statements." So that in this approach he wanted at the end of the day to determine on this cash flow model --putting aside new potential business, putting aside what the effect of transformation would be, he wanted to determine what the macro situation was going to be, and that's called the top-down approach. Bucky, would you mind getting slide 54 for a

approach provided an overview of the institution and a sense of how the issue being investigated will affect the institution on a macro basis. Mr. Buchmiller's use

of the top-down approach was rational and appropriate." Okay, Bucky, can you get it back for me. Now, he wasn't stopping there, your Honor. he points out in the next line: "The next perspective As

I'll want is to review internal audit and PWC validation of these processes and quarterly-reported figures." So he wasn't just relying on what he's being given directly by the company and the like. That's the

bulk of it, but he's also looking at what the outside BARBARA STROH, CSR, CRR, CMR

1087 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz auditor is saying, and he says: "As a capital markets

person (as opposed to capital markets bureau person)" -- I'm not sure what he means by that, but I do know what means by this: "I want to first and

primarily understand the economics, then how the economics are (or aren't) captured and reported in statutory and GAAP accounting, and then look at the sensitivities." Then he says he's only in Armonk part time, "but please be sure to include this department e-mail on all replies." So this to me and to our experts and to the people at the department was the heart of what appears to be, your Honor, an extremely hands-on, detailed, conscientious approach to analyzing the risk of loss methodologies and all of the financial information that was important to this process. As I said, your Honor, we could go through -and I mean it would be rough. We could go through

every single exchange during, you know, this several-month period, and when you finish with it -and I've done it -- there is only one impression, and it's inescapable, and that impression is that these folks worked incredibly hard. They were extraordinarily conscientious. BARBARA STROH, CSR, CRR, CMR They

1088 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 BARBARA STROH, CSR, CRR, CMR MBIA Respondents-Kasowitz acted purely in good faith to come up with the right answers. In those circumstances, your Honor, the conclusion is clear that what they were doing was not only not irrational, not arbitrary and capricious. was eminently rational, eminently hard working. So what do the banks say about this? they say about that e-mail? (End of take 7) (Continued on next page) What do It

1089 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 T8 MR. KASOWITZ: They ignore virtually every single PROCEEDINGS - KASOWITZ

statement and word in that e-mail about the methodical and conscientious way Mr. Buchmiller approached his problem and instead, they focus on one thing. brutally out of context, your Honor. They focus on that one line where Mr. Buchmiller says that in connection with all of this, that is probably going to require some significant handled holding. The They take it pretty

present counsel suggest that Mr. Buchmiller's comment means he was not up to the task of analyzing MBIA's loss models and other financial data because he says obviously, this will require some significant hand holding. That's rich too, your Honor. You have a guy who is

working really hard to get his hands around a lot of complicated data, a lot of which he has already worked with, but because he wants to make sure so much that he gets this right and he learns the way to do it and the substance of it, he says, hold my hand, help me through this stuff, I will work hard and do it. You help me.

I will tell you, is that a basis to find that his conduct in and review and analysis was arbitrary and capricious? I don't think so.

I think it's actually pretty absurd, but let's look to see what Mr. Buchmiller says about it because I think NK

1090 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ that he had a reaction to it. of his affidavit. I laid out this plan in my January 9th, 2009 e-mail to Mr. McKiernan explaining my goal to analyze MBIA Corp's loss models in a very hands on manner, just as an IPM employee would. Petitioners have attempted to distort this e-mail and its reference to hand holding, suggesting that it shows that I lack significant prior experience with respect to structured finance modeling. Again, that is inaccurate. My reference to him This is paragraph 30 of, 30

hand holding was simply a request for logistical training from IPM that would enable me to reproduce MBIA Corp's results, using its software, with the same proficiency as an IPM employee and thereby testing the integrity of MBIA Corp's models and procedures. Thus, the e-mail demonstrates only that I did not have prior experience working with MBIA Corp's modeling software. By reproducing MBIA Corp's process step by step,

I validated that its models and procedures were robust, reasonable and consistently applied, and that they were, in fact, how MBIA Corp produced the financial statements and projections submitted in support of its transformation application. I don't think I need to say anything more about NK

1091 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 that. So, your Honor, on January 13th, 2009, two days, two business days after he sent his e-mail, McKiernan and others at the IPM group met with Mr. Buchmiller to begin this hands on review of MBIA's insurance loss reserve. At that meeting Mr. Buchmiller met with Mr. McKiernan and his colleagues and they discussed the particular transactions that Mr. Buchmiller would analyze as part of his bottom up approach. That can be found at Buchmiller supplemental affidavit 32, paragraphs 32 through 34. Thereafter, there were a series of meetings between Mr. Buchmiller and the IPM group to review, in detail, MBIA Insurance's loss modeling and their loss reserving process, including specific messages where Mr. Buchmiller was able, himself, to operate and manipulate and drive the specific loss reserving models for certain insured obligations on MBIA's computers. Those meetings, your Honor, covered in McKiernan's affidavit at paragraphs 19 through 28, and just to give the Court a flavor quickly of what happened, let me tell you with one of those meetings -- it's the first one that's on January 16th of '09 -- at that meeting, McKiernan and some others at IPM, gave a demonstration, met with Buchmiller and provided a demonstration of how to drive the RMBS portfolio. NK PROCEEDINGS - KASOWITZ

1092 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ The -- pardon me -- the RMBS portfolio were second-lien home mortgages. While, the RMBS attempt to -- the banks attempt

to ignore the depth of this work, the evidence shows that he was making a very, very substantial effort to dig into the modeling processes and satisfy himself that the partner, that MBIA's methodology was, in fact, sound and reliable. This modeling session on the 16th, focused on a specific transaction. snappy name. The IPM group walked Mr. Buchmiller through the modeling of this transaction and in a hands on way, and during that meeting, Mr. Buchmiller as he says in his affidavit, drove the model and recreated the model by obtaining the relevant data himself from, not only information that he was being provided by MBIA, but also from publicly available information, and applying that publicly available information to MBIA's assumptions to determine loss projections and the like. This discussion of this kind of analysis, your Honor, is at paragraphs 27 through 40 of Mr. Buchmiller's initial affidavit and paragraphs 35 through 38 of his supplemental affidavit. He explains it, your Honor. He says, I selected It was called RFC 2007 HSA2 -- pretty

the RFC 2007 HSA2 transaction for a deep dive review because its performance had deteriorated rapidly during 2008. NK It

1093 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 to me. PROCEEDINGS - KASOWITZ had experienced a high volume of loss activity to date, and at that time it was a sixth largest transaction in terms of MBIA Corp's existing loss reserves. My objective was to take one of the most severely underperforming RMBS transactions, focus on MBIA Corp's loss projections for that transaction under both the sensitivity and stress cases, and then use that information to validate the loss projections for the remainder of the portfolio. Now, your Honor, that sounds eminently reasonable I am not in that space. I am not an expert on

that, but what he is saying is, that he is looking for the things that he knows, like the fact that this had been one of their worst performing transactions and he wanted to use that. You go to the worst and then use that to see how it had been performing, and then, to make determinations to the extent that you can, about what kind of reserves to take and the like. And he goes, he walked through and did monthly loss projections and the like. He uploaded these monthly loss

projections and expectations as a vector on a model that a license from a company called Intex, which is state of the art technology, and a provider of modeling software, and he produced cash flow projections for each tranche of the deals he was looking for, with any resulting shortfalls in the NK

1094 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ insured tranches that were to be paid by MBIA. paragraph 33 of his affidavit. Here is what he said. "The cash flow projections -- " this is 57. "The cash flow projections are used to evaluate the ability of the remaining pool of assets to cover principle and interest payments, as well as fees associated with the securitization. IPM then subjects the model cash flows to That's at

two stress tests by holding Roll Rates, which were historically high in early 2009 and -- " your Honor, "Roll Rates", the word has been used a lot so far during this hearing. "Roll Rates" are monthly averages of mortgage delinquencies. So that, in 30 days you will have a

particular Roll Rate and a number of people who aren't paying their mortgages and the longer you go out, to the extent that you have higher Roll Rates, more people who are not paying, they didn't pay in 30 days, they are not paying in 60 days, they are really not paying in 90 days, those people are not going to pay. And, that is useful information, of course, for people who are doing this kind of analysis. And he said, that these Roll Rates, which were historically high in early 2009, constant for different lengths of time, additional six months past the baseline and NK

1095 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ additional 12 months past the baseline to determine what impact that level of additional stress would have on MBIA Corp's ability to pay claims as they come due. These became the new constant default rates that are input to Intex to calculate the cash flows for each stress test. We are going to be talking, we are going to use some of these terms later on on Tuesday when we talk about the responses to some of the issues that the, that the banks have raised, but the point here is, this is a lot of work and it looks and it is very reasonable, very responsible, based on what was actually happening in this area of the economy at the time, and what was happening at MBIA at the time, and after reviewing RFC 2007 HSA2 in depth, Mr. Buchmiller found that MBIA's loss assumptions for the transaction were reasonable. Now, you have heard, you have heard time and time again that, from the banks, that Mr. Buchmiller only reviewed three deals and that wasn't enough. And, as we

pointed out before, this idea of reviewing a selected number of deals is congruent with best practices in a risk focused approach. We have also heard, and I think Mr. Holgado made this point on Monday and Tuesday, that it is a misrepresentation to say that MBIA only reviewed three NK

1096 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ deals -- pardon me -- that Mr. Buchmiller only reviewed -my mistake -- that Mr. Buchmiller only reviewed three deals. In fact, contrary to the banks' argument, Mr. Buchmiller proceeded to review 20 other transactions just with respect to this RFC deal, to verify that the models and the procedures and the assumptions used for this RFC deal were applied consistently across MBIA's RMBS portfolio. Let's take a look. I think that's 58.

"After reviewing RFC 2007 HSA2 from performance data through loss projections, I found MBIA Corp's loss assumptions for the transaction to be reasonable. I then

reviewed approximately 20 other transactions, primarily from the Countrywide and RFC series, to verify that the models, procedures and assumptions used for RFC 2007 HSA2 were applied consistently across MBIA Corp's RMBS portfolio." Then, it goes on. I then reviewed these assumptions for the entire RMBS sector and determined that MBIA's overall loss modeling methodology for the RMBS portfolio was reasonable, and that a post transformation MBIA Corp could withstand losses from this sector. Now, as the affidavits that I referred to demonstrate, and I think as Mr. Holgado pointed out earlier in the week, and as this points out, Mr. Buchmiller applied this approach across MBIA's insured portfolios, including NK

1097 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ intensive CDO and CMBS modeling sessions on January 28th and February 9th and 10th. Ultimately, he made his recommendations based on this kind of broad, but very, very intensive work. Now, we have heard the banks make the argument that even if this were best practices within the monoline industry, and I don't have the exact words precisely, but I think the argument that I heard for three days last week was, so what? They are just the monoline industry.

The implication being, that because of what has happened to nearly all of the monoline insurers during this unprecedented, unpredicted financial crisis, they don't know what to do. So, if your best practices with them -- big deal. Well, first of all, that's not true. And, secondly, that's

not the standard of best practices that Mr. Buchmiller lived up to here. As Professor Miller points out, the risk based

approach that Mr. Buchmiller used, has been adopted by both Federal financial regulators and the New York State Insurance Department. In the 1990's and 2000's, for example, financial institution regulators adopted risk based examination procedures similar to the risk focused approach employed by the NYID in its review of the transformation application. Regulators advocating the risk based approach and NK

1098 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ the depository institution area include the FDIC, the Federal Reserve, the National Credit Union Administration and the OCC, as well as state banking departments under the guidance of the Conference of State Bank Supervisors. So, more recently, risk focused surveillance has been recognized as a best practice in the insurance industry. The NAIC adopted a risk focused surveillance

framework in 2004, implemented risk focused revisions to its financial condition examiner's handbook in 2006, and in 2010 adopted accreditation standards, requiring all insurance company examinations be performed using the risk focused approach. Now, I am going to talk about the NAIC later on but, your Honor, this makes it absolutely clear that the approach that, that the approach that was being taken here by Mr. Buchmiller was consistent with best practices. if we could turn to slide 39? Yes. And,

This is Professor Miller's opinion as set forth in detail below. "My opinions are, the NYID's evaluation and approval of the transformation were appropriate and consistent with best practices in the field of financial institution regulation, including the practices that the Petitioners themselves have applied." So, in addition, well, your Honor, in looking at NK

1099 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ this, you know, this sort of snapshot of interaction, interactions between Mr. Buchmiller and the Department, we come away from the banks with this argument that Mr. Buchmiller wasn't -- we can drop that -- Mr. Buchmiller wasn't qualified to do this because he needed hand holding. I submit, your Honor, that is such a distorted snippet, it's kind of funny. But, in addition to this hand holding thing, the Department says that the review and analysis by -- pardon me -- the banks say that the review and analysis by the Department was improperly rushed. fast. So, Mr. Holgado did a great job, I thought on Monday and Tuesday of addressing this, and I am going to say a little bit more about it later, but I think it's worth noting right now, that the work that was done by the New York Insurance Department, the then New York Insurance Department on MBIA's transformation proposal, was far more deliberate, far more conscientious, far more time consuming, than the Treasury Department's bail out of Bank of America and other financial institutions over a weekend in 2008 to the tune of $250 billion. As Professor Miller states, "indeed, the NYID's review of MBIA's loss reserves, was no more expedited than the U.S. Treasury's due diligence, with respect to the nine NK Too fast. Did it too

1100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ major American banks, including several that are or have been Petitioners in this proceeding, that were suddenly provided with a $250 billion cash infusion at an October 2008 meeting with Treasury Secretary Paulson, who had hatched this plan over a weekend of meetings with other Bush administration officials. One weekend. 250. Pretty good. Pretty good deal.

Just as Secretary Paulson and the Secretary of the Treasury were already well versed in the financial condition of the bailed out banks, Superintendent Dinallo and the NYID had a wealth of institutional knowledge of MBIA, leading up to the transformation application, providing a significant foundation for an expeditious, yet comprehensive review process. Now, I would submit, your Honor, actually, that Professor Miller as being kind in this assessment. And,

you know, I am not sure whether he is accurate when he says that it was a $250 billion cash infusion over that weekend. I seem to recall somewhere that it was half that, 125 billion, but what's a 125 billion between friends, as these banks are. It is billions and billions and billion of dollars at the beginning of the worst financial crisis since the Great Depression, and a determination was made by regulators that action needed to be taken in order to help the public NK

1101 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ interest and prevent something bad from happening. what they did. One weekend, 125, $250 billion. Here, by striking That's

contrast, we have a transaction that had been conceived of, over about a year before approval, worked on in a highly detailed, high conscientious way over a year, and approved, finally, on the basis of an enormous amount of work done by hard working, good faith, energetic employees of the New York Department of insurance and approved by Superintendent Dinallo who, during this time, had considered a variety of other steps, if possible, to see if other action could be taken to address MBIA's situation and the situations of other monolines. And, in fact, your Honor, at the beginning of this process, Superintendent Dinallo was opposed to transformation. Contrary to the suggestions and the arguments that the banks have made that this was some kind of secret conspiracy hatched between the Department and MBIA from the beginning to do this, it wasn't anything of the sort. Certainly wasn't secret, as we have seen, nor was it something with which the Department agreed at the beginning. They disagreed with it. We are going to show the

Court the evidence of that, but over the evolution of time as circumstances changed, and analysis was done, this was NK

1102 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NK PROCEEDINGS - KASOWITZ agreed to be the right solution, at the right time, based on the enormous amount of work that was done. So, this might be a good time to break, your Honor? THE COURT: very much. MR. KASOWITZ: (Recess taken.) (Continued on next page.) Thank you, your Honor. We will take ten minutes. Thank you

1103 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 T9 THE COURT: Okay, ready? Yes, your Honor, thank you. MBIA Respondents-Kasowitz

MR. KASOWITZ:

So we believe that anyone -- that when the record of this proceeding is reviewed fully, that there is no reasonable way to come to a conclusion that there was anything that was arbitrary or capricious about what the department did here. We have talked about a number of different parts of the record, and yet another part of that record is the 59-page file memorandum that Mr. Buchmiller prepared, and we think that that is, along with everything else, an important piece of this record. I remember when I read it, your Honor, it's very difficult to, after reading a summary of the detailed work that Mr. Buchmiller and others did, come away with the conclusion that this was irrational. Now, the banks say that the department should have done things differently, and they have experts who say that the banks should have done things differently. We're going to go into more detail about their experts, but certainly -- and we don't believe that they make any kind of showing that sustains or even comes close to sustaining their burden. BARBARA STROH, CSR, CRR, CMR

1104 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 in reason. MBIA Respondents-Kasowitz But even if this did become a battle of the experts, that's not enough under New York law, your Honor, as New York law gives great deference to the decisions of state agencies, and those decisions cannot be overturned unless they are plainly irrational. Let's think about that. Irrational; lacking

The one thing I promise is that the

evidence of the department's review, Mr. Buchmiller's report, his affidavits, the exhibits, the work that others did, the cooperation that MBIA gave in that, the analysis that others did, there is, when you look at all of it, it was conscientious, it was logical, it was hard working. There is no way to come away from that work, that body of work and say that this is lacking in reason. So, your Honor, after the department's review, the department informed MBIA on February 17, 2009 that transformation had been approved in a letter from the department to Mr. Ram, R-A-M, Wertheim, W-E-R-T-H-E-I-M. The approval letter makes clear -- it's been gone through, so I'm not going to go through it. Holgado did a very good job showing how all of the component transactions had been properly approved. BARBARA STROH, CSR, CRR, CMR Mr.

1105 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz The letter properly goes through all of that, and as Mr. Holgado pointed out, the letter provides by its terms that, contrary to the position that the banks have taken, it wasn't just -- the department wasn't just relying on representations contained in the application from MBIA and on the truth of those representations. That's part sub1 up there. That's the

argument that the banks have made for the past three years in this case, that all the department was doing was relying on the truth of what MBIA was telling them, which is fine. reliable. But the letter makes clear that the department was also basing its decision on the department's examination of the MBIA entity's "financial condition prior to the transformation" -- that was sub2 at the top -- "and the department's analysis of the MBIA entity's financial condition after the effectuation of the transformation." So, this was a very, very thorough job, and the letter is, by its own terms, perfectly valid, perfectly complete. One of the things that we're going to do on Tuesday, your Honor, is to address some of the legal BARBARA STROH, CSR, CRR, CMR They should be relying on that. It's

1106 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz arguments that have been advanced by the banks. the legal arguments that they make is that this approval needs to be invalidated by this court because somehow there is a defect in the approval because the letter doesn't state all the grounds for approval, that it doesn't contain certain technical things. That is all nonsense, your Honor. We're going One of

to present the requirements under the Insurance Law as to what's required, and this letter, candidly, goes much further than what is required in determining whether or not that approval was valid. issue as to that. It's also interesting, your Honor, I think, and important that at the time that the approval letter was given, the department also issued a press release, and the press release is dated the next day. It's February 18, 2009, and this is a press release issued under the auspices of the New York State Insurance Department, and it's a very, very important document, your Honor, extremely helpful in providing insight into analysis and the like. It's clear. It couldn't be clearer: "The New There is no

York State Insurance Department has facilitated and supervised a transformation of MBIA Insurance Corporation that effectively splits the company in two, BARBARA STROH, CSR, CRR, CMR

1107 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 two ways: MBIA Respondents-Kasowitz dividing its assets and liabilities between two highly capitalized insurance companies, Superintendent Eric Dinallo announced today." "This deal is fair to all policyholders -- the bank counterparties and other policyholders of the structured financial and the owners and issuers of municipal bonds. "It should aid the municipal bond market had in two ways: First both MBIA Corp. and National will Let me look right at the

continue" -- I'm sorry. document:

"It should aid the municipal bond market in First, it will stabilize and, hopefully,

increase the ratings and, therefore, the value of $537 billion in outstanding municipal bonds. "60 percent of those bonds are owned by individuals, including many retirees. The improved

insurance on their bonds will protect the value of their investments and should encourage them to continue investing in municipal bonds. "Second, at a time when we want to increase spending on infrastructure as part of the stimulus plan, some municipalities and public authorities who need to raise money for building bridges or schools, housing or hospitals, have had to pay more to issue BARBARA STROH, CSR, CRR, CMR

1108 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 bottom: MBIA Respondents-Kasowitz bonds, leaving less to spend on building or put off development because they were unable to borrow." "Municipalities and authorities have been searching for bond insurance in a marketplace where only one insurer is currently active, and, with the return of a solidly capitalized insurer with more than 30 years of experience, we hope this will help reinvigorate the municipal bond market and help public entities get easier, less costly access to credit." All, certainly, goals that are well within the authority of the superintendent to try to achieve. those that are well within the authority of the department to try to achieve, as the banks own experts have testified, and all goals that are critical, your Honor, and have been too long delayed by the kind of litigation that has been commenced. Now, the press release also says at the "Both MBIA Corp. and National will continue to All

pay all valid claims in a timely fashion, and both entities will have sufficient resources to meet policy holder claims as they come due. "Consistent with New York State Insurance Law, the New York State Insurance Department only approved the transaction after deciding that both companies would have sufficient statutory capital to meet the BARBARA STROH, CSR, CRR, CMR

1109 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz letter and spirit of the Insurance Law." Pretty complete and accurate description of exactly what transpired here. Now, we've heard from Mr. Holgado that Superintendent Dinallo, as we've heard from Mr. Holgado, Superintendent Dinallo has described his critical role in reviewing and approving the transformation in a very detailed affidavit that's been submitted in this proceeding. Again, your Honor, Mr. Dinallo's affidavit demonstrates conclusively that he considered carefully the implications of the transformation on MBIA, on its policyholders and on the public interest, he and correctly applied the applicable provisions of the Insurance Law. I can read Mr. Dinallo's affidavit or his deposition testimony, your Honor, and reasonably conclude that his approval of transformation was anything other than carefully considered and rational. The banks, however, say that because of the financial crisis, Superintendent Dinallo, in effect -and I have said this earlier -- should have done nothing. They say that in those turbulent times, that the future was so uncertain and so unpredictable, that BARBARA STROH, CSR, CRR, CMR

1110 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 say, see? MBIA Respondents-Kasowitz it was irrational for Superintendent Dinallo to approve the transformation. What the banks -- the purported support for this proposition that the banks opine is supposedly a statement by Superintendent Dinallo wherein they say that he's admitted that MBIA's loss projections were unreliable because they reflect what banks counsel say was an acknowledgement that there was a, quote, "substantial degree of uncertainty," close quotes, in MBIA's loss projections. Based on this purported admission, the banks Superintendent Dinallo approved this

transformation improperly because here he's admitting that the loss projections of MBIA are in some way unreliable. There is a substantial degree of uncertainty, and in their brief, your Honor they quote that language, and they actually quote it wrong. The language from the affidavit says significant degree of uncertainty over these four words, but I don't care about that. substantial, I don't care. What I do care about, your Honor, is that they quoted outputting it into the real paragraph where it belongs, as if it were some, you know, striking BARBARA STROH, CSR, CRR, CMR The significance,

1111 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 sentence: MBIA Respondents-Kasowitz admission by the superintendent that he's done something really bad. So, let's look at actually paragraph 61 of Superintendent Dinallo's affidavit, and let's look at what it really meant. portion. "The part that is quoted in the sursurreply brief that was submitted by the banks and the part that is quoted in the argument that the banks made, I think, on the first day of this hearing was as follows: "I recognized that a significant degree of uncertainty would be inherent in MBIA Corp.'s projections." That's it. That's what they use. This is the So look at the yellowed-in

basis of their claim that there is some admission by the superintendent, this is the big admission, the smoking gun claim that there is some admission by the superintendent that MBIA Corp.'s projections are somehow unreliable, and that Superintendent Dinallo has somehow admitted that. So let's read what it really says, the full "I recognize that a significant degree of

uncertainty would be inherent in MBIA Corp.'s projections and, concomitantly, in Mr. Buchmiller's own review of MBIA Corp.'s loss modeling" -- this is the BARBARA STROH, CSR, CRR, CMR

1112 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz part they leave out -- "or, for that matter, in anyone's predictions of future events or analysis of those predictions." If you read the whole paragraph, your Honor --I'm going to read it. It's a great paragraph. I

didn't write it, but it's great:

"I understand that

Mr. Buchmiller was analyzing loss modeling that was, in essence, trying to predict the assertion and resolution of future policy claims tied to, among other things, macroeconomic conditions such as unemployment rate, GDP and housing prices. "This task was made more difficult because the unprecedented economic changes occurring at the time undercut the predictive power of historical losses and assumptions which are typically used by life and property insurers to predict future claims." I recognize that a significant degree of uncertainty would be inherent in MBIA Corp.'s projections and, concomitantly" -- I always pronounce this word wrong, so I'll get it wrong again -"concomitantly in Mr. Buchmiller's own review of MBIA Corp.'s loss modeling or, for that matter, in anyone's predictions of future events or analysis of those predictions." I thus viewed Mr. Buchmiller's task not as BARBARA STROH, CSR, CRR, CMR

1113 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz deciding whether MBIA Corp.'s predictions of future losses were 'accurate,' since such an assessment could be made only in hindsight. "Rather, I viewed his task as examining the analytical soundness of MBIA Corp.'s loss modeling and informing me and my senior staff if he observed anything in his examination that called into question the financial statements presented or otherwise would be relevant to our consideration of the transformation application." Superintendent Dinallo was making the common-sense observation that no one can predict the future with certainty. Therefore and obviously, the accuracy of any projections, whether they were MBIA's, whether they be the department's, whether they be the bank or whether they were some expensive third-party consultants, your Honor, cannot be verified except in hindsight. Now, your Honor, the banks have always taken that part out, but we thought that it was important to bring it in, and the department and the superintendent's statement here is pure common sense, your Honor. That's exactly what Superintendent Dinallo confirmed at his deposition. BARBARA STROH, CSR, CRR, CMR

1114 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 that. question. MBIA Respondents-Kasowitz Slide 64, Bucky. There was an objection. "What was the basis for that recognition?" was There is an objection. "Answer: I think I can answer it without You are doing loss

I think it is common sense.

projections over potentially macroeconomic events. They are never considered to be perfect. "They are considered to be within a range of acceptability such that you walk away thinking it's fair and equitable because there is sufficient solvency. "No one expects certainty. insurance." Now, your Honor, I actually apologize a bit for dwelling so much on this, but I had thought that it's sort of uncontroversial, pure common sense that you can't predict the future with certainty. Based on what I've seen from the banks, however, they seem -- the banks' lawyers, at least, seem not to be -- they have some difficulty with this concept. They think it's some enormous admission. I can tell you, though, your Honor, the banks themselves, the clients, they don't have any difficulty with this concept whatsoever. BARBARA STROH, CSR, CRR, CMR That is

1115 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 this. MBIA Respondents-Kasowitz The banks repeat that concept in virtually every single public statement that they make, and anyone can find that just by going on the Internet. So let me give you an example of what I came up with the other day. issued a press release. Bank of America issued a press release, and the press release announced that: "The Federal reserve On May 7, 2009, Bank of America

had just notified it that stress test results on the bank demonstrated that the bank needed to increase its loss reserves or its capital by $33.9 billion." Apparently their projections in the prior year, 2008, hadn't panned out so well. It happens.

However, give the Bank of America their due on They had not made any claim that their They hadn't

projections were going to be accurate. promised that.

In fact, in the same press release, here's what Bank of America said about its projections. it, Bunky. "Bank of America and its management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. "These statements are not historical facts BARBARA STROH, CSR, CRR, CMR Hit

1116 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 MBIA Respondents-Kasowitz but, instead, represent Bank of America's current expectations, plans or forecasts of its future earnings, integration of acquisitions and related cost savings, loan modifications, investment bank rankings, loan and adopt growth, mortgage originations and market share, credit losses, credit reserves and charge-offs, consumer credit card net loss ratios, tax rates, payments on mortgage-backed securities, global market originations and trading and other similar matters." This is the good one: "These statements are

not a guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and are often beyond Bank of America's control. "Actual outcomes and results may differ materially from those expressed in or implied by any of these forward-looking statements." So, your Honor, Bank of America agrees with Superintendent Dinallo that all predictions of future events are inherently uncertain. The truth is that even in this proceeding the banks don't argue that the department should not have relied on any projections, notwithstanding the fact that any and all such projections are inherently, as the Bank of America admits, your Honor, uncertain. BARBARA STROH, CSR, CRR, CMR

1117 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 say. MBIA Respondents-Kasowitz They simply disagree with the ones that the superintendent relied on. But the fact that the banks disagree with the projections that the superintendent relied upon is absolutely no basis under law to conclude that what the superintendent did here could possibly constitute an abuse of discretion. Moreover, your Honor, the projections the banks state the department should have relied on are completely inappropriate to the task. Those

projections, your Honor, are the ones that the banks say came from BlackRock. So the banks argue that the only projections that the superintendent could have relied upon at this time were projections provided by some very expensive, Rolls Royce, third-party consultant, and they -- that's what they've been arguing. You can't do this work yourself, the banks Mr. Superintendent, you don't know what you're In

doing, Mr. Buchmiller doesn't know what he's doing. fact, nobody at the department knows what they're doing.

It's such an offensive argument, your Honor. It carries absolutely no weight. (End of take 9) BARBARA STROH, CSR, CRR, CMR

1118 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 BARBARA STROH, CSR, CRR, CMR MBIA Respondents-Kasowitz (Continued on next page)

1119 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 T10 MR. KASOWITZ: consultant. Let's deal with the third-party PROCEEDINGS - KASOWITZ

Let's deal with what this supposed obligation

was, let's deal with what this supposed obligation was that the banks, that the banks say that the Department had to hire some third-party consultant for this transaction -because, at the end of the day, that's what it boils down. Superintendent Dinallo, you blew it, because you didn't go hire some third-party consultant. there is a basis for that. Let's see if

Maybe I missed something.

So, as a starting point, Section 201 of the Insurance Law which we quoted it at the beginning of this, delegates broad responsibility and authority to the Superintendent to make determinations. And, the Courts have been very, very clear that's a broad scope, broad responsibility, and that responsibility imposes on the Superintendent and gives him the right to make the decision about whether or not to go out and hire somebody. It's not the banks' call, it's not their lawyers, it's not Black Rock -- it's the Superintendent who is the real expert here. And so, is there a basis in the Insurance Law that required Superintendent Dinallo to hire a third-party consultant? No, there is not. NK

1120 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 this. Former Superintendent Serio testified at his deposition as follows, about whether or not the sitting Superintendent has the discretion whether to hire a third-party evaluator or not. "Question: In connection with those tri annual PROCEEDINGS - KASOWITZ So, let's see what the banks' experts say about

examinations, does the Insurance Department retain experts, third-party experts to evaluate the solvency of those monoline carriers? "Answer: the option to do so. They may or they may not. They have

And, as Mr. Moriarity testified, I

believe they have done so, not necessarily monolines, but on examinations generally." We will get to Mr. Moriarity's testimony. His

testimony was that they don't, but we will take a look at that in a second, "but there is nothing that obliges them to do that in these circumstances, correct? "No, nothing obliges them. It's usually

determined based on whether the Department considers it capable of handling the exam with existing staff." Now, let's see what Superintendent James Corcoran said at his deposition, and I take it -"Question: I take it there is no document in the

New York State Insurance Law, no guideline, no list, no NK

1121 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 this. Mr. Muhl: "The Superintendent has the authority to NAIC. "Question: Thank you." PROCEEDINGS - KASOWITZ document, no memo, no anything else, that says that the New York Insurance Department is required to hire outside consultants or experts to assist in the review of transactions in front of the Insurance Department, correct? There is an objection. "Question: Is there a document that says that?

All I am asking, is there is a document that says that? "A document that says you are required to hire outside people? "Question: "Answer: Yes. No -- there is procedures inside the

Let's see what Superintendent Muhl had to say about

determine what process to follow when it reviews applications, correct? "Answer: He does have that discretion, yes.

"And, he also has that discretion to determine whether or not to retain an outside expert? "Answer: Yes."

Your Honor, as this testimony from the banks' own experts yet again confirms, if anything belongs within the ambit of the discretion of the Superintendent, who is the NK

1122 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ official expert here, it is a question of whether to utilize outside experts to assist in his official functions. So, A, no statute requires it. B, the Superintendent has the discretion to decide whether or not to hire. be hired. I think whether he should have or not, certainly is not going to, can't, under any circumstances constitute, if he does it, it's not going to constitute an abuse of discretion in this instance, but should he have hired Black Rock? Let's think about it. Should the Superintendent outsource to Black Rock his regulatory authority, and if he didn't, is that some kind of abuse? Well, MBIA submits here, your Honor, consistent with the position the Department has taken, that that would have been a grievous mistake. It would be difficult to Okay -- should be hired, shouldn't

think of a third-party consultant that has more conflicts of interest in this situation than Black Rock. Those conflicts were revealed at the deposition of Mr. Paltrowitz, who was the expert retained by the banks in this case. Now, Mr. Paltrowitz admitted that Black Rock held surplus debt issued by MBIA Insurance during 2008 and that Black Rock also, quote, presumably, close quote, owned or NK

1123 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ held MBIA insured structured finance products or credit default swaps. that are insured. Paltrowitz also acknowledged -- that's at pages 62 through 64 of Mr. Paltrowitz' deposition. Mr. Paltrowitz also acknowledged Black Rock's intimate business relationships with many of the banks, including Merrill Lynch, which is now owned by Bank of America. That's Mr. Paltrowitz, at pages 64 through 67. In fact, your Honor, as of December 31, 2008, precisely the time when Bank of America says that the Department should have hired Black Rock, Merrill Lynch, which is a Petitioner here and which is owned by Bank of America, owned 44 percent of the outstanding voting common stock in Black Rock. Basically, these guys, the banks, B of A owns half of Black Rock basically. Now, your Honor, the fact that B of A owned basically half of Black Rock is found at Exhibit RX 34, page 5 to the affidavit of Ken David, which was submitted with MBIA's surreply papers. So, your Honor, the banks are basically arguing that the Department should have hired and paid them, the banks, or someone they owned half of, to have analyzed the NK So, Black Rock owns some of these products

1124 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ transformation on behalf of the Department, even though, even though Black Rock also held MBIA Insurance securities. I mean it's incredible. It's like the Department, if I were representing MBIA back at that time or I owned MBIA, like Warburg Pincus, it's like the Department coming to Warburg Pincus, that owned a lot of MBIA, not even half, but owned a lot of it and said you know what Warburg? We are doing this, we are

doing this approval, this review and approval of whether or not MBIA can do this transformation, transformation that all these blanks like. We are doing it. You guys, Warburg Pincus,

We need a consultant.

you have a great name, you have great capacity and great, great skills, so why don't you come in and you will be our consultant. it. You will tell us whether or not you should do

It's ridiculous. They wouldn't hire Warburg Pincus to do it because

they will be conflicted in favor of MBIA, and they are not going to hire Bank of America to do it, because they are conflicted against MBIA. whatsoever. Now, I think it was on the first or second day of this hearing when the banks' counsel was talking about the credentials of Black Rock to do this kind of work. They It's nonsense. Makes no sense

made reference to this long, I mean, I will tell you it was NK

1125 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ glowing, your Honor, it was glowing. If I ever get into a position where somebody honors me or something, I am hiring that guy to come and do the thing. He is going to be the toast master, tell people how

great I am. Black Rock is the gold standard, Rolls Royce, they are the best, they are the biggest. of money. You remember what it was. Everyone pays them tons

And so, and I think my recollection is, that when they went through this litany of honorariums of Black Rock, I, one of the things that counsel said was that Black Rock gets retained by all of these clients -- they named some of the clients -- they talked about some government agencies that they get hired by too. I was impressed.

Apparently, what counsel didn't tell the Court, neglected to say, was that Black Rock's conflicts of interest in this area are so egregious, that according to a July 2011 review, the Federal reserve, the Federal Reserve system by the United States Government Accountable Office, the GAO, the Federal Reserve had refused to consider Black Rock as a service provider for transactions involving Bank of America, because Bank of America owned a significant stake in Black Rock. For example, this is the GAO report. For example,

"FRBR did not consider Black Rock as a service provider for NK

1126 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 up. MR. KASOWITZ: THE COURT: Two minutes? PROCEEDINGS - KASOWITZ the Bank of America lending commitment because Bank of America owned a significant stake in Black Rock." It's not that tough. here, your Honor. It's precisely the situation

Absolutely no difference whatsoever. So, the Department has, the

Now, so then -- okay.

Department had no statutory obligation to reach out and hire any third-party consultant. The banks' own experts say that

it was within the Superintendent's discretion to decide whether or not he wanted to hire a third-party consultant. The third-party consultant that had been trumpeted to the Court, and to anyone who will listen, as the right one to do this job, Black Rock, is specifically and heavily undeniably conflicted in this situation. good for Black Rock here. Doesn't sound too

One more reason that Black Rock

would be a completely inappropriate candidate for this engagement, your Honor. That is that. THE COURT: I want to let you know you need to wrap

Yes. We will get back to this later. 70.

MR. KASOWITZ:

Here it is in 60 seconds. Slide 70.

So, the way that Buchmiller did his work, your NK

1127 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 PROCEEDINGS - KASOWITZ Honor, was that he was replicating what MBIA was doing. He

did this very, very intensive analysis of how MBIA did their modeling. He did it soup to nuts. What was the He pulled a pig from

He had an expression for it. expression -- Pig through a python.

the mouth, all the way through the python, and did this analysis about it. It was completely transparent to him and to the Department what, how the announcement went. it was totally transparent. They will you tell you what the inputs are that they put into their model. They will tell you what the Black Rock is,

output is that comes out of the model, and in this case, huge numbers. Everything is bad. They won't tell

Here is what they won't tell you. you how they do it.

They don't tell you what their formula

is for how they manipulate the data, and that part is admitted by their expert in his deposition. They won't tell you because it's proprietary and the R & D efforts of what we do, we view the replication as trade secrets, if you will. So, if I understand this correctly, your Honor, the banks are saying that the only permissible -- the transformation could have been done validly is if the Department, the state agency, a public agency, procured the NK

1128 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NK PROCEEDINGS - KASOWITZ services of a self interested consultant, riddled with conflicts of interest which, at the end of the day, would have refused to share its proprietary state of the art technology with even the State, it's client, that had hired it. Your Honor, that argument defies common sense. Black Rock was a totally ineligible third-party consultant here. It's a good thing that they weren't hired in those

circumstances. Thank you, your Honor. THE COURT: We are finished for today. I just

want to speak to the attorneys for two minutes as everybody else cleans up. I hope you all have a very nice holiday weekend. We will see you Tuesday at 10:00 A.M. (Whereupon, the case was adjourned to Tuesday, May, 28, 2012, at 10:00 A.M.)